-----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, JMKqSNzfjHdHu0NkY5FXvdtdkrVnTVYb8z/RF7267hdY1WCIXph/94UdyRGXn+N1 z4fUWyUbsNUHGRkSe7CzOg== 0001047469-99-032625.txt : 19990818 0001047469-99-032625.hdr.sgml : 19990818 ACCESSION NUMBER: 0001047469-99-032625 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 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: 99694060 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 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 JULY 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, 95134 CALIFORNIA (Zip Code) (Address of Principal Executive Offices) (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 August 6, 1999, there were 243,766,741 shares of the registrant's common stock, $0.01 par value, outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CADENCE DESIGN SYSTEMS, INC. INDEX
PAGE ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets: July 3, 1999 and January 2, 1999............................................................ 3 Condensed Consolidated Statements of Income: Three and Six Months Ended July 3, 1999 and July 4, 1998.................................... 4 Condensed Consolidated Statements of Cash Flows: Three and Six Months Ended July 3, 1999 and July 4, 1998.................................... 5 Notes to Condensed Consolidated Financial Statements.......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................. 37 Item 2. Changes in Securities and Use of Proceeds..................................................... 38 Item 3. Defaults Upon Senior Securities............................................................... 38 Item 4. Submission of Matters to a Vote of Security Holders........................................... 38 Item 5. Other Information............................................................................. 39 Item 6. Exhibits and Reports on Form 8-K.............................................................. 39 Signatures................................................................................................. 40
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
JULY 3, JANUARY 2, 1999 1999 ------------ ------------ (UNAUDITED) Current Assets: Cash and cash equivalents........................................................... $ 192,960 $ 209,074 Short-term investments.............................................................. 33,028 40,403 Receivables, net.................................................................... 254,091 305,143 Inventories......................................................................... 9,741 9,903 Prepaid expenses and other.......................................................... 117,408 101,629 ------------ ------------ Total current assets.............................................................. 607,228 666,152 Marketable securities................................................................. -- 19,969 Property, plant, and equipment, net................................................... 309,649 274,208 Software development costs, net....................................................... 10,732 13,045 Acquired intangibles, net............................................................. 278,350 286,088 Installment contract receivables...................................................... 104,036 100,529 Other assets.......................................................................... 190,287 180,231 ------------ ------------ $ 1,500,282 $ 1,540,222 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of capital leases................................. $ 1,615 $ 1,273 Accounts payable and accrued liabilities............................................ 222,066 242,524 Income taxes payable................................................................ 7,858 21,241 Deferred revenue.................................................................... 130,159 106,786 ------------ ------------ Total current liabilities......................................................... 361,698 371,824 ------------ ------------ Long-term Liabilities: Long-term debt and capital leases................................................... 1,253 136,380 Deferred income taxes............................................................... 71,543 58,306 Minority interest liability......................................................... 41 377 Other long-term liabilities......................................................... 19,726 25,505 ------------ ------------ Total long-term liabilities....................................................... 92,563 220,568 ------------ ------------ Stockholders' Equity: Preferred stock..................................................................... -- -- Common stock and capital in excess of par value..................................... 871,100 817,978 Treasury stock at cost.............................................................. (223,575) (219,417) Retained earnings................................................................... 408,177 358,322 Unrealized gain (loss) on investments............................................... (31) 125 Accumulated other comprehensive loss................................................ (9,650) (9,178) ------------ ------------ Total stockholders' equity........................................................ 1,046,021 947,830 ------------ ------------ $ 1,500,282 $ 1,540,222 ------------ ------------ ------------ ------------
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 SIX MONTHS ENDED ---------------------- ---------------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: Product........................................................ $ 117,890 $ 177,406 $ 305,247 $ 346,337 Services....................................................... 74,943 66,871 147,417 121,342 Maintenance.................................................... 71,360 71,459 146,720 141,845 ---------- ---------- ---------- ---------- Total revenue................................................ 264,193 315,736 599,384 609,524 ---------- ---------- ---------- ---------- Costs and expenses: Cost of product................................................ 20,064 22,118 38,600 39,053 Cost of services............................................... 48,844 48,771 96,102 89,150 Cost of maintenance............................................ 12,930 12,399 25,830 24,977 Amortization of acquired intangibles........................... 12,856 2,884 25,570 3,687 Marketing and sales............................................ 82,936 81,199 162,999 159,716 Research and development....................................... 50,359 49,439 101,227 97,131 General and administrative..................................... 20,903 20,002 42,163 39,480 Unusual items.................................................. 19,648 -- 33,840 60,857 ---------- ---------- ---------- ---------- Total costs and expenses..................................... 268,540 236,812 526,331 514,051 ---------- ---------- ---------- ---------- Income (loss) from operations.............................. (4,347) 78,924 73,053 95,473 Other income, net................................................ 141 3,365 276 6,683 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes.................................................... (4,206) 82,289 73,329 102,156 Provision (benefit) for income taxes............................. (1,199) 22,327 23,474 44,148 ---------- ---------- ---------- ---------- Net income (loss).......................................... $ (3,007) $ 59,962 $ 49,855 $ 58,008 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic net income (loss) per share................................ $ (0.01) $ 0.26 $ 0.21 $ 0.25 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted net income (loss) per share.............................. $ (0.01) $ 0.23 $ 0.19 $ 0.22 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding....................... 241,978 234,842 241,026 233,681 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and potential common shares outstanding--assuming dilution................................. 241,978 260,021 257,016 259,529 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED -------------------- JULY 3, JULY 4, 1999 1998 --------- --------- Cash and Cash Equivalents at Beginning of Period............................................. $ 209,074 $ 221,030 --------- --------- Cash Flows from Operating Activities: Net income................................................................................. 49,855 58,008 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................................ 76,736 46,117 Deferred income taxes.................................................................... 13,584 (2,023) Write-off of software development costs, net............................................. 1,441 -- Write-off of prepaid expenses and other.................................................. 642 -- Write-off of equipment, acquired intangibles, and other assets........................... 4,641 1,840 Write-off of acquired in-process technology.............................................. 8,900 56,900 Change in other long-term liabilities and minority interest expense...................... (5,960) 7,047 Equity (income) loss from investments.................................................... 883 (496) Provisions for doubtful accounts......................................................... 6,250 2,010 Non-cash restructuring charges........................................................... 3,321 452 Write-off of non-current assets.......................................................... 2,145 -- Changes in operating assets and liabilities, net of effect of acquired and disposed businesses: Receivables............................................................................ (54,947) 7,448 Inventories............................................................................ 162 5,891 Prepaid expenses and other............................................................. (16,666) 23,224 Installment contract receivables....................................................... 18,980 (84,156) Accounts payable and accrued liabilities............................................... (9,762) (24,628) Income taxes payable................................................................... (783) 43,121 Deferred revenue....................................................................... 21,804 (1,739) --------- --------- Net cash provided by operating activities............................................ 121,226 139,016 --------- --------- Cash Flows from Investing Activities: Maturities of short-term investments--held-to-maturity..................................... 27,245 38,498 Purchases of short-term investments--held-to-maturity...................................... (57) (35,843) Maturities of short-term investments--available-for-sale................................... -- 390,078 Purchases of short-term investments--available-for-sale.................................... -- (423,422) Purchases of property, plant, and equipment................................................ (71,377) (61,067) Capitalization of software development costs............................................... (13,528) (11,590) Increase in acquired intangibles and other assets.......................................... (13,452) (19,382) Investment in venture capital partnership.................................................. (5,770) (2,774) Cash effect of business acquisitions and dispositions...................................... (2,806) (51,313) Sale of put warrants....................................................................... 3,609 9,659 Purchase of call options................................................................... (3,609) (9,659) --------- --------- Net cash used for investing activities............................................... (79,745) (176,815) --------- --------- Cash Flows from Financing Activities: Proceeds from long-term debt............................................................... 30,168 -- Principal payments on long-term debt and capital leases.................................... (165,000) (1,584) Proceeds from issuance of common stock..................................................... 49,642 44,274 Purchases of treasury stock................................................................ (49,125) (98,103) Proceeds from transfer of financial assets in exchange for cash............................ 77,162 27,163 --------- --------- Net cash used for financing activities............................................... (57,153) (28,250) --------- --------- Effect of exchange rate changes on cash...................................................... (442) (2,846) --------- --------- Decrease in Cash and Cash Equivalents........................................................ (16,114) (68,895) --------- --------- Cash and Cash Equivalents at End of Period................................................... $ 192,960 $ 152,135 --------- --------- --------- ---------
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 and six months ended July 4, 1998, have been reclassified to conform with the 1999 presentation. ACQUISITIONS In June 1999, Cadence entered into a merger agreement with OrCAD, Inc. (OrCAD) and on July 19, 1999, completed its tender offer for all of the issued and outstanding shares of OrCAD common stock. OrCAD is a supplier of computer-aided engineering and computer-aided design software and services for the printed circuit board industry. Pursuant to a cash tender offer Cadence acquired approximately 96% of the outstanding shares of OrCAD at $13 per share for a total purchase price of approximately $121 million. In July 1999, Cadence acquired the balance of the OrCAD shares in a short form cash merger and the acquisition will be accounted for as a purchase. In May 1999, Cadence completed its merger with Quickturn Design Systems, Inc., a Delaware corporation (Quickturn). Quickturn designs, manufactures, sells, and supports hardware and software products that verify the design of computer chips and electronic systems. Cadence acquired all of the outstanding shares of Quickturn common stock in a tax-free, stock-for-stock transaction for approximately 24.6 million shares of Cadence common stock. The acquisition was accounted for as a pooling-of-interests. In addition, Cadence assumed approximately all outstanding stock options and warrants of Quickturn. All prior period condensed financial statements were restated as if the merger took place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures. For the three month periods ended April 3, 1999 and April 4, 1998, Cadence's revenues and net income (loss) were approximately $305.2 million and $270.2 million and $51.8 million and $(0.4) million, respectively. For the three month periods ended March 31, 1999 and 1998, Quickturn's revenues and net income (loss) were approximately $30 million and $23.6 million and $1.1 million and $(1.6) million, respectively. In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a supplier of design verification technology used in system-on-a-chip design. Cadence acquired all of the outstanding stock of 6 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. 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. INVENTORIES Cadence's inventories include high technology parts and components that were acquired in connection with the merger with Quickturn. A summary of inventories follows:
JULY 3, JANUARY 2, 1999 1999 ------- ---------- (IN THOUSANDS) Work in process.............................. $ 9,521 $8,798 Raw materials................................ 220 1,105 ------- ---------- Total inventories.......................... $ 9,741 $9,903 ------- ---------- ------- ----------
7 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) UNUSUAL ITEMS AND RESTRUCTURING A summary of unusual items and restructuring charges follows:
THREE MONTHS SIX MONTHS ENDED ENDED ---------------- ---------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS) Restructuring charges.............. $10,703 $ -- $12,888 $ 3,957 Merger costs....................... 8,435 -- 8,435 -- Asset impairment................... 3,510 -- 6,617 -- Litigation settlement.............. (3,000) -- (3,000) -- Write-off of acquired in-process technology....................... -- -- 8,900 56,900 ------- ------- ------- ------- Total unusual items.............. $19,648 $ -- $33,840 $60,857 ------- ------- ------- ------- ------- ------- ------- -------
RESTRUCTURING In the three month period ended July 3, 1999, Cadence recorded $10.7 million in restructuring charges including severance costs to terminate 49 employees and costs to consolidate facilities. Severance costs of $8.7 million relate to restructuring plans primarily aimed at reducing costs after Cadence merged with Quickturn, further actions taken to restructure the Cadence services business in Japan, and severance resulting from the resignation of Cadence's Chief Executive Officer. Facilities consolidation charges of $2 million are the result of the closure of 15 Quickturn facilities, including $1 million to close and exit the excess facilities and $1 million of related leasehold improvement abandonment costs. Closure and exit costs of $1 million include payments required under lease contracts (less any applicable sublease income) after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. Asset related costs written-off consist of leasehold improvements to facilities that were abandoned and whose estimated fair market value is zero. Through July 1999, 80% of the sites have been vacated and the remaining sites will be vacated primarily during the third and fourth quarter of 1999. Noncancelable lease payments on vacated facilities will be paid out through 2003. In the three month period ended April 3, 1999, Cadence recorded $2.2 million in severance costs to terminate 45 employees. These actions were taken to complete Cadence's restructuring program initiated in the fourth quarter of 1998. The restructuring plan was primarily aimed at reducing the costs of excess personnel in its services business, and Cadence anticipates that the actions taken in the first quarter of 1999 will save an estimated additional $0.6 million in fiscal 1999. In each of the three month periods ended April 3, 1999 and July 3, 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. Included in unusual items for the six month period ended July 4, 1998 were restructuring charges of $4 million related to severance costs associated with Cadence's international business operations and consolidation and cancellation of a certain information technology support services contract. 8 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following tables summarize the Company's restructuring activity during the six months ended July 3, 1999:
FOR THE SIX MONTHS ENDED JULY 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....... 10,885 978 -- 1,025 12,888 Reclassifications................ (515) 179 501 (165) -- Non-cash charges................. (533) (331) (663) (1,794) (3,321) Cash charges..................... (11,811) (4,914) (1,337) (880) (18,942) ------------ ---------- ------------- ------- -------- Balance, July 3, 1999.............. $ 11,140 $ 10,408 $ 714 $ 9,490 $ 31,752 ------------ ---------- ------------- ------- -------- ------------ ---------- ------------- ------- --------
MERGER COSTS AND IN-PROCESS TECHNOLOGY In connection with the acquisition of Quickturn, Cadence charged to expense $8.4 million representing merger costs in the three month period ended July 3, 1999. These merger costs represent fees for financial advisors, attorneys, and accountants. In connection with the DAI acquisition in the first quarter of 1999, 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 "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Merger Costs and In-Process Technology." ASSET IMPAIRMENT In the three month period ended July 3, 1999, Cadence incurred charges totaling $3.5 million in connection with the cancellation of an information technology services contract with a third-party and the abandonment of capitalized software development costs associated with Cadence products that will no longer be sold. In the three month period ended April 3, 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 losses recorded for the six month period ended July 3, 1999, were the amounts by which the carrying amounts of the intangible assets exceeded their fair market values. LITIGATION SETTLEMENT On June 23, 1999, Cadence and Mentor Graphics Corporation (Mentor) announced the settlement of a patent infringement action pending in the United States District Court for the District of Oregon. In the settlement, the parties agreed that the District Court in Portland would enter a judgment declaring that certain Quickturn patents are valid, enforceable, and were infringed by Mentor's sale of SimExpress products in the United States. Mentor is permanently enjoined from producing, marketing or selling 9 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SimExpress emulation systems in the United States. In connection with the settlement, Mentor paid Cadence $3 million. CREDIT FACILITY During the six month period ended July 3, 1999, Cadence repaid $135 million of its revolving credit facility. At July 3, 1999, there were no borrowings under this revolving credit facility. 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 SIX MONTHS ENDED ENDED ---------------- ---------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS) Net income (loss).................. $(3,007) $59,962 $49,855 $58,008 Translation loss................... (1,411) (1,179) (472) (2,648) Unrealized loss on investments..... (104) (8) (156) (25) ------- ------- ------- ------- Comprehensive income (loss)...... $(4,522) $58,775 $49,227 $55,335 ------- ------- ------- ------- ------- ------- ------- -------
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 issuances 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. 10 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 SIX MONTHS ENDED ENDED ---------------- ---------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS) Weighted average common shares used to calculate basic net income (loss) per share................. 241,978 234,842 241,026 233,681 Options.......................... -- 24,873 14,368 25,572 Warrants and other contingent shares......................... -- 302 307 274 Puts............................. -- 4 1,315 2 ------- ------- ------- ------- Weighted average common and potential common shares used to calculate diluted net income (loss) per share................. 241,978 260,021 257,016 259,529 ------- ------- ------- ------- ------- ------- ------- -------
Had Cadence recorded net income for the three months ended July 3, 1999, dilutive weighted outstanding options would have been 10.2 million shares and weighted outstanding warrants and other dilutive contingent shares would have been 2.6 million shares. CONTINGENCIES Refer to Part II, Item 1 for a description of legal proceedings. 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 July 3, 1999, there were 4 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 $13.08 to $34.59 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 July 3, 1999, Cadence had 3 million call options outstanding at prices ranging from $13.33 to $34.84 per share. The put warrants and call options outstanding at July 3, 1999 are exercisable on various dates through February 2000, and Cadence has the contractual ability to settle the options prior to their maturity. At July 3, 1999, the fair value of the call options was approximately $4.2 million and the fair value of the put warrants was approximately $36.4 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 11 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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 July 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 includes the Company President and Chief Executive Officer and his senior staff. Cadence's business activities are organized on the basis of three operating segments. The Products segment designs and sells a variety of electronic design automation products that are licensed to customers. The Services segment offers methodology and design 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 (marketing and sales, research and development, and general and administrative), unusual items, other income, net, and income taxes. 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 or to assess their performance. Depreciation and amortization is allocated among the segments in order to determine each segments' gross margin. 12 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following tables present information about reported segments for the three months ended July 3, 1999 and July 4, 1998:
FOR THE THREE MONTHS ENDED JULY 3, 1999 ------------------------------------------------------ PRODUCT SERVICES MAINTENANCE OTHER TOTAL -------- -------- ----------- --------- -------- (IN THOUSANDS) Revenue............................ $117,890 $ 74,943 $71,360 $ -- $264,193 Cost of revenue.................... 20,064 48,844 12,930 -- 81,838 Amortization of acquired intangibles...................... 11,632 1,224 -- -- 12,856 -------- -------- ----------- --------- -------- Gross margin..................... 86,194 24,875 58,430 -- 169,499 Marketing and sales................ -- -- -- (82,936) (82,936) Research and development........... -- -- -- (50,359) (50,359) General and administrative......... -- -- -- (20,903) (20,903) Unusual items...................... -- -- -- (19,648) (19,648) Other income, net.................. -- -- -- 141 141 -------- -------- ----------- --------- -------- Income (loss) before provision (benefit) for income taxes....... $ 86,194 $ 24,875 $58,430 $(173,705) $ (4,206) -------- -------- ----------- --------- -------- -------- -------- ----------- --------- -------- FOR THE THREE MONTHS ENDED JULY 4, 1998 ------------------------------------------------------ Revenue............................ $177,406 $ 66,871 $71,459 $ -- $315,736 Cost of revenue.................... 22,118 48,771 12,399 -- 83,288 Amortization of acquired intangibles...................... 1,769 1,115 -- -- 2,884 -------- -------- ----------- --------- -------- Gross margin..................... 153,519 16,985 59,060 -- 229,564 Marketing and sales................ -- -- -- (81,199) (81,199) Research and development........... -- -- -- (49,439) (49,439) General and administrative......... -- -- -- (20,002) (20,002) Unusual items...................... -- -- -- -- -- Other income, net.................. -- -- -- 3,365 3,365 -------- -------- ----------- --------- -------- Income (loss) before provision (benefit) for income taxes....... $153,519 $ 16,985 $59,060 $(147,275) $ 82,289 -------- -------- ----------- --------- -------- -------- -------- ----------- --------- --------
13 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following tables present information about reported segments for the six months ended July 3, 1999 and July 4, 1998:
FOR THE SIX MONTHS ENDED JULY 3, 1999 ------------------------------------------------------ PRODUCT SERVICES MAINTENANCE OTHER TOTAL -------- -------- ----------- --------- --------- (IN THOUSANDS) Revenue............................ $305,247 $147,417 $146,720 $ -- $ 599,384 Cost of revenue.................... 38,600 96,102 25,830 -- 160,532 Amortization of acquired intangibles...................... 22,951 2,619 -- -- 25,570 -------- -------- ----------- --------- --------- Gross margin..................... 243,696 48,696 120,890 -- 413,282 Marketing and sales................ -- -- -- (162,999) (162,999) Research and development........... -- -- -- (101,227) (101,227) General and administrative......... -- -- -- (42,163) (42,163) Unusual items...................... -- -- -- (33,840) (33,840) Other income, net.................. -- -- -- 276 276 -------- -------- ----------- --------- --------- Income (loss) before provision (benefit) for income taxes....... $243,696 $ 48,696 $120,890 $(339,953) $ 73,329 -------- -------- ----------- --------- --------- -------- -------- ----------- --------- --------- FOR THE SIX MONTHS ENDED JULY 4, 1998 ------------------------------------------------------ Revenue............................ $346,337 $121,342 $141,845 $ -- $ 609,524 Cost of revenue.................... 39,053 89,150 24,977 -- 153,180 Amortization of acquired intangibles...................... 2,519 1,168 -- -- 3,687 -------- -------- ----------- --------- --------- Gross margin..................... 304,765 31,024 116,868 -- 452,657 Marketing and sales................ -- -- -- (159,716) (159,716) Research and development........... -- -- -- (97,131) (97,131) General and administrative......... -- -- -- (39,480) (39,480) Unusual items...................... -- -- -- (60,857) (60,857) Other income, net.................. -- -- -- 6,683 6,683 -------- -------- ----------- --------- --------- Income (loss) before provision (benefit) for income taxes....... $304,765 $ 31,024 $116,868 $(350,501) $ 102,156 -------- -------- ----------- --------- --------- -------- -------- ----------- --------- ---------
14 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 THE FORWARD LOOKING STATEMENTS DISCUSSED HEREIN. FACTORS THAT COULD CAUSE ACTUAL RESULTS OR PERFORMANCE TO DIFFER MATERIALLY OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "RESULTS OF OPERATIONS," "YEAR 2000 UPDATE," "LIQUIDITY AND CAPITAL RESOURCES," "FACTORS THAT MAY AFFECT FUTURE RESULTS," AND "DISCLOSURES ABOUT MARKET RISK." OVERVIEW Cadence provides software and hardware 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 and hardware 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 June 1999, Cadence entered into a merger agreement with OrCAD, Inc. (OrCAD) and on July 19, 1999, completed its tender offer for all of the issued and outstanding shares of OrCAD common stock. OrCAD is a supplier of computer-aided engineering and computer-aided design software and services for the printed circuit board industry. Pursuant to a cash tender offer Cadence acquired approximately 96% of the outstanding shares of OrCAD at $13 per share for a total purchase price of approximately $121 million. In July 1999, Cadence acquired the balance of the OrCAD shares in a short form cash merger and the acquisition will be accounted for as a purchase. In May 1999, Cadence completed its merger with Quickturn Design Systems, Inc., a Delaware corporation (Quickturn). Quickturn designs, manufactures, sells, and supports hardware and software products that verify the design of computer chips and electronic systems. Cadence acquired all of the outstanding shares of Quickturn common stock in a tax-free, stock-for-stock transaction for approximately 24.6 million shares of Cadence common stock. The acquisition was accounted for as a pooling of interests. In addition, Cadence assumed all of the outstanding stock options and warrants of Quickturn. All prior period condensed financial statements were restated as if the merger took place at the beginning of such periods, in accordance with required pooling of interests accounting and disclosures. In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a supplier of design verification technology used in system-on-a-chip design. Cadence acquired all of the outstanding stock of 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. 15 RESULTS OF OPERATIONS REVENUE
