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EX-31.02 - EX-31.02 - CADENCE DESIGN SYSTEMS INCf54883exv31w02.htm
EX-21.01 - EX-21.01 - CADENCE DESIGN SYSTEMS INCf54883exv21w01.htm
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
     
(Mark One)    
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the fiscal year ended January 2, 2010
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the transition period from            to           .
 
Commission file number 0-15867
 
(CADENCE LOGO)
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)   (Zip Code)
 
(408) 943-1234
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Names of Each Exchange on which Registered
Common Stock, $0.01 par value per share
  NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [ X ]  No [    ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [    ]  No [ X ]
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [    ]  No [    ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [    ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [ X ] Accelerated filer [    ] Non-accelerated filer [    ] Smaller reporting company [    ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No [ X ]
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter ended July 4, 2009 was $1,539,777,972.
 
On February 6, 2010, approximately 270,240,892 shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive proxy statement for Cadence Design Systems, Inc.’s 2010 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
 


 

 
CADENCE DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 2, 2010
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PART I.
 
Item 1. Business
 
This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain forward-looking statements. Certain of such statements, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. We refer you to the “Proprietary Technology,” “Competition,” “Risk Factors,” “Critical Accounting Estimates,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Liquidity and Capital Resources” sections contained in this Annual Report on Form 10-K and the risks discussed in our other Securities Exchange Commission, or SEC, filings, where important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements are identified.
 
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Annual Report on Form 10-K. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update these forward-looking statements.
 
Overview
 
We develop electronic design automation, or EDA, software and hardware. We license software, sell or lease hardware technology and provide engineering and education services throughout the world to help manage and accelerate electronics product development processes. Our customers use our products and services to design and develop complex integrated circuits, or ICs, and electronics systems.
 
We were organized as a Delaware corporation in June 1988. Our headquarters is located at 2655 Seely Avenue, San Jose, California 95134. Our telephone number is (408) 943-1234. We use our website at www.cadence.com as a channel for distribution of important information about our company. News releases and financial information regarding our company are posted on and accessible at our investor relations webpage on our website at www.cadence.com. Our website permits investors to subscribe to e-mail notification alerts when we post new material information on our website. We also make available on our investor relations webpage, free of charge, copies of our SEC filings and submissions as soon as reasonably practicable after electronically filing or furnishing such documents with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and the charters of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee of our Board of Directors are also posted on the investor relations webpage on our website at www.cadence.com. Stockholders may also request copies of these documents by writing to our Corporate Secretary at the address above. Information on our website is not incorporated by reference in this Annual Report on Form 10-K unless expressly noted.
 
Factors Driving the Electronic Design Automation Industry
 
During 2008 and 2009, the semiconductor industry’s growth declined as the overall macroeconomic environment deteriorated. Electronics companies faced financial challenges in 2008 and 2009 because consumer spending on electronics was adversely affected by increased unemployment, and corporate spending was restrained by the tightened credit market and the economic downturn. During 2009, semiconductor unit volumes decreased and average selling prices declined. These factors, combined with the macroeconomic environment, affect how electronics companies address traditional challenges of cost, quality, innovation and time-to-market associated with highly complex electronics systems and IC product development.


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Although estimates project moderate growth for the semiconductor industry in 2010, we believe that increased spending on EDA and other tools may grow more slowly than the semiconductor industry as a whole in 2010.
 
Electronics companies demand ever higher levels of productivity from their design teams, better predictability in their development schedules and higher quality products in order to be competitive and profitable in the price-conscious markets they serve. Electronics companies are responding to demand for increased functionality and miniaturization by combining subsystems — such as radio frequency, or RF, wireless communication, video signal processing and microprocessors — onto a single silicon chip, creating a system-on-chip, or SoC, or multiple chips into a single chip package in a format referred to as system-in-package, or SiP. These trends toward subsystem integration have required chip makers to find solutions to challenges previously addressed by system companies, such as verifying system-level functionality and hardware-software interoperability.
 
SoC designs put many more transistors on each chip, increasing the need for tight control over power consumption. This is done not only to increase battery life in portable devices, but also to minimize energy cost for computing and networking equipment. Higher power devices generate more heat, which further increases both system cost as well as operating expenses for cooling. Evolving semiconductor manufacturing processes with smaller features (transistors and wires) and lower supply voltages address both of these issues to some degree, but introduce new challenges of their own. Contemporary portable electronic devices contain chips in which individual features can be as small as 45 nanometers, or 45/1,000,000ths of a millimeter. Because of the electrical characteristics of the materials used to construct the transistors, which are essentially microscopic switches, chips continue to consume power even when transistors in the device are switched off. To overcome these and other power-related issues, specific “low power” design techniques must be developed and are most effective if they are integrated throughout the design flow, from logic design and verification through physical implementation.
 
Variability in the processes and materials used to manufacture silicon chips have become so pervasive at 65 nanometers and below that traditional connections between design and manufacturing teams are insufficient to ensure chip performance and yield. Integrating detailed models of the manufacturing process into the chip design environment is desirable so engineers can craft a design to avoid or overcome these manufacturing process variations. Similarly, manufacturing teams can optimize their processes if, along with the design, they are provided with information about the most critical parts of the chip. However, sharing information between design and manufacturing processes is complicated because current data formats used to describe the chip design differ from data formats used to describe the manufacturing process and control the manufacturing equipment. Moreover, design and manufacturing most often involve two or more separate companies, because multiple companies may participate in the design of the chip and in the manufacturing and assembly of the final device.
 
These trends represent significant new challenges for electronics design processes. Specifically, product performance and size requirements of the mobile consumer electronics market require microelectronic systems to be smaller, consume less power and provide multiple functions all in one SoC or SiP. This requires designers to pay close attention to many electrical, physical and manufacturing effects that were inconsequential in previous generations of chip designs. The design challenge becomes more complex with each new generation of electronics and providers of EDA solutions must deliver products that address these technical challenges while improving the productivity, predictability, reliability and profitability of the design process.
 
Products and Product Strategy
 
Our products are engineered to improve our customers’ design productivity and design quality by providing a comprehensive set of EDA tools. Product revenues include all fees earned from granting licenses to use our software and from sales and leases of our hardware products, and exclude revenues derived from maintenance and services. We offer customers three license types for our software: perpetual, term and subscription. See “Software Licensing Arrangements” for additional discussion of our license types.
 
We combine our products and technologies into “platforms” for four major design activities:
 
  •      Functional Verification;
  •      Digital IC Design and Implementation;
  •      Custom IC Design and Verification; and
  •      System Interconnect Design.


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The four Cadence® design platforms are branded as Incisive® functional verification, Encounter® digital IC design, Virtuoso® custom design and Allegro® system interconnect design. In addition, we augment these platform product offerings with a set of design for manufacturing, or DFM, products that service both the digital and custom IC design flows. We updated all of our foundation technologies between December 2008 and December 2009.
 
The products and technologies that comprise our platforms are combined with services, ready-to-use packages of technologies assembled from our broad portfolio and other associated components that provide comprehensive solutions for low power, mixed signal, enterprise verification and advanced node designs. These solutions and their constituent elements are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and printed circuit board, or PCB, and IC package / SiP design.
 
Our Product revenue was $400.8 million, or 47% of our total revenue, during fiscal 2009, $516.6 million, or 50% of our total revenue, during fiscal 2008, and $1,104.0 million, or 68% of our total revenue, during fiscal 2007. For additional description of our Product revenue, including the current year decrease, see the discussion under the heading “Results of Operations” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Functional Verification
 
Our Functional Verification offerings are comprised of two major categories of offerings: Logic Verification and System Design and Verification.
 
Logic Verification
 
Our Logic Verification offering consists of the property checking and simulation and environment capabilities within the Incisive functional verification platform. This offering enables our customers to employ enterprise-level verification process automation, including verification planning, process tracking and management that allow the coordination of verification activities across multiple teams and various specialists.
 
Our Logic Verification offering includes:
 
  •      Planning and management that automates and guides the verification process, from specifications to metric-driven functional closure;
  •      Testbench and simulation that offer Open Verification Methodology, or OVM, multi-language testbench and transaction-level support, assertion checking, low-power and mixed-signal simulation, analysis and a debug environment;
  •      Formal verification, providing a mathematical method for verifying register transfer level, or RTL, functional correctness with assertions before a testbench simulation;
  •      A verification intellectual property, or IP, portfolio that enables engineers to improve productivity while reducing risks associated with standard protocol development and compliance and provides a broad catalog of standard verification IP equipped with a Compliance Management System allowing metric-driven closure;
  •      Palladium® and Xtreme® series of emulation and acceleration hardware;
  •      SoC Functional Verification Kit, capturing reference examples of verification flows and reduces customers’ language, technology and methodology adoption risks; and
  •      Tailored verification services for methodology adoption, environment migration and educational training that provide customized means of addressing customer-specific challenges.
 
Our Logic Verification offering also provides methodology-driven and multi-product flows that allow customers to incrementally adopt certain aspects of this offering and to address specific challenges. These flows include:
 
  •      Multi-language OVM, enabling productivity and quality gains with reusable and scalable verification environments;
  •      Metric-driven verification, enabling schedule predictability with a plan- and metric-driven solution and automated functional verification closure;


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  •      Assertion-based verification, enabling productivity and quality gains with block and chip verification of functional intent that are captured via assertions;
  •      Low power verification, as part of our Low Power Solution, enabling quality and productivity gains associated with the growing need to verify power management logic; and
  •      Mixed signal verification, enabling risk reduction via integrated verification of designs with both digital and analog content.
 
System Design and Verification
 
Our System Design and Verification consists of the acceleration/emulation and system-level design capabilities and includes design and verification hardware and software, verification IP services and methodologies that provide customers with system-wide planning and management, design and verification IP reuse automation and system verification. In addition, this offering provides system power exploration, analysis and optimization.
 
Our System Design and Verification offering targets IP and SoC design and verification planners and architects, transaction-level IP developers and SoC and system-level IP verification and validation engineers.
 
Our System Design and Verification offering includes:
 
  •      SoC estimation software that enables chip architects and planners to evaluate the cost, performance and power of the SoC before initiating a design project;
  •      System-level verification planning and management that automates and guides the verification process;
  •      C-to-Silicon Compiler, providing high-level synthesis with IP reuse automation and architectural analysis and produces RTL micro-architectural designs;
  •      Palladium and Xtreme series of emulation and acceleration hardware;
  •      Incisive Simulation Analysis, providing support for transaction-level verification, analysis and mixed-language testbench and full RTL verification;
  •      Incisive Software eXtension for hardware and software co-verification and co-debug; and
  •      Verification IP and SpeedBridge® adapters that enable chip architect and planners to improve productivity while reducing risks associated with standard protocol compliance and provide a catalogue of standard protocols.
 
We also offer customers consulting services for verification acceleration and system emulation. Our QuickCycles program allows customers access to our Palladium and Xtreme simulation acceleration and emulation products, either on their secure internet site or remotely over a high-speed, secure network connection.
 
Digital IC Design and Implementation
 
Our Digital IC offerings include two major categories of offerings: Logic Design and Implementation.
 
Logic Design
 
Our Logic Design offering is comprised of equivalency checking, synthesis and test capabilities within the Encounter digital IC design platform and property checking, simulation, and environment capabilities within the Incisive functional verification platform. This offering provides planning, design, verification and test technologies and services to customers across all digital design end markets. Logic Design capabilities are aggregated into solutions that address our customers’ needs in areas such as power efficiency and advanced process nodes. Our Logic Design offering targets engineers who are tasked with digital chip development planning, functional design, verification, logical implementation and design-for-test, or DFT.
 
Our Logic Design offering includes:
 
  •      Chip Planning System and Incyte Chip Estimator, providing users with the ability to perform technical and cost trade-off analyses in the product planning phase of a project;
  •      Low power capability that enables users to maximize energy efficiency of their designs;
  •      Engineering change order aware products that provide an automated solution for pre-mask and post-mask management of specification changes;
  •      Logic synthesis, enabling simultaneous, multi-objective optimization for key project attributes;


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  •      Implementation signoff, extending into areas of low power, constraints and design sign-off rule verification, to provide more accurate results; and
  •      DFT, automatic test pattern generation and failure diagnosis technologies integrated in the design process, to address the challenges of complex SoC development.
 
Implementation
 
Our Implementation offering is comprised of a range of the Encounter digital IC design platform capabilities. The Implementation offering includes timing analysis, signal integrity and place and route capabilities within the Encounter digital IC design platform. This offering enables customers to create a physical representation of logic models, analyze electrical and physical characteristics of a design and prepare a design for manufacturing.
 
Our Implementation offering includes:
 
  •      Silicon virtual prototyping with automated floorplan synthesis and ranking capabilities, enabling designers to explore the design space and plan the complete implementation of a chip before committing to a specific implementation strategy;
  •      Global RTL and physical synthesis that enables customers to improve the quality of silicon;
  •      Embedded sign-off-qualified variation analysis and optimization across the design flow, providing a more predictable design closure at advanced nodes;
  •      Integrated diagnostic tools for rapid global timing, clock and power analysis and debugging; and
  •      Interoperability with our Custom IC Design offering to enable implementation of mixed-signal ICs.
 
Our Encounter L, XL and GXL offerings also provide designers with the ability to chose the appropriate products that match their needs, ranging from smaller designs on mature technologies to the largest designs on the most advanced process nodes.
 
Custom IC Design and Verification
 
Our Custom IC Design and Verification offering is comprised of a range of Virtuoso custom design platform capabilities and certain DFM products capabilities. The Custom IC Design and Verification offering includes the environment, IC layout and simulation capabilities within the Virtuoso custom design platform. This offering provides designers with an integrated flow for design creation, validation and implementation of silicon-accurate analog, custom digital, mixed-signal, memory and RF designs, while ensuring that these designs are ready for manufacturing through integrated DFM capabilities.
 
Our Virtuoso Custom IC Design and Verification offering includes:
 
  •      Reference flows for analog, mixed-signal, RF and analog-digital integration focused on wireless and analog/mixed-signal market segments;
  •      Comprehensive specification-driven design environment to analyze designs over a broad set of manufacturing and environmental operating conditions;
  •      Schematic-capture support and constraint-driven design techniques to secure and retain a designer’s intent throughout the design process;
  •      Automatic analog circuit sizing and optimization including yield optimization;
  •      Multi-mode simulation for digital, analog, mixed-signal and RF designs; and
  •      Interactive, assisted or fully automated options for custom layout with advanced floorplanning, chip editing, process node migration and analog/mixed-signal routing technologies.
 
Our Virtuoso L, XL and GXL offerings also provide designers with the ability to choose the appropriate products that match their needs, ranging from simple entry-level component design to the most complex DFM-aware SoC designs.
 
System Interconnect Design
 
Our System Interconnect Design offerings include the following capabilities within the Allegro system interconnect design platform: PCB, IC package, SiP, design management and collaboration. Certain offerings also include the simulation capability within the Virtuoso custom design platform. These offerings enable engineers who


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are responsible for the capture, layout and analysis of advanced PCB and IC packages to design high-performance electronic products across the domains of IC, IC package and PCB, to increase functional density and to manage design complexity while reducing cost and time to market.
 
Our System Interconnect Design offering includes:
 
  •      Constraint-driven methodology from advanced design capture and authoring, signal integrity and power delivery optimization and analysis through detailed physical implementation and DFM preparation;
  •      Optimized system level interconnect — the electronic signal and power paths across PCBs, IC Packages and ICs — through a co-design methodology to reduce hardware costs and the duration of design projects;
  •      Embedded support for silicon input/output transceiver algorithmic modeling (using Input / Output Buffer Information Specification 5.0);
  •      Algorithmic modeling, enabling characterization of the latest serial interface protocols that are being adopted across all markets;
  •      Million-bit channel analysis, allowing design engineers to verify standards compliance during the design process;
  •      SiP RF Layout and RF Architect, including a methodology for integrating multiple levels of silicon and discrete functionality in a single performance, cost and size-optimized IC Package; and
  •      SiP integration with our Encounter Digital IC and Virtuoso Custom IC offerings to co-design, streamline and optimize IC Package design.
 
Our System Interconnect Design offerings are available as a set of scalable capability-tiered products, including L, XL and GXL, depending on the requirements of our customers. For the mainstream PCB customers, where individual or small team productivity is a focus, we provide the OrCAD® family of offerings that is marketed worldwide through a network of resellers.
 
Design for Manufacturing
 
With the advent of silicon manufacturing technologies at geometries of 65 nanometer and below, our customers are increasingly concerned about manufacturability of their designs. The physical layout of each IC requires detailed analysis and optimization to ensure that the design can be manufactured in volume while performing as expected. Our strategy is to integrate DFM awareness into our core design platforms of Encounter Digital IC and Virtuoso Custom IC. Some of our DFM capabilities include:
 
  •      Parasitic extraction products that take a physical representation of a design and determine the electrical properties to enable additional simulation and timing analysis;
  •      On-chip power distribution for digital, analog and SoC designs;
  •      Manufacturing design rule checks to ensure the proposed design meets foundry process requirements; and
  •      Analytical and design tools for physical and electrical effects, process proximity correction, and yield / failure analysis diagnostics.
 
Our primary focus in DFM is to address manufacturing effects as early in the product development process as possible. As a result, we are enhancing the DFM awareness of our core Encounter Digital IC and Virtuoso Custom IC product offerings. Where upstream integration is not possible, we offer certain stand-alone DFM products.
 
Third Party Programs and Initiatives
 
In addition to our products, many customers use internally-developed design tools or design tools provided by other EDA companies, as well as IP available from multiple suppliers. We support the use of third-party design products and IP through vehicles such as our Connections® program and through our participation in the OpenAccess Coalition, the Power Forward Initiative and other programs and initiatives. We also contribute to the development and deployment of EDA industry standards.


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Maintenance
 
Customer service and support is critical to the adoption and successful use of our products. We provide our customers with technical support to facilitate their use of our software and hardware solutions.
 
We offer maintenance to our customers as an integral, non-cancelable component of our subscription license agreements, as a component of our term license agreements subject to annual renewal, or as a separate agreement subject to annual renewal for our perpetual license customers.
 
Our Maintenance revenue was $345.3 million, or 40% of our total revenue, during fiscal 2009, $388.5 million, or 37% of our total revenue, during fiscal 2008, and $385.2 million, or 24% of our total revenue, during fiscal 2007. For additional description of our Maintenance revenue, see the discussion under the heading “Results of Operations” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Services
 
We offer a number of fee-based services, including engineering and education services. These services may be sold separately or sold and performed in conjunction with the sale, lease or license of our products.
 
Our Services revenue was $106.5 million, or 13% of our total revenue, during fiscal 2009, $133.5 million, or 13% of our total revenue, during fiscal 2008, and $125.8 million, or 8% of our total revenue, during fiscal 2007. For additional description of our Services revenue, see the discussion under the heading “Results of Operations” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Engineering Services
 
We offer engineering services to aid our customers with the design of complex ICs and the implementation of key design capabilities, including low power, IC packaging and board design, mixed-signal design, functional verification, digital implementation, analog/mixed-signal and system-level. The customers for these services primarily consist of semiconductor and systems companies developing products for the consumer, communications, military and aerospace and computing markets. These ICs range from digital SoCs, analog and RF designs to complex mixed-signal ICs.
 
We offer engineering capabilities to assist customers from product concept to volume manufacturing. We leverage our experience and knowledge of design techniques, our products, leading practices and different design environments to improve the productivity of our own and our customers’ engineering teams. Depending on the customers’ projects and needs, we work with customers using outsourcing, consultative and collaborative offerings. Our Virtual Computer-Aided Design offering enables our engineering teams at one or more of our locations to collaborate with our customers’ teams located elsewhere in the world during the course of their design and engineering projects through a secure network infrastructure. We also make our design IP portfolio available to customers as part of our technology and services solutions. These reusable design and methodology components enable us to efficiently deliver our services and allow our customers to reduce the design complexity and time to market when developing complex SoCs.
 
Through collaboration with our customers, we are able to design advanced ICs and gain direct and early visibility to industry design issues that may not be addressed adequately by today’s EDA technologies. This enables us to target and accelerate the development of new software technology and products to satisfy current and future design requirements.
 
Education Services
 
Our education services offerings can be customized and include training programs that are conducted via the internet or in a classroom setting. The content of these offerings ranges from the latest IC design techniques to methodologies for using the most recent features of our EDA products. The primary focus of education services is to accelerate our customers’ path to productivity in the use of our products.


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Marketing and Sales
 
We generally market our products and provide maintenance and services to existing and prospective customers through a direct sales force consisting of sales people and applications engineers. Applications engineers provide technical pre-sales and post-sales support for software products. Due to the complexity of many of our EDA products and the electronic design process, the sales cycle is generally long, requiring three to six months or more. During the sales cycle, our direct sales force generally provides technical presentations, product demonstrations and support for on-site customer evaluation of our solutions. We also use traditional marketing approaches to promote our products and services, including advertising, direct mail, trade shows, public relations and the internet. We selectively utilize value added resellers to broaden our reach and reduce cost of sales. All OrCAD and selected Incisive products are primarily marketed through these channels. With respect to international sales, we generally market and support our products and services through our subsidiaries. We also use a third-party distributor to sell our products and services to certain customers in Japan.
 
Software Licensing Arrangements
 
We sell software using three license types: subscription, term and perpetual. Customers who prefer to license technology for a specified, limited period of time will choose either a subscription or term license, and customers who prefer to have the right to use the technology continuously without time restriction will choose a perpetual license. Customers who desire to use new technology during the life of the contract will select a subscription license, which allows them limited access to unspecified new technology on a when-and-if-available basis, as opposed to a term or perpetual license, which does not include rights to use new technology. Payment terms for subscription and term licenses generally provide for payments to be made in installments over the license period and payment terms for perpetual licenses generally are net 30 days.
 
We offer a delivery mechanism for term and subscription licenses called eDA Cards. eDA cards have an overall “face” value amount that customers draw down against as they select specific products that are priced based on the particular duration of use the customer desires. The selection and licensing of the specific products is accomplished through an automated on-line system. The card expires when all of the face value is consumed, or on the pre-determined expiration date, whichever comes first. There are two types of eDA Cards. An eDA Gold Card is a term license that enables a customer to access a predetermined list of existing products. An eDA Platinum Card is a subscription license that enables a customer to access existing and new technology.
 
For a further description of our license agreements, revenue recognition policies and results of operations, please refer to the discussion under the heading “Critical Accounting Estimates” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Backlog
 
Our backlog as of January 2, 2010 was approximately $1.6 billion, as compared to approximately $1.8 billion as of January 3, 2009. Backlog consists of revenue to be recognized in fiscal periods after January 2, 2010 from a variety of license types, which generally include, but are not limited to:
 
  •      Subscription licenses for software products;
  •      Sale or lease of hardware;
  •      Maintenance contracts on hardware and software products;
  •      Orders for hardware and software products sold on perpetual and term licenses on which customers have delivery dates after January 2, 2010;
  •      Licenses with payments that are outside our customary terms; and
  •      The undelivered portion of engineering services contracts.
 
