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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-10606
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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 SEALY AVENUE, BUILDING 5, SAN JOSE, CALIFORNIA 95134
(Address of Principal Executive Offices, including Zip Code)
(408) 943-1234
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
(Title of Each Class) (Names of Each Exchange on which
Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held on March 20, 1998
by non-affiliates of the registrant: $7,224,125,357
Number of shares of common stock outstanding at March 20, 1998: 211,087,339
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting to be held
on May 6, 1998 are incorporated by reference into Part III hereof.
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CADENCE DESIGN SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 10
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 12
Item 6 Selected Financial Data................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 14
Item 7A. Quantitative and Qualitative Disclosures and Market Risk.................................. 26
Item 8. Financial Statements and Supplementary Data............................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 28
Item 11. Executive Compensation.................................................................... 29
Item 12 Security Ownership of Certain Beneficial Owners and Management............................ 29
Item 13. Certain Relationships and Related Transactions............................................ 29
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K......................... 30
Signatures................................................................................ 64
2
PART I.
ITEM 1. BUSINESS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements within the meaning of the Private Securities Reform Act of 1995.
Readers are referred to "Marketing and Sales," "Research and Development,"
"Competition," "Proprietary Technology," "Manufacturing," and "Factors That May
Affect Future Results" sections contained herein, which identify important risk
factors that could cause actual results to differ from those contained in the
forward-looking statements.
OVERVIEW
Cadence Design Systems, Inc. (Cadence or the Company) provides comprehensive
services and technology for the product development requirements of the world's
leading electronics companies. The Company licenses its leading-edge electronic
design automation (EDA) software technology and provides a range of professional
services to companies throughout the world to help optimize its customers'
product development processes. Recently, the Company has expanded the role it
plays with companies that produce electronic products and with an emerging class
of companies that require electronic content in their products, but who may not
have any internal expertise in electronic design. The Company is now a supplier
of "design realization" solutions, which are used by companies to design and
develop integrated circuits (ICs) and systems--including semiconductors,
computer systems and peripherals, telecommunications and networking equipment,
mobile and wireless devices, automotive electronics, consumer products, and
other advanced electronics.
Cadence was formed as a result of the merger of SDA Systems, Inc. into ECAD,
Inc. in May 1988. The Company's executive offices are located at 2655 Sealy
Avenue, Building 5, San Jose, California 95134, and its telephone number at that
location is (408) 943-1234.
ELECTRONIC DESIGN AUTOMATION AND DESIGN SERVICES
Cadence serves the worldwide electronics industry, which is quickly evolving
from a business-to-business mode to more of a consumer electronics market. The
shift of the electronics industry to the consumer electronics market is
evidenced by the incorporation of electronic content in consumer items such as
home appliances, automotive products, entertainment products and games, and
personal communication and organization devices. The electronics industry
presents challenges for developers of electronic products, where time-to-market,
cost, and the need for product diversity become the focus in a fast-paced and
volatile market.
Within the context of this evolution, a significant challenge faced by the
electronics industry is the continuing escalation in complexity of electronic
devices. While manufacturing capabilities at semiconductor "fabs" are developing
technology capable of producing silicon wafers that have the capacity of 100
million transistors, the ability of companies to design and develop integrated
circuits on the available silicon capacity lags behind. Additionally, current
chip designs utilize "deep submicron" (DSM) manufacturing process geometries
that add additional challenges to the design process. DSM figures refer to the
width of the spaces between the wire that connect transistors on a chip, e.g. a
0.25 micron geometry means that the wires are laid 0.25 micron apart (for
reference, the diameter of the period at the end of this sentence is roughly 400
microns). Engineering organizations are addressing the DSM challenge in a number
of ways, including revamping old design methodologies, introducing new EDA tools
and technologies to their design environments, and adopting a "system-on-a-chip"
style of design to take advantage of silicon manufacturing capabilities.
3
System-on-a-chip (SOC) design is an emerging trend that is having a
significant impact on costs, time, and business models associated with
developing advanced chips. SOC allows the combination of multiple discrete
functions, previously enabled by individual chips, onto a single piece of
silicon. Much the way individual chips are assembled today on printed circuit
boards (PCBs), an SOC design combines multiple "virtual chips" or blocks of
intellectual property to create a single-chip system.
THE INTEGRATED CIRCUIT AND ELECTRONICS SYSTEM DESIGN PROCESS
The electrical design process involves describing the architectural,
behavioral, functional, and structural attributes of an IC or electronic system.
This process involves describing the product overall system architecture and
then implementing it by creating a design description, simulating the design to
identify electrical defects, and refining the description to meet predetermined
design specifications.
ARCHITECTURAL DEFINITION
A natural evolution of EDA is a top-down design approach known as electronic
systems design automation (ESDA). ESDA products are designed to allow customers
to include product concepts in the EDA environment, accelerating and enhancing
the early phases of system development.
A new approach called virtual prototyping, starts with the creation of a
product prototype in software. Virtual prototyping allows the designer to focus
on what is needed for the product to be successful as opposed to how the design
is implemented.
IMPLEMENTATION--THE DESIGN DESCRIPTION
The first step in the implementation process is creation of the design
description. To handle the complexity of large designs, engineers use a variety
of techniques, including block diagrams, equations or special design description
languages referred to as hardware description languages (HDLs).
STRUCTURAL DESIGN AND SIMULATION
Before an IC or PCB can be manufactured, high level design descriptions must
be detailed into a structural design, in which the engineer specifically defines
components, their interconnections, and associated physical properties.
Structural designs may be created manually or generated using an automated
process called logic synthesis. In structural design, critical design time can
be saved by selecting components from an electronic library and including them
in the design, rather than recreating symbols and data for each design. A
database containing the design electrical characteristics, interconnections, and
specific design rules is automatically created and used as the foundation for
subsequent design steps.
Electronics designers use simulation throughout the electrical design
process to identify design errors before the design is manufactured. In
addition, simulation enables electronics designers to quickly explore design
alternatives, and it can be performed at different levels of design abstraction
and with mixed levels of abstraction. This enables a designer to verify the
conceptual, structural, and performance aspects of the design. A key element in
the simulation process is the use of component libraries containing software
models of commonly used parts.
PHYSICAL DESIGN AND VERIFICATION
When the design is determined to be functionally correct, the designer
generates a non-graphical description called a netlist that details the design
components and interconnections. This netlist becomes the blueprint for physical
design. Next, the physical design team determines the layout and associated
interconnection of the components on the target substrate that will yield the
optimum combination of performance, area, and cost. Once this process is
completed, physical verification tools are used to provide
4
a final check of the design implementation before products are released to
manufacturing. Accuracy in this process is essential to avoiding costly
production runs of faulty parts.
ELECTRONIC DESIGN AUTOMATION TOOLS
The Company's product offerings include a variety of EDA tools. These EDA
tools include system level design, custom IC design, deep submicron design,
logic design and verification, and printed circuit board design, which enable
electronic product designers to improve the quality of their products as well as
their productivity. These products apply to one or more steps in the electronics
system design process.
SYSTEM-LEVEL
The Company's Alta-TM- technology allows customers to test their concepts
early in the design process, giving them an opportunity to ensure that their
product design meets required specifications. The Alta Signal Processing
WorkSystem-Registered Trademark- (SPW-Registered Trademark-) toolset provides
electronic companies with a high level of design automation for a number of
application areas, including wireless communications, networking, and
multimedia. Visual Architect-TM- behavioral synthesis, announced in 1997,
provides both system and ASIC designers with a complete and open design flow.
This tool enables communication between the architects of high-performance
systems and the engineers who actually design the chips that are part of the
system design.
CUSTOM IC
The Company's custom layout portfolio is anchored by the
Virtuoso-Registered Trademark- product family, which provides tools for basic
layout editing, design compaction, layout synthesis, and device-level editing.
The Company's analog and mixed-signal design solution is comprised of the
Spectre-Registered Trademark- circuit simulation family and the Analog
Artist-Registered Trademark- design system.
Dracula-Registered Trademark- verification and Diva-TM- verification provide
integral solutions for automated and interactive physical verification. This
enables electronic product designers to perform a final check of their design
before products are released to manufacturing. New releases in 1997 included
Vampire-Registered Trademark- RCX verification and the ConcICe-TM- tools. These
products provide designers of deep submicron ICs with a fast, accurate full-chip
extraction and analysis tool.
DEEP SUBMICRON
Silicon Ensemble-TM- Deep Submicron provides a broad solution for routing
designs that consist of a mixed cell- and gate-based approach. This product
includes several specialized routing engines that deal with complex challenges
like datapath, complex clock trees, crosstalk, and power on ICs.
LOGIC DESIGN AND VERIFICATION
Some of the Company's most popular products are its
Verilog-Registered Trademark- based products. These tools are used by numerous
ASIC vendors and support over 185 ASIC libraries. The NC
Verilog-Registered Trademark- simulator, which achieved a record 25,000
installations worldwide in 1997, gives customers advanced technology,
accelerated simulation performance, and overall productivity needed to verify
today's large, complex system designs in a timely manner.
SYSTEM DESIGN PRODUCTS
The Allegro-TM- product and SPECCTRA-TM- PCB place-and-route product family
offer broad solutions for the layout of standard PCBs and advanced component
packaging. In 1997, the Company introduced its comprehensive high-speed PCB
solution for Microsoft Windows NT. This enables designers using both UNIX and
Windows NT workstations to share the same design technology. In addition, the
Company
5
offers thermal, signal integrity, reliability, and electromagnetic analysis
tools for detecting potential manufacturing problems.
CONNECTIONS PROGRAM
Cadence cooperates with other design automation vendors to deliver
full-scope technology to its customers. Through the Cadence Connections Program,
customers can more easily integrate products and technologies with other EDA
vendors' products and technologies. This enables the flexibility to mix-and-
match third-party and proprietary tools to specifically meet a customer's design
automation needs. Today, more than 100 companies have integrated their tools
with Cadence software. In 1996, the Company furthered this program by
introducing "Platinum" status relationships, whereby Cadence and its Platinum
Partners will jointly deliver integrated design flows.
SERVICES
Cadence offers developers of electronic products a portfolio of services
within the broad categories of consulting services, design services, and
industry services.
CONSULTING SERVICES
Cadence provides a variety of services that help improve design
environments, from training classes and custom software coding to flow and
methodology deployment to complete design process re-engineering. Cadence's
Educational Services offer more than 50 training courses within all areas of
Cadence technology. Cadence's Applications Services help developers of
electronic products to maximize their productivity with Cadence software
applications by transferring knowledge from Cadence applications engineers to
customer design teams in new methodologies and technologies. In addition,
Cadence offers Design Process Service solutions including optimizing existing
product development processes, creating new design methodologies, migrating to
new methodologies based on significant upgrades of EDA technology, constructing
high re-use product development systems, and transferring technological
competency.
DESIGN SERVICES
Cadence offers services to perform design projects for electronic system
components such as integrated circuits or software.
When developers of electronic content lack the experience or resources to do
their own design work, or when they need to keep their internal engineers on
high priority design activities, Cadence's design services help these developers
by doing design work for them. Cadence IC designers are skilled in all areas of
design, including chip architecture, logic design, physical design, and
manufacturing interface/product engineering.
Cadence offers a variety of design services across all aspects of
analog/mixed signal IC and block design realization, including foundry/process
selection and testing from prototype to production.
Cadence's silicon technology services enable semiconductor companies and
users of foundry services to get technologies and products into a manufacturing
environment faster.
INDUSTRY SERVICES
In the high growth communications and multimedia industries, Cadence can
design complete, production ready, reference systems or IC level products for
its customers.
6
MARKETING AND SALES
As of February 28, 1998, Cadence had 481 employees engaged in field sales
and sales support, representing approximately 12% of its total work force. In
North America, Cadence uses a direct sales force consisting of sales people and
applications engineers to license and optimize its products. Cadence's sales
force presents Cadence and its products for licensing to prospective customers,
while applications engineers provide technical pre-sales as well as post-sales
support. Due to the complexity of EDA products, the selling cycle is generally
long, with three to six months or longer being typical. During the sales cycle,
the Company's direct sales force generally provide technical presentations,
product demonstrations, and often, an on-site customer evaluation of Cadence
software.
Internationally (excluding Japan), Cadence markets and supports its products
and services primarily through its subsidiaries and various distributors.
Following a reorganization of the Company's distribution channel in Japan in
1997, the Company now licenses its products through Innotech Corporation
(Innotech) and markets its services through a wholly owned subsidiary. Revenue
from Innotech, in which the Company is an approximate 11% stockholder, did not
exceed 10% of the Company's revenue in 1997. In 1996 and 1995, Innotech
accounted for 14% and 15% of total revenue, respectively.
Revenue from international sources was $470.2 million, $350.2 million, and
$271.8 million, or approximately 51%, 47%, and 50% of total revenue for 1997,
1996, and 1995, respectively. See "Notes to Consolidated Financial Statements"
for a summary of operations by geographic area. Prices for international
customers are quoted from a local currency international price list. The list is
prepared based on the U.S. dollar price list but reflects the higher cost of
doing business outside the United States. International customers are invoiced
in the local currency or U.S. dollars using current exchange rates.
The Company conducts business on a global basis. Accordingly, the Company's
future results could be adversely affected by a variety of uncontrollable and
changing factors including foreign currency exchange rates; regulatory,
political or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; government spending
patterns; and natural disasters, among other factors. Any or all of these
factors could have a material adverse impact on the Company's future
international business in these or other countries. See "Factors That May Affect
Future Results" in Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional risks associated with the
Company having a significant portion of total revenues derived internationally.
Cadence is required to have United States Department of Commerce export
licenses for shipment of its products outside the United States to certain
countries and certain end users. Although to date, Cadence has not encountered
any material difficulty in obtaining these licenses, any difficulty in obtaining
necessary export licenses in the future could have an adverse effect on the
Company's business, results of operations, and financial condition.
RESEARCH AND DEVELOPMENT
For the years 1997, 1996, and 1995, respectively, Cadence's investment in
research and development was $155.4 million, $128.9 million, and $100.4 million
prior to capitalizing $15 million, $13.6 million, and $11.8 million of software
development costs. See "Notes to Consolidated Financial Statements" for a more
complete description of Cadence's capitalization of certain software development
costs.
Cadence is currently developing technology that it will introduce to the EDA
market in 1998 and beyond. Among the primary areas that Cadence is addressing
are SOC design, the design of silicon devices in the deep sub-micron range,
high-speed board design, architectural-level design, high-performance logic
verification technology, and hardware/software co-design. The industry in which
the Company competes is subject to rapid technological developments, evolving
industry standards, changes in customer requirements, and frequent new product
introductions and enhancements. As a result, the Company's success, in part,
depends upon its ability, on a cost-effective and timely basis, to continue to
enhance its existing
7
solutions and to develop and introduce new solutions that improve performance,
and reduce total cost of ownership. In order to achieve these objectives, the
Company's management and engineering personnel work closely with customers, to
identify and respond to customer needs, as well as with other innovators of
design products, including universities, laboratories, and corporations. The
Company will also continue to make strategic acquisitions and equity investments
where appropriate. Still, there can be no assurance that the Company will be
able to successfully develop new products to address new customer requirements
and technological changes, or that such products will achieve market acceptance.
Cadence's advanced research and development group, Cadence Laboratories, is
committed to new technological development. This group is chartered with
identifying and developing prototype technologies in emerging design areas which
will offer substantially improved alternatives to current EDA solutions.
COMPETITION
The Company operates in the highly competitive EDA industry and in the
emerging commercial electronic design and consulting markets.
The EDA industry continues to be characterized by falling prices, rapid
technological change, and new market entrants. The Company's success is
dependent upon its ability to develop innovative, cost competitive EDA software
products and bring them to market in a timely manner. The Company competes with
a number of companies--including Avant! Corporation, Mentor Graphics Corp.,
Synopsys, Inc., and Zuken-Redac. The Company also experiences competition from
manufacturers of electronic devices that have the capability to develop their
own EDA software. Some of these companies may have substantially greater
financial, marketing, and technological resources than the Company.
The EDA industry has relatively low barriers to entry and, therefore, the
number of the Company's actual and potential competitors is significant. A
potential competitor who possesses the necessary knowledge of electronic circuit
and systems design, production, and operations could develop competitive EDA
tools using a moderately priced computer workstation and bring such tools to
market quickly. There can be no assurance that development of competitive
products will not result in a shift of customer preferences away from the
Company's products, resulting in a significant decrease in the sales of the
Company's comparable products. In addition, there can be no assurance that the
Company will successfully identify new product opportunities, develop and bring
new products to market in a timely manner, and achieve market acceptance of its
products.
In the electronic design and consulting markets, the Company competes with
numerous consulting companies. This emerging market represents the outsourcing
of an activity by electronic manufacturers that has traditionally been performed
in-house, and is thus subject to the customers' "make versus buy" decisions.
Therefore, the Company's ability to obtain such business is dependent upon its
ability to offer better strategic concepts and technical solutions, lower
prices, a quicker response, or a combination of these factors. There can be no
assurance the Company will be able to effectively compete in this area and any
failure to compete in this area may have a material adverse effect on Cadence's
business, operating results, and financial condition.
