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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 1,SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-10606
------------------------
CADENCE DESIGN SYSTEMS, INC.
(Exact name of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
------------------------
DELAWARE 77-0148231
(State or Other Jurisdiction of (IRS(I.R.S. Employer Identification No.)
Incorporation or Organization)
2655 SEELY AVENUE, BUILDING 5, SAN 95134
JOSE, CALIFORNIA (zip code)(Zip Code)
(Address of principal executive
offices)Principal Executive
Offices)
(408) 943-1234
(Registrant's telephone number,Registrant's Telephone Number, including area code)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 August 4,November 3, 2000, there were 246,240,851245,787,927 shares of the registrant's
common stock, $0.01 par value, outstanding.
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CADENCE DESIGN SYSTEMS, INC.
INDEX
PAGE
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
July 1,September 30, 2000 and January 1, 2000................2000.................... 3
Condensed Consolidated Statements of Income:Operations:
Three and SixNine Months Ended July 1,September 30, 2000 and
July
3, 1999.......................................October 2, 1999........................................... 4
Condensed Consolidated Statements of Cash Flows:
SixNine Months Ended July 1,September 30, 2000 and July 3,
1999..........................................October 2,
1999...................................................... 5
Notes to Condensed Consolidated Financial Statements......................................Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............... 12Operations................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................. 27Risk...................................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 31Proceedings........................................... 35
Item 2. Changes in Securities and Use of Proceeds......... 32Proceeds................... 37
Item 3. Defaults Upon Senior Securities................... 33Securities............................. 37
Item 4. Submission of Matters to a Vote of Security Holders................................................. 33Holders......... 37
Item 5. Other Information................................. 33Information........................................... 37
Item 6. Exhibits and Reports on Form 8-K.................. 33
Signatures.................................................. 348-K............................ 37
Signatures.............................................................. 39
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JULY 1,SEPTEMBER 30, JANUARY 1,
2000 2000
------------------------ ----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 113,165122,190 $ 111,401
Short-term investments.................................... 6,2785,788 7,357
Receivables, net.......................................... 231,839256,302 248,034
Inventories, net.......................................... 15,21917,285 19,872
Prepaid expenses and other................................ 117,77487,012 93,248
---------- ----------
Total current assets.................................... 484,275488,577 479,912
Property, plant, and equipment, net......................... 337,755348,288 330,409
Software development costs, net............................. 10,72510,736 10,692
Acquired intangibles, net................................... 366,984349,158 402,154
Installment contract receivables............................ 45,90740,423 84,160
Other assets................................................ 150,087178,807 152,332
---------- ----------
$1,395,733$1,415,989 $1,459,659
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases....... $ 3,4472,651 $ 3,924
Accounts payable and accrued liabilities.................. 256,988250,056 265,518
Deferred revenue.......................................... 192,468194,596 152,116
---------- ----------
Total current liabilities............................... 452,903447,303 421,558
---------- ----------
Long-term Liabilities:
Long-term notes payable and capital leases................ 4,1983,817 25,024
Other long-term liabilities............................... 31,17547,453 26,928
---------- ----------
Total long-term liabilities............................. 35,37351,270 51,952
---------- ----------
Stockholders' Equity:
Common stock and capital in excess of par value........... 820,225789,366 857,960
Treasury stock, at cost.................................... (246,251)cost................................... (221,593) (240,748)
Retained earnings......................................... 338,063351,734 344,247
Accumulated other comprehensive gainincome (loss)............... (4,580)............. (2,091) 24,690
---------- ----------
Total stockholders' equity.............................. 907,457917,416 986,149
---------- ----------
$1,395,733$1,415,989 $1,459,659
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIXNINE MONTHS ENDED
------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------- -------- -------- --------------------- ---------- ------------- ----------
Revenue:
Product........................................... $140,383 $117,890 $245,915 $305,247
Services.......................................... 80,177 74,943 155,992 147,417
Maintenance....................................... 78,122 71,360 154,268 146,720Product...................................... $165,341 $ 80,658 $411,256 $385,905
Services..................................... 87,320 73,125 243,312 220,542
Maintenance.................................. 79,800 72,114 234,068 218,834
-------- -------- -------- --------
Total revenue................................... 298,682 264,193 556,175 599,384revenue.............................. 332,461 225,897 888,636 825,281
-------- -------- -------- --------
Costs and Expenses:
Cost of product................................... 20,501 20,064 40,979 38,600product.............................. 22,931 20,405 63,910 59,005
Cost of services.................................. 52,182 48,844 101,183 96,102services............................. 55,991 47,559 157,174 143,661
Cost of maintenance............................... 15,329 12,930 29,518 25,830maintenance.......................... 17,183 13,613 46,701 39,443
Amortization of acquired intangibles.............. 19,868 12,856 39,534 25,570intangibles......... 20,648 16,833 60,182 42,403
Marketing and sales............................... 95,031 82,936 181,198 162,999sales.......................... 97,845 88,203 279,043 251,202
Research and development.......................... 65,772 50,359 128,345 101,227development..................... 66,614 58,447 194,959 159,674
General and administrative........................ 23,751 20,903 46,283 42,163administrative................... 24,121 22,449 70,404 64,612
Unusual items..................................... -- 19,648 -- 33,840items................................ 10,101 12,171 10,101 46,011
-------- -------- -------- --------
Total costs and expenses........................ 292,434 268,540 567,040 526,331expenses................... 315,434 279,680 882,474 806,011
-------- -------- -------- --------
Income (loss) from operations................. 6,248 (4,347) (10,865) 73,053operations............ 17,027 (53,783) 6,162 19,270
Other income, net................................... 1,407 141 2,453 276net.............................. 1,573 520 4,026 796
-------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes................................ 7,655 (4,206) (8,412) 73,329taxes....................... 18,600 (53,263) 10,188 20,066
Provision (benefit) for income taxes................ 2,029 (1,199) (2,229) 23,474taxes........... 4,929 (11,817) 2,700 11,657
-------- -------- -------- --------
Net income (loss)..................................................... $ 5,62613,671 $(41,446) $ (3,007)7,488 $ (6,183) $ 49,8558,409
======== ======== ======== ========
Basic net income (loss) per share...................share.............. $ 0.020.06 $ (0.01)(0.17) $ (0.03)0.03 $ 0.210.03
======== ======== ======== ========
Diluted net income (loss) per share.................share............ $ 0.020.05 $ (0.01)(0.17) $ (0.03)0.03 $ 0.190.03
======== ======== ======== ========
Weighted average common shares outstanding.......... 244,404 241,978 244,516 241,026outstanding..... 244,597 242,877 244,543 241,643
======== ======== ======== ========
Weighted average common and potential common
shares outstanding--assuming dilution.................... 258,583 241,978 244,516 257,016outstanding-assuming dilution......... 262,823 242,877 261,803 256,046
======== ======== ======== ========
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)
SIXNINE MONTHS ENDED
-------------------
JULY 1, JULY 3,----------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
-------- ---------------------- -----------
Cash and Cash Equivalents at Beginning of Period............Period $111,401 $209,074
-------- --------
Cash Flows from Operating Activities:
Net income (loss)......................................... (6,183) 49,855income................................................ 7,488 8,409
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization........................... 95,819 76,736150,414 117,924
Asset impairment and write-off of equipment and
non-current assets.................................... -- 4,97412,744
Deferred income taxes................................... 14 13,584(1,264) 13,529
Net investment gains on sale, equity loss, and
write-downs........................................... (5,124) 2,633(7,645) 458
Write-off of acquired in-process technology............. -- 8,90020,700
Minority interest expense............................... --expense (income)...................... 12,209 (126)
Provisions for losses on trade accounts receivable...... 883 6,250
Write-off of non-current assets......................... -- 2,1451,443 9,114
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Receivables........................................... (65,265) (54,947)(134,588) (99,041)
Inventories........................................... (809) 162(2,875) (2,846)
Prepaid expenses and other............................ (24,458) (16,666)(35,965) (15,667)
Installment contract receivables...................... 38,251 18,98079,190 39,328
Accounts payable and accrued liabilities.............. 10,682 (6,441)21,102 (12,574)
Income taxes payable.................................. -- (783)4,968 (11,590)
Deferred revenue...................................... 40,352 21,80442,480 25,338
Other long-term liabilities........................... 4,247 (5,834)8,316 (2,568)
-------- --------
Net cash provided by operating activities........... 88,409 121,226145,273 103,132
-------- --------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity....investments-held-to-maturity..... 999 27,24523,591
Purchases of short-term investments--held-to-maturity.....investments-held-to-maturity...... -- (57)(43)
Maturities of short-term investments--available-for-sale......................... 1,107investments-available-for-sale... 2,621 24,510
Purchases of short-term investments-available-for-sale.... -- (15)
Purchases of property, plant, and equipment............... (46,652) (71,377)(78,575) (101,347)
Capitalization of software development costs.............. (14,714) (13,528)(21,428) (19,609)
Increase in acquired intangibles and other assets......... (21,848) (13,452)(45,586) (1,878)
Net investment in venture capital partnership and equity
investments............................................. (497) (5,770)4,543 (5,925)
Cash effect of business acquisitions...................... (4,503) (2,806)(96,784)
Sale of put warrants...................................... 25,51630,163 3,609
Purchase of call options.................................. (25,516)(30,163) (3,609)
-------- --------
Net cash used for investing activities.............. (86,108) (79,745)(141,929) (177,500)
-------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt.............................. -- 30,168notes payable..................... 38,000 98,544
Principal payments on long-term debtnotes payable and capital
leases... (21,763) (165,000)leases.................................................. (60,821) (195,204)
Proceeds from issuance of common stock.................... 40,945 49,64269,298 55,298
Purchases of treasury stock............................... (98,631) (49,125)(158,396) (82,223)
Proceeds from transfer of financial assets in exchange for
cash.................................................... 80,808 77,162124,303 102,390
-------- --------
Net cash provided by (used for) financing
activities........................................ 1,359 (57,153)12,384 (21,195)
-------- --------
Effect of exchange rate changes on cash..................... (1,896) (442)(4,939) (153)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 1,764 (16,114)10,789 (95,716)
-------- --------
Cash and Cash Equivalents at End of Period.................. $113,165 $192,960$122,190 $113,358
======== ========
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 Cadence, 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, Cadence 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
Cadence's Annual Report on Form 10-K for the fiscal year ended January 1, 2000.
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
revenuesrevenue and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
January 1, 2000 and for the three and sixnine months ended July 3,October 2, 1999 have
been reclassified to conform with the July 1,September 30, 2000 presentation.
INVENTORIES
Cadence's inventories include high technology parts and components for
complex computer systems that emulate the performance and operation of computer
chips and electronic systems.
A summary of inventories follows:
JULY 1,SEPTEMBER 30, JANUARY 1,
2000 2000
--------------------- ----------
(IN THOUSANDS)
Raw materials............................................ $12,615materials............................................... $15,460 $19,033
Work in process.......................................... 2,604process............................................. 1,825 839
------- -------
Total inventories, net................................. $15,219net.................................. $17,285 $19,872
======= =======
RESTRUCTURING
Liabilities for excess facilities and other restructuring charges are
included in accrued and other long-term liabilities, while severance and
benefits liabilities are included in payroll and payroll-related
6
RESTRUCTURINGCADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
accruals. The following table summarizes Cadence's restructuring activity during
the sixnine months ended July 1,September 30, 2000:
FOR THE SIXNINE MONTHS ENDED JULY 1,SEPTEMBER 30, 2000
------------------------------------------------------------
SEVERANCE
AND EXCESS OTHER
BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL
--------- ---------- ------------- -------- --------
(IN THOUSANDS)
Balance, January 1, 2000.....................2000.................... $8,013 $6,464 $ 426 $5,861 $20,764
Non-cash charges........................... (110) (71)charges.......................... (127) (644) (62) (3,345) (3,588)(4,238) (5,071)
Cash charges............................... (1,650) (302)charges.............................. (4,892) (345) (364) (598) (2,914)(763) (6,364)
------ ------ ----- ------ -------
Balance, July 1, 2000........................ $6,253 $6,091September 30, 2000................. $2,994 $5,475 $ -- $1,918 $14,262$ 860 $ 9,329
====== ====== ===== ====== =======
CREDIT FACILITY
In October 1998,FACILITIES
On September 29, 2000, Cadence entered into atwo syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility, referred to as the 1998 Facility, with a syndicate of banks that allows Cadence
to borrow up to $355 million. As amended in September and November of 1999, the
1998 Facility is divided between awhich
$177.5 million two yearterminated on September 27, 2000 and $177.5 million was
terminated immediately prior to closing of the 2000 Facilities. One of the new
2000 Facilities is a $100 million three-year revolving credit facility, referred
to as the Two Year Facility, andThree-Year Facility. The other new facility is a $177.5$250 million 364-day
revolving credit facility convertible into a one yeartwo-year term loan, referred to as
the 364-Day Facility. The Two YearThree-Year Facility expiresterminates on September 29, 2001.2003.
The 364-Day Facility will either expireterminate on September 27, 2000,28, 2001, at which time the
revolving credit facility may be converted to a one
yeartwo-year term loan with a
maturity date of September 27, 2001,29, 2003, or, at the request of Cadence and with the
agreementconsent of members of the bank group that wish to do so, the termination date of
the revolving facility may be renewedextended for one additional year.364-day period with
respect to the portion of the 364-day Facility that a consenting bank holds. For
both the 2000 Facilities, Cadence has the option to pay interest based on LIBOR
plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a
financial covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and
(ii) prime rate. As a result, Cadence's interest rate expenses associated with
this borrowing will vary with market rates. In addition, commitment fees are
payable on the unutilizedunused portion of the Two YearThree-Year Facility at rates between 0.23%0.25%
and 0.30%0.34% based on a pricing grid tied to a financial covenant and on the unutilizedunused
portion of the 364-Day Facility at a fixed rate of 0.18%0.20%. Cadence may not borrow
under the 364-day facility at any time that any portion of the Three-Year
Facility remains unused. The 1998 Facility
contains2000 Facilities contain certain financial and other
covenants.