The substantial majority of our backlog is generated by our product and maintenance businesses because customer licenses generally include both product and maintenance components. Historically, we have not experienced significant cancellations of our contracts with customers. However, we occasionally reschedule the required completion dates of engineering services contracts, deferring revenue recognition under those contracts beyond the original anticipated completion date. Changes in customer license types or payment terms also can


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impact the timing of revenue recognition. We currently expect approximately 80% of our fiscal 2010 revenue to come from our backlog as of January 2, 2010.
 
Revenue Seasonality
 
Historically, revenue has been lowest in our first quarter and highest in our fourth quarter, with a material decline between the fourth quarter of one year and the first quarter of the following year. However, our license mix has changed such that a substantial proportion of licenses require ratable revenue recognition. Although we still expect the first quarter to remain our lowest quarter for revenue within a fiscal year, we do not expect the decrease in revenue from the fourth quarter of one year to the first quarter of the following year to be as significant as it has been historically.
 
Research and Development
 
Our investment in research and development was $354.7 million during fiscal 2009, $457.9 million during fiscal 2008 and $494.0 million during fiscal 2007.
 
The primary areas of our research and development include SoC design, the design of silicon devices in the nanometer range, high-performance IC packaging, SiP and PCB design, system-level modeling and verification, high-performance logic verification technology and hardware/software co-verification. The electronics industry combines rapid innovation with rapidly increasing design and manufacturing complexity, so we make significant investments in enhancing our current products, as well as creating new products and technologies and integrating those products and technologies together into segmented solutions.
 
Our future performance depends largely on our ability to maintain and enhance our current product development and commercialization, to develop, acquire or operate with new products from third parties, and to develop solutions that meet increasingly demanding productivity, quality, predictability and cost requirements on a schedule that keeps pace with our customers’ technical developments and industry standards.
 
Manufacturing and Software Distribution
 
We perform final assembly and testing of our hardware verification, acceleration and emulation products at our headquarters in San Jose, California. Subcontractors manufacture all major subassemblies, including all individual PCBs and custom ICs, and supply them for qualification and testing before their incorporation into the assembled product.
 
Software and documentation are primarily distributed to customers by secure electronic delivery or on DVD.
 
Proprietary Technology
 
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks and trade secret laws, licenses and restrictive agreements to establish and protect our proprietary rights in technology and products. Many of our products include software or other intellectual property licensed from third parties. We may have to seek new licenses or renew existing licenses for third party software and other intellectual property in the future. As part of performing engineering services for customers, our engineering services business uses certain software and other intellectual property licensed from third parties, including that of our competitors.
 
Competition
 
We compete in the EDA industry for products and maintenance primarily with three companies: Synopsys, Inc., Mentor Graphics Corporation and Magma Design Automation, Inc. We also compete with numerous smaller EDA companies, with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products, and with numerous electronics design and consulting companies. We generally compete on the basis of product quality, product features, level of integration or compatibility with other tools, price, payment terms and maintenance offerings.


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Our maintenance business flows directly from our product business. The competitive issues associated with our maintenance business are substantially similar to those for our product business in that every maintenance contract is the direct result of a product contract, and once we have entered into a product contract, maintenance is generally purchased by the customer to ensure access to bug fixes and service releases, as and when they are made available, and other continued support.
 
Certain competitive factors in the engineering services business as described herein differ from those of the products and maintenance businesses. While we do compete with other EDA companies in the engineering services business, our principal competitors are independent engineering service businesses. These companies vary greatly in focus, geographic location, capability, cost structure and pricing. In addition, manufacturers of electronic devices may be reluctant to purchase services from independent vendors, including us, because they wish to promote their own internal design departments. We compete with these companies by focusing on the design of complex analog, digital and mixed-signal ICs and SoCs. It is our strategy to use engineering services as a differentiator to further promote our products and maintenance businesses.
 
International Operations
 
We have 56 sales offices, design centers and research and development facilities, approximately half of which are located outside of the United States. We consider customer sales and support requirements, the availability of a skilled workforce, and costs and efficiencies, among other relative benefits, when determining what operations to locate internationally. For additional information regarding our international operations, see the discussion under the heading “The effect of foreign exchange rate fluctuations and other risks to our international operations may seriously harm our financial condition” under Item 1A, “Risk Factors” and Note 21 to our Consolidated Financial Statements.
 
Employees
 
As of January 2, 2010, we employed approximately 4,400 individuals, with approximately 1,800 in sales, services, marketing, support and manufacturing activities, approximately 2,000 in product research and development and approximately 600 in management, administration and finance. None of our employees is represented by a labor union and we have experienced no work stoppages. We believe that our employee relations are good.
 
Executive Officers of the Registrant
 
The following table provides information regarding our executive officers as of February 26, 2010:
 
             
Name
 
Age
 
Positions and Offices
 
Lip-Bu Tan
    50     President, Chief Executive Officer and Director
John J. Bruggeman II
    48     Senior Vice President and Chief Marketing Officer
Thomas A. Cooley
    48     Senior Vice President, Worldwide Field Operations
James J. Cowie
    45     Senior Vice President, General Counsel and Secretary
Chi-Ping Hsu
    54     Senior Vice President, Research and Development
Charlie Huang
    46     Senior Vice President and Chief Strategy Officer
Nimish H. Modi
    47     Senior Vice President, Research and Development
Kevin S. Palatnik
    52     Senior Vice President and Chief Financial Officer
 
Our executive officers are appointed by the Board of Directors and serve at the discretion of the Board of Directors.
 
LIP-BU TAN has served as President and Chief Executive Officer of Cadence since January 2009. Mr. Tan has been a member of the Cadence Board of Directors since February 2004 and serves as a member of the Technology Committee of the Cadence Board of Directors. In 1987, Mr. Tan founded Walden International, an international venture capital firm, and since that time has served as its Chairman. Mr. Tan also serves as a director of Flextronics International Ltd., Semiconductor Manufacturing International Corporation and SINA Corporation.


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JOHN J. BRUGGEMAN II has served as Senior Vice President and Chief Marketing Officer of Cadence since August 2009. Before joining Cadence, from February 2004 to July 2009, Mr. Bruggeman served as Chief Marketing Officer at Wind River Systems, Inc., an embedded software company that was acquired by Intel Corporation in July 2009. From May 2002 to January 2004, Mr. Bruggeman was Vice President of Marketing at Mercury Interactive Corporation, a business technology optimization company.
 
THOMAS A. COOLEY has served as Senior Vice President, Worldwide Field Operations of Cadence since October 2008. From March 1995 to October 2008, Mr. Cooley held several sales related positions at Cadence, most recently as Corporate Vice President of Sales for North America, Europe, Middle East, Africa, or EMEA, and India.
 
JAMES J. COWIE has served as Senior Vice President and General Counsel of Cadence since April 2008 and Secretary of Cadence since May 2008. From August 2000 to March 2008, Mr. Cowie held several positions at Cadence, most recently as Corporate Vice President — Business Development, Associate General Counsel and Assistant Secretary.
 
CHI-PING HSU has served as Senior Vice President, Research and Development of Cadence since November 2008. From April 2003 to November 2008, Mr. Hsu held several positions at Cadence, most recently as Corporate Vice President, IC Digital and Power Forward. Before joining Cadence, Mr. Hsu served as President and Chief Operating Officer of Get2Chip Inc., a supplier of high-performance system-on-chip synthesis that was acquired by Cadence in April 2003.
 
CHARLIE HUANG has served as Senior Vice President and Chief Strategy Officer of Cadence since January 2009. From April 2007 to January 2009, Mr. Huang served as Senior Vice President — Business Development of Cadence. Mr. Huang was General Partner at Telos Venture Partners, a Cadence related venture capital firm, from 2004 to 2005. From 2001 to March 2007, Mr. Huang held several positions at Cadence related to business development. Before joining Cadence, Mr. Huang co-founded and was Chief Executive Officer of CadMOS Design Technology, Inc., an EDA company that was acquired by Cadence in 2001.
 
NIMISH H. MODI has served as Senior Vice President, Research and Development of Cadence since November 2008. From August 2006 to November 2008, Mr. Modi served as Corporate Vice President, Front-End Design. Before joining Cadence, from May 1988 to August 2006, Mr. Modi held several positions at Intel Corporation, a semiconductor company, most recently as Vice President in the Enterprise Platforms Group.
 
KEVIN S. PALATNIK has served as Senior Vice President and Chief Financial Officer of Cadence since April 2008. From January 2002 to April 2008, Mr. Palatnik served in a number of positions at Cadence, including as Corporate Vice President, Technical Field Operations and Corporate Vice President, Field Operations Finance, and most recently as Senior Vice President and Corporate Controller. Before joining Cadence, Mr. Palatnik held several engineering and senior financial positions at International Business Machines Corporation, a computer hardware and software company.


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Item 1A. Risk Factors
 
Our business faces many risks. Described below are what we believe to be the material risks that we face. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer.
 
Risks Related to Our Business
 
We are subject to the cyclical nature of the integrated circuit and electronics systems industries, and any downturn in these industries may reduce our orders and revenue.
 
Purchases of our products and services are dependent upon the commencement of new design projects by IC manufacturers and electronics systems companies. The IC and electronics systems industries are cyclical and are 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 IC and electronics systems industries experienced significant challenges in 2008 and 2009. The IC and electronic systems industries have also experienced significant downturns in connection with, or in anticipation of, maturing product cycles of both these industries’ and their customers’ products. As in the past, the economic downturn in 2008 and 2009 was characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Although estimates project moderate growth for the semiconductor industry in 2010, we believe that increased spending on EDA and other tools may grow more slowly than the semiconductor industry as a whole in 2010. The economic downturn in the industries we serve has contributed to the reduction in our revenue in the past and could continue to adversely affect our business, operating results and financial condition.
 
We have experienced varied operating results, and our operating results for any particular fiscal period are affected by the timing of significant orders for our software products, fluctuations in customer preferences for license types and the timing of revenue recognition under those license types.
 
We have experienced, and may continue to experience, varied operating results. In particular, we incurred net losses during fiscal 2009 and fiscal 2008, and we expect to incur a net loss during fiscal 2010. Various factors affect our operating results and some of them are not within our control. Our operating results for any period are affected by the timing of certain orders for our software products.
 
Our operating results are also affected by the mix of license types executed in any given period. We license software using three different license types: subscription, term and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, whereas product revenue associated with subscription licenses is recognized over multiple periods during the term of the license. Revenue may also be deferred under term and perpetual licenses until payments become due and payable from customers with nonlinear payment terms or as cash is collected from customers with lower credit ratings. In addition, revenue is impacted by the timing of license renewals, the extent to which contracts contain flexible payment terms, changes in existing contractual arrangements with customers and the mix of license types (i.e., perpetual, term or subscription) for existing customers. These changes could have the effect of accelerating or delaying the recognition of revenue from the timing of recognition under the original contract. Our license mix has changed such that a substantial proportion of licenses require ratable revenue recognition, and we expect the change in license mix, combined with the slow growth in spending by our customers in the semiconductor sector, may make it difficult for us to increase our revenue.
 
We plan operating expense levels primarily based on forecasted revenue levels. These expenses and the impact of long-term commitments are relatively fixed in the short term. In addition, revenue levels are harder to forecast in a difficult economic environment. A shortfall in revenue could lead to operating results below expectations because we may not be able to quickly reduce these expenses in response to short-term business changes.
 
Generally, the majority of our contracts are executed in the final few weeks of a fiscal quarter. This makes it difficult to estimate with accuracy how much business will be executed before the end of each fiscal quarter. Due to


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the volume or complexity of transactions that we review at the very end of the quarter, or due to operational matters regarding particular agreements, we may not finish processing or ship products under some contracts that have been signed during that fiscal quarter, which means that the associated revenue cannot be recognized in that particular period.
 
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Estimates” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.
 
You should not view our historical results of operations as reliable indicators of our future performance. If our revenue, operating results or business outlook for future periods fall short of the levels expected by securities analysts or investors, the trading price of our common stock could decline.
 
Our operating results and revenue could be adversely affected by customer payment delays, customer bankruptcies and defaults or modifications of licenses or supplier modifications.
 
As a result of the challenging economic environment, our customers, who are primarily concentrated in the semiconductor sector, have experienced and may continue to experience adverse changes in their business and, as a result, may delay or default on their payment obligations, file for bankruptcy or modify or cancel plans to license our products, and our suppliers may significantly and quickly increase their prices or reduce their output. If our customers are not successful in generating sufficient cash or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, although these obligations are generally not cancelable. Our customers’ inability to fulfill payment obligations may adversely affect our revenue and cash flow. Additionally, our customers may seek to renegotiate pre-existing contractual commitments. Payment defaults by our customers or significant reductions in existing contractual commitments could have a material adverse effect on our financial condition and operating results. Because of the high volatility driving material fluctuations in asset prices, the capital and credit markets have contracted, and if we were to seek funding from the capital or credit markets in response to any material level of customer defaults, we may not be able to secure funding on terms acceptable to us or at all, which, may have a material negative impact on our business.
 
Our failure to respond quickly to technological developments could make our products uncompetitive and obsolete.
 
The industries in which we compete experience rapid technology developments, changes in industry standards and customer requirements and frequent new product introductions and improvements. Currently, the industries we serve are experiencing the following trends:
 
  •      Migration to nanometer design — when the size of process features and features, such as wires, transistors and contacts on ICs, continuously shrink due to the ongoing advances in the semiconductor manufacturing processes — represents a major challenge for participants in the semiconductor industry, from IC design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such proportions is challenging the industry in the application of more complex physics and chemistry that is needed to realize advanced silicon devices. For EDA tools, models of each component’s electrical properties and behavior become more complex as do requisite analysis, design and verification capabilities. Novel design tools and methodologies must be invented quickly to remain competitive in the design of electronics in the smallest nanometer ranges.
  •      The challenges of nanometer design are leading some customers to work with older, less risky manufacturing processes that may reduce their need to upgrade or enhance their EDA products and design flows.
  •      The ability to design SoCs increases the complexity of managing a design that, at the lowest level, is represented by billions of shapes on the fabrication mask. In addition, SoCs typically incorporate


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  microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the IC and the related software embedded on the IC.
  •      With the availability of seemingly endless gate capacity, there is an increase in design reuse, or the combining of off-the-shelf design IP with custom logic to create ICs. The unavailability of high-quality design IP that can be reliably incorporated into a customer’s design with our IC implementation products and services could reduce demand for our products and services.
  •      Increased technological capability of the Field-Programmable Gate Array, which is a programmable logic chip, creates an alternative to IC implementation for some electronics companies. This could reduce demand for our IC implementation products and services.
  •      A growing number of low-cost engineering services businesses could reduce the need for some IC companies to invest in EDA products.
 
If we are unable to respond quickly and successfully to these trends, we may lose our competitive position, and our products or technologies may become uncompetitive or obsolete. To compete successfully, we must develop or acquire new products and improve our existing products and processes on a schedule that keeps pace with technological developments and the requirements for products addressing a broad spectrum of designers and designer expertise in our industries. We must also be able to support a range of changing computer software, hardware platforms and customer preferences. We cannot guarantee that we will be successful in this effort.
 
Our stock price has been subject to significant fluctuations, and may continue to be subject to fluctuations.
 
The market price of our common stock has experienced significant fluctuations and may fluctuate or decline in the future, and as a result you could lose the value of your investment. The market price of our common stock may be affected by a number of factors, including, but not limited to:
 
  •      Announcements of our quarterly operating results and revenue and earnings forecasts that fail to meet or are inconsistent with earlier projections or the expectations of our securities analysts or investors;
  •      Changes in our orders, revenue or earnings estimates;
  •      Announcements of a restructuring plan;
  •      Changes in management;
  •      A gain or loss of a significant customer or market segment share;
  •      Announcements of new products or acquisitions of new technologies by us, our competitors or our customers; and
  •      Market conditions in the IC, electronics systems and semiconductor industries.
 
In addition, equity markets in general, and technology companies’ equities in particular, have experienced extreme price and volume fluctuations. Such price and volume fluctuations may adversely affect the market price of our common stock for reasons unrelated to our business or operating results.
 
Litigation could adversely affect our financial condition or operations.
 
We are currently, and in the future may be, involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. We are also currently engaged in a consolidated securities class action lawsuit and shareholder derivative lawsuits. For information regarding the litigation matters in which we are currently engaged, please refer to the discussion under Item 1, “Legal Proceedings.” We cannot provide any assurances that the final outcome of these lawsuits or any other proceedings that may arise in the future will not have a material adverse effect on our business, operating results, financial condition or cash flows. Litigation can be time-consuming and expensive and could divert management’s time and attention from our business, which could have a material adverse effect on our revenues and operating results.


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Our future revenue is dependent in part upon our installed customer base continuing to license or buy additional products, renew maintenance agreements and purchase additional services.
 
Our installed customer base has traditionally generated additional new license, service and maintenance revenues. In future periods, customers may not necessarily license or buy additional products or contract for additional services or maintenance. In some cases, maintenance is renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. If our customers decide not to renew their maintenance agreements or license additional products or contract for additional services, or if they reduce the scope of the maintenance agreements, our revenue could decrease, which could have an adverse effect on our operating results. Our customers, many of which are large semiconductor companies, often have significant bargaining power in negotiations with us. Mergers or acquisitions of our customers can reduce the total level of purchases of our software and services, and in some cases, increase customers’ bargaining power in negotiations with their suppliers, including us.
 
We depend upon our management team and key employees, and our failure to attract, train, motivate and retain management and key employees may make us less competitive in our industries and therefore harm our results of operations.
 
Our business depends upon the efforts and abilities of our executive officers and other key employees, including key development personnel. From time to time, there may be changes in our management team resulting from the hiring and departure of executive officers, and as a result, we may experience disruption to our business that may harm our operating results and our relationships with our employees, customers and suppliers may be adversely affected. Competition for highly skilled executive officers and employees can be 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 facilities. To attract, retain and motivate 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 and increase compensation expense, and pay significant base salaries and cash bonuses, which could harm our operating results. The high cost of training new employees, not fully utilizing these employees, or losing trained employees to competing employers could also reduce our operating margins and harm our business or operating results.
 
In addition, the NASDAQ Marketplace Rules require stockholder approval for new equity compensation plans and significant amendments to existing equity compensation plans, including increases in shares available for issuance under such plans, and prohibit NASDAQ member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions. These regulations could make it more difficult for us to grant equity compensation to employees in the future. To the extent that these regulations make it more difficult or expensive to grant equity compensation to employees, we may incur increased compensation costs or find it difficult to attract, retain and motivate employees, which could materially and adversely affect our business.
 
We may not be able to effectively implement our restructuring plans, and our restructuring plans may not result in the expected benefits we have anticipated, possibly having a negative affect on our future operating results.
 
During fiscal 2008 and fiscal 2009, we initiated restructuring plans in an effort to decrease costs by reducing our workforce and by consolidating facilities. We may not be able to successfully complete and realize the expected benefits of our restructuring plans, such as improvements in operating margins and cash flows, in the restructuring periods contemplated. The restructuring plans have involved and may continue to involve higher costs or a longer timetable than we currently anticipate or may fail to improve our operating results as we anticipate. Our inability to realize these benefits may result in an inefficient business structure that could negatively impact our results of operations. Our restructuring plans have caused us and will cause us to incur substantial costs related to severance and other employee-related costs. Our restructuring plans may also subject us to litigation risks and expenses. In addition, our restructuring plans may have other consequences, such as attrition beyond our planned reduction in workforce, a negative impact on employee morale or our ability to attract highly skilled employees and our competitors may seek to gain a competitive advantage over us. The restructuring plans could also cause our


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remaining employees to leave or result in reduced productivity by our employees, and, in turn, this may affect our revenue and other operating results in the future.
 
We may not receive significant revenue from our current research and development efforts for several years, if at all.
 
Developing EDA technology and integrating acquired technology into existing platforms is expensive, and these investments often require a long time to generate returns. Our strategy involves significant investments in research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain and improve our competitive position. However, we cannot predict that we will receive significant, if any, revenue from these investments.
 
The competition in our industries is substantial and we may not be able to continue to successfully compete in our industries.
 
The EDA industry and the commercial electronics engineering services industry are highly competitive. If we fail to compete successfully in these industries, it could seriously harm our business, operating results or financial condition. To compete in these industries, we must identify and develop or acquire innovative and cost-competitive EDA products, integrate them into platforms and market them in a timely manner. We must also gain industry acceptance for our engineering services and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors, than those of our competitors and the internal design departments of electronics manufacturers. We may not be able to compete successfully in these industries. Factors that could affect our ability to succeed include:
 
  •      The development by others of competitive EDA products or platforms and engineering services, possibly resulting in a shift of customer preferences away from our products and services and significantly decrease revenue;
  •      Decisions by electronics manufacturers to perform engineering services internally, rather than purchase these services from outside vendors due to budget constraints or excess engineering capacity;
  •      The challenges of developing (or acquiring externally-developed) technology solutions that are adequate and competitive in meeting the requirements of next-generation design challenges;
  •      The significant number of current and potential competitors in the EDA industry and the low cost of entry;
  •      Intense competition to attract acquisition targets, possibly making it more difficult for us to acquire companies or technologies at an acceptable price or at all; and
  •      The combination of or collaboration among many EDA companies to deliver more comprehensive offerings than they could individually.
 
We compete in the EDA products market with Synopsys, Inc., Magma Design Automation, Inc. and Mentor Graphics Corporation. We also compete with numerous smaller EDA companies, with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products, and with numerous electronics design and consulting companies. Manufacturers of electronic devices may be reluctant to purchase engineering services from independent vendors such as us because they wish to promote their own internal design departments.
 
We may need to change our pricing models to compete successfully.
 
The highly competitive markets in which we compete can put pressure on us to reduce the prices of our products. If our competitors offer deep discounts on certain products in an effort to recapture or gain market segment share or to sell other software or hardware products, we may then need to lower our prices or offer other favorable terms to compete successfully. Any such changes would be likely to reduce our profit margins and could adversely affect our operating results. Any substantial changes to our prices and pricing policies could cause sales and software license revenues to decline or be delayed as our sales force implements and our customers adjust to the new pricing policies. Some of our competitors may bundle products for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time,


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significantly constrain the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the number of sales or with lower spending, then the reduced license revenues resulting from lower prices could have an adverse effect on our results of operations.
 
We have acquired and expect to acquire other companies and businesses and may not realize the expected benefits of these acquisitions.
 
We have acquired and expect to acquire other companies and businesses in the future. While we expect to carefully analyze each potential acquisition before committing to the transaction, we may not consummate any particular transaction, but may nonetheless incur significant costs, or if a transaction is consummated, we may not be able to integrate and manage acquired products and businesses effectively. In addition, acquisitions involve a number of risks. If any of the following events occurs when we acquire another business, it could seriously harm our business, operating results or 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 evaluating and negotiating these transactions and integrating an acquired business;
  •      The discovery, after completion of the acquisition, of unanticipated liabilities assumed from the acquired business or of assets acquired, such that we cannot realize the anticipated value of the acquisition;
  •      The failure to realize anticipated benefits such as cost savings and revenue enhancements;
  •      The failure to retain key employees of the acquired business;
  •      Difficulties related to integrating the products of an acquired business in, for example, distribution, engineering and customer support areas;
  •      Unanticipated costs;
  •      Customer dissatisfaction with existing license agreements with us, possibly dissuading them from licensing or buying products acquired by us after the effective date of the license; and
  •      The failure to understand and compete effectively in markets where we have limited experience.
 
