-----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, OHTPE534hAAubk2eR/7Y12HLbytzmRXYFC7oDPpltV6N8dAk0O3ztGQtVgRYLkGJ 9fzoW0e5+B8R75VWntjycg== 0000912057-97-009695.txt : 19970324 0000912057-97-009695.hdr.sgml : 19970324 ACCESSION NUMBER: 0000912057-97-009695 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970321 SROS: NYSE 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10606 FILM NUMBER: 97560329 BUSINESS ADDRESS: STREET 1: 555 RIVER OAKS PKWY 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-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 28, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________ to ____________ COMMISSION FILE NUMBER 1-10606 CADENCE DESIGN SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0148231 - ----------------------------- -------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or No.) organization)
555 RIVER OAKS PARKWAY, SAN JOSE, CALIFORNIA 95134 (Address of principal executive offices, including Zip Code) (408) 943-1234 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE - ------------------------------------ --------------------------------------- Name of each exchange on which Title of each class registered
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Aggregate market value of the voting stock held on March 3, 1997 by non-affiliates of the registrant: $2,837,562,594 Number of shares of common stock outstanding at March 3, 1997: 88,596,639 DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the Annual Meeting to be held on May 1, 1997 are incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CADENCE DESIGN SYSTEMS, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE --------- PART I. Item 1. Business..................................................................................... 3 Item 2. Properties................................................................................... 10 Item 3. Legal Proceedings............................................................................ 10 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 11 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 12 Item 6. Selected Financial Data...................................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 12 Item 8. Financial Statements and Supplementary Data.................................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................................... 21 PART III. Item 10. Directors and Executive Officers of the Registrant........................................... 22 Item 11. Executive Compensation....................................................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 23 Item 13. Certain Relationships and Related Transactions............................................... 23 PART IV. Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................ 24 Signatures ............................................................................................. 55
2 PART I ITEM 1. BUSINESS Cadence Design Systems, Inc. (Cadence or the Company) develops, markets and supports electronic design automation (EDA) software tools that automate, enhance and accelerate the design and verification of integrated circuits (ICs) and electronic systems. The Company combines its technology with services to help optimize its customers' product development processes. The Company's products and services are used by companies throughout the world to design and develop electronic circuits and systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. Cadence was formed as a result of the merger of SDA Systems, Inc. (SDA) into ECAD, Inc. (ECAD) in May 1988. In addition to certain smaller acquisitions from 1989 through 1994, in December 1991, Cadence merged with Valid Logic Systems Incorporated (Valid), a company that developed and supported EDA software used to design electronic systems, printed circuit boards (PCBs) and applications for electronic product designs involving advanced packaging technology such as hybrids and multi-chip modules (MCMs). In February 1989, Valid had acquired Integrated Measurement Systems, Inc. (IMS), a company that manufactures and markets verification systems used in testing prototype application specific integrated circuits (ASICs). During 1995, Cadence and IMS sold to the public approximately 3.0 million shares of common stock, of which approximately 2.6 million shares were sold by the Company as the sole selling stockholder of IMS. In February 1997, Cadence and IMS sold 1.65 million shares of common stock to the public, of which .95 million were owned by the Company. As a result, the Company received approximately $18.6 million of proceeds and reduced its ownership in IMS to approximately 37%. As Cadence was the majority stockholder with an ownership percentage of approximately 55% as of December 28, 1996, the consolidated financial statements of the Company for all periods presented include the accounts of IMS after elimination of inter-company accounts and transactions and minority interest adjustments. In October 1996, the Company entered into a merger agreement with Cooper and Chyan Technology, Inc. (CCT), a company that develops, markets and supports