During the sixnine months ended July 1,September 30, 2000, Cadence repaid all of the
$20 million outstanding under the 1998 Facility at January 1, 2000. At
July 1,September 30, 2000, there were no borrowings outstanding under the 1998 Facility.2000
Facilities.
7
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and
losses and other unrealized gains and losses that have been previously excluded
from net income (loss) and reflected instead in shareholders' equity. A summary
of comprehensive income (loss) follows:
THREE MONTHS ENDED SIXNINE MONTHS ENDED
------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------- -------- -------- --------------------- ---------- ------------- ----------
(IN THOUSANDS)
Net income (loss)..................................................................... $13,671 $(41,446) $ 5,626 $(3,007) $ (6,183) $49,8557,488 $8,409
Translation loss....................................... (1,549) (1,411) (1,667) (472)gain (loss)......................... (2,924) 186 (4,591) (286)
Unrealized lossgain (loss) on investments......................... (20,826) (104) (27,603) (156)
--------investments........... 5,413 (34) (22,190) (190)
------- -------- --------------- ------
Comprehensive income (loss).......................... $(16,749) $(4,522) $(35,453) $49,227
========................. $16,160 $(41,294) $(19,293) $7,933
======= ======== =============== ======
7
NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the weighted average common shares used
to calculate basic net income (loss) per share to the weighted average common
and potential common shares used to calculate diluted net income (loss) per
share:
THREE MONTHS ENDED SIXNINE MONTHS ENDED
------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
-------- -------- -------- --------------------- ---------- ------------- ----------
(IN THOUSANDS)
Weighted average common shares used to calculate
basic net income (loss) per share........................... 244,404 241,978 244,516 241,026
Options............................................... 11,996share............. 244,597 242,877 244,543 241,643
Options....................................... 17,662 -- -- 14,36816,143 12,488
Warrants and other contingent shares.................. 712shares.......... 537 -- 583 301
Puts.......................................... 27 -- 307
Puts.................................................. 1,471 -- -- 1,315534 1,614
------- ------- ------- -------
Weighted average common and potential common
shares used to calculate diluted net income
(loss) per share...... 258,583 241,978 244,516 257,016share.............................. 262,823 242,877 261,803 256,046
======= ======= ======= =======
Had Cadence recorded net income for the sixthree months ended July 1, 2000,October 2, 1999,
dilutive weighted outstanding options would have been 15.48.7 million and dilutive
weighted outstanding warrants, puts, and other dilutive contingent shares would have been
1.42.5 million.
CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
PUT WARRANTS AND CALL OPTIONS
Cadence has authorized three seasoned systematic stock repurchase programs
under which it repurchases common stock to satisfy its estimated requirements
for shares to be issued under its Employee Stock Purchase Plan, or ESPP, the
1997 Nonstatutory Stock Option Plan, referred to as the 1997 Plan, and the 2000
Nonstatutory Stock Option Plan, referred to as the 2000 Plan. These repurchases
are intended to
8
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
cover Cadence's expected reissuances under the ESPP for the next 12 months and
both the 1997 Plan and 2000 Plan for the next 24 months.
As part of its authorized repurchase programs, Cadence has sold put warrants
through private placements. At July 1,September 30, 2000, there were 6.35 million put
warrants outstanding, each of which entitles the holder to sell one share of
common stock to Cadence on a specified date and at a specified price ranging
from $18.02$19.56 to $22.31 per share. Additionally, Cadence purchased call options
that entitle Cadence to buy shares of its common stock at a specified price to
satisfy anticipated stock repurchase requirements under Cadence's systematic
stock repurchase programs. At July 1,September 30, 2000, Cadence had 4.63.6 million call
options outstanding at exercise prices ranging from $18.27$19.81 to $22.56 per share.
The put warrants and call options outstanding at July 1,September 30, 2000 are
exercisable on various dates through FebruaryMay 2001 and Cadence has the contractual
ability to settle the options prior to their maturity. At July 1,September 30, 2000,
the fair value of the call options was approximately $12.1$20.5 million and the fair
value of the put warrants was approximately $16.7$4.4 million. The fair valuevalues of the
call options and put warrants and call
options waswere estimated by Cadence's investment bankers.
If exercised, Cadence has the right to settle the put warrants with that
number of shares of Cadence common stock having a value equal to the difference
between the exercise price and the fair value at the date of exercise.
Settlement of the put warrants with common stock could cause Cadence to issue a
substantial number of shares, depending on the exercise price of the put
warrants and the per share fair value of Cadence's common stock at the time of
exercise. In addition, settlement of put warrants in common stock could lead to
the disposition by put warrant holders of shares of Cadence's common stock 8
that
such holders may have accumulated in anticipation of the exercise of the put
warrants or call options, which may negatively affect the price of Cadence's
common stock. At July 1,September 30, 2000, because Cadence had the ability to settle
these put warrants with common stock, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.
SEGMENT REPORTING
The following tables present information about reported segments for the
three months ended July 1, 2000 and July 3, 1999:
FOR THE THREE MONTHS ENDED JULY 1, 2000
--------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
-------- -------- ----------- --------- --------
(IN THOUSANDS)
Revenue................................ $140,383 $80,177 $78,122 $ -- $298,682
Cost of revenue........................ 20,501 52,182 15,329 -- 88,012
Amortization of acquired intangibles... 10,562 9,306 -- -- 19,868
-------- ------- ------- --------- --------
Gross margin....................... 109,320 18,689 62,793 -- 190,802
Marketing and sales.................... -- -- -- (95,031) (95,031)
Research and development............... -- -- -- (65,772) (65,772)
General and administrative............. -- -- -- (23,751) (23,751)
Other income, net...................... -- -- -- 1,407 1,407
-------- ------- ------- --------- --------
Income (loss) before provision
(benefit) for income taxes........... $109,320 $18,689 $62,793 $(183,147) $ 7,655
======== ======= ======= ========= ========
FOR THE THREE MONTHS ENDED JULY 3, 1999
--------------------------------------------------------
Revenue. $117,890 $ 74,943 $ 71,360 $ -- $264,193
Cost of revenue........................ 20,064 48,844 12,930 -- 81,838
Amortization of acquired intangibles... 11,632 1,224 -- -- 12,856
-------- ------- ------- --------- --------
Gross margin......................... 86,194 24,875 58,430 -- 169,499
Marketing and sales.................... -- -- -- (82,936) (82,936)
Research and development............... -- -- -- (50,359) (50,359)
General and administrative............. -- -- -- (20,903) (20,903)
Unusual items.......................... -- -- -- (19,648) (19,648)
Other income, net...................... -- -- -- 141 141
-------- ------- ------- --------- --------
Income (loss) before provision
(benefit) for income taxes........... $ 86,194 $24,875 $58,430 $(173,705) $ (4,206)
======== ======= ======= ========= ========
9
The following tables present information about reported segments for the six
months ended July 1, 2000 and July 3, 1999:
FOR THE SIX MONTHS ENDED JULY 1, 2000
--------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
-------- -------- ----------- --------- --------
(IN THOUSANDS)
Revenue............................... $245,915 $155,992 $154,268 $ -- $556,175
Cost of revenue....................... 40,979 101,183 29,518 -- 171,680
Amortization of acquired
intangibles......................... 21,140 18,394 -- -- 39,534
-------- -------- -------- --------- --------
Gross margin........................ 183,796 36,415 124,750 -- 344,961
Marketing and sales................... -- -- -- (181,198) (181,198)
Research and development.............. -- -- -- (128,345) (128,345)
General and administrative............ -- -- -- (46,283) (46,283)
Other income, net..................... -- -- -- 2,453 2,453
-------- -------- -------- --------- --------
Income (loss) before provision
(benefit) for income taxes.......... $183,796 $ 36,415 $124,750 $(353,373) $ (8,412)
======== ======== ======== ========= ========
FOR THE SIX MONTHS ENDED JULY 3, 1999
--------------------------------------------------------
Revenue. $305,247 $147,417 $ 146,720 $ -- $599,384
Cost of revenue....................... 38,600 96,102 25,830 -- 160,532
Amortization of acquired
intangibles......................... 22,951 2,619 -- -- 25,570
-------- -------- -------- --------- --------
Gross margin........................ 243,696 48,696 120,890 -- 413,282
Marketing and sales................... -- -- -- (162,999) (162,999)
Research and development.............. -- -- -- (101,227) (101,227)
General and administrative............ -- -- -- (42,163) (42,163)
Unusual items......................... -- -- -- (33,840) (33,840)
Other income, net..................... -- -- -- 276 276
-------- -------- -------- --------- --------
Income (loss) before provision
(benefit) for income taxes.......... $243,696 $ 48,696 $120,890 $(339,953) $ 73,329
======== ======== ======== ========= ========
TALITY CORPORATION
On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new, publicly tradedpublicly-traded company named Tality
Corporation, or Tality. In furtheranceTality's separation from Cadence was effective
October 4, 2000. Tality's electronic design services business now operates as an
indirect subsidiary of this plan,Cadence. Tality has filed a registration statement with
the Securities and Exchange Commission for its
initial public offering. The completion of the separation andTality's initial public offering, is contingent upon certain conditions, includingor
IPO. On October 9, 2000, Cadence announced that it had postponed Tality's IPO
due to unfavorable market conditions. The financial statements and financial
information in this Quarterly Report on Form 10-Q do not give effect to the separation, which has not been completed as
of the date of this report. We expect that the separation of this business from
Cadence, including the transfer of related assets, liabilities and intellectual
property rights, will be substantially completed prior to the completion of the
initial public offering.IPO.
Immediately following the separation and initial public
offering,proposed IPO, Cadence expects that it will own
approximately 80% of Tality's equity and will continue to consolidate itsTality's
financial results.results so long as Cadence retains voting control over Tality.
The full impact of the planned separation if it occurs, on Cadence's business, operating results,
and financial condition cannot be predicted at this time.
However, certain incremental expensesSEGMENT REPORTING
With the separation of Tality, Cadence's business activities are now
organized on the basis of four operating segments. The Product segment designs
and licenses to customers a variety of electronic design automation products.
The Tality segment provides engineering services and intellectual property for
the design of complex electronic systems and integrated circuits. The Services
segment offers methodology services to assist companies in developing electronic
designs. The Maintenance segment is primarily a
9
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
technical support organization, and maintenance agreements are offered to
customers either as part of our product license agreements or separately.
Cadence does not allocate these segments, except for Tality, below the gross
margin level. Cadence's organizational structure reflects this segmentation and
segments have not been aggregated for purposes of this disclosure.
The following tables present information about reported segments for the
three months ended September 30, 2000 and October 2, 1999:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------------
CONSOLIDATED
PRODUCT TALITY SERVICES MAINTENANCE OTHER TOTAL
-------- -------- -------- ----------- --------- ------------
(IN THOUSANDS)
Revenue.............................. $165,341 $ 52,033 $35,287 $79,800 $ -- $332,461
Cost of revenue...................... 22,931 39,650 16,341 17,183 -- 96,105
Amortization of acquired
intangibles........................ 16,398 4,074 176 -- -- 20,648
-------- -------- ------- ------- --------- --------
Gross margin....................... 126,012 8,309 18,770 62,617 -- 215,708
Marketing and sales.................. -- (9,274) -- -- (88,571) (97,845)
Research and development............. -- (2,871) -- -- (63,743) (66,614)
General and administrative........... -- (8,553) -- -- (15,568) (24,121)
Unusual items........................ -- (5,349) -- -- (4,752) (10,101)
Other income, net.................... -- 411 -- -- 1,162 1,573
-------- -------- ------- ------- --------- --------
Income (loss) before provision
(benefit) for income taxes......... $126,012 $(17,327) $18,770 $62,617 $(171,472) $ 18,600
======== ======== ======= ======= ========= ========
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
-----------------------------------------------------------------------
CONSOLIDATED
PRODUCT TALITY SERVICES MAINTENANCE OTHER TOTAL
-------- -------- -------- ----------- --------- ------------
(IN THOUSANDS)
Revenue.............................. $ 80,658 $ 33,794 $39,331 $72,114 $ -- $225,897
Cost of revenue...................... 20,405 28,546 19,013 13,613 -- 81,577
Amortization of acquired
intangibles........................ 14,960 1,521 352 -- -- 16,833
-------- -------- ------- ------- --------- --------
Gross margin....................... 45,293 3,727 19,966 58,501 -- 127,487
Marketing and sales.................. -- (7,836) -- -- (80,367) (88,203)
Research and development............. -- (2,129) -- -- (56,318) (58,447)
General and administrative........... -- (7,194) -- -- (15,255) (22,449)
Unusual items........................ -- -- -- -- (12,171) (12,171)
Other income, net.................... -- (305) -- -- 825 520
-------- -------- ------- ------- --------- --------
Income (loss) before provision
(benefit) for income taxes......... $ 45,293 $(13,737) $19,966 $58,501 $(163,286) $(53,263)
======== ======== ======= ======= ========= ========
10
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following tables present information about reported segments for the
nine months ended September 30, 2000 and October 2, 1999:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------------
CONSOLIDATED
PRODUCT TALITY SERVICES MAINTENANCE OTHER TOTAL
-------- -------- -------- ----------- --------- ------------
(IN THOUSANDS)
Revenue............................. $411,256 $142,317 $100,995 $234,068 $ -- $888,636
Cost of revenue..................... 63,910 109,828 47,346 46,701 -- 267,785
Amortization of acquired
intangibles....................... 47,499 12,167 516 -- -- 60,182
-------- -------- -------- -------- --------- --------
Gross margin...................... 299,847 20,322 53,133 187,367 -- 560,669
Marketing and sales................. -- (25,943) -- -- (253,100) (279,043)
Research and development............ -- (8,668) -- -- (186,291) (194,959)
General and administrative.......... -- (24,232) -- -- (46,172) (70,404)
Unusual items....................... -- (6,090) -- -- (4,011) (10,101)
Other income, net................... -- 1,540 -- -- 2,486 4,026
-------- -------- -------- -------- --------- --------
Income (loss) before provision
(benefit) for income taxes........ $299,847 $(43,071) $ 53,133 $187,367 $(487,088) $ 10,188
======== ======== ======== ======== ========= ========
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
-----------------------------------------------------------------------
CONSOLIDATED
PRODUCT TALITY SERVICES MAINTENANCE OTHER TOTAL
-------- -------- -------- ----------- --------- ------------
(IN THOUSANDS)
Revenue............................. $385,905 $ 91,314 $129,228 $218,834 $ -- $825,281
Cost of revenue..................... 59,005 83,572 60,089 39,443 -- 242,109
Amortization of acquired
intangibles....................... 36,792 4,903 708 -- -- 42,403
-------- -------- -------- -------- --------- --------
Gross margin...................... 290,108 2,839 68,431 179,391 -- 540,769
Marketing and sales................. -- (24,175) -- -- (227,027) (251,202)
Research and development............ -- (7,358) -- -- (152,316) (159,674)
General and administrative.......... -- (20,601) -- -- (44,011) (64,612)
Unusual items....................... -- -- -- -- (46,011) (46,011)
Other income, net................... -- (59) -- -- 855 796
-------- -------- -------- -------- --------- --------
Income (loss) before provision
(benefit) for income taxes........ $290,108 $(49,354) $ 68,431 $179,391 $(468,510) $ 20,066
======== ======== ======== ======== ========= ========
NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-19, "Determination of Whether Share Settlement is
Within the Control of the Issuer for Purposes of Applying Issue No. 96-13,"
which was taken up to address implementation of the EITF's March 2000 final
consensus of EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity
Derivative Transactions That Contain Certain Provisions That Require Cash
Settlement If Certain Events Occur." The final consensus in Issue 00-7 generally
stated that equity derivative contracts that contain provisions that implicitly
or explicitly require net cash settlement outside of the control of the company
must be treated as assets and liabilities and carried at fair value with changes
in fair value recognized in
11
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
earnings rather than equity instruments carried at original cost and reported as
part of permanent equity. This interpretation becomes effective June 30, 2001
and is not expected to be incurred in
future periods as decisions are made regarding the separation.
