UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------______________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 4,OCTOBER 3, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-10606
-----------------------______________________
CADENCE DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
-----------------------______________________
DELAWARE 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 SEELY AVENUE, BUILDING 5, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
(408) 943-1234
Registrant's telephone number, including area code
-----------------------______________________
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
--- ------------ ----------
At AugustNovember 7, 1998, there were 212,307,359221,828,768 shares of the registrant's Common
Stock, $0.01 par value outstanding.
CADENCE DESIGN SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
July 4, 1998 and January
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
October 3, 1998 and January 3, 1998. . . . . . . . . . . 3
Condensed Consolidated Statements of Income:
Three and Nine Months Ended October 3, 1998 and
September 27, 1997 . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended October 3, 1998 and September 27,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income:
Three and Six Months Ended July 4, 1998 and June 28
1997 . . 4
Condensed Consolidated Statements of Cash Flows:
Six Months Ended July 4, 1998 and June 28, 1997 . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . .19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .22
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . .23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JULY 4, JANUARYOctober 3, January 3,
1998 1998
---------- --------------------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 134,914 $ 207,024
Short-term investmentsequivalents . . . . . . . . . . . . . 125,826 97,180
Accounts receivable, net . . . . . . . . . . . . 230,565 205,006
Prepaid expenses and other. $ 207,727 $ 207,024
Short-term investments. . . . . . . . . . . . 79,854. . . . . . . . . . . . . . . . 38,231 97,180
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 236,866 205,006
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . 86,582 99,849
---------- --------------------- -----------
Total current assets . . . . . . . . . . . . . 571,159. . . . . . . . . . . . . 569,406 609,059
----------- -----------
Property, plant, and equipment, net. . . . . . . . 230,421. . . . . . . . . . . . . . . 248,019 197,421
Software development costs, net. . . . . . . . . . 14,050. . . . . . . . . . . . . . . 13,548 15,068
Purchased software and intangibles, net. . . . . . 31,546. . . . . . . . . . . . . . . 91,154 10,117
Installment contract receivables . . . . . . . . . 103,966. . . . . . . . . . . . . . . 95,269 61,326
Other non-current assets . . . . . . . . . . . . . 135,042 130,859
---------- ----------
$1,086,184 $1,023,850
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . $ 802 $ 794
Accounts payable and accrued liabilities . . . . 148,367 156,426
Income taxes payable . . . . . . . . . . . . . . 8,710 5,161
Deferred revenue . . . . . . . . . . . . . . . . 104,256 106,414
---------- ----------
Total current liabilities. . . . . . . . . . . 262,135 268,795
---------- ----------
Long-term165,826 130,859
----------- -----------
$ 1,183,222 $ 1,023,850
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-termCurrent portion of long-term debt . . . . . . . . . . . . . . . . . 1,048 1,599
Minority interest liability. . . . . . . . . . . 196 121
Other long-term$ 1,105 $ 794
Accounts payable and accrued liabilities. . . . . . . . . . . 33,529 26,238
---------- ----------
Total long-term liabilities. . . . . . . . . . 34,773 27,958
---------- ----------
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . -- --. . 161,831 156,426
Payable to Ambit shareholders . . . . . . . . . . . . . . . . . . . . . . . . 252,990 - -
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,480 5,161
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,431 106,414
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 560,837 268,795
----------- -----------
Long-term liabilities:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461 1,599
Minority interest liability . . . . . . . . . . . . . . . . . . . . . . . . . 325 121
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 30,167 26,238
----------- -----------
Total long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . 31,953 27,958
----------- -----------
Stockholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Common stock and capital in excess of par value . . . . . . . . . . . . . . . . . . 596,638626,602 502,602
Treasury stock at cost (8,351(9,644 and 6,739 shares, respectively) . . . . . . . . . . . . (167,905)(205,781) (97,285)
Retained earnings.earnings . . . . . . . . . . . . . . . 369,842 328,934
Accumulated translation adjustment . . . . . . . (9,299). . . . . . . . 177,080 328,934
Accumulated translation adjustment. . . . . . . . . . . . . . . . . . . . . . (7,469) (7,154)
---------- --------------------- -----------
Total stockholders' equity . . . . . . . . . . 789,276. . . . . . . . . . . . . 590,432 727,097
---------- ----------
$1,086,184 $1,023,850
---------- ----------
---------- --------------------- -----------
$ 1,183,222 $ 1,023,850
----------- -----------
----------- -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------- -------- ------- --------------------- ------------- ------------- -------------
Revenue:
Product. . . . . .Product . . . . . . . . . . . . . . . $ 162,547173,269 $ 116,540135,480 $ 316,596489,865 $ 218,863
Services354,343
Services. . . . . . . . . . . . . . . 67,704 40,355 184,733 113,723
Maintenance . . . . . . 64,727 39,614 117,029 73,368
Maintenance.. . . . . . . 67,634 59,031 196,020 164,815
------------- ------------- ------------- -------------
Total revenue. . . . . . . . . . . 308,607 234,866 870,618 632,881
------------- ------------- ------------- -------------
Costs and expenses:
Cost of product . . . . . . . . . . . 15,614 11,253 40,325 30,296
Cost of services. . . . . . . . . . . 50,061 28,520 138,066 80,582
Cost of maintenance . . . . . . . . . 12,338 7,039 32,869 18,425
Marketing and sales . . . . . . . . . 76,052 63,261 216,663 178,119
Research and development. . . . . . . 44,854 35,927 129,522 100,979
General and administrative. . . . . . 16,660 14,251 49,484 40,093
Unusual items . . . . . . . . . . . . 278,333 - - 364,290 34,114
------------- ------------- ------------- -------------
Total costs and expenses . . . . . 493,912 160,251 971,219 482,608
------------- ------------- ------------- -------------
Income (loss) from operations . (185,305) 74,615 (100,601) 150,273
Other income, net. . . . . . . . . . . . 1,328 4,386 6,523 22,397
------------- ------------- ------------- -------------
Income (loss) before provision
for income taxes . . . . . . (183,977) 79,001 (94,078) 172,670
Provision for income taxes . . . . . . . 8,785 23,700 57,776 51,801
------------- ------------- ------------- -------------
Net income (loss) . . . . . . . $ (192,762) $ 55,301 $ (151,854) $ 120,869
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic net income (loss) per share. . . . $ (0.91) $ 0.27 $ (0.72) $ 0.63
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted net income (loss) per share. . . $ (0.91) $ 0.24 $ (0.72) $ 0.56
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . 64,514 54,312 128,386 105,784
---------- ---------- ---------- ----------
Total revenue . . . . . . . . . . . . . . . . 291,788 210,466 562,011 398,015
---------- ---------- ---------- ----------
Costs and expenses:
Cost of product. . . . . . . . . . . . . . . . . 12,374 10,090 24,711 19,043
Cost of services . . . . . . . . . . . . . . . . 48,351 27,868 88,005 52,062
Cost of maintenance. . . . . . . . . . . . . . . 10,188 5,634 20,531 11,386
Marketing and sales. . . . . . . . . . . . . . . 71,366 59,689 140,611 114,858
Research and development . . . . . . . . . . . . 42,961 33,799 84,668 65,052
General and administrative . . . . . . . . . . . 16,303 13,638 32,824 25,842
Unusual items. . . . . . . . . . . . . . . . . . -- 22,366 85,957 34,114
---------- ---------- ---------- ----------
Total costs and expenses. . . . . . . . . . . 201,543 173,084 477,307 322,357
---------- ---------- ---------- ----------
Income from operations. . . . . . . . . . . 90,245 37,382 84,704 75,658
Other income, net. . . . . . . . . . . . . . . . . 2,576 3,255 5,195 18,011
---------- ---------- ---------- ----------
Income before provision for income taxes . 92,821 40,637 89,899 93,669
Provision for income taxes . . . . . . . . . . . . 26,454 12,191 48,991 28,101
---------- ---------- ---------- ----------
Net income. . . . . . . . . . . . . . . . . $ 66,367 $ 28,446 $ 40,908 $ 65,568
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income per share . . . . . . . . . . . . $ 0.31 $ 0.15 $ 0.19 $ 0.36
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income per share . . . . . . . . . . . $ 0.28 $ 0.13 $ 0.17 $ 0.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding . . . . 212,210 191,194 211,112 183,564
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------212,292 204,168 211,505 190,432
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common and
potential common shares
outstanding--assumingoutstanding -- assuming dilution . . . . . 236,205 213,732 235,601 206,643
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------212,292 231,627 211,505 214,971
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
JULY 4, JUNE 28,Nine Months Ended
----------------------------
October 3, September 27,
1998 1997
----------- ------------------------ -------------
Cash and Cash Equivalents at Beginning of Period . . . . . . . . . . . . . . . . $ 207,024 $ 284,512
----------- ------------------------ -------------
Cash Flows from Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . 40,908 65,568. . . . . . (151,854) 120,869
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 41,658 22,959
Deferred income taxes . . . . . . . . . . . . . . . . . . (5,628) (4,242)
Write-offs of equipment and other assets, net . . . . . . 1,751 1,834
Write-off of in-process research and development. . . . . 82,000 4,860
Other long-term liabilities and minority
interest expense. . . . . . . . . . . . . . . . . . . . 7,047 2,798
Gain on sale of subsidiary stock. . . . . . . . . . . . . -- (13,061)
Changes in operating assets and liabilities,
net of effect of acquired and disposed businesses:
Accounts receivable . . . . . . . . . . . . . . . . . (19,629) 6,848
Prepaid expenses and other. . . . . . . . . . . . . . 22,697 (1,727)
Installment contract receivables. . . . . . . . . . . (42,640) (6,500)
Accrued liabilities and payables. . . . . . . . . . . (22,163) 17,615
Income taxes payable. . . . . . . . . . . . . . . . . 48,341 26,139
Deferred revenue. . . . . . . . . . . . . . . . . . . (2,234) (3,578)
----------- -----------
Net cash provided by operating activities . . . . . 152,108 119,513
----------- -----------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity . . . 38,498 13,059
Purchases of short-term investments--held-to-maturity . . . (35,843) (57,625)
Maturities of short-term investments--available-for-sale . . 378,049 --
Purchases of short-term investments--available-for-sale. . . (409,350) --
Purchases of property, plant, and equipment. . . . . . . . . (55,822) (46,147)
Capitalization of software development costs . . . . . . . . (11,590) (6,800)
Increase in purchased software, intangibles,
and other assetsamortization. . . . . . . . . . . . . . . . . . . . . . (18,609) (10,613). . 64,544 41,838
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,400) (13,401)
Write-off of equipment and other assets, net . . . . . . . . . . . . . . . . 3,903 3,253
Write-off of in-process research and development . . . . . . . . . . . . . . 339,500 4,860
Other long-term liabilities and minority interest expense. . . . . . . . . . 3,861 4,957
Gain on sale of subsidiary stock . . . . . . . . . . . . . . . . . . . . . . - - (13,061)
Changes in operating assets and liabilities, net of effect of acquired and
disposed businesses:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,432) (20,696)
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . 24,220 (10,455)
Installment contract receivables . . . . . . . . . . . . . . . . . . . . . (34,290) - -