software tools that help designers route the wires that interconnect the electronic devices on high performance PCBs and ICs. The acquisition is expected to be accounted for as a pooling-of-interests. The merger has been approved by CCT's shareholders and is currently awaiting regulatory approval. On January 3, 1997, each of Cadence and CCT received a request for additional information from the United States Federal Trade Commission with respect to their proposed transaction. There can be no assurance that regulatory approval will be obtained and that the merger will be consummated. In November 1996, the Company consummated a secondary public offering whereby 5.75 million shares of common stock were sold, generating $202.1 million of net proceeds. In December 1996, the Company completed the acquisition of High Level Design Systems, Inc., (HLDS), a company which developed, marketed and supported EDA software for the design of high-density, high performance ICs. As part of its overall investment strategy, the Company has committed to participate in a venture capital partnership, Telos Venture Partners (the Partnership), as a limited partner. The Partnership's purpose is to make venture capital investments in start-up and growth oriented businesses, with some emphasis on businesses in the semiconductor and software industries. The Company's total investment of $25 million will be completed over the next two to three years. THE INTEGRATED CIRCUIT AND ELECTRONIC SYSTEM DESIGN PROCESS The electrical design process involves describing the architectural, behavioral, functional and structural attributes of an IC or electronic system. This process involves describing the product overall system architecture and then implementing it by creating a design description, simulating the design to identify electrical defects and refining the description to meet predetermined design specifications. 3 ARCHITECTURAL DEFINITION Cadence's Alta Business Unit offers a class of software for top-down design known as electronic systems design automation (ESDA). The Company's ESDA products are designed to allow customers to include product concepts in the EDA environment, accelerating and enhancing the early phases of system development. The Signal Processing Workbench (SPW-Registered Trademark-) tool set provides customers with a higher level of design automation for a number of application areas including wireless communications, networking and multi-media. The Signal Processing Workbench includes a large applications library of design blocks, a complete technology base and a visualization and analysis environment. Once the design is conceptualized, the Signal Processing Workbench provides links to implementation which include multiple capabilities that allow the design to be passed downstream to ASIC and IC engineers. ESDA is seen as a natural evolution of EDA that enables customers to include product concept in the design environment. Alta's focus is on virtual product design, a new approach that starts with the creation of a product prototype in software, which is called virtual prototype. Virtual prototyping allows the designer to focus on what is needed for the product to be successful as opposed to how the design is implemented. IMPLEMENTATION -- THE DESIGN DESCRIPTION The first step in the implementation process is creation of the design description. To handle the complexity of large designs, engineers use a variety of techniques, including block diagrams, equations or special design description languages referred to as hardware description languages (HDLs). For digital designs, the most common HDLs are Verilog-Registered Trademark- HDL, a language originally developed by Cadence that is now in the public domain and an Institute of Electronic and Electrical Engineers (IEEE) standard, and VHSIC HDL-TM- (VHDL), a language that is also an IEEE standard and backed by the U.S. Department of Defense. Verilog and VHDL are both supported by Cadence as well as many other EDA vendors. Similar standard HDLs are emerging for analog design. Cadence introduced an analog extension to Verilog called Verilog-A-TM- in 1994, and in June of 1996 it became an official Open Verilog International (OVI) standard. STRUCTURAL DESIGN & SIMULATION Before an IC or PCB can be manufactured, high level design descriptions must be detailed into a structural design, in which the engineer specifically defines components, their interconnections and associated physical properties. Structural designs may be created manually or generated using an automated process called logic synthesis. In structural design, critical design time can be saved by selecting components from an electronic library and including them in the design, rather than recreating symbols and data for each design. A database containing the design electrical characteristics, interconnections and specific design rules is automatically created and used as the foundation for subsequent design steps. Electronics designers use simulation throughout the electrical design process to identify design errors before the design is manufactured. In addition, simulation enables electronics designers to quickly explore design