NEW ACCOUNTING STANDARDShave a material effect on Cadence's financial position,
results of operations, or cash flows.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of Accounting 10
PinciplesPrinciples Board, or APB, Opinion
No. 25. This interpretation provides guidance regarding the application of APB
Opinion No. 25 to stock compensation involving employees. This interpretation
iswas effective July 1, 2000 and isdid not expected to have a material effect on Cadence's
financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Cadence must adopt SAB 101 will be adopted in the
fourth quarter of its fiscal 2000. The adoption of this statement is not
expected to have a material effect on Cadence's financial position, results of
operations, or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. It requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met and that a company must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," was issued. The statement defers the effective date of SFAS
No. 133 until the first quarter of fiscal 2001. The adoption of this statement
is not expected to have a material effect on Cadence's financial position,
results of operations, or cash flows.
1112
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS
THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. CADENCE'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE ACTUAL
RESULTS OR PERFORMANCE TO DIFFER MATERIALLY OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "RESULTS OF
OPERATIONS," "LIQUIDITY AND CAPITAL RESOURCES," "FACTORS THAT MAY AFFECT FUTURE
RESULTS," AND "DISCLOSURES ABOUT MARKET RISK."
OVERVIEW
Cadence Design Systems, Inc., or Cadence, provides comprehensive software
and other technology and offers design and methodology services for the product
development requirements of the world's leading electronics companies. Cadence
licenses its leading-edge electronic design automation, or EDA, software and
hardware technology and provides a range of services to companies throughout the
world to help its customers optimize their product development processes.
Cadence is a supplier of products and services which are used by companies to
design and develop complex chips and electronic systems including
semiconductors, computer systems and peripherals, telecommunications and
networking equipment, mobile and wireless devices, automotive electronics,
consumer products, and other advanced electronics.
TALITY CORPORATION
On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new, publicly tradedpublicly-traded company named Tality
Corporation, or Tality. In furtheranceTality's separation from Cadence was effective on
October 4, 2000. Tality's electronic design services business now operates as an
indirect subsidiary of this plan,Cadence. Tality has filed a registration statement with
the Securities and Exchange Commission for its
initial public offering. The completion of the separation andTality's initial public offering, is contingent upon certain conditions, includingor
IPO. On October 9, 2000, Cadence announced that it had postponed Tality's IPO
due to unfavorable market conditions. The financial statements and financial
information in this Quarterly Report on Form 10-Q do not give effect to a separation, which has not been completed as of
the date of this report. We expect that the separation of this business from
Cadence, including the transfer of related assets, liabilities and intellectual
property rights, will be substantially completed prior to the completion of the
initial public offering.IPO.
Immediately following the separation and initial public
offering,proposed IPO, Cadence expects that it will own
approximately 80% of Tality's equity and will continue to consolidate itsTality's
financial results.results so long as Cadence retains voting control over Tality.
As Cadence executesa result of the separation of Tality fromand pending IPO, Cadence Cadence is
incurringhas incurred and will
continue to incur certain incremental costs, primarily for deferred stock
compensation, legal and accounting services, strategic business planning,
information systems separation, development of compensation and benefits
strategies, and recruitment of certain key Tality management. Direct costs of
the Tality initial public offering,IPO, such as the underwriter'sunderwriters' commissions and legal and accounting
fees will be deducted from the proceeds of the offering.
The full impact of the planned separation if it occurs, on Cadence's business, operating results,
and financial condition cannot be predicted at this time.
However, certain incremental expenses are expected to be incurred in
future periods as decisions are made regarding the separation.
1213
RESULTS OF OPERATIONS
SIX MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- ---------------------- ---------- -------- -------- --------------------- ---------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
REVENUE
Product.................................... $140.4 $117.9 19% $245.9 $305.3 (19)Product............................. $165.3 $ 80.7 105 % Services................................... 80.2 74.9 7% 156.0 147.4 6%
Maintenance................................ 78.1 71.4 9% 154.3 146.7 5%$411.2 $385.9 7 %
Tality.............................. 52.0 33.8 54 % 142.3 91.3 56 %
Services............................ 35.4 39.3 (10)% 101.0 129.3 (22)%
Maintenance......................... 79.8 72.1 11 % 234.1 218.8 7 %
------ ------ ------ ------
Total revenue............................ $298.7 $264.2 13% $556.2 $599.4 (7)revenue..................... $332.5 $225.9 47 % $888.6 $825.3 8 %
====== ====== ====== ======
SOURCES OF REVENUE AS A PERCENT OF
TOTAL REVENUE
Product....................................Product............................. 50% 36% 46% 47%
45% 44% 51%
Services................................... 27% 28% 28% 25%
Maintenance................................Tality.............................. 16% 15% 16% 11%
Services............................ 11% 17% 11% 16%
Maintenance......................... 24% 32% 26% 27% 28% 24%
Product revenue increased $22.5$84.7 million and decreased $59.4$25.4 million in the three and
sixnine months ended July 1,September 30, 2000, respectively, when compared to the same
periods in 1999. The increase in the three months ended July 1,September 30, 2000 was
primarily due to thean overall increase in sales volume of Cadence's software
products. The increase in sales volume of products was primarily attributable to
increased sales volume of integrated circuit implementation products, which include
place and route, physical design and verification products, intellectual
property creation products, which include mixed signal and simulation products,
as well as sales
ofand printed circuit board related product associated with the acquisition of
OrCAD, Inc., or OrCAD, which was completedproducts. The increase in the third quarter of 1999 and for
which there were no similar sales in the comparable period in 1999. The decrease
in the sixnine months
ended July 1,September 30, 2000 was primarily due to an overall decreaseincrease in sales
volume of Cadence's softwareintellectual
property creation products and the implementation of Cadence's
software subscription licensing model, first implemented during the third
quarter of 1999. The decrease in sales volume of products was primarily
attributable to lower sales of integratedprinted circuit implementation products, which
include place and route and physical design and verificationboard related products, partially
offset by sales associated with the OrCAD acquisition.
Servicesa decrease in integrated circuit implementation products.
Tality revenue increased $5.3$18.2 million and $8.6$51 million in the three and sixnine
months ended July 1,September 30, 2000, respectively, when compared to the same periods
in 1999, primarily due to an increase in demand for Cadence's designTality's services and
billable hours incurred for design services, partially offset by a decreaseservices. The increase in methodology services engagements due to lower staffing levels in the current
periods. Increases in design servicesTality revenue werewas
primarily due to an increase in services performed in the wireless
communications area with generaland to moderate increases in each of the other
remaining areas, wired communications,
information appliances, and industrial electronics.
MaintenanceServices revenue increased $6.7decreased $3.9 million and $7.6$28.3 million in the three and
sixnine months ended July 1,September 30, 2000, respectively, when compared to the same
periods in 1999, primarily due to a decrease in services engagements due to
lower staffing levels.
14
Maintenance revenue increased $7.7 million and $15.2 million in the three
and nine months ended September 30, 2000, respectively, when compared to the
same periods in 1999, primarily due to the growth of the installed customer base
and the renewal of maintenance and support contracts.
SIX MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- ---------------------- ---------- -------- -------- --------------------- ---------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
REVENUE BY GEOGRAPHY
Domestic................................... $160.5 $142.9 12% $312.7 $277.5 13%
International.............................. 138.2 121.3 14% 243.5 321.9 (24)Domestic.............................. $191.6 $120.4 59% $504.3 $397.9 27 %
International......................... 140.9 105.5 34% 384.3 427.4 (10)%
------ ------ ------ ------
Total revenue............................ $298.7 $264.2 13% $556.2 $599.4 (7)revenue....................... $332.5 $225.9 47% $888.6 $825.3 8 %
====== ====== ====== ======
REVENUE BY GEOGRAPHY AS A PERCENT OF
TOTAL REVENUE
Domestic................................... 54% 54% 56% 46%
International.............................. 46% 46% 44% 54%Domestic.............................. 58% 53% 57% 48%
International 42% 47% 43% 52%
13
International revenue increased $16.9$35.3 million and decreased $78.4$43.1 million in
the three and sixnine months ended July 1,September 30, 2000, respectively, when compared
to the same periods in 1999. The increase in the three months ended
July 1,September 30, 2000 was primarily due to increases in product and maintenance
revenue in Europe,all regions, partially offset by a decrease in services revenue in
Europe, Japan, and Asia. The decrease in the nine months ended September 30,
2000 was primarily due to a decrease in product and services revenue in Japan
and a decrease in services revenue in Europe, partially offset by increases in
product and maintenance revenue in Japan. The decrease in the six months ended July 1, 2000
was primarily due to decreases in product revenue in Japan and Asia and
decreases in services revenue in Europe and Japan.Europe.
Foreign currency exchange rates negligibly affected revenue for the three
months ended September 30, 2000, and positively affected revenue by
$2.9 million
and $4.6$4.7 million during the three and sixnine months ended July 1,September 30, 2000
respectively, when compared to
the same periods in 1999,1999. The increase during the nine months ended
September 30, 2000 was primarily due to the strengthening of the Japanese yen in
relation to the U.S. dollar, offset partially by the weakening of the German
mark and British pound sterling and German deutsche
mark in relation to the U.S. dollar. Foreign currency
exchange rates positively affected revenue by $3.9$4.9 million and $8$12.9 million
during the three and sixnine months ended July 3,October 2, 1999, respectively, when
compared to the same periods in 1998, primarily due to the strengthening of the
Japanese yen in relation to the U.S. dollar.
THREE MONTHS ENDED SIXNINE MONTHS ENDED
--------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- ---------------------- ---------- -------- -------- --------------------- ---------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
COST OF REVENUE
Product................................ $20.5 $20.1 2%Product............................... $22.9 $20.4 12 % $ 41.0 $38.6 6%
Services............................... $52.2 $48.8 7% $101.2 $96.1 5%
Maintenance............................ $15.3 $12.9 19%63.9 $59.0 8 %
Tality................................ $39.7 $28.5 39 % $109.8 $83.6 31 %
Services.............................. $16.3 $19.1 (15)% $ 29.5 $25.8 14%47.4 $60.1 (21)%
Maintenance........................... $17.2 $13.6 26 % $ 46.7 $39.4 19 %
COST OF REVENUE AS A PERCENT OF
RELATED REVENUE
Product................................Product............................... 14% 25% 16% 15%
17% 17% 13%
Services............................... 65% 65% 65% 65%
Maintenance............................ 20% 18%Tality................................ 76% 84% 77% 92%
Services.............................. 46% 49% 47% 46%
Maintenance........................... 22% 19% 20% 18%
15
Cost of product revenue includes costs of production personnel, packaging
and documentation, royalties, and amortization of capitalized software
development costs for software products. Manufacturing costs associated with
hardware emulation system products include materials, labor, and overhead.
Cost of product revenue remained flatincreased $2.5 million and $4.9 million for the
three and nine months ended July 1,September 30, 2000, and increased $2.4 million for the six months ended July 1, 2000,respectively, when compared to
the same periods in 1999. The increase in cost of product revenue in
the six months ended July 1, 2000 was1999, primarily due to higher manufacturing costs associated
with emulation system products.
Because the majority of Cadence's cost of software product revenue does not
vary significantly with changes in revenue, product gross margin increased in
the three and nine months ended July 1,September 30, 2000, when compared to the same
period in 1999, primarily due to an increase in sales volume of software
products.
ProductCost of Tality revenue includes costs associated with providing electronics
design services to customers, including salaries and benefits, cost of software,
depreciation, facilities, and project management. Cost of Tality revenue
increased $11.1 million and $26.3 million in the three and nine months ended
September 30, 2000, respectively, when compared to the same periods in 1999,
primarily due to Tality's addition of design engineers and the acquisition of
Diablo Research Company LLC, or Diablo, which was completed in the fourth
quarter of 1999.
