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 April 3, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-10606
______________________
CADENCE DESIGN SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
______________________
Delaware 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 Seely Avenue, Building 5, San Jose, California 95134
(Address of Principal Executive Offices) (Zip Code)
(408) 943-1234
Registrant's Telephone Number, including Area Code
______________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At May 7, 1999, there were 218,433,848 shares of the registrant's common stock,
$0.01 par value, outstanding.
CADENCE DESIGN SYSTEMS, INC.
INDEX
Page
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
April 3, 1999 and January 2, 1999............... 3
Condensed Consolidated Statements of Operations:
Three Months Ended April 3, 1999 and April 4,
1998............................................ 4
Condensed Consolidated Statements of Cash Flows:
Three Months Ended April 3, 1999 and April 4,
1998............................................ 5
Notes to Condensed Consolidated Financial
Statements...................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 10
Item 3. Quantitative and Qualitative Disclosures About 27
Market Risk.....................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 31
Item 2. Changes in Securities and Use of Proceeds......... 32
Item 3. Defaults Upon Senior Securities................... 32
Item 4. Submission of Matters to a Vote of Security 32
Holders...........................................
Item 5. Other Information................................. 32
Item 6. Exhibits and Reports on Form 8-K.................. 32
Signatures .................................................. 34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
April 3, January 2,
1999 1999
--------------- ---------------
(Unaudited)
Current Assets:
Cash and cash equivalents..................... $ 203,777 $ 183,066
Short-term investments........................ 13,131 26,686
Receivables, net.............................. 252,113 277,599
Prepaid expenses and other.................... 98,902 92,359
---------- ----------
Total current assets........................ 567,923 579,710
Property, plant, and equipment, net.............. 278,453 262,675
Software development costs, net.................. 12,039 13,045
Acquired intangibles, net........................ 289,796 282,489
Installment contract receivables................. 105,297 100,529
Other assets..................................... 164,842 167,510
---------- ----------
$1,418,350 $1,405,958
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital
leases....................................... $ 1,230 $ 1,273
Accounts payable and accrued liabilities...... 158,794 211,220
Income taxes payable.......................... 7,359 19,133
Deferred revenue.............................. 102,677 96,286
---------- ----------
Total current liabilities................... 270,060 327,912
---------- ----------
Long-term Liabilities:
Long-term debt and capital leases............. 86,083 136,380
Deferred income taxes......................... 69,097 58,927
Minority interest liability................... 240 377
Other long-term liabilities................... 24,306 24,883
---------- ----------
Total long-term liabilities................. 179,726 220,567
---------- ----------
Stockholders' Equity:
Preferred stock............................... - - - - - - - -
Common stock and capital in excess of par
value........................................ 764,848 725,325
Treasury stock at cost (6,367 and 10,147
shares, respectively)........................ (200,685) (219,417)
Retained earnings............................. 412,694 360,916
Accumulated other comprehensive loss.......... (8,293) (9,345)
---------- ----------
Total stockholders' equity.................. 968,564 857,479
---------- ----------
$1,418,350 $1,405,958
========== ==========
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
----------------------------
April 3, April 4,
1999 1998
------------- -------------
Revenue:
Product......................................... $166,095 $154,049
Services........................................ 70,560 52,302
Maintenance..................................... 68,579 63,872
-------- --------
Total revenue................................. 305,234 270,223
-------- --------
Costs and expenses:
Cost of product................................. 12,971 11,844
Cost of services................................ 46,492 39,601
Cost of maintenance............................. 10,700 10,343
Amortization of acquired intangibles............ 12,457 546
Marketing and sales............................. 70,168 69,245
Research and development........................ 45,201 41,707
General and administrative...................... 16,484 16,521
Unusual items................................... 14,192 60,857
-------- --------
Total costs and expenses...................... 228,665 250,664
-------- --------
Income from operations...................... 76,569 19,559
Other income (expense), net...................... (605) 2,619
-------- --------
Income before provision for income taxes.... 75,964 22,178
Provision for income taxes....................... 24,186 22,537
-------- --------
Net income (loss)........................... $ 51,778 $ (359)
======== ========
Basic net income (loss) per share................ $0.24 $ - - - -
========
Diluted net income (loss) per share.............. $0.22 $ - - - -
========
Weighted average common shares outstanding....... 217,092 210,014
======== ========
Weighted average common and potential common
shares outstanding-assuming dilution............ 233,791 210,014
======== ========
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)
Three Months Ended
----------------------------------
April 3, April 4,
1999 1998
---------------- ----------------
Cash and Cash Equivalents at Beginning of Period $183,066 $ 207,024
-------- ---------
Cash Flows from Operating Activities:
Net income (loss)............................................................... 51,778 (359)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................. 35,697 18,854
Deferred income taxes......................................................... 19,185 3,961
Write-off of software development costs, net.................................. 640 - - - -
Write-off of prepaid expenses and other....................................... 642 - - - -
Write-off of equipment, acquired intangibles, and other assets................ 2,684 920
Write-off of acquired in-process technology................................... 8,900 56,900
Change in other long-term liabilities and minority interest expense........... (769) 4,817
Equity income from investments................................................ (75) (17)
Provisions for doubtful accounts.............................................. 2,019 - - - -
Non-cash restructuring charges................................................ 1,564 452
Changes in operating assets and liabilities, net of effect of acquired
businesses:
Receivables................................................................. (37,980) 7,714
Prepaid expenses and other.................................................. (7,108) 23,390
Installment contract receivables............................................ 9,538 (4,126)
Accounts payable and accrued liabilities.................................... (42,336) (44,084)
Income taxes payable........................................................ 3,257 23,649
Deferred revenue............................................................ 4,822 10,543
-------- ---------
Net cash provided by operating activities................................. 52,458 102,614
-------- ---------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity.......................... 13,596 24,180
Purchases of short-term investments--held-to-maturity........................... (41) (23,258)
Maturities of short-term investments--available-for-sale........................ - - - - 189,150
Purchases of short-term investments--available-for-sale......................... - - - - (206,150)
Purchases of property, plant, and equipment..................................... (32,021) (30,890)
Capitalization of software development costs.................................... (6,394) (5,453)
Increase in acquired intangibles and other assets............................... (9,934) (12,804)
Investment in venture capital partnership....................................... (3,289) (2,220)
Net cash paid for acquisitions.................................................. (1,632) (51,313)
-------- ---------
Net cash used for investing activities.................................... (39,715) (118,758)
-------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.................................................... 30,000 - - - -
Principal payments on long-term debt and capital leases......................... (80,306) (879)
Sale of common stock............................................................ 29,843 23,559
Purchases of treasury stock..................................................... (20,784) (33,010)
Proceeds from transfer of financial assets in exchange for cash................. 48,244 - - - -
-------- ---------
Net cash provided by (used for) financing activities...................... 6,997 (10,330)
-------- ---------
Effect of exchange rate changes on cash.......................................... 971 (1,335)
-------- ---------
Increase (decrease) in Cash and Cash Equivalents................................. 20,711 (27,809)
-------- ---------
Cash and Cash Equivalents at End of Period....................................... $203,777 $ 179,215
======== =========
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 2, 1999.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
January 2, 1999 and for the three months ended April 4, 1998, have been
reclassified to conform with the 1999 presentation.
Acquisitions
In January 1999, Cadence acquired all of the outstanding stock of Design
Acceleration, Inc. (DAI) for approximately 0.6 million shares of Cadence's
common stock and $2.9 million of cash. The total purchase price was $25.7
million, and the acquisition was accounted for as a purchase. In connection
with the acquisition, net intangibles of $24.1 million were acquired. The
results of operations of DAI and the estimated fair value of the assets acquired
and liabilities assumed are included in Cadence's condensed financial statements
from the date of acquisition. Intangibles arising from the acquisition are
being amortized on a straight-line basis over five years.
Management estimates that $8.9 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense in the condensed consolidated statements of
operations upon consummation of the acquisition. The value assigned to acquired
in-process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the acquired in-process technology
into commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the purchased in-process technology.
If these projects are not successfully developed, future revenue, and
profitability of Cadence may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.
6
Comparative pro forma financial information has not been presented because the
results of operations of DAI were not material to Cadence's condensed
consolidated financial statements.