The electronic design and consulting service businesses have relatively low
barriers to entry and, therefore, EDA and other electronics companies and
management consulting firms have entered and may continue to enter into this
market. The pricing model for services is susceptible to labor supply and demand
as well as the Company's continuing ability to provide competitive
time-to-market benefits to its customers. Some of the Company's current and
potential competitors may have substantially greater financial, marketing, and
technological resources than the Company. There can be no assurance that the
Company will be able to compete successfully.
8
PROPRIETARY TECHNOLOGY
Cadence's success is dependent, in part, upon its proprietary technology.
The Company generally relies upon patents, copyrights, trademarks, and trade
secret laws to establish and maintain its proprietary rights in its technology
and products. Cadence has a program to file applications for and obtain patents
in the United States and in selected foreign countries where a potential market
for Cadence's products exists. Cadence has been issued a number of patents;
other patent applications are currently pending. There can be no assurance that
any of these patents will not be challenged, invalidated or circumvented, or
that any rights granted thereunder will provide competitive advantages to
Cadence. In addition, there can be no assurance that patents will be issued from
pending applications, or that claims allowed on any future patents will be
sufficiently broad to protect Cadence's technology. In addition, the laws of
some foreign countries may not permit the protection of Cadence's proprietary
rights to the same extent as do the laws of the United States. Although Cadence
believes the protection afforded by its patents, patent applications,
copyrights, and trademarks has value, the rapidly changing technology in the EDA
industry makes Cadence's future success dependent primarily on the innovative
skills, technological expertise, and management abilities of its employees
rather than on patent, copyright, and trademark protection.
Many of Cadence's products are designed to include software or other
intellectual property licensed from third parties. While it may be necessary in
the future to seek or renew licenses relating to various aspects of its
products, Cadence believes that based upon past experience and standard industry
practice, such licenses generally could be obtained on commercially reasonable
terms. Because of the existence of a large number of patents in the EDA industry
and the rapid rate of issuance of new patents, it is not economically practical
to determine in advance whether a product or any of its components infringe
patent rights of others. From time to time, Cadence receives notices from or is
sued by third parties regarding patent claims. If infringement is alleged,
Cadence believes that, based upon industry practice, any necessary license or
rights under such patents may be obtained on terms that would not have a
material adverse effect on Cadence's business, operating results, and financial
condition. Nevertheless, there can be no assurance that the necessary licenses
would be available on acceptable terms, if at all, or that Cadence would prevail
in any such challenge. The inability to obtain certain licenses or other rights
or to obtain such licenses or rights on favorable terms, or the need to engage
in litigation could have a material adverse effect on Cadence's business,
operating results, and financial condition.
MANUFACTURING
Cadence's software production operations consist of configuring the proper
version of a product, outsourcing the recording of the product on magnetic tape
or CD-ROM, and producing customer unique access keys which allow customers to
use licensed products. User manuals and other documentation are generally
available on CD-ROM, but are occasionally supplied in hard copy format.
Shipments are generally made within two weeks of receiving an order.
The Company has generally been able to obtain adequate manufacturing
supplies in a timely manner from existing sources, or where necessary, from
alternative sources of supply. A reduction or interruption in supply or a
significant increase in the price of one or more components would adversely
affect the Company's business, operating results, and financial condition and
could damage customer relationships.
EMPLOYEES
As of February 28, 1998, Cadence employed 3,945 persons-including 2,045 in
sales, marketing, support, and manufacturing activities, 1,131 in product
development, and 769 in management, administration, and finance. None of
Cadence's employees is represented by labor unions, and Cadence has experienced
no work stoppages. Cadence believes that its employee relations are good.
Competition in recruiting of personnel in the software industry is intense.
Cadence believes that its future success will depend in part on its continued
ability to recruit, assimilate, and retain highly skilled
9
management, marketing, and technical personnel. To date, the Company believes
that it has been successful in recruiting qualified employees, but there is no
assurance that it will continue to be successful in the future.
ITEM 2. PROPERTIES
The Company's headquarters are located in San Jose, California, and the
Company owns the related land and buildings. The total square footage of the
buildings comprising the Company's headquarters is approximately 554,000 square
feet. In 1998, the Company anticipates the completion of a new building on the
San Jose, California campus with an estimated square footage of approximately
85,000 square feet.
In 1998, the Company anticipates the completion of a new research and
development facility in Noida, India, with an estimated square footage of
approximately 90,000 square feet. Beginning in 1998, new facilities in
Edinburgh, Scotland will be constructed in conjunction with the Company's new
design center. These facilities are anticipated to total approximately 550,000
square feet.
In addition to the Company's headquarters, the Company continues to lease
three buildings with approximately 209,000 square feet in San Jose, California.
Two leases, including approximately 129,000 square feet, expire in March 1998
with the remaining lease expiring in February 1999. Approximately 97,000 of the
square footage of these facilities has been sublet and the remaining capacity is
available for sublet.
Cadence leases additional facilities for its sales offices in the United
States and various foreign countries, and research and development facilities in
San Diego, Santa Cruz, and Berkeley, California, Lawrence, Kansas, and in the
United Kingdom, France, Taiwan, and India. Cadence also leases approximately
100,000 square feet of facilities in Chelmsford, Massachusetts and approximately
85,000 square feet in Sunnyvale, California. In 1998, the Company anticipates
leasing a new design factory in Rancho Bernardo, California, with an estimated
square footage of approximately 77,000 square feet.
Cadence believes that these facilities and the undeveloped land adjacent to
its current headquarters are adequate for its current needs and that suitable
additional or substitute space will be available as needed to accommodate
expansion of the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and litigation
matters which arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(Avant!) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy, and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's former President and Chief Executive Officer, and with leave
of the court, on January 29, 1998 filed a second amended counterclaim. The
second amended counterclaim alleges, INTER ALIA, that the Company and its former
President and Chief Executive Officer had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its former
President and Chief Executive Officer believe that each has meritorious defenses
to Avant!'s claims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint. The second amended counterclaim
10
remains severed from the Company's complaint and stayed pending resolution of
the Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order enjoining
the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s
Aquarius software infringes Cadence's code and, if so, to enter an order
enjoining the sale of that software. 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. In an order issued on December 19,
1997, as modified on January 26, 1998, the District Court entered an injunction
barring any further infringement of Cadence's copyrights in Design Framework II
software, or selling, licensing or copying such product derived from Design
Framework II, including but not limited to, Avant!'s ArcCell products. The
Company's motion for an injunction covering Avant!'s Aquarius product line
remains pending before the District Court.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5 million bond, in
light of criminal proceedings pending against Avant! and several of its
executives. The District Court has not yet set a trial date for the civil
proceedings. The Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CDN. The Company has never declared or paid any cash dividends on its
common stock in the past, and none are planned to be paid in the future. As of
March 20, 1998, the Company had approximately 2,097 stockholders of record, not
including those held in street or nominee name.
The following table sets forth the high and low sales price for the Common
Stock for each calendar quarter in the two-year period ended January 3, 1998:
HIGH LOW
--------- ---------
1997:
First Quarter........................................................................... $ 21.94 $ 15.69
Second Quarter.......................................................................... $ 19.00 $ 13.38
Third Quarter........................................................................... $ 27.50 $ 16.75
Fourth Quarter.......................................................................... $ 28.75 $ 22.31
1996:
First Quarter........................................................................... $ 15.17 $ 11.50
Second Quarter.......................................................................... $ 21.88 $ 14.84
Third Quarter........................................................................... $ 18.94 $ 11.50
Fourth Quarter.......................................................................... $ 20.69 $ 16.32
12
ITEM 6. SELECTED FINANCIAL DATA
FIVE FISCAL YEARS ENDED JANUARY 3, 1998:
------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue............................................ $ 915,893 $ 741,459 $ 548,418 $ 429,072 $ 368,623
Unusual items(1)................................... $ 44,053 $ 100,543 $ -- $ 14,707 $ 19,650
Income (loss) from operations...................... $ 234,007 $ 91,259 $ 117,860 $ 44,047 $ (8,415)
Income (loss) before cumulative effect of change in
accounting method(2)............................. $ 181,742 $ 29,038 $ 97,270 $ 36,648 $ (12,779)
Net income (loss)(3)............................... $ 169,466 $ 29,038 $ 97,270 $ 36,648 $ (12,779)
Net income (loss) per share--assuming dilution..... $ 0.77 $ 0.16 $ 0.51 $ 0.19 $ (0.07)
Total assets....................................... $ 1,023,850 $ 717,001 $ 374,035 $ 361,048 $ 339,301
Long-term obligations.............................. $ 1,599 $ 20,292 $ 1,619 $ 2,098 $ 4,001
- ------------------------
(1) Unusual items are as follows for each of the years ended 1997, 1996, 1994,
and 1993. There were no unusual items in 1995:
- 1997 included restructuring charges of $34.4 million, $6.6 million for
write-offs of in-process research and development, and $3.1 million for
write-offs of capitalized software development costs.
- 1996 included write-offs of in-process research and development of $95.7
million, $2.7 million for write-offs of capitalized software development
costs, and $2.1 million for restructuring charges.
- 1994 included a provision for litigation settlement of $10.1 million and a
$4.6 million write-off of in-process research and development.
- 1993 included restructuring charges of $13.5 million and a $6.2 million
loss from operations of a disposed division.
(2) Income before cumulative effect of change in accounting method in 1997
excluded a $12.3 million charge, net of taxes of $5.3 million, for
reengineering project costs that had been previously capitalized by the
Company associated with its implementation of enterprise-wide information
systems.
(3) Net income included a $9.2 million and a $13.6 million after tax gain on the
sale of stock of a subsidiary in 1997 and 1995, respectively. A $3.1 million
after tax gain on the sale of an equity investment was included in net
income for 1994.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and notes thereto. All references to years represent fiscal years
unless otherwise noted. Except for the historical information contained herein,
the following discussion contains forward looking statements based on current
expectations that involve certain risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below in "Factors That May Affect Future Results," "Disclosures about
Market Risk," and "Liquidity and Capital Resources."
In November 1997, the Company effected a two-for-one stock split in the form
of a stock dividend. Prior periods have been restated to reflect the stock
split.
OVERVIEW
Cadence Design Systems, Inc. (the Company) provides comprehensive services
and technology for the product development requirements of the world's leading
electronics companies. The Company licenses its leading-edge electronic design
automation (EDA) software technology and provides a range of professional
services to companies throughout the world to help optimize its customers'
product development processes. Recently, the Company has expanded the role it
plays with companies that produce electronic products and with an emerging class
of companies that require electronic content in their products, but who may not
have any internal expertise in electronic design. The Company's business
objectives are based on providing complete solutions, which range from
individual software tools to complete outsourcing of design work. The Company is
now a supplier of "design realization" solutions, which are used by companies to
design and develop integrated circuits (ICs) and systems--including
semiconductors, computer systems and peripherals, telecommunications and
networking equipment, mobile and wireless devices, automotive electronics,
consumer products, and other advanced electronics.
In May 1997, the Company merged with Cooper and Chyan Technology, Inc.
(CCT), whose software products are used to design sophisticated integrated
circuits and high-speed printed circuit boards. In connection therewith, the
Company issued approximately 22.8 million shares of common stock. The
acquisition was accounted for as a pooling of interests. The operations of CCT
were not material to the Company's consolidated operations and financial
position; therefore, prior period financial statements were not restated. The
results of CCT from the date of acquisition forward have been recorded in the
Company's consolidated financial statements.
In December 1996, the Company completed the acquisition of High Level Design
Systems, Inc. (HLDS), a company which developed, marketed, and supported EDA
software for the design of high-density, high performance ICs. The acquisition
was accounted for as a purchase and, accordingly, the results of HLDS from the
date of the acquisition forward have been recorded in the Company's consolidated
financial statements.
In November 1996, the Company consummated a secondary public offering
whereby 11.5 million shares of common stock were sold, generating $202.1 million
of net proceeds.
In July 1995, the Company and its wholly-owned subsidiary, Integrated
Measurement Systems, Inc. (IMS), sold to the public approximately 3 million
shares of common stock, of which approximately 2.6 million shares were sold by
the Company as the sole selling stockholder of IMS, and 0.4 million shares were
sold by IMS. As a result of the offering and sale of shares by the Company, the
Company's ownership interest in IMS decreased to approximately 55%. As the
Company remained the majority stockholder at December 28, 1996, the consolidated
financial statements of the Company for fiscal years 1996 and 1995 included the
accounts of IMS after elimination of intercompany accounts and transactions and
minority
14
interest adjustments. In February 1997, the Company and IMS sold 1.7 million
shares of IMS common stock to the public of which 0.95 million were owned by the
Company. As a result, the Company received approximately $18.6 million, reduced
its ownership in IMS to approximately 37%, and began accounting for its
investment in IMS using the equity method of accounting.
RESULTS OF OPERATIONS
REVENUE
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Product............................................ $ 530.5 $ 414.1 $ 292.2 28% 42%
Services........................................... 160.9 114.6 65.9 40% 74%
Maintenance........................................ 224.5 212.8 190.3 5% 12%
--------- --------- ---------
Total revenue.......................................... $ 915.9 $ 741.5 $ 548.4 24% 35%
--------- --------- ---------
--------- --------- ---------
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
Product............................................ 58% 56% 53%
Services........................................... 18% 15% 12%
Maintenance........................................ 24% 29% 35%
In 1997, strong demand for the Company's products and services generated a
24% increase in revenue as compared to the prior year.
Product revenue recorded in 1997 did not include product revenue from IMS,
since IMS' results were not consolidated with the Company in 1997. The product
revenue in 1996 included product revenue of $40.3 million from IMS. The
Company's product revenue includes product revenue for CCT, from the date of
acquisition on May 7, 1997 forward. CCT's product revenues in early 1997, prior
to the acquisition, and in fiscal year 1996, totaled $7.8 million and $27.3
million, respectively. If IMS' sales had been excluded from the 1996 results and
if CCT's product revenue had been included in 1997 and 1996, product revenue
would have shown an increase of $137.2 million or 34% in 1997, as compared to
1996. The increase was primarily driven by increased demand for products used by
customers to develop custom ICs and deep submicron designs--including design
entry tools, place-and-route tools, physical verification tools, and
system-level tools.
The 1996 increase, as compared to 1995, was attributed to increased sales
volume of the Company's automatic place-and-route, physical layout,
verification, and timing-driven design process tools. Also, demand increased for
electronic systems design automation products, produced by the Company's Alta
business unit, which are designed to allow customers to include product concepts
in the EDA environment--thereby accelerating and enhancing the early phases of
system development.
The increases in services revenue in 1997 and 1996 were the result of
significant demand for the Company's services offerings, which provide a range
of solutions to address the product development needs of its customers in North
America, Europe, Japan, and Asia. The increase in 1996 over 1995 was also driven
by the first full year of an outsourcing agreement with Unisys Corporation
(Unisys) pursuant to which the Company assumed a substantial portion of Unisys'
internal silicon design operation. This five-year agreement was signed in March
1995 for a total contract value of at least $75 million.
The increase in maintenance revenue in 1997 and 1996 was attributable to an
increase in the Company's installed base of products. The decreased maintenance
revenue growth rates in 1997 and 1996 were due to customers renewing maintenance
contracts at a slower rate than in the prior years.
15
Revenue from international sources was approximately $470.2 million, $350.2
million, and $271.8 million, or 51%, 47%, and 50% of total revenue for 1997,
1996, and 1995, respectively. In 1997, domestic and international revenue
increased 14% and 34%, respectively, following increases of 41% and 29%,
respectively, in 1996. The increase in total revenue from international sources
in 1997, as compared to 1996, was primarily attributable to product revenue
growth and new services contracts in all regions. The higher percentage increase
in international revenue in 1997, as compared to domestic revenue, was primarily
attributable to an increase in international product revenue in 1997 as compared
to 1996. The increase in international revenue in 1997, as compared to 1996, and
in 1996, as compared to 1995, more than offset the negative impact of $32.4
million and $31.4 million, respectively, on revenue as a result of the weakening
of certain foreign currencies, primarily the Japanese yen, in relation to the
U.S. dollar.
COST OF REVENUE
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Product.......................................... $ 41.5 $ 48.4 $ 44.8 (14)% 8%
Services......................................... $ 114.8 $ 81.0 $ 55.0 42% 47%
Maintenance...................................... $ 26.8 $ 24.1 $ 16.7 11% 44%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
Product.......................................... 8% 12% 15%
Services......................................... 71% 71% 83%
Maintenance...................................... 12% 11% 9%
Cost of product revenue includes costs of production personnel, packaging
and documentation, amortization of capitalized software development costs, and
in 1996 and 1995, costs related to IMS' automated test equipment hardware
business. If IMS's costs had been excluded from the costs incurred in 1996, and
CCT's costs, prior to the acquisition date, had been included in 1996 and early
1997, cost of product would have increased $6.1 million or 17% from 1996 to
1997. The increase was primarily driven by additional costs incurred for the
Company's new European manufacturing facility, increases in software
amortization, and royalty expenses. On the same basis, cost of revenue as a
percent of product sales would have been 9% in 1996. The decreases in cost of
product as a percentage of product revenue in 1997, as compared to 1996, and in
1996, as compared to 1995, were primarily due to revenues growing at a faster
rate than costs. The increase in cost of product in absolute dollars in 1996, as
compared to 1995, was primarily due to increased purchased software amortization
and the write-off of $1.6 million of capitalized software development costs
related to products at the end of their life cycle.