Accrued liabilities and payables . . . . . . . . . . . . . . . . . . . . . (19,199) 35,576
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,761 55,573
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,222 (10,206)
------------- -------------
Net cash provided by operating activities. . . . . . . . . . . . . . . . 264,836 199,107
------------- -------------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity . . . . . . . . . . . . 48,802 19,600
Purchases of short-term investments--held-to-maturity. . . . . . . . . . . . . (35,852) (67,688)
Maturities of short-term investments--available-for-sale . . . . . . . . . . . 537,552 - -
Purchases of short-term investments--available-for-sale. . . . . . . . . . . . (491,553) - -
Purchases of property, plant, and equipment. . . . . . . . . . . . . . . . . . (84,395) (62,341)
Capitalization of software development costs . . . . . . . . . . . . . . . . . (17,316) (11,077)
Increase in purchased software, intangibles, and other assets. . . . . . . . . (30,990) (43,713)
Net proceeds from sale of subsidiary stock . . . . . . . . . --. . . . . . . . . - - 18,582
Effect of deconsolidation on cash. . . . . . . . . . . . . . -- (9,536). . . . . . . . . - - (25,118)
Purchase of businesses, net of acquired cash . . . . . . . . (51,313) 42,358. . . . . . . . . (100,134) 38,357
Sale of put warrants . . . . . . . . . . . . . . . . . . . . 23,149. . . . . . . . . 28,302 5,688
Purchase of call options . . . . . . . . . . . . . . . . . . (23,149) (5,688)
----------- -----------
Net cash used for investing activities. . . . . . . . (165,980) (56,722)
----------- -----------. . (28,302) (5,688)
------------- -------------
Net cash used for investing activities . . . . . . . . . . . . . . . . . (173,886) (133,398)
------------- -------------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations and long-term debt . . . . . . . . . . . . . . . . . . . . (1,203) (19,529)(699) (21,795)
Sale of common stock . . . . . . . . . . . . . . . . . . . . 43,411 12,693. . . . . . . . . 60,949 41,383
Purchases of treasury stock. . . . . . . . . . . . . . . . . (98,103) (21,079)
----------- -----------
Net cash used for financing activities. . . . . . . . (55,895) (27,915)
----------- -----------. . (150,035) (33,138)
------------- -------------
Net cash used for financing activities . . . . . . . . . . . . . . . . . (89,785) (13,550)
------------- -------------
Effect of exchange rate changes on cash. . . . . . . . . . . . (2,343) (2,630)
----------- -----------
Increase (decrease) in Cash and Cash Equivalents . . . . . . . (72,110) 32,246
----------- -----------. . (462) (4,114)
------------- -------------
Increase in Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . . . . . 703 48,045
------------- -------------
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . $ 134,914207,727 $ 316,758
----------- -----------
----------- -----------332,557
------------- -------------
------------- -------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's annual reportAnnual Report on Form 10-K for the fiscal year ended
January 3, 1998.
The unaudited condensed consolidated financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the consolidated financial statements as of January 3,
1998 and for the three and sixnine months ended June 28,September 27, 1997, have been
reclassified to conform with the 1998 presentation.
REVENUE RECOGNITION
Effective January 4, 1998, the Company adopted Statement of Position (SOP)
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's consolidated financial position or results of operations.
ACQUISITIONS
In September 1998, the Company acquired all of the outstanding stock of
Ambit Design Systems, Inc. (Ambit), a California corporation, for cash. The
total purchase price was $255 million, and the acquisition was accounted for as
a purchase. In connection with the acquisition, net intangibles of $250.9
million were acquired. The results of operations of Ambit and the estimated
fair value of the assets acquired and liabilities assumed are included in the
Company's financial statements from the date of acquisition. Intangibles
arising from the acquisition are being amortized on a straight-line basis over
seven years.
Management estimates that $214.4 million of the purchased intangibles
was purchased in-process technology that had not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately expensed in the Condensed Consolidated Statement of Income upon
consummation of the acquisition. The value assigned to purchased in-process
technology, based on a valuation prepared by an independent third-party
appraisal company, was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the purchased in-process
technology (Buildgates synthesis product architecture, Placement Knowledgeable
Synthesis, data path compiler, and static timing engine) into commercially
6
viable products, estimating the resulting net cash flows from such projects,
and discounting the net cash flows back to their present value. The discount
rate includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. The in-process
technology is expected to be commercially viable in 1999. If these projects
are not successfully developed, business, operating results, and financial
condition of the Company may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.
The following table represents unaudited consolidated pro forma information
as if the Company and Ambit had been combined as of the beginning of the periods
presented. The pro forma data are presented for illustrative purposes only and
are not necessarily indicative of the combined financial position or results of
operations of future periods or the results that actually would have resulted
had the Company and Ambit been a combined company during the specified periods.
The pro forma results include the effects of the amortization of intangible
assets and adjustments to the income tax provision. The pro forma combined
results exclude acquisition-related charges for purchased in-process technology
related to Ambit.
Nine Months Ended
--------------------------
October 3, September 27,
1998 1997
------------- -------------
(In thousands)
Revenue. . . . . . . . . . . . . . . . . . . . . . $ 881,434 $ 634,009
------------- -------------
------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . $ 54,346 $ 113,004
------------- -------------
------------- -------------
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.59
------------- -------------
------------- -------------
Diluted . . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.53
------------- -------------
------------- -------------
In September 1998, the Company acquired Bell Labs' Integrated Circuit
Design Automation Group of Lucent Technologies Inc. (BLDA), for cash. The total
purchase price was $58 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $60.6 million
were acquired. The results of operations of BLDA and the estimated fair value
of the assets acquired and liabilities assumed are included in the Company's
financial statements from the date of acquisition. Intangibles arising from the
acquisition are being amortized on a straight-line basis over five years.
Management estimates that $42.7 million of the purchased intangibles was
purchased in-process technology that had not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately expensed in the Condensed Consolidated Statement of Income upon
consummation of the acquisition. The value assigned to purchased in-process
technology, based on a valuation prepared by an independent third-party
appraisal company, was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the purchased in-process
technology (Formalcheck verification tool and Clover design rule checking and
extraction tool) into commercially viable products, estimating the resulting
net cash flows from such projects, and discounting the net cash flows back to
their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the
purchased in-process technology. The in-process technology is expected to be
commercially viable in 2000. If these projects are not successfully developed,
business, operating results, and financial condition of the Company may be
adversely affected. Additionally, the value of other intangible assets
acquired may become impaired.
In March 1998, the Company acquired all of the outstanding stock of
Excellent Design, Inc. (EXD), a Japanese corporation, for cash. The total
purchase price was $40.9 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $48.7 million
were
7
acquired. The results of operations of EXD and the estimated fair value of the
assets acquired and liabilities assumed are included in the Company's financial
statements from the date of acquisition. Intangibles arising from the
acquisition are being amortized on a straight-line basis over five years.
Management estimates that $42 million of the purchased intangibles was
purchased in-process technology that had not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately expensed in the Condensed Consolidated Statement of Income upon
consummation of the acquisition. The value assigned to purchased in-process
technology, based on a valuation prepared by an independent third-party
appraisal company, was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to
their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the
purchased in-process technology. If these projects are not successfully
developed, business, operating results, and financial condition of the
Company may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
In February 1998, the Company acquired all of the outstanding stock of
Symbionics Group Limited (Symbionics), a U.K. corporation, for approximately
1 million shares of the Company's common stock and $21.3 million of cash. The
total purchase price was $46.1 million, and the acquisition was accounted for as
a purchase. In connection with the acquisition, net intangibles of $46 million
were acquired. The results of operations of Symbionics and the estimated fair
value of the assets acquired and liabilities assumed are included in the
Company's financial statements from the date of which $40 million was reflected as a charge to operations
for the write-off of in-process research and development that had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use.acquisition. Intangibles
arising from the acquisition are being amortized on a straight-line basis over
five years.
6
In March 1998, the Company acquired allManagement estimates that $40 million of the outstanding stock of
Excellent Design, Inc., a Japanese corporation, for cash. The total purchase
pricepurchased intangibles was
$40.9 million, and the acquisition was accounted for as a purchase.
In connection with the acquisition, net intangibles of $48.7 million were
acquired, of which $42 million was reflected as a charge to operations for
the write-off ofpurchased in-process research and developmenttechnology that had not yet reached technological
feasibility and in management's opinion, hadhas no probable alternative future use. Intangibles arising fromAccordingly, this amount was
immediately expensed in the acquisition are being
amortizedCondensed Consolidated Statement of Income upon
consummation of the acquisition. The value assigned to purchased in-process
technology, based on a straight-line basis over five years.valuation prepared by an independent third-party
appraisal company, was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from such projects, and discounting the net cash flows back to
their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the
purchased in-process technology. If these projects are not successfully
developed, business, operating results, and financial condition of the
Company may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired.
Pro forma results of operations of BLDA, EXD, and Symbionics have not been
presented because the effects of these acquisitions were not material on either
an individual or an aggregated basis.
COMPREHENSIVE INCOME (LOSS)
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which was adopted by the Company in the first quarter of 1998. SFAS
No. 130 requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that has the new measure
of income on it. "Comprehensive income" includes foreign currency translation
gains and losses and other unrealized gains and losses that have been previously
excluded from net income (loss) and reflected instead in equity.
