-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U+k4Agh5XE78Zajuy4Qgi44/IvH4vLsF5UO3N1Z8Rk12D3T7RqTnXHRJHdumlQBh WTYUE+3aoqBWk1N2NBtzJQ== 0001012870-99-001651.txt : 19990519 0001012870-99-001651.hdr.sgml : 19990519 ACCESSION NUMBER: 0001012870-99-001651 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990403 FILED AS OF DATE: 19990518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADENCE DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000813672 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770148231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10606 FILM NUMBER: 99629374 BUSINESS ADDRESS: STREET 1: 2655 SEELY ROAD BLDG 5 CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089431234 MAIL ADDRESS: STREET 1: 555 RIVER OAKS PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: ECAD INC /DE/ DATE OF NAME CHANGE: 19880609 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-10606 ______________________ CADENCE DESIGN SYSTEMS, INC. (Exact name of Registrant as Specified in its Charter) ______________________ Delaware 77-0148231 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2655 Seely Avenue, Building 5, San Jose, California 95134 (Address of Principal Executive Offices) (Zip Code) (408) 943-1234 Registrant's Telephone Number, including Area Code ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At May 7, 1999, there were 218,433,848 shares of the registrant's common stock, $0.01 par value, outstanding. CADENCE DESIGN SYSTEMS, INC. INDEX Page -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets: April 3, 1999 and January 2, 1999............... 3 Condensed Consolidated Statements of Operations: Three Months Ended April 3, 1999 and April 4, 1998............................................ 4 Condensed Consolidated Statements of Cash Flows: Three Months Ended April 3, 1999 and April 4, 1998............................................ 5 Notes to Condensed Consolidated Financial Statements...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 10 Item 3. Quantitative and Qualitative Disclosures About 27 Market Risk..................................... PART II. OTHER INFORMATION Item 1. Legal Proceedings................................. 31 Item 2. Changes in Securities and Use of Proceeds......... 32 Item 3. Defaults Upon Senior Securities................... 32 Item 4. Submission of Matters to a Vote of Security 32 Holders........................................... Item 5. Other Information................................. 32 Item 6. Exhibits and Reports on Form 8-K.................. 32 Signatures .................................................. 34 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
ASSETS April 3, January 2, 1999 1999 --------------- --------------- (Unaudited) Current Assets: Cash and cash equivalents..................... $ 203,777 $ 183,066 Short-term investments........................ 13,131 26,686 Receivables, net.............................. 252,113 277,599 Prepaid expenses and other.................... 98,902 92,359 ---------- ---------- Total current assets........................ 567,923 579,710 Property, plant, and equipment, net.............. 278,453 262,675 Software development costs, net.................. 12,039 13,045 Acquired intangibles, net........................ 289,796 282,489 Installment contract receivables................. 105,297 100,529 Other assets..................................... 164,842 167,510 ---------- ---------- $1,418,350 $1,405,958 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of capital leases....................................... $ 1,230 $ 1,273 Accounts payable and accrued liabilities...... 158,794 211,220 Income taxes payable.......................... 7,359 19,133 Deferred revenue.............................. 102,677 96,286 ---------- ---------- Total current liabilities................... 270,060 327,912 ---------- ---------- Long-term Liabilities: Long-term debt and capital leases............. 86,083 136,380 Deferred income taxes......................... 69,097 58,927 Minority interest liability................... 240 377 Other long-term liabilities................... 24,306 24,883 ---------- ---------- Total long-term liabilities................. 179,726 220,567 ---------- ---------- Stockholders' Equity: Preferred stock............................... - - - - - - - - Common stock and capital in excess of par value........................................ 764,848 725,325 Treasury stock at cost (6,367 and 10,147 shares, respectively)........................ (200,685) (219,417) Retained earnings............................. 412,694 360,916 Accumulated other comprehensive loss.......... (8,293) (9,345) ---------- ---------- Total stockholders' equity.................. 968,564 857,479 ---------- ---------- $1,418,350 $1,405,958 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended ---------------------------- April 3, April 4, 1999 1998 ------------- ------------- Revenue: Product......................................... $166,095 $154,049 Services........................................ 70,560 52,302 Maintenance..................................... 68,579 63,872 -------- -------- Total revenue................................. 305,234 270,223 -------- -------- Costs and expenses: Cost of product................................. 12,971 11,844 Cost of services................................ 46,492 39,601 Cost of maintenance............................. 10,700 10,343 Amortization of acquired intangibles............ 12,457 546 Marketing and sales............................. 70,168 69,245 Research and development........................ 45,201 41,707 General and administrative...................... 16,484 16,521 Unusual items................................... 14,192 60,857 -------- -------- Total costs and expenses...................... 228,665 250,664 -------- -------- Income from operations...................... 76,569 19,559 Other income (expense), net...................... (605) 2,619 -------- -------- Income before provision for income taxes.... 75,964 22,178 Provision for income taxes....................... 24,186 22,537 -------- -------- Net income (loss)........................... $ 51,778 $ (359) ======== ======== Basic net income (loss) per share................ $0.24 $ - - - - ======== Diluted net income (loss) per share.............. $0.22 $ - - - - ======== Weighted average common shares outstanding....... 217,092 210,014 ======== ======== Weighted average common and potential common shares outstanding-assuming dilution............ 233,791 210,014 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended ---------------------------------- April 3, April 4, 1999 1998 ---------------- ---------------- Cash and Cash Equivalents at Beginning of Period $183,066 $ 207,024 -------- --------- Cash Flows from Operating Activities: Net income (loss)............................................................... 51,778 (359) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................................................. 35,697 18,854 Deferred income taxes......................................................... 19,185 3,961 Write-off of software development costs, net.................................. 640 - - - - Write-off of prepaid expenses and other....................................... 642 - - - - Write-off of equipment, acquired intangibles, and other assets................ 2,684 920 Write-off of acquired in-process technology................................... 8,900 56,900 Change in other long-term liabilities and minority interest expense........... (769) 4,817 Equity income from investments................................................ (75) (17) Provisions for doubtful accounts.............................................. 2,019 - - - - Non-cash restructuring charges................................................ 1,564 452 Changes in operating assets and liabilities, net of effect of acquired businesses: Receivables................................................................. (37,980) 7,714 Prepaid expenses and other.................................................. (7,108) 23,390 Installment contract receivables............................................ 9,538 (4,126) Accounts payable and accrued liabilities.................................... (42,336) (44,084) Income taxes payable........................................................ 3,257 23,649 Deferred revenue............................................................ 4,822 10,543 -------- --------- Net cash provided by operating activities................................. 52,458 102,614 -------- --------- Cash Flows from Investing Activities: Maturities of short-term investments--held-to-maturity.......................... 13,596 24,180 Purchases of short-term investments--held-to-maturity........................... (41) (23,258) Maturities of short-term investments--available-for-sale........................ - - - - 189,150 Purchases of short-term investments--available-for-sale......................... - - - - (206,150) Purchases of property, plant, and equipment..................................... (32,021) (30,890) Capitalization of software development costs.................................... (6,394) (5,453) Increase in acquired intangibles and other assets............................... (9,934) (12,804) Investment in venture capital partnership....................................... (3,289) (2,220) Net cash paid for acquisitions.................................................. (1,632) (51,313) -------- --------- Net cash used for investing activities.................................... (39,715) (118,758) -------- --------- Cash flows from financing activities: Proceeds from long-term debt.................................................... 30,000 - - - - Principal payments on long-term debt and capital leases......................... (80,306) (879) Sale of common stock............................................................ 29,843 23,559 Purchases of treasury stock..................................................... (20,784) (33,010) Proceeds from transfer of financial assets in exchange for cash................. 48,244 - - - - -------- --------- Net cash provided by (used for) financing activities...................... 6,997 (10,330) -------- --------- Effect of exchange rate changes on cash.......................................... 971 (1,335) -------- --------- Increase (decrease) in Cash and Cash Equivalents................................. 20,711 (27,809) -------- --------- Cash and Cash Equivalents at End of Period....................................... $203,777 $ 179,215 ======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The condensed consolidated financial statements included herein have been prepared by Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Cadence's annual report on Form 10-K for the fiscal year ended January 2, 1999. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the condensed consolidated financial statements as of January 2, 1999 and for the three months ended April 4, 1998, have been reclassified to conform with the 1999 presentation. Acquisitions In January 1999, Cadence acquired all of the outstanding stock of Design Acceleration, Inc. (DAI) for approximately 0.6 million shares of Cadence's common stock and $2.9 million of cash. The total purchase price was $25.7 million, and the acquisition was accounted for as a purchase. In connection with the acquisition, net intangibles of $24.1 million were acquired. The results of operations of DAI and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence's condensed financial statements from the date of acquisition. Intangibles arising from the acquisition are being amortized on a straight-line basis over five years. Management estimates that $8.9 million of the purchase price represents acquired in-process technology that has not yet reached technological feasibility and has no alternative future use. Accordingly, this amount was immediately charged to expense in the condensed consolidated statements of operations upon consummation of the acquisition. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate includes a factor that takes into account the uncertainty surrounding the successful development of the purchased in-process technology. If these projects are not successfully developed, future revenue, and profitability of Cadence may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. 6 Comparative pro forma financial information has not been presented because the results of operations of DAI were not material to Cadence's condensed consolidated financial statements. Unusual Items and Restructuring A summary of unusual items and restructuring charges follows:
Three Months Ended ------------------------ April 3, April 4, 1999 1998 ----------- ----------- (In thousands) Write-off of acquired in-process technology...... $ 8,900 $56,900 Asset impairment................................. 3,107 - - - - Restructuring charges............................ 2,185 3,957 ------- ------- Total unusual items........................... $14,192 $60,857 ======= =======
Acquisitions and In-Process Technology In connection with the acquisition of DAI, Cadence immediately charged to expense $8.9 million representing in-process technology that had not yet reached technological feasibility and had no alternative future use. See "Acquisitions." Asset Impairment and Restructuring In the first quarter of 1999, Cadence incurred charges totaling $3.1 million in connection with the abandonment of certain third-party software licenses that will no longer be used by its design services business and capitalized software development costs associated with Cadence products that will no longer be sold. The impairment loss recorded was the amount by which the carrying amount of the intangible assets exceeded fair market value. In addition, Cadence recorded $2.2 million in severance costs to terminate 45 employees. These actions were taken to complete Cadence's restructuring program initiated in the fourth quarter of 1998. The restructuring plan was primarily aimed at reducing the costs of excess personnel in its services business, and Cadence anticipates that the actions taken in the first quarter of 1999 will save an estimated additional $0.6 million in fiscal 1999. All termination notices and benefits were communicated to the affected employees prior to quarter-end and all severance benefits are expected to be paid in 1999. The following table summarizes the Company's restructuring activity during the first quarter of 1999:
For the Three Months Ended April 3, 1999 ---------------------------------------------------------------------------------------- Severance and Excess Other Benefits Facilities Restructuring Assets Total ---------------- ---------------- ---------------- ---------------- ---------------- (In thousands) Balance, January 2, 1999.......... $13,114 $14,496 $2,213 $11,304 $41,127 1999 restructuring charges....... 2,185 - - - - - - - - - - - - 2,185 Non-cash charges................. (216) (121) (554) (673) (1,564) Cash charges..................... (6,111) (2,044) (708) (448) (9,311) ------- ------- ------ ------- ------- Balance, April 3, 1999............ $ 8,972 $12,331 $ 951 $10,183 $32,437 ======= ======= ====== ======= =======
7 Comprehensive Income (Loss) "Comprehensive income (loss)" includes foreign currency translation gains and losses and other unrealized gains and losses that have been previously excluded from net income and reflected instead in equity. A summary of comprehensive income (loss) follows:
Three Months Ended ------------------------- April 3, April 4, 1999 1998 ----------- ------------ (In thousands) Net income (loss)................................ $51,778 $ (359) Translation income (loss)........................ 1,052 (1,206) ------- ------- Comprehensive income (loss)...................... $52,830 $(1,565) ======= =======
Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the sum of the weighted average shares of common stock outstanding and the incremental number of potential common shares issuable upon the exercise of outstanding common stock options, warrants, contingent isuances of common stock, and put warrants computed using the treasury stock method. For periods in which Cadence had losses, potential common shares from common stock options, warrants, contingent issuances of common stock, and put warrants are excluded from the computation of diluted net loss per share as their effect is antidilutive. The following is a reconciliation of the weighted average common shares used to calculate basic net income (loss) per share to the weighted average common and potential common shares used to calculate diluted net income (loss) per share:
Three Months Ended -------------------- April 3, April 4, 1999 1998 --------- --------- (In thousands) Weighted average common shares used to calculate basic net income (loss) per share............... 217,092 210,014 Options................................... 16,123 - - - - Puts...................................... 401 - - - - Warrants and other contingent common 175 - - - - shares................................... ------- ------- Weighted average common and potential common shares used to calculate diluted net income 233,791 210,014 (loss) per share................................ ======= =======
If Cadence recorded net income in the first quarter of 1998, dilutive weighted average outstanding options would have been 24.7 million shares and weighted average outstanding warrants and other dilutive contingent common shares would have been 0.2 million shares. Contingencies Refer to Part II, Item 1 for a description of legal proceedings. 8 Put Warrants and Call Options Cadence has authorized two seasoned systematic stock repurchase programs under which it repurchases common stock to satisfy estimated requirements for shares to be issued under its Employee Stock Purchase Plan (ESPP) and the 1997 Nonstatutory Stock Option Plan (the 1997 Plan). Such repurchases are intended to cover Cadence's expected reissuances under the ESPP and the 1997 Plan for the next 12 months and 24 months, respectively. As part of its authorized repurchase programs, Cadence has sold put warrants through private placements. At April 3, 1999, there were 2.9 million put warrants outstanding, each of which entitles the holder to sell one share of common stock to Cadence on a specified date and at a specified price ranging from $20.88 to $35.14 per share. Additionally, during this same period, Cadence purchased call options that entitle Cadence to buy shares of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence's systematic stock repurchase programs. At April 3, 1999, Cadence had 2.1 million call options outstanding at prices ranging from $21.13 to $35.39 per share. The put warrants and call options outstanding at April 3, 1999 are exercisable on various dates through November 1999, and Cadence has the contractual ability to settle the options prior to their maturity. At April 3, 1999, the fair value of the call options was approximately $8.8 million and the fair value of the put warrants was approximately $17.3 million. The fair value of the put warrants and call options was estimated by Cadence's investment advisors. If exercised, Cadence has the right to settle the put warrants with Cadence common stock equal to the difference between the exercise price and the fair value at the date of exercise. Settlement of the put warrants with stock could cause Cadence to issue a substantial number of shares, depending on the exercise price of the put warrants and the per share fair value of Cadence's common stock at the time of exercise. In addition, settlement of put warrants in stock could lead to the disposition by put warrant holders of shares of Cadence's common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may adversely affect the price of Cadence's common stock. At April 3, 1999, Cadence had the ability to settle these put warrants with stock and, therefore, no amount was classified out of stockholders' equity in the condensed consolidated balance sheets. Segment Reporting In 1998, Cadence adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker when deciding how to allocate resources and when assessing performance. Cadence currently has three operating segments: Products, Services, and Maintenance. Cadence's chief operating decision making group is the Executive Staff, which is comprised of the Chief Executive Officer and Executive Vice Presidents. Cadence's business activities are organized on the basis of differences in its related products and services. The Products segment designs and sells a variety of electronic design automation software tools that are licensed to customers. The Services segment offers design and methodology services either to assist companies in developing electronic designs or to assume responsibility for the design effort when customers wish to outsource this work. The Maintenance segment is primarily a technical support organization, and maintenance agreements are offered to customers either as part of our product license agreements or separately. Cadence's organizational structure reflects this segmentation, and segments have not been aggregated for purposes of this disclosure. Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes operating expenses, unusual items, other income, net, and income taxes. 9 Profitability information about Cadence's segments is available only to the extent of gross margin by segment, and operating expenses and other income and expense items are managed on a functional basis. There are no differences between the accounting policies used to measure profit and loss for segments and those used on a consolidated basis. Revenue is defined as revenue from external customers with no intersegment revenue or expenses. Cadence's management does not identify or allocate its assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed by Cadence's Executive Staff to make decisions about resources to be allocated among the segments and when assessing their performance. Depreciation and amortization is allocated among the segments in order to determine each segments' gross margin. The following tables present information about reported segments for the three months ended April 3, 1999 and April 4, 1998:
For the Three Months Ended April 3, 1999 --------------------------------------------------------------------- Product Services Maintenance Other Total ------------ ----------- ----------- -------------- ------------- (In thousands) Revenue............. $166,095 $70,560 $68,579 $ - - - - $305,234 Cost of revenue..... 12,971 46,492 10,700 - - - - 70,163 Amortization of acquired intangibles........ 11,062 1,395 - - - - - - - - 12,457 -------- ------- ------- --------- -------- Gross margin...... 142,062 22,673 57,879 - - - - 222,614 Marketing and sales. - - - - - - - - - - - - (70,168) (70,168) Research and - - - - - - - - - - - - (45,201) (45,201) development........ General and - - - - - - - - - - - - (16,484) (16,484) administrative..... Unusual items....... - - - - - - - - - - - - (14,192) (14,192) Other expense, net.. - - - - - - - - - - - - (605) (605) -------- ------- ------- --------- -------- Income (loss) before provision for income taxes... $142,062 $22,673 $57,879 $(146,650) $ 75,964 ======== ======= ======= ========= ======== For the Three Months Ended April 4, 1998 --------------------------------------------------------------------- Revenue............. $154,049 $52,302 $63,872 $ - - - - $270,223 Cost of revenue..... 11,844 39,601 10,343 - - - - 61,788 Amortization of acquired intangibles........ 493 53 - - - - - - - - 546 -------- ------- ------- --------- -------- Gross margin...... 141,712 12,648 53,529 - - - - 207,889 Marketing and sales. - - - - - - - - - - - - (69,245) (69,245) Research and development........ - - - - - - - - - - - - (41,707) (41,707) General and administrative..... - - - - - - - - - - - - (16,521) (16,521) Unusual items....... - - - - - - - - - - - - (60,857) (60,857) Other income, net... - - - - - - - - - - - - 2,619 2,619 -------- ------- ------- --------- -------- Income (loss) before provision for income taxes... $141,712 $12,648 $53,529 $(185,711) $ 22,178 ======== ======= ======= ========= ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere herein. Except for the historical information contained herein, the following discussion contains forward-looking statements based on current expectations that involve certain risks and uncertainties. Cadence's actual results could differ materially from those 10 discussed herein. Factors that could cause actual results or performance to differ materially or contribute to such differences include, but are not limited to, those discussed below in "Liquidity and Capital Resources," "Year 2000 Update," "Factors That May Affect Future Results," and "Disclosures about Market Risk." Overview Cadence provides software technology and comprehensive design and methodology services and technology for the product development requirements of the world's leading electronics companies. Cadence licenses its leading-edge electronic design automation (EDA) software technology and provides a variety of professional services to companies throughout the world ranging from methodology services to help optimize performance of the customer's product to design services to create the actual design of the electronic system for the customer's product. Cadence is a supplier of "design realization" solutions, which are used by companies to design and develop complex chips and electronic systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products, and other advanced electronics. In January 1999, Cadence acquired all of the outstanding stock of Design Acceleration, Inc. (DAI) for approximately $0.6 million shares of Cadence's common stock and $2.9 million of cash. The total purchase price was $25.7 million, and the acquisition was accounted for as a purchase. DAI is a supplier of design verification technology used in system-on-a-chip design. In December 1998, Cadence entered into a merger agreement with Quickturn Design Systems, Inc. (Quickturn). Quickturn designs, manufactures, sells and supports products that verify the design of computer chips and electronic systems. Cadence will acquire Quickturn in a tax-free, stock-for- stock transaction. Each share of Quickturn common stock will be converted into $15 worth of Cadence common stock. Cadence common stock will be valued at the average of its closing prices over a five day period that ends before the second business day before the merger closes. There were 18,416,484 shares of Quickturn common stock outstanding as of April 30, 1999. In addition, Cadence will assume outstanding stock options and warrants of Quickturn. The merger is expected to be accounted for as a pooling of interests. The consummation of the merger is subject to various conditions, including the approval of Quickturn's stockholders. A meeting of Quickturn's stockholders to vote on approval of the merger is scheduled for May 21, 1999. If the approval of Quickturn's stockholders is obtained, Cadence anticipates that the closing will occur shortly thereafter. There can be no assurance that stockholder approval will be obtained, or the other conditions will be satisfied, and that the merger will be consummated. Results of Operations Revenue Three Months Ended ---------------------- April 3, April 4, 1999 1998 % Change ---------- ---------- ---------- (In millions) Product............................... $166.1 $154.0 8% Services.............................. 70.6 52.3 35% Maintenance........................... 68.5 63.9 7% ------ ------ Total revenue....................... $305.2 $270.2 13% ====== ====== Sources of Revenue as a Percent of Total Revenue Product............................... 54% 57% 11 Services.............................. 23% 19% Maintenance........................... 23% 24% In the first quarter of 1999, product revenue increased $12.1 million or 8%, as compared to the first quarter of 1998. The increase in product revenue for the first quarter of 1999 was primarily attributable to increased demand for synthesis and mixed signal products. Services revenue increased $18.3 million or 35% in the first quarter of 1999, as compared to the first quarter of 1998, primarily due to increased demand for Cadence's design and methodology services offerings. Maintenance revenue increased $4.6 million or 7% in the first quarter of 1999, as compared to the first quarter of 1998, primarily due to continued growth of the installed customer base and the renewal of maintenance and support contracts. Revenue by Geography Three Months Ended ---------------------- April 3, April 4, 1999 1998 % Change ---------- ---------- ----------- (In millions) Domestic.............................. $113.3 $148.5 (24%) International......................... 