In a number of our previously completed acquisitions, we have agreed to make future payments, either in the form of employee bonuses or contingent purchase price payments, or earnouts, based on the performance of the acquired businesses or the employees who joined us with the acquired businesses. We may use earnouts for acquisitions in the future. The performance goals pursuant to which these future payments may be made generally relate to achievement by the acquired business or the employees who joined us with the acquired business of certain specified orders, revenue, run rate, product proliferation, product development or employee retention goals during a specified period following completion of the applicable acquisition. Future acquisitions may involve issuances of stock as full or partial payment of the purchase price for the acquired business, grants of incentive stock or options to employees of the acquired businesses (which may be dilutive to existing stockholders), expenditure of substantial cash resources or the incurrence of material amounts of debt.
 
The specific performance goal levels and amounts and timing of employee bonuses or contingent purchase price payments vary with each acquisition. While we expect to derive value from an acquisition in excess of such contingent payment obligations, our strategy may change and we may be required to make certain contingent payments without deriving the anticipated value.
 
We rely on our proprietary technology, as well as software and other intellectual property rights licensed to us by third parties, and we cannot assure you that the precautions taken to protect our rights will be adequate or that we will continue to be able to adequately secure such intellectual property rights from third parties.
 
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secret laws, licenses and restrictive agreements to establish and protect our proprietary rights in technology and products. Despite the precautions we may take to protect our intellectual property, third parties have tried in the past, and may try in the future, to challenge, invalidate or circumvent these safeguards. The rights granted under our patents or attendant to our other intellectual property may not provide us with any competitive advantages. Patents may not be issued on any of our pending applications and our issued patents may not be


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sufficiently broad to protect our technology. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as applicable law protects these rights in the United States. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights.
 
Many of our products include software or other intellectual property licensed from third parties. We may have to seek new or renew existing licenses for such software and other intellectual property in the future. Our engineering services business holds licenses to certain software and other intellectual property owned by third parties, including that of our competitors. Our failure to obtain software or other intellectual property licenses or other intellectual property rights that is necessary or helpful for our business on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm our business, operating results or financial condition.
 
We could lose key technology or suffer serious harm to our business because of the infringement of our intellectual property rights by third parties or because of our infringement of the intellectual property rights of third parties.
 
There are numerous patents in the EDA industry and new patents are being issued at a rapid rate. It is not always 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, we may be compelled to respond to or prosecute intellectual property infringement claims to protect our rights or defend a customer’s rights.
 
Intellectual property infringement claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm our business, operating results or financial condition. In settling these claims, we 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 favorable to us. Being compelled to enter into a license agreement with unfavorable terms could seriously harm our business, operating results or financial condition. Any potential intellectual property litigation could compel us to do one or more of the following:
 
  •      Pay damages (including the potential for treble damages), license fees or royalties (including royalties for past periods) to the party claiming infringement;
  •      Stop licensing products 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, or not be accomplished.
 
If we were compelled to take any of these actions, our business or operating results may suffer.
 
If our security measures are breached and an unauthorized party obtains access to customer data, our information systems may be perceived as being unsecure and customers may curtail or stop their use of our products and services.
 
Our products and services involve the storage and transmission of customers’ proprietary information, and breaches of our security measures could expose us to a risk of loss or misuse of this information, litigation and potential liability. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose existing customers and our ability to obtain new customers.


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The long sales cycle of our products and services makes the timing of our revenue difficult to predict and may cause our operating results to fluctuate unexpectedly.
 
Generally, we have a long sales cycle that can extend up to six months or longer. The complexity and expense associated with our business generally require a lengthy customer education, evaluation 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.
 
In addition, sales of our products and services have been and may in the future be delayed if customers delay approval or commencement of projects because of:
 
  •      The timing of customers’ competitive evaluation processes; or
  •      Customers’ budgetary constraints and budget cycles.
 
Long sales cycles for acceleration and emulation hardware products subject us to a number of significant risks over which we have limited control, including insufficient, excess or obsolete inventory, variations in inventory valuation and fluctuations in quarterly operating results.
 
The majority of our contracts are executed in the final few weeks of a fiscal quarter. This makes it difficult to determine with accuracy how much business will be executed in each fiscal quarter. Also, because of the timing of large orders and our customers’ buying patterns, we may not learn of orders shortfalls, revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter. These factors may cause our operating results to fluctuate unexpectedly, which can cause significant fluctuations in the trading price of our common stock.
 
Our reported financial results may be adversely affected by changes in United States generally accepted accounting principles.
 
United States generally accepted accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by United States issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.
 
The effect of foreign exchange rate fluctuations and other risks to our international operations may seriously harm our financial condition.
 
We have significant operations outside the United States. Our revenue from international operations as a percentage of total revenue was approximately 57% during fiscal 2009, 58% during fiscal 2008 and 54% during fiscal 2007. We expect that revenue from our international operations will continue to account for a significant portion of our total revenue. We also transact business in various foreign currencies, primarily the Japanese yen. The volatility of foreign currencies in certain regions, most notably the Japanese yen, European Union euro, British pound and Indian rupee have had, and may in the future have, a harmful effect on our revenue or operating results.
 
Fluctuations in the rate of exchange between the United States dollar and the currencies of other countries where we conduct business could seriously harm our business, operating results or financial condition. For example, when a foreign currency declines in value relative to the United States dollar, it takes more of the foreign currency to purchase the same amount of United States dollars than before the change. If we price our products and services in the foreign currency, we receive fewer United States dollars than we did before the change. If we price our products and services in United States dollars, the decrease in value of the local currency results in an increase in the price for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in markets where business is transacted in the local currency. On the other hand, when a foreign currency increases in value relative to the United States dollar, it takes more United States


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dollars to purchase the same amount of the foreign currency. As we use the foreign currency to pay for payroll costs and other operating expenses in our international operations, this results in an increase in operating expenses.
 
Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of one of our subsidiaries. A subsidiary’s functional currency is generally the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Although we attempt to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt our results of operations as expressed in United States dollars.
 
Our international operations may also be subject to other risks, including:
 
  •      The adoption or expansion of government trade restrictions;
  •      Limitations on repatriation of earnings;
  •      Limitations on the conversion of foreign currencies;
  •      Reduced protection of intellectual property rights in some countries;
  •      Recessions in foreign economies;
  •      Longer collection periods for receivables and greater difficulty in collecting accounts receivable;
  •      Difficulties in managing foreign operations;
  •      Compliance with U.S. and foreign laws and regulations applicable to our worldwide operations;
  •      Political and economic instability;
  •      Unexpected changes in regulatory requirements;
  •      Tariffs and other trade barriers; and
  •      United States and other governments’ licensing requirements for exports, which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products.
 
We have offices throughout the world, including key research and development facilities outside of the United States. Our operations are dependent upon the connectivity of our operations throughout the world. Activities that interfere with our international connectivity, such as computer hacking or the introduction of a virus into our computer systems, could significantly interfere with our business operations.
 
Our operating results could be adversely affected as a result of changes in our effective tax rates.
 
Our future effective tax rates could be adversely affected by the following:
 
  •      Changes in tax laws or the interpretation of such tax laws, including potential United States and international tax reforms;
  •      Earnings being lower than anticipated in countries where we are taxed at lower rates as compared to the United States federal and state statutory tax rates;
  •      An increase in expenses not deductible for tax purposes, including certain stock-based compensation and impairment of goodwill;
  •      Changes in the valuation allowance against our deferred tax assets;
  •      Changes in judgment from the evaluation of new information that results in a recognition, derecognition, or change in measurement of a tax position taken in a prior period;
  •      Increases to interest expenses classified in the financial statements as income taxes;
  •      New accounting standards or interpretations of such standards;
  •      A change in our decision to indefinitely reinvest foreign earnings outside the United States; or
  •      Results of tax examinations by the Internal Revenue Service, or IRS, and state and foreign tax authorities.
 
Any significant change in our future effective tax rates could adversely impact our results of operations for future periods.


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We have received examination reports from the IRS proposing deficiencies in certain of our tax returns, and the outcome of current and future tax examinations may have a material adverse effect on our results of operations and cash flows.
 
The IRS and other tax authorities regularly examine our income tax returns, and the IRS is currently examining our federal income tax returns for the tax years 2006 through 2008. In July 2006, the IRS completed its field examination of our federal income tax returns for the tax years 2000 through 2002 and issued a Revenue Agent’s Report, or RAR, in which the IRS proposed to assess an aggregate tax deficiency for the three-year period of approximately $324.0 million. In November 2006, the IRS revised the proposed aggregate tax deficiency for the three-year period to approximately $318.0 million. The IRS is contesting our qualification for deferred recognition of certain proceeds received from restitution and settlement in connection with litigation during the period. The proposed tax deficiency for this item is approximately $152.0 million. The remaining proposed tax deficiency of approximately $166.0 million is primarily related to proposed adjustments to our transfer pricing arrangements with foreign subsidiaries and to our deductions for foreign trade income. We have filed a timely protest with the IRS and are seeking resolution of the issues through the Appeals Office of the IRS, or the Appeals Office.
 
In May 2009, the IRS completed its field examination of our federal income tax returns for the tax years 2003 through 2005 and issued a RAR, in which the IRS proposed to assess an aggregate deficiency for the three-year period of approximately $94.1 million. In August 2009, the IRS revised the proposed aggregate tax deficiency for the three-year period to approximately $60.7 million. The IRS is contesting our transfer pricing arrangements with our foreign subsidiaries and deductions for foreign trade income. The IRS made similar claims against our transfer pricing arrangements and deductions for foreign trade income in prior examinations and may make similar claims in its examinations of other tax years. We have filed a timely protest with the IRS and will seek resolution of the issues through the Appeals Office.
 
We believe that the proposed IRS adjustments are inconsistent with applicable tax laws and we are vigorously challenging these proposed adjustments. The RARs are not final Statutory Notices of Deficiency, but the IRS imposes interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at rates published and adjusted quarterly by the IRS and have been between 4% and 10% since 2001.
 
The calculation of our provision (benefit) for income taxes requires us to use significant judgment and involves dealing with uncertainties in the application of complex tax laws and regulations. In determining the adequacy of our provision (benefit) for income taxes, we regularly assess the potential settlement outcomes resulting from income tax examinations. However, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. In addition, we cannot be certain that such amount will not be materially different from the amount that is reflected in our historical income tax provisions and accruals. Should the IRS or other tax authorities assess additional taxes as a result of a current or a future examination, we may be required to record charges to operations in future periods that could have a material impact on the results of operations, financial position or cash flows in the applicable period or periods.
 
Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material differences between forecasted and actual tax rates could have a material impact on our results of operations.
 
Forecasts of our income tax position and resultant effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of estimating our annual income or loss, the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, as well as benefits from available deferred tax assets, the impact of various accounting rules and changes to these rules and results of tax audits. To forecast our global tax rate, pre-tax profits and losses by jurisdiction are estimated and tax expense by jurisdiction is calculated based on such estimates. Forecasts of annual income or loss that are near break-even will cause our estimated annual effective tax rate to be particularly sensitive to any changes to our estimates of tax expense. If our estimate of the pre-tax profit and losses, the mix of our profits and losses, our ability to use deferred tax assets, the results of tax audits, or effective tax rates by jurisdiction is different than those estimates, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of operations.


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Failure to obtain export licenses could harm our business by rendering us unable to ship products and transfer our technology outside of the United States.
 
We must comply with regulations of the United States and of certain other countries in shipping our software products and transferring our technology outside the United States and to foreign nationals. Although we have not had any significant difficulty complying with such regulations so far, any significant future difficulty in complying could harm our business, operating results or financial condition.
 
Errors or defects in our products and services could expose us to liability and harm our reputation.
 
Our customers use our products and services in designing and developing products that involve a high degree of technological complexity, each of which has its own specifications. Because of the complexity of the systems and products with which we work, some of our products and designs can be adequately tested only when put to full use in the marketplace. As a result, our customers or their end users may discover errors or defects in our software or the systems we design, or the products or systems incorporating our design and intellectual property may not operate as expected. Errors or defects could result in:
 
  •      Loss of customers;
  •      Loss of market segment share;
  •      Failure to attract new customers or achieve market acceptance;
  •      Diversion of development resources to resolve the problem;
  •      Loss of or delay in revenue;
  •      Increased service costs; and
  •      Liability for damages.
 
If we become subject to unfair hiring claims, we could be prevented from hiring needed employees, incur liability for damages and incur substantial costs in defending ourselves.
 
Companies in our industry that lose employees to 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 employees or cause us to incur liability for damages. We could also incur substantial costs in defending ourselves or our employees against these claims, regardless of their merits. Defending ourselves from these claims could also divert the attention of our management away from our operations.
 
Our business is subject to the risk of earthquakes.
 
Our corporate headquarters, including certain of our research and development operations and certain of our distribution facilities, is located in the Silicon Valley area of Northern California, a region known to experience seismic activity. If significant seismic activity were to occur, our operations may be interrupted, which would adversely impact our business and results of operations.
 
We maintain research and development and other facilities in parts of the world that are not as politically stable as the United States, and as a result we may face a higher risk of business interruption from acts of war or terrorism than businesses located only or primarily in the United States.
 
We maintain international research and development and other facilities, some of which are in parts of the world that are not as politically stable as the United States. Consequently, we may face a greater risk of business interruption as a result of terrorist acts or military conflicts than businesses located domestically. Furthermore, this potential harm is exacerbated given that damage to or disruptions at our international research and development facilities could have an adverse effect on our ability to develop new or improve existing products as compared to other businesses which may only have sales offices or other less critical operations abroad. We are not insured for losses or interruptions caused by acts of war or terrorism.


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Risks Related to Our Securities and Indebtedness
 
Our debt obligations expose us to risks that could adversely affect our business, operating results or financial condition, and could prevent us from fulfilling our obligations under such indebtedness.
 
We have a substantial level of debt. As of January 2, 2010, we had outstanding indebtedness with a principal balance of $500.2 million as follows:
 
  •      $250.0 million related to our 1.375% Convertible Senior Notes Due December 2011, or the 2011 Notes;
  •      $250.0 million related to our 1.500% Convertible Senior Notes Due December 2013, or the 2013 Notes and, together with the 2011 Notes, the Convertible Senior Notes; and
  •      $0.2 million related to our Zero Coupon Zero Yield Senior Convertible Notes Due 2023, or the 2023 Notes.
 
The level of our current or future indebtedness, among other things, could:
 
  •      Make it difficult for us to satisfy our payment obligations on our debt as described below;
  •      Make us more vulnerable in the event of a downturn in our business;
  •      Reduce funds available for use in our operations or for developments or acquisitions of new technologies;
  •      Make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;
  •      Impose operating or financial covenants on us;
  •      Limit our flexibility in planning for or reacting to changes in our business; or
  •      Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.
 
While we are not currently a party to any loans that would prohibit us from making payment on our outstanding convertible notes, we are not prevented by the terms of the convertible notes from entering into other loans that could prohibit such payments. If we are prohibited from paying our outstanding indebtedness, we could try to obtain the consent of the lenders under those arrangements to make such payment, or we could attempt to refinance the borrowings that contain the restrictions. If we do not obtain the necessary consents or refinance the borrowings, we may be unable to satisfy our outstanding indebtedness. Any such failure would constitute an event of default under our indebtedness, which could, in turn, constitute a default under the terms of any other indebtedness then outstanding.
 
If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any other indebtedness as well.
 
We have in the past and may in the future attempt to access the capital or credit markets in order to obtain funding to meet particular capital or liquidity needs. The capital and credit markets have contracted and, when compounded by the difficult economic environment and our lower levels of business, we may not be able to secure additional funding on terms acceptable to us or at all, which may adversely impact our business and operating results.
 
Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition. In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that permit incorporation by reference of substantial information regarding us and potentially hindering our ability to raise capital through the issuance of our securities and will increase the costs of such registration to us.
 
On the first day of fiscal 2009, we retrospectively adopted new accounting principles as required by the “Debt with Conversion and Other Options” subtopic of the FASB Accounting Standards Codification, and adjusted all periods for which the Convertible Senior Notes were outstanding before the date of adoption. This adoption had an adverse effect on our operating results and financial condition, particularly with respect to interest expense ratios


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commonly referred to by lenders, and could potentially hinder our ability to raise capital through the issuance of debt or equity securities.
 
Conversion of the Convertible Senior Notes will dilute the ownership interests of existing stockholders.
 
The terms of the Convertible Senior Notes permit the holders to convert the Convertible Senior Notes into shares of our common stock. The terms of the Convertible Senior Notes stipulate a net share settlement, which upon conversion of the Convertible Senior Notes requires us to pay the principal amount in cash and the conversion premium, if any, in shares of our common stock based on a daily settlement amount, calculated on a proportionate basis for each day of the relevant 20 trading-day observation period. The initial conversion rate for the Convertible Senior Notes is 47.2813 shares of our common stock per $1,000 principal amount of Convertible Senior Notes, equivalent to a conversion price of approximately $21.15 per share of our common stock. The conversion price is subject to adjustment in some events but will not be adjusted for accrued interest, except in limited circumstances. The conversion of some or all of the Convertible Senior Notes will dilute the ownership interest of our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could adversely affect prevailing market prices of our common stock.
 
Each $1,000 of principal of the Convertible Senior Notes is initially convertible into 47.2813 shares of our common stock, subject to adjustment upon the occurrence of specified events. Holders of the Convertible Senior Notes may convert their notes at their option on any day before the close of business on the scheduled trading day immediately preceding December 15, 2011 in the case of the 2011 Notes and December 15, 2013 in the case of the 2013 Notes, in each case only if:
 
  •      The price of our common stock reaches $27.50 during certain periods of time specified in the Convertible Senior Notes;
  •      Specified corporate transactions occur; or
  •      The trading price of the Convertible Senior Notes falls below 98% of the product of (i) the last reported sale price of our common stock and (ii) the conversion rate on that date.
 
From November 2, 2011, in the case of the 2011 Notes, and November 1, 2013, in the case of the 2013 Notes, and until the close of business on the scheduled trading day immediately preceding the maturity date of such Convertible Senior Notes, holders may convert their Convertible Senior Notes at any time, regardless of the foregoing circumstances. As of January 2, 2010, none of the conditions allowing holders of the Convertible Senior Notes to convert had been met.
 
Although the conversion price of the Convertible Senior Notes is currently $21.15 per share, we entered into hedge and separate warrant transactions concurrent with the issuance of the Convertible Senior Notes to reduce the potential dilution from the conversion of the Convertible Senior Notes. However, we cannot guarantee that such hedges and warrant instruments will fully mitigate the dilution. In addition, the existence of the Convertible Senior Notes may encourage short selling by market participants because the conversion of the Convertible Senior Notes could depress the price of our common stock.
 
At the option of the holders of the Convertible Senior Notes, under certain circumstances we may be required to repurchase the Convertible Senior Notes in cash or shares of our common stock.
 
Under the terms of the Convertible Senior Notes, we may be required to repurchase the Convertible Senior Notes following a “fundamental change” in our corporate ownership or structure, such as a change of control in which substantially all of the consideration does not consist of publicly traded securities, prior to maturity of the Convertible Senior Notes. The repurchase price for the Convertible Senior Notes in the event of a fundamental change must be paid solely in cash. This repayment obligation may have the effect of discouraging, delaying or preventing a takeover of our company that may otherwise be beneficial to investors.


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Hedge and warrant transactions entered into in connection with the issuance of the Convertible Senior Notes may affect the value of our common stock.
 
We entered into hedge transactions with various financial institutions, at the time of issuance of the Convertible Senior Notes, with the objective of reducing the potential dilutive effect of issuing our common stock upon conversion of the Convertible Senior Notes. We also entered into separate warrant transactions with the same financial institutions. In connection with our hedge and warrant transactions, these financial institutions purchased our common stock in secondary market transactions and entered into various over-the-counter derivative transactions with respect to our common stock. These entities or their affiliates are likely to modify their hedge positions from time to time prior to conversion or maturity of the Convertible Senior Notes by purchasing and selling shares of our common stock, other of our securities or other instruments they may wish to use in connection with such hedging. Any of these transactions and activities could adversely affect the value of our common stock and, as a result, the number of shares and the value of the common stock holders will receive upon conversion of the Convertible Senior Notes. In addition, subject to movement in the price of our common stock, if the hedge transactions settle in our favor, we could be exposed to credit risk related to the other party with respect to the payment we are owed from such other party. If the financial institutions with which we entered into these hedge transactions were to fail or default, our ability to settle on these transactions could be harmed or delayed.
 
Rating agencies may provide unsolicited ratings on the Convertible Senior Notes that could reduce the market value or liquidity of our common stock.
 
We have not requested a rating of the Convertible Senior Notes from any rating agency and we do not anticipate that the Convertible Senior Notes will be rated. However, if one or more rating agencies independently elects to rate the Convertible Senior Notes and assigns the Convertible Senior Notes a rating lower than the rating expected by investors, or reduces such rating in the future, the market price or liquidity of the Convertible Senior Notes and our common stock could be harmed. Should a decline in the market price of the Convertible Senior Notes result, as compared to the price of our common stock, this may trigger the right of the holders of the Convertible Senior Notes to convert the Convertible Senior Notes into cash and shares of our common stock.
 
Anti-takeover defenses in our certificate of incorporation and bylaws and certain provisions under Delaware law could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.
 
Our certificate of incorporation and bylaws and certain provisions of the Delaware General Corporation Law that apply to us could make it difficult for another company to acquire control of our company. For example:
 
  •      Our certificate of incorporation allows our 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 of our preferred stock that may be issued in the future may be superior to the rights of holders of our common stock.
  •      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.
 
All or any one of these factors could limit the price that certain investors would be willing to pay for shares of our common stock and could allow our Board of Directors to resist, delay or prevent an acquisition of our company, even if a proposed transaction were favored by a majority of our independent stockholders.
 
Item 1B. Unresolved Staff Comments
 
None.


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Item 2. Properties
 
We own land and buildings at our headquarters located in San Jose, California. We also own buildings in India. As of January 2, 2010, the total square footage of our owned buildings was approximately 950,000.
 
In January 2007, we completed the sale of certain of our land and buildings in San Jose, California. Concurrently with the sale, we leased back from the purchaser all available space in the buildings for two years. The lease term ended in January 2009, and we have vacated the leased buildings.
 
We lease additional facilities in the United States and various other countries. We sublease certain of these facilities where space is not fully utilized or has been involved in restructuring plans.
 
We believe that these facilities, including our newly constructed building located at our headquarters, are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of our operations.
 
Item 3. Legal Proceedings
 
From time to time, we are involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, we accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on our judgments using the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates.
 
During fiscal 2008, three complaints were filed in the United States District Court for the Northern District of California, all alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, on behalf of a purported class of purchasers of Cadence’s common stock. We intend to continue to vigorously defend these complaints and any other securities lawsuits that may be filed. See Note 15 to our Consolidated Financial Statements for additional details and the status of these complaints.
 