Unusual Items and Restructuring
A summary of unusual items and restructuring charges follows:
Three Months Ended
------------------------
April 3, April 4,
1999 1998
----------- -----------
(In thousands)
Write-off of acquired in-process technology...... $ 8,900 $56,900
Asset impairment................................. 3,107 - - - -
Restructuring charges............................ 2,185 3,957
------- -------
Total unusual items........................... $14,192 $60,857
======= =======
Acquisitions and In-Process Technology
In connection with the acquisition of DAI, Cadence immediately charged to
expense $8.9 million representing in-process technology that had not yet reached
technological feasibility and had no alternative future use. See
"Acquisitions."
Asset Impairment and Restructuring
In the first quarter of 1999, Cadence incurred charges totaling $3.1 million
in connection with the abandonment of certain third-party software licenses that
will no longer be used by its design services business and capitalized software
development costs associated with Cadence products that will no longer be sold.
The impairment loss recorded was the amount by which the carrying amount of the
intangible assets exceeded fair market value.
In addition, 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, and
Cadence anticipates that the actions taken in the first quarter of 1999 will
save an estimated additional $0.6 million in fiscal 1999. All termination
notices and benefits were communicated to the affected employees prior to
quarter-end and all severance benefits are expected to be paid in 1999.
The following table summarizes the Company's restructuring activity during the
first quarter of 1999:
For the Three Months Ended April 3, 1999
----------------------------------------------------------------------------------------
Severance
and Excess Other
Benefits Facilities Restructuring Assets Total
---------------- ---------------- ---------------- ---------------- ----------------
(In thousands)
Balance, January 2, 1999.......... $13,114 $14,496 $2,213 $11,304 $41,127
1999 restructuring charges....... 2,185 - - - - - - - - - - - - 2,185
Non-cash charges................. (216) (121) (554) (673) (1,564)
Cash charges..................... (6,111) (2,044) (708) (448) (9,311)
------- ------- ------ ------- -------
Balance, April 3, 1999............ $ 8,972 $12,331 $ 951 $10,183 $32,437
======= ======= ====== ======= =======
7
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 and reflected instead in equity. A summary of comprehensive
income (loss) follows:
Three Months Ended
-------------------------
April 3, April 4,
1999 1998
----------- ------------
(In thousands)
Net income (loss)................................ $51,778 $ (359)
Translation income (loss)........................ 1,052 (1,206)
------- -------
Comprehensive income (loss)...................... $52,830 $(1,565)
======= =======
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss)
by the weighted average shares of common stock outstanding during the period.
Diluted net income (loss) per share is calculated by dividing net income (loss)
by the sum of the weighted average shares of common stock outstanding and the
incremental number of potential common shares issuable upon the exercise of
outstanding common stock options, warrants, contingent isuances of common stock,
and put warrants computed using the treasury stock method. For periods in which
Cadence had losses, potential common shares from common stock options, warrants,
contingent issuances of common stock, and put warrants are excluded from the
computation of diluted net loss per share as their effect is antidilutive.
The following is a reconciliation of the weighted average common shares used
to calculate basic net income (loss) per share to the weighted average common
and potential common shares used to calculate diluted net income (loss) per
share:
Three Months Ended
--------------------
April 3, April 4,
1999 1998
--------- ---------
(In thousands)
Weighted average common shares used to calculate
basic net income (loss) per share............... 217,092 210,014
Options................................... 16,123 - - - -
Puts...................................... 401 - - - -
Warrants and other contingent common 175 - - - -
shares................................... ------- -------
Weighted average common and potential common
shares used to calculate diluted net income 233,791 210,014
(loss) per share................................ ======= =======
If Cadence recorded net income in the first quarter of 1998, dilutive
weighted average outstanding options would have been 24.7 million shares and
weighted average outstanding warrants and other dilutive contingent common
shares would have been 0.2 million shares.
Contingencies
Refer to Part II, Item 1 for a description of legal proceedings.
8
Put Warrants and Call Options
Cadence has authorized two seasoned systematic stock repurchase programs under
which it repurchases common stock to satisfy estimated requirements for shares
to be issued under its Employee Stock Purchase Plan (ESPP) and the 1997
Nonstatutory Stock Option Plan (the 1997 Plan). Such repurchases are intended
to cover Cadence's expected reissuances under the ESPP and the 1997 Plan for the
next 12 months and 24 months, respectively.
As part of its authorized repurchase programs, Cadence has sold put warrants
through private placements. At April 3, 1999, there were 2.9 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 $20.88 to $35.14 per share. Additionally, during this same period, Cadence
purchased call options that entitle Cadence to buy shares of common stock at a
specified price to satisfy anticipated stock repurchase requirements under
Cadence's systematic stock repurchase programs. At April 3, 1999, Cadence had
2.1 million call options outstanding at prices ranging from $21.13 to $35.39 per
share. The put warrants and call options outstanding at April 3, 1999 are
exercisable on various dates through November 1999, and Cadence has the
contractual ability to settle the options prior to their maturity. At April 3,
1999, the fair value of the call options was approximately $8.8 million and the
fair value of the put warrants was approximately $17.3 million. The fair value
of the put warrants and call options was estimated by Cadence's investment
advisors.
If exercised, Cadence has the right to settle the put warrants with Cadence
common stock equal to the difference between the exercise price and the fair
value at the date of exercise. Settlement of the put warrants with stock could
cause Cadence to issue a substantial number of shares, depending on the exercise
price of the put warrants and the per share fair value of Cadence's common stock
at the time of exercise. In addition, settlement of put warrants in stock could
lead to the disposition by put warrant holders of shares of Cadence's common
stock that such holders may have accumulated in anticipation of the exercise of
the put warrants or call options, which may adversely affect the price of
Cadence's common stock. At April 3, 1999, Cadence had the ability to settle
these put warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.
Segment Reporting
In 1998, Cadence adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Under SFAS No. 131, operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker when deciding how to
allocate resources and when assessing performance. Cadence currently has three
operating segments: Products, Services, and Maintenance. Cadence's chief
operating decision making group is the Executive Staff, which is comprised of
the Chief Executive Officer and Executive Vice Presidents.
Cadence's business activities are organized on the basis of differences in its
related products and services. The Products segment designs and sells a variety
of electronic design automation software tools that are licensed to customers.
The Services segment offers design and methodology services either to assist
companies in developing electronic designs or to assume responsibility for the
design effort when customers wish to outsource this work. The Maintenance
segment is primarily a technical support organization, and maintenance
agreements are offered to customers either as part of our product license
agreements or separately. Cadence's organizational structure reflects this
segmentation, and segments have not been aggregated for purposes of this
disclosure.
Segment income from operations is defined as gross margin under generally
accepted accounting principles and excludes operating expenses, unusual items,
other income, net, and income taxes.
9
Profitability information about Cadence's segments is available only to the
extent of gross margin by segment, and operating expenses and other income and
expense items are managed on a functional basis. There are no differences
between the accounting policies used to measure profit and loss for segments and
those used on a consolidated basis. Revenue is defined as revenue from external
customers with no intersegment revenue or expenses.
Cadence's management does not identify or allocate its assets, including
capital expenditures, by operating segment. Accordingly, assets are not being
reported by segment because the information is not available by segment and is
not reviewed by Cadence's Executive Staff to make decisions about resources to
be allocated among the segments and when assessing their performance.
Depreciation and amortization is allocated among the segments in order to
determine each segments' gross margin.
The following tables present information about reported segments for the three
months ended April 3, 1999 and April 4, 1998:
For the Three Months Ended April 3, 1999
---------------------------------------------------------------------
Product Services Maintenance Other Total
------------ ----------- ----------- -------------- -------------
(In thousands)
Revenue............. $166,095 $70,560 $68,579 $ - - - - $305,234
Cost of revenue..... 12,971 46,492 10,700 - - - - 70,163
Amortization of
acquired
intangibles........ 11,062 1,395 - - - - - - - - 12,457
-------- ------- ------- --------- --------
Gross margin...... 142,062 22,673 57,879 - - - - 222,614
Marketing and sales. - - - - - - - - - - - - (70,168) (70,168)
Research and - - - - - - - - - - - - (45,201) (45,201)
development........
General and - - - - - - - - - - - - (16,484) (16,484)
administrative.....