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- ------- ------- -------- (IN MILLIONS) Product............................ $ 117.9 $ 177.4 (34)% $ 305.3 $ 346.3 (12)% Services........................... 74.9 66.9 12% 147.4 121.3 21% Maintenance........................ 71.4 71.4 0% 146.7 141.9 3% ------- ------- ------- ------- Total revenue.................... $ 264.2 $ 315.7 (16)% $ 599.4 $ 609.5 (2)% ------- ------- ------- ------- ------- ------- ------- -------
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE Product............................ 45% 56% 51% 57% Services........................... 28% 21% 25% 20% Maintenance........................ 27% 23% 24% 23%
The decreases in product revenue of $59.5 million and $41.1 million for the three and six month periods ended July 3, 1999, respectively, when compared to the same periods of 1998, were attributable primarily to a decrease in demand for IC implementation products, which include place and route and physical design tools, and IP creation products, which include verilog and algorithm design tools, partially offset by an increase in demand for Quickturn products. In July 1999, Cadence implemented a new software product licensing model that will include a new subscription license over a two-year term. This new product licensing model allows customers to purchase software products with licenses that have shorter periods and allow access to new technology. Because Cadence's new model includes undelivered technology, sales of software products under this model require revenue to be recognized ratably over the license period. Total revenues in the third quarter are expected to decrease from the current quarter primarily due to a larger portion of its software being licensed pursuant to the new subscription license, which will require revenue to be recognized ratably over the license period. See "Factors That May Affect Future Results." Services revenue increased $8 million and $26.1 million in the three and six month periods ended July 3, 1999, respectively, when compared to the same periods of 1998. The increases in services revenue were primarily the result of increased demand for Cadence's design services offerings. Maintenance revenue remained flat for the three month period ended July 3, 1999, and increased $4.8 million for the six month period ended July 3, 1999, when compared to the same periods of 1998, primarily due to continued growth of the installed customer base and the renewal of maintenance and support contracts. 16 REVENUE BY GEOGRAPHY
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- ------- ------- -------- (IN MILLIONS) Domestic........................... $ 142.9 $ 150.1 (5)% $ 284.2 $ 318.7 (11)% International...................... 121.3 165.6 (27)% 315.2 290.8 8% ------- ------- ------- ------- Total revenue...................... $ 264.2 $ 315.7 (16)% $ 599.4 $ 609.5 (2)% ------- ------- ------- ------- ------- ------- ------- -------
REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE Domestic........................... 54% 48% 47% 52% International...................... 46% 52% 53% 48%
Total revenue from international sources decreased in the three month period ended July 3, 1999, as compared to the same period in 1998. The decrease was due primarily to a decrease in product and services in Europe, partially offset by an increase in maintenance in Europe and services in Japan. Total revenue from international sources increased for the six month period ended July 3, 1999, as compared to the same period in the prior year, due primarily to higher demand for products in Japan, services in Japan and Canada, and maintenance in Europe, partially offset by lower demand for products in Europe in the three month period ended July 3, 1999. 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 verification products as well as methodology and design services offerings. Revenue growth is expected to be slower for the remainder of 1999 primarily due to a larger portion of its software being licensed pursuant to subscription licenses where revenue is recognized ratably over the licence period. Foreign currency exchange rates positively affected reported revenue by $3.9 million and $8 million during the three and six month periods ended July 3, 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 $6.8 million and $10.7 million during the three and six month periods ended July 4, 1998, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. COST OF REVENUE
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- ------- ------- -------- (IN MILLIONS) Product............................ $20.1 $22.1 (9)% $38.6 $39.1 (1)% Services........................... $48.8 $48.8 0% $96.1 $89.2 8% Maintenance........................ $12.9 $12.4 4% $25.8 $25.0 3%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE Product............................ 17% 12% 13% 11% Services........................... 65% 73% 65% 73% Maintenance........................ 18% 17% 18% 18%
17 Cost of product revenue includes costs of production personnel, packaging and documentation, and amortization of capitalized software development costs for software products. Manufacturing costs associated with Quickturn hardware emulation system products include materials, labor, and overhead. Cost of product revenue decreased $2 million and $0.5 million for the three and six month periods ended July 3, 1999, respectively, as compared to the same periods of 1998. These decreases were primarily due to inventory obsolescence charges of $5.7 million in the three month period ended April 4, 1998, associated with Quickturn's introduction of the Mercury Design Verification System. The decrease was partially offset by increases in other Quickturn hardware manufacturing costs of $3.1 million and $3.6 million, increases in software product royalty expense of $1.7 million and $1.3 million, and increases in amortization of capitalized software development costs of $1 million and $1.8 million for the three and six month periods ended July 3, 1999, respectively, as compared to the same periods of 1998. Product gross margin decreased for the three and six month periods ended July 3, 1999, compared to the same periods of 1998 primarily due to lower demand and sales of software products. Product gross margin for the three and six month periods ended July 3, 1999, also declined due to a higher proportion of hardware revenue with lower gross margins than software product revenue. The majority of Cadence's costs of software product revenue do not vary significantly with changes in revenue. Product gross margin may continue to be adversely affected during the remainder of 1999 due to expected lower revenue. 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 remained flat in the three month period ended July 3, 1999, and increased $6.9 million in the six months ended July 3, 1999, as compared to the same periods of 1998. The increase in the six month period ended July 3, 1999 was primarily due to the addition of services professionals, primarily through acquisitions completed in 1998. Services gross margin increased for the three and six months ended July 3, 1999, as compared to the same periods of 1998, primarily due to increased utilization of services capacity and the management of expenses. 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 three and six months ended July 3, 1999, as compared to the same periods of 1998. AMORTIZATION OF ACQUIRED INTANGIBLES
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- (IN MILLIONS) Amortization of acquired intangibles...................... $12.9 $2.9 $25.6 $3.7
AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE Amortization of acquired intangibles...................... 5% 1% 4% 1%
Amortization of acquired intangibles increased $10 million and $21.9 million for the three and six months ended July 3, 1999, respectively, as compared to the same periods in 1998, as a result of the subsequent acquisitions of Ambit Design Systems, Inc. (Ambit), Symbionics Group Limited, Bell Labs' 18 Integrated Circuit Design Automation group of Lucent Technologies, Inc. (BLDA), and Excellent Design, Inc. in 1998, and Design Acceleration, Inc. in the three month period ended April 3, 1999, which were accounted for using the purchase method of accounting. OPERATING EXPENSES
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 % CHANGE 1999 1998 % CHANGE ------- ------- -------- ------- ------- -------- (IN MILLIONS) Marketing and sales................ $82.9 $81.2 2% $ 163.0 $ 159.7 2% Research and development........... $50.4 $49.4 2% $ 101.2 $ 97.1 4% General and administrative......... $20.9 $20.0 5% $ 42.2 $ 39.5 7%
EXPENSES AS A PERCENT OF TOTAL REVENUE Marketing and sales................ 31% 26% 27% 26% Research and development........... 19% 16% 17% 16% General and administrative......... 8% 6% 7% 6%
Marketing and sales expenses increased $1.7 million and $3.3 million for the three and six month periods ended July 3, 1999, respectively, as compared to the same periods of 1998. The three month period ended July 3, 1999 increased primarily due to an increase in sales support costs in Japan and sales commissions, partially offset by a decrease in salaries and travel expenses. For the six month period ended July 3, 1999, the increase in sales and marketing expenses of $3.3 million was primarily the result of an increase in sales support costs in Japan, partially offset by a decrease in employee related expenses, including salaries and bonus, and travel. Foreign currency exchange rates negatively affected reported marketing and sales expenses by $0.9 million and $1.4 million during the three and six month periods ended July 3, 1999, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar. During the three and six month periods ended July 4, 1998, foreign currency exchange rates positively affected marketing and sales expenses by $2.1 million and $3.9 million, respectively, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar. Cadence's expenses for research and development, prior to the reduction for capitalization of software development costs, was $57.5 million for the three months ended July 3, 1999 and $55.6 million for the three months ended July 4, 1998, representing 22% and 18% of total revenue for each quarter, respectively. For the three and six month periods ended July 3, 1999 and July 4, 1998, Cadence capitalized $7.1 million and $6.1 million and $13.5 million and $11.6 million of software development costs, respectively, representing 12% and 11% of total research and development expenditures made in each of those periods, respectively. The increase in capitalized software development costs for the three and six months ended July 3, 1999 resulted primarily from general increases in new product development. The increase in net research and development expenses of $1 million for the three month period ended July 3, 1999, as compared with the same period of 1998, was primarily attributable to costs related to the operations of Ambit and BLDA. The increase in research and development expenses of $4.1 million for the six month period ended July 3, 1999, as compared with the same period of 1998, was primarily attributable to costs related to the operations of Ambit and BLDA. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed. General and administrative expenses increased $0.9 million and $2.7 million for the three and six months ended July 3, 1999, respectively, as compared to the same periods of 1998. The increase in the three month period ended July 3, 1999, as compared to the same period in 1998, was primarily attributable 19 to an increase in bad debt expense of $2.9 million, partially offset by a decrease in consulting services. The increase for the six months ended July 3, 1999, as compared to the same period in 1998, was primarily attributable to increases in bad debt expense of $4.7 million and legal expenses of $2.2 million, partially offset by a decrease in consulting and temporary services. Operating expenses as a percent of total revenue increased and may continue to increase during the remainder of 1999, as compared to 1998, primarily due to the decrease in total revenue resulting from lower demand for software products and due to a larger portion of Cadence's software being licensed pursuant to subscription licenses where revenue is recognized ratably over the license period. UNUSUAL ITEMS AND RESTRUCTURING The following table presents information regarding unusual items for the quarters ended July 3, 1999 and July 4, 1998:
THREE MONTHS SIX MONTHS ENDED ENDED ----------------- ----------------- JULY 3, JULY 4, JULY 3, JULY 4, 1999 1998 1999 1998 ------- ------- ------- ------- (IN MILLIONS) Restructuring charges.............. $10.7 $ -- $12.9 $ 4.0 Merger costs....................... 8.4 -- 8.4 -- Asset impairment................... 3.5 -- 6.6 -- Litigation settlement.............. (3.0) -- (3.0) -- Write-off of acquired in-process technology....................... -- -- 8.9 56.9 ------- ------- ------- ------- Total unusual items.............. $19.6 $ -- $33.8 $60.9 ------- ------- ------- ------- ------- ------- ------- -------