alternatives, and it can be performed at different levels of design abstraction and with mixed levels of abstraction. This enables a designer to verify the conceptual, structural and performance aspects of the design. A key element in the simulation process is the use of component libraries containing software models of commonly used parts. PHYSICAL DESIGN AND VERIFICATION When the design is determined to be functionally correct, the designer generates a non-graphical description called a netlist that details the design components and interconnections. This netlist becomes the blueprint for physical design. Next, the physical design team determines the layout and associated 4 interconnection of the components on the target substrate that will yield the optimum combination of performance, area and cost. Once this process is completed, physical verification tools are used to provide a final check of the design implementation before products are released to manufacturing. Accuracy in this process is essential to avoiding costly production runs of faulty parts. EDA TOOLS The Company's EDA tools are used by customers to analyze, simulate, implement and verify electronic designs. In addition, the Company's tools let design architects and engineers build abstract models of chips, simulate their behavior, and analyze their physical attributes for acceptable performance. The resulting productivity and accuracy improvements over earlier generation approaches to IC design enable customers to develop increasingly complex, high-quality electronic products with accelerated time to market schedules. CAE PRODUCTS Cadence is a leader in the computer aided engineering (CAE) market primarily based on its strong market presence in logic simulation. Cadence's Verilog HDL logic simulator, VerilogXL-TM-, is used by numerous ASIC vendors and supports over 185 ASIC libraries. Cadence also offers a broad suite of tools for logic synthesis. The Synergy-TM- product line provides designers the ability to easily target their design for implementation into an ASIC, field programmable gate array (FPGA) or programmable logic device (PLD) design. Synergy enables designers to make critical tradeoffs between area, power and performance to optimize their design based on specific design requirements. With the advent of deep submicron technology, successful completion of complex designs will require companies to adopt new methodologies and utilize innovative design automation tools. Success will be predicated on introducing physical design knowledge into the logic design process to ensure that the resulting silicon will meet specifications. The adoption of design planning tools will become increasingly important for electronics designers because such tools provide the necessary bridge between the logic and physical domains. An advanced high level design planning environment allows engineers to accurately predict physical effects that are used to provide guidelines for logic optimization and final implementation. IC DESIGN PRODUCTS The Company's custom layout portfolio is anchored by the Virtuoso-Registered Trademark- product family. This suite consists of tools for basic layout editing, design compaction, layout synthesis and device-level editing. In 1995, the Company introduced Virtuoso FastChip-TM-, which provides the ability to rapidly create cells and blocks for applications including random logic, standard cell blocks and library elements, reducing overall design time. In addition, FastChip allows chip designers to perform extensive "what-if" analysis with design variables like placement and aspect ratios that have significant bearing on performance. The Ensemble-TM- product family provides advanced place and route (P&R) solutions for gate, cell, block and mixed designs including: Gate Ensemble-TM- for gate array design, Cell Ensemble-Registered Trademark- , which is finely tuned for two layer metal designs and Cell3 Ensemble-Registered Trademark-, which is based on advanced routing algorithms for three layer metal and above designs. Silicon Ensemble-TM-, which is based on Cadence's proprietary area- based architecture and was introduced in early 1996, provides a broad solution for routing designs that consist of a mix of cell and gate-based approaches. In addition, Silicon Ensemble includes several specialized routing engines to deal with specific design challenges like datapath, complex clock trees, crosstalk and power. Cadence's product lines for automated and interactive physical verification are anchored by the Dracula-Registered Trademark- and Diva-TM- products, respectively. Physical verification provides the final check before products are released to manufacturing. In 1995, Cadence introduced Vampire-TM-, which provides advanced hierarchical design capability necessary to successfully verify large scale chips. 