Unusual items....... - - - - - - - - - - - - (14,192) (14,192)
Other expense, net.. - - - - - - - - - - - - (605) (605)
-------- ------- ------- --------- --------
Income (loss)
before provision
for income taxes... $142,062 $22,673 $57,879 $(146,650) $ 75,964
======== ======= ======= ========= ========
For the Three Months Ended April 4, 1998
---------------------------------------------------------------------
Revenue............. $154,049 $52,302 $63,872 $ - - - - $270,223
Cost of revenue..... 11,844 39,601 10,343 - - - - 61,788
Amortization of
acquired
intangibles........ 493 53 - - - - - - - - 546
-------- ------- ------- --------- --------
Gross margin...... 141,712 12,648 53,529 - - - - 207,889
Marketing and sales. - - - - - - - - - - - - (69,245) (69,245)
Research and
development........ - - - - - - - - - - - - (41,707) (41,707)
General and
administrative..... - - - - - - - - - - - - (16,521) (16,521)
Unusual items....... - - - - - - - - - - - - (60,857) (60,857)
Other income, net... - - - - - - - - - - - - 2,619 2,619
-------- ------- ------- --------- --------
Income (loss)
before provision
for income taxes... $141,712 $12,648 $53,529 $(185,711) $ 22,178
======== ======= ======= ========= ========
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 herein.
Except for the historical information contained herein, the following discussion
contains forward-looking statements based on current expectations that involve
certain risks and uncertainties. Cadence's actual results could differ
materially from those
10
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 "Liquidity and Capital Resources," "Year 2000
Update," "Factors That May Affect Future Results," and "Disclosures about Market
Risk."
Overview
Cadence provides software technology and comprehensive design and
methodology services and technology for the product development requirements of
the world's leading electronics companies. Cadence licenses its leading-edge
electronic design automation (EDA) software technology and provides a variety of
professional services to companies throughout the world ranging from methodology
services to help optimize performance of the customer's product to design
services to create the actual design of the electronic system for the customer's
product. Cadence is a supplier of "design realization" solutions, which are
used by companies to design and develop complex chips and electronic systems,
including semiconductors, computer systems and peripherals, telecommunications
and networking equipment, mobile and wireless devices, automotive electronics,
consumer products, and other advanced electronics.
In January 1999, Cadence acquired all of the outstanding stock of
Design Acceleration, Inc. (DAI) for approximately $0.6 million shares of
Cadence's common stock and $2.9 million of cash. The total purchase price was
$25.7 million, and the acquisition was accounted for as a purchase. DAI is a
supplier of design verification technology used in system-on-a-chip design.
In December 1998, Cadence entered into a merger agreement with
Quickturn Design Systems, Inc. (Quickturn). Quickturn designs, manufactures,
sells and supports products that verify the design of computer chips and
electronic systems. Cadence will acquire Quickturn in a tax-free, stock-for-
stock transaction. Each share of Quickturn common stock will be converted into
$15 worth of Cadence common stock. Cadence common stock will be valued at the
average of its closing prices over a five day period that ends before the second
business day before the merger closes. There were 18,416,484 shares of
Quickturn common stock outstanding as of April 30, 1999. In addition, Cadence
will assume outstanding stock options and warrants of Quickturn. The merger is
expected to be accounted for as a pooling of interests. The consummation of the
merger is subject to various conditions, including the approval of Quickturn's
stockholders. A meeting of Quickturn's stockholders to vote on approval of the
merger is scheduled for May 21, 1999. If the approval of Quickturn's
stockholders is obtained, Cadence anticipates that the closing will occur
shortly thereafter. There can be no assurance that stockholder approval will be
obtained, or the other conditions will be satisfied, and that the merger will be
consummated.
Results of Operations
Revenue
Three Months Ended
----------------------
April 3, April 4,
1999 1998 % Change
---------- ---------- ----------
(In millions)
Product............................... $166.1 $154.0 8%
Services.............................. 70.6 52.3 35%
Maintenance........................... 68.5 63.9 7%
------ ------
Total revenue....................... $305.2 $270.2 13%
====== ======
Sources of Revenue as a Percent of Total Revenue
Product............................... 54% 57%
11
Services.............................. 23% 19%
Maintenance........................... 23% 24%
In the first quarter of 1999, product revenue increased $12.1 million or
8%, as compared to the first quarter of 1998. The increase in product revenue
for the first quarter of 1999 was primarily attributable to increased demand for
synthesis and mixed signal products.
Services revenue increased $18.3 million or 35% in the first quarter of
1999, as compared to the first quarter of 1998, primarily due to increased
demand for Cadence's design and methodology services offerings.
Maintenance revenue increased $4.6 million or 7% in the first quarter of
1999, as compared to the first quarter of 1998, primarily due to continued
growth of the installed customer base and the renewal of maintenance and support
contracts.
Revenue by Geography
Three Months Ended
----------------------
April 3, April 4,
1999 1998 % Change
---------- ---------- -----------
(In millions)
Domestic.............................. $113.3 $148.5 (24%)
International......................... 191.9 121.7 58%
------ ------
Total revenue....................... $305.2 $270.2 13%
====== ======
Revenue by Geography as a Percent of Total Revenue
Domestic.............................. 37% 55%
International......................... 63% 45%
Total revenue from international sources increased in the first quarter
of 1999, as compared to the first quarter of 1998, primarily due to increased
demand for products in Europe and Japan, and services in Europe, offset slightly
by a decline in products and services in the rest of Asia.
Differences in the rate of growth of domestic and international revenue,
over the periods presented and as compared geographically, are primarily due to
fluctuations in demand and resulting sales volume of place-and-route, physical
design, and synthesis products as well as consulting and design services
offerings. Revenue growth is expected to be slower for the remainder of 1999.
Foreign currency exchange rates positively affected reported revenue by
$4.1 million during the first quarter of 1999, primarily due to the
strengthening of the Japanese yen in relation to the U.S. dollar. Foreign
currency exchange rates negatively affected reported revenue by $3.7 million
during the first quarter of 1998, primarily due to the weakening of the Japanese
yen in relation to the U.S. dollar. Additional information about revenues by
geographic area can be found under "Segment Reporting" in the Notes to Condensed
Consolidated Financial Statements.
12
Cost of Revenue
Three Months Ended
--------------------
April 3, April 4,
1999 1998 % Change
--------- --------- ----------
(In millions)
Product............................... $13.0 $11.8 10%
Services.............................. $46.5 $39.6 17%
Maintenance........................... $10.7 $10.3 3%
Cost of Revenue as a Percent of Related Revenue
Product............................... 8% 8%
Services.............................. 66% 76%
Maintenance........................... 16% 16%
Cost of product revenue includes costs of production personnel,
packaging and documentation, and amortization of capitalized software
development costs. Cost of product revenue increased $1.2 million for the first
quarter of 1999, primarily due to higher amortization of software development
costs, as compared to the first quarter of 1998.
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 $6.9 million in the
first quarter of 1999, as compared to the first quarter of 1998, primarily due
to Cadence's continued investment in developing new services offerings and the
addition of services professionals, primarily through acquisitions completed in
1998.
Services gross margin increased for the first quarter of 1999, as
compared to 1998, primarily due to increased utilization of services capacity
and Cadence's efforts to manage expenses to improve profitability. Services
gross margin has been, and may continue to be, adversely affected by Cadence's
inability to fully utilize its services resources. In addition, services gross
margin may continue to be adversely affected by Cadence's inability to achieve
operating efficiencies when implementing a growing number of services offerings.
Cost of maintenance revenue includes the cost of customer services, such
as hot-line and on-site support, and production personnel, packaging, and
documentation of maintenance updates. Cost of maintenance revenue in absolute
dollars and as a percent of related revenue remained relatively flat in the
first quarter of 1999, as compared to the first quarter of 1998.
Amortization of Acquired Intangibles
Three Months Ended
--------------------
April 3, April 4,
1999 1998
--------- ---------
(In millions)
Amortization of acquired intangibles........... $12.5 $ 0.5
Amortization of Acquired Intangibles as a Percent of Total Revenue
Amortization of acquired intangibles........... 4% 0%
Amortization of acquired intangibles increased $12 million for the first
quarter of 1999, as compared with the first quarter of 1998, as a result of the
acquisitions of Ambit Design Systems, Inc. (Ambit), Symbionics Group Limited,
Bell Labs' Integrated Circuit Design Automation group of Lucent
13
Technologies, Inc. (BLDA), and Excellent Design, Inc. in 1998, which were
accounted for using the purchase method of accounting.