Cost of services revenue includes personnel and related costs associated
with providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop, and retain services
professionals. Cost of services increased in total dollars in both 1997 and 1996
due to investments in services capacity, primarily headcount related, and the
continued development of this line of business. The services gross margin in
1997 remained consistent with 1996 at 29%. Continued investment in the services
business offset operating efficiencies from a larger revenue base. Continued
investment in developing new services offerings and the cost of integrating new
services professionals performing a growing number of services offerings will
continue to put pressure on services gross margins until operating efficiencies
are obtained. The improvement in services gross margins to 29% in 1996, as
compared to 17% in 1995, was due to increased operating efficiencies attained
within existing services offerings.
Cost of maintenance revenue includes the cost of customer services such as
hot-line and on-site support and the production cost of the maintenance renewal
process. The increase in cost of maintenance
16
in total dollars, and as a percentage of maintenance revenue in 1997 and 1996,
was principally due to additional on-site support costs necessary to support a
larger installed base. The 1997 costs also increased due to additional costs
associated with the Company's new European manufacturing facility.
OPERATING EXPENSES
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Marketing and sales................................ $ 257.8 $ 226.5 $ 185.0 14% 22%
Research and development........................... $ 140.4 $ 115.3 $ 88.6 22% 30%
General and administrative......................... $ 56.5 $ 54.4 $ 40.4 4% 34%
OPERATING EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales................................ 28% 31% 34%
Research and development........................... 15% 16% 16%
General and administrative......................... 6% 7% 7%
GENERAL
Operating expenses incurred in 1997 excluded expenses from IMS and included
expenses from CCT for the period from May 7, 1997 through January 3, 1998.
MARKETING AND SALES
The increase in marketing and sales expenses for 1997, as compared to 1996,
was primarily the result of an increase of $24.1 million in employee related
expenses--attributable to increased headcount and commissions, as well as
increases in consulting and other services costs of $6.1 million, management
information systems costs of $5.9 million, and costs associated with business
trips of $5.8 million. These increases were partially offset by a decrease of
$11.9 million related to the deconsolidation of IMS and additionally by the
weakening of certain foreign currencies, primarily the Japanese yen, in relation
to the U.S. dollar which favorably impacted marketing and sales expenses by
approximately $5.6 million in 1997, as compared to the prior year. Marketing and
sales expenses grew from 1995 to 1996 due to an additional $26.6 million of
employee related costs resulting from increased headcount, including
commissions, recruiting, relocations, and a higher volume of pre-sales
activities and advertising. These increases were partially offset by the
weakening of certain foreign currencies, particularly the Japanese yen, which
resulted in a favorable impact of $5.6 million.
RESEARCH AND DEVELOPMENT
The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $155.4 million, $128.9
million, and $100.4 million for 1997, 1996, and 1995, respectively, representing
17%, 17%, and 18% of total revenue, respectively. The expense increases for
1997, as compared to 1996, were primarily attributable to higher salary-related
costs due to an increased headcount of $22.5 million and management information
systems costs of $9.7 million. These increases were partially offset by a
decrease of $7.5 million related to the deconsolidation of IMS. The increase of
$26.7 million in 1996, as compared to 1995, was primarily attributable to higher
salary-related costs due to increased headcount of $15.6 million and $6 million
of higher consulting and recruiting, computer maintenance, and facilities costs.
The Company capitalized approximately $15 million, $13.6 million, and $11.8
million of software development costs in the years 1997, 1996, and 1995,
respectively, which represented approximately 10%, 11%, and 12% of total
research and development expenditures incurred
17
in those years. The amount of capitalized software development costs in any
given period may vary depending on the exact nature of the development
performed.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased in 1997, as compared to 1996,
primarily as a result of increased management information systems costs of $9.6
million, partially offset by decreases in legal expenses of $4.6 million, and a
decrease of $3.5 million resulting from the deconsolidation of IMS. The increase
in 1996, as compared to 1995, was due to higher legal costs of $5.9 million,
higher management information and telecommunication costs of $2.2 million, and
higher outside service costs of $1 million. The percentage change in general and
administrative expenses between 1997 and 1996, as compared to the percentage
change between 1996 and 1995, decreased primarily due to high legal expenses
incurred by the Company in 1996.
UNUSUAL ITEMS AND RESTRUCTURING
Described below are unusual items and restructuring charges in 1997 and
1996. None were recorded in 1995.
1997 1996
--------- ---------
(IN MILLIONS)
Restructuring charges.................................................... $ 34.4 $ 2.1
Write-off of in-process research and development......................... 6.6 95.7
Write-off of capitalized software development costs...................... 3.1 2.7
--------- ---------
Total unusual items.................................................. $ 44.1 $ 100.5
--------- ---------
--------- ---------
Unusual items included restructuring charges of $34.4 million recorded by
the Company in 1997 for the reduction of personnel whose duties were made
redundant, closure of duplicated and excess facilities, fees of financial
advisors, attorneys, and accountants, and other expenses associated with the
merger with CCT and the acquisition of HLDS. Additionally, the Company
restructured its international business operations to reduce the Company's cost
structure and to further integrate and reduce selling and marketing activities.
In connection with the 1997 restructuring activities, the Company reduced its
workforce by approximately 230 employees representing various sales, marketing,
and research and development departments. The majority of the restructuring
charges were utilized during the year, with the exception of facility costs
which will be paid out through the year 2000, and some severance costs and other
restructuring charges to be paid during 1998.
In 1997, the Company wrote off $6.6 million of acquired in-process research
and development associated with its acquisitions of Synthesia AB and Advanced
Microelectronics. These costs reflected research and development which had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. Additionally, the Company wrote off capitalized software
development costs of $3.1 million for products developed by the Company which
were replaced by CCT products or by license of replacement technology.
Included in 1996 unusual items was a $95.7 million write-off of in-process
research and development, $2.7 million of capitalized software development costs
for products developed by the Company which were replaced by HLDS products, as
well as $2.1 million of restructuring charges consisting of employee termination
costs associated with the outsourcing of the Company's management information
technology services, and costs associated with excess facilities. The in-process
research and development had not reached technological feasibility and, in
management's opinion, had no probable alternative future use.
18
Liabilities for excess facilities and other restructuring charges are
included in other current and non-current liabilities, while severance and
benefits liabilities are included in payroll and payroll related accruals.
CHANGE IN ACCOUNTING METHOD
In November 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Ruling 97-13 "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation," which requires
companies to expense costs incurred for business process reengineering projects.
As a result, the Company recorded a $12.3 million charge in 1997, net of taxes
of $5.3 million, as a cumulative effect of change in accounting method for
reengineering project costs that had been previously capitalized by the Company
associated with its implementation of enterprise-wide information systems.
OTHER INCOME AND EXPENSE
Other income (expense) for 1997, 1996, and 1995 is as follows:
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Interest income...................................................... $ 17.9 $ 4.3 $ 4.8
Gain on sale of IMS stock............................................ 13.1 -- 18.9
Equity earnings in IMS............................................... 1.9 -- --
Minority interest expense............................................ (0.4) (3.0) (1.4)
Gain (loss) on foreign exchange...................................... (1.4) 0.2 (0.1)
Interest expense..................................................... (2.5) (1.9) (2.2)
Other expense, net................................................... (3.0) (0.4) (2.8)
--------- --------- ---------
Total other income (expense)......................................... $ 25.6 $ (0.8) $ 17.2
--------- --------- ---------
--------- --------- ---------
Interest income increased in 1997, as compared to 1996, by $13.6 million,
primarily due to higher average cash and investment balances throughout 1997.
The decrease in 1996, as compared to 1995, was primarily attributable to
prevailing interest rates being lower in 1996, as compared to 1995.
In 1995, an $18.9 million gain was recorded on the sale of approximately 45%
of the stock of IMS, then a previously wholly-owned subsidiary of the Company.
In 1997, the Company sold additional shares of IMS for a $13.1 million gain,
thereby reducing its ownership to approximately 37%. As a result, the Company
began reporting its share of IMS earnings using the equity method of accounting,
which generated $1.9 million in equity income in 1997, and reduced minority
interest expense by $2.6 million in 1997, as compared to 1996. The increase in
minority interest expense in 1996, as compared to 1995, was due to higher
minority interest expense associated with IMS and a Japanese subsidiary.
The loss on foreign exchange increased in 1997, as compared to 1996, due to
unfavorable volatile Asian currencies, primarily the Japanese yen and Korean
won. The increase in other expense in 1997, as compared to 1996, was due
primarily to investment losses. The decrease in 1996, as compared to 1995, was
due primarily to losses recorded for abandoned equipment in 1995.
19
INCOME TAXES
The provision for income taxes and the effective tax rates for 1997, 1996,
and 1995 are as follows:
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Provision for income taxes*.......................................... $ 72.6 $ 61.4 $ 37.8
Effective tax rate................................................... 30% 68% 28%
- ------------------------
* Includes tax benefit in 1997 of $5.3 million on cumulative effect of change in
accounting method.
At January 3, 1998, the Company had total net deferred tax assets of
approximately $88.1 million. Realization of the deferred tax assets will be
dependent on generating sufficient taxable income prior to the expiration of the
loss and tax credit carryforwards. The net valuation allowance decreased by
$10.8 million in 1997. The decrease in valuation allowance for equity and
intangibles of $9.1 million was due to the expected realization of the tax
benefits of stock option deductions generated in prior years. The valuation
allowance provision for income taxes decreased by $1.7 million due to the
realization of net operating losses and tax credits generated in prior years.
Although realization is not assured, management believes that it is more likely
than not that the net deferred tax assets will be realized. The amount of the
net deferred tax assets, however, could be reduced or increased in the near term
if actual facts, including the estimate of future taxable income, differ from
those estimated.
The effective tax rate of 30% for 1997 was lower than the effective tax rate
in 1996 due primarily to foreign earnings, which were taxed at lower rates. The
1996 effective tax rate of 33% excluded the write-off of $95.7 million for
in-process research and development costs associated with the HLDS acquisition,
which was not deductible for tax purposes. The increase in the 1996 effective
tax rate, as compared to the 1995 effective tax rate, was primarily due to an
increase in state income taxes and a smaller reduction in the valuation
allowance.
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only safe and high credit
quality securities, 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.
20
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at January 3, 1998. All investments mature, by policy,
in one year or less.
CARRYING AVERAGE
VALUE INTEREST RATE
----------- ---------------
(IN MILLIONS, EXCEPT FOR
AVERAGE INTEREST RATES)
Investment Securities:
Cash equivalents--fixed rate.................................... $ 81.8 5.76%
Short-term investments--fixed rate.............................. 46.2 5.56%
Short-term investments--variable rate........................... 51.0 6.14%
-----------
Total investment securities................................... 179.0 5.82%
Money market funds--variable.................................... 36.4 5.68%
-----------
Total interest bearing instruments............................ $ 215.4 5.80%
-----------
-----------
FOREIGN CURRENCY RISK
The Company transacts business in various foreign currencies, primarily in
Japan, emerging market countries in Asia, and certain European countries. The
Company has established a foreign currency hedging program, utilizing foreign
currency forward exchange contracts (forward contracts) to hedge certain foreign
currency transaction exposures in Japan, Canada, Asia, and certain European
countries. Under this program, increases or decreases in the Company's foreign
currency transactions are partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.
The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in other income (expense), and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included in
net income as a component of other income (expense). The Company's ultimate
realized gain or loss with respect to currency fluctuations will depend on the
currency exchange rates and other factors in effect as the contracts mature.
The table below provides information as of January 3, 1998 about the
Company's forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature in less than thirty days.
NOTIONAL AVERAGE
AMOUNT CONTRACT RATE
----------- -------------
(IN MILLIONS, EXCEPT FOR
AVERAGE CONTRACT RATES)
Forward Contracts:
Japanese yen.................................................... $ 20.0 129.35
British pound sterling.......................................... $ 5.4 0.61
German deutschemarks............................................ $ 8.1 1.79
French franc.................................................... $ 3.7 5.98
Swedish krona................................................... $ (3.3) 7.82
Canadian dollars................................................ $ 3.1 1.42
Italian lira.................................................... $ 1.6 1,753.48
The unrealized gain (loss) on the outstanding forward contracts at January
3, 1998 was immaterial to the Company's consolidated financial statements. Due
to the short-term nature of the forward contracts,
21
the fair value at January 3, 1998 was negligible. The realized gain (loss) on
these contracts as they matured was not material to the consolidated operations
of the Company.
EQUITY PRICE RISK
The Company, as part of its authorized repurchase program, has purchased
call options that entitle the Company to buy on a specified day one share of
common stock at a specified price to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. Additionally,
the Company has sold put warrants through private placements.
The table below provides information at January 3, 1998 about the Company's
put warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through February 26, 1999.
1998 1999 ESTIMATED
MATURITY MATURITY FAIR VALUE
----------- ----------- -----------
(SHARES AND CONTRACT
AMOUNTS IN MILLIONS)
Put Warrants:
Shares..................................................... 4.5 1.3
Weighted average strike price.............................. $ 23.81 $ 24.20
Contract amount............................................ $ 108 $ 30.3 $ 17.5
Call Options:
Shares..................................................... 3.4 0.9
Weighted average strike price.............................. $ 23.90 $ 24.45
Contract amount............................................ $ 81.2 $ 20.8 $ 20.5
The Company has the right to settle the put warrants with stock. Settlement
of the put warrants with stock could cause the Company to issue a substantial
number of shares, depending on the exercise price of the put warrants and the
per share fair value of the Company's common stock at the time of exercise. In
addition, settlement of the put warrants in stock could lead to the disposition
by put warrant holders of shares of the Company's common stock that such holders
may have accumulated in anticipation of the exercise of the put warrants or call
options, which may impact the price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
At January 3, 1998, the Company's principal sources of liquidity consisted
of $304.2 million of cash and short-term investments, as compared with $285.5
million and $96.6 million at December 28, 1996 and December 30, 1995,
respectively, and a three-year, $120 million secured revolving line of credit
agreement. As of January 3, 1998, the Company had no borrowings under the
revolving line of credit.
Cash generated from operating activities increased $23 million in the year
ended January 3, 1998, as compared to the year ended December 28, 1996,
primarily due to higher net income and increases in accrued liabilities and
payables and income taxes payable. This increase was partially offset by
increases in accounts receivable, installment contract receivables, and deferred
income taxes. Cash generated from operating activities decreased $21.8 million
to $175.3 million for the year ended December 28, 1996, as compared to the year
ended December 30, 1995. The decrease was primarily due to increases in accounts
receivable, prepaid expenses and other assets, and lower deferred income taxes,
partially offset by an increase in net income prior to the write-off of
in-process research and development, an increase in accrued liabilities and
payables, and higher deferred revenue
At January 3, 1998, the Company had net working capital of $340.3 million,
as compared with $259.6 million at December 28, 1996. The primary reasons for
the increase were increases in accounts receivable of $56.6 million and in
prepaid expenses and other assets of $50.8 million, partly offset by an
22
increase in accounts payable and accrued liabilities of $40.3 million. The
increase in accounts receivable was attributable to increased billing activity,
primarily due to higher revenue. The increase in accounts payable and accrued
liabilities was primarily attributable to payments expected to be made in early
1998, including bonus and commissions payments, restructuring charges, sales
taxes, and withholdings for issuance of stock under the Company's Employee Stock
Purchase Plan (ESPP).
In addition to its short-term investments, the Company's primary investing
activities were purchases of property and equipment, purchases of software and
intangibles, the capitalization of software development costs, and an investment
in a limited partnership, which combined represented $123 million and $96.4
million of cash used for investing activities in the years ended January 3, 1998
and December 28, 1996, respectively. In 1998, the Company anticipates the
completion of a new building and improvements on the San Jose, California campus
with an estimated cost of approximately $14.5 million. Additionally, new
facilities in Scotland will be constructed in conjunction with the Company's new
design center. If the Company becomes the owner of such facilities, absent of
any financing from any third party, the Company may incur estimated land and
building costs of approximately $115 million over the next seven years.
In May 1997, Cadence announced that its board of directors had rescinded the
Company's previously-announced stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. The Company rescinded the stock repurchase
program in connection with its merger with CCT in order to comply with
requirements for the pooling of interests accounting treatment. Cadence
announced a new seasoned systematic stock repurchase program in September of
1997 in connection with the establishment of the new 1997 Stock Option Plan (the
1997 Plan). The shares acquired by the Company under this new program will be
used to meet the recurring share issuance requirements of the 1997 Plan. The
repurchase authorization for the 1997 Plan is 4 million shares over a two year
period; 2.4 million additional shares are authorized for repurchase for the ESPP
over a two year period. In November 1997, the Company announced a new 10
million-share stock repurchase program. The shares acquired by the Company under
this program will be used for general corporate purposes.