Tality gross margin decreasedincreased in the sixthree and nine months ended
July 1,September 30, 2000, when compared to the same
periodcorresponding periods in 1999,
primarily due to a decrease in sales volumeimproved engineering staff utilization and increased use of
software products and the
implementation of Cadence's software subscription licensing model, which was
implemented during the third quarter of 1999.reusable intellectual property.
Cost of services revenue includes costs associated with providing services
to customers, primarily salaries and costs to recruit, develop and retain
personnel, and costs to maintain the infrastructure necessary to manage a
services organization. Cost of services revenue increased $3.4decreased $2.7 million and
$5.1$12.7 million in the three and sixnine months ended July 1,September 30, 2000,
respectively, when compared to the same periods in 1999, primarily due to Cadence's addition ofa
decrease in services professionals, in connection with its acquisition of Diablo Research
Company LLC, or Diablo, which was completed in the fourth quarter of 1999.engagements.
Services gross margin remained flat forin the three and sixnine months ended
July 1,September 30, 2000, when compared to the samecorresponding periods in 1999. Services
gross margin has been, and may continue to be, harmed by Cadence's inability to
fully utilize its services resources. In addition, services gross margin may
continue to be harmed
14
by Cadence's inability to achieve operating efficiencies
while 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, production personnel, packaging, and documentation
of maintenance updates. Cost of maintenance revenue increased $2.4$3.6 million and
$3.7$7.3 million in the three and sixnine months ended July 1,September 30, 2000,
respectively, when compared to the same periods in 1999, due to increases in
employee-related costs and costs associated with the OrCAD acquisition which was completedto invest in the third
quarter of 1999 for which there were no similar costs in the first six months of
1999.customer service.
THREE MONTHS ENDED SIXNINE MONTHS ENDED
--------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 2000
--------- --------- -------- --------1999
------------- ---------- ------------- ----------
(IN MILLIONS)
AMORTIZATION OF ACQUIRED INTANGIBLES
Amortization of acquired intangibles........................ $19.9 $12.9 $39.5 $25.6intangibles............ $20.6 $16.8 $60.2 $42.4
AMORTIZATION OF ACQUIRED INTANGIBLES AS A
PERCENT OF TOTAL REVENUE
Amortization of acquired intangibles........................intangibles............ 6% 7% 5% 7% 4%5%
Amortization of acquired intangibles increased $7$3.8 million and
$13.9$17.8 million in the three and sixnine months ended July 1,September 30, 2000,
respectively, when compared with the same periods in 1999, primarily due to the
1999 acquisitionsacquisition of OrCAD and Tality's acquisition of Diablo.
16
SIX MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -------------------
JULY 1, JULY 3, JULY 1, JULY 3,-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 % CHANGE 2000 1999 % CHANGE
--------- ---------------------- ---------- -------- -------- --------------------- ---------- --------
(IN MILLIONS, EXCEPT PERCENTAGES)
OPERATING EXPENSES
Marketing and sales........................ $95.0 $82.9 15% $181.2 $163.0sales................... $97.9 $88.2 11% $279.0 $251.2 11%
Research and development................... $65.8 $50.4 31% $128.3 $101.2 27%development.............. $66.6 $58.4 14% $195.0 $159.7 22%
General and administrative................. $23.8 $20.9 14%administrative............ $24.1 $22.4 8% $ 46.370.4 $ 42.2 10%64.6 9%
EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales........................ 32%sales................... 29% 39% 31% 33% 27%30%
Research and development...................development.............. 20% 26% 22% 19%
23% 17%
General and administrative.................administrative............ 7% 10% 8% 8% 8% 7%
Marketing and sales expenses increased $12.1$9.6 million and $18.2$27.8 million in the
three and sixnine months ended July 1,September 30, 2000, respectively, when compared to
the same periods in 1999, primarily due to an increase in employee-related costs
and costs associated with the 1999 acquisition of OrCAD for which there were no
similar costs in the first sixseven months of 1999. Foreign currency exchange rates
for the three and six months ended July 1, 2000, when compared to the same
periods in 1999, had a negligible effect on reported marketing and sales
expense.
Cadence's expenses in research and development, prior to the reduction for
capitalization of software development costs, were $71.7$73.3 million, representing
24%22% of total revenue, in the three months ended July 1,September 30, 2000 and
$57.5$64.5 million, representing 22%29% of total revenue, for the three months ended
July 3,October 2, 1999. For the three and sixnine months ended July 1,September 30, 2000, Cadence
capitalized software development costs of $6$6.7 million and $14.7$21.4 million,
respectively, representing 8%9% and 10% of total research and development
expenditures, respectively. For the three and sixnine months ended July 3,October 2, 1999,
Cadence capitalized software development costs of $7.1$6.1 million and
$13.5$19.6 million, respectively, representing 12%9% and 10%11% of total research and
development expenditures, respectively. The
decrease and increase in capitalized software
development costs for the three and sixnine month periods ended July 1,September 30, 2000, respectively,
resulted primarily from increases and decreases in hours incurred on new product development
and new product releases. In any given period, the amount of capitalized
software development costs may vary depending on the exact nature of the
development performed.
15
The increase in net research and development expenses of $15.4$8.2 million and
$27.1$35.3 million for the three and sixnine months ended July 1,September 30, 2000,
respectively, when compared to the same periods in 1999, was primarily
attributable to employee-related costs, consulting costs, and costs associated
with the 1999 acquisition of OrCAD for which there were no similar costs in the
first sixseven months of 1999.
General and administrative expenses increased $2.8$1.7 million and $4.1$5.8 million
in the three and sixnine months ended July 1,September 30, 2000, respectively, when
compared to the same periods in 1999, primarily due to employee-related costs associated with
building the infrastructure of the Tality organization.
Foreign currency exchange rates positively affected operating expenses by
$1.3 million and costs
attributable$1.1 million for the three months and nine months ended
September 30, 2000, respectively, when compared to the OrCADsame periods in 1999. The
decrease during these periods ended September 30, 2000 was primarily due to the
weakening of the British pound sterling, the French franc, and Diablo acquisitions,the German mark
in relation to the U.S. dollar, partially offset partially by a
reductionthe strengthening of the
Japanese yen in bad debt expense.relation to the U.S. dollar. Foreign currency exchange rates
negatively affected operating expenses by $2 million and $3.4 million during the
three and nine months ended October 2, 1999, respectively, when compared to the
same periods in 1998, primarily due to the weakening of the Japanese yen in
relation to the U.S. dollar.
17
UNUSUAL ITEMS
The following table presents information regarding unusual items for the
three and sixnine months ended July 3,September 30, 2000 and October 2, 1999:
THREE MONTHS SIXENDED NINE MONTHS ENDED
ENDED
JULY 3, JULY 3,-------------------------- -------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------------------- ---------- ------------- ---------------
(IN MILLIONS)
Deferred stock compensation.............. $ 5.2 $ -- $ 5.2 $ --
Separation costs......................... 4.9 -- 4.9 --
Restructuring charges................................ $10.7 $12.9charges.................... -- 0.4 -- 13.3
Merger costs......................................... 8.4costs............................. -- -- -- 8.4
Asset impairment..................................... 3.5impairment......................... -- -- -- 6.6
Litigation settlement................................ (3.0)settlement.................... -- -- -- (3.0)
Write-off of acquired in-process
technology..........technology............................. -- 8.911.8 -- 20.7
----- ----- ----- -----
Total unusual items.............................. $19.6 $33.8items...................... $10.1 $12.2 $10.1 $46.0
===== ===== ===== =====
DEFERRED STOCK COMPENSATION
Deferred stock compensation represents the difference between the exercise
price of stock option grants and restricted stock grants to employees and the
deemed fair value of Tality's common stock at the time of those grants. We
recorded deferred stock compensation of $64.7 million for the three and nine
months ended September 30, 2000. We are amortizing deferred stock compensation
to expense over the period during which the stock options and restricted stock
vest, four years and one year, respectively. Accordingly, the compensation
expense is recognized over the period during which the services have been
provided. Such amortization amounted to $5.2 million for the three and nine
months ended September 30, 2000.
SEPARATION COSTS
In the three and nine months ended September 30, 2000, Cadence recorded
$4.9 million in separation costs related to the separation and planned IPO of
Tality. These costs include legal and accounting services, strategic business
planning, information systems separation, and development of compensation and
benefits strategies.
RESTRUCTURING
In the three months ended July 3, 1999, Cadence recorded $10.7 million in
restructuring charges, including severance costs to terminate 49 employees and
to consolidate facilities. Severance costs of $8.7 million relate to
restructuring plans primarily aimed at reducing costs after Cadence merged with
Quickturn, further actions taken to restructure the Cadence services business in
Japan, and severance expense resulting from the resignation of Cadence's former
Chief Executive Officer.
Facilities consolidation charges of $2 million were incurred in connection
with the closure of 15 Quickturn facilities, including $1 million to close and
exit the excess facilities and $1 million of related leasehold improvement
abandonment costs. Closure and exit costs include payments required under lease
contracts, less any applicable sublease income, after the properties were
abandoned, lease buyout costs, restoration costs associated with certain lease
arrangements, and costs to maintain facilities during the period after
abandonment. Asset relatedAsset-related costs written-off consist of leasehold improvements
offor facilities that were abandoned and whose estimated fair market value is
zero. As of July 1, 2000, all of the 15 excess Quickturn sites had been vacated.
Noncancelable lease payments onfor vacated facilities will be paid out through
2003.
18
In the three months ended April 3, 1999, Cadence recorded $2.2 million in
severance costs to terminate 45 employees. These actions were taken to complete
Cadence's restructuring program initiated in the fourth quarter of 1998. The
restructuring plan was primarily aimed at reducing the costs of excess personnel
in its services business.
Actual amounts of termination benefits, facilities, and other restructuring
related payments can be found in Notes to Condensed Consolidated Financial
Statements under "RESTRUCTURING."
16
MERGER COSTS
In connection with the acquisition of Quickturn, Cadence charged to expense
$8.4 million representing merger costs in the three month period ended July 3,
1999. These merger costs represented professional fees for financial advisors,
attorneys, and accountants.
ASSET IMPAIRMENT
In the three months ended July 3, 1999, Cadence incurred charges totaling
$3.5 million in connection with the cancellation of an information technology
services contract with a third-partythird party and the abandonment of capitalized software
development costs associated with Cadence products that willwere no longer to be
sold.
In the three months ended April 3, 1999, Cadence incurred charges totaling
$3.1 million in connection with the abandonment of certain third-party software
licenses that willwere no longer to be used by its design services business and
capitalized software development costs associated with Cadence products that
willwere no longer to be sold.
The impairment losses recorded for the sixnine months ended July 3,October 2, 1999
were the amounts by which the carrying amounts of the intangible assets exceeded
their fair market values.
LITIGATION SETTLEMENT
In June 1999, Cadence and Mentor Graphics Corporation announced the
settlement of a patent infringement action pending in the United States District
Court for the District of Oregon. As a result, the court entered a judgment
declaring that certain Quickturn patents are valid, enforceable, and were
infringed by Mentor's sale of SimExpress products in the U.S. Mentor is
permanently enjoined from producing, marketing or selling SimExpress emulation
systems in the U.S. In connection with the settlement, Mentor paid Cadence
$3 million.
IN-PROCESS TECHNOLOGY
In August 1999, Cadence acquired OrCAD, Inc., a supplier of computer-aided
engineering and computer-aided design software and services for the printed
circuit board industry, for cash. Cadence acquired all of the outstanding stock
of OrCAD and assumed all outstanding OrCAD stock options. The purchase price was
$131.4 million and the acquisition was accounted for as a purchase.
Upon consummation of the OrCAD acquisition, Cadence immediately charged to
expense $11.8 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired in-process technology was determined by identifying
research projects in areas for which technological feasibility had not been
established. The value was determined by estimating the costs to develop the
acquired in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. Certain of the acquired in-process technology became
commercially viable in each of 1999 and 2000. Expenditures to
19
complete this acquired in-process technology did not materially differ from the
original cost to complete estimations.
To date, OrCAD's results have not differed significantly from the forecast
assumptions. In addition, Cadence's research and development expenditures since
the acquisition have not differed materially from expectations. Revenue
contribution from the acquired technology falls within an acceptable range of
plans in its role in Cadence's suite of design systems and tools. The risks
associated with this research and development are still considered high and no
assurance can be made that these products will meet market expectations.
In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a
supplier of design verification technology used in system-on-a-chip, or SOC,
design. The total purchase price was $25.7 million and the acquisition was
accounted for as a purchase.
Upon consummation of the DAI acquisition, Cadence immediately charged to
expense $8.9 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. The
value assigned to acquired in-process technology was determined by identifying
research projects in areas for which technological feasibility hashad not been
established. The value was determined by estimating the costs to develop the
acquired in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. Certain acquired in-process technology under development
at the time of acquisition was initially expected to become commercially viable
in 1999, but has since been delayed to 2000 and 2001. Expenditures to complete
this acquired in-process technology are expected to total approximately
$1.5 million. These estimates are subject to change, given the uncertainties of
the development process, and no assurance can be given that deviations from
these estimates will not occur. Additionally, these projects will require
expenditures for additional research and development after they have reached a
state of technological and commercial feasibility.
To date, DAI's results have not differed significantly from the forecasted
assumptions. In addition, Cadence's research and development expenditures since
the acquisition have not differed materially from expectations. Revenue
contribution from the acquired technology falls within an acceptable range of
plans in its role in Cadence's suite of design systems and tools. The risks
associated with the research and 17
development are still considered high and no
assurance can be made that these future products will meet market expectations.