Operating Expenses
Three Months Ended
--------------------
April 3, April 4,
1999 1998 % Change
--------- --------- ----------
(In millions)
Marketing and sales................... $70.2 $69.2 1%
Research and development.............. $45.2 $41.7 8%
General and administrative............ $16.5 $16.5 0%
Expenses as a Percent of Total Revenue
Marketing and sales................... 23% 26%
Research and development.............. 15% 15%
General and administrative............ 5% 6%
Marketing and sales expenses increased $1 million in the first quarter
of 1999, as compared to the first quarter of 1998, primarily attributable to an
increase in sales support costs in Japan, partially offset by a decrease in
sales commissions. Foreign currency exchange rates negatively affected reported
marketing and sales expenses by $0.5 million during the first quarter of 1999,
primarily due to the strengthening of the Japanese yen in relation to the U.S.
dollar. During the first quarter of 1998, foreign currency exchange rates
positively affected marketing and sales expenses by $1.7 million , primarily due
to the weakening of the Japanese yen in relation to the U.S. dollar.
Cadence's investment in research and development, prior to the reduction
for capitalization of software development costs, was $51.6 million and $47.2
million for the first quarters of 1999 and 1998, respectively, representing 17%
of total revenue for each quarter. The increase in net research and development
expenses for the first quarter of 1999 was primarily attributable to employee
and other costs related to the acquisition and operations of Ambit and BLDA.
Cadence capitalized $6.4 million and $5.5 million of software development costs
for each of the first quarter of 1999 and 1998, respectively, which represented
12% of total research and development expenditures made in each of those
periods. The increase in capitalized software development costs for the first
quarter of 1999 resulted primarily from general increases in new product
development. In any given period, the amount of capitalized software
development costs may vary depending on the exact nature of the development
performed.
General and administrative expenses remained relatively flat in the
first quarter of 1999, as compared to the same period of the prior year.
Unusual Items
The following table presents information regarding unusual items for the
quarters ended April 3, 1999 and April 4, 1998:
Three Months Ended
--------------------
April 3, April 4,
1999 1998
--------- ---------
(In millions)
Write-off of acquired in-process technology...... $ 8.9 $56.9
Asset impairment................................. 3.1 - - - -
Restructuring charges............................ 2.2 4.0
----- -----
Total unusual items....................... $14.2 $60.9
===== =====
14
Acquisitions and In-Process Technology
In January 1999, Cadence acquired all of the outstanding stock of Design
Acceleration, Inc. (DAI) for approximately 0.6 million shares of Cadence's
common stock and $2.9 million of cash. The total purchase price was $25.7
million, and the acquisition was accounted for as a purchase. In connection
with the acquisition, net intangibles of $24.1 million were acquired.
Upon consummation of the DAI acquisition, Cadence immediately charged to
expense $8.9 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. See
"Notes to Condensed Consolidated Financial Statements." The value was
determined by estimating the costs to develop the acquired in-process technology
into commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate includes a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process technology under development is expected to be commercially
viable in 1999. Expenditures to complete the in-process technology is expected
to total approximately $0.7 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.
At the time of its acquisition by Cadence, DAI was working on several
significant research and development projects that were intended to provide a
next generation environment for design verification and analysis. These efforts
included the development of a highly automated approach for high-level test
bench creation and analysis, a waveform viewer capable of supporting analog and
mixed signal designs and a tool designed to analyze verification code coverage
at the transactional level. The nature of the efforts to complete these in-
process research and development projects relate, in varying degrees, to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed in-process
technologies meet their design specifications, which include functional,
technical, and economic performance requirements.
The net cash flows generated by the projects underway at DAI, which were
used to value the acquired in-process technology, were based on management's
estimates of revenue, cost of revenue, research and development costs, selling,
general and administrative costs, and income taxes from such projects. The
revenue projections were based on the potential market size for which these
projects are addressing, Cadence's ability to gain market acceptance for these
projects, and the life cycle of in-process technology.
Estimated total revenues from the acquired in-process product areas peak
in years 2001-2002 and decline rapidly thereafter as other new products are
expected to enter the market. In addition, a portion of the anticipated revenue
has been attributed to enhancements of the base technology under development,
and has been excluded from net cash flow calculations. Existing technology was
valued at $11.4 million. The net cash flows generated from the in-process
technology are expected to reflect earnings before interest, taxes, and
depreciation of approximately 60% for the sales generated from in-process
technology. There can be no assurance that these assumptions will prove
accurate, or that Cadence will realize the anticipated benefits of this
acquisition. See "Factors That May Affect Future Results."
The discount applied to the net cash flows to calculate the present
value of such net cash flows was based on the weighted average cost of capital
(WACC). The WACC calculation produces the average required rate of return of an
investment in an operating enterprise, based on various required rates of return
from investments in various areas of the enterprise. The discount rate used to
discount the net cash flows from purchased in-process technology was 22%. These
discount rates are sometimes higher than
15
the WACC due to the inherent uncertainties in the estimates, including the
uncertainty surrounding the successful development of the acquired in-process
technology, the useful life of such technology, the profitability levels of such
technology, if any, and the uncertainty of technological advances, all of which
are unknown at this time.
As evidenced by their continued support for research and development
projects, management believes Cadence is well positioned to successfully
complete each of these projects. However, there is risk associated with the
completion of the projects and there is no assurance that each will meet with
either technological or commercial success. If these projects are not
successfully developed, Cadence's business, operating results, and financial
condition may be adversely affected in future periods. In addition, the value of
other intangible assets acquired may become impaired.
To date, DAI'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 the research and development are still considered high and no
assurance can be made that future products will meet market expectations.
In the three months ended April 4, 1998, Cadence acquired all of the
outstanding stock of Excellent Design, Inc., a Japanese corporation (EXD) and
Symbionics Group Limited, a U.K corporation (Symbionics).
The total purchase price of EXD was $40.9 million, and the acquisition
was accounted for as a purchase. EXD provides application-specific integrated
circuit and system-on-a-chip (SOC) design and library development.
Upon consummation of the EXD acquisition, Cadence immediately charged to
expense $28.4 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. 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. At the time of the acquisition, the in-process technology under
development was expected to be commercially viable on dates ranging from the end
of 1998 through the year 2000. Expenditures to complete these projects were
expected to total approximately $7 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.
The total purchase price of Symbionics was $46.1 million, and the
acquisition was accounted for as a purchase. Symbionics provides product
development design services to leading electronic manufacturers.
Upon consummation of the Symbionics acquisition, Cadence immediately
charged to expense $28.5 million representing acquired in-process technology
that had not yet reached technological feasibility and had no alternative future
use. The value was determined by estimating the costs to develop the acquired
in-process technology into commercially viable products, estimating the
resulting net cash flows from such projects, and discounting the net cash flows
back to their present value. The discount rate includes a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. At the time of the acquisition, the in-process technology
under development was expected to be commercially viable on dates ranging from
the end of 1998 through the
16
year 2000. Expenditures to complete these projects were expected to total
approximately $6 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, EXDs' and Symbionics' results have not differed significantly
from the forecast assumptions. Cadence's research and development expenditures
since the acquisitions have not differed materially from expectations. 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 development are still considered high and no
assurance can be made that future products will meet market expectations.
Asset Impairment and Restructuring
In the first quarter of 1999, Cadence incurred charges totaling $3.1
million in connection with the abandonment of certain third-party software
licenses that will no longer be used by its design services business and
capitalized software development costs associated with Cadence products that
will no longer be sold. The impairment loss recorded was the amount by which the
carrying amount of the intangible assets exceeded fair market value.
In addition, 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 cost of excess personnel in its
services business, and Cadence anticipates that the actions taken in the first
quarter of 1999 will save an estimated additional $0.6 million in fiscal 1999.
All termination notices and benefits were communicated to the affected employees
prior to quarter-end and all severance benefits are expected to be paid in 1999.
Actual amounts of termination benefits, facilities, and other
restructuring related payments can be found in Notes to Condensed Consolidated
Financial Statements under "Asset Impairment and Restructuring."
Other Income (Expense) and Income Taxes
Other income (expense) decreased $3.2 million in the first quarter of
1999, as compared to the first quarter of 1998, primarily due to the decrease in
interest income of $2.1 million and an increase in interest expense of $0.8
million. The decrease in interest income was due to a lower average balance of
invested cash and short-term investments and lower interest rates. The increase
in interest expense was due to borrowings against Cadence's unsecured credit
facility.