8
A summary of comprehensive income (loss) follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
July 4, June 28, July 4, June 28,Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------- -------- ------- --------------------- ------------- ------------- -------------
(In thousands)
Net income (loss). . . . . . . $ (192,762) $ 55,301 $ (151,854) $ 120,869
Foreign currency translation
adjustment . . . . . . . . . . . . . . . . . . 1,830 393 (315) (2,358)
------------- ------------- ------------- -------------
Comprehensive income (loss). . $ 66,367(190,932) $ 28,44655,694 $ 40,908(152,169) $ 65,568
Foreign currency translation adjustment. . . . . . (939) 960 (2,145) (2,751)
--------- --------- --------- ---------
Comprehensive income . . . . . . . . . . . . . . . $ 65,428 $ 29,406 $ 38,763 $ 62,817
--------- --------- --------- ---------
--------- --------- --------- ---------118,511
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares of common stock outstanding during the
period, and for diluted net income (loss) per share, net income (loss) is
divided by the weighted average shares of common stock outstanding and potential
common shares during the period. Potential common shares included in the
dilution calculation consist of dilutive shares issuable upon the exercise of
outstanding common stock options, warrants, contingent issuances of common
stock, and put warrants computed using the treasury stock method. For the
periods in which the Company had losses, potential common shares from common
stock options, warrants, contingent issuances of common stock, and put warrants
are excluded from the computation of diluted net loss per share as their effects
are antidilutive.
The following is a reconciliation of the weighted average common shares
used to calculate basic net income (loss) per share to the weighted average
common and potential common shares used to calculate diluted net income (loss)
per share:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
July 4, June 28, July 4, June 28,Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------- -------- ------- --------------------- ------------- ------------- -------------
(In thousands)
Weighted average common shares
used to calculate basic net income
(loss) per share . . . . . . . . . . . 212,210 191,194 211,112 183,564
Options212,292 204,168 211,505 190,432
Options. . . . . . . . . . . . . . . . - - 27,253 - - 24,222
Warrants and other contingent
common shares . . . . . . . . . . . - - 206 - - 240
Puts . . . . . . . . . . . . . . . . . . . 23,707 22,115 24,222 22,706
Warrants and other contingent shares. . . . . 284 192 265 257
Puts. . . . . . . . . . . . . . . . . . . . . 4 231 2 116
------- ------- ------- -------- - - - - - 77
------------- ------------- ------------- -------------
Weighted average common and
potential common shares used to
calculate diluted net income (loss)
per share . . . . . . . . . . . . . . . . . . . 236,205 213,732 235,601 206,643
------- ------- ------- -------
------- ------- ------- -------212,292 231,627 211,505 214,971
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
7Had the Company recorded net income for the three and nine months ended
October 3, 1998, dilutive weighted outstanding options would have been
19 million and 22.5 million shares, respectively, and weighted outstanding
warrants and other dilutive contingent shares would have been 0.6 million and
0.4 million shares, respectively.
REPRICING OF STOCK OPTIONS
In order to continue to attract and retain employees, the Board of
Directors authorized the repricing of options to purchase shares of common stock
effective as of the close of business on September 4, 1998 to the then fair
market value of $22.59 per share. Under the terms of the repricing,
9
optionees were required to extend their existing vesting schedules in exchange
for the repriced options. All repriced options maintained the same expiration
terms. Approximately 3.7 million options were repriced under this program. The
Board of Directors and Executive Officers were excluded from the repricing.
CREDIT FACILITY
In October 1998, the Company entered into a senior unsecured credit
facility (the 1998 Facility) with a syndicate of banks which allows the Company
to borrow up to $355 million. The Facility is divided between a $177.5 million
three year revolving credit facility (the Three Year Facility) and a $177.5
million 364-day revolving credit facility convertible to a three year term loan
(the 364-Day Facility). The Three Year Facility expires September 29, 2001 and
the 364-Day Facility will either expire on September 29, 1999, and be converted
to a three year term loan with a maturity date of September 29, 2002, or at the
option of the bank group, be renewed for an additional one year period. The
Company has the option to pay interest based on LIBOR plus a spread of between
0.50% and 1.00%, based on a pricing grid tied to a financial covenant or the
higher of the Federal Funds Rate plus 0.50% or the prime rate. In addition,
commitment fees are payable on the unutilized portions of the Three Year
Facility at rates between 0.18% and 0.30% based on a pricing grid tied to a
financial covenant and on the unutilized portion of the 364 Day Facility at a
fixed rate of 0.10%. The 1998 Facility contains certain financial and other
covenants. As of October 3, 1998, the Company had no outstanding borrowings
under the 1998 Facility.
In April 1996, the Company entered into a senior secured revolving credit
facility (the 1996 Facility) which allowed the Company to borrow up to $120
million through April 1999. As a result of the Company securing the 1998
Facility, the 1996 Facility was terminated in September 1998.
FINANCING
The Company has a customer finance program whereby it may transfer
qualifying accounts receivables to certain financing institutions on a
non-recourse basis. These transfers are recorded as sales and accounted for
in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
PUT WARRANTS AND CALL OPTIONS
The Company has two seasoned authorized stock repurchase programs. Under
one program, the Company repurchases common stock to satisfy estimated
requirements for shares to be issued under its Employee Stock Purchase Plan
(ESPP) over the next 12 months. The shares acquired under the second program
will be used to meet the recurring share issuance requirements of the 1997 Stock
Option Plan.
As part of its authorized repurchase programs, the Company has sold put
warrants through private placements. At July 4,October 3, 1998, there were 5.35.4 million
put warrants outstanding which entitle the holder to sell one share of common
stock to the Company on a specified date and at a specified price ranging from
$24.20$20.88 to $35.14 per share. Additionally, during thisthe same period, the Company
purchased call options that entitle the Company to buy on a specified date one
share of common stock at a specified
10
price. At July 4,October 3, 1998, the Company had 3.63.8 million call options outstanding
at prices ranging from $24.44$21.13 to $35.39 per share to satisfy anticipated stock
repurchase requirements under the Company's systematic repurchase programs. The
put warrants and call options outstanding at July 4,October 3, 1998 are exercisable on
various dates through November 12, 1999.
If exercised, the put warrants will be settled with the issuance of stock
equal to the difference between the exercise price and the fair value at the
date of exercise. Accordingly, settlement of the put warrants could cause the
Company to issue a substantial number of shares, depending on the exercise price
of the put warrants and the per share fair value of the Company's common stock
at the time of exercise. In addition, settlement of the put warrants could lead
to the disposition by put warrant holders of shares of the Company's common
stock that such holders may have accumulated in anticipation of the exercise of
the put warrants or call options, which may impact the price of the Company's
common stock. At July 4,October 3, 1998, because the put warrants will be settled with
stock, if exercised, no amount was classified out of stockholders' equity in the
consolidated balance sheet. The effect of the exercise of these put warrants
and call options is reported in stockholders' equity.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
It requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met and that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and cannot be applied retroactively. The Company
has not yet determined the impact SFAS No. 133 will have on its financial
position, results of operations, or cash flows.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The Company anticipates that SOP 98-1 will not have
a material impact on its consolidated financial statements.
8SUBSEQUENT EVENTS
In October 1998, the Company began to draw on its 364-Day Facility to fund
the acquisition of the outstanding shares of Ambit. As of November 7, 1998, the
Company had $125 million outstanding under the 1998 Facility.
In October 1998, the Company announced a restructuring for the fourth
quarter of 1998 with a related charge estimated at approximately $36 million.
This charge is required to cover expenses related to staff reductions of
approximately 560 employees and facilities and program streamlining.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AND "LIQUIDITY AND CAPITAL RESOURCES."
RESULTS OF OPERATIONS
REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,REVENUE
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 % CHANGEChange 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------Change
------------- ------------- ------------- ------------- ------------- -------------
(In millions)
Product. . . . . . . . . $ 162.6173.3 $ 116.5 39%135.5 28% $ 316.6489.9 $ 218.9 45%354.4 38%
Services . . . . . . . . 64.7 39.6 63% 117.0 73.4 60%67.7 40.4 68% 184.7 113.7 62%
Maintenance. . . . . . . 64.5 54.467.6 59.0 15% 196.0 164.8 19%
128.4 105.7 21%
-------- -------- -------- --------------------- ------------- ------------- -------------
Total revenue. . .revenue . . $ 291.8308.6 $ 210.5 39%234.9 31% $ 562.0870.6 $ 398.0 41%
-------- -------- -------- --------
-------- -------- -------- --------
632.9 38%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
Product. . . . . . . . . 56% 55%58% 56% 55%56%
Services . . . . . . . . 22% 19%17% 21% 18%
Maintenance. . . . . . . 22% 26%25% 23% 27%26%
The increase in product revenue of $46.1$37.8 million and $97.7$135.5 million for the
three and sixnine month periods ended July 4,October 3, 1998, respectively, when compared
to the same periods of 1997, was attributable primarily to increased demand for
products used by customers to develop integrated circuits (ICs) and deep
submicron designs, including design entry tools, custom layout tools, analog
design tools, automatic place-and-route tools, and verification tools.
Services revenue increased $25.1$27.3 million and $43.6$71 million in the three and
sixnine month periods ended July 4,October 3, 1998, respectively, when compared to the
same periods of 1997. The increase in services revenue was primarily the result
of increased demand for the Company's services offerings throughout the world.
The increase in maintenance revenue of $10.1$8.6 million and $22.7$31.2 million for
the three and sixnine month periods ended July 4,October 3, 1998, respectively, as
compared to the same periods of 1997, was attributable primarily to an increase
in the Company's installed base of products and the sale of higher priced
maintenance contracts which on average require higher support levels.
Revenue from international sources was approximately $164.2$150.2 million and
$104.8$134.2 million, or 56%49% and 50%57% of total revenue, for the secondthird quarters of 1998
and 1997, respectively. For the sixnine month period ended July 4,October 3, 1998,
revenue from international sources was $285.8$436 million, as compared to $202.1$336.3
million for the same period of 1997, representing 51%50% and 53%, respectively, of
total revenue for each period. The increase in total revenue from international
sources in the secondthird quarter of 1998, as compared to the same period of 1997,
was primarily attributable to strong revenue growth in Europe.Japan. Total revenue growth
from international sources for the third quarter of 1998, was partially offset
by a $6.6$9.1 million negative impact on revenue as a result of the weakening of
certain foreign currencies, primarily the Japanese yen, in relation to the U.S.
dollar.