5 The Analog Artist-TM- series provides a broad set of simulation, layout and verification tools for chip design. This product family features the Spectre-TM- high-speed circuit simulation family of products. In 1994, Cadence introduced SpectreHDL-TM-, the industry's first analog behavioral simulation system for analog and mixed-signal applications. In 1995, the Company further expanded the product offering with the introduction of SpectreRF-TM-, simulation technology utilized specifically for the design of radio frequency applications. Additionally, Cadence now offers IC design products previously marketed by HLDS. These design planning products include Top-Down DP-TM-, which has been released for limited customer use, for hardware description language designers in the functional design phase; Logic DP-TM-, for application by gate level designers in the logic implementation phase; and Physical DP-TM-, for application by layout engineers in the physical implementation and verification phase. HLDS also offered an EDA infrastructure product now offered by Cadence on which newly defined deep submicron (ICs with feature size below 0.35 micron) design methodologies can be implemented. HLDS' infrastructure product, called Pillar-TM-, provides computer aided design (CAD) developers who are responsible for implementing deep submicron methodologies with a database, graphical user interface, applications programming interfaces and a software development environment. HLDS also offered two other standalone EDA tools now offered by Cadence to solve specific deep submicron design problems: HyperExtract-TM- and Fasnet-TM- Delay Calculator. These tools complement the design planning products and may be integrated with the Pillar infrastructure product. SYSTEM DESIGN PRODUCTS The Allegro-TM- product line offers broad solutions for layout of standard PCB, hybrid (MCM) Allegro-TM- and advanced component packaging. In addition, the Company offers thermal, signal integrity, reliability and electromagnetic analysis tools for detecting potential manufacturing problems. In 1995, the Company introduced BoardQuest-TM-, which is specifically tailored for the needs of high-speed designers, offering advanced system planning to accurately predict thermal, interconnect and electromagnetic effects early in the design process. For analog system and board level design, Cadence's Analog Workbench-TM- offers tools from top-down design through board design. SERVICES Cadence offers services ranging from advanced tools training and methodology assessment to joint design work with customers or even complete outsourcing of its customer's design work where Cadence is responsible for the entire product design from start to finish. In addition, the Company believes that customer support is a key factor in successfully marketing EDA products and generating repeat orders. The Company's product maintenance contracts entitle the customers to product updates, documentation and ongoing support. The Company is pursuing a strategy of combining a broad suite of design tools with world-class support, design and process services to enable its customers to accelerate their product development efforts, improve their design productivity and successfully cope with the increasing complexity of IC and electronic system design. The design process is becoming more complicated as customers are seeking to create higher performance products, lower development costs, improve time to market and migrate their design and manufacturing efforts to utilize deep submicron technologies. As a consequence, the Company believes that its solutions-oriented approach to providing both EDA tools and services will enable customers to more effectively respond to demanding market requirements. Cadence offers a range of design development and support to its customers, from remodeling the customer's design factory (i.e. re-engineering the product design process) to leasing out Cadence's Design Factory(SM), which includes everything from assistance with specific designs to a complete outsourcing of a 6 particular design operation. The Company works with the customer's executive management and engineering team to assess a customer's design goals and objectives and translate those goals into design solutions. Cadence's services offerings include product design, library design, design process and software services. Cadence offers product design services to facilitate complex IC design targeted to on-time completion with reliability. The Company offers on-site design assistance and full service chip designs. Library design services assist in the optimization of libraries for performance, density, quality, reliability and testability and the targeting of existing libraries to multiple foundry sources and product applications. Cadence also offers design process services to assist its customers management and engineering teams to optimize their internal design process by providing a product development environment blueprint and implementation management. In addition, Cadence offers application and education services that facilitate the implementation and assimilation of Cadence tools and technology aimed at maximizing customers productivity with Cadence's software applications. MARKETING AND SALES As of February 28, 1997, Cadence had 1,784 employees engaged in field sales and sales support, representing approximately 56% of its total work force. In North America, Cadence uses a direct sales force consisting of sales people and applications engineers