Cadence's estimated effective tax rate in the first quarter of 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 effective
tax rate for the first quarter of 1998 was also 28.5%.
Year 2000 Update
The Year 2000 computer issue creates risks for Cadence, the full extent
and scope of which have not yet been fully assessed. In the event that internal
products and systems, or those products and systems provided by, or utilized by,
third parties do not correctly recognize and process date data information
beyond the year 1999, it could have a material adverse effect on Cadence's
business, operating results and financial condition.
To address Year 2000 issues, Cadence initiated a program designed to
address the most critical Year 2000 items that would affect Cadence's products,
its worldwide business systems, and the operations of the following functions:
research and development, finance, sales, manufacturing, and human resources.
Assessment and remediation efforts regarding these critical items are proceeding
in parallel. Cadence is also creating a plan to work with critical suppliers and
customers to determine that such
17
suppliers' and customers' operations and the products and services they provide
are Year 2000 capable or to monitor their progress towards Year 2000 capability.
Cadence has commenced work on contingency plans to address potential problems
with its internal systems and with suppliers, customers, and other third
parties.
In 1997, Cadence commenced a program to inventory, assess, remediate,
and test the Year 2000 capability of its products. As a result of those efforts,
Cadence believes that the most current release of Cadence's software products,
as set forth in the Year 2000 Software Compliance List (available on Cadence's
web site), are Year 2000 Compliant. Cadence uses the term "Year 2000 Compliant"
to mean that the software will not: (A) cease to perform due solely to a change
in date to or after January 1, 2000, or (B) generate incorrect or ambiguous data
or results with respect to same-century and/or multi-century formulas,
functions, date values, and date data interfaces. Cadence does not believe that
customers are using a significant amount of products that are not determined to
be Year 2000 Compliant. Cadence continues to further validate current products,
as well as new products, products acquired through acquisitions and releases
through testing and code reviews. All Cadence Year 2000 activities concerning
Cadence's products are expected to be completed by October 1999.
In 1995, Cadence also commenced a worldwide business systems replacement
project with systems that use programs primarily from SAP America, Inc. (SAP),
PeopleSoft, Inc. (PeopleSoft), and Siebel Systems, Inc. (Siebel). The new
systems are expected to make approximately 70% of Cadence's business computer
systems Year 2000 Compliant. In addition, during September 1997, Cadence
commenced an investigation of the condition of Year 2000 readiness for all of
its other internal business applications. This effort began with an inventory
to identify current business applications, an evaluation of their Year 2000
readiness status and development of plans for remediation and testing of all
discovered issues. As of February 1999, of the 60 business application systems
that had been identified, 54 had been modified or replaced and determined to be
Year 2000 ready. Recently, Cadence has identified additional areas requiring
Year 2000 assessment, remediation and testing, specifically software interfaces,
and applications used to interact with vendors, as well as applications that are
unique to the various international operations. Cadence expects that all
business critical applications will be Year 2000 Compliant by the third quarter
of 1999.
In July 1998, Cadence established a cross functional Year 2000 Project
Team to identify and resolve all remaining Year 2000 readiness issues. The
primary remaining issues consist of assessing the Year 2000 impact for outside
vendors, customers, facilities, and the remaining internal business systems that
are not yet assessed as Year 2000 compliant. Project plans have been developed
and include the process of identifying and prioritizing critical suppliers and
customers at the direct interface level and communicating with them about their
plans and progress in addressing Year 2000 issues. Detailed evaluations of the
most critical third parties have been initiated. It is expected that all Year
2000 project inventories will be completed by the end of the second quarter of
1999. This effort is being followed by each business function conducting a
focused level of ranking and functional assessment of its inventory to establish
the methods and actions required to resolve any Year 2000 issues discovered. The
assessment efforts are estimated to be completed by the second quarter of 1999.
The remediation (modification or replacement of existing software or systems)
efforts are expected to be completed by the third quarter of 1999 and the
testing phases of the Year 2000 Project Plans are expected to take place
throughout most of 1999 and estimated to be completed, for all business critical
items, by the fourth quarter of 1999. All remaining issues (which are considered
low priority or low risk to the business) are planned to be addressed as time
permits and could continue through the first half of 2000.
It is estimated that the 1999 budget for Year 2000 related costs to
resolve remaining readiness issues will be approximately $13 million. The costs
of implementing the SAP, PeopleSoft and Siebel business application systems are
not included in these cost estimates. The total cost associated with required
modifications to become Year 2000 compliant is not expected to have a material
adverse effect on Cadence's business, operating results, and financial
condition. Cadence's current estimates of the
18
amount of time and costs necessary to implement and test its systems are based
on the facts and circumstances existing at this time. The estimates were derived
utilizing multiple assumptions of future events including the continued
availability of certain resources, implementation success, and other factors.
New developments may occur that could affect Cadence's estimates for Year 2000
compliance. These developments include, but are not limited to: (a) the
availability and cost of personnel trained in this area, (b) the ability to
locate and correct all relevant computer code and equipment, and (c) the
planning and modification success needed to achieve full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000
Update contains forward-looking statements based on current expectations that
involve risks and uncertainties and should be considered in conjunction with the
following. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations of Cadence. Such failures could materially and adversely affect
Cadence's business, operating results, and financial condition. Due in large
part to the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, as well as the lack of remediation and testing for the remaining
internal business systems that are not yet assessed as Year 2000 Compliant,
Cadence is currently unable to determine whether the consequences of Year 2000
issues will have a material impact on Cadence's business, operating results, or
financial condition.
Cadence's risks associated with non-information technology systems and
embedded systems are generally limited to systems that typically involve
environmental control systems, interruptible power systems, elevator systems,
and security systems. Cadence feels confident that through its research,
testing, and corrective actions, any Year 2000 problems caused by these systems
will not have a material adverse effect on its business, operating results, or
financial condition.
The reasonably likely worst case scenario of a Year 2000 problem for all
of Cadence's material systems is that Cadence's operations could be disrupted
for a few days before the problem could be identified and remediated. The
reasonably likely worst case scenario associated with Cadence products for a
Year 2000 problem is that a customer project could be delayed for a short period
of time before the problem can be identified and remediated by Cadence's support
process. Because of the small amount of software code that could be involved, it
is anticipated that problems will be remediated within 5 business days from when
the problem is recreated by Cadence's support organization. Cadence uses
contract terms to limit indirect damages that may be incurred by customers,
although no assurance can be given that such terms are enforceable.
The Year 2000 Project is expected to significantly reduce Cadence's
level of uncertainty regarding Year 2000 issues and, in particular, about the
Year 2000 readiness of its material internal operations and external agents. In
addition, Cadence believes that the current Year 2000 activities surrounding
Cadence's software products and internal systems have significantly reduced the
risk of any interruption caused by any Year 2000 issues in these areas. However,
because of uncertainties with Year 2000 issues, Cadence is currently unable to
determine whether and to what extent the Year 2000 problem will harm its
business, operating results, or financial condition.
Liquidity and Capital Resources
At April 3, 1999, Cadence's principal sources of liquidity consisted of
$216.9 million of cash and short-term investments, compared to $209.8 million at
January 2, 1999, and a $355 million senior unsecured credit facility. As of
April 3, 1999, Cadence had outstanding borrowings of $85 million under its
revolving credit facility.
Cash provided by operating activities decreased $50.2 million to $52.5
million for the first quarter of 1999, as compared to the first quarter of 1998.
The decrease was primarily due to decreases in net
19
income before unusual items, increases in other non-cash charges, and changes in
the balances of operating assets and liabilities.
At April 3, 1999, Cadence had net working capital of $297.9 million
compared with $251.8 million at January 2, 1999. The working capital increase
was driven primarily by decreases in accounts payable and accrued liabilities of
$52.4 million and income taxes payable of $11.8 million, and an increase in cash
and cash equivalents and short-term investments of $7.2 million, partially
offset by a decrease in receivables of $25.5 million. The decrease in accounts
payable and accrued liabilities was primarily attributable to payments made for
commissions, taxes, bonuses, and stock purchased under Cadence's Employee Stock
Purchase Plan. The decrease in receivables was due primarily to increased
financing of receivables as installment contract receivables to certain
financing institutions on a non-recourse basis.