191.9 121.7 58% ------ ------ Total revenue....................... $305.2 $270.2 13% ====== ====== Revenue by Geography as a Percent of Total Revenue Domestic.............................. 37% 55% International......................... 63% 45% Total revenue from international sources increased in the first quarter of 1999, as compared to the first quarter of 1998, primarily due to increased demand for products in Europe and Japan, and services in Europe, offset slightly by a decline in products and services in the rest of Asia. Differences in the rate of growth of domestic and international revenue, over the periods presented and as compared geographically, are primarily due to fluctuations in demand and resulting sales volume of place-and-route, physical design, and synthesis products as well as consulting and design services offerings. Revenue growth is expected to be slower for the remainder of 1999. Foreign currency exchange rates positively affected reported revenue by $4.1 million during the first quarter of 1999, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. Foreign currency exchange rates negatively affected reported revenue by $3.7 million during the first quarter of 1998, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. Additional information about revenues by geographic area can be found under "Segment Reporting" in the Notes to Condensed Consolidated Financial Statements. 12 Cost of Revenue Three Months Ended -------------------- April 3, April 4, 1999 1998 % Change --------- --------- ---------- (In millions) Product............................... $13.0 $11.8 10% Services.............................. $46.5 $39.6 17% Maintenance........................... $10.7 $10.3 3% Cost of Revenue as a Percent of Related Revenue Product............................... 8% 8% Services.............................. 66% 76% Maintenance........................... 16% 16% Cost of product revenue includes costs of production personnel, packaging and documentation, and amortization of capitalized software development costs. Cost of product revenue increased $1.2 million for the first quarter of 1999, primarily due to higher amortization of software development costs, as compared to the first quarter of 1998. Cost of services revenue includes costs associated with providing services to customers, primarily salaries and costs to recruit, develop, and retain personnel, and costs to maintain the infrastructure necessary to manage a services organization. Cost of services revenue increased $6.9 million in the first quarter of 1999, as compared to the first quarter of 1998, primarily due to Cadence's continued investment in developing new services offerings and the addition of services professionals, primarily through acquisitions completed in 1998. Services gross margin increased for the first quarter of 1999, as compared to 1998, primarily due to increased utilization of services capacity and Cadence's efforts to manage expenses to improve profitability. Services gross margin has been, and may continue to be, adversely affected by Cadence's inability to fully utilize its services resources. In addition, services gross margin may continue to be adversely affected by Cadence's inability to achieve operating efficiencies when implementing a growing number of services offerings. Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, and production personnel, packaging, and documentation of maintenance updates. Cost of maintenance revenue in absolute dollars and as a percent of related revenue remained relatively flat in the first quarter of 1999, as compared to the first quarter of 1998. Amortization of Acquired Intangibles Three Months Ended -------------------- April 3, April 4, 1999 1998 --------- --------- (In millions) Amortization of acquired intangibles........... $12.5 $ 0.5 Amortization of Acquired Intangibles as a Percent of Total Revenue Amortization of acquired intangibles........... 4% 0% Amortization of acquired intangibles increased $12 million for the first quarter of 1999, as compared with the first quarter of 1998, as a result of the acquisitions of Ambit Design Systems, Inc. (Ambit), Symbionics Group Limited, Bell Labs' Integrated Circuit Design Automation group of Lucent 13 Technologies, Inc. (BLDA), and Excellent Design, Inc. in 1998, which were accounted for using the purchase method of accounting. Operating Expenses
Three Months Ended -------------------- April 3, April 4, 1999 1998 % Change --------- --------- ---------- (In millions) Marketing and sales................... $70.2 $69.2 1% Research and development.............. $45.2 $41.7 8% General and administrative............ $16.5 $16.5 0%
Expenses as a Percent of Total Revenue Marketing and sales................... 23% 26% Research and development.............. 15% 15% General and administrative............ 5% 6%
Marketing and sales expenses increased $1 million in the first quarter of 1999, as compared to the first quarter of 1998, primarily attributable to an increase in sales support costs in Japan, partially offset by a decrease in sales commissions. Foreign currency exchange rates negatively affected reported marketing and sales expenses by $0.5 million during the first quarter of 1999, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. During the first quarter of 1998, foreign currency exchange rates positively affected marketing and sales expenses by $1.7 million , primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. Cadence's investment in research and development, prior to the reduction for capitalization of software development costs, was $51.6 million and $47.2 million for the first quarters of 1999 and 1998, respectively, representing 17% of total revenue for each quarter. The increase in net research and development expenses for the first quarter of 1999 was primarily attributable to employee and other costs related to the acquisition and operations of Ambit and BLDA. Cadence capitalized $6.4 million and $5.5 million of software development costs for each of the first quarter of 1999 and 1998, respectively, which represented 12% of total research and development expenditures made in each of those periods. The increase in capitalized software development costs for the first quarter of 1999 resulted primarily from general increases in new product development. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed. General and administrative expenses remained relatively flat in the first quarter of 1999, as compared to the same period of the prior year. Unusual Items The following table presents information regarding unusual items for the quarters ended April 3, 1999 and April 4, 1998:
Three Months Ended -------------------- April 3, April 4, 1999 1998 --------- --------- (In millions) Write-off of acquired in-process technology...... $ 8.9 $56.9 Asset impairment................................. 3.1 - - - - Restructuring charges............................ 2.2 4.0 ----- ----- Total unusual items....................... $14.2 $60.9 ===== =====
14 Acquisitions and In-Process Technology In January 1999, Cadence acquired all of the outstanding stock of Design Acceleration, Inc. (DAI) for approximately 0.6 million shares of Cadence's common stock and $2.9 million of cash. The total purchase price was $25.7 million, and the acquisition was accounted for as a purchase. In connection with the acquisition, net intangibles of $24.1 million were acquired. Upon consummation of the DAI acquisition, Cadence immediately charged to expense $8.9 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. See "Notes to Condensed Consolidated Financial Statements." The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate includes a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. The in-process technology under development is expected to be commercially viable in 1999. Expenditures to complete the in-process technology is expected to total approximately $0.7 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. At the time of its acquisition by Cadence, DAI was working on several significant research and development projects that were intended to provide a next generation environment for design verification and analysis. These efforts included the development of a highly automated approach for high-level test bench creation and analysis, a waveform viewer capable of supporting analog and mixed signal designs and a tool designed to analyze verification code coverage at the transactional level. The nature of the efforts to complete these in- process research and development projects relate, in varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities that are necessary to establish that the proposed in-process technologies meet their design specifications, which include functional, technical, and economic performance requirements. The net cash flows generated by the projects underway at DAI, which were used to value the acquired in-process technology, were based on management's estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs, and income taxes from such projects. The revenue projections were based on the potential market size for which these projects are addressing, Cadence's ability to gain market acceptance for these projects, and the life cycle of in-process technology. Estimated total revenues from the acquired in-process product areas peak in years 2001-2002 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue has been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $11.4 million. The net cash flows generated from the in-process technology are expected to reflect earnings before interest, taxes, and depreciation of approximately 60% for the sales generated from in-process technology. There can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefits of this acquisition. See "Factors That May Affect Future Results." The discount applied to the net cash flows to calculate the present value of such net cash flows was based on the weighted average cost of capital (WACC). The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of the enterprise. The discount rate used to discount the net cash flows from purchased in-process technology was 22%. These discount rates are sometimes higher than 15 the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which are unknown at this time. As evidenced by their continued support for research and development projects, management believes Cadence is well positioned to successfully complete each of these projects. However, there is risk associated with the completion of the projects and there is no assurance that each will meet with either technological or commercial success. If these projects are not successfully developed, Cadence's business, operating results, and financial condition may be adversely affected in future periods. In addition, the value of other intangible assets acquired may become impaired. To date, DAI's results have not differed significantly from the forecast assumptions. In addition, Cadence's research and development expenditures since the acquisition have not differed materially from expectations. Revenue contribution from the acquired technology falls within an acceptable range of plans in its role in Cadence's suite of design systems and tools. The risks associated with the research and development are still considered high and no assurance can be made that future products will meet market expectations. In the three months ended April 4, 1998, Cadence acquired all of the outstanding stock of Excellent Design, Inc., a Japanese corporation (EXD) and Symbionics Group Limited, a U.K corporation (Symbionics). The total purchase price of EXD was $40.9 million, and the acquisition was accounted for as a purchase. EXD provides application-specific integrated circuit and system-on-a-chip (SOC) design and library development. Upon consummation of the EXD acquisition, Cadence immediately charged to expense $28.4 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable on dates ranging from the end of 1998 through the year 2000. Expenditures to complete these projects were expected to total approximately $7 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. The total purchase price of Symbionics was $46.1 million, and the acquisition was accounted for as a purchase. Symbionics provides product development design services to leading electronic manufacturers. Upon consummation of the Symbionics acquisition, Cadence immediately charged to expense $28.5 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate includes a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable on dates ranging from the end of 1998 through the 16 year 2000. Expenditures to complete these projects were expected to total approximately $6 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. To date, EXDs' and Symbionics' results have not differed significantly from the forecast assumptions. Cadence's research and development expenditures since the acquisitions have not differed materially from expectations. Revenue contribution from the acquired technology falls within an acceptable range of plans in its role in Cadence's suite of design systems and tools. The risks associated with the research and development are still considered high and no assurance can be made that future products will meet market expectations. Asset Impairment and Restructuring In the first quarter of 1999, Cadence incurred charges totaling $3.1 million in connection with the abandonment of certain third-party software licenses that will no longer be used by its design services business and capitalized software development costs associated with Cadence products that will no longer be sold. The impairment loss recorded was the amount by which the carrying amount of the intangible assets exceeded fair market value. In addition, Cadence recorded $2.2 million in severance costs to terminate 45 employees. These actions were taken to complete Cadence's restructuring program initiated in the fourth quarter of 