to license its products. Cadence's sales force presents Cadence and its products for licensing to prospective customers, while applications engineers provide technical pre-sales as well as post-sales support. Due to the complexity of EDA products, the selling cycle is generally long, with three to six months or longer being typical. Activities during this sales cycle typically consist of technical presentations, product demonstrations, and often, an on-site customer evaluation of Cadence software. In Europe and Asia, Cadence markets and supports its products primarily through 15 majority-owned subsidiaries. Cadence also serves its international customers through distributors in various countries throughout Europe and Asia/Pacific. Cadence licenses its IC products in Japan primarily though a distributor, Innotech Corporation (Innotech). In 1996, 1995 and 1994, Innotech accounted for 14%, 15% and 10% of total revenue, respectively. Cadence's systems products and services are marketed in Japan through a majority-owned subsidiary. Revenue from international sources was $350.2 million, $271.8 million and $221.5 million, or approximately 47%, 50% and 52% of total revenue for 1996, 1995 and 1994, respectively. (See Notes to Consolidated Financial Statements for a summary of operations by geographic area.) Prices for international customers are quoted from a local currency international price list. The list is prepared based on the U.S. dollar price list but reflects the higher cost of doing business outside the United States. International customers are invoiced in the local currency or U.S. dollars using current exchange rates. The Company enters into foreign currency forward contracts to hedge the impact of foreign currency fluctuations. Though the Company attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may have a material adverse impact on the Company's results of operations. Cadence is required to have United States Department of Commerce export licenses for shipment of its products outside the United States. Although to date Cadence has not encountered any material difficulty in obtaining these licenses, any difficulty in obtaining necessary export licenses in the future could have an adverse effect on revenue. PRODUCT DEVELOPMENT AND ENGINEERING For the years 1996, 1995 and 1994, respectively, Cadence's investment in research and development was $128.9 million, $100.4 million and $88.2 million prior to capitalizing $13.6 million, $11.8 million and 7 $10.8 million of software development costs. See Notes to Consolidated Financial Statements for a more complete description of Cadence's capitalization of certain software development costs. Cadence is currently developing technology that it will introduce to the EDA market in 1997 and beyond. Among the primary areas that Cadence is addressing are the design of silicon devices in the deep sub-micron range, high-speed board design, architectural-level design, high-performance logic verification technology and hardware/software co-design. CUSTOMER ALLIANCES Cadence has established close working relationships with a number of semiconductor manufacturers and electronic system companies based on a business alliances model. To ensure that research and development activities are properly prioritized and also that finished products meet customers' needs, major new product developments often times begin after collaboration with a Cadence customer/partner. These technology alliances allow Cadence to work with customers' designers in defining and developing state-of-the-art solutions for current and emerging design approaches. Through an engineer exchange program, customers will often work on-site at Cadence facilities, giving Cadence valuable insight into customer product planning. Product development partnerships are generally directed at the development and refinement of specific tools. UNIVERSITY PROGRAMS Cadence supports EDA research by sharing its design automation technology and expertise with universities. More than 500 universities worldwide participate, including the University of California at Berkeley, Duke University, the Massachusetts Institute of Technology and Stanford University. Certain faculty members from the University of California at Berkeley, considered to be a leading university for IC design software research, have served as consultants to Cadence since its inception. These consultants have helped Cadence to stay abreast of the latest developments and directions in the rapidly changing IC design software industry. NEXT-GENERATION TECHNOLOGICAL DEVELOPMENT Cadence's advanced research and development group, Cadence Laboratories, is committed to new technological development. This group, located in Berkeley, California and in Rome, Italy, is chartered with identifying and developing prototype technologies in emerging design areas which will offer substantially improved alternatives to current EDA solutions. COMPETITION The Company operates in the highly competitive EDA industry, which continues to be characterized by falling prices, rapid technological change, and new market entrants. The Company's success is dependent upon its ability to develop