912
COST OF REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 % CHANGEChange 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------Change
------------- ------------- ------------- ------------- ------------- -------------
(In millions)
Product. . . . . . . . . $ 12.415.6 $ 10.1 23%11.3 39% $ 24.740.3 $ 19.0 30%30.3 33%
Services . . . . . . . . $ 48.450.1 $ 27.9 74%28.5 76% $ 88.0138.1 $ 52.1 69%80.6 71%
Maintenance. . . . . . . $ 10.212.3 $ 5.6 81%7.0 75% $ 20.532.9 $ 11.4 80%
18.4 78%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
Product. . . . . . . . .9% 8% 9% 8% 9%
Services . . . . . . . . 75% 70%74% 71% 75% 71%
Maintenance. . . . . . . 16% 10% 16%18% 12% 17% 11%
Cost of product revenue includes costs of production personnel,
packaging and documentation, royalties, and the amortization of goodwill and
capitalized software development costs. Cost of product increased by $2.3$4.3
million and $5.7$10 million for the three and sixnine month periods ended July 4,October 3,
1998, respectively, as compared with the same periods of 1997, primarily due
to higher amortization costs associated with goodwill and capitalized
software development costs and an increase in product royalty costs.
Cost of services revenue includes personnel and related costs associated
with providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop and retain services
professionals. Cost of services revenue increased by $20.5$21.6 million and $35.9$57.5
million for the three and sixnine month periods ended July 4,October 3, 1998,
respectively, as compared with the same periods of 1997, primarily due to the
continued
investment in developing new services offerings and the addition of services professionals by the Company, primarily through acquisitions and
increased hiring.hiring, and the continued investment in developing new services
offerings. Services gross margins have been and may continue to be adversely
affected by the cost of integrating new service professionals as well as the
Company's inability to fully utilize these resources. In addition, services
gross margins may continue to be adversely affected by the Company's inability
to achieve operating efficiencies with its resources to implementwhen implementing a growing
number of services offerings.
Cost of maintenance revenue includes the cost of customer services such as
hot-line and on-site support and the production cost of the maintenance renewal
process. Cost of maintenance revenue increased by $4.6$5.3 million and $9.1$14.5 million
for the three and sixnine month periods ended July 4,October 3, 1998, respectively, as
compared with the same periods of 1997, primarily due to additional costs
associated with supporting a larger installed base of products, andincluding
products acquired, additional costs to provide higher support levels to customers.on a per
customer basis, and establishing a new centralized customer response center.
OPERATING EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 % CHANGEChange 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------Change
------------- ------------- ------------- ------------- ------------- -------------
(In millions)
Marketing and sales. . . . . . . . $ 71.476.1 $ 59.763.3 20% $ 140.6216.7 $ 114.9178.1 22%
Research and development . . . . . $ 43.044.9 $ 33.8 27%35.9 25% $ 84.7129.5 $ 65.1 30%101.0 28%
General and administrative . . . . $ 16.316.7 $ 13.6 20%14.3 17% $ 32.849.5 $ 25.8 27%
40.1 23%
OPERATING EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales. . . . . 24%. . . 25% 27% 25% 28% 25% 29%
Research and development . . . . . 15% 16%15% 15% 16%
General and administrative . 6%. . . 5% 6% 6% 6%
1013
The increase in marketing and sales expenses of $11.7$12.8 million in the secondthird
quarter of 1998, as compared with the secondthird quarter of 1997, was primarily the
result of an increase of $9.1$10 million in employee related expenses attributable
to increased headcount and commissions, as well as an increase in sales support
costs in Japan of $1.4$4.1 million. The increase in marketing and sales expenses in
the secondthird quarter of 1998 was partially offset by a $1.6$1.9 million decrease
resulting from the weakening of certain foreign currencies, primarily the
Japanese yen, in relation to the U.S. dollar in the secondthird quarter of 1998, as
compared with the secondthird quarter of 1997. For the sixnine month period ended
July 4,October 3, 1998, as compared with the same period of 1997, the increase in
marketing and sales expenses of $25.7$38.6 million was primarily the result of an
increase of $17.2$25 million in employee related expenses attributable to increased
headcount and commissions, as well as an increase in sales support costs in
Japan of $5.6$6.5 million.
The Company's investment in research and development, prior to the
reduction for capitalization of software development costs, was $49.1$50.6 million
and $37.3$40.2 million for the secondthird quarters of 1998 and 1997, respectively,
representing 17%16% and 18%17% of total revenue, respectively. The increase in net
research and development expenses for the secondthird quarter of $9.2$9 million was
primarily attributable to employee related costs of $6.9$3.9 million due to
increased headcount and facilities costs of $3.3 million, partially offset by
an increase in the capitalization of software development costs of $2.6$3.2 million. The Company
capitalized $6.1$5.7 million and $3.5$4.3 million of software development costs for the
secondthird quarters of 1998 and 1997, respectively, which represented 13% and 9%, respectively,11% of total
research and development expenditures made in each of those periods, resulting
primarily from general increases in new product development. The increase in
net research and development expenses of $19.6$28.5 million for the sixnine month period
ended July 4,October 3, 1998, as compared with the same period of 1997, was primarily
the result of an increase of $11.7$16.1 million in employee related expenses
attributable to increased headcount, facilities costs of $6.7$9.8 million and
management information systems costs of $4.5$5.5 million, partially offset by an
increase in the capitalization of software development costs of $4.8$6.2 million.
For the sixnine month periods ended July 4,October 3, 1998 and June 28,September 27, 1997, the
Company capitalized $11.5$17.3 million and $6.8$11.1 million of software development
costs, which represented 12% and 9%10%, respectively, of total research and
development expenditures made in each of those periods, resultingperiods. The increase resulted
primarily from general increases in new product development. In any given
period, the amount of capitalized software development costs may vary depending
on the exact nature of the development performed.
General and administrative expenses increased by $2.7$2.4 million and $7$9.4
million for the three and sixnine month periods ended July 4,October 3, 1998,
respectively, as compared to the same periods of 1997. This was primarily
attributable to an increase in bad debt expense of $1.2 million and $3.1
million, consulting services fees for information services of $2.2$0.7 million and $4.1$2.4 million, and employee
related expenses of $0.2 million and $1.9 million, for the three and sixnine month
periods ended July 4,October 3, 1998, respectively, as compared to the same periods of
1997,1997.
UNUSUAL ITEMS
Described below are unusual items and an increase in bad
debt expense of $1.1 million and $1.9 million, respectively.
UNUSUAL ITEMSrestructuring charges during the
three months ended October 3, 1998. There were no unusual items in the three
month period ended July 4, 1998.
ForSeptember 27, 1997.
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(In millions)
Write-off of in-process research and development . . . $ 257.5 $ - - $ 339.5 $ 4.9
Restructuring charges. . . . . . . . . . . . . . . . . 20.8 - - 24.8 29.2
------------- ------------- ------------- -------------
$ 278.3 $ - - $ 364.3 $ 34.1
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
During the nine months ended October 3, 1998, the Company made a number of
purchase acquisitions. The consolidated financial statements include the
operating results of each business from the
14
date of acquisition. A summary of purchase acquisitions for the nine months
ended October 3, 1998, follows:
Purchased
Technology
Entity Name: Purchase Price Purchase Date Charge
-------------- ------------- ------------------
(In millions)
Ambit Design Systems, Inc. $ 255.0 September 1998 $ 214.4
Bell Labs' Integrated Circuit
Design Automation Group $ 58.0 September 1998 $ 42.7
Symbionics Group Limited $ 46.1 February 1998 $ 40.0
Excellent Design, Inc. $ 40.9 March 1998 $ 42.0
In September 1998, the Company acquired all of the outstanding stock of
Ambit Design Systems, Inc. (Ambit), a California corporation, for cash. The
total purchase price was $255 million, and the acquisition was accounted for as
a purchase. In connection with the acquisition, net intangibles of $250.9
million were acquired.
Upon consummation of the Ambit acquisition, the Company immediately
expensed $214.4 million representing purchased in-process technology that had
not yet reached technological feasibility and has no alternative future use
(see Notes to Condensed Consolidated Financial Statements). The value was
determined by estimating the costs to develop the purchased in-process
technology (Buildgates synthesis product architecture, Placement Knowledgeable
Synthesis, Data Path Compiler, and Static Timing engine) into commercially
viable products, estimating the resulting net cash flows from such projects,
and discounting the net cash flows back to their present value. The discount
rate includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. The in-process
technology is expected to be commercially viable in 1999.
In September 1998, the Company acquired Bell Labs' Integrated Circuit
Design Automation Group of Lucent Technologies Inc. (BLDA), for cash. The total
purchase price was $58 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $60.6 million
were acquired.
Upon consummation of the BLDA acquisition, the Company immediately
expensed $42.7 million representing purchased in-process technology that had
not yet reached technological feasibility and has no alternative future use
(see Notes to Condensed Consolidated Financial Statements). The value was
determined by estimating the costs to develop the purchased in-process
technology (Formalcheck verification tool and Clover design rule checking and
extraction tool) into commercially viable products, estimating the resulting
net cash flows from such projects, and discounting the net cash flows back to
their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the
purchased in-process technology. The in-process technology is expected to be
commercially viable in 2000.
The resulting net cash flows from such projects are based on the Company
management's estimates of revenues, cost of revenues, research and development
costs, selling, general and administrative costs, and income taxes from such
projects. These estimates are based on the following assumptions:
The revenue projections are based on the potential market size that the
projects are addressing, the Company's ability to gain market share in these
segments, and the life cycle of in-process technology.
15
These estimates also include anticipated growth related to the Company's
utilization of the acquired technologies in conjunction with the Company's
products, the Company's marketing and distribution of the resulting products
through its resellers, and the Company's enhancement to the acquired products
by providing incremental financial support and stability. Estimated total
revenues from the purchased in-process product areas peak in years 2003-2004
and decline rapidly in 2005-2006 as other new products are expected to enter
the market. In addition, a portion of the anticipated revenues has been
attributed to enhancements of the base technology under development, and has
been excluded from net cash flow calculations. Existing technology was valued
at $26.4 million and $17.6 million related to the Ambit and BLDA
acquisitions, respectively. There can be no assurances that these assumptions
will prove accurate, or that the Company will realize the anticipated benefit
of the acquisition. See "Factors That May Affect Future Results -- Risks of
Mergers and Acquisitions."