RESTRUCTURING In the three month period ended July 3, 1999, Cadence recorded $10.7 million in restructuring charges including severance costs to terminate 49 employees and costs to consolidate facilities. Severance costs of $8.7 million relate to restructuring plans primarily aimed at reducing costs after Cadence merged with Quickturn, further actions taken to restructure the Cadence services business in Japan, and severance resulting from the resignation of Cadence's Chief Executive Officer. Facilities consolidation charges of $2 million are the result of the closure of 15 Quickturn facilities, including $1 million to close and exit the excess facilities and $1 million of related leasehold improvement abandonment costs. Closure and exit costs of $1 million include payments required under lease contracts (less any applicable sublease income) after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. Asset related costs written-off consist of leasehold improvements to facilities that were abandoned and whose estimated fair market value is zero. Through July 1999, 80% of the sites have been vacated and the remaining sites will be vacated primarily during the third and fourth quarter of 1999. Noncancelable lease payments on vacated facilities will be paid out through 2003. In the three month period ended April 3, 1999, Cadence recorded $2.2 million in severance costs to terminate 45 employees. These actions were taken to complete Cadence's restructuring program initiated in the fourth quarter of 1998. The restructuring plan was primarily aimed at reducing the costs of excess personnel in its services business, and Cadence anticipates that the actions taken in the first quarter of 1999 will save an estimated additional $0.6 million in fiscal 1999. In each of the three month periods ended April 3, 1999 and July 3, 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. 20 Included in unusual items for the six month period ended July 4, 1998 were restructuring charges of $4 million related to severance costs associated with Cadence's international business operations and consolidation and cancellation of a certain information technology support services contract. MERGER COSTS AND IN-PROCESS TECHNOLOGY In connection with the acquisition of Quickturn, Cadence charged to expense $8.4 million representing merger costs in the three month period ended July 3, 1999. These merger costs represent fees for financial advisors, attorneys, and accountants. In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a supplier of design verification technology used in system-on-a-chip design. Cadence acquired all of the outstanding stock of 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 21 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 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 year 2000. 22 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 In the three month period ended July 3, 1999, Cadence incurred charges totaling $3.5 million in connection with the cancellation of an information technology services contract with a third-party and the abandonment of capitalized software development costs associated with Cadence products that will no longer be sold. In the three month period ended April 3, 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 losses recorded for the six month period ended July 3, 1999, were the amounts by which the carrying amounts of the intangible assets exceeded fair market values. LITIGATION SETTLEMENT On June 23, 1999, Cadence and Mentor Graphics Corporation (Mentor) announced the settlement of a patent infringement action pending in the United States District Court for the District of Oregon. In the settlement, the parties agreed that the District Court in Portland would enter a judgment declaring that certain Quickturn patents are valid, enforceable, and were infringed by Mentor's sale of SimExpress products in the United States. Mentor is permanently enjoined from producing, marketing or selling SimExpress emulation systems in the United States. In connection with the settlement Mentor paid Cadence $3 million. OTHER INCOME AND INCOME TAXES Other income decreased $3.2 million and $6.4 million in the three and six months ended July 3, 1999, respectively, as compared to the same periods in 1998, primarily due to a decrease in interest income resulting from a lower average balance of invested cash and short-term investments and lower interest rates. Cadence's estimated effective tax rate for the three and six month periods ended July 3, 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 three and six month periods ended July 4, 1998 was 27.1% and 27.8%, respectively, excluding the effect of the write-off of acquired in-process technology of $56.9 million, which is not deductible for income tax purposes. 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 23 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 has created a plan to work with critical suppliers and customers to determine that such 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 August 1999, of the 60 business application systems that had been identified, all 60 have been modified or replaced and determined to be Year 2000 ready. 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 end of 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 are well underway. It is expected that all Year 2000 project inventories will be completed by August 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 October 1999. The remediation (modification or replacement of existing software or systems) efforts are expected to be completed by October 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, during the fourth quarter of 1999. All remaining issues (which are considered low priority or low risk to the 24 business) are planned to be addressed as time permits and could continue through the first half of 2000. Recent acquisitions of Quickturn and OrCAD are undergoing Year 2000 program evaluations since both companies had existing Year 2000 programs in place prior to the acquisition. Estimated 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 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. 25 LIQUIDITY AND CAPITAL RESOURCES At July 3, 1999, Cadence's principal sources of liquidity consisted of $226 million of cash and short-term investments, compared to $249.5 million at January 2, 1999, and a $355 million senior unsecured credit facility. As of July 3, 1999, Cadence had no borrowings under its revolving credit facility. Cash provided by operating activities decreased $17.8 million to $121.2 million for the six months ended July 3, 1999, as compared to the six months ended July 4, 1998. The decrease was primarily due to decreases in net income and changes in adjustments to net income and in the balances of operating assets and liabilities. At July 3, 1999, Cadence had net working capital of $245.5 million compared with $294.3 million at January 2, 1999. The working capital decrease was driven primarily by decreases in receivables of $51.1 million and cash of $23.5 million and an increase in deferred revenue of $23.4 million, partially offset by decreases in accounts payable and accrued liabilities of $20.5 million and income taxes payable of $13.4 million and an increase in prepaid expenses of $15.8 million. The decrease in receivables was primarily attributable to a decrease in product revenues while the increase in deferred revenue was due to an increase in services and maintenance contracts. The increase in prepaid expenses was due primarily to estimated income tax payments. 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 the effect of business acquisitions and dispositions, which combined represented $106.9 million and $146.1 million of cash used for investing activities in the six months ended July 3, 1999 and July 4, 1998, respectively. In connection with the consummation of the merger with Quickturn, Cadence rescinded 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. In August 1999, the Board of Directors approved a 10,000,000 share expansion of Cadence's existing seasoned systematic repurchase program. Of this amount, 2,500,000 shares were authorized to meet the share issuance requirements of Cadence's 1997 Stock Option Plan and 7,500,000 shares were authorized for Cadence's Employee Stock Purchase Plan. Cadence is now authorized to repurchase an aggregate of 13,000,000 shares for the 1997 Stock Option Plan and 13,400,000 shares for the ESPP. Since 1994, Cadence has sold put warrants and purchased call options through private placements. See "Notes to Condensed Consolidated Financial Statements." At July 3, 1999, Cadence has a maximum potential obligation related to put warrants to buy back 4 million shares of its common stock at an aggregate price of approximately $87 million. The put warrants will expire at various dates through February 2000, 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 seasoned stock repurchase programs and the contemplated additions of property, plant, and equipment of approximately $50 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 July 3, 1999, Cadence had contributed approximately $33.5 million to this partnership, which is reflected in other assets in the accompanying condensed consolidated balance sheets, net of operating losses. Cadence's $355 million senior unsecured credit 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 (the 26 364-Day Facility). The 364-Day facility will expire on September 29, 1999, or at the option of the bank group, be renewed for an additional one year period. Cadence anticipates that current cash and short-term investment balances, cash flows from operations, and its revolving credit facility will be sufficient to meet its working capital requirements on a short-and long-term basis. 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 for these 12 inch wafers. 27 - 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. 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. CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED NUMBER OF SUPPLIERS Cadence depends on several suppliers for certain key components and board assemblies used in its hardware-based emulation products. Cadence's inability to develop alternative sources or to obtain sufficient quantities of these components or board assemblies could result in delays or deductions in 28 product shipments. In particular, Cadence currently relies on Xilinx, Inc. for the supply of key integrated circuits and on IBM for the hardware components for both Cadence's CoBALT-TM- product and Mercury Design Verification System-TM-. With regard to the Mercury Design Verification System-TM-, IBM recently replaced Cadence's previous supplier. IBM is currently providing the assembly services for several Mercury components on an order-by-order basis. Cadence is negotiating with IBM to establish an overall contract, but these negotiations may not be successfully completed. Other disruptions in supply may also occur. If there were a reduction or interruption, Cadence's results of operations would be seriously harmed. Even if Cadence can eventually obtain these components from alternative sources, a significant amount of time and resources would be required to redesign Cadence's products to accommodate the alternative supplier. FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS COULD HURT CADENCE'S BUSINESS AND THE MARKET PRICE OF ITS STOCK Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence's quarterly operating results and some of them are not within Cadence's control, including the mix of products and services sold, the mix of licenses used to sell products and the timing of significant orders for its software products by customers. Quarterly operating results are affected by the mix of products sold because there are significant differences in margins from the sale of hardware and software products and products and services. For example, in the past Cadence has realized gross margins on software product sales of approximately 87% but realizes gross margins of approximately 73% on hardware product sales and 35% on its performance of services. In addition, Cadence's quarterly operating results are affected by the mix of licenses entered into in connection with the sale of software products. Cadence has three basic licensing models: perpetual, fixed-term and subscription. Perpetual and fixed-term licenses recognize a larger portion of the revenue at the beginning of the license period and subscription licenses recognize revenue ratably over each quarter of the term of the license. If Cadence customers purchase more software products pursuant to a subscription agreement in any one quarter, the operating results for that quarter may be lower that that of comparable quarters in which perpetual and fixed-term licenses were used for more software products transactions. Finally, Cadence's quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5 million. The failure to close a contract for the sale of one or more orders of Cadence's software products could seriously hurt its quarterly operating results. Cadence's hardware products typically have a lengthy sales cycle, during which Cadence may expend substantial funds and management effort without any assurance that a sale will result. Sales of Cadence's hardware products depend, in significant part, upon the decision of the prospective customer to commence a project for the design and development of complex computer chips and systems. Such projects often require significant amounts of time and commitments of capital. Cadence hardware sales may be delayed if customers delay commencement of projects. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including inventory obsolescence and fluctuations in quarterly operating results. In addition, Cadence bases its expense budgets partially on its expectations of future revenue. However, it is difficult to predict revenue levels or growth. Revenue levels that are below Cadence's expectations could seriously hurt Cadence's business, operating results, and financial condition. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of Cadence common stock could decline dramatically. Also, because of the 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. 29 CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY INTEGRATE THEM OR THE COMPANIES IT RECENTLY ACQUIRED Cadence has acquired other businesses before and may do so again. While Cadence expects to analyze carefully all potential transactions before committing to them, Cadence cannot assure you that any transaction that is completed will result in long-term benefits to Cadence or its stockholders or that Cadence's management will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after Cadence acquires another business, it could seriously harm Cadence's business, operating results, and financial condition: - Difficulties in combining previously separate businesses into a single unit; - The substantial diversion of management's attention from day-to-day business when negotiating these transactions and 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; - Retention of key personnel; - 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 53% and 48% for the six month periods ended July 3, 1999, and July 4, 1998, respectively. 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. 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; 30 - 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 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. 31 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. 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, and products acquired through recent acquisitions. Because of these uncertainties, Cadence is currently unable 32 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 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 33 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. 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 July 3, 1999. All investments mature in one year or less.
CARRYING AVERAGE VALUE INTEREST RATE ----------- --------------- (IN MILLIONS, EXCEPT FOR AVERAGE INTEREST RATES) Investment Securities: Cash equivalents--fixed rate....................................... $ 35.0 5.13% Short-term investments--fixed rate................................. 33.0 6.08% ----------- Total investment securities...................................... 68.0 5.59% Cash equivalents--variable rate.................................... 103.8 4.61% ----------- Total interest bearing instruments............................... $ 171.8 5.00% ----------- ----------- Debt: Revolving credit facility.......................................... $ -- ----------- -----------
INTEREST RATE SWAP RISK Cadence entered into a 4.8% fixed interest rate-swap in connection with its accounts receivable financing program to modify the interest rate characteristics of the receivables sold to a financing institution on a non-recourse basis. At July 3, 1999, the notional amount was $21.7 million which will be amortized in quarterly installments of $2.2 million through October 2001. The estimated fair value at July 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. The table below provides information as of July 3, 1999 about Cadence's material forward contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts 34 (at contract exchange rates) and the weighted average contractual foreign currency exchange rates. These forward contracts mature prior to July 14, 1999.