innovative, cost competitive EDA software products and services, and to bring them to market in a timely manner. The Company competes with other companies, including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., Viewlogic Systems, Inc. and Zuken-Redac, that sell one or more competing products and with actual and potential customers' internal EDA software development and design services groups as well. Some of the Company's competitors may have substantially greater financial, marketing and technological resources than the Company. There can be no assurance that the Company will be able to compete successfully. Because the EDA industry is labor intensive rather than capital intensive, the number of the Company's actual and potential competitors is significant. A potential competitor who possesses the necessary knowledge of electronic circuit and systems design, production and operation could develop competitive EDA tools using a moderately priced computer workstation and bring such tools to market 8 quickly. There can be no assurance that development of competitive products will not result in a shift of customer preferences away from the Company's products, resulting in a significant decrease in the sales of the Company's comparable products. Intense competition in the EDA industry has lowered product prices. In the past, discounts of up to 60% of the list prices of the EDA products have been given. Although the Company is striving to reduce discounts, it recognizes that it may be required to discount EDA product prices under similar circumstances in the future. Cadence cooperates with other design automation vendors to deliver full-scope technology to its customers. Through Cadence's Connections Program, customers can more easily integrate Cadence products and technologies with other companies products and technologies. This provides customers with the flexibility to mix and match third-party and proprietary tools to specifically meet their design automation needs. Today over 100 companies have integrated their tools with Cadence's software. In 1996 Cadence introduced platinum status relationships with its Connections Program to jointly deliver, with its platinum partners, integrated design flows. In addition, Cadence is a founding member of the Virtual Socket Interface Alliance, an open membership organization that is developing open specifications to facilitate the development of next generation "system-on-a-chip" solutions. The major advantages of Cadence products over its competitors products include higher performance capabilities, enhanced features, and more efficient design methodologies through integration of electrical and physical design tools. Cadence's commitment to industry standard hardware platforms, operating systems and networking protocols allows users to configure an open design environment tailored to their specific needs. As design needs grow, a Cadence design environment usually can be expanded to include additional Cadence tools or third-party tools. PROPRIETARY TECHNOLOGY Cadence believes that its continued success lies, in part, in its employees and the combined knowledge, ability and experience they collectively bring and the abilities of its management team to focus that energy on achieving the Company's goals and objectives. Cadence relies principally on licensing, non-disclosure, proprietary rights, and other forms of agreements to secure its rights to its proprietary technology. Cadence's products are generally licensed to end-users on a "right to use" basis pursuant, typically, to a non-transferable license grant which restricts the use of its products to designated seats at designated sites for the customer's internal design purposes only. Cadence's various agreements prohibit a customer from disclosing the proprietary information contained in the Company's products to any other third person or entity. Although Cadence has taken various technical measures in the form of keys, time-driven locks, and other software and hardware mechanisms to protect its technology, Cadence recognizes that it may very well be technologically feasible for competitors of Cadence to copy aspects of the Company's licensed products in violation of agreements and Cadence's proprietary rights. In appropriate circumstances, Cadence will seek civil and criminal penalties along with any available equitable relief against those who would take or attempt to take or otherwise misappropriate its proprietary technology and other confidential information. Cadence also relies on a combination of patent, copyright, and trade secret laws and other traditional intellectual property protection mechanisms. In 1996, Cadence was granted 9 new patents for a total of 25 issuances and was allowed 8 additional patents. In 1996, Cadence filed in excess of 15 new trademark applications. In addition, Cadence has also sought federal copyright protection for certain of its products. Cadence does not believe that any of its technology infringes that of others nor does Cadence believe that any of its trademarks infringe the marks of others. 