Since 1994, as part of its previously discussed authorized stock repurchase
program, the Company has sold put warrants and purchased call options through
private placements. The Company had a maximum potential obligation related to
the put warrants at January 3, 1998 to buy back 5.8 million shares of its common
stock at an aggregate price of approximately $138.3 million. The put warrants
will expire at various dates from February 1998 through February 1999. The
Company has the ability to settle these put warrants with stock and, therefore,
no amount was classified out of stockholders' equity in the consolidated balance
sheet. The effect of the exercise of these put warrants and call options is
reported in stockholders' equity.
Anticipated cash requirements for 1998 include the repurchase of stock for
the Company's stock repurchase programs and the contemplated additions of
property, plant, and equipment of approximately $85 million, including the new
building and improvements on the San Jose, California campus as discussed
previously.
As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $35 million will be made over
the next two to three years. At January 3, 1998, the Company had contributed
approximately $20 million, which is reflected in other assets in the
consolidated balance sheet, net of operating losses.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and its $120 million revolving line of
credit should be sufficient to meet its working capital and capital expenditure
requirements on a short- and long-term basis.
23
NEW ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 129, "Disclosure of Information About Capital Structure." SFAS No.
129 requires companies to disclose certain information about their capital
structure. SFAS No. 129 did not have a material impact on the Company's
consolidated financial statement disclosures.
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Comprehensive Income," which will be adopted by the Company in the first
quarter of 1998. SFAS No. 130 requires companies to report a new, additional
measure of income on the income statement or to create a new financial statement
that has the new measure of income on it. "Comprehensive Income" is to include
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. The Company anticipates that SFAS No. 130 will not have a material
impact on its consolidated financial statements.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in its
1998 annual consolidated financial statements. SFAS No. 131 requires companies
to report financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and expense
items, and segment assets, as well as information about the revenues derived
from the Company's products and services, the countries in which the Company
earns revenues and holds assets, and major customers.
In 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition," which will be adopted by the Company in
the first quarter of 1998. SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The Company anticipates that SOP 97-2 will not have a material impact on its
consolidated financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Because of rapid technological changes in the EDA industry, the Company's
future revenues will depend on its ability to develop or acquire new products
and enhance its existing products on a timely basis to keep pace with
innovations in technology and to support a range of changing computer software,
hardware platforms, and customer preferences. Changes in manufacturing
technology may render the Company's software tools obsolete. Lack of market
acceptance or significant delays in product development could result in a loss
of competitiveness of the Company's products, with a resulting loss of revenues.
The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by many
factors, including the desire to obtain new technologies, the desire to expand
and enhance the Company's product and service lines, and the desire to attract
personnel. Growth through acquisition has several identifiable risks, including
risks related to integration of the previously distinct businesses into a single
unit, the substantial management time devoted to such activities, undisclosed
liabilities, the failure to realize anticipated benefits (such as cost savings
and synergies), and issues related to product transition (such as distribution,
engineering, and customer support).
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's consolidated results of operations may
be adversely affected if revenue does not materialize in a quarter as
anticipated. Since expenses are usually committed in advance of revenues, and
because only a small portion of expenses vary with revenue, the Company's
consolidated results of operations may be impacted significantly by lower
revenue which would be attributable to various factors and could affect quarter
to quarter comparisons. The Company's focus on providing services is relatively
recent. The percentage revenue growth from this source from 1996 to 1997 may not
be indicative of future growth.
In addition, a substantial portion of the Company's revenues from services
are earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect
24
on the Company's business, financial condition, and results of operations.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced, and may continue to experience, decreases in first
quarter revenue compared with the preceding fourth quarter, which is believed to
result primarily from the capital purchase cycle of the Company's customers.
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff, and a number of other key
management, sales, support, technical, and services personnel. As noted above,
the Company has recently increased its focus on offering professional services
to its customers. To the extent that the Company is not able to attract, retain,
train, and motivate highly skilled employees, directly or through acquisition,
who are able to provide services that satisfy customer's expectations, the
Company's business and consolidated results of operations would be adversely
affected.
The Company expects that international revenues will continue to account for
a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements and tariffs, and other trade barriers. Currency exchange
fluctuations in countries in which the Company conducts business could also
materially adversely affect the Company's business, consolidated financial
condition, and consolidated results of operations. The Company enters into
forward contracts to hedge the short-term impact of foreign currency
fluctuations. Although the Company attempts to reduce the impact of foreign
currency fluctuations, significant exchange rate movements may have a material
adverse impact on the Company's consolidated results of operations.
Effective July 1, 1997, the Company reorganized the operation of its
business in Japan, acquiring an equity position in and entering into a long-term
exclusive arrangement for distribution of EDA software products with Innotech
Corporation. The Company will continue to market and provide design services in
Japan through a wholly-owned subsidiary. Future results may be adversely
affected if the Company fails to realize the benefits contemplated by the
reorganization of its Japanese business operations.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its databases against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion, and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures are sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, consolidated financial condition, and
consolidated results of operations.
The Company is currently in the process of transitioning to new computer
software for its financial, accounting, project system accounting, and order
management information systems. The successful implementation of these new
systems is crucial to the efficient operation of the Company's business. There
can be no assurance that the Company will implement its new systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. Problems with installation or initial operation of the
new systems could cause substantial management difficulties in operations
planning, financial reporting, and management, and thus could have a material
adverse effect on the Company's business, consolidated financial condition, and
consolidated results of operations.
The Company believes that all of its most current releases of its products
will not cease to perform nor generate incorrect or ambiguous data or results
solely due to a change in date to or after January 1, 2000, and will calculate
any information dependent on such dates in the same manner, and with the same
functionality, data integrity, and performance, as such products do on or before
December 31, 1999 (collectively, "Year 2000 Compliance"). Year 2000 Compliance
issues may arise with respect to any
25
modifications made to the Company's products by a party other than the Company
or from the combination or use of the Company's products with any other software
programs or hardware devices not provided by the Company, and therefore may
result in unforeseen Year 2000 Compliance problems for some of the Company's
customers, which may have an adverse effect on the Company.
Additionally, as with any company with a computing infrastructure and
utilizing business-application software programs written over many years, the
Company's internal operations may be subject to Year 2000 Compliance issues. The
Company has been implementing enterprise-wide information systems which support
a majority of the Company's operations. These systems are considered to be Year
2000 Compliant and are expected to be used world-wide by April 1998. Based
solely due to a change in date to or after January 1, 2000 thereon, the Company
believes that its internal operations will not be materially adversely impacted.
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures about Market Risk" found in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
SUMMARY QUARTERLY DATA--UNAUDITED
1997 1996
---------------------------------------------- ----------------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue.......................... $ 283,013 $ 234,866 $ 210,466 $ 187,548 $ 212,262 $ 188,741 $ 177,026 $ 163,430
Cost of revenue.................. $ 53,795 $ 46,812 $ 43,592 $ 38,897 $ 42,807 $ 39,262 $ 37,765 $ 33,639
Income (loss) from
operations(1).................. $ 83,733 $ 74,615 $ 37,382 $ 38,277 $ (40,729) $ 49,982 $ 43,433 $ 38,573
Income before cumulative effect
of change in accounting
method(2)...................... $ 60,873 $ 55,301 $ 28,446 $ 37,122 $ (57,816) $ 32,687 $ 28,588 $ 25,579
Net income (loss)(3)............. $ 48,597 $ 55,301 $ 28,446 $ 37,122 $ (57,816) $ 32,687 $ 28,588 $ 25,579
Net income (loss) per share--
diluted........................ $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ (0.36) $ 0.18 $ 0.16 $ 0.14
- ------------------------
(1) Income (loss) from operations for 1997 and 1996 included certain unusual
item charges for $44.1 million and $100.5 million, respectively, which
follow:
- For the fourth quarter ended January 3, 1998, unusual items totaled $9.9
million, of which $6.3 million was for restructuring charges, $1.9 million
represented a write-off of capitalized software development costs, and
$1.7 million was for the write-off of in-process research and development.
- For the second quarter ended June 28, 1997, unusual items totaled $22.4
million, of which $21.2 million was for restructuring charges and $1.2
million was a write-off of capitalized software development costs.
- For the first quarter ended March 29, 1997, unusual items totaled $11.8
million, of which $6.9 million was for restructuring charges and $4.9
million represented a write-off of in-process research and development.
- For the fourth quarter ended December 28, 1996, unusual items totaled
$100.5 million, of which $95.7 million was for the write-off of in-process
research and development, $2.7 million represented a write-off of
capitalized software development costs, and $2.1 million was for
restructuring charges.
(2) For the fourth quarter ended January 3, 1998 income before cumulative effect
of change in accounting method excluded a $12.3 million charge, net of taxes
of $5.3 million, for reengineering project costs that had been previously
capitalized by the Company associated with its implementation of
enterprise-wide information systems.
(3) Net income included a $13.1 million after tax gain on the sale of stock of a
subsidiary in first quarter ended March 28, 1997.
27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors is incorporated by
reference from the sections entitled "Election of Directors" and "Compliance
with the Reporting Requirements of Section 16(a)" in the Company's definitive
Proxy Statement for its annual stockholders' meeting to be held May 6, 1998.
The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
- ------------------------- --- ----------------------------------------------------------------
John R. Harding 42 President, Chief Executive Officer, and Director
H. Raymond Bingham 52 Executive Vice President, Chief Financial Officer, and Director
Michael W. Bealmear 50 Executive Vice President, Worldwide Services
K.C. Murphy 43 Executive Vice President, Strategic Business Group and Corporate
Strategic Planning
John F. Olsen 46 Executive Vice President, Worldwide Sales and Marketing
Shane V. Robison 43 Executive Vice President, Engineering
R.L. Smith McKeithen 54 Vice President, General Counsel, and Secretary
William Porter 43 Vice President, Corporate Controller, and Assistant Secretary
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
JOHN R. HARDING has served as President and Chief Executive Officer and a
director of the Company since October 1997. Mr. Harding joined Cadence in May
1997 as Senior Vice President, Strategic Business Units. Prior to joining the
Company, Mr. Harding served as President and Chief Executive Officer of Cooper &
Chyan Technology, Inc. (CCT), a software company, from December 1994 until its
merger with the Company in May 1997. Before joining CCT, Mr. Harding was with
Zycad Corporation, an electronic design automation company, as Executive Vice
President, Worldwide Sales and Marketing, from January 1992 to October 1994.
H. RAYMOND BINGHAM has served as Executive Vice President and Chief
Financial Officer of the Company since 1993. Mr. Bingham has been a director of
the Company since November 1997. Prior to joining the Company, Mr. Bingham was
Executive Vice President and Chief Financial Officer of Red Lion Hotels and
Inns, an owner operator of a chain of hotels, for eight years. Mr. Bingham is a
director of Sunstone Hotel Investors, Inc. and Integrated Measurement Systems,
Inc.
MICHAEL W. BEALMEAR joined Cadence in August 1997 as Executive Vice
President, Worldwide Services. Prior to joining the Company, Mr. Bealmear was a
Senior Vice President for Worldwide Services at Sybase, Inc., a relational
database company, for three years and was a Senior Vice President and Area
Managing Director for SHL Systemhouse, an information technology consulting
company, for three years.
K.C. MURPHY joined Cadence in April 1996 as Senior Vice President, Corporate
Strategy, and in November 1997 became Executive Vice President, Strategic
Business Group and Corporate Strategic Planning. Prior to joining the Company,
Mr. Murphy worked for 17 years at Advanced Micro Devices, a semiconductor
manufacturer, where he held various positions, most recently Vice President of
Strategic Marketing.
JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field
Operations, and in November 1997 became Executive Vice President, Worldwide
Sales and Marketing. Prior to joining the
28
Company, Mr. Olsen served as a partner for KPMG Peat Marwick LLP, a public
accounting firm, for five years.
SHANE V. ROBISON joined Cadence in July 1995 and in November 1997 became
Executive Vice President, Engineering. Prior to joining the Company, Mr. Robison
served as Vice President and General Manager of the Personal Interactive
Electronics Division of Apple Computer, Inc., a personal computer manufacturer,
for more than seven years.
R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General
Counsel, and Secretary. From 1994 to 1996, he served as Vice President, General
Counsel and Secretary of Strategic Mapping, Inc., a computer based mapping and
demographic database company. From 1988 to 1994, Mr. McKeithen served as Vice
President, General Counsel, and Secretary of Silicon Graphics, Inc., a
manufacturer of workstations, servers, and microprocessors.
WILLIAM PORTER joined Cadence in February 1994 as Vice President, Corporate
Controller, and Assistant Secretary. From September 1988 to February 1994, Mr.
Porter served as Technical Accounting and Reporting Manager and most recently as
Controller of Cupertino Operations with Apple Computer, Inc., a personal
computer company. From 1976 until 1988, he held various positions with Arthur
Andersen LLP, a public accounting firm, most recently as Senior Audit Manager.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Director and Executive Compensation" in the Company's
definitive Proxy Statement for its annual stockholders' meeting to be held May
6, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for its annual
stockholders' meeting to be held May 6, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its annual stockholders' meeting to be held May 6, 1998.
29
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE
-----
(a)1. FINANCIAL STATEMENTS:
- Report of Independent Public Accountants. 35
- Consolidated Balance Sheets at January 3, 1998 and December 28, 1996. 36
- Consolidated Statements of Income for the three fiscal years ended January 3, 1998. 37
- Consolidated Statements of Stockholders' Equity for the three fiscal years ended January 3, 1998. 38
- Consolidated Statements of Cash Flows for the three fiscal years ended January 3, 1998. 39
- Notes to Consolidated Financial Statements. 40
(a)2. FINANCIAL STATEMENT SCHEDULES:
II. Valuation and Qualifying Accounts and Reserves 63
All other schedules are omitted because they are not required or the required information is shown
in the financial statements or notes thereto.
(a)3. EXHIBITS:
The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of
Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1
Registration Statement (No. 33-13845) originally filed on April 29, 1987).
(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the
State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to the
Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988).
(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the
State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form
S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the 1988 Form S-1)).
(d) The Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock as
filed with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to
Exhibit 3A to the Registrant's Current Report on Form 8-K (No. 0-15867) originally filed on June 12,
1989 (the 1989 Form 8-K)).
(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit
3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October
7, 1991 (the 1991 Form S-4)).
(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with
the Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to
Exhibit 3.01(f) from the Registrant's Form 10-K (No. 1-10606) for the year ended December 31, 1991).
30
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
(g) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware on August 22, 1997 (incorporated by reference to Exhibit
10.49 of the Registrant's Form 10-Q for the third quarter ended September 27, 1997).
3.02 The Registrant's Bylaws, as currently in effect (incorporated by reference to Exhibit 3.02 to the 1987
Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K).
4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the
1991 Form S-4).
4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and Savings Bank
which includes as exhibits thereto the Certificate of Designation for the Series A Junior Participating
Preferred Stock, the form of Rights Certificate, and the Summary of Rights to Purchase Preferred Shares
(incorporated by reference to Exhibit 1A, 1B, and 1C to the Registrant's Current Report on Form 8-K
filed on February 16, 1996).
10.01 The Registrant's 1987 Stock Option Plan, as amended and restated on February 23, 1998 (incorporated by
reference to the Registrant's Preliminary Proxy Statement filed on March 16, 1998 (the 1998 Preliminary
Proxy Statement)).*
10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under
the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's
Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).*
10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant
and Form of Stock Option Exercise Notice and Agreement (the first document is incorporated by reference
to Exhibit 4.02 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994
(the 1994 Form S-8) and the latter two documents are incorporated by reference to Exhibit 10.08 - 10.10
to the 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.04 of the 1994 Form S-8).*
10.05 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.05 to the Registrant's Form 10-K for the fiscal year ended December 30, 1995
(the 1995 Form 10-K)).*
10.06 The Registrant's 1990 Employee Stock Purchase Plan, as amended on March 4, 1997 (incorporated by
reference to Exhibit 10.07 to the Registrant's Form 10-K for the fiscal year ended December 28, 1996).*
10.07 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form 10-K)).*
10.08 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the
1995 Form 10-K).*
10.09 The Registrant's Senior Executive Bonus Plan (previously the Chief Executive Officer Bonus Plan for
1996), as amended January 1, 1998 (incorporated by reference to the 1998 Preliminary Proxy Statement).*
10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the
1994 Form 10-K).*
10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K).*
31
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
10.12 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates (ROPA), a
California limited partnership, and the Registrant, for the Registrant's offices at 555 River Oaks
Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K
(No. 1-10606) for the year ended December 31, 1990 (the 1990 Form 10-K)).
10.13 Lease, dated June 29, 1989, by and between ROPA and the Registrant for the Registrant's offices at 575
River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form
10-K).
10.14 Lease, dated June 29, 1989, by and between ROPA and the Registrant for the Registrant's offices at 535
and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990
Form 10-K).
10.15 Lease, dated December 19, 1988, by and among the Richard T. Peery and John Arrillaga Separate Trusts and
Valid Logic Systems Incorporated (Valid) (which merged into the registrant) for the Registrant's offices
at 2835 North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the Form
10-K (No. 0-11974) for Valid for the fiscal year ended December 30, 1990).