OTHER INCOME AND INCOME TAXES
Other income increased $1.3$1.1 million and $2.2$3.2 million in the three and sixnine
months ended July 1,September 30, 2000, respectively, when compared to the same periods
in 1999, primarily due to an increase in foreign exchange gains and a decrease
in interest income. The decrease in interest income was due to a lower average
balance of invested cash and short-term investments.
Cadence's estimated effective tax rate for the three and sixnine months ended
July 1,September 30, 2000 was 26.5%. The effective tax rate for the three and sixnine
months ended July 3,October 2, 1999 was 28.5%, excluding the effect of the write-off of
acquired in-process technology of $8.9 million, which is not deductible for
income tax purposes. The decrease in the 2000 effective tax rate when compared
to 1999 is primarily due to foreign earnings being taxed at a lower rate.
LIQUIDITY AND CAPITAL RESOURCES
At July 1,September 30, 2000, Cadence's principal sources of liquidity consisted of
$119.4$128 million of cash and short-term investments, compared to $118.8 million at
January 1, 2000, and a $355 milliontwo senior unsecured credit
facility.20
facilities that allow Cadence to borrow up to $350 million. As of July 1,September 30,
2000, Cadence had no outstanding borrowings under thethese credit facility.facilities.
Cash provided by operating activities decreased $32.8increased $42.1 million to
$88.4$145.3 million for the sixnine months ended July 1,September 30, 2000, when compared to
the sixnine months ended July 3,October 2, 1999. The decreaseincrease was primarily due to
decreases in net
income before unusual items, deferred income taxes, receivables, and prepaid
expenses, partially offset by increases in depreciation and amortization, installment contract receivables, accounts payable and accrued
liabilities, depreciation and amortization, and deferred revenue.revenue, partially
offset by decreases in receivables, prepaid expenses and other, and net income
before unusual items.
At July 1,September 30, 2000, Cadence had net working capital of $31.5$41.3 million
compared with $58.4 million at January 1, 2000. The working capital decrease was
driven primarily by a decrease in receivables of $16.2 million and an increase in deferred revenue of $40.4$42.5 million, partially
offset by an increase in prepaid
expenses and other of $24.6 million, and to a lesser extent, a decrease in accounts payable and accrued liabilities of
$8.5$15.6 million and an increase in cash and cash equivalents of $10.8 million. The
increase in prepaid expensesdeferred revenue was due to increase product sales and othermaintenance
contracts. The decrease in accounts payable and accrued liabilities was
primarily due to an increasereductions in unbilled
professional servicesaccrued employee benefits, accrued consulting
service, and prepaid income taxes.accruals for payments to vendors.
In addition to its short-term investments, Cadence's primary investing
activities consisted of purchases of property, plant, and equipment,
capitalization of software development costs, acquired intangibles and other
assets, venture capital partnership investments and equity investments, and
business acquisitions, which combined represented $95.8$145.5 million and
$106.9$225.5 million of cash used for investing activities in the sixnine months ended
July 1,September 30, 2000 and July 3,October 2, 1999, respectively.
Since 1994, Cadence has sold put warrants and purchased call options through
private placements. See "Notes to Condensed Consolidated Financial Statements."
At July 1,September 30, 2000, Cadence had a maximum potential obligation related to put
warrants to repurchase 6.35 million shares of its common stock at an aggregate
price of approximately $131$104.8 million. The put warrants will expire on various
dates through FebruaryMay 2001, and Cadence has the contractual ability to settle the
options prior to their maturity. Cadence has the abilityright to settle these put
warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.
Anticipated cash requirements for the remainder of 2000 includesinclude working
capital, capital expenditures and payment of operating expenses, including
marketing and sales expense, research and development expense, general and
administrative expense and potential acquisitions of, or investments in,
complementary businesses or technologies, and the purchase of treasury stock
through Cadence's stock repurchase programs.
18
As part of its overall investment strategy, Cadence has become a limited
partner in a venture capital fund and is committed to invest up to
$100 million. As of July 1,September 30, 2000, Cadence had contributed approximately
$45.2$47.0 million to this partnership, which is reflected in other assets in the
accompanying condensed consolidated balance sheets, net of operating losses.
Cadence anticipates that current cash and short-term investment balances,
cash flows from operations, and its $355 milliontwo revolving credit facilityfacilities that allow
borrowings of up to $350 million will be sufficient to meet its working capital
requirements on a short-and long-term basis.
Cadence will continue to fund Tality's operations, as it has done
historically, through the date that Tality receives the net proceeds from its
planned initial public offering.IPO.
NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-19, "Determination of Whether Share Settlement is
Within the Control of the Issuer for Purposes of Applying Issue No. 96-13,"
which was taken up to address implementation of the EITF's March 2000 final
consensus of EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity
21
Derivative Transactions That Contain Certain Provisions That Require Cash
Settlement If Certain Events Occur." The final consensus in Issue 00-7 generally
stated that equity derivative contracts that contain provisions that implicitly
or explicitly require net cash settlement outside of the control of the company
must be treated as assets and liabilities and carried at fair value with changes
in fair value recognized in earnings rather than equity instruments carried at
original cost and reported as part of permanent equity. This interpretation
becomes effective June 30, 2001 and is not expected to have a material effect on
Cadence's financial position, results of operations, or cash flows.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of Accounting Principles Board, or APB, Opinion
No. 25. This interpretation provides guidance regarding the application of APB
Opinion No. 25 to stock compensation involving employees. This interpretation
iswas effective July 1, 2000 and isdid not expected to have a material effect on Cadence's
financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Cadence must adopt SAB 101 will be adopted in the
fourth quarter of its fiscal 2000. The adoption of this statement is not
expected to have a material effect on Cadence's financial position, results of
operations, or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. It requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met and that a company must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," was issued. The statement defers the effective date of SFAS
No. 133 until the first quarter of fiscal 2001. The adoption of this statement
is not expected to have a material effect on Cadence's financial position,
results of operations, or cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Quarterly
Report on Form 10-Q should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occurs, our business, operating results, and financial condition could be
materially harmed. The risk factors affecting Tality Corporation which,
immediately after its separation from Cadence and initial public offering will remain a subsidiary of
Cadence, are described in detail in the Registration Statement on Form S-1 filed
by Tality Corporation with the Securities and Exchange Commission on July 17,
2000, as amended. WE ARE IN THE PROCESS OF RESTRUCTURING OURUnless specifically noted, references to Cadence in the
discussion below are references to Cadence and its subsidiaries, including
Tality Corporation and its subsidiaries.
CADENCE HAS REORGANIZED ITS DESIGN SERVICES GROUP AS A SEPARATE COMPANY, WHICH
MAY IMPACT OURITS FINANCIAL RESULTS
Since 1995, Cadence has operated an internal electronics design services
group. On July 17, 2000, Cadence announced its plan to separate its design
services group into a separate company focused on 19
providing design solutions and
proprietary technology to electronics product companies and integrated circuit
manufacturers, and announced the planned initial public offering of the separate
company. The separation was effective on October 4, 2000. Upon completion of thisthe
planned initial public offering of
22
Tality, Cadence expects that it will hold approximately 80% of the voting power
of the new
company.Tality. While Cadence does not currently plan to distribute to Cadence
stockholders its equity interests in Tality Corporation or its subsidiaries, it
will have the right at any time to convert and thereafter sell some or all of its shares of voting stock.these equity interests.
Cadence has agreed with the underwriters not to transfer its equity interests in
Tality Corporation and limited partnership units in Tality, LP for 180 days
after the date of the initial public offering of Tality Corporation, except with
the prior written consent of Goldman, Sachs & Co. After the expiration of this
180-day period, Cadence will no longer be restricted from transferring any of
its common stock of Tality Corporation or limited partnership units in Tality,
LP to the public or its stockholders. Cadence currently expects that the
principal factors that it would consider in determining whether and when to
exchange, convert, sell or distribute to its stockholders any of its shares or
partnership units include:
- The relative market prices of its Tality's common stock and Cadence's common
stock;
- The ability of an affiliate of Tality to make sales under Rule 144 of the
Securities Act of 1933 or under an effective registration statement
covering Cadence's shares of Tality's common stock;
- The absence of any court order or other regulation prohibiting or
restricting such sales; and
- Other conditions affecting Tality's business or Cadence's business.other
businesses.
CADENCE ALSO RETAINS THE RIGHTHAS AGREED TO SELL ANY OR ALL OF ITSGRANT CERTAIN RIGHTS AND PROVIDE CERTAIN SERVICES TO
TALITY LP LIMITED
PARTNERSHIP UNITSON TERMS THAT ARE MORE FAVORABLE TO ONE OR MORE THIRD PARTIES FOR STRATEGIC OR OTHER REASONSTALITY THAN TERMS THAT WOULD BE
OFFERED TO AN UNRELATED PARTY
In connection with the separation of Tality, Cadence will also enterentered into a number
of agreements governing theits business relationships between the companieswith Tality and theCadence's
provision of certain services to Tality, including provision of certain
facilities, and accounting, finance, legal, human resources, and other
administrative services.services, on terms that are more favorable to Tality than terms
that would be offered to an unrelated entity. As a result, Cadence will beis obligated
to provide certain services to Tality for the periods defined in the various
agreements.agreements, which may impact our financial results.
CADENCE LACKS LONG-TERM EXPERIENCE IN ITS ELECTRONICS DESIGN AND METHODOLOGY
SERVICES BUSINESS
Cadence has no long-term experience in offering electronics design and
methodology services and therefore may not be as experienced in this businessthese businesses
as others. The market for these services is relatively new and rapidly evolving.
Cadence expects the expenses of the design services business to increase
substantially in connection with Tality's separation from Cadence and as it
continues to expand its operations. The rate of growth of the design services
group'sTality's revenue over
prior periods may not continue or increase, and its separation and expansion may
prove more expensive than Cadence anticipates. If Tality fails to increase its
revenue to offset its expenses, the design services
groupTality will continue to experience losses.
Cadence's or Tality's failure to succeed in these services businesses may
seriously harm Cadence's business, operating results, and financial condition.
THE SUCCESS OF CADENCE'S ELECTRONIC DESIGN AND METHODOLOGY SERVICES BUSINESSES
DEPENDSDEPEND ON MANY FACTORS THAT ARE BEYOND ITS CONTROL
In order to be successful with its electronics design and methodology
services, Cadence must overcome several factors that are beyond its control,
including the following:
- MANY SERVICE CONTRACTS GENERALLY REPRESENT LARGE AMOUNTS OF REVENUE.
Cadence's electronics design and methodology services contracts generally
represent a relatively large amount of revenue per order. Therefore, the
loss of individual orders could seriously hurt Cadence's revenue and
operating results.
20
- CADENCE'S COST OF SERVICES PERSONNEL IS HIGH AND REDUCES GROSS MARGIN.
Gross margin represents the difference between the amount of revenue from
the sale of services and Cadence's cost of providing those services.
Cadence must pay high salaries to professional services personnel to
attract and retain them.professional services
personnel. This results in a lower gross margin than the gross margin in
Cadence's software business. In addition, the high cost of training new
services personnel or not fully utilizing these personnel can
significantly lower gross margin.
Additionally, a substantial portion of these services contracts are
fixed-price contracts.23
- A SUBSTANTIAL PORTION OF THESE SERVICES CONTRACTS ARE FIXED-PRICE
CONTRACTS. This means that the customer pays a fixed price that has been
agreed upon ahead of time, no matter how much time or how many resources
Cadence must devote to perform the contract. If Cadence's cost in
performing the services consistently and significantly exceeds the amount
the customer has agreed to pay, it could seriously harm Cadence's
business, operating results, and financial condition.
CADENCE'S FAILURE TO RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS COULD MAKE
ITS PRODUCTS UNCOMPETITIVE AND OBSOLETE
The industries in which Cadence competes experience rapid technology
developments, changes in industry standards, changes in customer requirements
and frequent new product introductions and improvements. Currently, the
electronic chip design industry is experiencing several revolutionary trends:
- The size of features such as wires, transistors, and contacts on chips is
shrinking due to advances in semiconductor manufacturing processes.
Process feature sizes refer to the width of the transistors and the width
and spacing of the interconnect on the chip. Feature size is normally
identified by the headline transistor length, which is shrinking from 0.35
microns to 0.18 microns and below. This is commonly referred to in the
semiconductor industry as the migration to deep submicron and it
represents a major challenge for all levels of the semiconductor industry
from chip design and design automation to design of manufacturing
equipment and the manufacturing process itself. Shrinkage of transistor
length to such infinitesimal proportions (for reference, the diameter of
the period at the end of this sentence is approximately 400 microns) is
challenging fundamental laws of physics and chemistry.
- The ability to design very large chips, in particular integration of
entire electronic systems onto a single chip instead of a circuit board (a
process that is referred to in the industry as SOC), increases the
complexity of managing a design that at the lowest level is represented by
billions of shapes on the fabrication mask. In addition, systems typically
incorporate microprocessors and digital signal processors that are
programmed with software, requiring simultaneous design of the silicon
chip and the related embedded software on the chip.
If Cadence is unable to respond quickly and successfully to these
developments and changes, Cadence may lose its competitive position and its
products or technologies may become uncompetitive or obsolete. In order to
compete successfully, Cadence must develop or acquire new products and improve
its existing products and processes on a schedule that keeps pace with
technological developments in its industries. Cadence must also be able to
support a range of changing computer software, hardware platforms and customer
preferences. There is no guarantee that Cadence will be successful in this
regard.
CADENCE'S FAILURE TO OBTAIN SOFTWARE OR OTHER INTELLECTUAL PROPERTY LICENSES OR
ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS COULD SERIOUSLY HARM ITS BUSINESS
Cadence's success depends, in part, upon its proprietary technology. Many of
Cadence's products include software or other intellectual property licensed from
third parties, and Cadence may have to seek new or renew existing licenses for
this software and other intellectual property in the future. Cadence's design
services business also requires it to license software or other intellectual
property of third parties. Cadence's failure to obtain for its use software or
other intellectual property licenses or other intellectual property rights on
favorable terms, or the need to engage in litigation over these licenses or
rights, could seriously harm Cadence's business, operating results, and
financial condition.