9 MANUFACTURING Cadence's software production operations consist of configuring the proper version of a product, recording it on magnetic tape or CD-ROM, and producing customer unique access keys which allow customers to use licensed products. User manuals and other documentation are generally available on CD-ROM, but are occasionally supplied in hard copy format. Shipments are generally made within two weeks of receiving an order. EMPLOYEES As of February 28, 1997, Cadence employed 3,190 persons, including 1,942 in sales, marketing, support and manufacturing activities, 1,000 in product development and 248 in management, administration and finance. None of Cadence's employees is represented by a labor union, and Cadence has experienced no work stoppages. Cadence believes that its employee relations are good. Competition in recruiting of personnel in the software industry is intense. Cadence believes that its future success will depend in part on its continued ability to recruit and retain highly skilled management, marketing and technical personnel. ITEM 2. PROPERTIES The Company's headquarters are located in San Jose, California, and the Company owns the related land and buildings. The total square footage of the buildings comprising the Company's headquarters is approximately 510,000. In addition to the Company's headquarters, the Company continues to lease three buildings with approximately 209,000 square feet in San Jose, California at an annual rate of approximately $5.6 million. The leases related to approximately 129,000 square feet expire in March 1998, and the remaining lease expires in June 1997. Approximately 198,000 of the square footage of these facilities has been sublet and the balance remains available for sublet. Cadence leases additional facilities for its sales offices in the United States and various foreign countries, and research and development facilities in San Diego, Santa Cruz and Berkeley, California, Lawrence, Kansas, United Kingdom, France, Taiwan and India at an aggregate annual rental of approximately $8.7 million. Cadence also leases approximately 100,000 square feet of facilities in Chelmsford, Massachusetts for its east coast operations and approximately 85,000 square feet in Sunnyvale, California for its Alta operations at a combined annual rate of approximately $ 1.6 million. Cadence also leases approximately 70,000 square feet in a building in Beaverton, Oregon, at a current annual rental of approximately $.8 million, which houses manufacturing, engineering, marketing and administrative operations for IMS and a regional software sales office. Cadence believes that these facilities and the undeveloped land adjacent to its current headquarters are adequate for its current needs and that suitable additional or substitute space will be available as needed to accommodate expansion of the Company's operations. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is involved in various disputes and litigation matters which have arisen in the ordinary course of business. These include disputes and lawsuits related to intellectual property, licensing, contract law, distribution arrangements, and employee relations matters. The Company filed a complaint in the United States District Court for the Northern District of California on December 6, 1995 against Avant! Corporation (a company formed by a merger of companies formerly known as ArcSys, Inc. and ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade secrets, copyright infringement, conspiracy and other illegalities. 10 On January 16, 1996, Avant! filed various counterclaims against the Company and the Company's President and CEO, and on April 12, 1996, Avant! filed a First Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the Company and its President and CEO had cooperated with the Santa Clara County District Attorney and initiated and pursued its complaint against Avant! for anti-competitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!'s stock price and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The amended counterclaim also alleges that certain Company insiders engaged in illegal insider trading with respect to Avant!'s stock. The Company and its President and CEO continue to believe that each has meritorious defenses to Avant!'s amended counterclaims, and each intends to defend such action vigorously. By an order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the Company's complaint. On April 19, 1996, the company filed a motion seeking a preliminary injunction to prevent further use of Cadence copyrighted code and trade secrets by Avant!. By order of March 18, 1997, the Court granted in part and denied in part that motion. The Court has not yet set a trial date. The Company intends to pursue its claims vigorously. Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange under the symbol CDN. The Company has never declared or paid any cash dividends on its common stock in the past and none are planned to be paid in the future. As of December 28, 1996, the Company had approximately 1,644 stockholders of record, not including those held in street or nominee name. The following table sets forth the high and low sales price for the Common Stock for each calendar quarter in the two-year period ended December 28, 1996.