The net cash flows generated from the in-process technology are expected
to benefit from economies of scale through leveraging the Company
infrastructure (i.e., sales through existing channels at lower direct selling
costs, consolidated marketing and advertising programs, and a fully scaled
general and administrative structure), although there can be no assurance such
economies of scale will be achieved or benefits will be realized. Earnings
before interest, taxes, and depreciation are estimated to be approximately
54% to 61% for the sales generated from in-process technology. The Company's
corporate tax rate (28.5%) is used in determining the net free cash flows.
The discount of the net cash flows to their present value is based on
the weighted average cost of capital (WACC). The WACC calculation produces
the average required rate of return of an investment in an operating
enterprise, based on various required rates of return from investments in
various areas of the enterprise. The WACC assumed for the Company, as a
corporate business enterprise, is 11% to 12%. The discount rate used to
discount the net cash flows from purchased in-process technology is 20% to
25%. This discount rate is higher than the WACC due to the inherent
uncertainties in the estimates described above, including the uncertainty
surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability levels of
such technology, if any, and the uncertainty of technological advances,
all of which are unknown at this time.
If these projects are not successfully developed, the Company's
business, operating results, and financial condition may be materially
adversely affected in future periods. In addition, the value of other
intangible assets acquired may become impaired.
Unusual items also include restructuring charges of $20.8 million for
the three month period ended June 28, 1997, the Company incurred
approximately $22.4 million of expenses related to its merger with CCT, which
were included in unusual items,October 3, 1998, for the reduction ofin personnel whose duties were
made redundant, closure of duplicated and excess facilities, fees of financial
advisors, attorneys, and accountants, and other expenses
associated with the merger. Additionally,integration of its services organization and the
consolidation of facilities. In connection with the restructuring activities,
the Company recorded expensesreduced its workforce by approximately 101 employees. The
majority of the restructuring charges will be utilized during 1998, with the
exception of facility costs which will be paid out through the year 2008, and
some severance costs and other restructuring charges to restructure its
international business operations to reduce the Company's cost structure and to
further integrate and reduce selling and marketing activities.
11
be paid during 1999.
In February 1998, the Company acquired all of the outstanding stock of
Symbionics Group Limited (Symbionics), a U.K. corporation, for approximately 1
million shares of the Company's common stock and $21.3 million of cash. The
total purchase price was $46.1 million, and the acquisition was accounted for as
a purchase. In connection with the acquisition, net intangibles of $46 million
were acquired,acquired. Upon consummation of whichthe Symbionics acquisition, the Company
immediately expensed $40 million was reflected as a charge to operations
for the write-off ofrepresenting purchased in-process research and developmenttechnology
that had not yet reached technological feasibility and in management's opinion, hadhas no probable alternative future
use.use (see Notes to Condensed Consolidated Financial Statements).
In March 1998, the Company acquired all of the outstanding stock of
Excellent Design, Inc. (EXD), a Japanese corporation, for cash. The total
purchase price was $40.9 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $48.7
million were acquired,acquired. Upon consummation of whichthe EXD acquisition, the Company
immediately expensed $42 million was reflected as a charge to operations for
the write-off ofrepresenting purchased in-process research and developmenttechnology
that had not yet reached technological feasibility and in management's opinion, had no probable
alternative
future use.use (see Notes to Condensed Consolidated Financial Statements).
16
Included in unusual items for the sixnine month period ended June 28,September 27,
1997 werewas a $4.9 million write-off of in-process research and developmenttechnology associated with an
acquisition and a $29.2 million restructuring charge due to the Company's
merger with High Level Design Systems, Inc. and CCT,Cooper and Chyan Technology,
Inc., its reorganization into business units, and expenses to restructure the
Company's international business operations.
OTHER INCOME, NET AND INCOME TAXES
Other income, net of other expenses, remained relatively flat indecreased by $3.1 million for the
three month period ended July 4,October 3, 1998, as compared to the same period of
1997. Other1997, primarily due to a decrease in interest income of $2.1 million and a
higher interest expense of $0.6 million. For the nine month period ended
October 3, 1998, other income, net of other expenses, decreased by $12.8$15.9
million, for the
six month period ended July 4, 1998, as compared to the same period of 1997, primarily due to the $13.1
million gain on the sale of stock recorded in the first quarter of 1997 and a
decrease in interest income of $1.9 million,
partially offset by the decrease in interest expense of $1.1$4 million.
The Company's estimated effective tax rate in the three and sixnine month
periods ended July 4,October 3, 1998 was 28.5%, excluding the effect of the write-offwrite-offs
of in-process researchtechnology of $82 million and development of $82.0$214.8 million in the
first quarterand third quarters of 1998, respectively, which is not deductible for
income tax purposes. This compares to 30% for the same periods of the prior
year. The decrease in the effective rate was due to the difference in tax rates
between domestic and foreign operations.
YEAR 2000 UPDATE
Year 2000 computer issues create risks for the Company, the full extent
and scope of such risks have not yet been fully assessed. In the event that
internal products and systems, or those products and systems provided or
utilized by third parties do not correctly recognize and process date data
information beyond the year 1999, material adverse effects on the Company's
business, operating results, and financial condition could result.
To address Year 2000 issues, the Company has initiated a program
designed to address the most critical Year 2000 items that would affect the
Company's products, its worldwide business systems, and the operations of the
following functions: research and development, finance, sales, manufacturing,
and human resources. Assessment and remediation efforts regarding these
critical items are proceeding in parallel. The Company is also creating a
plan to work with critical suppliers to determine that such suppliers'
operations and the products and services they provide the Company are Year
2000 capable or to monitor their progress towards Year 2000 capability. The
Company has not commenced work on contingency plans to address potential
problems with its internal systems or the systems of its supplier and
customers or other third parties.
In 1995, the Company commenced a worldwide business systems replacement
project with systems that use programs primarily from SAP America, Inc.
(SAP), PeopleSoft, Inc. (PeopleSoft), and Siebel Systems, Inc. (Siebel). The
new systems are targeted at bringing approximately seventy percent (70%) of
the Company's business computer systems into Year 2000 compliance. In
addition, in September 1997, the Company commenced an investigation of the
condition of Year 2000 readiness of all of its other internal business
applications. This effort began with an inventory to identify current
business applications, an evaluation of their Year 2000 readiness status and
development of plans for remediation and testing of all discovered issues.
As of June 1998, of the 60 business application systems that had been
identified, 50 had been modified or replaced and determined to be Year 2000
ready. Recently, the Company has identified additional areas requiring Year
2000 assessment, remediation, and testing, specifically software interfaces
and applications used to interact with vendors, as well as applications that
are unique to the various international operations. The Company expects that
all business critical applications shall be Year 2000 ready by the fourth
quarter of 1999.
In 1997, the Company commenced a program to inventory, assess,
remediate, and test the Year 2000 capability of the Cadence software
products. As a result of those efforts, the Company believes the most
current release of Cadence software products are Year 2000 Compliant. The
Company defines the term "Year 2000 Compliant" to mean that the software will
not: (a) cease to perform due solely to a change in date to or after January
1, 2000, nor (b) generate incorrect or ambiguous data or results with respect
to same-century and/or multi-century formulas, functions, date values, and
date data interfaces. Cadence continues to further validate current products,
new releases for such products, as well as new products, products acquired
through acquisitions, and releases through testing and code reviews. There is
no assurance that products acquired through acquisition, such as Ambit and
BLDA products, are Year 2000 Compliant. All Cadence Year 2000 activities
concerning the Company's current products are expected to be completed by
October 1999.
In July 1998, the Company established a cross functional Year 2000
project team to identify and resolve all remaining Year 2000 readiness
issues. The primary remaining issues consist of assessing the Year 2000
impact for outside vendors, customers, and facilities as well as the
remaining 30% of the internal business systems that are not yet assessed as
Year 2000 ready. Project plans are being developed and will include the
process of identifying and prioritizing critical suppliers and customers at
the direct interface level, and communicating with them about their plans and
progress in addressing Year 2000 issues. Detailed evaluations of the most
critical third parties have been initiated. It is expected that all Year
2000 project plans and 1999 budgets will be completed by the first quarter of
1999 and the remaining inventories completed by the end of the second quarter
of 1999. This effort will be followed by each business function conducting a
focused level of ranking and functional assessment of its inventory to
establish the methods and actions required to resolve any Year 2000 issues
discovered. The assessment efforts are estimated to be completed by the
second quarter of 1999. The remediation (modification or replacement of
existing software or systems) and the testing phases of the project plans are
expected to take place throughout most of 1999 and are estimated to be
completed, for all business critical items, by the fourth quarter of 1999.
All remaining issues (which are considered low priority or low risk to the
business) are planned to be addressed as time permits and could continue
through the first half of 2000.
It is estimated that the 1999 budget for Year 2000 related costs to
resolve remaining readiness issues will be approximately $15 million. The
costs of implementing the SAP, PeopleSoft, and Siebel business application
systems are not included in these cost estimates. The total cost associated
with required modifications to become Year 2000 ready is not expected to
have a material adverse effect on the Company's business, operating results
and financial condition. The Company's current estimates of the amount of
time and costs necessary to implement and test its systems are based on the
facts and circumstances existing at this time. The estimates were derived
utilizing multiple assumptions of future events including the continued
availability of certain resources, implementation success and other factors.