In addition to its short-term investments, Cadence's primary investing
activities consisted of purchases of property, plant, and equipment, acquired
intangibles and other assets, capitalization of software development costs,
venture capital partnership investments, and acquisitions, which combined
represented $53.3 million and $102.7 million of cash used for investing
activities in the first quarters of 1999 and 1998, respectively.
In the first quarter of 1999, Cadence completed the construction of a
new building and improvements on its San Jose, California campus with an
estimated total cost of approximately $16.3 million. Also in the first quarter
of 1999, Cadence purchased an additional facility adjacent to its San Jose,
California campus for $27.5 million, which it expects to occupy in the third
quarter of 1999. Additionally, the construction of a new Cadence design center
in Scotland was commenced in 1998.
In connection with and prior to the consummation of the merger with
Quickturn, Cadence will rescind its stock repurchase program, with the exception
of continued systematic stock repurchases under its seasoned stock repurchase
programs for Cadence's 1997 Plan and ESPP.
Since 1994, Cadence has sold put warrants and purchased call options
through private placements. See "Notes to Condensed Consolidated Financial
Statements." At April 3, 1999, Cadence has a maximum potential obligation
related to put warrants to buy back 2.9 million shares of its common stock at an
aggregate price of approximately $84 million. The put warrants will expire at
various dates through November 1999, and Cadence has the contractual ability to
settle the options prior to their maturity. Cadence has the ability to settle
these put warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.
Anticipated cash requirements for the remainder of 1999 include the
purchase of treasury stock through Cadence's stock repurchase programs and the
contemplated additions of property, plant, and equipment of approximately $120
million.
As part of its overall investment strategy, Cadence has committed to
invest $50 million in a venture capital partnership as a limited partner over
the next three to four years. As of April 3, 1999, Cadence had contributed
approximately $29.3 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 million revolving credit
facility will be sufficient to meet its working capital requirements on a short-
and long-term basis.
20
Factors That May Affect Future Results
Cadence lacks long-term experience in its electronics design and methodology
services business
Cadence only recently began to focus on offering electronics design and
methodology services and therefore may not be as experienced in this business as
others. The market for these services is relatively new and rapidly evolving.
Cadence's failure to succeed in these services businesses may seriously harm
Cadence's business, operating results, and financial condition.
The success of Cadence's electronic design and methodology services businesses
depends 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.
. Many service contracts are at a fixed price. A substantial portion of
these service contracts are fixed-price contracts. This means that the
customer pays a fixed price that has been agreed upon ahead of time, no
matter how much time or how many resources Cadence must devote to
perform the contract. If Cadence's cost in performing the services
consistently and significantly exceeds the amount the customer has
agreed to pay, it could seriously harm Cadence's business, operating
results, and financial condition.
. Cadence's cost of service personnel is high and reduces gross margin.
Gross margins 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. 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.
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:
. Developments in manufacturing that enable production of chips with
extremely small spacing between transistors, so-called deep submicron
chips, that challenge the fundamental laws of physics and chemistry.
. The ability of manufacturers to produce chips from 12 inch silicon
wafers as opposed to today's eight inch wafers. This ability to place
millions of additional transistors on each chip requires entirely new
software tools for designers to design these 12 inch chips.
. The ability to design entire electronic systems on a single chip, so-
called System-on-a-Chip or SOC, rather than a circuit board greatly
increases design complexity and requires the ability to design both
hardware and software on a single chip.
21
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.
Also, Cadence generally relies on patents, copyrights, trademarks and
trade secret laws to establish and protect its proprietary rights in technology
and products. Despite precautions Cadence may take to protect its intellectual
property, Cadence cannot assure you that third parties will not try to
challenge, invalidate, or circumvent these patents. Cadence also cannot assure
you that the rights granted under its patents will provide it with any
competitive advantages, patents will be issued on any of its pending
applications or future patents will be sufficiently broad to protect Cadence's
technology. Furthermore, the laws of foreign countries may not protect Cadence's
proprietary rights in those countries to the same extent as U.S. law protects
these rights in the United States.
Cadence cannot assure you that its reliance on licenses from or to third
parties, or patent, copyright, trademark, and trade secret protection, will be
enough to be successful and profitable in the industries in which Cadence
competes.
Intellectual property infringement by or against Cadence could seriously harm
its business
There are numerous patents in the electronic design automation software
industry and new patents are being issued at a rapid rate. It is not always
economically practicable to determine in advance whether a product or any of its
components infringes the patent rights of others. As a result, from time to
time, Cadence may be forced to respond to or prosecute intellectual property
infringement claims to protect its rights or defend a customer's rights. These
claims, regardless of merit, could consume valuable management time, result in
costly litigation or cause product shipment delays, all of which could seriously
harm Cadence's business, operating results, and financial condition. In settling
these claims, Cadence may be required to enter into royalty or licensing
agreements with the third parties claiming infringement. These royalty or
licensing agreements, if available, may not have terms acceptable to Cadence.
Being forced to enter into a license agreement with unfavorable terms could
seriously harm Cadence's business, operating results, and financial condition.
Fluctuations in quarterly results of operations could hurt Cadence's
business and the market price of its stock
Cadence has experienced, and may continue to experience, varied
quarterly operating results. Various factors affect Cadence's quarterly
operating results and some of them are not within Cadence's control, including
the mix of products and services sold and the timing of significant orders for
its software products by customers. Quarterly operating results are affected by
the mix of products sold because there are significant differences in margins
from the sale of products and services. Cadence
22
realizes gross margins on product sales of approximately 90% but realizes gross
margins of approximately 30% on its performance of services. In addition,
Cadence's quarterly operating results are affected by the timing of significant
orders for its software products because a significant number of contracts for
software products are in excess of $5 million. The failure to close a contract
for the sale of one or more orders of Cadence's software products could
seriously hurt its quarterly operating results.
In addition, Cadence bases its expense budgets partially on its
expectations of future revenue. However, it is difficult to predict revenue
levels or growth. Revenue levels that are below Cadence's expectations could
seriously hurt Cadence's business, operating results, and financial condition.
If revenue or operating results fall short of the levels expected by public
market analysts and investors, the trading price of Cadence common stock could
decline dramatically. Also, because of the large order size and its customers'
buying patterns, Cadence may not learn of revenue shortfalls, earnings
shortfalls or other failures to meet market expectations until late in a fiscal
quarter, which could cause even more immediate and serious harm to the trading
price of Cadence common stock.
Because Cadence's focus on providing services is relatively recent, it
believes that quarter-to-quarter comparisons of its results of operations may
not be meaningful. Therefore, stockholders should not view Cadence's historical
results of operations as reliable indicators of its future performance.
Cadence expects to acquire other companies and may not successfully integrate
them
Cadence has acquired other businesses before and may do so again. While
Cadence expects to analyze carefully all potential transactions before
committing to them, Cadence cannot assure you that any transaction that is
completed will result in long-term benefits to Cadence or its stockholders or
that Cadence's management will be able to manage the acquired businesses
effectively. In addition, growth through acquisition involves a number of
risks. If any of the following events occurs after Cadence acquires another
business, it could seriously harm Cadence's business, operating results, and
financial condition:
. Difficulties in combining previously separate businesses into a single
unit;
. The substantial diversion of management's attention from day-to-day
business when negotiating these transactions and later integrating an
acquired business;
. The discovery after the acquisition has been completed of liabilities
assumed from the acquired business;
. The failure to realize anticipated benefits such as cost savings and
revenue enhancements;
. Difficulties related to assimilating the products of an acquired
business. For example, in distribution, engineering, and customer
support areas; and
. The failure to identify or correct a material Year 2000 problem of an
acquired business.
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 operations outside the United States. Cadence's revenue from
international operations as a percentage of total revenue was approximately 63%
for the first quarter of 1999 and approximately 45% for the first quarter of
1998. Cadence also transacts business in various foreign currencies. Recent
economic uncertainty and the weakening of foreign currencies in the Asia-Pacific
region has had, and may continue to have, a seriously harmful effect on
Cadence's revenue and operating results.
23
Fluctuations in the rate of exchange between U.S. Dollars and the
currencies of countries other than the U.S. in which Cadence conducts business
could seriously harm its business, operating results, and financial condition.