1998. The restructuring plan was primarily aimed at reducing the cost of excess personnel in its services business, and Cadence anticipates that the actions taken in the first quarter of 1999 will save an estimated additional $0.6 million in fiscal 1999. All termination notices and benefits were communicated to the affected employees prior to quarter-end and all severance benefits are expected to be paid in 1999. Actual amounts of termination benefits, facilities, and other restructuring related payments can be found in Notes to Condensed Consolidated Financial Statements under "Asset Impairment and Restructuring." Other Income (Expense) and Income Taxes Other income (expense) decreased $3.2 million in the first quarter of 1999, as compared to the first quarter of 1998, primarily due to the decrease in interest income of $2.1 million and an increase in interest expense of $0.8 million. The decrease in interest income was due to a lower average balance of invested cash and short-term investments and lower interest rates. The increase in interest expense was due to borrowings against Cadence's unsecured credit facility. Cadence's estimated effective tax rate in the first quarter of 1999 was 28.5%, excluding the effect of the write-off of acquired in-process technology of $8.9 million, which is not deductible for income tax purposes. The effective tax rate for the first quarter of 1998 was also 28.5%. Year 2000 Update The Year 2000 computer issue creates risks for Cadence, the full extent and scope of which have not yet been fully assessed. In the event that internal products and systems, or those products and systems provided by, or utilized by, third parties do not correctly recognize and process date data information beyond the year 1999, it could have a material adverse effect on Cadence's business, operating results and financial condition. To address Year 2000 issues, Cadence initiated a program designed to address the most critical Year 2000 items that would affect Cadence's products, its worldwide business systems, and the operations of the following functions: research and development, finance, sales, manufacturing, and human resources. Assessment and remediation efforts regarding these critical items are proceeding in parallel. Cadence is also creating a plan to work with critical suppliers and customers to determine that such 17 suppliers' and customers' operations and the products and services they provide are Year 2000 capable or to monitor their progress towards Year 2000 capability. Cadence has commenced work on contingency plans to address potential problems with its internal systems and with suppliers, customers, and other third parties. In 1997, Cadence commenced a program to inventory, assess, remediate, and test the Year 2000 capability of its products. As a result of those efforts, Cadence believes that the most current release of Cadence's software products, as set forth in the Year 2000 Software Compliance List (available on Cadence's web site), are Year 2000 Compliant. Cadence uses the term "Year 2000 Compliant" to mean that the software will not: (A) cease to perform due solely to a change in date to or after January 1, 2000, or (B) generate incorrect or ambiguous data or results with respect to same-century and/or multi-century formulas, functions, date values, and date data interfaces. Cadence does not believe that customers are using a significant amount of products that are not determined to be Year 2000 Compliant. Cadence continues to further validate current products, as well as new products, products acquired through acquisitions and releases through testing and code reviews. All Cadence Year 2000 activities concerning Cadence's products are expected to be completed by October 1999. In 1995, Cadence also commenced a worldwide business systems replacement project with systems that use programs primarily from SAP America, Inc. (SAP), PeopleSoft, Inc. (PeopleSoft), and Siebel Systems, Inc. (Siebel). The new systems are expected to make approximately 70% of Cadence's business computer systems Year 2000 Compliant. In addition, during September 1997, Cadence commenced an investigation of the condition of Year 2000 readiness for all of its other internal business applications. This effort began with an inventory to identify current business applications, an evaluation of their Year 2000 readiness status and development of plans for remediation and testing of all discovered issues. As of February 1999, of the 60 business application systems that had been identified, 54 had been modified or replaced and determined to be Year 2000 ready. Recently, Cadence has identified additional areas requiring Year 2000 assessment, remediation and testing, specifically software interfaces, and applications used to interact with vendors, as well as applications that are unique to the various international operations. Cadence expects that all business critical applications will be Year 2000 Compliant by the third quarter of 1999. In July 1998, Cadence established a cross functional Year 2000 Project Team to identify and resolve all remaining Year 2000 readiness issues. The primary remaining issues consist of assessing the Year 2000 impact for outside vendors, customers, facilities, and the remaining internal business systems that are not yet assessed as Year 2000 compliant. Project plans have been developed and include the process of identifying and prioritizing critical suppliers and customers at the direct interface level and communicating with them about their plans and progress in addressing Year 2000 issues. Detailed evaluations of the most critical third parties have been initiated. It is expected that all Year 2000 project inventories will be completed by the end of the second quarter of 1999. This effort is being followed by each business function conducting a focused level of ranking and functional assessment of its inventory to establish the methods and actions required to resolve any Year 2000 issues discovered. The assessment efforts are estimated to be completed by the second quarter of 1999. The remediation (modification or replacement of existing software or systems) efforts are expected to be completed by the third quarter of 1999 and the testing phases of the Year 2000 Project Plans are expected to take place throughout most of 1999 and estimated to be completed, for all business critical items, by the fourth quarter of 1999. All remaining issues (which are considered low priority or low risk to the business) are planned to be addressed as time permits and could continue through the first half of 2000. It is estimated that the 1999 budget for Year 2000 related costs to resolve remaining readiness issues will be approximately $13 million. The costs of implementing the SAP, PeopleSoft and Siebel business application systems are not included in these cost estimates. The total cost associated with required modifications to become Year 2000 compliant is not expected to have a material adverse effect on Cadence's business, operating results, and financial condition. Cadence's current estimates of the 18 amount of time and costs necessary to implement and test its systems are based on the facts and circumstances existing at this time. The estimates were derived utilizing multiple assumptions of future events including the continued availability of certain resources, implementation success, and other factors. New developments may occur that could affect Cadence's estimates for Year 2000 compliance. These developments include, but are not limited to: (a) the availability and cost of personnel trained in this area, (b) the ability to locate and correct all relevant computer code and equipment, and (c) the planning and modification success needed to achieve full implementation. Readers are cautioned that the foregoing discussion regarding Year 2000 Update contains forward-looking statements based on current expectations that involve risks and uncertainties and should be considered in conjunction with the following. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations of Cadence. Such failures could materially and adversely affect Cadence's business, operating results, and financial condition. Due in large part to the uncertainty of the Year 2000 readiness of third-party suppliers and customers, as well as the lack of remediation and testing for the remaining internal business systems that are not yet assessed as Year 2000 Compliant, Cadence is currently unable to determine whether the consequences of Year 2000 issues will have a material impact on Cadence's business, operating results, or financial condition. Cadence's risks associated with non-information technology systems and embedded systems are generally limited to systems that typically involve environmental control systems, interruptible power systems, elevator systems, and security systems. Cadence feels confident that through its research, testing, and corrective actions, any Year 2000 problems caused by these systems will not have a material adverse effect on its business, operating results, or financial condition. The reasonably likely worst case scenario of a Year 2000 problem for all of Cadence's material systems is that Cadence's operations could be disrupted for a few days before the problem could be identified and remediated. The reasonably likely worst case scenario associated with Cadence products for a Year 2000 problem is that a customer project could be delayed for a short period of time before the problem can be identified and remediated by Cadence's support process. Because of the small amount of software code that could be involved, it is anticipated that problems will be remediated within 5 business days from when the problem is recreated by Cadence's support organization. Cadence uses contract terms to limit indirect damages that may be incurred by customers, although no assurance can be given that such terms are enforceable. The Year 2000 Project is expected to significantly reduce Cadence's level of uncertainty regarding Year 2000 issues and, in particular, about the Year 2000 readiness of its material internal operations and external agents. In addition, Cadence believes that the current Year 2000 activities surrounding Cadence's software products and internal systems have significantly reduced the risk of any interruption caused by any Year 2000 issues in these areas. However, because of uncertainties with Year 2000 issues, Cadence is currently unable to determine whether and to what extent the Year 2000 problem will harm its business, operating results, or financial condition. Liquidity and Capital Resources At April 3, 1999, Cadence's principal sources of liquidity consisted of $216.9 million of cash and short-term investments, compared to $209.8 million at January 2, 1999, and a $355 million senior unsecured credit facility. As of April 3, 1999, Cadence had outstanding borrowings of $85 million under its revolving credit facility. Cash provided by operating activities decreased $50.2 million to $52.5 million for the first quarter of 1999, as compared to the first quarter of 1998. The decrease was primarily due to decreases in net 19 income before unusual items, increases in other non-cash charges, and changes in the balances of operating assets and liabilities. At April 3, 1999, Cadence had net working capital of $297.9 million compared with $251.8 million at January 2, 1999. The working capital increase was driven primarily by decreases in accounts payable and accrued liabilities of $52.4 million and income taxes payable of $11.8 million, and an increase in cash and cash equivalents and short-term investments of $7.2 million, partially offset by a decrease in receivables of $25.5 million. The decrease in accounts payable and accrued liabilities was primarily attributable to payments made for commissions, taxes, bonuses, and stock purchased under Cadence's Employee Stock Purchase Plan. The decrease in receivables was due primarily to increased financing of receivables as installment contract receivables to certain financing institutions on a non-recourse basis. In addition to its short-term investments, Cadence's primary investing activities consisted of purchases of property, plant, and equipment, acquired intangibles and other assets, capitalization of software development costs, venture capital partnership investments, and acquisitions, which combined represented $53.3 million and $102.7 million of cash used for investing activities in the first quarters of 1999 and 1998, respectively. In the first quarter of 1999, Cadence completed the construction of a new building and improvements on its San Jose, California campus with an estimated total cost of approximately $16.3 million. Also in the first quarter of 1999, Cadence purchased an additional facility adjacent to its San Jose, California campus for $27.5 million, which it expects to occupy in the third quarter of 1999. Additionally, the construction of a new Cadence design center in Scotland was commenced in 1998. In connection with and prior to the consummation of the merger with Quickturn, Cadence will rescind its stock repurchase program, with the exception of continued systematic stock repurchases under its seasoned stock repurchase programs for Cadence's 1997 Plan and ESPP. Since 1994, Cadence has sold put warrants and purchased call options through private placements. See "Notes to Condensed Consolidated Financial Statements." At April 3, 1999, Cadence has a maximum potential obligation related to put warrants to buy back 2.9 million shares of its common stock at an aggregate price of approximately $84 million. The put warrants will expire at various dates through November 1999, and Cadence has the contractual ability to settle the options prior to their maturity. Cadence has the ability to settle these put warrants with stock and, therefore, no amount was classified out of stockholders' equity in the condensed consolidated balance sheets. Anticipated cash requirements for the remainder of 1999 include the purchase of treasury stock through Cadence's stock repurchase programs and the contemplated additions of property, plant, and equipment of approximately $120 million. As part of its overall investment strategy, Cadence has committed to invest $50 million in a venture capital partnership as a limited partner over the next three to four years. As of April 3, 1999, Cadence had contributed approximately $29.3 million to this partnership, which is reflected in other assets in the accompanying condensed consolidated balance sheets, net of operating losses. Cadence anticipates that current cash and short-term investment balances, cash flows from operations, and its $355 million revolving credit facility will be sufficient to meet its working capital requirements on a short- and long-term basis. 