Also during fiscal 2008, two derivative complaints were filed in Santa Clara County Superior Court. These complaints purport to bring suit derivatively, on behalf of Cadence, against certain of Cadence’s current and former directors for alleged breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. We are analyzing these derivative complaints and will respond to them appropriately. The parties to these cases have agreed to a temporary stay of the proceedings. See Note 15 to our Consolidated Financial Statements for additional details and the status of these complaints.
 
In light of the preliminary status of these lawsuits, we cannot predict the outcome of these matters. While the outcome of these litigation matters cannot be predicted with any certainty, we do not believe that the outcome of any current matters will have a material adverse effect on our consolidated financial position, liquidity or results of operations.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
None.


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PART II.
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Common Stock Market Price
 
Our common stock is traded on the NASDAQ Global Select Market under the symbol CDNS. We have never declared or paid any cash dividends on our common stock in the past, and we do not plan to pay cash dividends in the foreseeable future. As of February 6, 2010, we had approximately 976 registered stockholders and approximately 28,457 beneficial owners of our common stock.
 
The following table sets forth the high and low sales prices for Cadence common stock for each fiscal quarter in the two-year period ended January 2, 2010:
 
                 
    High     Low  
 
2009
               
First Quarter
  $ 4.64     $ 3.03  
Second Quarter
    6.40       4.26  
Third Quarter
    7.55       5.12  
Fourth Quarter
    8.18       5.60  
2008
               
First Quarter
  $ 17.18     $ 9.89  
Second Quarter
    11.73       10.02  
Third Quarter
    10.64       6.74  
Fourth Quarter
    6.93       2.42  


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Stockholder Return Performance Graph
 
The following graph compares the cumulative 5-year total stockholder return on our common stock relative to the cumulative total return of the NASDAQ Composite index and the S&P 400 Information Technology index. The graph assumes that the value of the investment in our common stock and in each index (including reinvestment of dividends) was $100 on January 1, 2005 and tracks it through January 2, 2010.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cadence Design Systems, Inc.,
The NASDAQ Composite Index, And The S&P 400 Information Technology Index
 
(PERFORMANCE GRAPH)
 
* $100 invested on 1/1/05 in stock or 12/31/04 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
 
Copyright © 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
                                                 
    1/1/05     12/31/05     12/30/06     12/29/07     1/3/09     1/2/10  
 
Cadence Design Systems, Inc. 
    100.00       122.52       129.69       123.32       27.81       43.37  
NASDAQ Composite
    100.00       101.33       114.01       123.71       73.11       105.61  
S&P 400 Information Technology
    100.00       101.70       116.98       121.55       70.30       110.87  
 
The stock price performance included in this graph is not necessarily indicative of future stock price performance


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Issuer Purchases of Equity Securities
 
In February 2008, our Board of Directors authorized a program to repurchase shares of our common stock in the open market with a value of up to $500.0 million in the aggregate. In August 2008, our Board of Directors authorized a new program to repurchase shares of our common stock in the open market with a value of up to an additional $500.0 million in the aggregate. The following table sets forth the repurchases we made during the three months ended January 2, 2010:
 
                                 
                      Maximum Dollar
 
                      Value of Shares that
 
                Total Number of
    May Yet
 
                Shares Purchased
    Be Purchased Under
 
    Total Number
    Average
    as Part of
    Publicly Announced
 
    of Shares
    Price Paid
    Publicly Announced
    Plans or Programs(1)
 
Period   Purchased(1)     Per Share     Plans or Programs     (In millions)  
 
October 4, 2009 – November 7, 2009
    3,914     $ 7.76       ----     $ 854.4  
November 8, 2009 – December 5, 2009
    20,308     $ 5.80       ----     $ 854.4  
December 6, 2009 – January 2, 2010
    287,657     $ 6.13       ----     $ 854.4  
                                 
Total
    311,879     $ 6.13       ----          
                                 
 
 
  (1)  Shares purchased that were not part of our publicly announced programs represent the surrender of shares of restricted stock awards to pay income taxes due upon vesting, and do not reduce the dollar value that may yet be purchased under our publicly announced repurchase programs.


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Item 6. Selected Financial Data – Unaudited
 
The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto and the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results. The notes below the table are provided for comparability purposes due to adoptions of recently issued accounting pronouncements on a prospective basis from the date of adoption or to describe significant, non-recurring transactions.
 
                                         
    Five Fiscal Years Ended January 2, 2010  
    2009     2008     2007     2006     2005  
          As
    As
    As
       
          Adjusted (4)     Adjusted (4)     Adjusted (4)        
    (In millions, except per share amounts)  
 
Revenue
  $    852.6     $   1,038.6     $   1,615.0     $   1,483.9     $   1,329.2  
Income (loss) from operations (1) (2)
    (123.6 )     (1,573.3 )     317.9       224.6       118.8  
Other income (expense), net
    (1.0 )     (16.8 )     58.5       70.4       15.1  
Net income (loss) (1) (2) (3)
    (149.9 )     (1,856.7 )     286.8       142.3       49.3  
Net income (loss) per share – assuming dilution (1) (2) (3)
    (0.58 )     (7.30 )     0.97       0.46       0.16  
Total assets (1) (3)
    1,410.6       1,679.9       3,862.6       3,432.3       3,401.3  
Convertible notes (4)
    436.0       416.6       397.8       610.8       420.0  
Other long-term debt
    ----       ----       ----       ----       128.0  
Stockholders’ equity (1) (3)
    108.4       186.7       2,173.6       1,808.3       1,844.7  
 
 
  (1)  During fiscal 2008, we recorded a $1,317.2 million impairment of goodwill, a $47.1 million impairment of intangible and tangible assets and a $326.0 million valuation allowance against our deferred tax assets. For additional description of the impairments of goodwill and intangible and tangible assets, see Note 13 to our Consolidated Financial Statements. For additional description of the valuation allowance, see Note 4 to our Consolidated Financial Statements.
 
  (2)  We adopted new accounting principles for share-based payments on January 1, 2006 using the modified prospective transition method. Using the modified prospective transition method, we began recognizing compensation expense for equity-based awards granted on or after January 1, 2006 and unvested awards granted prior to January 1, 2006.
 
  (3)  We adopted new accounting principles for recognizing and measuring uncertain tax positions on December 31, 2006, which was the first day of fiscal 2007. For additional description of these accounting principles, see Note 4 to our Consolidated Financial Statements. The cumulative effects of applying these have been reported as an adjustment to our opening balance of Retained earnings or other appropriate components of equity or net assets in our Consolidated Balance Sheet as of the beginning of fiscal 2007.
 
  (4)  We adopted new accounting principles for our Convertible Senior Notes on the first day of fiscal 2009. See Note 3 to our Consolidated Financial Statements for additional information and disclosures regarding this adoption.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K and with Item 1A, “Risk Factors.” Please refer to the cautionary language at the beginning of Part I of this Annual Report on Form 10-K regarding forward-looking statements.
 
Business Overview
 
We develop EDA software and hardware. We license software, sell or lease hardware technology, provide maintenance for our software and hardware and provide engineering and education services throughout the world to help manage and accelerate product development processes for electronics. Our customers use our products and services to design and develop complex ICs and electronics systems. During Fiscal 2009, we had orders of $615 million.
 
We primarily generate revenue from licensing our EDA software, selling or leasing our hardware technology, providing maintenance for our software and hardware and providing engineering services. Substantially all of our revenue is generated from IC manufacturers and designers and electronics systems companies and is dependent upon their commencement of new design projects. As a result, our revenue is significantly influenced by our customers’ business outlook and investment in the introduction of new products and the improvement of existing products.
 
Critical Accounting Estimates
 
In preparing our Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income (loss), as well as on the value of certain assets and liabilities on our Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, accounting for income taxes and allowance for doubtful accounts have the greatest potential impact on our Consolidated Financial Statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 2 to our Consolidated Financial Statements.
 
Revenue Recognition
 
We begin to recognize revenue from licensing and supporting our software and hardware products when all of the following criteria are met:
 
  •      We have persuasive evidence of an arrangement with a customer;
  •      Delivery of all specified products has occurred;
  •      The fee for the arrangement is considered to be fixed or determinable, at the outset of the arrangement; and
  •      Collectibility of the fee is probable.
 
Significant judgment is involved in the determination of whether the facts and circumstances of an arrangement support that the fee for the arrangement is considered to be fixed or determinable and that collectibility of the fee is probable, and that judgment can impact the amount of revenue that we recognize in a reporting period. We must also make these judgments when assessing whether a contract amendment to a term arrangement (primarily in the context of a license extension or renewal) constitutes a concession. Our experience has been that we are able to determine whether a fee is fixed or determinable for term licenses and we have established a history of collecting under the original contract without providing concessions on payments, products


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or services. However, we have concluded that fees are not fixed or determinable for license arrangements executed with customers in certain countries.
 
For installment contracts that do not include a substantial up front payment, we consider that a fee is fixed or determinable only if the arrangement has payment periods that are equal to or less than the term of the licenses and the payments are collected in equal or nearly equal installments, when evaluated over the entire term of the arrangement. While we do not expect that experience to change, if we no longer were to have a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be required to be recognized when payments under the installment contract become due and payable and are collectible. Such a change could have a material adverse effect on our results of operations.
 
Our experience has been that we are generally able to estimate whether collection is probable. Significant judgment is applied as we assess the creditworthiness of our customers to make this determination. If, in our judgment, collection of a fee is not probable, we defer the revenue until the uncertainty is removed, which generally means revenue is recognized upon receipt of cash payment. If we were unable to determine that collection is probable, such a change could have a material adverse effect on our results of operations.
 
A multiple element arrangement, or MEA, is any arrangement that includes or contemplates rights to a combination of software or hardware products, software license types, services, training or maintenance in a single arrangement. From time to time, we may include individual deliverables in separately priced and separately signed contracts with the same customer. We obtain and evaluate all known relevant facts and circumstances in determining whether the separate contracts should be accounted for individually as distinct arrangements or whether the separate contracts are, in substance, a MEA. Significant judgment can be involved in determining whether a group of contracts might be so closely related that they are, in effect, part of a single arrangement.
 
For our subscription licenses, including “eDA Platinum Cards,” the software license agreements typically combine the right to use specified software products, the right to maintenance, and the right to receive and use unspecified future software products for no additional fee, when and if available, during the term of the license agreement. Under these license agreements, when all four of the revenue recognition criteria outlined above are met, we recognize revenue ratably over the term of the license agreement beginning with delivery of the first product. Subscription license revenue is allocated to product and maintenance revenue. The allocation to maintenance revenue is based on the average substantive renewal rates included in the sale of similar term license arrangements. In the event that the license fee for this type of arrangement is not considered to be fixed or determinable at the outset of the arrangement, we recognize revenue at the lesser of (i) the pro-rata portion of the license fee for the applicable period, or (ii) as payments from the customer become due (if all other conditions for revenue recognition have been satisfied).
 
For term and perpetual licenses, including “eDA Gold Cards,” when all four of the revenue recognition criteria outlined above are met, software license fees are recognized as revenue, generally with product fees associated with the specified products recognized “up-front” upon completion of delivery, and with the maintenance fees recognized ratably over the term of the maintenance period. Under our current business model, a relatively small percentage of our revenue from software licenses is recognized on an up-front basis.
 
License agreements under which software fees are recognized up-front do not include the right to receive unspecified future software products. However, in the event such license agreements are executed within close proximity or in contemplation of other license agreements that require ratable revenue recognition with the same customer, the licenses together may be deemed a MEA, in which event all such revenue would be recognized over multiple periods.
 
Revenue from service contracts is recognized either on the time and materials method, as work is performed, or on the percentage-of-completion method. For contracts with fixed or not-to-exceed fees, we estimate on a monthly basis the percentage of completion based on the completion of milestones relating to the arrangement. We have a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all


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revenue and costs would be deferred until the project was completed. Such a change could have a material impact on our results of operations.
 
Accounting for Income Taxes
 
We provide for the effect of income taxes in our Consolidated Financial Statements using the asset and liability method. We also apply a two-step approach to determining the financial statement recognition and measurement of uncertain tax positions.
 
Income tax expense or benefit is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We must make significant assumptions, judgments and estimates to determine our current provision (benefit) for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our deferred tax assets. Our judgments, assumptions and estimates relating to the current provision (benefit) for income taxes include the geographic mix and amount of income (loss), our interpretation of current tax laws, and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Our judgments also include anticipating the tax positions we will take on tax returns before actually preparing and filing the tax returns. Changes in our business, tax laws or our interpretation of tax laws, and developments in current and future tax audits, could significantly impact the amounts provided for income taxes in our results of operations, financial position or cash flows.
 
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. To make this assessment, we take into account predictions of the amount and category of taxable income from various sources and all available positive and negative evidence about these possible sources of taxable income. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. For example, a company’s current year or previous year losses are given more weight than its future outlook. For the years ended January 2, 2010 and January 3, 2009, we concluded that a significant valuation allowance was required based on our evaluation and weighting of the positive and negative evidence. If, in the future, we determine that these deferred tax assets are more likely than not to be realized, a release of all or part, of the related valuation allowance could result in a material income tax benefit in the period such determination is made. For additional description of the valuation allowance, see Note 4 to our Consolidated Financial Statements.
 
We only recognize an income tax position in our financial statements that we judge is more likely than not to be sustained solely on its technical merits in a tax audit, including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If an income tax position meets the more likely than not recognition threshold, then we must measure the amount of the tax benefit to be recognized by determining the largest amount of tax benefit that has a greater than a 50% likelihood of being realized upon effective settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. To determine if a tax position is effectively settled, we must also estimate the likelihood that a taxing authority would review a tax position after a tax examination has otherwise been completed. We must also determine when it is reasonably possible that the amount of unrecognized tax benefits will significantly increase or decrease in the 12 months after each fiscal year-end. These judgments are difficult because a taxing authority may change its behavior as a result of our disclosures in our financial statements. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision.
 
We are also required to assess whether the earnings of our foreign subsidiaries will be indefinitely reinvested outside the United States. As of January 2, 2010, we had recognized a deferred tax liability of $34.7 million related


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to $67.9 million of earnings from certain foreign subsidiaries that are not considered indefinitely invested outside the United States. To calculate the tax liability for the repatriation of these earnings, we are required to estimate the geographic mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income and dividend withholding tax rates, the impact of foreign exchange rate fluctuations, and the potential outcomes of current and future tax audits. Changes in our actual or projected operating results, tax laws or our interpretation of tax laws, foreign exchange rates and developments in current and future tax audits could significantly impact the amounts provided for income taxes in our results of operations, financial position or cash flows.
 
Allowance for Doubtful Accounts
 
We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. This allowance is based on our assessment of the creditworthiness of our customers, historical experience and the overall economic climate of the industries that we serve. While we believe that our allowance for doubtful accounts is adequate, we continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding our ability to collect from our customers. Changes in circumstances, such as an unexpected change in a customer’s ability to meet its financial obligation to us or a customer’s payment trends, are hard to predict and may require us to adjust our estimates of the recoverability of amounts due to us. These changes could have a material adverse effect on our business, financial condition and operating results. As a result of our assessment of increased risk of customer delays or defaults on payment obligations, we have increased our allowance for doubtful accounts to $23.7 million as of January 2, 2010, as compared to $7.5 million as of January 3, 2009.
 
Results of Operations
 
Overview of Fiscal 2009
 
Our fiscal 2009 financial results reflected the following:
 
  •      Continuing pressures on the research and development budgets in our customer base that are used to license, purchase or lease EDA products or services;
  •      Lower business levels due to the challenging macroeconomic environment and the timing of our contract renewals with existing customers;
  •      Lower business levels and up-front revenue recognized due to our transition to a license mix with a higher proportion of ratable revenue, beginning in the third quarter of fiscal 2008;
  •      Decreased costs throughout the company as a result of our restructuring plans and other expense reductions;
  •      An increase in our allowance for doubtful accounts and the proportion of arrangements for which revenue is deferred until payments become due and payable or cash is received from customers, as a result of our assessment of the increased risk of customer delays or defaults on payment obligations; and
  •      Our retrospective adoption of new accounting principles, as required by the “Debt with Conversion and Other Options” subtopic of the FASB Accounting Standards Codification, increasing interest expense for all periods presented.
 
Revenue
 
We primarily generate revenue from licensing our EDA software, selling or leasing our hardware technology, providing maintenance for our software and hardware and providing engineering services. We principally utilize three license types: subscription, term and perpetual. The different license types provide a customer with different conditions of use for our products, such as:
 
  •      The right to access new technology;
  •      The duration of the license; and
  •      Payment timing.


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The timing of our product revenue is significantly affected by the mix of orders executed in any given period. For some orders, such as subscription orders, product and maintenance revenue is recognized ratably over multiple periods. In addition, depending on the individual facts and circumstances of particular orders, we have some orders where product and maintenance revenue is recognized as payments become due and some where revenue is only recognized when payment is received. For other orders, all product revenue is recognized up-front in the same quarter in which the order is executed.
 
We seek to achieve a mix of orders with approximately 90% of the total value of all executed orders consisting of orders for which the revenue is recurring, or ratable in nature, with the balance of the orders made up of orders for which the product revenue is recognized up-front. During fiscal 2009, approximately 90% of the total value of our executed orders was comprised of ratable revenue orders. If we achieve this desired mix of executed orders over time and there are no significant changes to our business, eventually approximately 90% of our revenue would come from ratable orders.
 
Customer decisions regarding these aspects of license transactions determine the license type, timing of revenue recognition and potential future business activity. For example, if a customer chooses a fixed duration of use, this will result in either a subscription or term license. A business implication of this decision is that, at the expiration of the license period, the customer must decide whether to continue using the technology and therefore renew the license agreement. Historically, larger customers generally used products from two or more of our five product groups and rarely completely terminated their relationship with us upon expiration of the license. See the discussion under the heading “Critical Accounting Estimates – Revenue Recognition” and Note 2 of our Consolidated Financial Statements for additional descriptions of license types and timing of revenue recognition.
 
Although we believe that pricing volatility has not generally been a material component of the change in our revenue from period to period, we believe that the amount of revenue recognized in future periods will depend on, among other things, the:
 
  •      Competitiveness of our new technology;
  •      Timing of contract renewals with existing customers;
  •      Length of our sales cycle; and
  •      Size, duration, terms and type of:
  •      Contract renewals with existing customers;
  •      Additional sales to existing customers; and
  •      Sales to new customers.
 
The value and duration of contracts, and consequently product revenue recognized, is affected by the competitiveness of our products. Product revenue recognized in any period is also affected by the extent to which customers purchase subscription, term or perpetual licenses, and the extent to which contracts contain flexible payment terms. The timing of revenue recognition is also affected by changes in the extent to which existing contracts contain flexible payment terms and by changes in contractual arrangements with existing customers (e.g., customers transitioning from subscription license arrangements to term license arrangements).
 
Revenue Mix
 
We analyze our software and hardware businesses by product group, combining revenues for both product and maintenance because of their interrelationship. During fiscal 2009, fiscal 2008 and fiscal 2007, our product groups were as follows:
 
Functional Verification:  Products in this group, including the Incisive functional verification platform, are used to verify that the high level, logical representation of an IC design is functionally correct.
 
Digital IC Design:  Products in this group, including the Encounter digital IC design platform, are used to accurately convert the high-level, logical representation of a digital IC into a detailed physical blueprint and then detailed design information showing how the IC will be physically implemented. This data is used for creation of the photomasks used to manufacture semiconductors.
 
Custom IC Design:  Our custom design products, including the Virtuoso custom design platform, are used for ICs that must be designed at the transistor level, including analog, RF, memory, high performance digital blocks and


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standard cell libraries. Detailed design information showing how an IC will be physically implemented is used for creation of the photomasks used to manufacture semiconductors.
 
System Interconnect Design:  This product group consists of our PCB and IC package design products, including the Allegro and OrCAD® products. The Allegro system interconnect design platform enables consistent co-design of interconnects across ICs, IC packages and PCBs, while the OrCAD line focuses on cost-effective, entry-level PCB solutions.
 
Design for Manufacturing:  Included in this product group are our physical verification and analysis products. These products are used to analyze and verify that the physical blueprint of the IC has been constructed correctly and can be manufactured successfully. Our strategy includes focusing on integrating DFM awareness into our core design platforms of Encounter digital IC design and Virtuoso custom design.
 
For additional description of our current product strategy, see the discussion under the heading “Products and Product Strategy” under Item 1, “Business.”
 
Revenue by Year
 
The following table shows our revenue for fiscal 2009, fiscal 2008 and fiscal 2007 and the dollar change in revenue between years:
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
    (In millions)  
 
Product
  $ 400.8     $ 516.6     $ 1,104.0     $ (115.8 )   $ (587.4 )
Services
    106.5       133.5       125.8       (27.0 )     7.7  
Maintenance
    345.3       388.5       385.2       (43.2 )     3.3  
                                         
Total revenue
  $ 852.6     $ 1,038.6     $ 1,615.0     $ (186.0 )   $ (576.4 )
                                         
 
Product revenue decreased during each of fiscal 2009, as compared to fiscal 2008, and fiscal 2008, as compared to fiscal 2007, primarily because of lower business levels due to the challenges in the macroeconomic environment, the timing of our contract renewals with existing customers, our transition to a ratable license mix and a longer sales cycle. As a result, product revenue decreased for all product groups, and particularly for Digital IC Design, Custom IC Design and Functional Verification products during both fiscal 2009 and fiscal 2008. We expect to recognize increased revenue during fiscal 2010, as compared to fiscal 2009 due to higher business levels and our continued transition to our more ratable business model.
 
Services revenue decreased during fiscal 2009, as compared to fiscal 2008, because of lower business levels due to the challenges in the macroeconomic environment and an increase in the proportion of arrangements for which revenue is deferred until payments become due and payable or cash is received from customers, primarily as a result of our assessment of the increased risk of customer delays or defaults on payment obligations.
 
Maintenance revenue decreased during fiscal 2009, as compared to fiscal 2008, due to the following:
 
  •      Lower business levels due to the challenges in the macroeconomic environment;
  •      An increase in the proportion of arrangements for which revenue is deferred until payments become due and payable or cash is received from customers, primarily as a result of our assessment of the increased risk of customer delays or defaults on payment obligations; and
  •      A decline in maintenance fees resulting from a reduction in the average duration of software license arrangements, because the annual fee for maintenance is lower for arrangements with shorter durations.


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The following table shows the percentage of product and related maintenance revenue contributed by each of our five product groups and Services and other during fiscal 2009, fiscal 2008 and fiscal 2007:
 
                         
    2009     2008     2007  
 
Functional Verification
    22%       22%       24%  
Digital IC Design
    21%       24%       27%  
Custom IC Design
    27%       24%       27%  
System Interconnect Design
    11%       11%       8%  
Design for Manufacturing
    7%       6%       6%  
Services and other
    12%       13%       8%  
                         
Total
    100%       100%       100%  
                         
 
As described under the heading “Critical Accounting Estimates,” certain of our licenses allow customers the ability to remix among software products. Additionally, we have licensed a combination of our products to customers with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products by these customers. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the above table would differ.
 
Although we believe the methodology of allocating revenue to product groups is reasonable, there can be no assurance that such allocated amounts reflect the amounts that would result had the customer individually licensed each specific software solution at the onset of the arrangement.
 