For example, if there is an increase in the rate at which a foreign currency
exchanges into U.S. Dollars, it will take more of the foreign currency to equal
a specified amount of U.S. Dollars than before the rate increase. If Cadence
prices its products and services in the foreign currency, it will receive less
in U.S. Dollars than it did before the rate increase went into effect. If
Cadence prices its products and services in U.S. Dollars, an increase in the
exchange rate will result in an increase in the price for Cadence's products and
services compared to those products of its competitors that are priced in local
currency. This could result in Cadence's prices being uncompetitive in markets
where business is transacted in the local currency. Cadence's international
operations may also be subject to other risks, including:
. The adoption and expansion of government trade restrictions;
. Volatile foreign exchange rates and currency conversion risks;
. Limitations on repatriation of earnings;
. Reduced protection of intellectual property rights in some countries;
. Recessions in foreign economies;
. Longer receivables collection periods and greater difficulty in
collecting accounts receivable;
. Difficulties in managing foreign operations;
. Political and economic instability;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers; and
. U.S. government licensing requirements for export as licenses can be
difficult to obtain.
Cadence expects that revenue from its international operations will
continue to account for a significant portion of its total revenue.
Exposure to foreign currency transaction risk can arise when
transactions are conducted in a currency different from the functional currency
of a Cadence subsidiary. A subsidiary's functional currency is the currency in
which it primarily conducts its operations, including product pricing, expenses
and borrowings. Cadence uses foreign currency forward exchange contracts, as
part of its foreign currency hedging program, to help protect against currency
exchange risks. These contracts allow Cadence to buy or sell specific foreign
currencies at specific prices on specific dates. Under this program, increases
or decreases in the value of Cadence's foreign currency transactions are
partially offset by gains and losses on these forward exchange contracts.
Although Cadence attempts to reduce the impact of foreign currency fluctuations,
significant exchange rate movements may hurt Cadence's results of operations as
expressed in U.S. Dollars.
Foreign currency exchange risk occurs for some of Cadence's foreign
operations whose functional currency is the local currency. The primary effect
of foreign currency translation on Cadence's results of operations is a
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 United States Department of Commerce
regulations in shipping its software products and other technologies outside the
United States. Although Cadence has not had any significant difficulty complying
with these regulations so far, any significant future difficulty in complying
could harm Cadence's business, operating results, and financial condition.
Cadence's inability to compete in its industries could seriously harm its
business
The electronic design automation software and the commercial electronic
design and methodology services industries are highly competitive. If Cadence is
unable to compete successfully in these industries, it could seriously harm
Cadence's business, operating results, and financial condition. To compete in
these industries, Cadence must identify and develop innovative and cost
competitive electronic design automation software products and market them in a
timely manner. It must also gain industry acceptance for its professional
services and offer better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of other design
companies and the internal design departments of electronics manufacturers.
Cadence cannot assure you that it will be able to compete successfully in these
industries. Factors which could affect Cadence's ability to succeed include:
. The development of competitive software products and design and
methodology services could result in a shift of customer preferences
away from Cadence's products and services and cause a significant
decrease in revenue;
. The electronics design and methodology services industries are
relatively new industries and electronics design companies and
manufacturers are only beginning to purchase these services from outside
vendors; and
. There are a significant number of current and potential competitors in
the electronic design automation software industry and the cost of entry
is low.
25
In the electronic design automation software industry, Cadence currently
competes with a number of large companies, including Avant! Corporation, Mentor
Graphics Corporation, Synopsys, Inc. and Zuken-Redac, and numerous small
companies. Cadence also competes with manufacturers of electronic devices that
have developed or have the capability to develop their own electronic design
automation software. Many manufacturers of electronic devices may be reluctant
to purchase services from independent vendors like Cadence because they wish to
promote their own internal design departments. In the electronics design and
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 consulting
industry.
Cadence's failure to attract, train, motivate, and retain key employees may
harm its business
The competition for highly skilled employees is intense. Cadence's
business depends on the efforts and abilities of its senior management, its
research and development staff, and a number of other key management, sales,
support, technical, and services personnel. Cadence's failure to attract, train,
motivate, and retain such employees would impair its development of new
products, its ability to provide design and methodology services and the
management of its businesses. This would seriously harm Cadence's business,
operating results, and financial condition.
"Year 2000 computer problems" could interrupt Cadence's business operations.
The so-called Year 2000 problem occurs when computer programs and
embedded microprocessors fail to process date information correctly beginning in
1999. If Cadence experiences a Year 2000 problem, it could result in an
interruption in, or a failure of, normal business operations. This could
seriously harm Cadence's business, operating results, and financial condition.
While Cadence has established a Year 2000 project team to identify and
resolve its potential Year 2000 issues, Cadence has not fully assessed the risks
the Year 2000 problem poses to its business. Cadence believes that its own
internally-developed software products generally will not have Year 2000
problems. However, Cadence is uncertain as to the Year 2000 readiness of third-
party suppliers and customers, approximately 30% of its internal information
business systems, and products acquired through recent acquisitions. Because of
these uncertainties, Cadence is currently unable to determine whether and to
what extent the Year 2000 problem will harm its business, operating results, or
financial condition.
Anti-takeover defenses in Cadence's charter, 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 the voting stock of the corporation, or who
is affiliated with the corporation and owned 15% or more of its voting
stock at any time within 3 years prior to the proposed business
combination, for a period of three years from the date the person became
a 15% owner, unless specified conditions are met.
. Cadence's Certificate of Incorporation allows the Cadence Board of
Directors to issue at any time and without stockholder approval,
preferred stock with such terms as it may determine. No shares of
Cadence preferred stock are currently outstanding. However, the rights
of holders of any
26
Cadence preferred stock that may be issued in the future may be superior
to the rights of holders of Cadence common stock.
. Cadence has a rights plan, commonly known as a "poison pill," which
would make it difficult for someone to acquire Cadence without the
approval of Cadence's Board of Directors.
All of these factors could limit the price that certain investors would
be willing to pay for shares of Cadence common stock and could delay, prevent or
allow the Board of Directors of Cadence to resist an acquisition of Cadence,
even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.
Item 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.
Cadence places its investments with high quality credit issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, Cadence's first priority is to reduce the risk of principal loss.
Consequently, Cadence seeks to preserve its invested funds by limiting default
risk, market risk and reinvestment risk. Cadence mitigates default risk by
investing in only high quality credit securities that it believes to be low risk
and by positioning its portfolio to respond appropriately to a significant
reduction in a credit rating of any investment issuer or guarantor. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity.
In October 1998, Cadence entered into a senior unsecured credit facility
(the 1998 Facility) with a syndicate of banks that allows Cadence to borrow up
to $355 million. The 1998 Facility is divided between a $177.5 million three
year revolving credit facility (the Three Year Facility) and a $177.5 million
364-day revolving credit facility convertible to a three year term loan (the
364-Day Facility). The Three Year Facility expires September 29, 2001. The
364-Day Facility will either expire on September 29, 1999 and be converted to a
three year term loan with a maturity date of September 29, 2002 or, at the
option of the bank group, be renewed for an additional one year period. Cadence
has the option to pay interest based on LIBOR plus a spread of between 0.50% and
1.00%, based on a pricing grid tied to a financial covenant, or the higher of
the Federal Funds Rate plus 0.50% or the prime rate. As a result, Cadence's
interest rate expenses associated with this borrowing will vary with market
rates. In addition, commitment fees are payable on the unutilized portions of
the Three Year Facility at rates between 0.18% and 0.30% based on a pricing grid
tied to a financial covenant and on the unutilized portion of the 364-Day
Facility at a fixed rate of 0.10%. The 1998 Facility contains certain financial
and other covenants.
27
The table below presents the carrying value and related weighted average
interest rates for Cadence's investment portfolio and its long-term debt
obligations. The carrying value approximates fair value at April 3, 1999. All
investments mature in one year or less.