New developments may occur that could affect the Company's estimates for the
required modifications to become Year 2000 ready. These developments
include, but are not limited to: (a) the availability and cost of personnel
trained in this area, (b) the ability to locate and correct all relevant
computer code and equipment, and (c) the planning and modification success
needed to achieve full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000
computer issues contains forward-looking statements based on current
expectations that involve risks and uncertainties and should be considered in
conjunction with the following. The failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations of the Company. Such failures could
materially and adversely affect the Company's business, operating results,
and financial condition. Due in large part to the uncertainty of the Year
2000 readiness of third-party suppliers and customers, as well as the lack of
a final Year 2000 project plan for the remaining internal business systems
that are not yet assessed as Year 2000 ready, the Company is currently
unable to determine whether the consequences of Year 2000 issues will have a
material impact on the Company's business, operating results or financial
condition. The Company's programs addressing Year 2000 computer issues is
expected to reduce the Company's level of uncertainty regarding Year 2000
issues and, in particular, about the Year 2000 readiness of its material
internal operations, suppliers, customers, and other third-parties. In
addition, the Company believes that the current Year 2000 activities
surrounding the Company's software products and internal systems have reduced
the risk of any disruption caused by any Year 2000 issues in these areas.
SINGLE EUROPEAN CURRENCY
The Company is in the process of addressing the issues raised by the
introduction of the Single European Currency ("Euro") as of January 1, 1999 and
during the transition period ending January 1, 2002. The Company expects that
its internal systems that will be affected by the initial introduction of the
Euro will be Euro capable by January 1, 1999, and does not expect the costs of
system modifications to be material. The Company does not presently expect that
introduction and use of the Euro will materially affect the Company's foreign
exchange and hedging activities, or the Company's use of derivative instruments,
or will result in any material increase in costs to the Company. While the
Company will continue to evaluate the impact of the Euro introduction over time,
based on currently available information, management does not believe that the
introduction of the Euro currency will have a material adverse impact on the
Company's business, operating results, and financial condition.
NEW ACCOUNTING STANDARDS
Effective January 4, 1998, the Company adopted SOP 97-2, "Software Revenue
Recognition." SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. The
adoption of SOP 97-2 did not have a material impact on the Company's
consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
It requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. The Company has not yet determined the impact SFAS No. 133 will
have on its financial position, results of operations, or cash flows.
12
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The Company anticipates that SOP 98-1 will not have
a material impact on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At July 4,October 3, 1998, the Company's principal sources of liquidity consisted
of $260.7$246 million of cash, cash equivalents, and short-term investments, compared
to $304.2 million at January 3, 1998, and a $110new $355 million senior secured revolvingunsecured
credit facility. As of AugustNovember 7, 1998, the Company had no borrowings of $125
million under the revolving line of credit.credit facility.
Cash generated from operating activities increased $32.6$65.7 million for the
sixnine months ended July 4,October 3, 1998, as compared to the sixnine months ended
June 28,September 27, 1997. The increase was due primarily to increases in net income
excluding unusual items and certain other non-cash charges, partially
17
offset by changes in the balances of operating assets and liabilities. An
important contributor to the increase was the Company's software financing
program, whereby interests in the Company's qualified accounts receivables
are transferred to third party financial institutions on a non-recourse basis
in exchange for cash.
At July 4,October 3, 1998, the Company had working capital of $309$8.6 million
compared with $340.3 million at January 3, 1998. Working capital reductions
were generated primarily by an increase in current liabilities, due primarily to
the $253 million payable to Ambit shareholders, and a decrease in cash and
short-term investments of $43.5$58.2 million. The decrease in cash was primarily due
to the repurchase of the Company's stock, capital expenditures, and
acquisitions, partially offset by cash generated from operations.
In addition to its short-term investments, the Company's primary investing
activities were acquisitions, purchases of property and equipment, purchases of
software, intangibles, and other assets, and the capitalization of software
development costs that in the aggregate represented $137.3$232.8 million and $21.2$78.8
million of cash used for investing activities in the sixnine months ended July 4,October
3, 1998 and June 28,September 27, 1997, respectively. ForAlso contributing to cash from
investing activities for the sixnine month period ended June 28,September 27, 1997, were
net proceeds related to the sale of Integrated Measurement Systems, Inc. (IMS)
stock contributedof $18.6 million, which was partially offset by the loss to the Company of
IMS cash of $9.5 million due to deconsolidation.
As part of its authorized stock repurchase programs, the Company has sold
put warrants and purchased call options through private placements. The Company
has a maximum potential obligation related to put warrants at July 4,October 3, 1998 to
buy back 5.35.4 million shares of its common stock at an aggregate price of
approximately $143.9 million.$144 million through November 1999.
Anticipated cash requirements for the remainder of 1998 include the
purchase of treasury stock through the exercise of call options for the
Company's stock repurchase programs, disbursements to Ambit shareholders of
approximately $253 million, and the contemplated additions of property, plant,
and equipment of approximately $45$25 million.
As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $50 million will be made over
the next three to four years. As of July 4,October 3, 1998, the Company had
contributed approximately $22.7$27.3 million, which wasis reflected in other non-current
assets in the accompanying condensed consolidated balance sheet, net of
operating losses.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and the $110$355 million revolving credit facility will
be sufficient to meet its working capital requirements for the
foreseeable future.
13
on a short- and long-term
basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The EDA industry and the commercial electronic design and consulting
industry in which the Company competes are subject to rapid technological
developments, evolving industry standards, changes in customer requirements, and
frequent new product introductions and enhancements. As a result, the Company's
future revenues and operating results will depend on its ability to develop or
acquire new products and enhance its existing products and processes on a timely
basis to keep pace with innovations in technology and to support a range of
changing computer software, hardware platforms, and customer preferences.
Changes in manufacturing technology may render the Company's software tools
obsolete. There can be no assurance that the Company will be able to
successfully develop new products to address new customer requirements and
technological changes, or that such products will achieve market
18
acceptance. Lack of market acceptance or significant delays in product
development could result in a loss of competitiveness of the Company's products,
with a resulting loss of revenues.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's operating expenses are partially based on its expectations
regarding future revenue. Since expenses are usually committed in advance of
revenues, and because only a small portion of expenses vary with revenue, the
Company's consolidated results of operations may be disproportionately impacted
by lower than expected revenue. Factors that may affect operating results
include, among other things: (i) the timing and introduction of new products;
(ii) the mix of products and services sold; (iii) the timing of significant
orders from and shipments to or implementations for customers; (iv) product and
services pricing and discounts; (v) the timing of completion of acquisitions;
and (vi) general economic conditions. In addition, the Company's focus on
providing services is relatively recent, and therefore quarter to quarter
comparisons may not be meaningful. For example, the revenue growth from this
source from the 1997 periods to the 1998 periods may not be indicative of future
growth. Although the Company's revenues are not generally seasonal in nature,
the Company has experienced, and may continue to experience, decreases in first
quarter revenue compared with the preceding fourth quarter, which is believed to
result primarily from the budgeting and expenditure cycles of the Company's
customers.
HIGHLY COMPETITIVE MARKET
The Company operates in the highly competitive EDA industry and in the
emerging commercial electronicelectronics design and consulting markets. The EDA industry
continues to be characterized by falling prices, rapid technological change, and
new market entrants. The Company's success is dependent upon its ability to
develop innovative, cost competitive EDA software products and take them to
market in a timely manner. The Company competes with a number of companies,
including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., and
Zuken-Redac. The Company also experiences competition from manufacturers of
electronic devices that have developed and/or have the capability to develop
their own EDA software. Some of these companies may have substantially greater
financial, marketing, and technological resources than the Company.
14
The EDA industry has relatively low barriers to entry, and, therefore,
the number of the Company's actual and potential competitors is significant.
A potential competitor that possesses the necessary knowledge of electronic
circuit and systems design, production, and operations could develop
competitive EDA tools using a moderately priced computer workstation and take
such tools to market quickly. There can be no assurance that development of
competitive products will not result in a shift of customer preferences away
from the Company's products, resulting in a significant decrease in the sales
of the Company's comparable products. In addition, there can be no assurance
that the Company will successfully identify new product opportunities,
develop and take new products to market in a timely manner and achieve market
acceptance of its products. Failure to do so may have a material adverse
effect on Cadence'sthe Company's business, operating results, and financial condition.
In the electronicelectronics design and consulting markets, the Company competes with
numerous EDA and other consulting companies. This emerging market represents
the outsourcing of an activity by electronics manufacturers that has
traditionally been performed in house, and is thus subject to the customers'
"make versus buy" decisions. As a result, the Company's services business must
also compete with the internal design capabilities of manufacturers of
electronic devices, many of which have substantially greater financial,
marketing, and technological resources than the Company. Therefore, the
Company's ability to obtain such business is dependent upon its ability to offer
better strategic concepts and technical solutions, competitive prices, a quicker
response or a combination of these factors. There can be no assurance the
Company will be able to effectively compete in this area, and any failure to
compete in the electronic design and consulting market may have a material
adverse effect on Cadence'sthe Company's
19
business, operating results, and financial condition.
The electronicelectronics design and consulting service businesses have relatively
low barriers to entry and, therefore, EDA and other electronics companies and
management consulting firms have entered and may continue to enter into this
market. The pricing model for services is susceptible to supply and demand
volatility for labor as well as the Company's continuing ability to provide
competitive time-to-market benefits to its customers. Some of the Company's
current and potential competitors in the electronicelectronics design and consulting
services businesses may have substantially greater financial, marketing, and
technological resources than the Company. There can be no assurance that the
Company will be able to compete successfully in these businesses, and any
failure to compete in this business may have a material adverse effect on Cadence'sthe
Company's business, operating results, and financial condition.
RISK OF SERVICES BUSINESS
The Company has recently increased its focus on offering electronics design
and consulting services. The market for such services in the electronics design
area is relatively new and evolving rapidly. In order to increase revenues and
sustain operating results from the Company's services business, the Company must
continue to gain market acceptance for its professional services, which will
depend substantially on its ability to offer better strategic concepts and
technical solutions, competitive prices, a timely response or a combination of
these factors. Failure to successfully operate its services business would have
a material adverse effect on the Company's business, operating results, and
financial condition.
The Company's professional services contracts generally reflect a high
amount of revenue per order. The loss of individual orders, therefore, could
have a significant impact on the revenue and operating results of the Company.
The timing of revenue from the Company's services business is also difficult to
predict because of the length and variability of the sales and implementation
cycles. In addition, a substantial portion of the Company's revenues from
services are earned pursuant to fixed price contracts. Variances in costs
associated with those contracts could have a material adverse effect on the
Company's business, operating results, and financial condition.