21
Also, Cadence generally relies on patents, copyrights, trademarks and trade
secret laws to establish and protect its proprietary rights in technology and
products. Despite precautions Cadence may take to protect its intellectual
property, Cadence cannot assure you that third parties will not try to
challenge, invalidate, or circumvent these patents. Cadence also cannot assure
you that the rights granted under its patents will provide it with any
competitive advantages, patents will be issued on any of its pending
24
applications, or future patents will be sufficiently broad to protect Cadence's
technology. Furthermore, the laws of foreign countries may not protect Cadence's
proprietary rights in those countries to the same extent as U.S. law protects
these rights in the U.S.
Cadence cannot assure you that its reliance on licenses from or to third
parties, or that patent, copyright, trademark, and trade secret protection,protections,
will be enough to be successful and profitable in the industries in which
Cadence competes.
INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST CADENCE COULD SERIOUSLY HARM
ITS BUSINESS
There are numerous patents in the EDA industry and new patents are being
issued at a rapid rate. It is not always economically practicable to determine
in advance whether a product or any of its components infringes the patent
rights of others. As a result, from time to time, Cadence may be forced to
respond to or prosecute intellectual property infringement claims to protect its
rights or defend a customer's rights. These claims, regardless of merit, could
consume valuable management time, result in costly litigation, or cause product
shipment delays, all of which could seriously harm Cadence's business, operating
results, and financial condition. In settling these claims, Cadence may be
required to enter into royalty or licensing agreements with the third parties
claiming infringement. These royalty or licensing agreements, if available, may
not have terms acceptable to Cadence. Being forced to enter into a license
agreement with unfavorable terms could seriously harm Cadence's business,
operating results, and financial condition. Any potential intellectual property
litigation could force us to do one or more of the following:
- Pay damages to the party claiming infringement;
- Stop licensing, or providing services that use, the challenged
intellectual property;
- Obtain a license from the owner of the infringed intellectual property to
sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
- Redesign the challenged technology, which could be time-consuming and
costly.
If we were forced to take any of these actions, our business and results of
operations may be harmed.
CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED NUMBER
OF SUPPLIERS
Cadence depends on several suppliers for certain key components and board
assemblies used in its hardware-based emulation products. Cadence's inability to
develop alternative sources or to obtain sufficient quantities of these
components or board assemblies could result in delays or reductions in product
shipments. In particular, Cadence currently relies on Xilinx, Inc. and Taiwan
Semiconductor Manufacturing Corporation for the supply of key integrated
circuits and on IBM for the hardware components for both Cadence's CoBALT-TM-
product and Mercury Design Verification System-TM-. Other disruptions in supply
may also occur. If there were such a reduction or interruption, Cadence's
results of operations would be seriously harmed. Even if Cadence can eventually
obtain these components from alternative sources, a significant delay in
Cadence's ability to deliver products would result.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS COULD HURT CADENCE'S BUSINESS
AND THE MARKET PRICE OF ITS STOCK
Cadence has experienced, and may continue to experience, varied quarterly
operating results. Various factors affect Cadence's quarterly operating results
and some of them are not within Cadence's control, including the mix of products
and services sold, the mix of licenses used to sell products and the timing of
significant orders for its software products and services by customers.
Quarterly operating results are affected by the mix of products and services
sold because there are significant differences in margins from the sale of
hardware and software products and services. For example, based on a three-year
average in 1999 Cadence had realized gross margins on software product sales of
approximately 91% but realized gross margins of approximately 65% on hardware
product sales and 32% on its performance of services. In
25
the secondthird quarter of 2000, realized gross margins remained flat at 91% for
software products and decreased to approximately 90%63% for softwarehardware products and
increased to approximately 67% for hardware products and to 35%36% for services. In addition, Cadence's quarterly
operating results are affected by the mix of licenses entered into in connection
with the sale of software products. Cadence has three basic licensing models:
perpetual, fixed-term, and subscription. Perpetual and fixed-term licenses
recognize a larger portion of the revenue at the beginning of the license period
and
22
subscription licenses recognize revenue ratably over each quarter of the
term of the license. As Cadence customers purchase more software products
pursuant to subscription agreements, future operating results may be lower than
that of comparable quarters in which perpetual and fixed-term licenses were in
greater use for software product transactions. Finally, Cadence's quarterly
operating results are affected by the timing of significant orders for its
software products because a significant number of contracts for software
products are in excess of $5 million. The failure to close a contract for the
sale of one or more orders of Cadence's software products could seriously harm
its quarterly operating results.
Cadence's hardware verification products typically have a lengthy sales
cycle, during which Cadence may expend substantial funds and management effort
without any assurance that a sale will result. Sales of Cadence's hardware products depend, in significant part, upon the
decision of the prospective customer to commence a project for the design and
development of complex computer chips and systems. SuchThese projects often require
significant commitments of time and capital. Cadence's hardware sales may be
delayed if customers delay commencement of projects. Lengthy hardware sales
cycles subject Cadence to a number of significant risks over which Cadence has
little or no control, including insufficient, excess or obsolescent inventory,
obsolescencevariations in inventory valuation and fluctuations in quarterly operating
results.
In addition, Cadence bases its expense budgets partially on its expectations
of future revenue. However, it is difficult to predict revenue levels or growth.
Revenue levels that are below Cadence's expectations could seriously hurt
Cadence's business, operating results, and financial condition. If revenue or
operating results fall short of the levels expected by public market analysts
and investors, the trading price of Cadence common stock could decline
dramatically. Also, because of the timing of large orders and its customers'
buying patterns, Cadence may not learn of revenue shortfalls, earnings
shortfalls or other failures to meet market expectations until late in a fiscal
quarter, which could cause even more immediate and serious harm to the trading
price of Cadence common stock.
Because Cadence has no long-term experience providing services, it believes
that quarter-to-quarter comparisons of its results of operations may not be
meaningful. Therefore, stockholders should not view Cadence's historical results
of operations as reliable indicators of its future performance. In addition,
many of our services engagements are terminable with little or no advance notice
and without penalty. Since a significant portion of our costs is fixed, we may
not be able to reduce our costs in a timely manner in connection with the
unanticipated revenue loss when one or more projects is terminated.
THE LENGTHY SALES CYCLE OF CADENCE'S PRODUCTS AND SERVICES MAKES THE TIMING OF
ITS REVENUE DIFFICULT TO PREDICT AND MAY CAUSE ITS OPERATING RESULTS TO
FLUCTUATE UNEXPECTEDLY
Cadence has a lengthy sales cycle that generally extends at least three to
five months. The length of our sales cycle may cause our revenue and operating
results to vary unexpectedly from quarter to quarter. The complexity and expense
associated with our business generally requires a lengthy customer education and
approval process. Consequently, we may incur substantial expenses and devote
significant management effort and expense to develop potential relationships
that do not result in agreements or revenue and may prevent us from pursuing
other opportunities.
In addition, sales of our products and services may be delayed if customers
delay approval or commencement of projects because of:
- Customers' budgetary constraints and internal acceptance review
procedures;
- The timing of customers' budget cycles; and
- The timing of customers' competitive evaluation processes.
26
If customers experience delays in their approval or project commencement
activities, we may not learn of, and therefore be able to communicate to the
public, revenue or earnings shortfalls until late in a fiscal quarter.
CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY INTEGRATE
THEM OR THE COMPANIES IT HAS RECENTLY ACQUIRED
Cadence has acquired other businesses before and may do so again. While
Cadence expects to analyze carefully all potential transactions before
committing to them, Cadence cannot assure you that any transaction that is
completed will result in long-term benefits to Cadence or its stockholders, or
that Cadence's management will be able to manage the acquired businesses
effectively. In addition, growth through acquisition involves a number of risks.
If any of the following events occurs after Cadence acquires another business,
it could seriously harm Cadence's business, operating results, and financial
condition:
- Difficulties in combining previously separate businesses into a single
unit;
- The substantial diversion of management's attention from day-to-day
business when negotiating these transactions and then integrating an
acquired business;
- The discovery after the acquisition has been completed of liabilities
assumed from the acquired business;
- The failure to realize anticipated benefits such as cost savings and
revenue enhancements;
- The failure to retain key personnel of the acquired business;
and
- Difficulties related to assimilating the products of an acquired business
in, for example, distribution, engineering, and customer support areas.
23
areas;
- Unanticipated costs;
- Adverse effects on existing relationships with suppliers and customers;
and
- Failure to understand and compete effectively in markets in which we have
limited previous experience.
CADENCE'S INTERNATIONAL OPERATIONS MAY SERIOUSLY HARM ITS FINANCIAL CONDITION
BECAUSE OF SEVERAL WEAK FOREIGN ECONOMIES AND THE EFFECT OF FOREIGN EXCHANGE
RATE FLUCTUATIONS
Cadence has significant operations outside the United States. Cadence's
revenue from international operations as a percentage of total revenue was
approximately 46%42% and 43% for the three and nine months ended July 1,September 30,
2000, respectively, and July 3, 1999.47% and 52% for the three and nine months ended
October 2, 1999, respectively. Cadence also transacts business in various
foreign currencies. Recent economic uncertainty and the volatility of foreign
currencies in certain parts of the Asia-Pacific region and Europe, has had, and
may continue to have, a seriously harmful effect on Cadence's revenue and
operating results.
Fluctuations in the rate of exchange between the U.S. dollar and the
currencies of countries other than the U.S. in which Cadence conducts business
could seriously harm its business, operating results, and financial condition.
For example, if there is an increase in the rate at which a foreign currency
exchanges into U.S. dollars, it will take more of the foreign currency to equal
a specified amount of U.S. dollars than before the rate increase. If Cadence
prices its products and services in the foreign currency, it will receive less
in U.S. dollars than it did before the rate increase went into effect. If
Cadence prices its products and services in U.S. dollars, an increase in the
exchange rate will result in an increase in the price for Cadence's products and
services compared to those products of its competitors that are priced in local
currency. This
27
could result in Cadence's prices being uncompetitive in markets where business
is transacted in the local currency. Cadence's international operations may also
be subject to other risks, including:
- The adoption and expansion of government trade restrictions;
- Volatile foreign exchange rates and currency conversion risks;
- Limitations on repatriation of earnings;
- Reduced protection of intellectual property rights in some countries;
- Recessions in foreign economies;
- Longer receivables collection periods and greater difficulty in collecting
accounts receivable;
- Difficulties in managing foreign operations;
- Political and economic instability;
- Unexpected changes in regulatory requirements;
- Tariffs and other trade barriers; and
- U.S. government licensing requirements for export which make licenses
difficult to obtain.
Cadence expects that revenue from its international operations will continue
to account for a significant portion of its total revenue.
Exposure to foreign currency transaction risk can arise when transactions
are conducted in a currency different from the functional currency of a Cadence
subsidiary. A subsidiary's functional currency is the currency in which it
primarily conducts its operations, including product pricing, expenses and
borrowings. Cadence uses foreign currency forward exchange contracts and
purchases foreign currency put options to help protect against currency exchange
risks. These forward contracts and put options allow Cadence to buy or sell
specific foreign currencies at specific prices on specific dates. Increases or
decreases in the value of Cadence's foreign currency transactions are partially
offset by gains and losses on these forward contracts and put options. Although
Cadence attempts to reduce the impact of foreign currency fluctuations,
significant exchange rate movements may hurt Cadence's results of operations as
expressed in U.S. dollars.
Foreign currency exchange risk occurs for some of Cadence's foreign
operations whose functional currency is the local currency. The primary effect
of foreign currency translation on Cadence's results of operations is a
reduction in revenue from a strengthening U.S. dollar, offset by a smaller
reduction in 24
expenses. Exchange rate gains and losses on the translation into
U.S. dollars of amounts denominated in foreign currencies are included as a
separate component of stockholders' equity.
CADENCE'S INABILITY TO DEAL EFFECTIVELY WITH THE CONVERSION TO THE EURO MAY
NEGATIVELY IMPACT ITS MARKETING AND PRICING STRATEGIES
On January 1, 1999, 11 member countries of the European Union adopted the
Euro as their common legal currency and established fixed conversion rates
between their sovereign currencies and the Euro. Transactions can be made in
either the sovereign currencies or the Euro until January 1, 2002, when the Euro
must be used exclusively. Currently, only electronic transactions may be
conducted using the Euro. Cadence believes that its internal systems and
financial institution vendors are capable of handling the Euro conversion and is
in the process of examining current marketing and pricing policies and
strategies that may be affected by conversion to the Euro. The cost of this
effort is not expected to materially hurt Cadence's results of operations or
financial condition. However, Cadence cannot assure you that all issues related
to the Euro conversion have been identified and that any additional issues would
not materially hurt Cadence's results of operations or financial condition. For
example, the conversion to the Euro may have competitive implications on
Cadence's pricing and marketing strategies and Cadence may be at risk to the
extent its principal European suppliers and customers are unable to deal
effectively with the impact of the Euro conversion. Cadence has not yet
completed its evaluation of the impact of the Euro conversion on its functional
currency designations.
FAILURE TO OBTAIN EXPORT LICENSES COULD HARM CADENCE'S BUSINESS
Cadence must comply with U.S. Department of Commerce regulations in shipping
its software products and other technologies outside the U.S. Although Cadence
has not had any significant difficulty complying with these regulations so far,
any significant future difficulty in complying could harm Cadence's business,
operating results, and financial condition.
CADENCE'S INABILITY TO COMPETE IN ITS INDUSTRIES COULD SERIOUSLY HARM ITS
BUSINESS
The EDA market and the commercial electronics design and methodology
services industries are highly competitive. If Cadence is unable to compete
successfully in these industries, it could seriously harm Cadence's business,
operating results, and financial condition. To compete in these industries,
Cadence must identify and develop innovative and cost competitive electronic
design automation software products and market them in a timely manner. It must
also gain industry acceptance for its design and methodology
28
services and offer better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of other design
companies and the internal design departments of electronics manufacturers.