20 Factors That May Affect Future Results Cadence lacks long-term experience in its electronics design and methodology services business Cadence only recently began to focus on offering electronics design and methodology services and therefore may not be as experienced in this business as others. The market for these services is relatively new and rapidly evolving. Cadence's failure to succeed in these services businesses may seriously harm Cadence's business, operating results, and financial condition. The success of Cadence's electronic design and methodology services businesses depends on many factors that are beyond its control In order to be successful with its electronics design and methodology services, Cadence must overcome several factors that are beyond its control, including the following: . Many service contracts generally represent large amounts of revenue. Cadence's electronics design and methodology services contracts generally represent a relatively large amount of revenue per order. Therefore, the loss of individual orders could seriously hurt Cadence's revenue and operating results. . Many service contracts are at a fixed price. A substantial portion of these service contracts are fixed-price contracts. This means that the customer pays a fixed price that has been agreed upon ahead of time, no matter how much time or how many resources Cadence must devote to perform the contract. If Cadence's cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence's business, operating results, and financial condition. . Cadence's cost of service personnel is high and reduces gross margin. Gross margins represents the difference between the amount of revenue from the sale of services and Cadence's cost of providing those services. Cadence must pay high salaries to professional services personnel to attract and retain them. This results in a lower gross margin than the gross margin in Cadence's software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin. Cadence's failure to respond quickly to technological developments could make its products uncompetitive and obsolete The industries in which Cadence competes experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the electronic chip design industry is experiencing several revolutionary trends: . Developments in manufacturing that enable production of chips with extremely small spacing between transistors, so-called deep submicron chips, that challenge the fundamental laws of physics and chemistry. . The ability of manufacturers to produce chips from 12 inch silicon wafers as opposed to today's eight inch wafers. This ability to place millions of additional transistors on each chip requires entirely new software tools for designers to design these 12 inch chips. . The ability to design entire electronic systems on a single chip, so- called System-on-a-Chip or SOC, rather than a circuit board greatly increases design complexity and requires the ability to design both hardware and software on a single chip. 21 If Cadence is unable to respond quickly and successfully to these developments and changes, Cadence may lose its competitive position and its products or technologies may become uncompetitive or obsolete. In order to compete successfully, Cadence must develop or acquire new products and improve its existing products and processes on a schedule that keeps pace with technological developments in its industries. Cadence must also be able to support a range of changing computer software, hardware platforms and customer preferences. There is no guarantee that Cadence will be successful in this regard. Cadence's failure to obtain software or other intellectual property licenses or adequately protect its proprietary rights could seriously harm its business Cadence's success depends, in part, upon its proprietary technology. Many of Cadence's products include software or other intellectual property licensed from third parties, and Cadence may have to seek new or renew existing licenses for this software and other intellectual property in the future. Cadence's design services business also requires it to license software or other intellectual property of third parties. Cadence's failure to obtain for its use software or other intellectual property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm Cadence's business, operating results, and financial condition. Also, Cadence generally relies on patents, copyrights, trademarks and trade secret laws to establish and protect its proprietary rights in technology and products. Despite precautions Cadence may take to protect its intellectual property, Cadence cannot assure you that third parties will not try to challenge, invalidate, or circumvent these patents. Cadence also cannot assure you that the rights granted under its patents will provide it with any competitive advantages, patents will be issued on any of its pending applications or future patents will be sufficiently broad to protect Cadence's technology. Furthermore, the laws of foreign countries may not protect Cadence's proprietary rights in those countries to the same extent as U.S. law protects these rights in the United States. Cadence cannot assure you that its reliance on licenses from or to third parties, or patent, copyright, trademark, and trade secret protection, will be enough to be successful and profitable in the industries in which Cadence competes. Intellectual property infringement by or against Cadence could seriously harm its business There are numerous patents in the electronic design automation software industry and new patents are being issued at a rapid rate. It is not always economically practicable to determine in advance whether a product or any of its components infringes the patent rights of others. As a result, from time to time, Cadence may be forced to respond to or prosecute intellectual property infringement claims to protect its rights or defend a customer's rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation or cause product shipment delays, all of which could seriously harm Cadence's business, operating results, and financial condition. In settling these claims, Cadence may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms acceptable to Cadence. Being forced to enter into a license agreement with unfavorable terms could seriously harm Cadence's business, operating results, and financial condition. Fluctuations in quarterly results of operations could hurt Cadence's business and the market price of its stock Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence's quarterly operating results and some of them are not within Cadence's control, including the mix of products and services sold and the timing of significant orders for its software products by customers. Quarterly operating results are affected by the mix of products sold because there are significant differences in margins from the sale of products and services. Cadence 22 realizes gross margins on product sales of approximately 90% but realizes gross margins of approximately 30% on its performance of services. In addition, Cadence's quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5 million. The failure to close a contract for the sale of one or more orders of Cadence's software products could seriously hurt its quarterly operating results. In addition, Cadence bases its expense budgets partially on its expectations of future revenue. However, it is difficult to predict revenue levels or growth. Revenue levels that are below Cadence's expectations could seriously hurt Cadence's business, operating results, and financial condition. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of Cadence common stock could decline dramatically. Also, because of the large order size and its customers' buying patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter, which could cause even more immediate and serious harm to the trading price of Cadence common stock. Because Cadence's focus on providing services is relatively recent, it believes that quarter-to-quarter comparisons of its results of operations may not be meaningful. Therefore, stockholders should not view Cadence's historical results of operations as reliable indicators of its future performance. Cadence expects to acquire other companies and may not successfully integrate them Cadence has acquired other businesses before and may do so again. While Cadence expects to analyze carefully all potential transactions before committing to them, Cadence cannot assure you that any transaction that is completed will result in long-term benefits to Cadence or its stockholders or that Cadence's management will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after Cadence acquires another business, it could seriously harm Cadence's business, operating results, and financial condition: . Difficulties in combining previously separate businesses into a single unit; . The substantial diversion of management's attention from day-to-day business when negotiating these transactions and later integrating an acquired business; . The discovery after the acquisition has been completed of liabilities assumed from the acquired business; . The failure to realize anticipated benefits such as cost savings and revenue enhancements; . Difficulties related to assimilating the products of an acquired business. For example, in distribution, engineering, and customer support areas; and . The failure to identify or correct a material Year 2000 problem of an acquired business. Cadence's international operations may seriously harm its financial condition because of several weak foreign economies and the effect of foreign exchange rate fluctuations Cadence has operations outside the United States. Cadence's revenue from international operations as a percentage of total revenue was approximately 63% for the first quarter of 1999 and approximately 45% for the first quarter of 1998. Cadence also transacts business in various foreign currencies. Recent economic uncertainty and the weakening of foreign currencies in the Asia-Pacific region has had, and may continue to have, a seriously harmful effect on Cadence's revenue and operating results. 23 Fluctuations in the rate of exchange between U.S. Dollars and the currencies of countries other than the U.S. in which Cadence conducts business could seriously harm its business, operating results, and financial condition. For example, if there is an increase in the rate at which a foreign currency exchanges into U.S. Dollars, it will take more of the foreign currency to equal a specified amount of U.S. Dollars than before the rate increase. If Cadence prices its products and services in the foreign currency, it will receive less in U.S. Dollars than it did before the rate increase went into effect. If Cadence prices its products and services in U.S. Dollars, an increase in the exchange rate will result in an increase in the price for Cadence's products and services compared to those products of its competitors that are priced in local currency. This could result in Cadence's prices being uncompetitive in markets where business is transacted in the local currency. Cadence's international operations may also be subject to other risks, including: . The adoption and expansion of government trade restrictions; . Volatile foreign exchange rates and currency conversion risks; . Limitations on repatriation of earnings; . Reduced protection of intellectual property rights in some countries; . Recessions in foreign economies; . Longer receivables collection periods and greater difficulty in collecting accounts receivable; . Difficulties in managing foreign operations; . Political and economic instability; . Unexpected changes in regulatory requirements; . Tariffs and other trade barriers; and . U.S. government licensing requirements for export as licenses can be difficult to obtain. Cadence expects that revenue from its international operations will continue to account for a significant portion of its total revenue. Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of a Cadence subsidiary. A subsidiary's functional currency is the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Cadence uses foreign currency forward exchange contracts, as part of its foreign currency hedging program, to help protect against currency exchange risks. These contracts allow Cadence to buy or sell specific foreign currencies at specific prices on specific dates. Under this program, increases or decreases in the value of Cadence's foreign currency transactions are partially offset by gains and losses on these forward exchange contracts. Although Cadence attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt Cadence's results of operations as expressed in U.S. Dollars. Foreign currency exchange risk occurs for some of Cadence's foreign operations whose functional currency is the local currency. The primary effect of foreign currency translation on Cadence's results of operations is a reduction in revenue from a strengthening U.S. Dollar, offset by a smaller reduction in 24 expenses. Exchange rate gains and losses on the translation into U.S. Dollars of amounts denominated in foreign currencies are included as a separate component of stockholders' equity. Cadence's inability to deal effectively with the conversion to the Euro may negatively impact its marketing and pricing strategies On January 1, 1999, 11 member countries of the European Union adopted the Euro as their common legal currency and established fixed conversion rates between their sovereign currencies and the Euro. Transactions can be made in either the sovereign currencies or the Euro until January 1, 2002, when the Euro must be used exclusively. Currently, only electronic transactions may be conducted using the Euro. Cadence believes that its internal systems and financial institution vendors are capable of handling the Euro conversion and is in the process of examining current marketing and pricing policies and strategies that may be affected by conversion to the Euro. The cost of this effort is not expected to materially hurt Cadence's results of operations or financial condition. However, Cadence cannot assure you that all issues related to the Euro conversion have been identified and that any additional issues would not materially hurt Cadence's results of operations or financial condition. For example, the conversion to the Euro may have competitive implications on Cadence's pricing and marketing strategies and Cadence may be at risk to the extent its principal European suppliers and customers are unable to deal effectively with the impact of the Euro conversion. Cadence has not yet completed its evaluation of the impact of the Euro conversion on its functional currency designations. Failure to obtain export licenses could harm Cadence's business Cadence must comply with United States Department of Commerce regulations in shipping its software products and other technologies outside the United States. Although Cadence has not had any significant difficulty complying with these regulations so far, any significant future difficulty in complying could harm Cadence's business, operating results, and financial condition. Cadence's inability to compete in its industries could seriously harm its business The electronic design automation software and the commercial electronic design and methodology services industries are highly competitive. If Cadence is unable to compete successfully in these industries, it could seriously harm Cadence's business, operating results, and financial condition. To compete in these industries, Cadence must identify and develop innovative and cost competitive electronic design automation software products and market them in a timely manner. It must also gain industry acceptance for its professional services and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors, than those of other design companies and the internal design departments of electronics manufacturers. Cadence cannot assure you that it will be able to compete successfully in these industries. Factors which could affect Cadence's ability to succeed include: . The development of competitive software products and design and methodology services could result in a shift of customer preferences away from Cadence's products and services and cause a significant decrease in revenue; . The electronics design and methodology services industries are relatively new industries and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors; and . There are a significant number of current and potential competitors in the electronic design automation software industry and the cost of entry is low. 25 In the electronic design automation software industry, Cadence currently competes with a number of large companies, including Avant! Corporation, Mentor Graphics Corporation, Synopsys, Inc. and Zuken-Redac, and numerous small companies. Cadence also competes with manufacturers of electronic devices that have developed or have the capability to develop their own electronic design automation software. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors like Cadence because they wish to promote their own internal design departments. In the electronics design and methodology services industries, Cadence competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronic design and consulting industry. Cadence's failure to attract, train, motivate, and retain key employees may harm its business The competition for highly skilled employees is intense. Cadence's business depends on the efforts and abilities of its senior management, its research and development staff, and a number of other key management, sales, support, technical, and services personnel. Cadence's failure to attract, train, motivate, and retain such employees would impair its development of new products, its ability to provide design and methodology services and the management of its businesses. This would seriously harm Cadence's business, operating results, and financial condition. "Year 2000 computer problems" could interrupt Cadence's business operations. The so-called Year 2000 problem occurs when computer programs and embedded microprocessors fail to process date information correctly beginning in 1999. If Cadence experiences a Year 2000 problem, it could result in an interruption in, or a failure of, normal business operations. This could seriously harm Cadence's business, operating results, and financial condition. While Cadence has established a Year 2000 project team to identify and resolve its potential Year 2000 issues, Cadence has not fully assessed the risks the Year 2000 problem poses to its business. Cadence believes that its own internally-developed software products generally will not have Year 2000 problems. However, Cadence is uncertain as to the Year 2000 readiness of third- party suppliers and customers, approximately 30% of its internal information business systems, and products acquired through recent acquisitions. Because of these uncertainties, Cadence is currently unable to determine whether and to what extent the Year 2000 problem will harm its business, operating results, or financial condition. Anti-takeover defenses in Cadence's charter, by laws, and under Delaware law could prevent an acquisition of Cadence or limit the price that investors might be willing to pay for Cadence common stock Provisions of the Delaware General Corporation Law that apply to Cadence and its Certificate of Incorporation could make it difficult for another company to acquire control of Cadence. For example: . Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of the voting stock of the corporation, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within 3 years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met. . Cadence's Certificate of Incorporation allows the Cadence Board of Directors to issue at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of Cadence preferred stock are currently outstanding. However, the rights of holders of any 26 Cadence preferred stock that may be issued in the future may be superior to the rights of holders of Cadence common stock. . Cadence has a rights plan, commonly known as a "poison pill," which would make it difficult for someone to acquire Cadence without the approval of Cadence's Board of Directors. All of these factors could limit the price that certain investors would be willing to pay for shares of Cadence common stock and could delay, prevent or allow the Board of Directors of Cadence to resist an acquisition of Cadence, even if the proposed transaction was favored by a majority of Cadence's independent stockholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk Disclosures about Market Risk Interest Rate Risk Cadence's exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. Cadence places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, Cadence's first priority is to reduce the risk of principal loss. Consequently, Cadence seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. Cadence mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. In October 1998, Cadence entered into a senior unsecured credit facility (the 1998 Facility) with a syndicate of banks that allows Cadence to borrow up to $355 million. The 1998 Facility is divided between a $177.5 million three year revolving credit facility (the Three Year Facility) and a $177.5 million 364-day revolving credit facility convertible to a three year term loan (the 364-Day Facility). The Three Year Facility expires September 29, 2001. The 364-Day Facility will either expire on September 29, 1999 and be converted to a three year term loan with a maturity date of September 29, 2002 or, at the option of the bank group, be renewed for an additional one year period. Cadence has the option to pay interest based on LIBOR plus a spread of between 0.50% and 1.00%, based on a pricing grid tied to a financial covenant, or the higher of the Federal Funds Rate plus 0.50% or the prime rate. As a result, Cadence's interest rate expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unutilized portions of the Three Year Facility at rates between 0.18% and 0.30% based on a pricing grid tied to a financial covenant and on the unutilized portion of the 364-Day Facility at a fixed rate of 0.10%. The 1998 Facility contains certain financial and other covenants. 27 The table below presents the carrying value and related weighted average interest rates for Cadence's investment portfolio and its long-term debt obligations. The carrying value approximates fair value at April 3, 1999. All investments mature in one year or less.
Average Carrying Interest Value Rate ---------- ---------- (In millions, except for average interest rates) Investment Securities: Cash equivalentsfixed rate.................... $ 98.5 4.94% Short-term investmentsfixed rate.............. 13.1 5.64% ------ Total investment securities............... 111.6 5.02% Cash equivalentsvariable rate................. 33.2 3.60% ------ Total interest bearing instruments........ $144.8 4.67% ====== Debt: Revolving credit facility..................... $ 85.0 5.44% ======
Interest Rate Swap Risk Cadence entered into a 4.8% fixed interest rate-swap in connection with its accounts receivable financing program to modify the interest rate characteristics of the receivables sold to a financing institution on a non- recourse basis. At April 3, 1999, the notional amount was $23.8 million which will be amortized in quarterly installments of $2.2 million through October 2001. The estimated fair value at April 3, 1999 was immaterial. Foreign Currency Risk Cadence transacts business in various foreign currencies, primarily in Japanese yen and certain European currencies. Cadence has established a foreign currency hedging program, utilizing foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures in Japan, Canada, Asia, and certain European countries. Under this program, increases or decreases in Cadence's foreign currency transactions are partially offset by gains and losses on the forward contracts, so as to mitigate the possibility of foreign currency transaction gains and losses. Cadence does not use forward contracts for trading purposes. All outstanding forward contracts at the end of a period are marked-to-market with unrealized gains and losses included in other income, net, and thus are recognized in income in advance of the actual foreign currency cash flows. As these forward contracts mature, the realized gains and losses are recorded and are included in net income as a component of other income, net. Cadence's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature. 28 The table below provides information as of April 3, 1999 about Cadence's material forward contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts (at contract exchange rates) and the weighted average contractual foreign currency exchange rates. These forward contracts mature prior to April 15, 1999. Average Notional Contract Forward Contracts: Amount Rate ----------- --------- (In millions, except for average contract rates) Japanese yen.................................. $ 54.9 111.98 British pound sterling........................ $ 14.6 1.63 Euro.......................................... $(11.2) 1.11 Swedish krona................................. $ (4.1) 7.83 Canadian dollars.............................. $ 2.6 1.50 Hong Kong dollars............................. $ 1.5 7.75 The unrealized gain (loss) on the outstanding forward contracts at April 3, 1999 was immaterial to Cadence's condensed consolidated financial statements. Due to the short-term nature of the forward contracts, the fair value at April 3, 1999 was negligible. The realized gain (loss) on these contracts as they matured was not material to the consolidated operations of Cadence. Equity Price Risk As part of its authorized repurchase program, Cadence has sold put warrants through private placements. Additionally, Cadence has purchased call options that entitle Cadence to buy on a specified day one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence's seasoned systematic repurchase programs. Cadence repurchases shares of its common stock under stock repurchase programs in order to make sure it has enough shares for issuance under its Employee Stock Purchase Plan (ESPP), its 1997 Stock Option Plan (the 1997 Plan) and for other corporate purposes. As part of these repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants. This may result in sales of a large number of shares and consequent decline in the market price of Cadence common stock. . Call options allow Cadence to buy shares of its stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of stock. If the market price of the stock is less than the exercise price of a call option, Cadence typically will not exercise the option. . Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence's exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall. . Put warrants allow the holder to sell to Cadence shares of Cadence common stock on a specified day at a specified price. Cadence has the right to settle the put warrants with shares of Cadence common stock valued at the difference between the exercise price and the fair value of the stock at the date of exercise. . Depending on the exercise price of the put warrants and the market price of the stock at the time of exercise, settlement of the put warrants with stock could cause Cadence to issue a substantial 29 number of shares to the holder of the put warrant. The holder may sell these shares in the market, which could cause the price of Cadence common stock to fall. . Put warrant holders may accumulate a substantial number of shares of stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall. The table below provides information at April 3, 1999 about Cadence's put warrants and call options. The table presents the contract amounts and the weighted average strike prices. The put warrants and call options expire at various dates through November 1999 and Cadence has the contractual ability to settle the options prior to their maturity.