Revenue by Geography
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
    (In millions)  
 
United States
  $ 370.0     $ 435.1     $ 741.9     $ (65.1 )   $ (306.8 )
Other Americas
    20.9       33.0       34.8       (12.1 )     (1.8 )
Europe, Middle East and Africa
    188.9       230.8       296.9       (41.9 )     (66.1 )
Japan
    152.8       204.1       342.6       (51.3 )     (138.5 )
Asia
    120.0       135.6       198.8       (15.6 )     (63.2 )
                                         
Total revenue
  $ 852.6     $ 1,038.6     $ 1,615.0     $ (186.0 )   $ (576.4 )
                                         
 
Revenue by Geography as a Percentage of Total Revenue
 
                         
    2009     2008     2007  
 
United States
    43%       42%       46%  
Other Americas
    3%       3%       2%  
Europe, Middle East and Africa
    22%       22%       19%  
Japan
    18%       20%       21%  
Asia
    14%       13%       12%  
 
No single customer accounted for 10% or more of total revenue during fiscal 2009, fiscal 2008 or fiscal 2007.
 
Changes in foreign currency exchange rates caused our revenue to increase by $7.8 million during fiscal 2009, as compared to fiscal 2008, primarily due to a decrease in the value of the United States dollar when compared to the Japanese yen, partially offset by an increase in the value of the United States dollar when compared to the British pound and the European Union euro. Changes in foreign currency exchange rates caused our revenue to increase by $24.5 million in fiscal 2008, as compared to fiscal 2007, primarily due to a decrease in the value of the United States


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dollar when compared to the Japanese yen and the European Union euro, partially offset by an increase in the value of the United States dollar when compared to the British pound. Additional information about revenue and other financial information by geography can be found in Note 21 to our Consolidated Financial Statements.
 
Stock-based Compensation Expense Summary
 
Stock-based compensation expense is reflected throughout our costs and expenses during fiscal 2009, fiscal 2008 and fiscal 2007 as follows:
 
                         
    2009     2008     2007  
    (In millions)  
 
Cost of product
  $ 0.1     $ 0.2     $ 0.2  
Cost of services
    3.3       4.3       3.9  
Cost of maintenance
    2.1       2.8       2.5  
Marketing and sales
    12.3       17.4       22.2  
Research and development
    26.4       36.7       46.3  
General and administrative
    10.5       19.9       26.3  
                         
Total
  $ 54.7     $ 81.3     $ 101.4  
                         
 
Stock-based compensation expense decreased by $26.6 million during fiscal 2009, as compared to fiscal 2008, and $20.1 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
  •      Newly granted restricted stock awards and restricted stock units, collectively referred to as restricted stock, and stock options have lower fair values, primarily due to our lower stock price;
  •      The decrease in the number of unvested restricted stock and stock options due to a reduction in headcount associated with our restructuring plans and the resignation of certain executives in the fourth quarter of fiscal 2008;
  •      The decrease in the maximum purchase limits under our Employee Stock Purchase Plan, or ESPP, and a lower fair value of purchase rights granted; and
  •      A decrease in stock bonuses.
 
Stock-based compensation expense during fiscal 2008 also decreased, as compared to fiscal 2007, due to the reversal of $6.5 million of stock-based compensation expense related to the modification of certain performance-based restricted stock awards, partially offset by an increase in stock option expense due to the acceleration of vesting of certain executives that resigned during fiscal 2008.
 
We expect stock-based compensation expense to continue to decrease during fiscal 2010, primarily due to lower fair values at grant dates for restricted stock and stock options, the cancellation of restricted stock and stock options as a result of our restructuring plans and other attrition, and a reduced number of equity grants during fiscal 2010.
 
Effects of Restructuring Plans
 
We plan operating expense levels primarily based on forecasted revenue levels. To offset some of the impact of the decrease in our revenue, we have implemented cost savings initiatives, including reducing headcount and related costs and reducing other discretionary spending. During fiscal 2008, we initiated a restructuring plan to improve our operating results and to align our cost structure with expected revenue. This restructuring plan decreased costs during fiscal 2009 by reducing our workforce throughout the company by approximately 625 positions. We expect ongoing annual savings of approximately $150.0 million related to the restructuring activities and other expense reductions initiated in fiscal 2008.
 
During fiscal 2009, we initiated an additional restructuring plan to improve our operating results and to align our cost structure with expected revenue. The 2009 restructuring plan, which we initiated during the second quarter of fiscal 2009 and continued during the fourth quarter of fiscal 2009, is intended to decrease costs by reducing our workforce throughout the company by approximately 345 positions. We expect ongoing annual savings of


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approximately $30.0 million related to the restructuring activities initiated during the second quarter of fiscal 2009. We expect that substantially all of the estimated restructuring plan-related annual operating expense savings related to the 2009 restructuring activities that we initiated during the fourth quarter of fiscal 2009, and announced in January 2010, will be offset by increased spending in connection with developing and enhancing our product technologies. See Note 5 to our Consolidated Financial Statements for additional details of these and our prior restructuring plans.
 
Cost of Revenue
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
    (In millions)  
 
Product
  $ 32.1     $ 50.3     $ 60.1     $ (18.2 )   $ (9.8 )
Services
    90.5       103.3       93.4       (12.8 )     9.9  
Maintenance
    46.6       55.8       61.1       (9.2 )     (5.3 )
 
The following table shows cost of revenue as a percentage of related revenue for fiscal 2009, fiscal 2008 and fiscal 2007:
 
                         
    2009     2008     2007  
 
Product
    8 %     10 %     5 %
Services
    85 %     77 %     74 %
Maintenance
    13 %     14 %     16 %
 
Cost of services as a percentage of Services revenue increased during fiscal 2009, as compared to fiscal 2008, primarily due to decreased Services revenue during fiscal 2009 as noted above.
 
Cost of Product
 
Cost of product includes costs associated with the sale or lease of our hardware and licensing of our software products. Cost of product primarily includes the cost of employee salary, benefits and other employee-related costs, including stock-based compensation expense, amortization of acquired intangibles directly related to our products, the cost of technical documentation and royalties payable to third-party vendors. Cost of product associated with our hardware products also includes materials, assembly and overhead. These additional manufacturing costs make our cost of hardware product higher, as a percentage of revenue, than our cost of software product.
 
A summary of Cost of product during fiscal 2009, fiscal 2008 and fiscal 2007 is as follows:
 
                         
    2009     2008     2007  
    (In millions)  
 
Product related costs
  $ 27.8     $ 33.0     $ 37.8  
Amortization of acquired intangibles
    4.3       17.3       22.3  
                         
Total Cost of product
  $ 32.1     $ 50.3     $ 60.1  
                         


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Cost of product decreased by $18.2 million during fiscal 2009, as compared to fiscal 2008, and $9.8 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Hardware costs
  $ (4.5 )   $ (5.8 )
Amortization of acquired intangibles
    (13.0 )     (5.0 )
Other individually insignificant items
    (0.7 )     1.0  
                 
    $ (18.2 )   $ (9.8 )
                 
 
Hardware costs decreased during fiscal 2009, as compared to fiscal 2008, primarily due to a decrease in hardware sales and a write-off of obsolete inventory that did not recur during fiscal 2009. Hardware costs decreased during fiscal 2008, as compared to fiscal 2007, primarily due to a decrease in hardware sales, partially offset by a write-off of obsolete inventory during fiscal 2008.
 
Amortization of acquired intangibles decreased during fiscal 2009, as compared to fiscal 2008, due to the impairment of certain acquired intangibles during fiscal 2008. Amortization of acquired intangibles decreased during fiscal 2008, as compared to fiscal 2007, because certain acquired intangible assets became fully amortized during the related periods.
 
Cost of product depends primarily upon the extent to which we acquire intangible assets, acquire licenses and incorporate third-party technology in our products that are licensed or sold in any given period, and the actual mix of hardware and software product sales in any given period. Cost of product as a percentage of product revenue increased during fiscal 2008, as compared to fiscal 2007, primarily due to decreased software product revenue during fiscal 2008.
 
Cost of Services
 
Cost of services primarily includes employee salary, benefits and other employee-related costs, costs to maintain the infrastructure necessary to manage a services organization and provisions for contract losses, if any. Cost of services decreased by $12.8 million during fiscal 2009, as compared to fiscal 2008, and increased $9.9 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs. 2008     2008 vs. 2007  
    (In millions)  
 
Salary, benefits and other employee-related costs
  $ (10.2 )   $ 3.3  
Facilities and other infrastructure costs
    (0.4 )     1.9  
Portion of the gain on the sale of land and building that relates to Cost of services expense
    ----       1.1  
Other discretionary spending
    (2.2 )     3.6  
                 
    $ (12.8 )   $ 9.9  
                 
 
Cost of Maintenance
 
Cost of maintenance includes the cost of customer services, such as hot-line and on-site support, employee salary, benefits and other employee-related costs, and documentation of maintenance updates. Cost of maintenance


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decreased by $9.2 million during fiscal 2009, as compared to fiscal 2008, and $5.3 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Salary, benefit and other employee-related costs
  $ (6.2 )   $ (4.6 )
Other discretionary spending
    (3.0 )     (0.7 )
                 
    $ (9.2 )   $ (5.3 )
                 
 
Operating Expenses
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
    (In millions)  
 
Marketing and sales
  $ 286.8     $ 358.4     $ 407.1     $ (71.6 )   $ (48.7 )
Research and development
    354.7       457.9       494.0       (103.2 )     (36.1 )
General and administrative
    122.7       152.0       169.0       (29.3 )     (17.0 )
                                         
Total operating expenses
  $ 764.2     $ 968.3     $ 1,070.1     $ (204.1 )   $ (101.8 )
                                         
 
Operating expenses decreased during fiscal 2009, as compared to fiscal 2008, primarily due to reduced headcount and related costs as a result of our 2008 and 2009 restructuring plans, and our cost savings initiatives to reduce discretionary spending. In addition, fiscal 2008 was a 53-week fiscal year, while fiscal 2009 was a 52-week fiscal year. Operating expenses decreased during fiscal 2008, as compared to fiscal 2007, primarily due to reduced headcount and related costs and our cost savings initiatives to reduce discretionary spending.
 
During fiscal 2007, we recognized a gain on the sale of land and buildings that related to, and accordingly reduced, operating expense for that period. There was no similar reduction during fiscal 2008.
 
The following table shows operating expenses as percentage of total revenue for fiscal 2009, fiscal 2008 and fiscal 2007:
 
                         
    2009     2008     2007  
 
Marketing and sales
    34%       35%       25%  
Research and development
    42%       44%       31%  
General and administrative
    14%       15%       10%  
 
Our operating expenses as a percentage of total revenue increased during fiscal 2008, as compared to fiscal 2007, due to our lower Product revenue during the period.


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Marketing and Sales
 
Marketing and sales expense decreased by $71.6 million during fiscal 2009, as compared to fiscal 2008, and $48.7 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs. 2008     2008 vs. 2007  
    (In millions)  
 
Salary, commissions, benefits and other employee-related costs
  $ (39.3 )   $ (44.7 )
Facilities and other infrastructure costs
    (9.8 )     3.2  
Travel and customer conference costs
    (8.4 )     (5.9 )
Stock-based compensation
    (5.1 )     (4.8 )
Professional services costs
    (3.4 )     1.0  
Executive severance costs
    (1.5 )     1.5  
Portion of the gain on the sale of land and building that relates to Marketing and sales expense
    ----       3.0  
Other discretionary spending
    (4.1 )     (2.0 )
                 
    $ (71.6 )   $ (48.7 )
                 
 
Research and Development
 
Research and development expense decreased by $103.2 million during fiscal 2009, as compared to fiscal 2008, and $36.1 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs. 2008     2008 vs. 2007  
    (In millions)  
 
Salary, benefits and other employee-related costs
  $ (71.4 )   $ (26.8 )
Stock-based compensation
    (10.3 )     (9.6 )
Facilities and other infrastructure costs
    (9.7 )     3.1  
Computer equipment lease costs and maintenance costs associated with third-party software
    (5.5 )     3.0  
Travel costs
    (3.4 )     (3.5 )
Professional services costs
    (1.9 )     (7.3 )
Executive severance costs
    (1.1 )     1.1  
Portion of the gain on the sale of land and building that relates to Research and development expense
    ----       5.1  
Other discretionary spending
    0.1       (1.2 )
                 
    $ (103.2 )   $ (36.1 )
                 


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General and Administrative
 
General and administrative expense decreased by $29.3 million during fiscal 2009 as compared to fiscal 2008, and $17.0 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Legal and other professional services costs
  $ (13.0 )   $ (3.0 )
Salary, benefits and other employee-related costs
    (10.5 )     (12.1 )
Stock-based compensation
    (9.4 )     (6.4 )
Executive severance costs
    (6.7 )     6.7  
Facilities and other infrastructure costs
    (6.2 )     (0.1 )
Losses on the sale of installment contract receivables
    (5.4 )     (7.7 )
Impairment of property, plant and equipment
    5.4       0.4  
Bad debt expense
    16.3       6.2  
Other discretionary spending
    0.2       (1.0 )
                 
    $ (29.3 )   $ (17.0 )
                 
 
Legal and other professional services costs decreased during fiscal 2009 as compared to fiscal 2008, primarily due to a decrease in professional services fees related to our proposed acquisition of Mentor Graphics Corporation and the restatement of our previously issued financial statements for the periods ended March 29, 2008 and June 28, 2008 that did not recur during fiscal 2009. See additional discussion of our current litigation in Note 15 to our Consolidated Financial Statements. Legal and other professional services costs decreased during fiscal 2008, as compared to fiscal 2007, due to litigation costs incurred during fiscal 2007 that did not recur during fiscal 2008, partially offset by increased professional services fees related to our proposed acquisition of Mentor Graphics Corporation and the restatement of our previously issued financial statements for the periods ended March 29, 2008 and June 28, 2008.
 
Losses on the sale of installment contract receivables decreased during fiscal 2009, as compared to fiscal 2008, and during fiscal 2008, as compared to fiscal 2007, due to a reduction in sales of receivables. The change in our license mix has resulted in an increased number of subscription licenses and a decrease in the sale of receivables to financial institutions because we generally do not sell the receivables associated with subscription licenses. Also, as a result of the credit losses recorded by banks during 2008 and 2009 and the financial challenges experienced by banks, a number of banks have become less willing to purchase assets because of capital constraints and concerns about over-exposure to the technology sector.
 
Bad debt expense increased during fiscal 2009, as compared to fiscal 2008, and during fiscal 2008, as compared to fiscal 2007, because certain of our customers experienced and may continue to experience adverse changes in their business, which has resulted and may continue to result in a delay or default on their payment obligations.
 
Executive severance costs during fiscal 2008 relate to the cash payable to three of the five executives who resigned in October 2008. The expense related to the other two resignations of executives is included in our Sales and marketing and Research and development expenses.


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Amortization of Acquired Intangibles
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
    (In millions)  
 
Amortization of acquired intangibles
  $ 11.4     $ 22.7     $ 19.4     $ (11.3 )   $ 3.3  
 
Amortization of acquired intangibles decreased $11.3 million during fiscal 2009, as compared to fiscal 2008, and increased $3.3 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Increase due to additions of acquired intangibles
  $ ----     $ 6.0  
Decrease due to impairment of intangibles during 2008
    (9.5 )     ----  
Decrease due to completed amortization of acquired intangibles
    (1.8 )     (2.7 )
                 
    $ (11.3 )   $ 3.3  
                 
 
Restructuring and Other Charges
 
We have initiated multiple restructuring plans since 2001, including a 2009 restructuring plan which includes restructuring activities initiated during the second quarter of fiscal 2009 as well as restructuring activities initiated during the fourth quarter of fiscal 2009 and announced in January 2010. These restructuring activities initiated during fiscal 2009 are together referred to as the 2009 Restructuring Plan. See Note 5 to our Consolidated Financial Statements for additional details of these restructuring plans.
 
Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Demand for our products and services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty and is especially difficult to predict in light of the current economic challenges and uncertainty. Accordingly, additional actions, including further restructuring of our operations, may be required in the future.
 
2009 Restructuring Plan
 
We have recorded total costs associated with the 2009 Restructuring Plan of $35.1 million. The costs recorded as part of the 2009 Restructuring Plan include severance payments, severance-related benefits and costs for outplacement services that were communicated to the affected employees before January 2, 2010, and estimated severance payments and related benefits that were both probable and estimable as of January 2, 2010 for employees notified after January 2, 2010.
 
Total severance and termination benefits of approximately $16.3 million related to the 2009 Restructuring Plan were paid to employees before January 2, 2010. Approximately $18.6 million of severance and termination benefits related to the 2009 Restructuring Plan will be paid after January 2, 2010, all of which is included in Accounts payable and accrued liabilities in our Consolidated Balance Sheet as of January 2, 2010. Due to varying regulations in the jurisdictions and countries in which we operate, we expect substantially all termination benefits to be paid by January 1, 2011. We expect ongoing annual savings of approximately $30.0 million related to the restructuring activities initiated during the second quarter of 2009. We expect that substantially all of the estimated restructuring plan-related annual operating expense savings related to the 2009 restructuring activities which we initiated during the fourth quarter of 2009 and announced in January 2010 will be offset by increased spending in connection with developing and enhancing our product technologies.


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2008 Restructuring Plan
 
The following table presents Restructuring and other charges for the 2008 Restructuring Plan:
 
                                 
    Severance
                   
    and
    Excess
             
    Benefits     Facilities     Other     Total  
    (In millions)  
 
Fiscal 2009
  $ (3.0 )   $ 0.5     $ ----     $ (2.5 )
Fiscal 2008
  $ 44.3     $ 2.3     $ 0.1     $ 46.7  
 
During fiscal 2008, we recorded $44.3 million of headcount reduction costs associated with the 2008 Restructuring Plan, including severance payments, severance-related benefits and costs for outplacement services, substantially all of which was paid by January 2, 2010.
 
During fiscal 2009, we recorded a net reversal of $2.5 million, consisting of reversals of $3.0 million in termination and related benefits costs that were less than initially estimated and $1.4 million of excess facilities costs due to a reduction in the estimated lease obligation associated with a facility vacated as part of the 2008 Restructuring Plan, partially offset by restructuring expense of $1.9 million related to facilities included in the 2008 Restructuring Plan that we exited during fiscal 2009.
 
Other Restructuring Plans
 
We recorded credits to Restructuring and other charges (credits) of $1.2 million during fiscal 2009, $0.3 million during fiscal 2008 and $9.7 million during fiscal 2007. During fiscal 2009, we recorded a release of $1.2 million of excess facilities costs due to a reduction in the estimated lease obligation associated with a facility vacated as part of the 2002 Restructuring Plan and a reduction in other facilities costs that were less than initially estimated.
 
During fiscal 2007, we completed a lease termination agreement for a facility included in the 2001 Restructuring Plan, whereby we paid $8.2 million and were released from all future obligations related to the facility. We recorded a credit to Restructuring and other charges of $7.1 million during fiscal 2007, representing the lease loss accrual related to this facility in excess of the amount paid.
 
Impairment of Goodwill
 
We conduct a goodwill impairment analysis annually and as necessary if changes in facts and circumstances indicate that the fair value of our reporting unit may be less than the carrying amount. We completed an interim goodwill impairment test during the fourth quarter of fiscal 2008 and recorded an Impairment of goodwill of $1,317.2 million, representing all of our goodwill. For additional description of our impairment of goodwill, see Note 13 to our Consolidated Financial Statements.
 
Impairment of Intangible and Tangible Assets
 
In connection with our cost savings initiatives that were implemented during the fourth quarter of fiscal 2008, we made certain changes to our DFM product strategy. As a result, we recognized an impairment charge of $42.5 million arising from the abandonment of certain identifiable intangible assets and reducing to net realizable value certain other identifiable intangible assets. We also abandoned and impaired $4.6 million of other long-lived assets during fiscal 2008.
 
Interest Expense
 
                         
    2009     2008     2007  
          As Adjusted     As Adjusted  
    (In millions)  
 
Interest expense
  $ 28.9     $ 27.4     $ 28.3  


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On the first day of fiscal 2009, we adopted new accounting principles as required by the “Debt with Conversion and Other Options” subtopic of the FASB Accounting Standards Codification, which requires issuers of certain types of convertible notes to separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This retroactive adoption required us to adjust our Consolidated Financial Statements for prior years to reflect increased interest expense in each of those years. The primary components of Interest expense for fiscal 2009, fiscal 2008 and fiscal 2007 consisted of the non-cash component associated with the amortization of the debt discount as required under these new accounting principles and the contractual interest expense of our Convertible Senior Notes.
 
Other Income (Expense), net
 
Other income (expense), net, for fiscal 2009, fiscal 2008 and fiscal 2007 was as follows:
 
                         
    2009     2008     2007  
    (In millions)  
 
Interest income
  $ 2.6     $ 20.4     $ 48.1  
Gains on sale of non-marketable securities
    ----       1.6       6.0  
Gains (losses) on available-for-sale securities
    2.3       (7.9 )     4.4  
Gains (losses) on securities in the non-qualified deferred compensation trust
    (1.0 )     (8.9 )     7.6  
Gains (losses) on foreign exchange
    0.4       3.4       (2.4 )
Net loss on liquidation of subsidiary
    ----       (9.3 )     ----  
Equity loss from investments
    (0.5 )     (0.9 )     (3.0 )
Write-down of investments
    (5.2 )     (16.7 )     (2.6 )
Other income
    0.4       1.5       0.4  
                         
Total other income (expense), net
  $ (1.0 )   $ (16.8 )   $ 58.5  
                         
 
The decrease in interest income during fiscal 2009, as compared to fiscal 2008, and during fiscal 2008, as compared to fiscal 2007, was due to lower average cash balances and lower interest rates.
 
We determined that certain of our non-marketable securities were other-than-temporarily impaired and we wrote down the investments by $5.2 million during fiscal 2009, $8.6 million during fiscal 2008 and $2.6 million during fiscal 2007. During fiscal 2008, we determined that two of our available-for-sale securities were other-than-temporarily impaired based on the severity and the duration of the impairments, and we wrote down the investments by $8.1 million. All of these impairments are included in the Write-down of investments line in the above table.
 
During fiscal 2008, we purchased approximately 4.3 million shares of Mentor Graphics common stock in connection with our proposed acquisition of Mentor Graphics. After the announcement of our withdrawal of the proposed acquisition of Mentor Graphics during fiscal 2008, we sold our entire equity interest in Mentor Graphics at a loss of $9.4 million, which is included in the Gains (losses) on available-for-sale securities line in the above table.
 
The $9.3 million loss on liquidation of subsidiary is primarily attributable to currency translation adjustment losses, net of gains, previously recorded in Accumulated other comprehensive income on our Consolidated Balance Sheet for a subsidiary that was completely liquidated during fiscal 2008.