Cadence cannot assure you that it will be able to compete successfully in these
industries. Factors which could affect Cadence's ability to succeed include:
- The development of competitive EDA products and design and methodology
services could result in a shift of customer preferences away from
Cadence's products and services and significantly decrease revenue;
- The electronics design and methodology services industries are relatively
new and electronics design companies and manufacturers are only beginning
to purchase these services from outside vendors;
- The pace of the technology change demands continuous technological
development to meet the requirements of next-generation design challenges;
and
- There are a significant number of current and potential competitors in the
EDA industry and the cost of entry is low.
In the electronic design automationEDA products industry, Cadence currently competes with a number of
large companies, including Avant! Corporation, Mentor Graphics Corporation,
Synopsys, Inc. and Zuken-
25
Redac,Zuken-Redac, and numerous small companies. Cadence also
competes with manufacturers of electronic devices that have developed or have
the capability to develop their own EDA products. Many manufacturers of
electronic devices may be reluctant to purchase services from independent
vendors such as Cadence because they wish to promote their own internal design
departments. In the electronics design and methodology services industries,
Cadence competes with numerous electronic design and consulting companies as
well as with the internal design capabilities of electronics manufacturers.
Other electronics companies and management consulting firms continue to enter
the electronic design and methodology services industries.
CADENCE IS SUBJECT TO THE CYCLICAL NATURE OF THE INTEGRATED CIRCUIT INDUSTRY,
AND ANY FUTURE DOWNTURNS WILL LIKELY REDUCE OUR REVENUE
Purchases of our products and services are highly dependent upon the
commencement of new design projects by integrated circuit manufacturers. The
integrated circuit industry is highly cyclical and is characterized by constant
and rapid technological change, rapid product obsolescence and price erosion,
evolving standards, short product life cycles, and wide fluctuations in product
supply and demand. The industry has experienced significant downturns, often
connected with, or in anticipation of, maturing product cycles of both
integrated circuit companies' and their customers' products and a decline in
general economic conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high inventory levels and
accelerated erosion of average selling prices. During these downturns, the
number of new integrated circuit design projects may decrease. Any future
downturns may reduce our revenue and harm our results of operations.
CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM
ITS BUSINESS
Competition for highly skilled employees is very intense. Cadence's business
depends on the efforts and abilities of its senior management, its research and
development staff, and a number of other key management, sales, support,
technical, and services personnel. The robust economyhigh cost of training new personnel, not
fully utilizing these personnel, or losing trained personnel to competing
employers could reduce our gross margins and opportunities
availableharm our business and operating
results. Competition for these personnel is intense, particularly in geographic
areas recognized as high technology centers such as the Silicon Valley area,
where our principal offices are located, and the other companies has madelocations where we
maintain large facilities. To attract and could continue to make employee
retention and recruiting more difficult for Cadence. Additionally, Cadence
expects more than 1,000 of its employees to become employees of Tality in
connectionretain individuals with the separationrequisite
expertise, we may be required to grant large numbers of its design services group.stock options or other
stock-based incentive awards, which may be dilutive to existing stockholders. We
may also be required to pay significant base salaries and cash bonuses, which
could harm our operating
29
results. If we do not succeed in hiring and retaining candidates with
appropriate qualifications, we will not be able to grow our business and our
operating results will suffer. Cadence's failure to attract, train, motivate,
and retain key employees would impair its development of new products, its
ability to provide design and methodology services and the management of its
businesses. This would seriously harm Cadence's business, operating results, and
financial condition.
IF CADENCE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, CADENCE COULD BE PREVENTED
FROM HIRING NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR SUBSTANTIAL
COSTS IN DEFENDING OURSELVESITSELF
Companies in Cadence's industry whose employees accept positions with
competitors frequently claim that these competitors have engaged in unfair
hiring practices or that the employment of these persons would involve the
disclosure or use of trade secrets. These claims could prevent us from hiring
personnel or cause us to incur liability for damages. Cadence could also incur
substantial costs in defending ourselves or its employees against these claims,
regardless of their merits. Defending ourselves from these claims could also
divert the attention of its management away from its operations.
ERRORS OR DEFECTS IN ITSCADENCE DESIGNS COULD EXPOSE USIT TO LIABILITY AND HARM OUR
REPUTATION
Cadence's clientscustomers use its products and services in designing and
developing products that involve a high degree of technological complexity, each
of which has its own specifications and is based on various industry standards.
Because of the complexity of the systems and products with which Cadence works,
some of its products and designs can be adequately tested only when put to full
use in the marketplace. As a result, its clientscustomers or their end users may
discover errors or defects in Cadence's software or the systems Cadence designs,
or the products or systems incorporating its design and intellectual property
may not operate as expected. Errors or defects could result in:
- Loss of current clientscustomers and loss of or delay in revenue and loss of
market share;
- Failure to attract new clientscustomers or achieve market acceptance;
- Diversion of development resources to resolving the problem;
- Increased service costs; and
- Liability for damages.
26
ANTI-TAKEOVER DEFENSES IN CADENCE'S CHARTER, BY LAWS,BY-LAWS, AND UNDER DELAWARE LAW
COULD PREVENT AN ACQUISITION OF CADENCE OR LIMIT THE PRICE THAT INVESTORS MIGHT
BE WILLING TO PAY FOR CADENCE COMMON STOCK
Provisions of the Delaware General Corporation Law that apply to Cadence and
its Certificate of Incorporation could make it difficult for another company to
acquire control of Cadence. For example:
- Section 203 of the Delaware General Corporation Law generally prohibits a
Delaware corporation from engaging in any business combination with a
person owning 15% or more of its voting stock, or who is affiliated with
the corporation and owned 15% or more of its voting stock at any time
within three years prior to the proposed business combination, for a
period of three years from the date the person became a 15% owner, unless
specified conditions are met.
- Cadence's Certificate of Incorporation allows Cadence's Board of Directors
to issue, at any time and without stockholder approval, preferred stock
with such terms as it may determine. No shares of preferred stock are
currently outstanding. However, the rights of holders of any Cadence
preferred stock that may be issued in the future may be superior to the
rights of holders of its common stock.
- Cadence has a rights plan, commonly known as a "poison pill," which would
make it difficult for someone to acquire Cadence without the approval of
Cadence's Board of Directors.
30
All or any one of these factors could limit the price that certain investors
would be willing to pay for shares of Cadence common stock and could delay,
prevent or allow Cadence's Board of Directors to resist an acquisition of
Cadence, even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Cadence's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt obligations. While
Cadence is exposed with respect to interest rate fluctuations in many of the
world's leading industrialized countries, Cadence's interest income and expense
is most sensitive to fluctuations in the general level of U.S. interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on
Cadence's cash and cash equivalents, short-term and long-term investments, and
interest paid on its long-term debt obligations as well as costs associated with
foreign currency hedges.
Cadence invests in high quality credit issuers and, by policy, limits the
amount of its credit exposure to any one issuer. As stated in its policy,
Cadence's first priority is to reduce the risk of principal loss. Consequently,
Cadence seeks to preserve its invested funds by limiting default risk, market
risk, and reinvestment risk. Cadence mitigates default risk by investing in only
high quality credit securities that it believes to be low risk and by
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. The portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity.
In October 1998,On September 29, 2000, Cadence entered into atwo syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility, referred to as the 1998 Facility, with a syndicate of banks that allows Cadence
to borrow up to $355 million. As amended in September and November of 1999, the
1998 Facility is divided between awhich
$177.5 million two yearexpired on September 27, 2000 and $177.5 million was terminated
immediately prior to closing of the 2000 Facilities. One of the new 2000
Facilities is a $100 million three-year revolving credit facility, referred to
as the Two Year Facility, andThree-Year Facility. The other new facility is a $177.5$250 million 364-day
revolving credit facility convertible into a one yeartwo-year term loan, referred to as
the 364-Day Facility. The Two YearThree-Year Facility expiresterminates on September 29, 2001.2003.
The 364-Day Facility will either expireterminate on September 27, 2000,28, 2001, at which time the
revolving credit facility may be converted to a one
yeartwo-year term loan with a
maturity date of September 27, 2001,29, 2003, or, at the request of Cadence and with the
agreementconsent of members of the bank group that wish to do so, the termination date of
the revolving facility may be renewedextended for one additional year.364-day period with
respect to the portion of the 364-day Facility that a consenting bank holds. For
both the 2000 Facilities, Cadence has the option to pay interest
27
based on LIBOR
plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a
financial covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and
(ii) prime rate. As a result, Cadence's interest rate expenses associated with
this borrowing will vary with market rates. In addition, commitment fees are
payable on the unutilizedunused portion of the Two YearThree-Year Facility at rates between 0.23%0.25%
and 0.30%0.34% based on a pricing grid tied to a financial covenant and on the unutilizedunused
portion of the 364-Day Facility at a fixed rate of 0.18%0.20%. Cadence may not borrow
under the 364-day facility at any time that any portion of the Three-Year
Facility remains unused. The 1998 Facility contains2000 Facilities contain certain financial and other
covenants.
The table below presents the carrying value and related weighted average
interest rates for Cadence's investment portfolio. All highly liquid investments
with an original maturity of three months or less at the date of purchase are
considered to be cash equivalents; investments with original maturities between
three and 12 months are considered to be short-term investments. Investments
with original maturities greater
31
than 12 months are considered non-current assets. As of July 1,September 30, 2000, substantially all
of Cadence's investments have maturities less than 12 months. The carrying value
approximated fair value at July 1,September 30, 2000.
FAIR AVERAGE
VALUE INTEREST RATE
-------- -------------
(In millions, except for average interest rates)
Investment Securities:
Short-term investments--fixed rate........................investments-fixed rate......................... $ 6.3 5.75%
Long-term investments--fixed rate......................... 1.0 6.90%5.8 6.58%
Cash equivalents-fixed rate............................... 9.3 5.89%
Cash equivalents-variable rate............................ 60.6 5.06%
----- Total short-term and long-term securities............... 7.3 5.91%
Cash equivalents--fixed rate.............................. 15.7 6.25%
Cash equivalents--variable rate........................... 35.1 5.04%
---------
Total interest bearing instruments...................... $58.1 5.48%$75.7 5.28%
===== ====
INTEREST RATE SWAP RISK
Cadence entered into a 4.8% fixed interest rate-swap in connection with its
accounts receivable financing program to modify the interest rate
characteristics of the receivables sold to a financing institution on a
non-recourse basis. At July 1,September 30, 2000, the notional amount payable was
$13$10.8 million, which will be amortized in quarterly installments of
approximately $2.2 million through October 2001. The estimated fair value at
July 1,September 30, 2000 was immaterial.
FOREIGN CURRENCY RISK
Cadence's operations include transactions in foreign currencies and, as a
result, Cadence benefits from a weaker dollar and is harmed by a stronger dollar
relative to major currencies worldwide. Accordingly, the primary effect of
foreign currency transactions on Cadence's results of operations is a reduction
in revenue and expenses from a strengthening U.S. dollar, offset by a smaller reduction in
expenses.dollar.
Cadence enters into foreign currency forward exchange contracts and
purchases foreign currency put options with financial institutions primarily to
protect against currency exchange risks associated with existing assets and
liabilities and probable but not firmly committed transactions, respectively.
Forward contracts are not accounted for as hedges and, therefore, the unrealized
gains and losses are recognized in other income, net in advance of the actual
foreign currency cash flows with the fair value of these forward contracts being
recorded as accrued liabilities.
28
Cadence purchases put options to hedge the currency exchange risks
associated with probable but not firmly committed transactions. Probable but not
firmly committed transactions consist of revenue from Cadence's products and
maintenance contracts in a currency other than the functional currency. These
transactions are made through Cadence's subsidiaries in Ireland and Japan. The
premium costs of the put options are recorded in other current assets while the
gains and losses are deferred and recognized in income in the same period as the
hedged transaction. Gains and losses on accounting hedges realized before the
settlement date of the related hedged transaction are also generally deferred
and recognized in income in the same period as the hedged transaction. Cadence
does not use forward contracts and put options for trading purposes. Cadence's ultimate realized
gain or loss with respect to currency fluctuations will depend on the currency
exchange rates and other factors in effect as the forward contracts and put
options mature.
The table below provides information as of July 1,September 30, 2000 about
Cadence's forward contracts and put options.contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts, at
32
contract exchange rates, and the weighted average contractual foreign currency
exchange rates. These forward contracts mature prior to August 17, 2000. The put options
mature prior to September 30,on or before November 16, 2000.
AVERAGE
NOTIONAL CONTRACT
AMOUNT RATE
-------- --------
Forward Contracts:
(In millions, except for average contract rates)
Japanese yen.............................................. $ 49.9 106.2839.7 105.67
Euro...................................................... 31.8 0.9434.2 0.90
British pound sterling.................................... 19.9 1.5125.6 1.50
Swedish krona............................................. 2.8 9.66
Canadian dollars.......................................... 2.9 1.47
Swedish krona............................................. 2.7 8.632.6 1.48
Hong Kong dollars......................................... 0.6 7.790.9 7.80
Singapore dollars......................................... 0.2 1.721.74
------
$108.0
======
Put Option:
Japanese yen.............................................. $ 9.3 107.00$106.0
======
While Cadence actively manages its foreign currency risks on an ongoing
basis, there can be no assurance that Cadence's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations, cash flows, and financial position.
On a net basis, foreign currency fluctuations did not have a material impact on
Cadence's results of operations and financial position during the three months
ended July 1,September 30, 2000. Due to the short-term nature of the forward contracts,
and
the put option, the fair value at July 1,September 30, 2000 was negligible. The realized gain (loss) on
the forward contracts and the put option as they matured was not material to the consolidated
operations of Cadence.