15
The professional services business is labor-intensive. Accordingly, the
ability to expand its services business is dependent on its ability to hire and
retain adequate professional services personnel. The market for professional
services personnel is highly competitive. In general, the high component of
salaries in the cost structure of the professional services business results in
lower gross margins than in the Company's software business. Services gross
margins have been and may continue to be adversely affected by the cost of
integrating new service professionals as well as the Company's inability to
fully utilize these resources. In addition, services gross margins may continue
to be adversely affected by the Company's inability to achieve operating
efficiencies with its resources to implement a growing number of services
offerings.
RISKS ASSOCIATED WITH MERGERS AND ACQUISITIONS
The Company has been involved, and may in the future be involved, in a
number of merger and acquisition transactions. These transactions have been
motivated by many factors, including the desire to obtain new technologies, the
desire to expand and enhance the Company's product and services lines and the
desire to attract personnel. Growth through acquisition has several
identifiable risks, including risks related to integration of the previously
distinct businesses into a single unit, the substantial management time devoted
to such activities, undisclosed liabilities, the failure to realize anticipated
benefits (such as cost savings and synergies) and issues related to product
transition (such as distribution, engineering and customer support).
Realization of any of these risks in connection with an acquisition by the
Company could have a material adverse effect on the Company's business,
operating results, and financial condition.
20
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support, technical, and services personnel. The Company has
recently increased its focus on offering professional services to its customers,
the growth of which is directly dependent on the attraction and retention of
personnel. The market for highly skilled employees is intensely competitive.
To the extent that the Company is not able to attract, retain, train, and
motivate highly skilled employees, directly or through acquisition, who are able
to provide EDA and other design services that satisfy customer's expectations,
the Company's business, operating results, and financial condition could be
materially adversely affected.
16
RISKS OF INTERNATIONAL OPERATIONS
The Company expects that international revenues will continue to account
for a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements, and tariffs and other trade barriers.barriers, and move to a single European
currency. In addition, political or economic conditions in a specific country
or region, government spending factors and natural disasters could have a
material adverse impact on the Company's future international business as well
as the Company's international operations. Currency exchange fluctuations in
countries in which the Company conducts business could also materially adversely
affect the Company's business, operating results, and financial condition. A
portion of the Company's international revenues are derived from Asia. Recent
economic uncertainty and related weakening of foreign currencies has had, and
may continue to have an adverse effect on the Company's revenues and operating
results. The Company enters into forward contracts to hedge the short-term
impact of foreign currency fluctuations. Although the Company attempts to
reduce the impact of foreign currency fluctuations, significant exchange rate
movements may have a material adverse impact on the Company's consolidated
results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
Cadence's success is dependent, in part, upon its proprietary technology.
The Company generally relies upon patents, copyrights, trademarks, and trade
secret laws to establish and maintain its proprietary rights in its technology
and products. Cadence has a program to file applications for and obtain patents
in the United States and in selected foreign countries where a potential market
for Cadence's products exists. Cadence has been issued a number of patents;
other patent applications are currently pending. There can be no assurance that
any of these patents will not be challenged, invalidated or circumvented or that
any rights granted thereunder will provide competitive advantages to Cadence.
In addition, there can be no assurance that patents will be issued from pending
applications, or that claims allowed on any future patents will be sufficiently
broad to protect Cadence's technology. In addition, the laws of some foreign
countries may not permit the protection of Cadence's proprietary rights to the
same extent as do the laws of the United States. Although Cadence believes the
protection afforded by its patents, patent applications, copyrights and
trademarks has value, the rapidly changing technology in the EDA industry makes
Cadence's future success dependent primarily on the innovative skills,
technological expertise, and management abilities of its employees rather than
on patent, copyright, and trademark protection.
Because of the existence of a large number of patents in the EDA industry
and the rapid rate of issuance of new patents, it is not economically
practicable to determine in advance whether a product or
21
any of its components infringeinfringes patent rights of others. From time to time,
Cadence receives notices from or is sued by third parties regarding patent or
other intellectual property claims or is called upon to defend or indemnify a
customer against such a claim of a third party. If infringement is alleged,
Cadence believes that, based upon industry practice, any necessary license or
rights under such patents may be obtained on terms that would not have a
material adverse effect on Cadence's business, operating results, and financial
condition. Nevertheless, there can be no assurance that the necessary licenses
would be available on acceptable terms, or at all, or that Cadence would prevail
in any such challenge. Many of Cadence's products are designed to include
software or other intellectual property licensed from third parties, and it may
be necessary in the future to seek or renew licenses relating to various aspects
of its products. The inability to obtain certain licenses or other rights or to
obtain such licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on Cadence's business, operating
results, and financial condition.
17
RISK OF FAILURE TO OBTAIN EXPORT LICENSES
Cadence is required to comply with the regulations of the United States
Department of Commerce with respect to the shipment of its products and other
technologies outside the United States to certain countries and certain end
users. Although to date, Cadence has not encountered any material difficulty in
complying with these regulations, any difficulty in such compliance in the
future could have an adverse effect on the Company's business, operating
results, and financial condition.
RISKS OF BUSINESS INTERRUPTION
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its databases against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion, and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures will be sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, operating results, and financial
condition.
IMPLEMENTATION OF NEW SYSTEMS
The Company is currently in the process of transitioning to new computer
software for its financial, accounting, project system accounting, and order
management information systems. The successful implementation of these new
systems is crucial to the efficient operation of the Company's business. There
can be no assurance that the Company will implement its new systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. Problems with installation or initial operation of
the new systems could cause substantial management difficulties in operations
planning, financial reporting, and management and thus could have a material
adverse effect on the Company's business, operating results, financial
condition, and results of operations.
YEAR 2000 COMPLIANCE
The Company believes that its most current releases of its products will
not ceasefailure to perform nor generate incorrect or ambiguous data or results
solely due tocorrect a change in date to or after January 1, 2000, and will
calculate any information dependent on such dates in the same manner, and
with the same functionality, data integrity and performance, as such products
do on or before December 31, 1999 (collectively, "Year 2000 Compliance").material Year 2000 Compliance issues may arise with respect to any modifications made
to the Company's products byproblem could result in an
interruption in, or a party other than the Companyfailure of, certain normal business activities or
from the
combination or useoperations of the Company's products with any other software programs
or hardware devices not provided by the Company,Company. Such failures could materially and therefore may result in
unforeseen Year 2000 Compliance problems for some of the Company's customers,
which may have a material adverse effect onadversely
affect the Company's business, operating results, and financial condition.
Additionally,Due in large part to the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, as with any company withwell as the lack of a computing infrastructure and
utilizing business-application software programs written over many years,final Year 2000
project plan for the remaining internal business systems that are not yet
assessed as Year 2000 ready, the Company is currently unable to determine
whether the consequences of Year 2000 issues will have a material impact on
the Company's internal operations may be subject tobusiness, operating results or financial condition. The
Company's programs addressing Year 2000 Compliance issues.
The Company has been implementing enterprise-wide information systems which
support a majority ofcomputer issues, described under
"Year 2000 Update," are expected to reduce the Company's operations. These systems are considered
to belevel of uncertainty
regarding Year 2000 Compliantissues and, are in use world-wide. Based solely due to a
change in date to or after January 1,particular, about the Year 2000 readiness
of its material internal
22
operations, suppliers, customers, and other third-parties. In addition, the
Company believes that itsthe current Year 2000 activities relating to the
Company's software products and internal operations will not be materially adversely impacted.
18
systems have reduced the risk of any
disruption caused by any Year 2000 issues in these areas.
STOCK REPURCHASE PROGRAM RISKS
The Company, as part of its authorized stock repurchase program, has
purchased call options that entitle the Company to buy on a specified day one
share of common stock at a specified price to satisfy anticipated stock
repurchase requirements under the Company's systematic repurchase programs.
Additionally, the Company has sold put warrants through private placements. If
exercised, the put warrants will be settled with the issuance of stock.
Accordingly, settlement of the put warrants could cause the Company to issue a
substantial number of shares, depending on the exercise price of the put
warrants and the per share fair value of the Company's common stock at the time
of exercise. In addition, settlement of the put warrants could lead to the
disposition by put warrant holders of shares of the Company's common stock that
such holders may have accumulated in anticipation of the exercise of the put
warrants or call options, which may impact the price of the Company's common
stock.
VOLATILITY OF STOCK PRICE
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Factors such as
fluctuations in revenues or operating results, including failure to meet
expectations of securities analysts, announcements of technological innovations
or new products by the Company or its competitors, or developments in or
disputes regarding patents and proprietary rights could have a significant
adverse effect on the trading price of the Company's common stock in any given
period. Moreover, the stock market has from time to time experienced extreme
price and volume fluctuations, which have particularly affected the market for
technology companies, and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political, and market conditions may adversely affect the
market price of the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only high credit quality
securities that it believes to be low risk and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
1923
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at July 4,October 3, 1998. All investments mature in one year
or less.
Carrying Average
Value Interest Rate
------------------ -------------
(In millions, except for average interest rates)
Investment Securities:
Cash equivalents-fixed rate . . . . . . . . . . . . . . . $ 31.2 5.18%
Short-term investments-fixed rate . . . . . . . . . . . . 36.1 5.75%
Short-term investments-variable rate. . . . . . . . . . . 2.0 5.60%
---------
Total investment securities. . . . . . . . . . . . . . 69.3 5.49%
Cash equivalents-variable rate. . . . . . . . . . . . $ 35.1 5.32%
Short-term investments-fixed rate. . . . . . . . . 66.9 5.69%
Short-term investments-variable rate . . . . . . . 79.3 5.72%
--------48.4 4.78%
---------
Total investment securitiesinterest bearing instruments . . . . . . . . . . 181.3 5.63%
Cash equivalents-variable rate . . . . . . . . . . 21.0 5.48%
--------
Total interest bearing instruments. . . . . . . $ 202.3 5.62%
--------
--------117.7 5.20%
---------
---------
FOREIGN CURRENCY RISK
The Company transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. The Company has established a
foreign currency hedging program, utilizing foreign currency forward exchange
contracts (forward contracts) to hedge certain foreign currency transaction
exposures in Japan, Canada, Asia, and certain European countries. Under this
program, increases or decreases in the Company's foreign currency transactions
are partially offset by gains and losses on the forward contracts, so as to
mitigate the possibility of foreign currency transaction gains and losses. The
Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in other income (expense), and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included in
net income as a component of other income (expense). The Company's ultimate
realized gain or loss with respect to currency fluctuations will depend on the
currency exchange rates and other factors in effect as the contracts mature.