NOTIONAL AVERAGE AMOUNT CONTRACT RATE ----------- ------------- (IN MILLIONS, EXCEPT FOR AVERAGE CONTRACT RATES) Forward Contracts: Japanese yen....................................................... $ 54.4 118.93 Euro............................................................... $ (26.3) 1.08 British pound sterling............................................. $ 26.3 1.60 Canadian dollars................................................... $ (5.0) 1.48 Swedish krona...................................................... $ (3.1) 8.23 Hong Kong dollars.................................................. $ 2.0 7.76
The unrealized gain (loss) on the outstanding forward contracts at July 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 July 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), and its 1997 Stock Option Plan (the 1997 Plan). 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 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 35 warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall. The table below provides information at July 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 February 2000 and Cadence has the contractual ability to settle the options prior to their maturity.
1999 2000 ESTIMATED MATURITY MATURITY FAIR VALUE ----------- ----------- ----------- (SHARES AND CONTRACT AMOUNTS IN MILLIONS) Put Warrants: Shares..................................................... 2.4 1.6 Weighted average strike price.............................. $ 27.11 $ 13.08 Contract amount............................................ $ 65.9 $ 21.1 $ 36.4 Call Options: Shares..................................................... 1.7 1.3 Weighted average strike price.............................. $ 26.87 $ 13.33 Contract amount............................................ $ 45.7 $ 16.6 $ 4.2
36 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. On July 30, 1999, the Ninth Circuit Court of Appeal affirmed the preliminary injunction. By an order dated July 22, 1997, the District Court stayed most activity in the case pending in that Court and ordered Avant! to post a $5 million bond, in light of related criminal proceedings pending against Avant! and several of its executives. 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. 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 was brought on behalf of a class of shareholders who purchased Cadence common stock between November 4, 1998 and April 20, 1999, and 37 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. In February 1998, Aptix Corporation (Aptix) and Meta Systems, Inc. (Meta) filed a lawsuit against Quickturn Design Systems, Inc. (Quickturn) in the U.S. District Court, the Northern District of California, alleging infringement of a U.S. patent owned by Aptix and licensed to Meta. Quickturn named Mentor Graphics Corporation (Mentor) as a party to this suit and filed a counter claim requesting the Court to declare the Aptix patent to be unenforceable based on inequitable conduct during the prosecution of the patent. The case is set for trial in mid-2000. On July 21, 1999, Mentor filed suit against Quickturn in the United States District Court, District of Delaware, alleging patent infringement involving Quickturn's Mercury hardware emulation systems. The complaint seeks a permanent injunction and unspecified damages. Cadence intends to vigorously defend the claims. On July 22, 1999, Quickturn and Cadence filed a complaint against Mentor and Meta asking for declaratory relief in the United States District Court for the Northern District of California as well as a Notice of Related Case asking that the action brought by Mentor be consolidated with the above-described action involving many of the same questions of fact and law, APTIX CORPORATION AND META SYSTEMS, INC. V. QUICKTURN DESIGN SYSTEMS, which is pending in the United States District Court, San Francisco Division. 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. 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 At the Annual Meeting of Stockholders held July 1, 1999, the stockholders of the Company approved the following matters: 1. A proposal to elect eight (8) directors of the Company to serve for the ensuing year and until their successors are elected or until such director's earlier resignation or removal.
NOMINEE IN FAVOR WITHHELD - ------------------------------------------------------------------ ------------- ---------- Carol A. Bartz.................................................... 192,645,375 1,710,951 H. Raymond Bingham................................................ 192,594,743 1,761,583 Dr. Leonard Y. W. Liu............................................. 192,570,710 1,785,616 Donald L. Lucas................................................... 192,543,283 1,813,043 Dr. Alberto Sangiovanni-Vincentelli............................... 192,612,414 1,743,912 George M. Scalise................................................. 192,621,621 1,734,705 Dr. John B. Shoven................................................ 192,631,354 1,724,972 Roger S. Siboni................................................... 192,421,802 1,934,524
2. A proposal for the approval of an amendment to the 1995 Directors Stock Option Plan (the Directors Plan) to increase the authorized shares of Cadence Common Stock that can be issued under the Directors Plan by 200,000 shares in each of the next three calendar years (i.e., 2000, 2001 and 2002) and to amend the definition of "change in control" and clarify the treatment of options upon a 38 change in control was approved by a vote of 157,125,427 for, 37,002,859 opposed, and 228,040 withheld. 3. A proposal for the approval of an amendment to the Employee Stock Purchase Plan (the ESPP), as amended, to increase the number of shares of common stock authorized for issuance under the ESPP from 17,500,000 to 23,500,000, an increase of 6,000,000 shares, was approved by a vote of 186,568,325 for, 7,621,463 opposed, and 166,538 withheld. 4. A proposal for the ratification of the selection of Arthur Andersen LLP as independent public accountants for the fiscal year ending January 1, 2000 was approved by a vote of 193,082,230 for, 1,153,796 opposed, and 120,300 withheld. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ----------- ------------------------------------------------------------------------------------ 10.48 Executive Termination and Release Agreement dated May 24, 1999, between Cadence and John R. Harding 10.49 The Registrant's 1995 Directors Stock Option Plan, as amended May 5, 1999 10.50 The Registrant's 1990 Employee Stock Purchase Plan, as amended May 5, 1999 27.01 Financial data schedule for the period ended July 3, 1999.
(b) Reports on Form 8-K: On May 26, 1999 and amended on June 15, 1999, the Registrant filed a Current Report on Form 8-K reporting the completion of Cadence's agreement to acquire Quickturn Design Systems, Inc., a Delaware corporation. On December 10, 1998 and amended on December 22, 1998 and January 6, 1999 and May 20, 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 May 6, 1999, the Registrant filed a Current Report on Form 8-K reporting Cadence's press release announcing its first quarter 1999 results and announcing the appointment of H. Raymond Bingham to the position of President and Chief Executive Officer. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CADENCE DESIGN SYSTEMS, INC. (REGISTRANT) DATE: August 16, 1999 By: /s/ H. RAYMOND BINGHAM ---------------------------------------- H. RAYMOND BINGHAM PRESIDENT AND CHIEF EXECUTIVE OFFICER DATE: August 16, 1999 By: /s/ WILLIAM PORTER ---------------------------------------- WILLIAM PORTER SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
40 EX-10.48 2 EXHIBIT 10.48 This offer provided on May 24, 1999 This offer is valid until June 15, 1999 EXECUTIVE TERMINATION AND RELEASE AGREEMENT This Agreement is entered into between John R. Harding ("Executive") and Cadence Design Systems, Inc., a Delaware corporation (the "Company"), as of this __ day of ______, 1999. WHEREAS, the Executive and the Company desire to reach an agreement concerning the circumstances under which the Executive's employment relationship with the Company will terminate; and WHEREAS, the Company desires to be relieved of any and all duties, obligations, and/or liabilities, if any exist, with respect to Executive, except for those obligations referred to herein; NOW THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Executive and the Company agree as follows: 1. Executive will no longer serve as President and Chief Executive Officer of the Company after April 26, 1999. Executive's position as an officer of the Company and member of the Board of Directors (the "Board") terminated on the same day. 1 2. Executive shall remain a full-time employee with the Company until May 31, 1999. During this time, Executive will report to and cooperate with the Board, and shall continue to receive his current base salary, and shall remain eligible for standard employee benefits, including, but not limited to, the continued vesting of his stock options and participation in the Non-Qualified Deferred Compensation Plan ("NQDC"), and the medical and dental insurance coverage which he elected and pays for under the Cadence Composition plan. 3. Executive shall, by May 31, 1999, return to the Senior Vice President of Human Services for the Company, all equipment provided to him by the Company while he served as a full-time employee, including but not limited to, any computer hardware or software, facsimile machines, printers, and phones. 4. PART-TIME EMPLOYMENT PERIOD 4.1 Beginning on June 1, 1999, Executive shall convert from a full-time to a part-time employee. The Executive will continue to be employed by the Company as a part-time employee through May 31, 2000, or until the Executive resigns his employment in writing, or the Company terminates Executive's employment for cause (as defined below), whichever occurs first ("Employment Period"). The Company shall not terminate Executive's employment during the Employment Period, except for cause, which is defined as: (1) Executive's material and willful breach of this Agreement after written notice of such breach and a reasonable opportunity to cure such breach; or (2) Executive's material and willful breach of the 2 Employee Invention and Confidential Information Agreement, which Executive signed on October 28, 1996 (a copy of which is attached hereto), after written notice of such breach and a reasonable opportunity to cure such breach. Unless terminated for cause (which results in immediate termination), Executive's employment will terminate at the conclusion of the Employment Period (the "Termination Date"). Upon termination of employment, vesting of Executive's stock options shall cease (except as provided in paragraph 5(b) herein), as will the company's obligation to provide salary to Executive and to make COBRA payments on his behalf. Executive's funds, invested in the NQDC, if any, shall be treated in accordance with the NQDC. 4.2 During the Employment Period, Executive shall be compensated at a rate of $2500.00 per month, subject to standard withholdings and deductions. Such compensation shall be paid on the Company's regular payroll schedule. 4.3 During the Employment Period, Executive shall report to the Chairman of the Board, and shall provide such consultation, advice and assistance as is reasonably requested of him to ensure a smooth transition of his responsibilities, for up to a maximum of twenty (20) hours per month. Executive will be free to accept other employment or consulting engagements during this period, so long as such employment or consulting is not inconsistent with 3 Executive's obligations under the Invention and Confidential Information Agreement. The Company will not require Executive to render services to the Company or its Board at a time or in a manner which would interfere with his ability to engage in such employment or consulting opportunities. 4.4 As a part-time employee, Executive will continue to receive, if he so elects, the same medical and dental insurance coverage as is currently in effect for Executive, at the Company's expense, but will not accrue vacation or be eligible for any other Company benefits, including but not limited to, the Employee Stock Purchase Plan, 401(k), life, and disability insurance, dependent life, and participation in the NQDC. All such other benefits will terminate on May 31, 1999, except that Executive's stock options provided to him under grant numbers 008395, 008901, 009304 and 010775, shall continue to vest during the Employment Period in accordance with the plans under which the options were granted. Employee's performance-based stock options (i.e., option grant numbers 010221 and 010779) shall cease vesting on May 31, 1999. After the Termination Date, Executive may elect to continue to receive, at his own expense, the same medical and dental insurance coverage which the Executive previously elected for the remainder of the COBRA period. 4 4.5 Executive shall fully cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the company. 5. EXECUTIVE SEVERANCE AGREEMENT (a) The parties intend and agree to modify the cash payment provision of paragraph 4 of the Employment Agreement between Executive and the Company, dated October 19, 1997 (the "First Agreement") as follows: Eight days after the execution of this Agreement, Executive shall receive a lump sum payment in the amount of [$2.1] million, less taxes and deductions required by law to be withheld. Such payment shall fully satisfy the company's obligation with respect to the payment of cash (salary and bonus) detailed in paragraph 4 of the First Agreement. (b) It is the parties' intent not to modify in any way the stock acceleration provision in paragraph 4 of the First Agreement. Accordingly, upon the termination of Executive's employment at the end of the Employment Period, for any reason, all of the unvested options held by Executive on the date of such termination that would have vested over the succeeding twenty-four month period shall immediately vest and become exercisable in full. However, should a Change in Control (as defined in the First Agreement) occur during the Employment Period, the stock acceleration provision of paragraph 4 of the First Agreement shall not apply. Instead, and in accordance with the First Agreement, all of 5 Executive's unvested options shall immediately vest in accordance with paragraph 5.2 (b) of the First Agreement. In either case, the options shall remain exercisable for thirty (30) days following Executive's Termination Date. The acceleration of vesting does not apply to performance-based stock option grants, specifically, grant numbers 010221 and 010779. 