EQUITY PRICE RISK
As part of its authorized repurchase program, Cadence has sold put warrants
and purchased call options through private placements. The put warrants, if
exercised, would entitle the holder to sell shares of Cadence common stock to
Cadence at a specified price. Similarly, the call options entitle Cadence to buy
shares of Cadence common stock at a specified price.
Cadence repurchases shares of its common stock under stock repurchase
programs for issuance under its Employee Stock Purchase Plan, or ESPP, its 1997
Stock Option Plan, referred to as the 1997 Plan, and its 2000 Stock Option Plan.
As part of these repurchase programs, Cadence has purchased and will purchase
call options or has sold and will sell put warrants. These transactions may
result in sales of a large
29
number of shares and consequent decline in the market
price of Cadence common stock. Cadence's stock repurchase program includes the
following characteristics:
- Call options allow Cadence to buy shares of its common stock on a
specified day at a specified price. If the market price of the stock is
greater than the exercise price of a call option, Cadence will typically
exercise the option and receive shares of its stock. If the market price
of the common stock is less than the exercise price of a call option,
Cadence typically will not exercise the option.
- Call option issuers may accumulate a substantial number of shares of
Cadence common stock in anticipation of Cadence's exercising its call
option and may dispose of these shares if and when Cadence fails to
exercise its call option. This could cause the market price of Cadence
common stock to fall.
- Put warrants allow the holder to sell to Cadence shares of Cadence common
stock on a specified day at a specified price. Cadence has the right to
settle the put warrants with shares of Cadence common stock valued at the
difference between the exercise price and the fair value of the stock at
the date of exercise.
33
- Depending on the exercise price of the put warrants and the market price
of Cadence common stock at the time of exercise, settlement of the put
warrants with Cadence common stock could cause Cadence to issue a
substantial number of shares to the holder of the put warrant. The holder
may sell these shares in the open market, which could cause the price of
Cadence common stock to fall.
- Put warrant holders may accumulate a substantial number of shares of
Cadence common stock in anticipation of exercising their put warrants and
may dispose of these shares if and when they exercise their put warrants
and Cadence issues shares in settlement of their put warrants. This could
also cause the market price of Cadence common stock to fall.
The table below provides information at July 1,September 30, 2000 about Cadence's
outstanding put warrants and call options. The table presents the contract
amounts and the weighted average strike prices. The put warrants and call
options expire on various dates through FebruaryMay 2001 and Cadence has the contractual
ability to settle the options prior to their maturity.
2000 2001 ESTIMATED
MATURITY MATURITY FAIR VALUE
-------- -------- ----------
(Shares and contract amounts in millions)
Put Warrants:
Shares.................................................... 6.1 0.23.1 1.9
Weighted average strike price............................. $20.72 $19.77$21.16 $21.06
Contract amount........................................... $127.3 $ 3.7 $16.765.6 $ 39.2 $ 4.4
Call Options:
Shares.................................................... 4.5 0.12.2 1.4
Weighted average strike price............................. $20.94 $20.02$21.34 $21.31
Contract amount........................................... $ 94.248.0 $ 2.8 $12.129.8 $20.5
3034
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time Cadence is involved in various disputes and litigation
matters that arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.
Cadence filed a complaint in the U.S. District Court for the Northern
District of California on December 6, 1995 against Avant! Corporation and
certain of its employees for misappropriation of trade secrets, copyright
infringement, conspiracy, and other illegal acts.
On January 16, 1996, Avant! filed various counterclaims against Cadence and
Joseph B. Costello, Cadence's former President and Chief Executive Officer, and
with leave of the court, on January 29, 1998, filed a second amended
counterclaim. The second amended counterclaim alleges, INTER ALIA, that Cadence
and Mr. Costello had cooperated with the Santa Clara County, California,
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitiveanti-competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Cadence insiders engaged in illegal
insider trading with respect to Avant!'s stock. Cadence and Mr. Costello believe
that they have meritorious defenses to Avant!'s claims, and each intends to
defend such action vigorously. By an order dated July 13, 1996, the court
bifurcated Avant!'s counterclaim from Cadence's complaint and stayed the
counterclaim pending resolution of Cadence's complaint. The counterclaim remains
stayed.
In an order issued on December 19, 1997, as modified on January 26, 1998,
the District Court entered a preliminary injunction barring Avant! from any
further infringement of Cadence's copyrights in Design 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 December 7, 1998,
the District Court issued a further preliminary injunction, which enjoined
Avant! from selling its Aquarius product line. Cadence posted a $10 million bond
in connection with the issuance of the preliminary injunction. On July 30, 1999,
the U.S. Court of Appeals for the Ninth Circuit affirmed the preliminary
injunction.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that court and ordered Avant! to post a $5 million bond in
light of related criminal proceedings pending against Avant! and several of its
executives.
On September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, and granted in part, and denied in part, each party's
motion regarding the scope of a June 6, 1994 Release Agreement between the
parties. The Courtcourt held that Cadence's copyright infringement claim against
Avant! is not barred by the release and that Cadence may proceed on that claim.
The Courtcourt also held that Cadence's trade secret claim based on Avant!'s use of
Cadence's Design Framework II source code is barred by the release. The Ninth
Circuit has agreed to hear both parties' appeal from the District Court's order.
The trial date has been vacated pending a decision on the appeal.appeal and the outcome
of the criminal case, for which the trial is scheduled to begin in
February 2001.
On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the U.S. District Court for the
Northern District of California, entitled Spett v. Cadence Design Systems, et
al., civil action no. C 99-2082. The action was brought on behalf of a class of
stockholders who purchased Cadence common stock between November 4, 1998 and
April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The lawsuit arises out of Cadence's
announcement of its first quarter 1999 financial results. On September 18, 2000
the District Court granted Cadence's Motion to Dismiss Plaintiffs' Claims with
leave to amend. To date, no amended complaint has been filed. Should an amended
complaint be filed, Cadence and the individual defendants intend to continue
their vigorous defense of the allegations.
35
In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit
against Quickturn Design Systems, Inc. in the U.S. District Court for the
Northern District of California. In this lawsuit, entitled Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762
31
WHA,
Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by
Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the
District Court to declare the Aptix patent invalid in view of the prior art and
unenforceable based on inequitable conduct during the prosecution of the patent.
In June 2000 the District Court entered judgment in favor of Quickturn,
dismissing the complaint and declaring the patent unenforceable. The plaintiffs
have filed a noticeOn
September 8, 2000 the Court ordered Aptix to pay $4.2 million to Quickturn as
reimbursement to Quickturn of appeal fromthe attorneys' fees and costs it incurred in the
litigation. Aptix has appealed the District's Court's judgment and, in the
meantime, has agreed to post a $2 million bond to secure the judgment.
On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District
Court for the District of Delaware, alleging that Quickturn's Mercury-TM-
hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832
allegedly assigned to Mentor. At Quickturn's request, Cadence was added as a
party defendant. Mentor has since asserted that Quickturn's Mercury
Plus(Plus-TM-)Plus(plus)-TM- emulation systems also infringe U.S. Patent Nos. 5,777,489 and
5,790,832. The complaint seeks a permanent injunction and unspecified damages.
Cadence intends to vigorously defend itself against these claims. On
December 14, 1999, this action was transferred to the U.S. District Court for
the Northern District of California, and renumbered Civil Action No. C 99-5464
SI.
On February 25, 2000, Cadence and several of its officers were named as
defendants in a lawsuit filed in the U.S. District Court for the Northern
District of California, entitled Maxick v. Cadence Design Systems, Inc., File
No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of
OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities
Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises
out of Cadence's acquisition of OrCAD, which was completed in August 1999.
Cadence's Motion to Dismiss plaintiffs' claims was denied.
On March 24, 2000, Mentor and Meta and several founders of Meta filed suit
against Quickturn and Cadence and a former Quickturn employee in the U.S.
District Court for the Northern District of California, Civil Action No. C
00-01030 SI. The suit alleges patent infringement of a U.S. Patent allegedly
assigned to Mentor, misappropriation of trade secrets and breach of confidence,
and seeks unspecified damages, injunctive relief and the assignment to Mentor of
a patent previously issued to Quickturn. Cadence intends to vigorously defend
itself against these claims, and has filed a counterclaim for declaratory
judgment of invalidity of several patents allegedly assigned to Mentor.
Following a motion by Cadence, the former Quickturn employee was dismissed as a
party to the action. Discovery in the action has subsequently been consolidated
with discovery in Civil Action No. C 99-5464, the Mentor v. Quickturn suit
transferred from Delaware.
On January 7, 1999, in the suit captioned Mentor Graphics Corporation, et.
al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action
No. 16843-NC ("Mentor v. Lobo"), an amended complaint was filed and served by
Mentor asserting claims against Cadence, Quickturn Design Systems, Inc. and its
Board of Directors for declaratory and injunctive relief for various alleged
breaches of fiduciary duty purportedly owned by Quickturn and its Board of
Directors to Quickturn's shareholders in connection with the merger between
Quickturn and Cadence. Mentor alleged that Cadence aided and abetted Quickturn
and its Board of Directors in those purported breaches. Mentor has not
prosecuted the matter since January 1999. In May 2000, Mentor advised the
Delaware Chancery Court of its objection to the settlement of a companion action
brought on behalf of certain Quickturn shareholders. Mentor further advised the
court that it would seek an award of attorneys' fees related to its prosecution
of the Mentor v. Lobo action. At the request of the court, on July 28, 2000,
Mentor filed its brief in support of its standing to seek such an award.
Cadence, intends to vigorously opposeQuickturn and the individual defendants have opposed Mentor's request.
The court is awaiting Mentor's Reply Brief and will then take the matter under
submission.
36
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
Cadence's business, operating results or financial condition. However, were an
unfavorable ruling to occur in any specific period, there exists the possibility
of a material adverse impact on the result of operations of that period.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 24, 2000, the stockholders
of Cadence approved the following matters:
1. A proposal to elect eight (8) directors of Cadence 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.............................................. 215,429,157 994,735
H. Raymond Bingham.......................................... 210,083,179 6,340,713
Dr. Leonard Y. W. Liu....................................... 215,452,707 971,185
Donald L. Lucas............................................. 215,261,253 1,162,639
Dr. Alberto Sangiovanni-Vincentelli......................... 215,442,956 980,936
George M. Scalise........................................... 215,436,453 987,439
Dr. John B. Shoven.......................................... 215,441,858 982,034
Roger S. Siboni............................................. 215,436,538 987,354
2. A proposal for the ratification of the selection of Arthur Andersen LLP as
independent public accountants for the fiscal year ending December 30, 2000
was approved by a vote of 216,074,304 for, 204,609 opposed, and 144,979
withheld.None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- --------------------------------------------------------------------------------- -------------
2.01 Amended and Restated Agreement of Limited Partnership of
Tality, LP dated October 4, 2000, between Tality Corporation
and Cadence Holdings, Inc.
2.02 Amended and Restated Master Separation Agreement dated as of
July 14,October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality LP.
2.03 General Assignment and Assumption Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP.
2.04 Master Intellectual Property Ownership and License Agreement
dated as of October 4, 2000 by and among Tality Corporation,
the Registrant, Cadence Holdings, Inc. and Tality, LP.
2.05 Employee Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP.
2.06 Master Corporate Services Agreement dated as of October 4,
2000 by and among Tality Corporation, the Registrant,
Cadence Holdings, Inc. and Tality, LP.
2.07 Real Estate Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP.
2.08 Master Confidentiality Agreement dated as of October 4, 2000
by and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP.
2.09 Indemnification and Insurance Matters Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP.
2.10 Asset Purchase Agreement dated as of October 4, 2000 by and
among the registrant,Registrant, Cadence Holders,Design System (Canada) Limited
and Tality Canada Corporation.
2.11 Asset Purchase Agreement dated as of October 3, 2000 by and
among Symbionics Limited, the Registrant and Cadence Design
Systems Limited.
2.12 Fixed Term License Agreement dated as of October 4, 2000
between the Registrant and Tality, LP.
2.13 Joint Technology Development and Support Agreement dated as
of October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, Corporation.LP.
37
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
2.14 Joint Sales Agreement dated as of October 4, 2000 by and
among Tality Corporation, the Registrant, Cadence Holdings,
Inc. and Tality, LP.
10.01 Credit Agreement, dated as of September 29, 2000, by and
among the Registrant and ABN AMRO Bank N.V., Bank One, N.A.,
KeyBank National Association and UBS AG, Stamford Branch.
10.02 364 Day Credit Agreement, dated as of September 29, 2000, by
and among the Registrant and ABN AMRO Bank N.V., Bank One,
N.A., KeyBank National Association and UBS AG, Stamford
Branch.
10.03 The Registrant's 1997 Stock Option Plan, as amended on
November 1, 2000.
10.04 The Registrant's 2000 Non-Statutory Equity Incentive Plan,
as amended (incorporated by reference to the Registrant's
Form of IndemnityS-8 Registration Statement filed on November 14, 2000).
10.05 Employment Agreement between Cadence Design Systems,
Inc.Tality Corporation and its directors and executive officers.Robert
P. Wiederhold dated as of July 14, 2000.
10.06 Tality Corporation 2000 Equity Incentive Plan, as amended.
10.07 Tality Corporation Directors Stock Option Plan
27.01 Financial data schedule for the period ended July 1,September 30,
2000.
(b) Reports on Form 8-K:
Cadence filed a Current Report on Form 8-K dated July 17, 2000 announcingattaching
Cadence's press release reporting the planned separation and initial public offering
of its design
services group.
33Tality.
Cadence filed a Current Report on Form 8-K dated October 9, 2000 attaching
Cadence's press release announcing the delay of the initial public offering
of Tality.
38
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 15,(Registrant)
Date: November 14, 2000 By: /s/ H. RAYMOND BINGHAM
------------- --------------------------------------------------------------------------------
H. Raymond Bingham
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND
DIRECTOR
DATE: August 15,Date: November 14, 2000 By: /s/ WILLIAM PORTER
------------- --------------------------------------------------------------------------------
William Porter
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
3439