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Provision (Benefit) for Income Taxes
 
The provision (benefit) for income taxes and the effective tax rates during fiscal 2009, fiscal 2008 and fiscal 2007 were as follows:
 
                   
    2009   2008   2007
        As Adjusted   As Adjusted
    (In millions, except percentages)
 
Provision (benefit) for income taxes
  $ (3.6)   $ 239.2   $ 61.4
Effective tax rate
    2%     (15)%     18%
 
During fiscal 2009, a change in United States federal tax law allowed companies to elect to carry back the fiscal 2009 net operating loss for a period of three, four or five years instead of the general two-year carryback period. Our benefit for income taxes during fiscal 2009 is primarily due to $27.3 million of tax benefit from the fiscal 2009 United States federal net operating losses that can be utilized to offset taxable income in prior years, that is partially offset by current year interest expense related to unrecognized tax benefits of $13.3 million, and an increase in unrecognized tax benefits, penalties and interest related to prior year tax positions of $14.5 million. With the exception of the fiscal 2009 United States federal net operating loss that can be utilized in prior years, we recorded a valuation allowance that offset the tax benefit from other fiscal 2009 United States losses and tax credits.
 
The $14.5 million increase in unrecognized tax benefits, penalties and interest during fiscal 2009 included $7.3 million of unrecognized tax benefits, penalties and interest that should have been recognized during multiple periods between fiscal 2004 through fiscal 2008. The effects on our fiscal 2009 results and our Consolidated Financial Statements for prior periods are not considered material.
 
We had a fiscal 2008 provision for income taxes, primarily due to the significant fiscal 2008 tax expenses related to the impairment of non-deductible goodwill, the increase in our valuation allowance against our deferred tax assets, and our decision to repatriate previously untaxed foreign earnings. During fiscal 2008, we recognized the impairment of $1,059.7 million of United States goodwill that was non-deductible. We also increased the valuation allowance against our deferred tax assets by $326.0 million because of the uncertainty regarding their ultimate realization. In making this judgment, we considered the fiscal 2008 loss that resulted in a cumulative three-year loss and other factors. Finally, given the challenges in the global capital markets during fiscal 2008, we decided that $317.2 million of previously untaxed earnings from foreign subsidiaries would not be indefinitely reinvested outside of the United States. As a result, we accrued a tax expense of $101.1 million during fiscal 2008 to provide for the federal, state and foreign income taxes on these repatriations.
 
Our effective tax rate was negative for fiscal 2008, as compared to the positive effective tax rate for fiscal 2007, primarily due to the fiscal 2008 Loss before provision for income taxes and the fiscal 2008 tax expenses related to the impairment of non-deductible goodwill, the increase in our valuation allowance against our deferred tax assets, and our decision to repatriate previously untaxed foreign earnings. The fiscal 2007 effective tax rate reflects the $27.8 million tax benefit from the fiscal 2007 effective settlement of the IRS Exam for the 1997-1999 tax years.
 
We expect our effective tax rate for fiscal 2010 to be negative. Our expectation excludes the impact of possible effective settlements of tax examinations that may occur during fiscal 2010. The effective tax rate is negative because we expect to record a loss before provision for income taxes during fiscal 2010 and because we expect to have tax expense on the income of certain foreign subsidiaries and interest expense on our unrecognized tax benefits. In addition, we currently anticipate recording a valuation allowance that will offset the potential tax benefit of certain tax loss and credit carryforwards generated during fiscal 2010.
 
We intend to indefinitely reinvest approximately $79.0 million of undistributed earnings of our foreign subsidiaries as of January 2, 2010, to meet the working capital and long-term capital needs of our foreign subsidiaries. The unrecognized deferred tax liability for these indefinitely reinvested foreign earnings was approximately $35.3 million as of January 2, 2010.
 
We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. We concluded that a valuation


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allowance of $383.2 million was required as of January 2, 2010. This represents an increase in valuation allowance of $52.0 million in comparison with the year ended January 3, 2009. If, in the future, we determine that these deferred tax assets are more likely than not to be realized, a release of all or part of the related valuation allowance could result in a material income tax benefit in the period such determination is made.
 
The IRS and other tax authorities regularly examine our income tax returns and we have received RARs indicating that the IRS has proposed to assess certain tax deficiencies. For further discussion regarding our Income taxes, including the calculation of our valuation allowance, our deferred tax assets, and the status of the IRS examinations, see Note 4 to our Consolidated Financial Statements.
 
Liquidity and Capital Resources
 
                                         
                      Change  
                      2009 vs.
    2008 vs.
 
    2009     2008     2007     2008     2007  
          As Adjusted     As Adjusted              
    (In millions)  
 
Cash, cash equivalents and Short-term investments
  $ 571.3     $ 572.1     $ 1,078.1     $ (0.8 )   $ (506.0 )
Net working capital
    452.8       389.8       743.4       63.0       (353.6 )
Cash provided by operating activities
    25.6       70.3       402.4       (44.7 )     (332.1 )
Cash used for investing activities
    (50.5 )     (126.9 )     (108.4 )     76.4       (18.5 )
Cash provided by (used for) financing activities
    21.0       (443.4 )     (170.1 )     464.4       (273.3 )
 
Cash and Cash Equivalents and Short-term Investments
 
As of January 2, 2010, our principal sources of liquidity consisted of $571.3 million of Cash and cash equivalents and Short-term investments, as compared to $572.1 million as of January 3, 2009 and $1,078.1 million as of December 29, 2007.
 
Our primary sources of cash during fiscal 2009 and fiscal 2008 were:
 
  •      Customer payments under software licenses and from the sale or lease of our hardware products;
  •      Customer payments for services;
  •      Cash received for common stock purchases under our employee stock purchase plan; and
  •      Proceeds from the sale of receivables during fiscal 2008.
 
Our primary uses of cash during fiscal 2009 and fiscal 2008 were:
 
  •      Payments relating to salary, benefits, other employee-related costs and other operating expenses, including our restructuring plans;
  •      Purchases of property, plant and equipment;
  •      Payments to former shareholders of acquired businesses;
  •      Purchases of treasury stock as part of our stock repurchase program during fiscal 2008; and
  •      Repurchase of the 2023 Notes in the amount of $230.2 million pursuant to their terms during fiscal 2008.
 
We expect that current cash and short-term investment balances and cash flows that are generated from operations will be sufficient to meet our working capital, other capital and liquidity requirements for at least the next 12 months.


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Net Working Capital
 
Net working capital increased $63.0 million as of January 2, 2010, as compared to January 3, 2009, and decreased $353.6 million as of January 3, 2009, as compared to December 29, 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
          As Adjusted  
    (In millions)  
 
Accounts payable and accrued liabilities
  $ 110.9     $ 28.8  
Current portion of deferred revenue
    55.4       (37.9 )
Cash and cash equivalents
    0.9       (494.7 )
Prepaid expenses and other
    (0.1 )     (38.8 )
Receivables, net
    (98.0 )     (27.5 )
Convertible notes
    ----       230.4  
Other individually insignificant items
    (6.1 )     (13.9 )
                 
    $ 63.0     $ (353.6 )
                 
 
Cash Flows from Operating Activities
 
Net cash provided by operating activities decreased $44.7 million during fiscal 2009, as compared to fiscal 2008, and $332.1 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Net income (loss), net of non-cash related gains and losses
  $ 55.0     $ (545.1 )
Proceeds from the sale of receivables, net
    (46.4 )     (163.2 )
Changes in operating assets and liabilities, net of effect of acquired businesses
    (53.3 )     376.2  
                 
    $ (44.7 )   $ (332.1 )
                 
 
Cash flows from operating activities include Net income (loss), adjusted for certain non-cash charges, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels, the payment terms set forth in our license agreements and by sales of our receivables. As a result of the challenging economic environment, our customers, who are primarily concentrated in the semiconductor sector, have experienced and may continue to experience adverse changes in their business and as a result, may delay purchasing our products and services or delay or default on their payment obligations. Approximately half of our total Receivables, net and Installment contract receivables, net as of January 2, 2010 relate to ten of our customers. If our customers are not successful in generating sufficient cash or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, although these obligations are generally not cancelable. Our customers’ inability to fulfill payment obligations may adversely affect our cash flow. Additionally, our customers may seek to renegotiate pre-existing contractual commitments. Though we have not yet experienced a material level of defaults, any material payment default by our customers or significant reductions in existing contractual commitments would have a material adverse effect on our financial condition and operating results.
 
We have entered into agreements whereby we may transfer accounts receivable to certain financial institutions on a non-recourse or limited-recourse basis. During fiscal 2009, we transferred accounts receivable to financial institutions on a non-recourse basis, totaling $5.8 million, net of the losses on the sale of the receivables, as compared to $52.2 million during fiscal 2008 and $215.4 million during fiscal 2007. The change in our license mix


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has resulted in an increased number of subscription licenses and, therefore, a decrease in the sale of receivables to financial institutions. For additional information regarding our sales of receivables, see Note 17 to our Consolidated Financial Statements.
 
During fiscal 2008 and the second quarter of fiscal 2009, we initiated restructuring plans to decrease costs by reducing our workforce and by consolidating facilities and we expect ongoing annual savings of approximately $180.0 million related to these restructuring activities and other expense reductions. In January 2010, we announced additional restructuring activities that we initiated during the fourth quarter of fiscal 2009. We expect that substantially all of the estimated annual operating expense savings associated with the restructuring activities announced in January 2010 will be offset by increased spending in connection with developing and enhancing our product technologies.
 
As of January 2, 2010, we had made payments in connection with these restructuring plans in the amount of $59.1 million and we expect to pay an additional amount of $20.8 million. We expect substantially all termination benefits related to these restructuring plans to be paid by January 1, 2011.
 
Cash Flows from Investing Activities
 
Our primary investing activities during fiscal 2009 and fiscal 2008 consisted of:
 
  •      Purchases and proceeds from the sale of property, plant and equipment;
  •      Purchases of available-for-sale securities during fiscal 2008;
  •      Cash paid in business combinations and asset acquisitions, net of cash acquired, and acquisition of intangibles; and
  •      Proceeds from the sale of available-for-sale securities and long-term investments.
 
Net cash used for investing activities decreased $76.4 million during fiscal 2009, as compared to fiscal 2008, and increased $18.5 million during fiscal 2008, as compared to fiscal 2007, due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Purchases of available-for-sale securities
  $ 62.4     $ (62.4 )
Purchases of property, plant and equipment
    56.0       (15.5 )
Cash paid in business combinations and asset acquisitions, net of cash acquired, and acquisition of intangibles
    6.8       59.8  
Proceeds from the sale of property, plant and equipment
    3.9       (46.5 )
Proceeds from the sale of available-for-sale securities
    (52.4 )     50.1  
Other individually insignificant items
    (0.3 )     (4.0 )
                 
    $ 76.4     $ (18.5 )
                 
 
In January 2007, we completed the sale of certain land and buildings in San Jose, California for a sales price of $46.5 million in cash. Concurrently with the sale, we leased back from the purchaser all available space in the buildings. During the lease term, we constructed an additional building on our San Jose, California campus to replace the buildings we sold in this transaction. The decrease in cash payments for Property, plant and equipment during fiscal 2009, as compared to fiscal 2008, is primarily due to the completion of this new building in January 2009.
 
During fiscal 2008, we purchased approximately 4.3 million shares of Mentor Graphics common stock for $62.4 million in connection with our proposed acquisition of Mentor Graphics. After the announcement of our withdrawal of the proposed acquisition of Mentor Graphics we sold our entire equity interest in Mentor Graphics for $53.0 million.


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In connection with our acquisitions completed before January 2, 2010, we may be obligated to pay up to an aggregate of $15.9 million in cash during the next 32 months if certain defined performance goals are achieved in full, of which $8.1 million would be included as compensation expense in our Consolidated Statements of Operations.
 
We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, purchasing software licenses, business combinations, and making long-term equity investments.
 
Cash Flows from Financing Activities
 
Financing cash flows during fiscal 2009 consisted primarily of the issuance of common stock under certain employee plans.
 
Net cash provided by financing activities was $21.0 million during fiscal 2009, as compared to net cash used in financing activities of $443.4 million during fiscal 2008, and $170.1 million during fiscal 2007. The changes in our financing cash flows are due to the following:
 
                 
    Change  
    2009 vs.
    2008 vs.
 
    2008     2007  
    (In millions)  
 
Purchases of treasury stock
  $ 274.0     $ 125.5  
Principal payments of our notes due 2023
    230.2       (230.2 )
Proceeds from the issuance of common stock
    (20.2 )     (207.3 )
Proceeds from receivable sale financing
    (18.0 )     18.0  
Payments on our term loan
    ----       28.0  
Other individually insignificant items
    (1.6 )     (7.3 )
                 
    $ 464.4     $ (273.3 )
                 
 
The decrease in Proceeds from the issuance of common stock during fiscal 2009, as compared to fiscal 2008, is primarily due to decreased purchase limits under our ESPP, which became effective during fiscal 2009. We did not repurchase any of our common stock during fiscal 2009. As of January 2, 2010, we had $854.4 million remaining under the stock repurchase programs authorized by our Board of Directors.
 
During fiscal 2008, we repurchased $230.2 million principal amount of the 2023 Notes upon election of the holders of the 2023 Notes pursuant to the terms thereof, for total consideration of $230.8 million.
 
We record a gain or loss on re-issuance of treasury stock based on the total proceeds received in the transaction. During fiscal 2009, we recorded losses on the re-issuance of treasury stock of $213.4 million as a component of Retained earnings (Accumulated deficit).
 
Other Factors Affecting Liquidity and Capital Resources
 
Income Taxes
 
We provide for United States income taxes on earnings of our foreign subsidiaries unless the earnings are considered indefinitely invested outside the United States. As of January 2, 2010, we had recognized a deferred tax liability of $34.7 million related to $67.9 million of earnings from certain foreign subsidiaries that are not considered indefinitely reinvested outside the United States and for which we have previously made a provision for income tax. We repatriated $50.0 million of the $67.9 million during January 2010 and expect to repatriate $12.9 million of the remainder during fiscal 2010. We estimate that the fiscal 2010 repatriations will result in fiscal 2010 cash tax payments of approximately $2.2 million.
 
We intend to indefinitely reinvest approximately $79.0 million of undistributed earnings of our foreign subsidiaries as of January 2, 2010, to meet the working capital and long-term capital needs of our foreign


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subsidiaries. The unrecognized deferred tax liability for these indefinitely reinvested foreign earnings was approximately $35.3 million as of January 2, 2010.
 
The IRS and other tax authorities regularly examine our income tax returns and we have received RARs pursuant to which the IRS has proposed to assess certain tax deficiencies. For additional description of our IRS Examinations, see Note 4 to our Consolidated Financial Statements.
 
As of January 2, 2010, we had current income tax liabilities related to unrecognized tax benefits of $3.9 million. As of January 2, 2010, we had long-term income tax liabilities related to unrecognized tax benefits of $313.6 million. For additional information on the income tax liabilities related to unrecognized tax benefits, see the discussion under the heading “Contractual Obligations.”
 
1.375% Convertible Senior Notes Due December 2011 and 1.500% Convertible Senior Notes Due December 2013
 
In December 2006, we issued $250.0 million principal amount of our 2011 Notes and $250.0 million of our 2013 Notes. Concurrently with the issuance of the Convertible Senior Notes, we entered into hedge transactions with various parties and, in separate transactions, sold warrants to purchase our common stock to various parties to reduce the potential dilution from the conversion of the Convertible Senior Notes and to mitigate any negative effect such conversion may have on the price of our common stock. The 2011 Notes mature on December 15, 2011 and the 2013 Notes mature on December 15, 2013, and the principal amounts will be paid in cash at maturity. For additional description of the Convertible Senior Notes, including the hedge and warrants transactions, see Note 3 to our Consolidated Financial Statements.
 
Contractual Obligations
 
A summary of our contractual obligations as of January 2, 2010 is as follows:
 
                                         
    Payments Due by Period  
          Less
                More
 
    Total     Than 1 Year     1-3 Years     3-5 Years     Than 5 Years  
    (In millions)  
 
Operating lease obligations
  $ 84.6     $ 24.4     $ 30.3     $ 13.2     $ 16.7  
Purchase obligations
    20.3       19.0       0.9       0.4       ----  
2023 Notes(1)
    0.2       ----       ----       0.2       ----  
Convertible Senior Notes
    500.0       ----       250.0       250.0       ----  
Contractual interest payments
    21.9       7.2       10.9       3.8       ----  
Current income tax payable and Unrecognized tax benefits
    8.0       8.0       ----       ----       ----  
Other long-term contractual obligations(2)
    237.8       ----       232.4       2.5       2.9  
                                         
Total
  $ 872.8     $ 58.6     $ 524.5     $ 270.1     $ 19.6  
                                         
 
 
 
  (1)   The 2023 Notes are due in August 2023. However, the holders of the 2023 Notes can require us to repurchase for cash the remaining portion of the 2023 Notes on August 15, 2013 for 100.00% of the principal amount. Therefore, we have included $0.2 million of principal of the 2023 Notes on the potential repurchase of the 2023 Notes in the 3-5 Years column in the above table.
 
  (2)   Included in other long-term contractual obligations are long-term income tax liabilities related to unrecognized tax benefits of $313.6 million, and of that amount we estimate that $215.9 million will be paid or settled within 1 to 3 years. We did not include the remaining long-term income tax liabilities of $97.7 million in the table above, because we estimated that this liability can be offset by available net operating loss and tax credit carryforwards, and that future cash payments will not be required to settle this liability. However, the total amounts of income tax payable and the timing of such tax payments may depend upon the resolution of current and future tax examinations that cannot be estimated with certainty. The remaining portion of other long-term contractual obligations is primarily acquisition-related liabilities.


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With respect to purchase obligations that are cancelable by us, the table includes the amount that would have been payable if we had canceled the obligation as of January 2, 2010 or the earliest cancellation date.
 
In connection with our acquisitions completed before January 2, 2010, we may be obligated to pay up to an aggregate of $15.9 million in cash during the next 32 months if certain defined performance goals are achieved in full.
 
Off-Balance Sheet Arrangements
 
As of January 2, 2010, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
New Accounting Standards
 
In October 2009, the FASB issued new accounting standards for multiple-deliverable arrangements and for revenue arrangements that include both tangible products and software elements.
 
The new standards for multiple-deliverable arrangements enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements.
 
Under the new standards for revenue arrangements that include both tangible products and software elements, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the pre-existing software revenue guidance. In addition, hardware components of a tangible product containing software components are always excluded from the pre-existing software revenue guidance.
 
We are currently evaluating the application to our revenue arrangements of the two new accounting standards described above. The impact of these new standards may result in revenue being recognized for certain sales of hardware and nonsoftware-related deliverables separate from the software deliverables within a multiple element arrangement. Both of these new standards are effective prospectively for revenue arrangements entered into or materially modified during fiscal years beginning on or after June 15, 2010, with the option to provide retrospective presentation for prior years, with early adoption permitted. We plan to adopt these two new accounting standards during our first quarter of fiscal 2011.
 
In June 2009, the FASB issued new accounting standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and require ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. These standards will be effective for us beginning in the first quarter of fiscal 2010. We are currently evaluating the impact that these new standards will have on our Consolidated Financial Statements.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
 
Most of our revenue, expenses and material business activity are transacted in the United States dollar. However, certain of our operations include transactions in foreign currencies and, therefore, we benefit from a weaker dollar, and in certain countries where we invoice customers in the local currency, we are adversely affected by a stronger dollar relative to major currencies worldwide. The primary effect of foreign currency transactions on our results of operations from a weakening United States dollar is an increase in revenue offset by a smaller increase


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in expenses. Conversely, the primary effect of foreign currency transactions on our results of operations from a strengthening United States dollar is a reduction in revenue offset by a smaller reduction in expenses.
 
We enter into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting 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 or other current assets.
 
Our policy governing hedges of foreign currency risk does not allow us to use forward contracts for trading purposes. Our forward contracts generally have maturities of 90 days or less. The effectiveness of our hedging program depends on our ability to estimate future asset and liability exposures. We enter into currency forward exchange contracts based on estimated future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of currency forward exchange contracts with actual underlying asset and liability exposures.
 
The following table provides information, as of January 2, 2010, about our forward foreign currency contracts. The information is provided in United States dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates expressed as units of the foreign currency per United States dollar, which in some cases may not be the market convention for quoting a particular currency. All of these forward contracts matured during January 2010.
 
               
          Weighted
          Average
    Notional
    Contract
    Principal     Rate
    (In millions)      
 
Forward Contracts:
             
Japanese yen
  $ 29.9       91.69
European Union euro
    14.2       0.69
Indian rupee
    13.4       46.64
Canadian Dollar
    10.6       1.06
Israeli shekel
    10.2       3.77
New Taiwan dollar
    7.6       32.19
Hong Kong dollar
    6.8       7.75
British pound sterling
    2.1       0.62
               
Total
  $ 94.8       N/A
               
Estimated fair value
  $ (0.5 )      
               
 
While we actively monitor our foreign currency risks, there can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.
 
Interest Rate Risk
 
Our exposure to market risk for changes in interest rates relates primarily to our portfolio of Cash and cash equivalents. While we are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on our Cash and cash equivalents and the costs associated with foreign currency hedges.


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We invest in high quality credit issuers and, by policy, limit the amount of our credit exposure to any one issuer. As part of our policy, our first priority is to reduce the risk of principal loss. Consequently, we seek to preserve our invested funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in only high quality credit securities that we believe to have low credit risk, and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The short-term interest-bearing portfolio of Cash and cash equivalents includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
 
All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Investments with maturities greater than three months are classified as available-for-sale and are considered to be short-term investments. The carrying value of our interest-bearing instruments approximated fair value as of January 2, 2010. The following table presents the carrying value and related weighted average interest rates for our interest-bearing instruments, which are all classified as Cash and cash equivalents on our Consolidated Balance Sheet as of January 2, 2010.
 
                 
    Carrying
    Average
 
    Value     Interest Rate  
    (In millions)        
 
Interest-Bearing Instruments:
               
Cash equivalents – variable rate
  $ 446.3       0.13%  
Cash – variable rate
    41.7       0.27%  
Cash – fixed rate
    47.6       0.67%  
                 
Total interest-bearing instruments
  $ 535.6       0.19%  
                 
 
Equity Price Risk
 
1.375% Convertible Senior Notes Due December 2011 and 1.500% Convertible Senior Notes Due December 2013
 
In December 2006, we issued $250.0 million principal amount of our 2011 Notes and $250.0 million of our 2013 Notes to three initial purchasers in a private placement pursuant to Section 4(2) of the Securities Act for resale to qualified institutional buyers pursuant to SEC Rule 144A. Concurrently with the issuance of the Convertible Senior Notes, we entered into hedge transactions with various parties and in separate transactions, sold warrants to various parties to reduce the potential dilution from the conversion of the Convertible Senior Notes and to mitigate any negative effect such conversion may have on the price of our common stock. For additional description of the Convertible Senior Notes, including the hedge and warrants transactions, see Note 3 to our Consolidated Financial Statements.
 
Investments
 
We have a portfolio of equity investments that includes marketable equity securities and non-marketable equity securities. Our equity investments are made primarily in connection with our strategic investment program. Under our strategic investment program, from time to time we make cash investments in companies with technologies that are potentially strategically important to us. See Note 6 to our Consolidated Financial Statements for additional details of these investments.


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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 15, “Exhibits and Financial Statement Schedules.”
 