Average
Carrying Interest
Value Rate
---------- ----------
(In millions, except for average interest rates)
Investment Securities:
Cash equivalentsfixed rate.................... $ 98.5 4.94%
Short-term investmentsfixed rate.............. 13.1 5.64%
------
Total investment securities............... 111.6 5.02%
Cash equivalentsvariable rate................. 33.2 3.60%
------
Total interest bearing instruments........ $144.8 4.67%
======
Debt:
Revolving credit facility..................... $ 85.0 5.44%
======
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 April 3, 1999, the notional amount was $23.8 million which
will be amortized in quarterly installments of $2.2 million through October
2001. The estimated fair value at April 3, 1999 was immaterial.
Foreign Currency Risk
Cadence transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Cadence has established a foreign
currency hedging program, utilizing foreign currency forward exchange contracts
(forward contracts) to hedge certain foreign currency transaction exposures in
Japan, Canada, Asia, and certain European countries. Under this program,
increases or decreases in Cadence's foreign currency transactions are partially
offset by gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. Cadence does not
use forward contracts for trading purposes. All outstanding forward contracts
at the end of a period are marked-to-market with unrealized gains and losses
included in other income, net, and thus are recognized in income in advance of
the actual foreign currency cash flows. As these forward contracts mature, the
realized gains and losses are recorded and are included in net income as a
component of other income, net. Cadence's ultimate realized gain or loss with
respect to currency fluctuations will depend on the currency exchange rates and
other factors in effect as the contracts mature.
28
The table below provides information as of April 3, 1999 about Cadence's
material forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature prior to April 15, 1999.
Average
Notional Contract
Forward Contracts: Amount Rate
----------- ---------
(In millions, except for average contract rates)
Japanese yen.................................. $ 54.9 111.98
British pound sterling........................ $ 14.6 1.63
Euro.......................................... $(11.2) 1.11
Swedish krona................................. $ (4.1) 7.83
Canadian dollars.............................. $ 2.6 1.50
Hong Kong dollars............................. $ 1.5 7.75
The unrealized gain (loss) on the outstanding forward contracts at April
3, 1999 was immaterial to Cadence's condensed consolidated financial statements.
Due to the short-term nature of the forward contracts, the fair value at April
3, 1999 was negligible. The realized gain (loss) on these contracts as they
matured was not material to the consolidated operations of Cadence.
Equity Price Risk
As part of its authorized repurchase program, Cadence has sold put
warrants through private placements. Additionally, Cadence has purchased call
options that entitle Cadence to buy on a specified day one share of common stock
at a specified price to satisfy anticipated stock repurchase requirements under
Cadence's seasoned systematic repurchase programs.
Cadence repurchases shares of its common stock under stock repurchase
programs in order to make sure it has enough shares for issuance under its
Employee Stock Purchase Plan (ESPP), its 1997 Stock Option Plan (the 1997 Plan)
and for other corporate purposes. As part of these repurchase programs, Cadence
has purchased and will purchase call options or has sold and will sell put
warrants. This may result in sales of a large number of shares and consequent
decline in the market price of Cadence common stock.
. Call options allow Cadence to buy shares of its stock on a specified day
at a specified price. If the market price of the stock is greater than
the exercise price of a call option, Cadence will typically exercise the
option and receive shares of stock. If the market price of the stock is
less than the exercise price of a call option, Cadence typically will
not exercise the option.
. Call option issuers may accumulate a substantial number of shares of
Cadence common stock in anticipation of Cadence's exercising its call
option and may dispose of these shares if and when Cadence fails to
exercise its call option. This could cause the market price of Cadence
common stock to fall.
. Put warrants allow the holder to sell to Cadence shares of Cadence
common stock on a specified day at a specified price. Cadence has the
right to settle the put warrants with shares of Cadence common stock
valued at the difference between the exercise price and the fair value
of the stock at the date of exercise.
. Depending on the exercise price of the put warrants and the market price
of the stock at the time of exercise, settlement of the put warrants
with stock could cause Cadence to issue a substantial
29
number of shares to the holder of the put warrant. The holder may sell
these shares in the market, which could cause the price of Cadence
common stock to fall.
. Put warrant holders may accumulate a substantial number of shares of
stock in anticipation of exercising their put warrants and may dispose
of these shares if and when they exercise their put warrants and Cadence
issues shares in settlement of their put warrants. This could also cause
the market price of Cadence common stock to fall.
The table below provides information at April 3, 1999 about Cadence's
put warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through November 1999 and Cadence has the contractual ability to
settle the options prior to their maturity.
Estimated
1999 Fair
Maturity Value
---------- ---------
(Shares and contract amounts in millions)
Put Warrants:
Shares........................................ 2.9
Weighted average strike price................. $28.51
Contract amount............................... $ 84.0 $17.3
Call Options:
Shares........................................ 2.1
Weighted average strike price................. $28.32
Contract amount............................... $ 58.1 $ 8.8
30
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 United States District Court for the
Northern District of California (the District Court) on December 6, 1995 against
Avant! Corporation (Avant!) and certain of its employees for misappropriation of
trade secrets, copyright infringement, conspiracy and other illegal acts.
On January 16, 1996, Avant! filed various counterclaims against Cadence
and Joseph B. Costello, Cadence's former President and Chief Executive Officer
(Costello), 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 Costello had cooperated with the Santa Clara County, California,
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Cadence insiders engaged in illegal
insider trading with respect to Avant!'s stock. Cadence and Costello believe
that each has meritorious defenses to Avant!'s claims, and each intends to
defend such action vigorously. By an order dated July 13, 1996, the court
bifurcated Avant!'s counterclaim from Cadence's complaint and stayed the
counterclaim pending resolution of Cadence's complaint. The counterclaim
remains stayed.
On April 19, 1996, Cadence filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order enjoining
the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s
Aquarius software infringes Cadence's code and, if so, to enter an order
enjoining the sale of that software. In an order issued on December 19, 1997,
as modified on January 26, 1998, the District Court entered a preliminary
injunction barring any further infringement of Cadence's copyrights in Design
Framework II software, or selling, licensing or copying such product derived
from Design Framework II, including but not limited to, Avant!'s ArcCell
products. On February 19, 1998, Avant! filed a petition for writ of certiorari
to the United States Supreme Court, requesting a review of the Ninth Circuit
Court's decision. The Supreme Court denied that petition without comment. On
July 9, 1998, Cadence filed further motions to enjoin Avant!'s Aquarius product
line on copyright and trade secret grounds. On December 7, 1998, the District
Court issued a further preliminary injunction, which enjoined Avant! from
selling its Aquarius product line. Cadence posted a $10 million bond in
connection with the issuance of the preliminary injunction.
By an order dated July 22, 1997, the District Court stayed most
activity in the case pending in that Court and ordered Avant! to post a $5
million bond, in light of related criminal proceedings pending against Avant!
and several of its executives. The District Court's December 7, 1998 order
lifted that stay in part, allowing the matter to proceed to trial as to certain
allegations against Avant! only, but not with respect to certain matters
involving the Avant! executives and other individuals against whom criminal
charges are pending. Cadence intends to pursue its claims vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
Cadence's business, operating results, or financial condition.
31
On April 30, 1999, Cadence and several of its officers and directors
were named as defendants in a lawsuit filed in the United States District Court
for the Northern District of California, entitled Spett v. Cadence Design
-----------------------
Systems, et al, civil action no. C 99-2082. The action purports to be brought
- ---------------
on behalf of a class of shareholders 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. Management
intends to vigorously defend the claims.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
In January 1998, Cadence issued 649,814 shares of its common stock,
$0.01 par value per share, to the stockholders of Design Acceleration, Inc.
(DAI), in connection with Cadence's acquisition of 100% of the outstanding stock
of DAI. Cadence's primary purpose in acquiring the DAI shares was the
acquisition of DAI's design verification and analysis technology for integration
into Cadence's product offerings.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
---------- -------------------------------------------------------------------------------
3.01 Amended and restated bylaws of the Registrant, as amended and restated on May
6, 1999.
27.01 Financial data schedule for the period ended April 3, 1999.
32
(b) Reports on Form 8-K:
On December 10, 1998 and amended on December 22, 1998 and January 6, 1999,
the Registrant filed a Current Report on Form 8-K reporting Cadence's
agreement to acquire Quickturn Design Systems, Inc., a Delaware
corporation.
On April 20, 1999, the Registrant filed a Current Report on Form 8-K
reporting that Cadence announced the appointment of H. Raymond Bingham to
the position of President and Chief Executive Officer.
33
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: May 17, 1999 By: /s/ H. Raymond Bingham
------------ ------------------------------
H. RAYMOND BINGHAM
President and Chief Executive Officer
DATE: May 17, 1999 By: /s/ William Porter
------------ ------------------------------
William Porter
Vice President
and Chief Financial Officer
34