10.16 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Joseph B. Costello
(incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration statement (No.
33-31673), originally filed on October 18, 1989.
10.17 Offer letter to H. Raymond Bingham, dated May 12, 1993 (incorporated by reference to Exhibit 10.24 to
the Form 10-K for the year ended December 31, 1993 (the 1993 Form 10-K)).*
10.18 Offer letter to M. Robert Leach, dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the
1993 Form 10-K).*
10.19 The 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form
S-8).*
10.20 Consulting agreement, dated October 26, 1993, with Alberto Sangiovanni-Vincentelli (incorporated by
reference to Exhibit 10.29 to the Registrant's Form 10-Q for the second quarter ended June 30, 1994).*
10.21 The Registrant's amended and restated 401(k) Plan (incorporated by reference to Exhibit 10.29 of the
Registrant's Form 10-Q for the first quarter ended March 30, 1996 (the 1996 First Quarter Form 10-Q)).*
10.22 Amendment, dated May 3, 1996 (incorporated by reference to Exhibit 10.30 to the 1996 First Quarter Form
10-Q), to Registrant's 1993 Non-Statutory Stock Option Plan.*
10.23 Revolving Credit Agreement, dated April 11, 1996, by and between the Registrant and Credit Lyonnais
(incorporated by reference to Exhibit 10.31 to the 1996 First Quarter Form 10-Q).
10.24 Term Loan Agreement, dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates
L.P. (ROPA), a California limited partnership (the Term Loan) (incorporated by reference to Exhibit
10.32 to the Registrant's Form 10-Q for the second quarter ended June 29, 1996 (the 1996 Second Quarter
Form 10-Q)).
10.25 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing
Statement, dated May 31, 1996, Schedule to Term Loan (incorporated by reference to Exhibit 10.33 to the
1996 Second Quarter Form 10-Q).
10.26 Assignment of Leases and Rents, dated May 31, 1996, Schedule to Term Loan (incorporated by reference to
Exhibit 10.34 to the 1996 Second Quarter Form 10-Q).
32
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
10.27 Assignment of Partnership Interests by Seeley Properties, Inc., dated May 31, 1996, Schedule to Term
Loan (incorporated by reference to Exhibit 10.35 to the 1996 Second Quarter Form 10-Q).
10.28 Assignment of Partnership Interests by the Registrant, dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to Exhibit 10.36 to the 1996 Second Quarter Form 10-Q).
10.29 Environmental Indemnity, dated May 31, 1996, Schedule to Term Loan (incorporated by reference to Exhibit
10.37 to the 1996 Second Quarter Form 10-Q).
10.30 Amendment, dated August 2, 1996 (incorporated by reference to Exhibit 10.39 to the 1996 Second Quarter
Form 10-Q), to the Registrant's 1993 Non-Statutory Stock Option Plan.*
10.31 Amendment Number 1, dated May 31, 1996, (incorporated by reference to Exhibit 10.40 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 555 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the
1990 Form 10-K).
10.32 Amendment Number 2, dated May 31,1996, (incorporated by reference to Exhibit 10.41 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 555 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the
1990 Form 10-K).
10.33 Amendment Number 1, dated May 31, 1996, (incorporated by reference to Exhibit 10.42 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the
1990 Form 10-K).
10.34 Amendment Number 2, dated May 31, 1996, (incorporated by reference to Exhibit 10.43 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the
1990 Form 10-K).
10.35 Amendment Number 1, dated May 31, 1996, (incorporated by reference to Exhibit 10.44 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17
to the 1990 Form 10-K).
10.36 Amendment Number 2, dated May 31, 1996, (incorporated by reference to Exhibit 10.45 to the 1996 Second
Quarter Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17
to the 1990 Form 10-K).
10.37 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the Registrant, High
Level Design Systems, Inc., a Delaware corporation, and Harbor Acquisition Sub, Inc., a Delaware
corporation (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed November 7, 1996 (the November 7, 1996 Form 8-K)).
10.38 Distribution Agreement, dated April 28, 1997, among Cadence Design Systems (Ireland) Ltd., Cadence
Design Systems K.K., and Cadence Design Systems (Japan) B.V. (incorporated by reference to Exhibit 10.48
to the Registrant's Form 10-Q for the second quarter ended June 28, 1997).
10.39 Agreement and Plan of Merger and Reorganization, dated as of October 28, 1996, among Registrant, Cooper
& Chyan Technology, Inc. (CCT), and Wyoming Acquisition Sub, Inc. (incorporated by reference to Exhibit
2.2 to the November 7, 1996 Form 8-K).
33
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
10.40 CCT 1993 Equity Incentive Plan, Form of Equity Incentive Plan Stock Option Agreement, Form of Exercise
of Equity Incentive Plan Stock Option and Form of Equity Incentive Plan Stock Option Exercise Agreement
(incorporated by reference to Exhibit 10.49 to the Registrant's Form S-4 Registration Statement (No.
333-16779) originally filed on November 27, 1996).
10.41 Employment Agreement, dated October 19, 1997, between the Registrant and John R. Harding.
10.42 Letter Agreement, dated December 5, 1997, between the Registrant and Joseph B. Costello.
10.43 Form of Executive Severence Agreement.
10.44 Indemnity Agreement, dated October 19, 1997, by and between the Registrant and John R. Harding.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Arthur Andersen LLP.
27.01 Financial data schedule for the period ended January 3, 1998.
27.02 Financial data schedule for the periods ended December 30, 1995, December 28, 1996, March 30, 1996, June
29, 1996, and September 28, 1996.
27.03 Financial data schedule for the periods ended March 29, 1997, June 28, 1997, and September 27, 1997.
- ------------------------
*A management contract or compensatory plan required to be filed as an exhibit
to Form 10-K.
(b) REPORTS ON FORM 8-K:
None.
(c) EXHIBITS:
The Company hereby files as part of this Form 10-K the Exhibits listed in
Item 14. (a) 3 above.
(d) FINANCIAL STATEMENT SCHEDULES:
See Item 14. (a) 2. of this Form 10-K.
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders and Board of Directors of Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cadence
Design Systems, Inc. (a Delaware corporation) and subsidiaries as of January 3,
1998 and December 28, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 3, 1998. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cadence
Design Systems, Inc. and subsidiaries as of January 3, 1998 and December 28,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998, in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14. (a) 2. is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
/s/ Arthur Andersen LLP
-------------------------------------------------------------------
ARTHUR ANDERSEN LLP
San Jose, California
January 23, 1998
35
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1997 1996
------------ -----------
Current Assets:
Cash and cash equivalents............................................................ $ 207,024 $ 284,512
Short-term investments............................................................... 97,180 1,015
Accounts receivable, less allowances of $21,200 in 1997 and $8,772 in 1996........... 205,006 148,449
Inventories.......................................................................... -- 8,133
Prepaid expenses and other........................................................... 99,849 49,026
------------ -----------
Total current assets............................................................... 609,059 491,135
Property, plant and equipment, net..................................................... 197,421 160,927
Software development costs, net........................................................ 15,068 21,295
Purchased software and intangibles, net................................................ 10,117 10,267
Other assets........................................................................... 192,185 33,377
------------ -----------
$ 1,023,850 $ 717,001
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt.................................. $ 794 $ 3,349
Accounts payable and accrued liabilities............................................. 156,426 116,174
Income taxes payable................................................................. 5,161 4,901
Deferred revenue..................................................................... 106,414 107,154
------------ -----------
Total current liabilities.......................................................... 268,795 231,578
------------ -----------
Long-Term Liabilities:
Long-term debt....................................................................... 1,599 20,292
Minority interest liability.......................................................... 121 15,205
Other long-term liabilities.......................................................... 26,238 22,378
------------ -----------
Total long-term liabilities........................................................ 27,958 57,875
------------ -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock--$0.01 par value; authorized 400 shares in 1997 and 2,000 shares in
1996, none issued or outstanding................................................... -- --
Common stock and capital in excess of $0.01 par value
Authorized: 300,000 shares
Issued: 214,405 shares in 1997 and 236,168 shares in 1996
Outstanding: 207,666 shares in 1997 and 173,223 shares in 1996..................... 502,602 603,430
Treasury stock at cost: 6,739 shares in 1997 and 62,945 shares in 1996............... (97,285) (325,637)
Retained earnings.................................................................... 328,934 151,596
Accumulated translation adjustment................................................... (7,154) (1,841)
------------ -----------
Total stockholders' equity......................................................... 727,097 427,548
------------ -----------
$ 1,023,850 $ 717,001
------------ -----------
------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
36
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FISCAL YEARS ENDED JANUARY 3, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
---------- ---------- ----------
Revenue:
Product.................................................................... $ 530,513 $ 414,029 $ 292,198
Services................................................................... 160,890 114,620 65,860
Maintenance................................................................ 224,490 212,810 190,360
---------- ---------- ----------
Total revenue............................................................ 915,893 741,459 548,418
---------- ---------- ----------
Costs and Expenses:
Cost of product............................................................ 41,509 48,383 44,793
Cost of services........................................................... 114,747 80,963 54,988
Cost of maintenance........................................................ 26,840 24,127 16,749
Marketing and sales........................................................ 257,867 226,496 185,025
Research and development................................................... 140,375 115,301 88,566
General and administrative................................................. 56,495 54,387 40,437
Unusual items.............................................................. 44,053 100,543 --
---------- ---------- ----------
Total costs and expenses................................................. 681,886 650,200 430,558
---------- ---------- ----------
Income from operations....................................................... 234,007 91,259 117,860
Other income (expense), net................................................ 25,624 (782) 17,237
---------- ---------- ----------
Income before provision for income taxes and cumulative effect of change in
accounting method.......................................................... 259,631 90,477 135,097
Provision for income taxes................................................. 77,889 61,439 37,827
---------- ---------- ----------
Income before cumulative effect of change in accounting method............... 181,742 29,038 97,270
Cumulative effect of change in accounting method, net of
taxes of $5,261.......................................................... 12,276 -- --
---------- ---------- ----------
Net income................................................................... $ 169,466 $ 29,038 $ 97,270
---------- ---------- ----------
---------- ---------- ----------
Net income per share:
Net income before cumulative effect of change in accounting method......... $ 0.93 $ 0.19 $ 0.59
---------- ---------- ----------
---------- ---------- ----------
Net income................................................................. $ 0.87 $ 0.19 $ 0.59
---------- ---------- ----------
---------- ---------- ----------
Net income per share--assuming dilution:
Net income before cumulative effect of change in accounting method......... $ 0.83 $ 0.16 $ 0.51
---------- ---------- ----------
---------- ---------- ----------
Net Income................................................................. $ 0.77 $ 0.16 $ 0.51
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding................................. 194,900 156,773 165,510
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and potential common shares outstanding--assuming
dilution................................................................. 219,552 183,789 191,114
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
37
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED JANUARY 3, 1998
(IN THOUSANDS)
COMMON STOCK
-----------------------
PAR VALUE
AND CAPITAL TREASURY STOCK ACCUMULATED
IN EXCESS OF ---------------------- RETAINED TRANSLATION
SHARES PAR SHARES AMOUNT EARNINGS ADJUSTMENT
--------- ------------ --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1994..................... 214,173 $ 265,173 (43,590) $ (133,728) $ 43,377 $ 1,241
Purchase of treasury stock................... -- -- (28,860) (163,928) -- --
Issuance of common stock..................... 13,416 26,984 1,990 6,772 (734) --
Tax benefits from employee stock
transactions............................... -- 8,463 -- -- -- --
Purchase of warrant.......................... -- (1,746) -- -- (15,442) --
Unrealized gain on investment in
subsidiary................................. -- 670 -- -- -- --
Translation adjustment....................... -- -- -- -- -- (291)
Net income................................... -- -- -- -- 97,270 --
--------- ------------ --------- ----------- ---------- ------------
BALANCE, DECEMBER 30, 1995..................... 227,589 299,544 (70,460) (290,884) 124,471 950
Purchase of treasury stock................... -- -- (10,314) (124,204) -- --
Issuance of common stock..................... 8,579 30,498 1,205 5,401 (3) --
Tax benefits from employee stock
transactions............................... -- 58,418 -- -- -- --
Purchase of warrant.......................... -- (2,437) -- -- (1,910) --
Treasury stock issued in connection with an
acquisition................................ -- 73,492 5,124 25,906 -- --
Shares issued in secondary offering, net of
expenses................................... -- 143,915 11,500 58,144 -- --
Translation adjustment....................... -- -- -- -- -- (2,791)
Net income................................... -- -- -- -- 29,038 --
--------- ------------ --------- ----------- ---------- ------------
BALANCE, DECEMBER 28, 1996..................... 236,168 603,430 (62,945) (325,637) 151,596 (1,841)
Purchase of treasury stock................... -- (720) (4,592) (104,526) -- --
Issuance of common stock..................... 14,962 64,549 1,167 7,308 -- --
Tax benefits from employee stock
transactions............................... -- 123,180 -- -- -- --
Treasury stock issued in connection with
acquisitions............................... -- 1,041 22,906 34,184 7,872 121
Unrealized gain on investment in
subsidiary................................. -- 2,758 -- -- -- --
Use of treasury shares for common stock
dividend................................... (36,725) (291,636) 36,725 291,386 -- --
Translation adjustment....................... -- -- -- -- -- (5,434)
Net income................................... -- -- -- -- 169,466 --
--------- ------------ --------- ----------- ---------- ------------
BALANCE, JANUARY 3, 1998....................... 214,405 $ 502,602 (6,739) $ (97,285) $ 328,934 $ (7,154)
--------- ------------ --------- ----------- ---------- ------------
--------- ------------ --------- ----------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
38
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED JANUARY 3, 1998
(IN THOUSANDS)
1997 1996 1995
---------- ---------- ----------
Cash and Cash Equivalents at Beginning of Year................................ $ 284,512 $ 84,867 $ 75,011
Cash Flows From Operating Activities:
Net income.................................................................. 169,466 29,038 97,270
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 56,637 51,742 46,019
Gain on sale of stock of subsidiary....................................... (13,061) -- (18,873)
Deferred income taxes..................................................... (68,465) (15,943) 5,693
Write-off of in-process research and development.......................... 6,571 95,700 --
Write-off of capitalized software development costs....................... 3,067 4,843 --
Write-off of business process re-engineering costs........................ 17,537 -- --
Equity in income from investee............................................ (1,934) -- --
Increase in other long-term liabilities and minority interest expense..... 2,668 5,992 3,135
Write-offs of equipment and other long-term assets........................ 3,073 1,719 2,281
Provisions for doubtful accounts and inventory write-offs................. 12,428 2,672 5,821
Changes in current assets and liabilities, net of effect of acquired and
disposed businesses:
Accounts receivable..................................................... (84,039) (59,736) (13,760)
Inventories............................................................. -- (981) (4,059)
Prepaid expenses and other.............................................. (29,449) (33,091) (2,132)
Installment contract receivables........................................ (61,830) -- --
Accounts payable and accrued liabilities................................ 64,072 30,041 29,427
Income taxes payable.................................................... 126,486 48,795 15,012
Deferred revenue........................................................ (4,868) 14,521 31,262
---------- ---------- ----------
Net cash provided by operating activities............................. 198,359 175,312 197,096
---------- ---------- ----------
Cash Flows From Investing Activities:
Maturities of short-term investments--held-to-maturity...................... 37,039 18,618 43,296
Purchases of short-term investments--held-to-maturity....................... (82,204) (7,859) (33,205)
Maturities of short-term investments--available-for-sale.................... 128,170 -- --
Purchases of short-term investments--available-for-sale..................... (179,170) -- --
Purchases of property, plant, and equipment................................. (92,428) (62,089) (28,338)
Capitalization of software development costs................................ (15,011) (13,560) (11,845)
Increase in purchased software, intangibles, and other assets............... (4,586) (13,326) (3,954)
Net proceeds from sale of subsidiary stock.................................. 18,582 -- 29,920
Effect of deconsolidation and reorganization on cash........................ (25,118) -- --
Investment in limited partnership........................................... (10,974) (7,471) (1,500)
Effect of acquisitions on cash.............................................. 30,596 -- --
Sale of put warrants........................................................ 19,016 13,870 1,304
Purchase of call options.................................................... (19,016) (13,870) (1,304)
---------- ---------- ----------
Net cash used for investing activities................................ (195,104) (85,687) (5,626)
---------- ---------- ----------
Cash Flows From Financing Activities:
Principal payments on notes payable and long-term debt...................... (22,921) (2,676) (26,542)
Net proceeds from issuance of long-term debt................................ -- 19,763 --
Sale of common stock........................................................ 54,365 226,749 26,500
Purchases of treasury stock................................................. (105,118) (124,204) (163,928)
Purchase of warrant......................................................... -- (4,347) (17,188)
---------- ---------- ----------
Net cash (used for) provided by financing activities.................. (73,674) 115,285 (181,158)
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... (7,069) (5,265) (456)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.............................. (77,488) 199,645 9,856
---------- ---------- ----------
Cash and Cash Equivalents at End of Year...................................... $ 207,024 $ 284,512 $ 84,867
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
39
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998
THE COMPANY
Cadence Design Systems, Inc. (Cadence or the Company) provides comprehensive
services and technology for the product development requirements of the world's
leading electronics companies. The Company licenses its leading-edge electronic
design automation software technology and provides a range of professional
services to companies throughout the world to help optimize product development
processes. Recently, the Company has expanded the role it plays with companies
that produce electronic products and with an emerging class of companies that
require electronic content in their products, but who may not have any internal
expertise in electronic design. The Company's business objectives are based on
providing complete solutions, which range from individual software tools to
complete outsourcing of design work. The Company is now a supplier of "design
realization" solutions, which are used by companies to design and develop
integrated circuits and systems--including semiconductors, computer systems and
peripherals, telecommunications and networking equipment, mobile and wireless
devices, automotive electronics, consumer products, and other advanced
electronics.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries after elimination of intercompany accounts
and transactions. Investments in companies in which ownership interests range
from 20 to 50 percent or to which the Company exercises significant influence
over operating and financial policies are accounted for using the equity method
of accounting.