The table below provides information as of July 4,October 3, 1998 about the
Company's material forward contracts. The information is provided in U.S.
dollar equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature in less than thirty days.
Average
Notional Contract
Forward Contracts: Amount Rate
-------- --------
Forward Contracts:
(In millions, except for average contract rates)
Japanese yenyen. . . . . . . . . . . . . . . . . . . . . . . $ 24.4 143.81
German deutschemarks32.7 143.61
French francs . . . . . . . . . . . . . . $ 4.0 1.79
Italian lira . . . . . . . . . . . . . . . . . . $ 3.5 1,769.65
French francs.(5.7) 5.93
Italian lira. . . . . . . . . . . . . . . . . . . . . . . $ 1.8 6.00
Swedish krona.4.6 1,749.28
German deutschemarks. . . . . . . . . . . . . . . . . . . $ 1.2 8.03
Singapore4.3 1.77
Canadian dollars. . . . . . . . . . . . . . . . $ 1.1 1.76
Canadian dollars . . . . . . . . . . . . . . . . $ (2.5) 1.47
British pound sterling . . . . . . . . . . . . . $ (3.0) 0.61(3.9) 1.52
The unrealized gain (loss) on the outstanding forward contracts at July
4,October
3, 1998 was immaterial to the Company's consolidated financial statements. Due
to the short-term nature of the forward contracts, the fair value at July
4,October 3,
1998 was negligible. The realized gain (loss) on these contracts as they
matured was not material to the consolidated operations of the Company.
2024
EQUITY PRICE RISK
The Company, as part of its authorized repurchase program, has purchased
call options that entitle the Company to buy on a specified day one share of
common stock at a specified price to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. Additionally,
the Company has sold put warrants through private placements.
The table below provides information at July 4,October 3, 1998 about the Company's
put warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through November 12, 1999.
1998 1999 Estimated
Maturity Maturity Fair Value
-------- -------- ----------
(Shares and contract amounts in millions)
Put Warrants:
SharesShares. . . . . . . . . . . . . . . . . . . 2.4 2.9
Weighted average strike price. . . . . . . $24.33 $29.95
Contract amount.. 1.2 4.2
Weighted average strike price . . . . . . . . . . . . . . $ 58.224.34 $ 85.7 $22.5
Call Options:
Shares27.22
Contract amount . . . . . . . . . . . . . . . . . . 1.7 1.9
Weighted average strike price.. . . $ 29.7 $ 114.3 $ 25.2
Call Options:
Shares. . . . . . . $24.45 $30.12
Contract amount.. . . . . . . . . . . . . . . . . . . 0.9 2.9
Weighted average strike price . . . . . . . . . . . . . . $ 41.624.47 $ 57.2 $19.727.19
Contract amount . . . . . . . . . . . . . . . . . . . . . $ 20.8 $ 78.8 $ 8.8
If exercised, the put warrants will be settled with stock. Settlement of
the put warrants with stock could cause the Company to issue a substantial
number of shares, depending on the exercise price of the put warrants and the
per share fair value of the Company's common stock at the time of exercise. In
addition, settlement of the put warrants in stock could lead to the disposition
by put warrant holders of shares of the Company's common stock that such holders
may have accumulated in anticipation of the exercise of the put warrants or call
options, which may adversely impact the price of the Company's common stock.
21INTEREST RATE SWAP RISK
The Company entered into a 4.8% fixed interest rate swap in connection with
its accounts receivable financing program to modify the interest rate
characteristics of the receivables sold to a certain financing institution on a
non-recourse basis. At October 3, 1998 the maturity distribution of the $26
million notional amount was in quarterly installments of approximately $2
million commencing in January 1999 and ending in October 2001. The estimated
fair value at October 3, 1998 was negligible.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and
litigation matters which arise in the ordinary course of business. These
include disputes and lawsuits related to intellectual property, licensing,
contract law,contracts, distribution arrangements, and employee relations matters.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(Avant!) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy, and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's former President and Chief Executive Officer, and with leave
of the court, on January 29, 1998 filed a second amended counterclaim. The
second amended counterclaim alleges, INTER ALIA, that the Company and its former
President and Chief Executive Officer had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its former
President and Chief Executive Officer believe that each has meritorious defenses
to Avant!'s claims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint and stayed the counterclaim pending resolution of the
Company's complaint. The counterclaim remains stayed.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order
enjoining the sale of Avant!'s ArcCell products and (b) to determine whether
Avant!'s Aquarius software infringes Cadence's code and, if so, to enter an
order enjoining the sale of that software. In an order issued on December 19,
1997, as modified on January 26, 1998, the district court entered an injunction
barring any further infringement of Cadence's copyrights in Design Framework II
software, or selling, licensing, or copying such product derived from Design
Framework II, including but not limited to, Avant!'s ArcCell products. On
February 19, 1998, Avant! filed a petition for WRIT OF CERTIORAI to the United
States Supreme Court, requesting a review of the Ninth Circuit Court's decision.
On April 17, 1998, the Company filed its opposition to Avant!'s Petition with
the Supreme Court. That petition was denied without comment by the United
States Supreme Court. On July 9, 1998, Cadence filed additional motions seeking
to enjoin further sale of Avant!'s Aquarius products on copyright and trade
secret grounds. Those motions
remain pending.The Court currently is considering those motions.
By an order dated July 22, 1997, the District Court stayed most activity
in the case pending in that Court and ordered Avant! to post a $5 million
bond, in light of criminal proceedings pending against Avant! and several of
its executives. On July 9, 1998, the Company filed a motion requesting that
the stay be lifted. The Court is currently considering that motion. The
District Court has not yet set a trial date. The Company intends to pursue
its claim vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse impact on
the Company's financial position or results of operations.
2226
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 6, 1998, the stockholders
of the Company approved the following matters:
1. A proposal to elect eight (8) directors of the Company to serve for the
ensuing year and until their successors are elected or until such director's
earlier resignation or removal.
Nominee In Favor Withheld
- ------- ----------- --------
Carol A. Bartz . . . . . . . . . . . . . . 184,126,069 214,043
H. Raymond Bingham . . . . . . . . . . . . 184,149,965 190,147
John R. Harding. . . . . . . . . . . . . . 184,150,739 189,373
Dr. Leonard Y. W. Liu. . . . . . . . . . . 184,075,024 265,088
Donald L. Lucas. . . . . . . . . . . . . . 184,133,161 206,951
Dr. Alberto Sangiovanni-Vincentelli. . . . 184,134,510 205,602
George M. Scalise. . . . . . . . . . . . . 184,123,866 216,246
Dr. John B. Shoven . . . . . . . . . . . . 184,106,111 234,001
2. A proposal for the approval of an amendment to the Certificate of
Incorporation, as amended, to increase the authorized shares of Common Stock
of the Company from 300,000,000 to 600,000,000 was approved by a vote of
177,362,155 for, 6,684,396 opposed, and 61,044 withheld.
3. A proposal for the approval of an amendment to the 1987 Stock Option
Plan, as amended, to (a) extend the term of such plan to May 31, 2007, and
(b) increase the number of authorized shares reserved under the plan from
61,370,100 to 71,370,100, an increase of 10,000,000 shares was approved by a
vote of 108,693,000 for, 50,721,131 opposed, and 342,738 withheld.
4. A proposal for the approval of the Senior Executive Bonus Plan was
approved by a vote of 181,762,886 for, 2,059,907 opposed, and 284,803
withheld.
5. A proposal for the ratification of the selection of Arthur Andersen LLP
as independent public accountants for the fiscal year ending January 2, 1999
was approved by a vote of 184,224,695 for, 86,210 opposed, and 32,807
withheld.
ITEM 5. OTHER INFORMATION
Pursuant to a recent change to the proxy rules, unless a stockholder who
wishes to bring a matter before the stockholders at the Company's 1999 annual
meeting of stockholders notifies the Company of such matter prior to February
14, 1999, management will have discretionary authority to vote all shares for
which it has proxies in opposition to such matter.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
-------- -------------
3.01 (h) The registrant's Certificate of Retirement of Series A-1
Convertible Preferred Stock as filed with the Secretary of State
of the State of Delaware on May 13,
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.45 Revolving Credit Agreement, dated September 30, 1998, by and
between ABN-AMBRO Bank and the Registrant.
10.46 Amendment, dated October 16, 1998, to the Revolving Credit
Agreement, by and between ABN-AMRO Bank and the Registrant
(Exhibit 10.45).
10.47 Agreement and Plan of Reorganization, dated September 3, 1998, by
and among the Registrant, Ambit Design Systems, Inc., and
Adirondack Transaction Corp. (incorporated by reference to
Exhibit 2.01 to the September 30, 1998 Form 8-K).
27.01 Financial data schedule for the period ended October 3, 1998.
3.01 (i) The Registrant's Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of the State
of Delaware on May 13, 1998.
3.01 (j) The Registrant's Restated Certificate of Incorporation as
filed with the Secretary of State of the State of Delaware on
May 13, 1998.
27.01 Financial data schedule for the period ended July 4, 1998.
(b) Reports on Form 8-K:
None.
24On July 21, 1998, the Registrant filed a Current Report on Form 8-K
reporting that the Company issued shares of common stock and the related
acquisition of Esperan Limited, a United Kingdom corporation.
On September 30, 1998, the Registrant filed a Current Report on Form
8-K reporting the Company's completion of the acquisition of Ambit Design
Systems, Inc.
On September 30, 1998, the Registrant filed a Current Report on Form
8-K reporting the Company's completion of the acquisition of certain assets
and liabilities of Bell Labs' Integrated Circuit Design Automation Group of
Lucent Technologies, Inc.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADENCE DESIGN SYSTEMS, INC.
(REGISTRANT)
DATE: August 14,November 13, 1998 By: /s/ John R. Harding
---------------------------------------------------- -------------------------------------
JOHN R. HARDING
President and Chief Executive Officer
DATE: August 14,November 13, 1998 By: /s/ H. Raymond Bingham
---------------------------------------------------- -------------------------------------
H. RAYMOND BINGHAM
Executive Vice President
and Chief Financial Officer
2528