6. GENERAL RELEASE BY EXECUTIVE (a) The Executive agrees that the payments and benefits provided herein are in full satisfaction of all obligations of the Company to the Executive arising out of or in connection with the Executive's employment and termination of his employment including, without limitation, all salary, bonuses, accrued vacation, sick pay, and reimbursement of expenses and two weeks salary as standard termination notice period, and that the payments and benefits provided herein constitute consideration for the covenants and releases of the Executive as set forth herein. The Executive acknowledges that the Executive has no claims against the Company based on the Executive's employment by the Company or the Executive's separation therefrom and irrevocably, fully and finally releases the Company, its subsidiaries and its affiliates, directors, officers, agents and employees ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, that Executive ever had, or now has, including but not limited to, any claims that may be alleged to arise out of or in connection 6 with the Executive's employment with the Company, or separation therefrom, including, not by way of limitation, any claims for wages, bonuses, or expense reimbursement, and any claims that any terms of the Executive's employment with the Company or any circumstances of the Executive's separation were wrongful, in breach of any obligation of the Company or in violation of any rights, contractual, statutory, in tort or otherwise, of the Executive, including but not limited to rights arising under Title VII of the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, as amended, the California Labor Code, the Age Discrimination in Employment Act of 1967, as amended, the Americans with Disabilities Act, the Equal Pay Act, the Fair Labor Standards Act, as amended, the Executive Retirement Income and Security Act of 1974, as amended, (except for Executive's rights under COBRA and Executive's rights to the money in Executive's 401(k) plan account and deferred compensation plan account), and any other local, state, or federal law, or law of any country, governing discrimination in employment, the payment of wages or benefits, or any other aspect of employment (collectively, "Claims"). IN THIS REGARD THE EXECUTIVE WAIVES ANY RIGHTS CONFERRED BY CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 7 (b) The release set forth in section (a) above does not and shall not extend to any obligations of the Company incurred under this Agreement or to any claims, cross-claims or rights of indemnification and/or contribution arising from federal securities laws or their state law counterparts or arising under the Indemnification Agreement referred to in paragraph 7 below. (c) The Executive understands that he may take twenty-one (21) days to consider this Agreement and that he has been advised that he should consult with an attorney, if he desires to do so, prior to executing this Agreement. The Executive further acknowledges that he understands that he may revoke this Agreement within seven (7) days of his execution of this document and that the consideration to be paid to the Executive pursuant to this Agreement will be paid only after that seven (7) day revocation period. 7. Executive shall continue to receive the benefits, and be subject to the obligations, of the Indemnification Agreement signed by him in October of 1997, to the extent and for the time period provided for in that agreement. (A copy of the agreement is attached hereto.) Executive shall cooperate fully with the Company in defending against any litigation matters that may be filed or threatened against him or the Company. 8. Executive further agrees that, during the first six (6) months of the Employment Period, Executive will not and Executive will not assist or induce any of his affiliates (defined as an employee directly supervised by Executive, or 8 Executive's agent, business partner or co-owner) to, personally or through others, induce, attempt to induce, solicit or attempt to solicit (on Executive's own behalf or on behalf of any other person or entity) anyone who is employed at that time by the Company to leave his or her employment with the Company, without the prior written approval of the Company's Senior Vice President of Human Services. 9. Executive further agrees that, for one (1) year following the execution of this Agreement, Executive will not and Executive will not assist or induce any of his affiliates (defined as an employee directly supervised by Executive, or Executive's agent, business partner or co-owner) to, without the prior written approval of the Company's Senior Vice President of Human Services, personally or through others, use any trade secret or proprietary information of the Company or any other improper means to interfere or attempt to interfere with the relationship or prospective relationship of the Company with any person or entity that to Executive's knowledge is on the date of the Agreement, or is expected to become, a customer or client of the Company. 10. GENERAL RELEASE BY THE COMPANY (a) The Company acknowledges that the Company is not aware of the existence of any claims it has against the Executive based on any acts or omissions arising from or related to the Executive's employment by the Company or the Executive's separation therefrom and irrevocably, fully and finally releases the Executive and his heirs, legal representatives and agents ("Releasees") from all causes of action, claims, suits, demands or other obligations or liabilities, whether known or unknown, that the Company ever had, 9 or now has, including but not limited to, any claims that may be alleged to arise out of or in connection with the Executive's employment with the Company, or separation therefrom, except for claims which may be alleged to arise out of Executive's unauthorized use or disclosure of the Company's confidential or proprietary information ("Claims"). IN THIS REGARD, THE COMPANY WAIVES ANY RIGHTS CONFERRED BY CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (b) The release set forth in section (a) above does not and shall not extend to any obligations of the Executive incurred under this Agreement or the Invention and Confidential Information Agreement and shall not be construed as granting the Executive any license to use any intellectual property of the Company. 11. The Executive and the Company's officers agree to keep the fact and terms of this Agreement, including the amount paid to the Executive pursuant hereto, confidential, except as to Executive's legal advisors, tax advisors, and spouse, and except for those terms required by law to be publicly disclosed. 12. Executive and the Company represent and warrant that there has been no assignment or other transfer of any interest in any Claims which either party may have against the other. 10 13. The parties agree that if either party hereafter commences, joins in, or in any manner seeks relief through any suit, claim, demand, charge, complaint or otherwise to enforce this Agreement or, if Executive or the Company in any manner seek relief for actions arising out of, based upon, or relating to any of the Claims released hereunder or in any manner asserts against the Releasees any of the Claims released hereunder, then the non-prevailing party will pay to the prevailing party in addition to any other damages caused thereby, all reasonable attorneys' fees incurred by the prevailing party in bringing, defending or otherwise responding to said suit or Claim. 14. The Executive agrees not to make any statement, written or oral, which disparages the Company or any of the Company's employees or representatives, products, or business practices. Likewise, the Company's CEO, executive officers, corporate vice presidents, and the members of its Board shall not make any statement, written or oral, which disparages the Executive. 15. The Executive acknowledges that during the Executive's employment with the Company, the Executive has had access to confidential and/or proprietary information of the Company and of third parties and acknowledges the Executive's obligation by agreement and/or at common law to continue to hold such information in confidence and neither disclose and/or use such information, notwithstanding the termination of the Executive's employment, and that the Executive has, to the best of his knowledge, returned to the Company all copies and records in any form of such information. 11 16. The parties further understand and agree that nothing contained in this Agreement shall constitute or be construed in any way as an admission of any wrongdoing or liability whatsoever by the Company or the Executive. 17. This Agreement shall be governed and enforced in accordance with the laws of the State of California. 18. The Company and Executive agree that any dispute regarding the interpretation or enforcement of this Agreement or any dispute arising out of Executive's employment following the execution of this Agreement or the termination of that employment with the Company, except for disputes regarding the interpretation of the Employee Invention and Confidential Information Agreement, which Executive signed on October 28, 1996, and disputes involving the protection of the Company's intellectual property, shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. 19. In the event that any part of this agreement is found to be void or unenforceable then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability or such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) such invalidity or enforceability of such 12 provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement as each provision is separable from every other part of such provision. 20. The Company shall have the right to assign its rights and obligations under this Agreement only to an entity which acquires substantially all of the assets of the Company. The rights and obligations of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and permitted assigns of the Company. Executive shall not have any right to assign his obligations under this Agreement and shall only be entitled to assign his rights under this Agreement by will or the laws of descent and distribution. 21. Executive represents and acknowledges that the Executive's decision to enter into this Agreement has been made voluntarily, knowingly, and without coercion of any kind. 22. This Agreement is intended by the parties to be a complete and final expression of their rights and duties respecting the employment of the Executive by the Company, and the separation of the Executive from the Company, except that nothing herein is intended to negate the Executive's continuing obligations under the Company's Employee Invention and Confidential Information Agreement referenced in paragraph 4.1 above and nothing herein is intended to negate the Company's and the Executive's continuing obligations under the Indemnification Agreement referred to in paragraph 7 above or the stock options referenced in paragraph 5(b) above, nor is 13 it intended to waive any of Executive's obligations under state and federal trade secret laws. This Agreement may not be modified unless such modification is embodied in writing, signed by the party against whom the modification is sought to be enforced. In witness whereof, the parties hereto have executed this Employment Termination and Release Agreement, effective eight (8) days after the date it is signed by Executive below. JOHN R. HARDING CADENCE DESIGN SYSTEMS, INC. By: -------------------- -------------------- RON KIRCHENBAUER Date: Date: -------------------- -------------------- 14 EX-10.49 3 EXHIBIT 10.49 CADENCE DESIGN SYSTEMS, INC. 1995 DIRECTORS STOCK OPTION PLAN ADOPTED ON OCTOBER 3, 1995 ADJUSTED FOR 3:2 STOCK SPLIT EFFECTIVE OCTOBER 31, 1995 AMENDED AND RESTATED ON FEBRUARY 9, 1996 APPROVED BY STOCKHOLDERS ON MAY 3, 1996 ADJUSTED FOR 3:2 STOCK SPLIT EFFECTIVE MAY 31, 1996 AMENDED ON AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996 AMENDED ON MAY 7, 1997 AMENDED ON OCTOBER 19, 1997 ADJUSTED FOR 2:1 STOCK SPLIT EFFECTIVE NOVEMBER 14, 1997 AMENDED AND RESTATED ON MAY 5, 1999 1. PURPOSE. (a) The purpose of the 1995 Directors Stock Option Plan (the "Plan") is to provide a means by which each director of Cadence Design Systems, Inc., a Delaware corporation (the "Company"), who is not otherwise at the time of grant an employee of the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company through the grant of options. (b) The word "Affiliate" as used in the Plan means any corporation or other entity which is controlled by the Company, which controls the Company, or which is under common control with the Company. (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) No option granted under the Plan is intended to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in section 2(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan, to construe, interpret and administer the Plan and options granted under the Plan, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any option, in a manner and to the extent it shall deem necessary or desirable to make the Plan fully effective. All decisions of the Board on such matters shall be final, binding and conclusive on all persons having an interest in such decision. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. (a) The number of shares of the Company's $.01 par value common stock (the "Common Stock") that may be sold pursuant to options granted under the Plan shall initially not exceed in the aggregate one million three hundred fifty thousand (1,350,000) shares of Common Stock, and shall automatically increase on the first trading day of each calendar year during the term of the Plan, beginning with the 2000 calendar year and ending with and including the 2002 calendar year, by an additional two hundred thousand (200,000) shares of Common Stock. If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for issuance under the Plan. The number of shares of Common Stock authorized for issuance under the Plan shall be subject to and adjusted by the provisions of Section 10 relating to adjustments in the capital structure of the Company. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options shall be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Each person who first becomes a Non-Employee Director after October 3, 1995 shall automatically be granted an option to purchase shares of the Common Stock on the terms and conditions set forth herein. Prior to May 15, 1997 the number of shares of the Common Stock which shall be subject to an option granted pursuant to this section 5(a) shall be equal to seven thousand five hundred (7,500) multiplied by the number of calendar quarters occurring between the date on which such person begins serving as a director of the Company and the first July 1 occurring after the date such person becomes a director of the Company. On and after May 15, 1997 and prior to October 19, 1997 the number of shares of the Common Stock which shall be subject to an option granted pursuant to this section 5(a) shall be equal to seven thousand 2 five hundred (7,500) multiplied by the number of calendar quarters occurring between the date on which such person begins serving as a director of the Company and the first April 1 occurring after the date such person becomes a director of the Company. On and after October 19, 1997 the number of shares of the Common Stock which shall be subject to an option granted pursuant to this section 5(a) shall be equal to five thousand six hundred twenty-five (5,625) multiplied by the number of calendar quarters occurring between the date on which such person begins serving as a director of the Company and the first April 1 occurring after the date such person becomes a director of the Company. If a person becomes a Non-Employee Director during a calendar quarter, he or she shall be treated as serving as a director of the Company for the entire such calendar quarter only if he or she becomes a Non-Employee Director during the first half of such calendar quarter. (b) On July 1, 1996 each person who on that date is then a Non-Employee Director shall automatically be granted an annual option to purchase thirty thousand (30,000) shares of Common Stock on the terms and conditions set forth herein. On July 1, 1997 each person who on that date is then a Non-Employee Director shall automatically be granted an annual option to purchase twenty-two thousand five hundred (22,500) shares of Common Stock on the terms and conditions set forth herein. On April 1 of each year, commencing with April 1, 1998, each person who on that date is then a Non-Employee Director shall automatically be granted an annual option to purchase twenty-two thousand five hundred (22,500) shares of Common Stock on the terms and conditions set forth herein. If the Non-Employee Director is an "Active Board Member" on the date the annual option is granted but is not then serving as the Chairman of the Board, then such director shall automatically be granted an option to purchase (i) an additional eleven thousand two hundred fifty (11,250) shares of Common Stock on the terms and conditions set forth herein if the annual option is granted on July 1, 1997, (ii) an additional fifteen thousand (15,000) shares of Common Stock on the terms and conditions set forth herein on each annual option grant date occurring before October 19, 1997, and (iii) an additional eleven thousand two hundred fifty (11,250) shares of Common Stock on the terms and conditions set forth herein on each annual option grant date occurring on or after October 19, 1997. If the Non-Employee Director is serving as the Chairman of the Board on the date the annual option is granted, then such director shall automatically be granted an option to purchase (i) an additional twenty-two thousand five hundred (22,500) shares of Common Stock on the terms and conditions set forth herein if the annual option is granted on July 1, 1997, (ii) an additional thirty thousand (30,000) shares of Common Stock on the terms and conditions set forth herein on each annual option grant date occurring before October 19, 1997, and (iii) an additional twenty-two thousand five hundred (22,500) shares of Common Stock on the terms and conditions set forth herein on each annual option grant date occurring on or after October 19, 1997. An "Active Board Member" shall be defined as a Non-Employee Director who is the chairman of one committee of the Board and is serving as a member of at least one additional committee of the Board. (c) In addition to the other options specified in section 5, each Non-Employee Director who serves on the Venture Committee of the Board on or after October 3, 1995 shall be granted one (but no more than one) Venture Committee membership option as follows, and each Non-Employee Director who serves as chairman of the Venture Committee of the Board on or after October 3, 1995 shall be granted, in addition to the one-time Venture Committee 3 membership option, one (but no more than one) Venture Committee chairman's option as follows: (i) Each Non-Employee Director who on October 3, 1995 is serving as a member of the Venture Committee of the Board shall automatically receive on October 3, 1995 a Venture Committee membership option to purchase forty-five thousand (45,000) shares of Common Stock on the terms and conditions set forth herein. (ii) The Non-Employee Director who on October 3, 1995 is serving as the chairman of the Venture Committee of the Board shall automatically receive on October 3, 1995 a Venture Committee chairman's option to purchase an additional forty-five thousand (45,000) shares of Common Stock on the terms and conditions set forth herein. (iii) Each Non-Employee Director who is selected for the first time to serve on the Venture Committee after October 3, 1995 but before October 19, 1997 automatically shall, upon the date of his or her initial selection to serve on the Venture Committee, be granted a Venture Committee membership option to purchase forty-five thousand (45,000) shares of Common Stock on the terms and conditions set forth herein. (iv) Each Non-Employee Director who is selected for the first time to serve on the Venture Committee on or after October 19, 1997 automatically shall, upon the date of his or her initial selection to serve on the Venture Committee, be granted a Venture Committee membership option to purchase thirty-three thousand seven hundred fifty (33,750) shares of Common Stock on the terms and conditions set forth herein. (v) Each Non-Employee Director who is selected for the first time to serve as the chairman of the Venture Committee after October 3, 1995 but before October 19, 1997 automatically shall, upon the date of his or her initial selection to serve as the chairman of the Venture Committee, be granted a Venture Committee chairman's option to purchase an additional forty-five thousand (45,000) shares of Common Stock on the terms and conditions set forth herein. (vi) Each Non-Employee Director who is selected for the first time to serve as the chairman of the Venture Committee after October 19, 1997 automatically shall, upon the date of his or her initial selection to serve as the chairman of the Venture Committee, be granted a Venture Committee chairman's option to purchase an additional thirty-three thousand seven hundred fifty (33,750) shares of Common Stock on the terms and conditions set forth herein. The Venture Committee options provided under this section 5(c) are not subject to adjustment as provided in section 5(a). (d) (i) Subject to section 5(d)(iii), on January 30, 1996 and January 30, 1997 each Non-Employee Director who on that date is then serving as the Chairman of the Board and has completed five (5) years of service as the Chairman of the Board shall automatically receive an 4 option to purchase one hundred thirty-five thousand (135,000) shares of Common Stock on the terms and conditions set forth herein. (ii) Subject to section 5(d)(iii), on January 30 of each year, commencing with January 30, 1998, each Non-Employee Director who on that date is then serving as the Chairman of the Board and has completed five (5) years of service as the Chairman of the Board shall automatically receive an option to purchase one hundred one thousand two hundred fifty (101,250) shares of Common Stock on the terms and conditions set forth herein. (iii) No Non-Employee Director shall receive more than one grant under section 5(d). (e) If an option would otherwise automatically be granted on or after October 3, 1995 to a Non-Employee Director under the terms of the Company's 1993 Directors Option Plan (the "1993 Directors Plan"), but cannot be granted in full because there are insufficient shares of Common Stock remaining in the share reserve for the 1993 Directors Plan which neither have been issued nor are then subject to the term of an outstanding option previously granted under the 1993 Directors Plan, then an option shall automatically be granted on the same date to such Non-Employee Director on the terms and conditions set forth herein. The number of shares of Common Stock which shall be subject to such an option shall be that number of shares which would otherwise have been subject to the option granted under the 1993 Directors Plan on the same date, but as to which such an option may not be granted under the 1993 Directors Plan to such Non-Employee Director solely because of the lack of sufficient uncommitted shares in the share reserve of the 1993 Directors Plan as described above. 6. OPTION PROVISIONS. Each option shall be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ten (10) years from the date of grant (the "Expiration Date"). In any and all circumstances, an option may be exercised only as to no more than that number of shares as to which it is exercisable at the time in question under the provisions of section 6(e). (b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted. The "fair market value" of the Common Stock shall be the mean average of the closing price of the Company's common stock for each of the last twenty trading days prior to the date of the grant of the option on the national securities exchange, national market system or other trading market on which the Company's common stock has the highest average trading volume. (c) The optionholder may elect to make payment of the exercise price under one of the following alternatives: 5 (i) Payment of the exercise price per share in cash (by check) at the time of exercise; or (ii) Provided that at the time of the exercise the Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of Common Stock already owned by the optionholder for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock shall be valued at its fair market value on the last day on which the Common Stock was actively traded preceding the date of exercise; (iii) Payment by the delivery of the optionholder's full recourse promissory note on such terms as may be determined by the Board which are not inconsistent with the terms of the Plan; or (iv) Payment by a combination of the methods of payment specified in sections 6(c)(i) through 6(c)(iii) above. For purposes of section 6(c)(ii), the "fair market value" of Common Stock shall be the closing price of such stock on the last trading day preceding the date of delivery of such Common Stock to the Company on the national securities exchange, national market system or other trading market on which the Common Stock has the highest average trading volume. If the optionholder uses a promissory note as partial payment of the exercise price pursuant to section 6(c)(iii), then such principal amount of such note may not exceed the maximum amount permitted by law (including but not limited to the limitation under the Delaware General Corporation Law that the par value of shares of stock may not be paid with a promissory note) and interest shall be compounded at least annually and shall be charged at no less than the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the terms of such promissory note. Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionholder prior to the issuance of shares of the Company's common stock. (d) Except as otherwise expressly provided in an optionholder's option agreement, an option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the person to whom the option is granted only by such person or by his guardian or legal representative. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the optionholder, shall thereafter be entitled to exercise the option. (e) (i) An option granted pursuant to section 5(a) or 5(b) prior to July 1, 1997 shall vest and become exercisable in full on the first June 30 following the grant of such option; 6 PROVIDED, HOWEVER, the optionholder has continuously served in the same capacity which entitled him or her to the grant of such option from the date of grant until and including the next following June 30. (ii) An option granted pursuant to section 5(a) or 5(b) on or after July 1, 1997 shall vest and become exercisable in full on the first March 31 following the grant of such option; PROVIDED, HOWEVER, the optionholder has continuously served in the same capacity which entitled him or her to the grant of such option from the date of grant until and including the next following March 31. (iii) An option granted pursuant to section 5(c), 5(d) or 5(e) shall become exercisable in installments over a period of three years from the date of grant at the rate of one-third (1/3rd) of the total number of shares subject to such option upon the first anniversary of the date of grant and subsequently at the rate of one thirty-sixth (1/36th) of the total number of shares subject to the option a month, in twenty-four (24) equal monthly installments; PROVIDED, HOWEVER, that the optionholder has, during the entire period from the grant date to such vesting date, continuously served in the same capacity which entitled him or her to the grant of such option, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. (f) The Company may require any optionholder, or any person to whom an option is transferred under section 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionholder's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionholder to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionholder or permitting the optionholder to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 7 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of the Common Stock required to satisfy such options. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the options granted under the Plan; PROVIDED, HOWEVER, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to options granted under the Plan shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionholder nor any person to whom an option is transferred under section 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option term, upon request, such financial and other information regarding the Company as comprises the annual report to the stockholders of the Company provided for in the Bylaws of the Company and such other information regarding the Company as the holder of such option may request under applicable law. (c) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or shall affect any right of the Company, its Board or stockholders or any Affiliate to remove any Non-Employee Director pursuant to the Company's Bylaws and the provisions of the Delaware General Corporation Law (or the laws of the Company's state of incorporation should that change in the future). (d) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him. 8 (e) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (f) The size of the Plan's share reserve set forth in section 3, the size of individual option grants described in section 5, and all other references in the Plan to specific numbers of shares of the Common Stock reflect and have taken into account (i) the Company's three-for-two (3:2) stock dividends effective as of October 31, 1995 and May 31, 1996, including all options granted under the Plan prior to May 31, 1996 and (ii) the Company's two-for-one (2:1) stock dividend effective as of November 14, 1997, including all options granted under the Plan prior to November 14, 1997. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the Common Stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and exercise price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding, and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") No adjustment shall result in the creation of a fractional share of stock or in an exercise price per share of stock expressed in units of less than one cent ($.01). (b) In the event of the occurrence of a Change in Control, to the extent not prohibited by applicable law, the time during which options outstanding under the Plan may be exercised shall be accelerated by the Board to a time prior to or as of the occurrence of such event and the options terminated if not exercised by the time specified by the Board, which in any event shall be after the effective time of such acceleration. If the Board fails to specify a time for acceleration of outstanding options and/or termination of outstanding options, then the time during which options outstanding under the Plan may be exercised shall be accelerated to a time immediately preceding the occurrence of the Change in Control, and the options terminated if not exercised prior to or upon the occurrence of a Change in Control defined in section 10(b)(i) or section 10(b)(iii) or within three (3) months following the occurrence of a Change in Control defined in section 10(b)(ii), section 10(b)(iv), or section 10(b)(v). For purposes of the Plan, a "Change in Control" means the happening of any of the following events: (i) A dissolution or liquidation of the Company. 