The Company's fiscal year end is the Saturday closest to December 31.
Certain prior year consolidated financial statement balances have been
reclassified to conform to the 1997 presentation.
STOCK SPLIT
In October 1997, the Company's Board of Directors declared a two-for-one
stock split, payable in the form of a dividend of one additional share of the
Company's common stock for every share owned by stockholders. Par value remained
at $0.01 per share. The stock split resulted in the issuance of approximately
104.4 million additional shares of common stock from authorized but unissued
shares and treasury shares. In May 1996 and October 1995, the Company's Board of
Directors effected three-for-two stock splits payable in the form of a dividend
of one additional share of the Company's common stock for every two shares owned
by stockholders. The stock splits resulted in the issuance of approximately 51.6
million and 75.6 million additional shares of common stock from authorized but
unissued shares in 1996 and 1995, respectively. Accordingly, all share and per
share data have been adjusted to retroactively reflect the stock splits.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
40
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries, where the functional
currency is the local currency, are translated using exchange rates in effect at
the end of the period and revenues and costs are translated using average
exchange rates for the period. Gains and losses on the translation into U.S.
dollars of amounts denominated in foreign currencies are included in net income
for those operations whose functional currency is the U.S. dollar, and as a
separate component of stockholders' equity for those operations whose functional
currency is the local currency.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange contracts (forward
contracts) to manage exposure related to certain foreign currency transactions.
The Company does not enter into derivative financial instruments for trading
purposes. All outstanding forward contracts at the end of the period are
marked-to-market, with unrealized gains and losses included in net income as a
component of other income (expense). The Company may, from time to time, adjust
its foreign currency hedging position by taking out additional contracts or by
terminating or offsetting existing forward contracts. These adjustments may
result from changes in the underlying foreign currency exposures or from
fundamental shifts in the economics of particular exchange rates. Gains and
losses on terminated forward contracts, or on contracts that are offset, are
recognized in income in the period of contract termination or offset.
REVENUE RECOGNITION
Product revenue consists principally of revenue earned under software
license agreements and is generally recognized when the software has been
shipped, there are no significant obligations remaining, and collection is
probable. Installment contract receivables result from customer contracts with
the Company's top-rated credit customers. The Company uses installment contracts
as a standard business practice and has a history of successfully collecting
under the original payment terms without making concessions on payments,
products, or services. Any maintenance included in these arrangements is
recognized ratably over the term of the arrangement. Revenue from subscription
license agreements which include software, rights to future software products,
and maintenance is deferred and recognized ratably over the term of the
subscription period. Test equipment revenue was recognized upon shipment.
Services revenue consists primarily of revenues received for performing
product design development and process improvement and education and
assimilation of software products into the customers' product development
process. Services revenue is generally recognized as the services are performed
or on the percentage of completion method of accounting, depending upon the
nature of the project. Under the percentage of completion method, revenue
recognized is that portion of the total contract price that costs expended to
date bears to the anticipated final total costs, based on current estimates of
the costs to complete the project. If the total estimated costs to complete a
project exceed the total contract amount, indicating a loss, the entire
anticipated loss would be recognized currently.
Maintenance revenue consists of fees for providing system updates, user
documentation, and technical support for software products. Maintenance revenue
is recognized ratably over the term of the agreement.
In 1997, no one customer accounted for more than 10% of total revenues. In
1996 and 1995, one customer (a distributor), which in 1996 and 1995 held a
minority interest in a subsidiary of the Company, accounted for 14% and 15% of
total revenue, respectively. Outstanding trade accounts receivable from this
41
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
related party were approximately $3.4 million and $5.4 million at December 28,
1996 and December 30, 1995, respectively.
NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128 "Earning per Share." SFAS No. 128 requires companies to compute
net income per share under two different methods, basic and diluted. Net income
per share for each period is calculated by dividing net income by the weighted
average shares of common stock outstanding during the period, and assuming
dilution, net income is divided by the weighted average shares of common stock
outstanding and potential common shares during the period. As a result, 1996 and
1995 net income per share have been restated to conform to the new standard.
Potential common shares included in the diluted calculation consist of dilutive
shares issuable upon the exercise of outstanding common stock options, warrants,
and put warrants computed using the treasury stock method.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments, including
commercial paper, Euro time deposits, repurchase agreements, and certificates of
deposit with an original maturity of ninety days or less to be cash equivalents.
Investments with original maturities greater than ninety days and less than one
year are classified as short-term investments. At January 3, 1998, there were no
investments with maturities greater than one year.
Management determines the appropriate classification of its investments in
debt and marketable equity securities at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company has classified all
marketable debt securities as held-to-maturity and has accounted for these
investments at amortized cost. The Company has classified its auction rate
securities as available-for-sale. These securities are carried at fair value,
with the unrealized gains and losses reported as a component of stockholders'
equity when these unrealized gains and losses are material to consolidated
financial operations of the Company.
INVENTORIES
During 1997, the Company changed its accounting method for Integrated
Measurement Systems Inc. to the equity method as described at "Integrated
Measurement Systems, Inc." further below and, as a result, no inventories were
recorded at January 3, 1998. Inventories totaling $8.1 million at December 28,
1996, consisting primarily of test equipment were stated at the lower of cost
(first-in, first-out method) or market. Cost includes labor, material, and
manufacturing overhead.
42
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
PROPERTY, PLANT, AND EQUIPMENT
Land, property, plant, and equipment is stated at cost. Depreciation and
amortization are provided over the estimated useful lives, by the straight-line
method, as follows:
Buildings................................................. 10-32 years
Leasehold and building improvements....................... Shorter of the lease
term or the estimated
useful life
Software.................................................. 3-8 years
Equipment................................................. 3-5 years
Furniture and fixtures.................................... 3-5 years
SOFTWARE DEVELOPMENT COSTS, PURCHASED SOFTWARE, AND INTANGIBLES
The Company capitalizes software development costs in compliance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors including, but not limited to, anticipated future gross product
revenue, estimated economic life, and changes in software and hardware
technology. Amortization of capitalized software development costs begins when
the products are available for general release to customers and is generally
computed on a straight-line basis over three years or, if less, the remaining
estimated economic life of the product. Purchased software and intangibles are
amortized on a straight-line basis over the remaining estimated economic life of
the underlying product (one to seven years). It is reasonably possible that the
estimates of anticipated future gross revenues, the remaining estimated economic
life of the products, or both could differ from those used to assess the
recoverability of these costs and result in a write-down of the carrying amount
or a shortened life of the costs in the near term.
In the accompanying consolidated statements of income, amortization is
included in cost of product for capitalized software development costs and in
either cost of product or cost of services for purchased software costs, as
determined by the nature of the underlying transaction. In total, amortization
of capitalized and purchased software and intangibles amounted to approximately
$21 million, $22.5 million, and $19.7 million for 1997, 1996, and 1995,
respectively. The Company wrote off approximately $3.1 million of capitalized
software development costs in 1997 that related to products that were replaced
(or discontinued) as a result of a merger or license of replacement technology.
The Company wrote off approximately $4.3 million of capitalized software
development costs related to products at the end of their life cycle in 1996, of
which $2.7 million related to products that were replaced (or discontinued) as a
result of the High Level Design Systems, Inc. acquisition.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which encourages entities to
recognize compensation costs for stock-based employee compensation plans using
the fair value based method of accounting defined in SFAS No. 123, but allows
for the continued use of the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," as further described at "Stockholders' Equity." The
Company has elected to continue with the accounting
43
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
prescribed by APB Opinion No. 25 and, as such, is required to disclose pro forma
net income and earnings per share as if the fair value based method of
accounting had been applied.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, including derivative financial instruments, which may
potentially subject the Company to concentrations of credit risk, consist
principally of cash investments, short-term investments, accounts receivable,
forward contracts, and call options purchased in conjunction with the Company's
stock repurchase program. The Company's investment policy limits investments to
short-term, low-risk instruments. Concentration of credit risk related to
accounts receivable is limited, due to the varied customers comprising the
Company's customer base and their dispersion across geographies. Credit exposure
related to the forward contracts and the call options is limited to the
unrealized gains on these contracts. All financial instruments are executed with
financial institutions with strong credit ratings, which minimizes risk of loss
due to nonpayment. The Company has not experienced any losses due to credit
impairment related to its financial instruments.
NEW ACCOUNTING STANDARDS
In 1997, the Company adopted SFAS No. 129, "Disclosure of Information About
Capital Structure." SFAS No. 129 requires companies to disclose certain
information about their capital structure. SFAS No. 129 did not have a material
impact on the Company's consolidated financial statement disclosures.
In 1997, the FASB issued SFAS No. 130, "Comprehensive Income," which will be
adopted by the Company in the first quarter of 1998. SFAS No. 130 requires
companies to report a new, additional measure of income on the income statement
or to create a new financial statement that has the new measure of income on it.
"Comprehensive Income" is to include 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. The Company anticipates that
SFAS No. 130 will not have a material impact on its consolidated financial
statements.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in its
1998 annual consolidated financial statements. SFAS No. 131 requires companies
to report financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and expense
items, and segment assets, as well as information about the revenues derived
from the Company's products and services, the countries in which the Company
earns revenues and holds assets, and major customers.
In 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition," which will be adopted by the Company in
the first quarter of 1998. SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The Company anticipates that SOP 97-2 will not have a material impact on its
consolidated financial statements.
44
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
FINANCIAL INSTRUMENTS
SHORT-TERM INVESTMENTS
A summary of the Company's held-to-maturity and available-for-sale
investment portfolios follows:
1997 1996
---------- ----------
(IN THOUSANDS)
Held-to-maturity:
Commercial paper.............................................................. $ 23,732 $ 112,965
Certificates of deposit....................................................... 1,000 4,221
Corporate debt securities..................................................... 18,020 1,015
Corporate equity securities................................................... 3,000 --
Foreign debt securities....................................................... 8,602 --
Euro time deposits............................................................ -- 20,000
Repurchase agreements......................................................... 60,094 19,803
U.S. Government notes......................................................... 7,488 --
State and local municipalities notes.......................................... 6,075 --
---------- ----------
Total held-to-maturity...................................................... 128,011 158,004
Available-for-sale:
Auction rate securities....................................................... 51,000 --
---------- ----------
Total available-for-sale.................................................... 51,000 --
---------- ----------
Total investment securities............................................... 179,011 158,004
Less: Cash equivalents.......................................................... 81,831 156,989
---------- ----------
Total short-term investments............................................ $ 97,180 $ 1,015
---------- ----------
---------- ----------
Investments in debt securities classified as held-to-maturity and
available-for-sale at January 3, 1998, have various maturity dates which do not
exceed one year. The cost of the securities held is based on the specific
identification method. The carrying value of cash and cash equivalents and
short-term investments approximate the fair value (based on quoted market
prices) of such investments. Accordingly, unrealized gains and losses were
immaterial at January 3, 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into forward contracts to hedge the impact of foreign
currency fluctuations. The Company does not enter into derivative financial
instruments for trading purposes. At January 3, 1998, the Company had
outstanding forward contracts with notional amounts totaling approximately $38.6
million. These contracts, which mature in less than thirty days, are hedges of
certain foreign currency transaction exposures in the British pound sterling,
German deutschemark, French franc, Italian lira, Swedish krona, Canadian dollar,
and Japanese yen. The estimated fair value at January 3, 1998 and December 28,
1996 was negligible.
45
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
BALANCE SHEET COMPONENTS
A summary of balance sheet components follows:
1997 1996
---------- ----------
(IN THOUSANDS)
Inventories:
Raw materials and supplies.................................................... $ -- $ 3,981
Work-in-process............................................................... -- 3,031
Finished goods................................................................ -- 1,121
---------- ----------
Inventories................................................................. $ -- $ 8,133
---------- ----------
---------- ----------
Property, Plant, and Equipment:
Equipment..................................................................... $ 185,054 $ 161,155
Land.......................................................................... 47,754 38,848
Buildings..................................................................... 45,324 38,613
Furniture and fixtures........................................................ 28,282 23,524
Leasehold and building improvements........................................... 28,232 26,091
---------- ----------
Total cost.................................................................. 334,646 288,231
Less: Accumulated depreciation and amortization............................... 137,225 127,304
---------- ----------
Property, plant, and equipment, net......................................... $ 197,421 $ 160,927
---------- ----------
---------- ----------
Software Development Costs:
Cost.......................................................................... $ 40,545 $ 58,781
Less: Accumulated amortization................................................ 25,477 37,486
---------- ----------
Software development costs, net........................................... $ 15,068 $ 21,295
---------- ----------
---------- ----------
Purchased Software and Intangibles:
Cost.......................................................................... $ 31,888 $ 32,226
Less: Accumulated amortization................................................ 21,771 21,959
---------- ----------
Purchased software and intangibles, net..................................... $ 10,117 $ 10,267
---------- ----------
---------- ----------
Other Assets:
Deferred income taxes......................................................... $ 74,860 $ 10,725
Installment contract receivables.............................................. 61,326 --
Other assets.................................................................. 55,999 22,652
---------- ----------
Other assets................................................................ $ 192,185 $ 33,377
---------- ----------
---------- ----------
Accounts Payable and Accrued Liabilities:
Payroll and payroll related accruals.......................................... $ 87,076 $ 65,424
Other accrued liabilities..................................................... 47,402 34,990
Accounts payable.............................................................. 21,948 15,760
---------- ----------
Accounts payable and accrued liabilities.................................... $ 156,426 $ 116,174
---------- ----------
---------- ----------
46
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
FINANCING
In April 1996, the Company entered into a senior secured revolving credit
facility (the Facility) which allows the Company to borrow up to $120 million
through April 1999. The Facility is secured by the majority of the Company's
property, plant, equipment, cash, investments, intangibles, and certain other
assets. The Company has the option to pay interest based upon the London
Interbank Offered Rate (LIBOR) plus 1.5%, or the higher of the federal funds
effective rate plus 0.5% or prime. The Company must comply with certain
financial covenants and conditions as defined in the Facility, with which the
Company was in compliance at January 3, 1998. At January 3, 1998, the Company
had no outstanding borrowings under the Facility.
In May 1996, the Company's wholly-owned real estate partnership, River Oaks
Place Associates L.P., entered into a $20 million long-term financing
arrangement (the ROPA Loan) with a bank. The ROPA loan was repaid in 1997.
Long-term debt consisted of the following:
1997 1996
--------- ---------
(IN THOUSANDS)
Capital lease obligations.......................................................... $ 1,693 $ 4,016
Other long-term debt............................................................... 700 --
Note payable (ROPA Loan)........................................................... -- 19,625
--------- ---------
Total............................................................................ 2,393 23,641
Less: Current portion.............................................................. 794 3,349
--------- ---------
Long-term debt................................................................... $ 1,599 $ 20,292
--------- ---------
--------- ---------
COMMITMENTS
Equipment and facilities are leased under various capital and operating
leases expiring at various dates through the year 2008. Certain of these leases
contain renewal options. Rental expense was approximately $15.9 million, $12.3
million, and $10.7 million for 1997, 1996, and 1995, respectively. In 1998, the
Company anticipates the completion of a new building and improvements on the San
Jose, California campus with an estimated cost of approximately $14.5 million.
Additionally, new facilities in Scotland will be constructed in conjunction with
the Company's new design center. If the Company becomes the owner of the such
facilities, absent of any financing from any third party, the Company may incur
estimated land and building costs of approximately $115 million over the next
seven years.
47
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
At January 3, 1998, future minimum lease payments under capital and
operating leases and the present value of the capital lease payments were as
follows:
CAPITAL OPERATING
LEASES LEASES
--------- -----------
(IN THOUSANDS)
For the years:
1998.......................................................................... $ 865 $ 17,414
1999.......................................................................... 547 14,566
2000.......................................................................... 317 8,031
2001.......................................................................... 74 5,683
2002.......................................................................... 8 2,560
Thereafter.................................................................... -- 89
--------- -----------
Total lease payments........................................................ 1,811 $ 48,343
-----------
-----------
Less: Amount representing interest (Average interest rate of 6.8%).............. 118
---------
Present value of lease payments............................................. 1,693
Less: Current portion........................................................... 794
---------
Long-term portion........................................................... $ 899
---------
---------
The cost of equipment under capital leases included in the consolidated
balance sheets as property, plant, and equipment at January 3, 1998 and December
28, 1996 was approximately $3.6 million and $11 million, respectively.