Estimated 1999 Fair Maturity Value ---------- --------- (Shares and contract amounts in millions) Put Warrants: Shares........................................ 2.9 Weighted average strike price................. $28.51 Contract amount............................... $ 84.0 $17.3 Call Options: Shares........................................ 2.1 Weighted average strike price................. $28.32 Contract amount............................... $ 58.1 $ 8.8
30 PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, licensing, contract law, distribution arrangements and employee relations matters. Cadence filed a complaint in the United States District Court for the Northern District of California (the District Court) on December 6, 1995 against Avant! Corporation (Avant!) and certain of its employees for misappropriation of trade secrets, copyright infringement, conspiracy and other illegal acts. On January 16, 1996, Avant! filed various counterclaims against Cadence and Joseph B. Costello, Cadence's former President and Chief Executive Officer (Costello), and with leave of the court, on January 29, 1998, filed a second amended counterclaim. The second amended counterclaim alleges, inter alia, that Cadence and Costello had cooperated with the Santa Clara County, California, District Attorney and initiated and pursued its complaint against Avant! for anticompetitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!'s stock price, and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The second amended counterclaim also alleges that certain Cadence insiders engaged in illegal insider trading with respect to Avant!'s stock. Cadence and Costello believe that each has meritorious defenses to Avant!'s claims, and each intends to defend such action vigorously. By an order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from Cadence's complaint and stayed the counterclaim pending resolution of Cadence's complaint. The counterclaim remains stayed. On April 19, 1996, Cadence filed a motion seeking a preliminary injunction to prevent further use of Cadence copyrighted code and trade secrets by Avant!. On March 18, 1997, the District Court issued an order in which it granted in part and denied in part that motion. On September 23, 1997, the United States Court of Appeals for the Ninth Circuit reversed the District Court's decision and directed the District Court (a) to issue an order enjoining the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s Aquarius software infringes Cadence's code and, if so, to enter an order enjoining the sale of that software. In an order issued on December 19, 1997, as modified on January 26, 1998, the District Court entered a preliminary injunction barring any further infringement of Cadence's copyrights in Design Framework II software, or selling, licensing or copying such product derived from Design Framework II, including but not limited to, Avant!'s ArcCell products. On February 19, 1998, Avant! filed a petition for writ of certiorari to the United States Supreme Court, requesting a review of the Ninth Circuit Court's decision. The Supreme Court denied that petition without comment. On July 9, 1998, Cadence filed further motions to enjoin Avant!'s Aquarius product line on copyright and trade secret grounds. On December 7, 1998, the District Court issued a further preliminary injunction, which enjoined Avant! from selling its Aquarius product line. Cadence posted a $10 million bond in connection with the issuance of the preliminary injunction. By an order dated July 22, 1997, the District Court stayed most activity in the case pending in that Court and ordered Avant! to post a $5 million bond, in light of related criminal proceedings pending against Avant! and several of its executives. The District Court's December 7, 1998 order lifted that stay in part, allowing the matter to proceed to trial as to certain allegations against Avant! only, but not with respect to certain matters involving the Avant! executives and other individuals against whom criminal charges are pending. Cadence intends to pursue its claims vigorously. Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse effect on Cadence's business, operating results, or financial condition. 31 On April 30, 1999, Cadence and several of its officers and directors were named as defendants in a lawsuit filed in the United States District Court for the Northern District of California, entitled Spett v. Cadence Design ----------------------- Systems, et al, civil action no. C 99-2082. The action purports to be brought - --------------- on behalf of a class of shareholders who purchased Cadence common stock between November 4,1998 and April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit arises out of Cadence's announcement of its first quarter 1999 financial results. Management intends to vigorously defend the claims. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information In January 1998, Cadence issued 649,814 shares of its common stock, $0.01 par value per share, to the stockholders of Design Acceleration, Inc. (DAI), in connection with Cadence's acquisition of 100% of the outstanding stock of DAI. Cadence's primary purpose in acquiring the DAI shares was the acquisition of DAI's design verification and analysis technology for integration into Cadence's product offerings. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith:
Exhibit Number Exhibit Title ---------- ------------------------------------------------------------------------------- 3.01 Amended and restated bylaws of the Registrant, as amended and restated on May 6, 1999. 27.01 Financial data schedule for the period ended April 3, 1999.
32 (b) Reports on Form 8-K: On December 10, 1998 and amended on December 22, 1998 and January 6, 1999, the Registrant filed a Current Report on Form 8-K reporting Cadence's agreement to acquire Quickturn Design Systems, Inc., a Delaware corporation. On April 20, 1999, the Registrant filed a Current Report on Form 8-K reporting that Cadence announced the appointment of H. Raymond Bingham to the position of President and Chief Executive Officer. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CADENCE DESIGN SYSTEMS, INC. (Registrant) DATE: May 17, 1999 By: /s/ H. Raymond Bingham ------------ ------------------------------ H. RAYMOND BINGHAM President and Chief Executive Officer DATE: May 17, 1999 By: /s/ William Porter ------------ ------------------------------ William Porter Vice President and Chief Financial Officer 34 EX-3.01 2 AMENDED AND RESTATED BYLAWS OF CADENCE Exhibit 3.01 AMENDED AND RESTATED BYLAWS OF CADENCE DESIGN SYSTEMS, INC. A Delaware corporation ARTICLE I STOCKHOLDERS Section 1.1. Annual Meetings. An annual meeting of stockholders shall be --------------- held for the election of directors at such date, time and place, either within or without the State of Delaware, as the Board of Directors may determine. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of stockholders for any ---------------- purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. Special meetings may not be called by any other person or persons. Section 1.3. Notice of Meetings. Written notice of all meetings of ------------------ stockholders shall be given which shall state the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation, such notice shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 1.4. Adjournments. Any meeting of stockholders may adjourn from ------------ time to time to reconvene at the same or another place, and notice need not be given of any such adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. At the adjourned meeting the Corporation may transact any business that may have been transacted at the original meeting. Section 1.5. Quorum. At each meeting of stockholders, the holders of a ------ majority of the shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum, except where otherwise required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation's stock held by the Corporation or another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any of the Corporation's stock held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided ------------ over by the Chief Executive Officer or, if there is no such designation or the position is vacant at the time, by the Chairman of the Board. The Board of Directors and, subject to any determinations by the Board of Directors, the person presiding over any meeting of stockholders, shall determine the order of business and all matters pertaining to the procedure and conduct of the meeting. The Secretary of the Corporation shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Voting at meetings of stockholders need not --------------- be by written ballot. At all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect. All other elections and questions, unless otherwise required by law or these Bylaws, shall be decided by the vote of the holders of a majority of the shares of stock entitled to vote thereon present in person or by proxy at the meeting. Section 1.8. Fixing Date for Determination of Stockholders of Record. In ------------------------------------------------------- order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed by the Board of Directors, then the record date shall be as provided by law. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date for such consent. Such request shall include a brief description of the action proposed to be taken. The Board of Directors shall, within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. Such record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. 2 Section 1.9. List of Stockholders Entitled to Vote. A complete list of ------------------------------------- stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 1.10. Action by Consent of Stockholders. Unless otherwise --------------------------------- restricted by the Certificate of Incorporation, and except as set forth in Section 1.8 above, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 1.11. Advance Notice of Stockholder Proposals and Nominations. ------------------------------------------------------- (a) At any annual meeting of the stockholders, only such business shall be conducted and only such nominations shall be considered, as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder (i) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and (ii) such other business must be a proper matter for stockholder action under the Delaware General Corporations Law. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to, or delayed by more than thirty (30) days after, the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (A) as to each person whom the stockholder proposes to nominate for election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act") and Rule 14a-11 thereunder, or as such rules may be amended or superseded, and shall be accompanied by such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (B) as to any other business that the stockholder 3 proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the Corporation that are owned beneficially and of record by such stockholder and such beneficial owner. (b) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.11 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth herein. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. (c) For purposes of this Section 1.11, "public announcement" shall mean disclosure in a press release reported by the Dow Jones New Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act. ARTICLE II BOARD OF DIRECTORS Section 2.1. Number; Qualifications. The Board of Directors shall consist ---------------------- of such number of directors as shall be fixed from time to time by resolution of the Board of Directors. Directors need not be stockholders. Section 2.2. Election; Resignation; Removal; Vacancies. Each director ----------------------------------------- shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified, or until his or her earlier resignation or removal. Any director may resign at any time upon written notice to the Corporation. Subject to the rights of any holders of Preferred Stock then outstanding, (i) any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, and (ii) any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors elected by all stockholders having the right to vote as a single class, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, or by the stockholders at a meeting or by written consent. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 4 Section 2.3. Regular Meetings. Regular meetings of the Board of Directors ---------------- may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given. Section 2.4. Special Meetings. Special meetings of the Board of Directors ---------------- may be called by the Chairman of the Board, the Chief Executive Officer or a majority of the Board of Directors and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given by the person or persons calling the meeting to all directors at least four days before the meeting if the notice is mailed, or at least twenty-four hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, or facsimile transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. Section 2.5. Telephonic Meetings Permitted. Members of the Board of ----------------------------- Directors, or any committee of the Board, may participate in a meeting of the Board or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meetings can hear each other, and participation in a meeting pursuant to conference telephone or similar communications equipment shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the -------------------------------- Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7. Organization. Meetings of the Board of Directors shall be ------------ presided over by the Chairman of the Board, or in his or her absence by the Chief Executive Officer, or in his or her absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Written Action by Directors. Any action required or --------------------------- permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing. Such writing or writings shall be filed with the minutes of proceedings of the Board or such committee. Section 2.9. Compensation of Directors. Directors, as such, may receive, ------------------------- pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.10. Qualification of Directors. No person shall be qualified to -------------------------- be elected to, or appointed to fill a vacancy on, the Board of Directors of the Corporation during the pendency of a Business Combination transaction, as defined herein, if such person is, or (in the case of a 5 person described in clause (i), (ii) or (iii) below) was within the two years preceding the date of such election or appointment: (i) an officer, director, employee or affiliate (as defined in Rule 144 of the Securities and Exchange Commission ("SEC")) of a party to such transaction (an "Interested Party") or of any affiliate of an Interested Party; (ii) an agent subject to the direction of an Interested Party; (iii) a consultant or advisor to an Interested Party; (iv) a person having a material financial interest in the transaction (other than through the ownership of stock or securities of the Corporation); or (v) a person having any business, financial or familial relationship with any person referred to in clauses (i)-(iv) above that would reasonably be expected to affect such person's judgment as a director of the Corporation. A person shall not be disqualified from election or appointment to the Board of Directors by reason of this Section 2.10 solely because such person is an employee or officer of this Corporation who receives normal and customary compensation as such and/or is a stockholder or affiliate of this Corporation. A Business Combination shall mean any of the following: (i) a merger or consolidation of this Corporation with another corporation, or a sale of all or substantially all of the business and assets of this Corporation; or (ii) an acquisition (including by tender offer or any other means) by any person (including any two or more persons comprising a group, within the meaning of SEC Rule 13(d)(5)), of beneficial ownership, within the meaning of Rule 13d-3 under the 1934 Act, of 15% or more of the outstanding common stock of this Corporation. A Business Combination shall be deemed pending for purposes of this Section 2.10 commencing on the date any offer or proposal for such transaction shall be made and until such time as the proposed transaction is abandoned or until such time as: (i) the party proposing such transaction shall have acquired beneficial ownership, as defined above, of 50% or more of this Corporation's outstanding voting stock; and (ii) 10 business days shall have elapsed thereafter. A business day shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. Section 2.11. Stock Options and Stock Option Repricing. Without the ---------------------------------------- approval of stockholders, the Corporation shall not (i) reprice any stock options relating to shares of the Corporation's stock ("Stock Options") held by a director or an executive officer of, or consultant to, the Corporation, or (ii) during any fiscal year, reprice Stock Options representing in the aggregate an amount exceeding two percent (2%) of the total number of outstanding Stock Options. For purposes of this Section 2.11, the term "executive officer" shall mean an executive officer as defined in Rule 3b-7 under the 1934 Act, and the term "reprice" shall mean lowering the exercise price of previously awarded Stock Options within the meaning of Item 402(i) under Securities and Exchange Commission Regulation S-K. 6 ARTICLE III COMMITTEES Section 3.1. Committees. The Board of Directors may, by resolution passed ---------- by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meetings and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it, but no such committee shall have such power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporations Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Section 3.2. Committee Rules. Unless the Board of Directors otherwise --------------- provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. ARTICLE IV OFFICERS Section 4.1. Generally. The officers of the Corporation shall be a Chief --------- Executive Officer, a President, a Secretary, and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, and such other officers as may be appointed in accordance with the provisions of Section 4.3 of these Bylaws. Any number of officers may be held by the same person. Section 4.2. Election of Officers. The officers of the Corporation, -------------------- except such officers as may be appointed in accordance with the provisions of Section 4.3 or Section 4.5 of these Bylaws, shall be appointed by the Board of Directors. Section 4.3. Subordinate Officers. The Board of Directors may appoint, or -------------------- may empower the Chief Executive Officer or the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 7 Section 4.4. Removal and Resignation of Officers. Subject to the rights, ----------------------------------- if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the Board or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation or removal shall be without prejudice to the rights, if any, of any party under any contract to which the officer is a party. Section 4.5. Vacancies in Offices. A vacancy in any office because of -------------------- death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. Section 4.6. Chairman of the Board. The Chairman of the Board, if such an --------------------- officer is elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or prescribed by these Bylaws. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized. If there is no Chief Executive Officer, or President, the Chairman of the Board shall also be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 4.7 of these Bylaws. Section 4.7. Chief Executive Officer. Subject to such supervisory powers, ----------------------- if any, as may be given by the Board of Directors to the Chairman of the Board, if there is such an officer, the Chief Executive Officer shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. In the absence of the Chairman of the Board or if there is none, he or she shall preside at all meetings of the Board of Directors. He or she shall have power to sign all contracts and other instruments of the Corporation that are authorized. He or she shall have the general powers and duties of management usually vested in the office of the Chief Executive Officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 4.8. President. Subject to the supervision of the Chief Executive --------- Officer and to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there are such officers, the President shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized. He or she shall have the general powers and duties of management usually vested in the office of president of a Corporation, and shall have 8 such other powers and duties as may be prescribed by the Board of Directors, these Bylaws, the Chief Executive Officer or the Chairman of the Board. Section 4.9. Vice President. In the absence or disability of the -------------- Chairman of the Board, the Chief Executive Officer, and the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the President, or the Chairman of the Board. Section 4.10. Secretary. The Secretary shall keep or cause to be kept, at --------- the principal executive office of the Corporation, or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders, with the time and place of holding, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office of the Corporation or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and he or she shall keep the seal of the Corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. Section 4.11. Chief Financial Officer. Subject to the direction of the ----------------------- Board of Directors, the President, and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer. The Chief Financial Officer shall render to the Chairman of the Board, the Chief Executive Officer, the President, and the directors, whenever they request it, an account of all of his or her actions as Chief Financial Officer and of the results of operations and financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. 9 ARTICLE V STOCK Section 5.1. Certificates. Every holder of stock shall be entitled to ------------ have a certificate signed by or in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer or the President, or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New ------------------------------------------------------------- Certificates. The Corporation may issue a new certificate of stock in the place - ------------ of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation an affidavit of loss and a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI INDEMNIFICATION Section 6.1. Indemnification of Officers, Directors and Employees. Each ---------------------------------------------------- person (a "Covered Person") who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation (including any subsidiary or affiliate thereof or any constituent corporation or any of the foregoing absorbed in any merger) or is or was serving at the request of the Corporation (including such subsidiary, affiliate or constituent corporation) as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other entity, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporations Law, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise and other taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such Covered Person in connection therewith and such indemnification shall continue as to a Covered Person who has ceased to serve in such capacity and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that the Corporation shall indemnify any such Covered Person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 6.2. Advance of Expenses. The Corporation shall pay all expenses ------------------- incurred by a Covered Person, or in defending any such proceeding as they are incurred in advance of its 10 final disposition; provided, however, that if the Delaware General Corporations Law then so requires, the payment of such expenses incurred in advance of the final disposition of such proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Covered Person, to repay all amounts so advanced if it should be determined ultimately that such person is not entitled to be indemnified under this Article VI or otherwise. Section 6.3. Right of Indemnitee to Bring Suit. The rights to --------------------------------- indemnification and to the advancement of expenses conferred in Sections 6.1 and 6.2 shall be contract rights. If a claim under such sections is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporations Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporations Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the Corporation. Section 6.4. Non-Exclusivity of Rights. The rights conferred on any ------------------------- person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5. Indemnification Contracts. The Board of Directors is ------------------------- authorized to cause the Corporation to enter into a contract with any director, officer or employee of the Corporation, or any person serving at the request of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, including employees benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VI. 11 Section 6.6. Insurance. The Corporation shall maintain insurance, at its --------- expense, to the extent it determines such to be reasonably available, to protect itself, its officers and directors and any other persons the Board of Directors may select, against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or less under the Delaware General Corporations Law. Section 6.7. Effect of Amendment. Any amendment, repeal or modification ------------------- of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. ARTICLE VII NOTICES Section 7.1. Notice. Except as otherwise specifically provided herein or ------ required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery (including use of a courier service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, mailgram or facsimile. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, two days after being deposited in the mail, and (iii) in the case of delivery via telegram, mailgram, telex, or facsimile, when dispatched. Section 7.2. Waiver of Notice. Any written waiver of notice, signed by ---------------- the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. ARTICLE VIII INTERESTED DIRECTORS Section 8.1. Interested Directors; Quorum. No contract or transaction ---------------------------- between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof that authorizes the contract or transaction, or solely 12 because his, her or their votes are counted for such purpose if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX MISCELLANEOUS Section 9.1. Fiscal Year. The fiscal year of the Corporation shall be ----------- determined by resolution of the Board of Directors. Section 9.2. Seal. The Board of Directors may provide for a corporate ---- seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors. Section 9.3. Form of Records. Any records maintained by the Corporation --------------- in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 9.4. Reliance Upon Books and Records. A member of the Board of ------------------------------- Directors of the Corporation, or a member of any committee designated by the Board of Directors, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or reports made to the Corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Corporation. Section 9.5. Certificate of Incorporation Governs. In the event of any ------------------------------------ conflict between the provisions of the Corporation's Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern. Section 9.6. Severability. If any provision of these Bylaws shall be held ------------ to be unenforceable, illegal or invalid, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any 13 such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall remain in full force and effect. ARTICLE X AMENDMENT Section 10.1. Amendments. Stockholders of the Corporation holding a ---------- majority of the Corporation's outstanding voting stock shall have the power to adopt, amend or repeal Bylaws. The Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation, except such power as may be expressly limited by Bylaws adopted by the stockholders. Notwithstanding the foregoing provisions of this Section 10.1, Section 2.11 of these Bylaws, relating to the repricing of stock options, shall not be amended unless approved by stockholders. 14 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CADENCE DESIGN SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-01-2000 JAN-03-1999 APR-03-1999 203,777 13,131 252,113 23,008 0 567,923 278,453 35,697 1,418,350 270,060 0 0 0 564,163 404,401 1,418,350 305,234 305,234 82,620 82,620 146,045 0 1,221 75,964 24,186 51,778 0 0 0 51,778 0.24 0.22
-----END PRIVACY-ENHANCED MESSAGE-----