9 (ii) A sale of all or substantially all of the assets of the Company. (iii) Either a merger or consolidation in which the Company is not the surviving corporation and the stockholders of the Company immediately prior to the merger or consolidation fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the voting power of the securities of the surviving corporation (or if the surviving corporation is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the surviving corporation and is not itself a controlled affiliate of any other entity) immediately following such transaction, or a reverse merger in which the Company is the surviving corporation and the stockholders of the Company immediately prior to the reverse merger fail to possess direct or indirect beneficial ownership of more than eighty percent (80%) of the securities of the Company (or if the Company is a controlled affiliate of another entity, then the required beneficial ownership shall be determined with respect to the securities of that entity which controls the Company and is not itself a controlled affiliate of any other entity) immediately following the reverse merger. For purposes of this section 10(b)(iii), any person who acquired securities of the Company prior to the occurrence of a merger, reverse merger, or consolidation in contemplation of such transaction and who after such transaction possesses direct or indirect beneficial ownership of at least ten percent (10%) of the securities of the Company or the surviving corporation (or if the Company or the surviving corporation is a controlled affiliate, then of the appropriate entity as determined above) immediately following such transaction shall not be included in the group of stockholders of the Company immediately prior to such transaction. (iv) An acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or a subsidiary or other controlled affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least twenty percent (20%) of the combined voting power entitled to vote in the election of directors. (v) The individuals who, as of the date immediately following the Company's 1999 Annual Meeting of Stockholders, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least fifty percent (50%) of the Board. If the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; PROVIDED, HOWEVER, that no individual shall be considered a member of the Incumbent Board if the individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. 11. AMENDMENT OF THE PLAN. 10 (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan. Except as provided in section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company where the amendment would: (i) Increase the number of shares which may be issued under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3 or any securities exchange or other trading market on which the Common Stock is actively traded. (b) Rights and obligations under any option granted before any amendment of the Plan or of the terms of such option shall not be impaired by such amendment unless (i) the Company requests the consent of the person holding the option, and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the date that all of the shares of the Company's Common Stock have been issued. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the holder of the option. 13. EFFECTIVE DATE OF AMENDED AND RESTATED PLAN. The Plan, in the form as amended and restated herein, shall become effective upon approval by the stockholders of the Company. 11 EX-10.50 4 EXHIBIT 10.50 CADENCE DESIGN SYSTEMS, INC. AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY BOARD OF DIRECTORS NOVEMBER 9, 1998 STOCKHOLDER APPROVAL NOT REQUIRED TERMINATION DATE: NONE 1. PURPOSE. (a) The Plan initially was established effective as of January 30, 1990 (the "Initial Plan") and has been amended subsequently from time to time. The Initial Plan hereby is amended and restated in its entirety as the Amended and Restated Employee Stock Purchase Plan effective as of the date of its adoption. The terms of the Initial Plan shall remain in effect and apply to all Rights granted pursuant to the Initial Plan. (b) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase Shares of the Company. (c) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (d) The Company intends that the Rights to purchase Shares granted under the Plan be considered options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the United States Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of the Board appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation. (f) "DIRECTOR" means a member of the Board. (g) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering Memorandum for eligibility to participate in the Offering. (h) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. (i) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (j) "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. (k) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on the New York Stock Exchange or any other established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then, except as otherwise provided in the Offering, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or, in the event that the security is traded on more than one such exchange or market, the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day occurring on or closest to the relevant determination date, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable, and on the date as determined more precisely in the Offering Memorandum. (l) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (m) "OFFERING" means the grant of Rights to purchase Shares under the Plan to Eligible Employees. (n) "OFFERING DATE" means a date selected by the Board for an Offering to commence. 2 (o) "OFFERING MEMORANDUM" means a memorandum describing the terms of the then current or otherwise relevant Offering. (p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (q) "PARTICIPANT" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. (r) "PLAN" means this Amended and Restated Employee Stock Purchase Plan. (s) "PURCHASE DATE" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (t) "RIGHT" means an option to purchase Shares granted pursuant to the Plan. (u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (v) "SECURITIES ACT" means the United States Securities Act of 1933, as amended. (w) "SHARE" means a share of the common stock of the Company. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase Shares shall be granted and the provisions of each Offering of such Rights (which need not be identical). 3 (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in Section 14. (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in securities, the Shares that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate Twenty-Three Million Five Hundred Thousand (23,500,000) Shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Right shall again become available for the Plan. (b) The Shares subject to the Plan may be unissued Shares or Shares that have been bought on the open market at prevailing market prices or otherwise. 5. GRANT OF RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Rights to purchase Shares of the Company under the Plan to Eligible Employees in an Offering on one or more Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all Employees granted Rights to purchase Shares under the Plan shall have the same rights and privileges. The terms and conditions of an 4 Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering Memorandum or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. (b) If a Participant has more than one Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant will be deemed to apply to all of his or her Rights under the Plan, and (ii) an earlier-granted Right (or a Right with a lower exercise price, if two Rights have identical grant dates) will be exercised to the fullest possible extent before a later-granted Right (or a Right with a higher exercise price if two Rights have identical grant dates) will be exercised. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or, as the Board may designated as provided in subsection 3(b), to Employees of an Affiliate. Except as provided in subsection 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. (c) No Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five 5 percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subsection 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) An Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all Employee Stock Purchase Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase Shares of the Company or any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such Shares (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. (e) The Board may provide in an Offering that Employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate. 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of Shares purchasable either: (i) with a percentage designated by the Board not exceeding fifteen percent (15%) of such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering; or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum amount of Shares that may be purchased by any Participant as well as a maximum aggregate amount of Shares that may be purchased by all Participants pursuant to such Offering. 6 In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate amount of Shares which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of Shares upon exercise of Rights granted under the Offering would exceed any such maximum aggregate amount, the Board shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (d) The purchase price of Shares acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering Memorandum, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the Participant) under the Offering, without interest unless otherwise specified in the Offering, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan but such 7 Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company and its designated Affiliates for any reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in Section 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified therefor in the relevant Offering, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of Shares up to the maximum amount of Shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional Shares shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering and permitted by law. (b) Unless otherwise specifically provided in the Offering, the amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is equal to the amount required to purchase one or more whole Shares on the final Purchase Date of the Offering shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (c) The amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is less than the amount required to 8 purchase one whole Share on the final Purchase Date of the Offering shall be carried forward, without interest, into the next Offering. (d) No Rights granted under the Plan may be exercised to any extent unless the Shares to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the amount of Shares required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Rights granted under the Plan shall constitute general funds of the Company. 9 12. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. (a) A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, Shares subject to Rights granted under the Plan unless and until the Participant's Shares acquired upon exercise of Rights under the Plan are recorded in the books of the Company. (b) Neither the Plan nor the grant of any Right thereunder shall confer any right on any Employee to remain in the employ of the Company or any Affiliate or restrict the right of the Company or any Affiliate to terminate such Employee's employment. 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) Subject to any required action by the stockholders of the Company, the number of Shares covered by each Right under the Plan that has not yet been exercised and the number of Shares that have been authorized for issuance under the Plan but have not yet been placed under a Right (collectively, the "Reserves"), as well as the price per Share covered by each Right under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split or the payment of stock dividend (but only on the Common Stock) or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to a Right. (b) In the event of the proposed dissolution or liquidation of the Company, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that the Rights under the Plan shall terminate as of a date fixed by the Board and give each Participant the right to exercise his or her Right. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another corporation or a parent or subsidiary of such successor corporation when the Company is not the surviving corporation, or a reverse merger in which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, and in lieu of assumption or substitution of the Rights, provide that each Participant shall have the right to exercise his or her Right. If the Board makes a Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Participant that the Right shall be fully exercisable for a period of twenty 10 (20) days from the date of such notice (or such other period of time as the Board shall determine), and the Right shall terminate upon the expiration of such period. (c) The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share covered by each outstanding Right, in the event that the Company effects one or more reorganizations, recapitalizations, rights offering, or other increases or reductions of outstanding Shares, and in the event of the Company being consolidated with or merged into any other corporation. 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in securities and except as to minor amendments to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Affiliate, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act or any Nasdaq or other securities exchange listing requirements. Currently under the Code, stockholder approval within twelve (12) months before or after the adoption of the amendment is required where the amendment will: (i) Increase the amount of Shares reserved for Rights under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code; or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it into compliance therewith. (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan without the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 11 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the Shares subject to the Plan's reserve, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 17. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon adoption by the Board. 12 EMPLOYEE STOCK PURCHASE PLAN HISTORY ADOPTED JANUARY 30, 1990 APPROVED BY STOCKHOLDERS MAY 11, 1990 1991 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1991 1992 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1992 1993 AMENDMENT APPROVED BY STOCKHOLDERS MAY 4, 1993 1994 AMENDMENT APPROVED BY STOCKHOLDERS MAY 17, 1994 AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996 1997 AMENDMENT APPROVED BY STOCKHOLDERS MAY 1, 1997 AMENDED AND RESTATED NOVEMBER 9, 1998 STOCKHOLDER APPROVAL NOT REQUIRED AMENDED MAY 5, 1999(1) 1999 AMENDMENT APPROVED BY STOCKHOLDERS _________, 1999 - --------------------------- (1) The 23,500,000 share reserve includes the 2,000,000 shares reserved for issuance in March 1997 and has been adjusted to reflect the 3-2 stock splits which occurred in October 1995 and May 1996 and the 2-1 stock split which occurred in October 1997. 13 EX-27.01 5 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-01-2000 JAN-03-1999 JUL-03-1999 192,960 33,028 254,091 30,795 9,741 607,228 309,649 237,227 1,500,282 361,698 0 0 0 647,525 398,496 1,500,282 599,384 599,384 186,102 186,102 340,229 0 1,658 73,329 23,474 49,855 0 0 0 49,855 0.21 0.19
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