Accumulated amortization of the leased equipment at January 3, 1998 and December
28, 1996 was approximately $2 million and $8.4 million, respectively.
CONTINGENCIES
From time to time the Company is involved in various disputes and litigation
matters which arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(Avant!) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy, and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's former President and Chief Executive Officer, and with leave
of the court, on January 29, 1998 filed a second amended counterclaim. The
second amended counterclaim alleges, INTER ALIA, that the Company and its former
President and Chief Executive Officer had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its former
President and Chief Executive Officer believe that each has meritorious defenses
to Avant!'s claims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint. The second amended counterclaim remains severed from the
Company's complaint and stayed pending resolution of the Company's complaint.
48
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order enjoining
the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s
Aquarius software infringes Cadence's code and, if so, to enter an order
enjoining the sale of that software. 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. In an order issued on December 19,
1997, as modified on January 26, 1998, the District Court entered an injunction
barring any further infringement of Cadence's copyrights in Design Framework II
software, or selling, licensing, or copying such product derived from Design
Framework II, including but not limited to, Avant!'s ArcCell products. The
Company's motion for an injunction covering Avant!'s Aquarius product line
remains pending before the District Court.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5 million bond, in
light of criminal proceedings pending against Avant! and several of its
executives. The District Court has not yet set a trial date for the civil
proceedings. The Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
STOCKHOLDERS' EQUITY
NET INCOME PER SHARE
The following is a reconciliation of the weighted average common shares used
to calculate net income per share to the weighted average common shares used to
calculate net income per share--assuming dilution, for the years 1997, 1996, and
1995:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Weighted average common shares used to calculate net income per
share................................................................ 194,900 156,773 165,510
Options.............................................................. 24,362 26,512 24,865
Warrants............................................................. 232 341 733
Puts................................................................. 58 163 6
--------- --------- ---------
Weighted average common shares used to calculate net income per
share--assuming dilution............................................. 219,552 183,789 191,114
--------- --------- ---------
--------- --------- ---------
Options to purchase 1,051,043 shares of common stock at the weighted average
price of $26.88 per share were outstanding at January 3, 1998, but were not
included in the computation of diluted income per share because the options'
exercise prices were greater than the average market price of the common shares.
The options, which expire in 2007, remained outstanding at January 3, 1998. Put
warrants to purchase 5,792,650 shares of common stock at the weighted average
price of $23.88 per share were outstanding at January 3, 1998, but were not
included in the computation of diluted income per share
49
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
because the put warrants' exercise prices were less than the average market
price of the common shares. The put warrants outstanding expire at various dates
from February 1998 to February 1999.
STOCK COMPENSATION PLANS
FIXED STOCK OPTION PLANS
The Company's 1997 Nonstatutory Stock Option Plan (the 1997 Plan) provides
for the issuance of non-qualified options to its employees to purchase up to
20,000,000 shares of common stock at an exercise price not less than the fair
market value of the stock on the date of grant. Options granted under the 1997
Plan become exercisable over a five year period, with, generally, one-fifth of
the shares vesting one year from the vesting commencement date with respect to
initial grants, and the remaining shares vesting in 48 equal monthly
installments. Options under the 1997 Plan generally expire ten years from the
date of grant.
The Company's Employee Stock Option Plan (the 1987 Plan) provides for the
issuance of either incentive or non-qualified options to its employees to
purchase up to 61,370,100 shares of common stock at an exercise price not less
than fair market value of the stock on the date of grant. Options granted under
the Plan become exercisable over periods of up to five years and expire five to
ten years from the date of grant.
The Company's Non-Statutory Stock Option Plan (the 1993 Non-Statutory Plan)
provides for the issuance of non-qualified options to its employees to purchase
up to 24,750,000 shares of common stock at an exercise price not less than the
fair market value of the stock on the date of grant. Options granted under the
Non-Statutory Plan become exercisable over a four year period, with one-fourth
of the shares vesting one year from the vesting commencement date, and the
remaining shares vesting in 36 equal monthly installments. Options under the
Non-Statutory Plan generally expire ten years from the date of grant.
Under the Directors Stock Option Plans (the Directors Plans), the Company
may grant non-qualified options to its non-employee directors for up to
3,352,496 shares of common stock at an exercise price not less than the fair
market value of the stock on the date of grant. Options granted under the
Directors Plans have a term of up to ten years. Certain of the option grants
vest one year from the date of grant, and certain other option grants vest
one-third one year from the date of grant and two-thirds ratably over the
subsequent two years.
The Company has assumed certain options granted to former employees of
acquired companies (Acquired Options). The Acquired Options were assumed by the
Company outside of the Plan, but all are administered as if issued under the
Plan. All of the Acquired Options have been adjusted to effectuate the
conversion under the terms of the Agreements and Plans of Reorganization between
the Company and the companies acquired. The Acquired Options generally become
exercisable over a four year period and generally expire either five or ten
years from the date of grant. No additional options will be granted under any of
the acquired companies' plans.
50
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
A summary of the status of all of the Company's fixed stock option plans as
of and during the years ended January 3, 1998 and December 28, 1996 follows:
1997 1996
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ----------- ------------ -----------
Outstanding at beginning of year..................... 38,974,434 $ 3.41 41,149,588 $ 4.23
Assumption of HLDS options......................... -- $ -- 1,012,220 $ 7.45
Assumption of CCT options.......................... 3,724,294 $ 5.31 -- $ --
Granted............................................ 18,741,739 $ 16.48 7,079,596 $ 16.00
Exercised.......................................... (14,960,681) $ 3.65 (8,580,116) $ 2.77
Forfeited.......................................... (4,015,057) $ 7.74 (1,683,266) $ 6.52
Expired............................................ -- $ -- (3,588) $ 2.14
------------- ------------
Outstanding at end of year....................... 42,464,729 $ 11.77 38,974,434 $ 3.41
------------- ------------
------------- ------------
Options exercisable at year end...................... 15,863,817 20,298,078
Options available for future grant................... 14,853,922 9,955,568
Weighted average fair value of options granted during
the year........................................... $ 7.52 $ 5.90
Combined activity as of and during the year ended December 30, 1995 was as
follows:
1995
SHARES
-----------------
Outstanding at beginning of year..................................................... 45,587,232
Granted............................................................................ 12,967,410
Exercised ($.09 per share to $5.85 per share)...................................... (13,416,982)
Canceled........................................................................... (3,988,072)
-----------------
Outstanding at end of year....................................................... 41,149,588
-----------------
-----------------
Range of exercise price of outstanding options at end of year........................ $0.10 - $12.98
Options exercisable at year end...................................................... 18,240,078
Options available for future grant................................................... 15,132,394
51
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
A summary of the status of all of the Company's fixed stock option plans at
January 3, 1998 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 1/3/98 CONTRACTUAL LIFE PRICE AT 1/3/98 PRICE
- ---------------------------- ------------ ------------------- ------------- ------------ -------------
$ 0.14 - $ 5.00............. 10,272,658 5.8 $ 2.47 8,646,714 $ 2.46
$ 5.01 - $10.00............. 7,705,379 7.6 $ 7.68 4,071,562 $ 7.62
$10.01 - $15.00............. 11,164,054 8.9 $ 14.36 1,874,459 $ 13.42
$15.01 - $20.00............. 8,937,413 9.0 $ 16.77 1,181,778 $ 18.24
$20.01 - $25.00............. 3,161,984 9.7 $ 22.98 78,608 $ 22.38
$25.01 - $30.00............. 1,223,241 9.7 $ 26.70 10,696 $ 26.97
------------ ------------
Total................... 42,464,729 15,863,817
------------ ------------
------------ ------------
STOCK REPURCHASE PLAN
The Company has a seasoned authorized stock repurchase program under which
it repurchases common stock to satisfy estimated requirements for shares to be
issued under its Employee Stock Purchase Plan (ESPP). Such repurchases are
intended to cover the Company's expected reissuances under the ESPP for the next
12 months. In 1997, the Company adopted a new seasoned systematic stock
repurchase program. The shares acquired under this new program will be untainted
shares used to meet the recurring share issuance requirements of the recently
adopted 1997 Stock Option Plan.
As part of its authorized repurchase program, the Company has sold put
warrants through private placements. At January 3, 1998, there were 5.8 million
put warrants outstanding which entitle the holder to sell one share of common
stock to the Company on a specified date and at a specified price ranging from
$23.09 to $24.34 per share. Additionally, during this same period, the Company
purchased call options that entitle the Company to buy on a specified date one
share of common stock at a specified price. At January 3, 1998, the Company had
4.3 million call options outstanding at prices ranging from $23.22 to $24.47 per
share to satisfy anticipated stock repurchase requirements under the Company's
systematic repurchase programs. The put warrants and call options outstanding at
January 3, 1998 are exercisable on various dates through February 26, 1999. At
January 3, 1998, the fair value of the call options was approximately $20.5
million and the fair value of the put warrants was approximately $17.5 million.
The fair value of put warrants and call options was estimated by the Company's
investment bankers.
The Company has the right to settle the put warrants with 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 the Company to
issue a substantial number of shares, depending on the exercise price of the put
warrants and the per share fair value of the Company's common stock at the time
of exercise. In addition, settlement of put warrants in stock could lead to the
disposition by put warrant holders of shares of the Company's common stock that
such holders may have accumulated in anticipation of the exercise of the put
warrants or call options, which may impact the price of the Company's common
stock. At January 3, 1998, the Company had the ability to settle these put
warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the consolidated balance sheet. The effect of the
exercise of these put warrants and call options is reported in stockholders'
equity.
52
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
EMPLOYEE STOCK PURCHASE PLAN
Under the 1990 Employee Stock Purchase Plan (ESPP), the Company is
authorized to issue up to 17,500,000 shares of common stock to its employees.
Under the terms of the ESPP, employees can choose each year to have up to 12% of
their annual base earnings plus bonuses withheld to purchase the Company's
common stock. The purchase price of the stock is 85% of the lesser of the fair
market value as of the beginning or the end of the semiannual option periods.
Under the ESPP, the Company issued 1,167,474, 1,211,074, and 1,989,456 shares to
employees in 1997, 1996, and 1995, respectively. The weighted average purchase
price and the weighted average fair value of shares issued in 1997 was $14.59
and $20.50, respectively.
PRO FORMA INFORMATION
This information is required to illustrate the financial results of
operations as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS No.
123. The fair value of the Company's options granted and shares purchased under
the ESPP for years ended January 3, 1998, December 28, 1996, and December 30,
1995 reported below was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions assuming a
dividend yield of zero for all periods:
1997 1996 1995
--------- --------- ---------
Risk-free interest rate................................................ 6.20% 6.16% 6.41%
Volatility factors of the expected market price of the Company's common
stock................................................................ 44% 35% 35%
Weighted average expected life of an option............................ 4 Years 4 Years 4 Years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. In management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options granted to its employees.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's fixed
stock option and employee stock purchase plans been
53
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
accounted for under SFAS No. 123, net income and earnings per share would have
been reduced to the following pro forma amounts:
1997 1996 1995
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income:
As reported................................................... $ 169,466 $ 29,038 $ 97,270
---------- --------- ---------
---------- --------- ---------
Pro forma..................................................... $ 128,214 $ 6,445 $ 87,300
---------- --------- ---------
---------- --------- ---------
Net income per share:
As reported................................................... $ 0.87 $ 0.19 $ 0.59
---------- --------- ---------
---------- --------- ---------
Pro forma..................................................... $ 0.66 $ 0.04 $ 0.53
---------- --------- ---------
---------- --------- ---------
Net income per share--assuming dilution:
As reported................................................... $ 0.77 $ 0.16 $ 0.51
---------- --------- ---------
---------- --------- ---------
Pro forma..................................................... $ 0.58 $ 0.04 $ 0.45
---------- --------- ---------
---------- --------- ---------
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and net income per share for 1997, 1996, and 1995 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
WARRANTS
In connection with the acquisition of High Level Design Systems, Inc., in
December 1996, the Company issued a warrant to Goldman, Sachs & Co. (Goldman
warrant) to purchase 170,400 shares of the Company's common stock at $28.79 per
share. The warrant expires in August 1999 and can be exercised at any time, in
whole or in part. The warrant was valued at the time of the acquisition at
approximately $0.6 million and was included as part of the total purchase price
of HLDS.
In connection with the purchase of the business and certain assets of
Comdisco Systems, Inc. (Comdisco), a subsidiary of Comdisco, Inc., in June 1993,
the Company issued a warrant (Comdisco Warrant) to purchase 5,850,000 shares of
the Company's common stock at $3.23 per share. Pursuant to the original terms of
the warrant agreement, during 1996 and 1995, the Company repurchased portions of
the warrant applicable to 300,000 and 5,310,000 shares, respectively, for
approximately $4.3 million and $17.2 million, respectively. The warrant for the
remaining 240,000 shares expires in June 2003 and can be exercised at any time
in increments of not less than 50,000 shares. The warrant was valued at the time
of issuance at approximately $1.8 million and was included as part of the total
purchase price of Comdisco.
54
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
RESERVED FOR FUTURE ISSUANCE
At January 3, 1998, the Company had reserved the following shares of
authorized but unissued common stock for future issuance:
SHARES
------------
Employee stock option plans..................................................... 55,629,481
Other option agreements......................................................... 65,000
Directors stock option plans.................................................... 1,624,170
ESPP............................................................................ 5,526,824
Put warrants.................................................................... 5,792,650
Comdisco warrant................................................................ 240,000
Goldman warrant................................................................. 170,400
------------
Total....................................................................... 69,048,525
------------
------------
STOCKHOLDER RIGHTS PLAN
On February 9, 1996, the Company adopted a new Stockholder Rights Plan (the
Preferred Rights Plan) to protect stockholders' rights in the event of a
proposed or actual acquisition of 15% or more of the outstanding shares of the
Company's common stock. As part of this plan, each share of the Company's common
stock carries one-third of a right to purchase one one-thousandth (1/1000) of a
share of Series A Junior Participating Preferred Stock (the Right), par value
$0.01 per share, of the Company at a price of $240 per one one-thousandth of a
share, subject to adjustment. The Rights are subject to redemption at the option
of the Board of Directors at a price of $0.01 per Right until the occurrence of
certain events. The Rights expire on February 20, 2006.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
In November 1997, the FASB Emerging Issues Task Force issued Ruling 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation," which requires companies to expense costs incurred
for business process reengineering projects. As a result, the Company recorded a
$12.3 million charge in 1997, net of income taxes of $5.3 million, as a
cumulative effect of change in accounting method for reengineering project costs
that had been previously capitalized by the Company associated with its
implementation of enterprise-wide information systems. This change in accounting
method effected net income per share and net income per share--assuming dilution
by $0.06.
55
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
INCOME TAXES
The provision for income taxes consisted of the following components:
1997 1996 1995
---------- ---------- ---------
(IN THOUSANDS)
Current:
Federal............................................................ $ 106,053 $ 59,412 $ 11,954
State.............................................................. 15,772 9,712 4,095
Foreign............................................................ 19,268 8,258 16,085
---------- ---------- ---------
Total current.................................................... 141,093 77,382 32,134
---------- ---------- ---------
Deferred (prepaid):
Federal............................................................ (64,363) (15,309) 4,989
State.............................................................. (2,818) (750) 201
Foreign............................................................ (1,284) 116 503
---------- ---------- ---------
Total deferred (prepaid)......................................... (68,465) (15,943) 5,693
---------- ---------- ---------
Total provision for income taxes............................... $ 72,628 $ 61,439 $ 37,827
---------- ---------- ---------
---------- ---------- ---------
Income before income taxes for 1997, 1996, and 1995 included income of
approximately $144.3 million, $25.3 million, and $34.2 million, respectively,
from the Company's foreign subsidiaries.
The provision for income taxes is net of the benefit of operating loss
carryforwards, totaling $3.6 million, $2.6 million, and $9.7 million, for 1997,
1996, and 1995, respectively.