Summary Quarterly Data – Unaudited
 
                                                                 
    2009     2008  
    4th     3rd     2nd     1st     4th     3rd     2nd     1st  
                            As
    As
    As
    As
 
                            Adjusted(4)     Adjusted(4)     Adjusted(4)     Adjusted(4)  
    (In thousands, except per share amounts)  
 
Revenue(1)
  $ 220,279     $ 216,122     $ 209,929     $ 206,302     $ 227,335     $ 232,488     $ 308,041     $ 270,750  
Cost of revenue
    40,390       38,649       46,027       44,177       49,267       51,416       57,063       51,734  
Net income (loss)(1)(2)(3)(5)
    1,790       (14,047 )     (74,357 )     (63,257 )     (1,634,105 )     (170,656 )     (18,812 )     (33,142 )
Net income (loss) per share – basic(1)(2)(3)(5)
    0.01       (0.05 )     (0.29 )     (0.25 )     (6.55 )     (0.67 )     (0.07 )     (0.13 )
Net income (loss) per share – diluted(1)(2)(3)(5)
    0.01       (0.05 )     (0.29 )     (0.25 )     (6.55 )     (0.67 )     (0.07 )     (0.13 )
 
(1) During the quarter ended January 3, 2009, we recorded an adjustment reducing Product revenue by $5.8 million to correct the amount of Product revenue that was previously recognized during the three months ended March 29, 2008. Product revenue for a software arrangement was recognized upon delivery of the software licenses during the three months ended March 29, 2008, but it was later determined that the Product revenue should have been recognized on a ratable basis. The correction is not considered material to the Consolidated Financial Statements.
 
(2) During the quarter ended January 3, 2009, we recorded a $1,317.2 million impairment of goodwill, a $47.1 million impairment of intangible and tangible assets and a $326.0 million valuation allowance against our deferred tax assets. For additional description of the impairments of goodwill and intangible and tangible assets, see Note 13 to our Consolidated Financial Statements. For additional description of the valuation allowance, see Note 4 to our Consolidated Financial Statements.
 
(3) During fiscal 2008, we decided to repatriate earnings from a foreign subsidiary to the United States that had previously been considered to be indefinitely reinvested outside the United States and for which deferred taxes had not been previously provided. As a result, we accrued a tax expense of $71.0 million during the third quarter of fiscal 2008 and $30.1 million during the fourth quarter of fiscal 2008 to provide for the federal, state and foreign income taxes on these repatriations.
 
(4) We adopted new accounting principles for our Convertible Senior Notes on the first day of fiscal 2009. See Note 3 to our Consolidated Financial Statements for additional information and disclosures regarding this adoption.
 
(5) During the quarter ended January 2, 2010, we recorded a $15.2 million tax benefit due to a United States federal tax law that was enacted during the fourth quarter of fiscal 2009, allowing us to carry back our fiscal 2009 net operating loss for a period of three, four or five years to offset taxable income in those preceding tax years. See Note 4 to our Consolidated Financial Statements for additional information regarding this election.
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO, of the effectiveness of the design and operation


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of our disclosure controls and procedures (as defined in Rules 13-15(e) and 15d-15(e) under the Exchange Act) as of January 2, 2010.
 
The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures, and to confirm that any necessary corrective action, including process improvements, was taken. This type of evaluation is done every fiscal quarter so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.
 
Based on their evaluation as of January 2, 2010, our CEO and CFO have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting during the quarter ended January 2, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Inherent Limitations on Effectiveness of Controls
 
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal control must reflect the fact that there are resource constraints, and the benefits of the control must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cadence have been detected.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of January 2, 2010. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that, as of January 2, 2010, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on our internal control over financial reporting, which is included in Item 15, “Exhibits and Financial Statement Schedules.”
 
Item 9B. Other Information
 
None.


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PART III.
 
Item 10. Directors, Executive Officers and Corporate Governance
 
The information required by Item 10 as to directors is incorporated herein by reference from the sections entitled “Proposal 1 – Election of Directors” and “Other Matters – Section 16(a) Beneficial Ownership Reporting Compliance” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders. The executive officers of Cadence are listed at the end of Item 1 of Part I of this Annual Report on Form 10-K.
 
The information required by Item 10 as to Cadence’s code of ethics is incorporated herein by reference from the section entitled “Corporate Governance – Code of Business Conduct” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
The information required by Item 10 as to the director nomination process and Cadence’s Audit Committee is incorporated by reference from the section entitled “Cadence’s Board of Directors – Committees of the Board of Directors” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
Item 11. Executive Compensation
 
The information required by Item 11 is incorporated herein by reference from the sections entitled “Cadence’s Board of Directors – Compensation of Directors,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Compensation of Executive Officers” and “Potential Payments Upon Termination or Change-in-Control and Employment Contracts” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by Item 12 is incorporated herein by reference from the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
Item 13. Certain Relationships and Related Transactions and Director Independence
 
The information required by Item 13 is incorporated herein by reference from the sections entitled “Certain Transactions” and “Cadence’s Board of Directors – Director Independence” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
Item 14. Principal Accountant Fees and Services
 
The information required by Item 14 is incorporated herein by reference from the section entitled “Fees Billed to Cadence by KPMG LLP During Fiscal 2009 and 2008” in Cadence’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.


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PART IV.
 
Item 15. Exhibits and Financial Statement Schedules
 
                         
            Page
 
 
(a) 1.
    Financial Statements
              Reports of Independent Registered Public Accounting Firm     60  
              Consolidated Balance Sheets as of January 2, 2010 and January 3, 2009     62  
              Consolidated Statements of Operations for the three fiscal years ended January 2, 2010     63  
              Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the three fiscal years ended January 2, 2010     64  
              Consolidated Statements of Cash Flows for the three fiscal years ended January 2, 2010     65  
              Notes to Consolidated Financial Statements     66  
 
(a) 2.
    Financial Statement Schedules
        II.  Valuation and Qualifying Accounts and Reserves     113  
        All other schedules are omitted because they are not required or the required information is shown in the Consolidated Financial Statements or Notes thereto.        
             
 
(a) 3.
    Exhibits     116  
       
        The exhibits listed in the accompanying Exhibit Index (following the Signatures section of this Annual Report on Form 10-K) are filed or incorporated by reference as part of this Annual Report on Form 10-K.
       
        The exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K contain agreements to which Cadence is a party. These agreements are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about Cadence or the other parties to the agreements. Certain of the agreements contain representations and warranties by each of the parties to the applicable agreement, and any such representations and warranties have been made solely for the benefit of the other parties to the applicable agreement as of specified dates, may apply materiality standards that are different than those applied by investors, and may be subject to important qualifications and limitations that are not necessarily reflected in the agreement. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon as statements of factual information.
 
 
Cadence, the Cadence logo, Allegro, Connections, Encounter, Incisive, OrCAD, Palladium, SpeedBridge, Virtuoso and Xtreme are registered trademarks of Cadence Design Systems, Inc. Other service marks, trademarks and tradenames referred to in this Annual Report on Form 10-K are the property of their respective owners.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
 
We have audited the accompanying consolidated balance sheets of Cadence Design Systems, Inc. and subsidiaries (the Company) as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 2, 2010. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule, as set forth under Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cadence Design Systems, Inc. and subsidiaries as of January 2, 2010 and January 3, 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended January 2, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in note 3 to the consolidated financial statements, the Company changed its method of accounting for its Convertible Senior Notes due to the retrospective adoption of new accounting requirements issued by the Financial Accounting Standards Board (FASB), as of January 4, 2009. Also, as discussed in note 4 to the consolidated financial statements, the Company changed its method of accounting for uncertainty in income taxes due to the adoption of new accounting requirements issued by the FASB, as of December 31, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cadence Design Systems, Inc.’s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
Mountain View, California
February 26, 2010


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
 
We have audited Cadence Design Systems, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Cadence Design Systems, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control — Integrated Framework issued by the COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cadence Design Systems, Inc. and subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 2, 2010, and our report dated February 26, 2010 expressed an unqualified opinion on those consolidated financial statements and the accompanying financial statement schedule.
 
/s/ KPMG LLP
Mountain View, California
February 26, 2010


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CADENCE DESIGN SYSTEMS, INC
CONSOLIDATED BALANCE SHEETS
January 2, 2010 and January 3, 2009
(In thousands, except par value)
 
ASSETS
 
                 
    2009     2008  
          As Adjusted
 
          (Note 3)  
 
Current Assets:
               
Cash and cash equivalents
  $ 569,115     $ 568,255  
Short-term investments
    2,184       3,840  
Receivables, net of allowances of $14,020 and $7,524, respectively
    200,628       298,665  
Inventories
    24,165       28,465  
Prepaid expenses and other
    54,655       54,765  
                 
Total current assets
    850,747       953,990  
Property, plant and equipment, net
    311,502       354,852  
Acquired intangibles, net
    28,841       49,082  
Installment contract receivables, net of allowances of $9,724 and $0, respectively
    58,448       160,742  
Other assets
    161,049       161,187  
                 
Total Assets
  $ 1,410,587     $ 1,679,853  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
               
Accounts payable and accrued liabilities
  $ 150,207     $ 261,099  
Current portion of deferred revenue
    247,691       303,111  
                 
Total current liabilities
    397,898       564,210  
                 
Long-Term Liabilities:
               
Long-term portion of deferred revenue
    92,298       130,354  
Convertible notes
    436,012       416,572  
Other long-term liabilities
    376,006       382,004  
                 
Total long-term liabilities
    904,316       928,930  
                 
Commitments and Contingencies (Note 15 and Note 16)
               
Stockholders’ Equity:
               
Preferred stock – $0.01 par value; authorized 400 shares, none issued or outstanding
    ----       ----  
Common stock – $0.01 par value; authorized 600,000 shares; issued and outstanding shares: 268,649 as of January 2, 2010; 257,857 as of January 3, 2009
    1,674,396       1,659,302  
Treasury stock, at cost; 37,388 shares as of January 2, 2010; 48,180 shares as of January 3, 2009
    (431,310 )     (695,152 )
Accumulated deficit
    (1,177,983 )     (814,679 )
Accumulated other comprehensive income
    43,270       37,242  
                 
Total stockholders’ equity
    108,373       186,713  
                 
Total Liabilities and Stockholders’ Equity
  $ 1,410,587     $ 1,679,853  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three fiscal years ended January 2, 2010
(In thousands, except per share amounts)
 
                         
    2009     2008     2007  
          As Adjusted
    As Adjusted
 
          (Note 3)     (Note 3)  
 
Revenue:
                       
Product
  $ 400,773     $ 516,603     $ 1,103,970  
Services
    106,555       133,498       125,838  
Maintenance
    345,304       388,513       385,205  
                         
Total revenue
    852,632       1,038,614       1,615,013  
                         
Costs and Expenses:
                       
Cost of product
    32,114       50,303       60,069  
Cost of services
    90,536       103,337       93,360  
Cost of maintenance
    46,593       55,840       61,079  
Marketing and sales
    286,833       358,409       407,148  
Research and development
    354,703       457,913       494,032  
General and administrative
    122,648       152,032       168,997  
Amortization of acquired intangibles
    11,420       22,732       19,421  
Impairment of goodwill
    ----       1,317,200       ----  
Impairment of intangible and tangible assets
    ----       47,069       ----  
Restructuring and other charges (credits)
    31,376       46,447       (9,686 )
Write-off of acquired in-process technology
    ----       600       2,678  
                         
Total costs and expenses
    976,223       2,611,882       1,297,098  
                         
Income (loss) from operations
    (123,591 )     (1,573,268 )     317,915  
Interest expense
    (28,872 )     (27,402 )     (28,260 )
Other income (expense), net
    (1,042 )     (16,843 )     58,530  
                         
Income (loss) before provision (benefit) for income taxes
    (153,505 )     (1,617,513 )     348,185  
Provision (benefit) for income taxes
    (3,634 )     239,202       61,397  
                         
Net income (loss)
  $ (149,871 )   $ (1,856,715 )   $ 286,788  
                         
Net income (loss) per share – basic
  $ (0.58 )   $ (7.30 )   $ 1.06  
                         
Net income (loss) per share – diluted
  $ (0.58 )   $ (7.30 )   $ 0.97  
                         
Weighted average common shares outstanding – basic
    257,782       254,323       271,455  
                         
Weighted average common shares outstanding – diluted
    257,782       254,323       295,591  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the three fiscal years ended January 2, 2010
(In thousands)
 
                                                 
    Common Stock                          
          Par Value
          Retained
    Accumulated
       
          and Capital
          Earnings
    Other
       
          in Excess
    Treasury
    (Accumulated
    Comprehensive
       
    Shares     of Par     Stock     Deficit)     Income     Total  
 
BALANCE, DECEMBER 30, 2006, as adjusted (Note 3)
    274,912     $ 1,508,258     $ (544,855 )   $ 832,426     $   12,484     $ 1,808,313  
Comprehensive income:
                                               
Net income, as adjusted (Note 3)
    ----       ----       ----       286,788       ----       286,788  
Other comprehensive income, net of taxes (Note 12)
    ----       ----       ----       ----       7,773       7,773  
                                                 
Total comprehensive income, net of taxes, as adjusted (Note 3)
                                            294,561  
                                                 
Purchase of treasury stock
    (19,400 )     ----       (399,490 )     ----       ----       (399,490 )
Issuance of common stock and re-issuance of treasury stock under equity incentive plans, net of forfeitures
    20,268       (54,901 )     344,348       (24,384 )     ----       265,063  
Stock received for payment of employee taxes on vesting of restricted stock
    (1,094 )     ----       (19,128 )     ----       ----       (19,128 )
Tax benefit from employee stock transactions
    ----       25,982       ----       ----       ----       25,982  
Tax benefit from call options, as adjusted (Note 3)
    ----       5,370       ----       ----       ----       5,370  
Stock options assumed in acquisitions
    ----       1,841       ----       ----       ----       1,841  
Stock-based compensation expense
    ----       91,850       ----       ----       ----       91,850  
Step acquisition adjustment (Note 14)
    ----       ----       ----       (1,556 )     ----       (1,556 )
Unrecognized tax benefit initial adoption adjustment (Note 4)
    ----       35,251       ----       59,366       ----       94,617  
Unrecognized tax benefit adjustment related to effective settlement with IRS (Note 4)
    ----       6,225       ----       ----       ----       6,225  
                                                 
BALANCE, DECEMBER 29, 2007, as adjusted (Note 3)
      274,686     $ 1,619,876     $ (619,125 )   $ 1,152,640     $ 20,257     $ 2,173,648  
                                                 
Comprehensive loss:
                                               
Net loss, as adjusted (Note 3)
    ----       ----       ----       (1,856,715 )     ----       (1,856,715 )
Other comprehensive income, net of taxes and liquidation of subsidiary (Notes 2 and 12)
    ----       ----       ----       ----       16,985       16,985  
                                                 
Total comprehensive loss, net of taxes, as adjusted (Note 3)
                                            (1,839,730 )
                                                 
Purchase of treasury stock
    (27,034 )     ----       (273,950 )     ----       ----       (273,950 )
Issuance of common stock and re-issuance of treasury stock under equity incentive plans, net of forfeitures
    10,931       (45,621 )     203,037       (110,604 )     ----       46,812  
Stock received for payment of employee taxes on vesting of restricted stock
    (726 )     ----       (5,114 )     ----       ----       (5,114 )
Tax expense from employee stock transactions
    ----       (5,472 )     ----       ----       ----       (5,472 )
Tax benefit from call options, as adjusted (Note 3)
    ----       4,389       ----       ----       ----       4,389  
Stock options assumed in acquisitions
    ----       1,140       ----       ----       ----       1,140  
Stock-based compensation expense
    ----       75,318       ----       ----       ----       75,318  
Unrecognized tax benefit adjustment (Note 4)
    ----       7,893       ----       ----       ----       7,893  
Tax adjustment related to the repatriation of earnings (Note 4)
    ----       1,779       ----       ----       ----       1,779  
                                                 
BALANCE, JANUARY 3, 2009, as adjusted (Note 3)
    257,857     $ 1,659,302     $ (695,152 )   $ (814,679 )   $ 37,242     $ 186,713  
                                                 
Comprehensive loss:
                                               
Net loss
    ----       ----       ----       (149,871 )     ----       (149,871 )
Other comprehensive income, net of taxes (Note 12)
    ----       ----       ----       ----       6,028       6,028  
                                                 
Total comprehensive loss, net of taxes
                                            (143,843 )
                                                 
Issuance of common stock and re-issuance of treasury stock under equity incentive plans, net of forfeitures
    11,824       (28,504 )     269,801       (213,433 )     ----       27,864  
Stock received for payment of employee taxes on vesting of restricted stock
    (1,032 )     ----       (5,959 )     ----       ----       (5,959 )
Tax expense from employee stock transactions
    ----       (299 )     ----       ----       ----       (299 )
Unrecognized tax benefit adjustment (Note 4)
    ----       (6,369 )     ----       ----       ----       (6,369 )
Stock-based compensation expense
    ----       50,266       ----       ----       ----       50,266  
                                                 
BALANCE, JANUARY 2, 2010
    268,649     $ 1,674,396     $ (431,310 )   $ (1,177,983 )   $ 43,270     $ 108,373  
                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three fiscal years ended January 2, 2010
(In thousands)
 
                         
    2009     2008     2007  
          As Adjusted
    As Adjusted
 
          (Note 3)     (Note 3)  
 
Cash and Cash Equivalents at Beginning of Year
  $ 568,255     $ 1,062,920     $ 934,342  
                         
Cash Flows from Operating Activities:
                       
Net income (loss)
    (149,871 )     (1,856,715 )     286,788  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Impairment of goodwill
    ----       1,317,200       ----  
Impairment of intangible and tangible assets
    ----       47,069       ----  
Depreciation and amortization
    93,139       126,489       128,486  
Amortization of debt discount and fees
    20,912       18,019       18,049  
Stock-based compensation
    54,706       81,274       101,415  
Loss from equity method investments
    481       945       3,027  
(Gain) loss on investments, net
    (1,292 )     15,263       (18,090 )
Gain on sale and leaseback of land and buildings
    (122 )     (185 )     (13,141 )
Write-down of investment securities
    5,207       16,653       2,550  
Write-off of acquired in-process technology
    ----       600       2,678  
Non-cash restructuring and other charges (credits)
    (358 )     279       (7,106 )
Loss on liquidation of subsidiary
    ----       9,327       ----  
Tax benefit from call options
    ----       4,389       5,370  
Impairment of property, plant and equipment
    6,730       2,170       2,365  
Deferred income taxes
    (3,438 )     198,784       12,365  
Proceeds from the sale of receivables, net
    5,827       52,232       215,444  
Provisions (recoveries) for losses (gains) on trade accounts receivable and sales returns
    20,947       4,578       (586 )
Other non-cash items
    (637 )     1,807       8,854  
Changes in operating assets and liabilities, net of effect of acquired businesses:
                       
Receivables
    61,966       (31,205 )     15,762  
Installment contract receivables
    114,346       79,635       (393,658 )
Inventories
    3,896       2,584       6,197  
Prepaid expenses and other
    (1,393 )     (4,618 )     (603 )
Other assets
    12,044       (2,778 )     (628 )
Accounts payable and accrued liabilities
    (94,851 )     (42,882 )     20,352  
Deferred revenue
    (95,135 )     25,648       44,775  
Other long-term liabilities
    (27,467 )     3,724       (38,227 )
                         
Net cash provided by operating activities
    25,637       70,286       402,438  
                         
Cash Flows from Investing Activities:
                       
Proceeds from sale of available-for-sale securities
    4,135       56,529       6,468  
Purchases of available-for-sale securities
    ----       (62,447 )     ----  
Proceeds from the sale of long-term investments
    ----       4,028       6,323  
Proceeds from the sale of property, plant and equipment
    3,864       ----       46,500  
Purchases of property, plant and equipment
    (41,308 )     (97,290 )     (81,795 )
Purchases of software licenses
    (774 )     (2,388 )     (2,000 )
Investment in venture capital partnerships and equity investments
    (2,300 )     (4,386 )     (3,214 )
Cash paid in business combinations and asset acquisitions, net of cash acquired, and acquisitions of intangibles
    (14,126 )     (20,931 )     (80,725 )
                         
Net cash used for investing activities
    (50,509 )     (126,885 )     (108,443 )
                         
Cash Flows from Financing Activities:
                       
Proceeds from receivable sale financing
    ----       17,970       ----  
Principal payments on receivable sale financing
    (2,467 )     (793 )     ----  
Principal payments on term loan
    ----       ----       (28,000 )
Payment of convertible notes due 2023
    ----       (230,207 )     ----  
Tax benefit from employee stock transactions
    1,383       483       21,090  
Proceeds from issuance of common stock
    28,010       48,192       255,462  
Stock received for payment of employee taxes on vesting of restricted stock
    (5,959 )     (5,114 )     (19,128 )
Purchases of treasury stock
    ----       (273,950 )     (399,490 )
                         
Net cash provided by (used for) financing activities
    20,967       (443,419 )     (170,066 )
                         
Effect of exchange rate changes on cash and cash equivalents
    4,765       5,353       4,649  
                         
Increase (decrease) in Cash and cash equivalents
    860       (494,665 )     128,578  
                         
Cash and Cash Equivalents at End of Year
  $ 569,115     $ 568,255     $ 1,062,920  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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CADENCE DESIGN SYSTEMS, INC.
January 2, 2010
 
NOTE 1.  CADENCE
 
Cadence Design Systems, Inc., or Cadence, licenses electronic design automation, or EDA, software, sells or leases hardware technology and intellectual property and provides engineering and education services throughout the world to help manage and accelerate electronic product development processes. Cadence customers use its products and services to design and develop complex integrated circuits, or ICs, and electronic systems.
 
NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation and Basis of Presentation
 
Cadence’s fiscal year end is the Saturday closest to December 31. Fiscal 2009 and fiscal 2007 were 52-week years. Fiscal 2008 was a 53-week year. The consolidated financial statements include the accounts of Cadence and its subsidiaries after elimination of intercompany accounts and transactions. All consolidated subsidiaries are wholly-owned by Cadence.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with United States 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.
 
Cash, Cash Equivalents and Short-Term Investments
 
Cadence considers all highly liquid debt instruments, including commercial paper, European Union euro time deposits, repurchase agreements and certificates of deposit, with remaining maturities of three months or less at the time of purchase to be cash equivalents. Investments with maturities greater than three months and less than one year are classified as Short-term investments.
 
Foreign Operations
 
Cadence transacts business in various foreign currencies. The United States dollar is the functional currency of Cadence’s consolidated entities operating in the United States and Cadence’s principal Irish, Israeli, Hungarian and Dutch subsidiaries. The functional currency for Cadence’s other consolidated entities operating outside of the United States is generally the local country’s currency, which is the primary currency in which the entity generates and expends cash. Cadence translates the financial statements of consolidated entities whose functional currency is not the United States dollar into United States dollars. Cadence translates assets and liabilities at the exchange rate in effect as of the financial statement date and translates statement of operations accounts using the average exchange rate for the period. Cadence includes translation adjustments from foreign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature in Stockholders’ Equity as a component of Accumulated other comprehensive income. Cadence reports gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency transactions, in its Consolidated Statements of Operations. Cadence recognized a $9.9 million loss attributable to currency translation adjustment losses, net of gains, from the complete liquidation of a subsidiary during fiscal 2008. There were no significant gains or losses on the liquidation of subsidiaries during fiscal 2009 or fiscal 2007.