The provision for income taxes differs from the amount estimated by applying
the statutory federal income tax rate to income before income taxes as follows:
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Provision computed at federal statutory rate........................ $ 84,733 $ 31,667 $ 47,284
State income tax, net of federal tax effect......................... 10,251 5,964 2,662
Non-deductible acquisition costs.................................... 6,005 -- --
Foreign withholding taxes........................................... 5,049 2,823 3,414
Amortization of goodwill............................................ 706 897 390
Write-off of in-process research and development.................... -- 33,495 --
Change in valuation allowance....................................... (1,714) (11,835) (19,999)
Research and development tax credit................................. (4,112) (207) (494)
Foreign tax credit.................................................. (5,049) -- (769)
Foreign income tax at a (lower) higher rate......................... (25,608) -- 2,129
Other............................................................... 2,367 (1,365) 3,210
---------- ---------- ----------
Provision for income taxes........................................ $ 72,628 $ 61,439 $ 37,827
---------- ---------- ----------
---------- ---------- ----------
Effective tax rate.................................................. 30% 68% 28%
---------- ---------- ----------
---------- ---------- ----------
56
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
The components of deferred tax assets and liabilities consisted of the
following:
1997 1996
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
Tax credits................................................................... $ 27,622 $ 12,029
Accrued royalty............................................................... 24,714 --
Sales returns and allowance................................................... 14,412 3,636
Depreciation and amortization................................................. 7,969 6,630
Vacation accrual.............................................................. 3,865 3,517
Restructure reserves.......................................................... 3,431 2,228
Net operating losses.......................................................... 2,802 7,789
Deferred revenue.............................................................. 1,763 5,367
Other......................................................................... 12,996 6,797
---------- ----------
Total deferred tax assets................................................... 99,574 47,993
Valuation allowance--provision for income taxes............................... -- (1,714)
Valuation allowance--equity and intangibles................................... -- (9,041)
---------- ----------
Net deferred tax assets..................................................... 99,574 37,238
---------- ----------
Deferred Tax Liabilities:
Capitalized software.......................................................... (9,127) (8,132)
Other......................................................................... (2,337) (9,202)
---------- ----------
Total deferred tax liabilities.............................................. (11,464) (17,334)
---------- ----------
Total net deferred tax assets............................................. $ 88,110 $ 19,904
---------- ----------
---------- ----------
The Company provides United States income taxes on the earnings of foreign
subsidiaries unless they are considered permanently invested outside of the
United States. At January 3, 1998, the cumulative amount of earnings upon which
United States income taxes have not been provided are approximately $126.3
million. At January 3, 1998, the unrecognized deferred tax liability for these
earnings was approximately $30.8 million.
The net valuation allowance decreased by $10.8 million in 1997. The decrease
in valuation allowance--equity and intangibles of $9.1 million is due to the
expected realization of the tax benefits of stock option deductions generated in
prior years. The valuation allowance--provision for income taxes decreased by
$1.7 million, due to the realization of net operating losses and tax credits
generated in prior years.
The remaining net operating loss carryforwards will expire at various dates
from 1998 through 2010 and federal tax credit carryforwards will expire at
various dates from 1998 through 2012.
The Company's federal income tax returns for 1989 through 1991 have been
examined by the Internal Revenue Service (IRS). Tax credits of $15.6 million
have been disallowed by the IRS. The Company is contesting these adjustments and
is pursuing administrative remedies. Management believes that adequate provision
has been made for any deficiency that may result from this examination and that
the resolution of this matter will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
57
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
STATEMENT OF CASH FLOWS
The supplemental cash flow information for 1997, 1996, and 1995 follows:
1997 1996 1995
---------- ---------- ---------
(IN THOUSANDS)
Cash Paid During the Year for:
Interest........................................................... $ 1,229 $ 2,185 $ 2,423
---------- ---------- ---------
---------- ---------- ---------
Income taxes (including foreign withholding tax)................... $ 11,942 $ 24,349 $ 12,968
---------- ---------- ---------
---------- ---------- ---------
Non-Cash Investing and Financing Activities:
Capital lease obligations incurred for equipment................... $ 2,570 $ 3,070 $ 1,149
---------- ---------- ---------
---------- ---------- ---------
Common and treasury stock issued under the ESPP and for
acquisitions..................................................... $ 52,594 $ 110,607 $ 6,522
---------- ---------- ---------
---------- ---------- ---------
Tax benefits from employee stock transactions...................... $ 123,180 $ 58,418 $ 8,463
---------- ---------- ---------
---------- ---------- ---------
INTEGRATED MEASUREMENT SYSTEMS, INC.
In July 1995, the Company reduced its ownership in Integrated Measurement
Systems, Inc. (IMS), its wholly-owned subsidiary, to 55% by selling to the
public approximately 3 million shares of common stock at $11 per share in a
registered initial public offering. Of these shares, approximately 0.4 million
were sold by IMS and approximately 2.6 million were sold by the Company as the
sole selling stockholder of IMS. The sale generated net proceeds to the Company
of approximately $26.6 million and a pre-tax gain of approximately $18.9
million, which is reflected as other income in the consolidated statement of
income. In 1997, the Company's ownership was reduced to approximately 37%, due
to the sale of 1 million shares of IMS common stock. Net proceeds totaled $18.6
million and a $13.1 million gain was recorded. Accordingly, beginning in 1997,
its investment in IMS is recorded using the equity method of accounting. The
minority interest liability for IMS at December 28, 1996 totaled $13.5 million.
ACQUISITIONS
ADVANCED MICROELECTRONICS
In October 1997, the Company acquired certain assets and related business
from the Advanced Microelectronics division of the Institute for Technology
Development, a non-profit corporation organized to conduct and transfer
scientific research into usable high technology for commercial application. This
division provided contract engineering services on a time-and-materials basis
for the design and development of integrated circuits. The total purchase price
was $2.4 million and the acquisition was accounted for as a purchase;
accordingly, the results of Advanced Microelectronics from the date of
acquisition forward have been included in the consolidated financial statements.
The excess of purchase price over net assets acquired was $2.1 million, of which
$1.7 million related to the write-off of in-process research and development
that had not reached technological feasibility and, in management's opinion, had
no probable alternative future use. Comparative pro forma financial information
has not been presented as the results of operations of Advanced Microelectronics
were not material to the Company's consolidated financial statements.
58
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
COOPER AND CHYAN TECHNOLOGY, INC.
In May 1997, the Company merged with Cooper and Chyan Technology, Inc.,
whose software products are used to design sophisticated integrated circuits and
high-speed printed circuit boards. In connection therewith, the Company issued
approximately 22.8 million shares of common stock. The acquisition was accounted
for as a pooling of interests. The operations of CCT were not material to the
Company's consolidated operations and financial position; therefore, prior
period consolidated financial statements were not restated. The results of CCT
from the date of acquisition forward have been recorded in the Company's
consolidated financial statements.
SYNTHESIA AB
In February 1997, the Company acquired all of the outstanding stock of
Synthesia AB (Synthesia) for 115,166 shares of the Company's common stock and
cash. The total purchase price was $4.7 million, and the acquisition was
accounted for as a purchase; accordingly, the results of Synthesia from the date
of acquisition forward have been included in the consolidated financial
statements. In connection with the acquisition, net intangibles of $5.6 million
were acquired, of which $4.9 million was reflected as a one-time charge to
operations for the write-off of in-process research and development that had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. Comparative pro forma financial information has not been
presented as the results of operations of Synthesia were not material to the
Company's consolidated financial statements.
HIGH LEVEL DESIGN SYSTEMS, INC.
In December 1996, the Company acquired all of the outstanding stock of High
Level Design Systems, Inc. (HLDS) for approximately 5.2 million shares of the
Company's common stock. The total purchase price was approximately $101.4
million. HLDS developed, marketed, and supported electronic design automation
software for the design of high-density, high-performance integrated circuits.
The acquisition was accounted for as a purchase and, accordingly, the results of
HLDS from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. In connection with the acquisition, net
intangibles of $99.6 million were acquired, of which $95.7 million was reflected
as a one-time charge to operations for the write-off of in-process research and
development that had not reached technological feasibility and, in management's
opinion, had no probable alternative future use. The remaining intangible of
$3.9 million, consisting of goodwill, is included in purchased software and
intangibles in the consolidated balance sheets and is being amortized over its
estimated useful life of five years.
In connection with the acquisition, net assets acquired were as follows:
(IN THOUSANDS)
--------------
Trade accounts receivable and other current assets...................................... $ 1,840
Intangibles, including in-process research and development.............................. 99,594
Property, equipment, and other long-term assets......................................... 5,945
Current liabilities assumed............................................................. (5,680)
Long-term liabilities assumed........................................................... (300)
--------------
Net assets acquired..................................................................... $ 101,399
--------------
--------------
59
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
The following unaudited pro forma information shows the results of
operations for the years ended December 28, 1996 and December 30, 1995, as if
the HLDS acquisition had occurred at the beginning of each period presented and
at the purchase price established in December 1996. The results are not
necessarily indicative of what would have occurred had the acquisition actually
been made at the beginning of each of the respective periods presented or of
future operations of the combined companies. The pro forma results for 1996
combine the Company's results for the year ended December 28, 1996 with the
results of HLDS for the period from January 1, 1996 through the date of
acquisition and includes the $95.7 million write-off discussed above. The
following unaudited pro forma results include the straight-line amortization of
intangibles over a period of five years.
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenue......................................................................... $ 751,453 $ 558,545
---------- ----------
---------- ----------
Net income...................................................................... $ 24,924 $ 94,819
---------- ----------
---------- ----------
Net income per share--assuming dilution......................................... $ 0.13 $ 0.48
---------- ----------
---------- ----------
Weighted average common and potential common shares outstanding................. 189,227 196,552
---------- ----------
---------- ----------
OTHER INCOME AND EXPENSE
Other income (expense) components for 1997, 1996, and 1995 is as follows:
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Interest income........................................................ $ 17,961 $ 4,362 $ 4,854
Gain on sale of IMS stock.............................................. 13,061 -- 18,873
Equity earnings in IMS................................................. 1,934 -- --
Minority interest expense.............................................. (353) (3,016) (1,341)
Gain (loss) on foreign exchange........................................ (1,424) 164 (117)
Interest expense....................................................... (2,508) (1,913) (2,222)
Other expense, net..................................................... (3,047) (379) (2,810)
--------- --------- ---------
Total other income (expense)....................................... $ 25,624 $ (782) $ 17,237
--------- --------- ---------
--------- --------- ---------
UNUSUAL ITEMS AND RESTRUCTURING
Described below are unusual items and restructuring charges in 1997 and
1996. None were recorded in 1995.
1997 1996
--------- ----------
(IN THOUSANDS)
Restructuring charges............................................................ $ 34,417 $ 2,119
Write-off of in-process research and development................................. 6,571 95,700
Write-off of capitalized software development costs.............................. 3,065 2,724
--------- ----------
Total unusual items.......................................................... $ 44,053 $ 100,543
--------- ----------
--------- ----------
60
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
Unusual items included restructuring charges of $34.4 million recorded by
the Company in 1997 for the reduction of personnel whose duties were made
redundant, closure of duplicated and excess facilities, fees of financial
advisors, attorneys, and accountants, and other expenses associated with the
merger with CCT and the acquisition of HLDS. Additionally, the Company
restructured its international business operations to reduce the Company's cost
structure and to further integrate and reduce selling and marketing activities.
In connection with the 1997 restructuring activities, the Company reduced its
workforce by approximately 230 employees representing various sales, marketing,
and research and development departments. The majority of the restructuring
charges were utilized during the year with the exception of facility costs,
which will be paid out through the year 2000, and some severance costs and other
restructuring charges to be paid during 1998.
In 1997, the Company wrote off $6.6 million of acquired in-process research
and development associated with its acquisitions of Synthesia AB and Advanced
Microelectronics. These costs reflected research and development which had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. Additionally, the Company wrote off capitalized software
development costs of $3.1 million for products developed by the Company which
were replaced by CCT products or by license of replacement technology.
Included in 1996 unusual items was a $95.7 million write-off of in-process
research and development, $2.7 million of capitalized software development costs
for products developed by the Company which were replaced by HLDS products, as
well as $2.1 million of restructuring charges consisting of employee termination
costs associated with the outsourcing of the Company's management information
technology services and costs associated with excess facilities. The in-process
research and development had not reached technological feasibility and, in
management's opinion, had no probable alternative future use.
Liabilities for excess facilities and other restructuring charges are
included in other current and non-current liabilities while severance and
benefits liabilities are included in payroll and payroll related accruals. The
following table summarizes the Company's restructuring activity during the years
ended in 1997 and 1996:
SEVERANCE
AND EXCESS OTHER
BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL
---------- ----------- ------------- --------- ----------
(IN THOUSANDS)
Balance, December 30, 1995.................. $ -- $ -- $ -- $ -- $ --
1996 restructuring charges................ 1,047 1,072 -- -- 2,119
Cash charges.............................. (392) -- -- -- (392)
---------- ----------- ------------- --------- ----------
Balance, December 28, 1996.................. 655 1,072 -- -- 1,727
1997 restructuring charges................ 11,895 2,102 18,073 2,347 34,417
Non-cash charges.......................... -- -- -- (2,347) (2,347)
Cash charges.............................. (10,263) (536) (14,223) -- (25,022)
---------- ----------- ------------- --------- ----------
Balance, January 3, 1998.................... $ 2,287 $ 2,638 $ 3,850 $ -- $ 8,775
---------- ----------- ------------- --------- ----------
---------- ----------- ------------- --------- ----------
61
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 3, 1998
OPERATIONS BY GEOGRAPHIC AREA
The Company operates primarily in one industry segment: the development and
marketing of computer-aided design software and related services. The Company's
products have been marketed internationally through distributors and through the
Company's subsidiaries in Europe and Asia/Pacific. Intercompany revenue results
from licenses that are based on a percentage of the subsidiaries' revenue from
unaffiliated customers. The following table presents a summary of operations by
geographic area.
1997 1996 1995
------------ ----------- ----------
(IN THOUSANDS)
Revenue:
Domestic operations(1)......................................... $ 705,995 $ 633,997 $ 440,618
European operations............................................ 415,791 119,455 97,596
Asia/Pacific operations........................................ 152,258 129,157 107,556
Eliminations................................................... (358,151) (141,150) (97,352)
------------ ----------- ----------
Consolidated................................................. $ 915,893 $ 741,459 $ 548,418
------------ ----------- ----------
------------ ----------- ----------
Intercompany Revenue (Eliminated in Consolidation):
Domestic operations............................................ $ 158,055 $ 94,156 $ 58,719
European operations............................................ 171,436 16,984 15,893
Asia/Pacific operations........................................ 28,660 30,010 22,740
------------ ----------- ----------
Consolidated................................................. $ 358,151 $ 141,150 $ 97,352
------------ ----------- ----------
------------ ----------- ----------
Income From Operations:
Domestic operations............................................ $ 8,195 $ (2,322) $ 41,367
European operations............................................ 157,591 29,917 31,888
Asia/Pacific operations........................................ 68,221 63,664 44,605
------------ ----------- ----------
Consolidated................................................. $ 234,007 $ 91,259 $ 117,860
------------ ----------- ----------
------------ ----------- ----------
Identifiable Assets:
Domestic operations............................................ $ 837,320 $ 750,040 $ 396,676
European operations............................................ 295,229 53,716 50,303
Asia/Pacific operations........................................ 69,811 59,008 63,680
Eliminations................................................... (178,510) (145,763) (136,624)
------------ ----------- ----------
Consolidated................................................. $ 1,023,850 $ 717,001 $ 374,035
------------ ----------- ----------
------------ ----------- ----------
- ------------------------
(1) Domestic operations revenue includes export revenue of approximately $15.5
million, $25 million, and $14.7 million to Europe for 1997, 1996, and 1995,
respectively, and approximately $91.2 million, $125.9 million, and $90.6
million to Asia/Pacific for 1997, 1996, and 1995, respectively.
62
SCHEDULE II
CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------------- ----------- ----------- ------------ -------------- -----------
Deducted from asset accounts:
Allowance for doubtful accounts:
Year Ended January 3, 1998................... $ 8,772 $ 438 $ 27,270(2) $ (15,280)(1) $ 21,200
Year Ended December 28, 1996................. $ 7,420 $ 1,621 $ -- $ (269)(1) $ 8,772
Year Ended December 30, 1995................. $ 4,905 $ 4,827 $ -- $ (2,312)(1) $ 7,420
- ------------------------
(1) Uncollectible accounts written-off, net of recoveries, deconsolidation of
Integrated Measurement Systems, Inc., and decrease in returns allowance
offset against revenues.
(2) Additions resulting from an increase in returns allowance offset against
revenue.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cadence Design Systems, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
CADENCE DESIGN SYSTEMS, INC.
/s/ JOHN R. HARDING
-----------------------------------------
John R. Harding
PRESIDENT & CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
NAME/TITLE DATE
- ------------------------------------------------------ ------------------
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ JOHN R. HARDING 4/1/98
- -------------------------------------------
John R. Harding
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, AND
DIRECTOR
/s/ H. RAYMOND BINGHAM 4/1/98
- -------------------------------------------
H. Raymond Bingham
VICE PRESIDENT, CONTROLLER
(Principal Accounting Officer),
AND ASSISTANT SECRETARY
/s/ WILLIAM PORTER 4/1/98
- -------------------------------------------
William Porter
ADDITIONAL DIRECTORS
/s/ DONALD L. LUCAS 4/1/98
- -------------------------------------------
Donald L. Lucas
/s/ CAROL BARTZ 4/1/98
- -------------------------------------------
Carol Bartz
/s/ DR. LEONARD Y. W. LIU 4/1/98
- -------------------------------------------
Dr. Leonard Y. W. Liu
/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI 4/1/98
- -------------------------------------------
Dr. Alberto Sangiovanni-Vincentelli
/s/ GEORGE M. SCALISE 4/1/98
- -------------------------------------------
George M. Scalise
/s/ DR. JOHN B. SHOVEN 4/1/98
- -------------------------------------------
Dr. John B. Shoven
64