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Derivative Financial Instruments
 
Cadence enters into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. The forward contracts are not designated as accounting hedges and, therefore, the unrealized gains and losses are recognized in Other income (expense), net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.
 
Cadence does not use forward contracts for trading purposes. Cadence’s forward contracts generally have maturities of 90 days or less. Recognized gains or losses with respect to our current hedging activities will ultimately depend on how accurately Cadence is able to match the amount of currency forward exchange contracts with underlying asset and liability exposures.
 
Allowance for Doubtful Accounts
 
Cadence analyzes the creditworthiness of its customers, historical experience, changes in customer demand, and the overall economic climate in the industries that Cadence serves, makes judgments as to its ability to collect outstanding receivables, and provides allowances for the portion of receivables when collection is not probable. Provisions are made based upon a specific review of customer receivables and are recorded in operating expenses. Receivables and Installment contract receivables are presented net of allowance for doubtful accounts of $23.7 million as of January 2, 2010 and $7.5 million as of January 3, 2009.
 
Cadence’s customers are primarily concentrated within the semiconductor sector, which was adversely affected by the 2008 and 2009 economic downturn. Approximately half of Cadence’s total Receivables, net and Installment contract receivables, net as of January 2, 2010 relate to ten customers.
 
Cadence believes that its allowance for doubtful accounts is adequate, but Cadence will continue to monitor customer liquidity and other economic conditions, which may result in changes to Cadence’s estimates regarding its allowance for doubtful accounts. The adequacy of the allowance for doubtful accounts is evaluated by Cadence at least quarterly, and any adjustments to the allowance for doubtful accounts resulting from these evaluations could be material to Cadence’s Consolidated Financial Statements.
 
Inventories
 
Inventories are stated at the lower of cost or market value. Cadence’s inventories include high technology parts and components for complex computer systems that emulate the performance and operation of computer IC 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. Cadence’s practice is to reserve for inventory in excess of 12-month demand.
 
Property, Plant and Equipment
 
Property, plant and equipment is stated at historical cost. Depreciation and amortization are generally provided over the estimated useful lives, using the straight-line method, as follows:
 
     
Computer equipment and related software
  2-7 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


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Cadence capitalizes the costs of software developed for internal use and 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. Capitalization of software developed for internal use and web site development costs ends, and amortization begins, when the computer software is substantially complete and ready for its intended use. Amortization is recorded on a straight-line basis over the estimated useful life of the software. Cadence capitalized $10.5 million during fiscal 2009, $15.6 million during fiscal 2008 and $24.1 million during fiscal 2007 for costs of software developed for internal use.
 
Cadence recorded depreciation and amortization expense in the amount of $69.4 million during fiscal 2009, $77.9 million during fiscal 2008 and $73.7 million during fiscal 2007 for property, plant and equipment. Cadence abandoned and impaired certain long-lived assets of $6.7 million during fiscal 2009, $2.2 million during fiscal 2008 and $2.4 million during fiscal 2007, and these charges are included throughout Cadence’s operating expenses in the accompanying Consolidated Statements of Operations. In addition, Cadence abandoned and impaired certain long-lived assets of $4.6 million during fiscal 2008, and this charge is included in Impairment of intangible and tangible assets in the accompanying Consolidated Statements of Operations.
 
In January 2007, Cadence completed the sale of certain land and buildings in San Jose, California for a sales price of $46.5 million in cash. Concurrently with the sale, Cadence leased back from the purchaser for two years approximately 262,500 square feet of office space, which represented all available space in the buildings, and Cadence has since vacated the leased buildings. As of January 2, 2010, Cadence had capitalized $66.0 million in connection with the completed construction of its new building at its headquarters in San Jose, California. Cadence occupied a portion of the new building during the fourth quarter of fiscal 2008 and the remaining portion of the building during the first quarter of fiscal 2009.
 
Software Development Costs
 
Software development costs are capitalized beginning when a product’s technological feasibility has been established by completion of a working model of the product and amortization begins when a product is available for general release to customers. The period between the achievement of technological feasibility and the general release of Cadence’s products has typically been of short duration and costs incurred during this period have not been material.
 
Goodwill
 
Cadence conducts a goodwill impairment analysis annually and as necessary if changes in facts and circumstances indicate that the fair value of Cadence’s reporting unit may be less than its carrying amount. Cadence’s goodwill impairment test consists of two steps. The first step requires that Cadence compare the estimated fair value of its single reporting unit to the carrying value of the reporting unit’s net assets, including goodwill. If the fair value of the reporting unit is greater than the carrying value of its net assets, goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value of its net assets, Cadence would be required to complete the second step of the test by analyzing the fair value of its goodwill. If the carrying value of the goodwill exceeds its fair value, an impairment charge is recorded.
 
In connection with the preparation of Cadence’s fiscal 2008 financial statements, Cadence performed an interim goodwill impairment test and recorded an Impairment of goodwill of $1,317.2 million, representing all of Cadence’s goodwill at the time. See Note 13 for additional information regarding Cadence’s goodwill impairment analysis.
 
Long-lived Assets, including Acquired Intangibles
 
Cadence’s long-lived assets consist of property, plant and equipment and other acquired intangibles, excluding goodwill. Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are one to ten years). Cadence reviews its long-lived assets for impairment 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


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of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. In addition, Cadence assesses its long-lived assets for impairment if they are abandoned.
 
Non-Marketable Securities
 
Cadence’s non-marketable securities include investments in privately-held companies, and these investments are initially recorded at cost. To determine the fair value of these privately-held investments, Cadence uses the most recent round of financing or estimates of current fair value using traditional valuation techniques. It is Cadence’s policy to review the fair value of these investments on a regular basis to determine whether the investments in these companies are other-than-temporarily impaired. This evaluation includes, but is not limited to, reviewing each company’s cash position, financing needs, earnings or revenue outlook, operational performance, management or ownership changes and competition and is based on information that Cadence requests from these companies. This information is not subject to the same disclosure regulations as United States publicly-traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If Cadence believes the carrying value of an investment is in excess of fair value, and this difference is other-than-temporary, it is Cadence’s policy to write down the investment to fair value.
 
Nonqualified Deferred Compensation Trust
 
Executive Officers, senior management and members of Cadence’s Board of Directors may elect to defer compensation payable to them under Cadence’s 1994 Nonqualified Deferred Compensation Plan, or the NQDC. Deferred compensation payments are held in accounts with values indexed to the performance of selected mutual funds or money market accounts. Cadence consolidates the NQDC trust accounts in its Consolidated Financial Statements.
 
The selected mutual funds or money market accounts held in the NQDC trust are classified as trading securities. Trading securities are stated at fair value, with the unrealized gains and losses recognized in the Consolidated Statements of Operations as Other income, net. These trading securities are classified as Other assets in the Consolidated Balance Sheets because the securities are not available for Cadence’s use in its operations.
 
Cadence’s obligation with respect to the NQDC trust is recorded in Other long-term liabilities on its Consolidated Balance Sheets. Increases and decreases in the NQDC liability are recorded as compensation expense in the Consolidated Statements of Operations.
 
Deferred Revenue
 
Deferred revenue arises when customers pay for products or services in advance of revenue recognition. Cadence’s deferred revenue consists primarily of unearned revenue on maintenance and product licenses for which revenue is recognized over the duration of the license. Maintenance on perpetual licenses is generally renewed annually, billed in full in advance, and the corresponding revenue is recognized over the ensuing 12-month maintenance term. The fees under product licenses for which revenue is not recognized immediately and for maintenance in connection with term and subscription licenses are generally billed quarterly in advance and the related revenue is recognized over multiple periods over the ensuing license period.
 
Comprehensive Income (Loss)
 
Other comprehensive income (loss) includes foreign currency translation gains and losses and unrealized gains and losses on marketable securities that are available-for-sale that have been excluded from Net income (loss) and reflected instead in Stockholders’ equity. Cadence has reported comprehensive income (loss) in its Consolidated Statements of Stockholders’ Equity. Cadence reclassified from unrealized holding gains and losses on marketable securities to realized gains included in Other income (expense), net, in the accompanying Consolidated Statements of Operations, $2.3 million during fiscal 2009, without any tax effect, ($7.9) million during fiscal 2008, without any tax effect, and $4.4 million during fiscal 2007, net of $1.8 million of tax. Cadence did not have a tax benefit for gross


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unrealized holding losses in marketable equity securities during fiscal 2009 or fiscal 2008. The tax benefit for gross unrealized holding losses in marketable equity securities was $2.5 million during fiscal 2007.
 
Revenue Recognition
 
  License Types
 
Cadence licenses software using three different license types:
 
  •      Subscription licenses;
  •      Term licenses; and
  •      Perpetual licenses.
 
For many of Cadence’s term and subscription license arrangements, Cadence uses its proprietary internet-based delivery mechanism, “eDA-on-tap,” to facilitate the delivery of its software products. To maximize the efficiency of this delivery mechanism, Cadence created two types of “eDA Cards.” Subscription license customers may purchase what Cadence refers to as an “eDA Platinum Card,” which provides the customer access to and use of all software products delivered at the outset of the arrangement and the ability to use additional unspecified software products that may become commercially available during the term of the arrangement, until the fees have been depleted. Term license customers may purchase what Cadence refers to as an “eDA Gold Card,” which provides the customer access to and use of all software products delivered at the outset of the arrangement, until the fees have been depleted. Overall, the eDA Cards provide greater flexibility for Cadence’s customers in how and when they deploy and use Cadence’s software products.
 
Subscription licenses – Cadence’s subscription license arrangements offer customers the right to:
 
  •      Access and use all software products delivered at the outset of an arrangement throughout the entire term of the arrangement, generally two to four years, with no rights to return;
  •      Use unspecified additional software products that become commercially available during the term of the arrangement; and
  •      Remix among the software products delivered at the outset of the arrangement, as well as the right to remix into other unspecified additional software products that may become available during the term of the arrangement, so long as the cumulative value of all products in use does not exceed the total license fee determined at the outset of the arrangement. These remix rights may be exercisable multiple times during the term of the arrangement. The right to remix all software products delivered pursuant to the license agreement is not considered an exchange or return of software because all software products have been delivered and the customer has the continuing right to use them.
 
In general, revenue associated with subscription licenses is recognized ratably over the term of the license commencing upon the later of the effective date of the arrangement or delivery of the first software product. Subscription license revenue is allocated to product and maintenance revenue. The allocation to maintenance revenue is based on vendor specific objective evidence, or VSOE, of fair value of the undelivered maintenance that was established in connection with the sale of our term licenses.
 
In the event that a subscription license arrangement was terminated by mutual agreement and a new term license arrangement is entered into either concurrently with or after the termination of the subscription license arrangement during fiscal 2007 and fiscal 2008, the revenue associated with the new term license arrangement is recognized upon the later of the effective date of the arrangement or delivery of the first software product, assuming all other revenue recognition criteria have been met.
 
Term licenses – Cadence’s term license arrangements offer customers the right to:
 
  •      Access and use all software products delivered at the outset of an arrangement throughout the entire term of the arrangement, generally two to four years, with no rights to return; and
  •      Remix among the software products delivered at the outset of the arrangement, so long as the cumulative value of all products in use does not exceed the total license fee determined at the outset of the arrangement. These remix rights may be exercisable multiple times during the term of the arrangement. The right to remix all software products delivered pursuant to the license agreement is not considered an


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  exchange or return of software because all software products have been delivered and the customer has the continuing right to use them.
 
In general, revenue associated with term licenses is recognized upon the later of the effective date of the arrangement or delivery of the software product.
 
Perpetual licenses – Cadence’s perpetual licenses consist of software licensed on a perpetual basis with no right to return or exchange the licensed software. In general, revenue associated with perpetual licenses is recognized upon the later of the effective date of the license or delivery of the licensed product.
 
Timing of Revenue Recognition
 
Cadence recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting receivable is probable, and VSOE exists.
 
Persuasive evidence of an arrangement – Generally, Cadence uses a contract signed by the customer as evidence of an arrangement for subscription and term licenses and hardware leases. If a contract signed by the customer does not exist, Cadence has historically used a purchase order as evidence of an arrangement for perpetual licenses, hardware sales, maintenance renewals and small fixed-price service projects, such as training classes and small methodology service engagements of approximately $10,000 or less. For all other service engagements, Cadence uses a signed professional services agreement and a statement of work to evidence an arrangement. In cases where both a signed contract and a purchase order exist, Cadence considers the signed contract to be the most persuasive evidence of the arrangement. Sales through Cadence’s distributors are evidenced by a master agreement governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.
 
Product delivery – Software and the corresponding access keys are generally delivered to customers electronically. Electronic delivery occurs when Cadence provides the customer access to the software. Occasionally, Cadence will deliver the software on a DVD with standard transfer terms of free-on-board, or F.O.B., shipping point. Cadence’s software license agreements generally do not contain conditions for acceptance. With respect to hardware, delivery of an entire system is deemed to occur upon its successful installation. For certain hardware products, installation is the responsibility of the customer, as the system is fully functional at the time of shipment. For these products, delivery is deemed to be complete when the products are shipped with freight terms of F.O.B. shipping point.
 
For customers who purchase eDA Gold or eDA Platinum Cards, delivery occurs when the customer has been provided with access codes that allow the customer to download the software pursuant to the terms of the software license agreement.
 
Fee is fixed or determinable – Cadence assesses whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the transaction. Cadence has established a history of collecting under the original contract without providing concessions on payments, products or services. For installment contracts that do not include a substantial up front payment, Cadence only considers that a fee is fixed or determinable if the arrangement has payment periods that are equal to or less than the term of the licenses and the payments are collected in equal or nearly equal installments, when evaluated over the entire term of the arrangement. Cadence has a history of collecting receivables under installment contracts of up to five years. However, Cadence has concluded that fees are not fixed or determinable for license arrangements executed with customers in certain countries.
 
Significant judgment is involved in assessing whether a fee is fixed or determinable. Cadence must also make these judgments when assessing whether a contract amendment to a term arrangement (primarily in the context of a license extension or renewal) constitutes a concession. Cadence’s experience has been that it is able to determine whether a fee is fixed or determinable for term licenses. While Cadence does not expect that experience to change, if Cadence no longer were to have a history of collecting under the original contract without providing concessions on term licenses, revenue from term licenses would be required to be recognized when payments under the installment contract become due and payable. Such a change could have a material impact on Cadence’s results of operations.


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Collection is probable – Cadence assesses the probability of collecting from each customer at the outset of the arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. If in Cadence’s judgment collection of a fee is not probable, Cadence defers the revenue until the uncertainty is removed, generally upon receipt of cash payment.
 
Vendor-specific objective evidence of fair value – Cadence’s VSOE for certain product elements of an arrangement is based upon the pricing in comparable transactions when the element is sold separately. VSOE for maintenance is based upon the customer’s stated annual renewal rates. VSOE for services is generally based on the price charged when the services are sold separately. For multiple element arrangements, VSOE must exist to allocate the total fee among all delivered and undelivered elements of a term or perpetual license arrangement. If VSOE does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until either such evidence does exist for the undelivered elements, or all elements are delivered, whichever is earlier. If VSOE of all undelivered elements exists but VSOE does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the VSOE of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue as the elements are delivered. Cadence’s experience has been that it is able to determine VSOE for maintenance when a stated annual renewal rate is included in the arrangement and time-based services. Cadence has not established VSOE for product, including licenses that include the right to receive unspecified future software products, or for annual maintenance that is not cancellable by the customer.
 
        Other Factors Affecting Revenue Recognition
 
Multiple element arrangement – A multiple element arrangement, or MEA, is any arrangement that includes or contemplates rights to a combination of software or hardware products, software license types, services, training or maintenance in a single arrangement. From time to time, Cadence may include individual deliverables in separately priced and separately signed contracts with the same customer. Cadence obtains and evaluates all known relevant facts and circumstances in determining whether the separate contracts should be accounted for individually as distinct arrangements or whether the separate contracts are, in substance, a MEA. Significant judgment can be involved in determining whether a group of contracts might be so closely related that they are, in effect, part of a single arrangement.
 
Finance fee revenue – Finance fees result from discounting to present value the product revenue derived from installment contracts in which the payment terms extend beyond one year from the effective date of the contract. Finance fees are recognized using a method that approximates the effective interest method over the relevant license term and are classified as product revenue. Finance fee revenue represented approximately 2% of total revenue during fiscal 2009, approximately 3% of total revenue during fiscal 2008 and approximately 2% of total revenue during of fiscal 2007. Upon the sale of an installment contract, Cadence recognizes the remaining finance fee revenue associated with the installment contract.
 
Services revenue – Services revenue consists primarily of revenue received for performing engineering services. These services are not related to the functionality of the products licensed. Revenue from service contracts is recognized either on the time and materials method, as work is performed, or on the percentage-of-completion method. For contracts with fixed or not-to-exceed fees, Cadence estimates on a monthly basis the percentage-of-completion based on the completion of milestones relating to the arrangement. Cadence has a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all revenue and costs would be deferred until the project was completed. Such a change could have a material impact on Cadence’s results of operations.
 
Taxes collected from customers and remitted to governmental authorities – Cadence applies the net basis presentation for taxes collected from customers and remitted to governmental authorities.


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  Accounting for Income Taxes
 
Cadence accounts for the effect of income taxes in its Consolidated Financial Statements using the asset and liability method. Cadence must make significant judgments in calculating its provision (benefit) for income taxes. Cadence is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, measured using enacted tax rates expected to apply to taxable income in the years when those temporary differences are expected to be recovered or settled. To measure the deferred tax assets and liabilities, Cadence’s judgments include anticipating the tax positions Cadence will take on tax returns for future years. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Cadence then records a valuation allowance to reduce the deferred tax assets to the amount that Cadence believes is more likely than not to be realized based on its judgment of all available positive and negative evidence. Deferred tax assets are realized by an enterprise by having sufficient taxable income to allow the related tax benefits to reduce taxes otherwise payable. Accordingly, the taxable income must be both of an appropriate character (e.g., capital versus ordinary, foreign versus United States source income) and within the carryback and carryforward periods permitted by law. In making such assessments, Cadence must make significant judgments about the possible sources of taxable income and the evidence available about each possible source of taxable income on a jurisdiction by jurisdiction basis. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which the strength of the evidence can be objectively verified. For example, a company’s current year or previous losses are given more weight than its future outlook. For the years ended January 2, 2010 and January 3, 2009, Cadence concluded that a significant valuation allowance was required based on its evaluation and weighting of the positive and negative evidence. See Note 4 for additional details. If, in the future, Cadence determines that these deferred tax assets are more likely than not to be realized, a release of all or part, of the related valuation allowance could result in a material income tax benefit in the period such determination is made.
 
Cadence takes a two-step approach to recognizing and measuring the financial statement benefit of uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon effective settlement of the audit. Cadence reevaluates its income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. Cadence classifies interest and penalties on unrecognized tax benefits as income tax expense.
 
Cadence is also required to assess whether the earnings of its foreign subsidiaries will be indefinitely reinvested outside the United States. As of January 2, 2010, Cadence had recognized a deferred tax liability of $34.7 million related to $67.9 million of earnings from certain foreign subsidiaries that are not considered indefinitely reinvested outside the United States. To calculate the tax liability for the repatriation of these earnings, Cadence is required to estimate the geographic mix of profits and losses earned by Cadence and its subsidiaries in tax jurisdictions with a broad range of income and dividend withholding tax rates, the impact of foreign exchange rate fluctuations, and the potential outcomes of current and future tax audits. Changes in Cadence’s actual or projected operating results, tax laws or Cadence’s interpretation of tax laws, foreign exchange rates and developments in current and future tax audits could significantly impact the amounts provided for income taxes in Cadence’s results of operations, financial position or cash flows.
 
  Restructuring Charges
 
Cadence accounts for restructuring charges with customary termination benefits when the costs are both probable and estimable. The costs are both probable and estimable on the date Cadence determines the number of employees whose positions will be terminated, their job classifications or functions, their location and the expected


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termination date, even if the actual positions are not finalized. Cadence accounts for restructuring charges with non-standard termination benefits when the plan has been communicated to the affected employees.
 
In connection with its restructuring plans, Cadence has made a number of estimates and assumptions related to losses on excess facilities vacated or consolidated, particularly the timing of subleases and sublease terms. Closure and space reduction costs included in the restructuring charges include payments required under leases less any applicable estimated sublease income after the facilities are abandoned, lease buyout costs and certain contractual costs to maintain facilities during the period after abandonment.
 
In addition, Cadence has recorded estimated provisions for termination benefits and outplacement costs, long-term asset impairments and other restructuring costs. Cadence regularly evaluates the adequacy of its restructuring accrual, and adjusts the balance based on changes in estimates and assumptions. Cadence may incur future charges for new restructuring plans as well as for changes in estimates to amounts previously recorded.
 
  Stock-Based Compensation
 
Cadence recognizes the cost of employee services received in exchange for awards of equity instruments as stock-based compensation expense. Stock-based compensation expense is measured at the grant date based on the value of the restricted stock award or restricted stock unit, collectively referred to as restricted stock, option or purchase right and is recognized as expense, less expected forfeitures, over the requisite service period, which typically equals the vesting period. The fair value of each option grant and each purchase right granted under Cadence’s Employee Stock Purchase Program, or ESPP, is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of each restricted stock issuance is determined using the fair value of Cadence’s common stock on the grant date. Cadence recognizes stock-based compensation expense on the straight-line method for options and restricted stock that only contain a service condition and on the graded-vesting method for options and restricted stock that contain both a service and performance condition. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the following:
 
  •      Expected volatility of our stock;
  •      Expected term of stock options;
  •      Risk-free interest rate for the period;
  •      Expected dividends, if any; and
  •      Expected forfeitures.
 
The computation of the expected volatility assumption used in the Black-Scholes option pricing model for new grants is based on implied volatility when the remaining maturities of the underlying traded options are at least one year and, when the remaining maturities of the underlying traded options are less than one year, it is based on an equal weighting of historical and implied volatilities.
 
When establishing the expected life assumption, Cadence reviews annual historical employee exercise behavior with respect to option grants having similar vesting periods. The risk-free interest rate for the period within the expected term of the option is based on the yield of United States Treasury notes in effect at the time of grant. Cadence has not historically paid dividends, thus the expected dividends used in the calculation are zero.
 
Judgment is required in estimating the amount of stock-based awards that Cadence expects to be forfeited. Cadence calculates a separate expected forfeiture rate for both stock options and restricted stock issuances based on historical trends. Judgment is also required to estimate the attainment of certain predetermined performance goals for a performance-based bonus plan, under which payments may be made in Cadence common stock, and performance-based restricted stock grants. Each period, Cadence estimates the most likely outcome of such performance goals and recognizes any related stock-based compensation expense. The amount of stock-based compensation expense recognized in any one period can vary based on the attainment or estimated attainment of the various performance goals. If such performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
 
The valuation of all options, including the expected life of stock options, are calculated based on one employee pool because there is no significant difference in exercise behavior between classes of employees. The expected


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