HIGH LOW --------- --------- 1995: First Quarter......................................................................... $ 12.39 $ 8.55 Second Quarter........................................................................ 15.50 11.28 Third Quarter......................................................................... 18.55 13.78 Fourth Quarter........................................................................ 28.25 16.05 1996: First Quarter......................................................................... $ 30.33 $ 23.00 Second Quarter........................................................................ 43.75 29.67 Third Quarter......................................................................... 37.88 23.00 Fourth Quarter........................................................................ 41.38 32.63
ITEM 6. SELECTED FINANCIAL DATA Five fiscal years ended December 28, 1996 (In thousands, except per share amounts)
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Revenue.............................................. $ 741,459 $ 548,418 $ 429,072 $ 368,623 $ 418,724 Unusual items (1).................................... $ 100,543 $ -- $ 14,707 $ 19,650 $ (253) Income (loss) from operations........................ $ 91,259 $ 117,860 $ 44,047 $ (8,415) $ 65,710 Net income (loss) (2)................................ $ 29,038 $ 97,270 $ 36,648 $ (12,779) $ 55,360 Net income (loss) per share.......................... $ .32 $ 1.05 $ .37 $ (.13) $ .53 Total assets......................................... $ 717,001 $ 374,035 $ 361,048 $ 339,301 $ 367,243 Long-term obligations................................ $ 20,292 $ 1,619 $ 2,098 $ 4,001 $ 5,722
(1) See Notes to Consolidated Financial Statements for further discussion. (2) Net income (loss) included a $13.6 million after tax gain on the sale of stock of a subsidiary and a $3.1 million after tax gain on the sale of an equity investment in the years ended December 30, 1995 and December 31, 1994, respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE RESULTS." OVERVIEW Cadence Design Systems, Inc. (the Company) develops, markets and supports electronic design automation (EDA) software tools that automate, enhance and accelerate the design and verification of integrated circuits (ICs) and electronic systems. The Company combines its technology with services to 12 help optimize its customers' product development processes. The Company's products and services are used by companies throughout the world to design and develop electronic circuits and systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. In December 1996, the Company completed the acquisition of High Level Design Systems, Inc. (HLDS), a company which developed, marketed and supported EDA software for the design of high-density, high performance ICs. The acquisition was accounted for as a purchase and, accordingly, the results of HLDS from the date of the acquisition forward have been recorded in the Company's consolidated financial statements. In connection with the acquisition, the Company recorded a charge to operations of $95.7 million for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. In November 1996, the Company consummated a secondary public offering whereby 5.75 million shares of common stock were sold generating $202.1 million of net proceeds. In October 1996, the Company entered into a merger agreement with Cooper and Chyan Technology, Inc. (CCT). CCT develops, markets and supports software tools that help designers route the wires that interconnect the electronic devices on high performance printed circuit boards (PCBs) and ICs. The acquisition is expected to be accounted for as a pooling of interests. The merger has been approved by CCT's shareholders and is currently awaiting regulatory approval. There can be no assurance that regulatory approval will be obtained and that the merger will be consummated. In July 1995, the Company and its wholly-owned subsidiary, Integrated Measurement Systems, Inc. (IMS), sold to the public approximately 3.0 million shares of common stock, of which approximately 2.6 million shares were sold by the Company as the sole selling stockholder of IMS and .4 million shares were sold by IMS. As a result of the offering and sale of shares by the Company, the Company's ownership interest in IMS decreased to approximately 55%. However, as the Company remained the majority stockholder as of December 28, 1996, the consolidated financial statements of the Company for all periods presented include the accounts of IMS after elimination of intercompany accounts and transactions and minority interest adjustments. In February 1997, the Company and IMS sold 1.7 million shares of common stock to the public of which .95 million were owned by the Company. As a result, the Company received approximately $18.6 million and reduced its ownership in IMS to approximately 37%. In August 1994, the Company acquired the business and certain assets of Redwood Design Automation, Inc. (Redwood). Redwood developed, marketed and supported advanced software tools for electronic systems design. The acquisition was accounted for as a purchase and, accordingly, the results of Redwood from the date of the acquisition forward have been recorded in the Company's consolidated financial statements. 13 RESULTS OF OPERATIONS REVENUE
% CHANGE -------------------- 1996 1995 1994 96/95 95/94 --------- --------- --------- --------- --------- (In millions) Product............................................................. $ 414.1 $ 292.2 $ 241.5 42% 21% Services............................................................ 114.6 65.9 28.4 74% 132% Maintenance......................................................... 212.8 190.3 159.2 12% 20% --------- --------- --------- Total revenue..................................................... $ 741.5 $ 548.4 $ 429.1 35% 28% --------- --------- --------- --------- --------- --------- Sources of Revenue as a Percent of Total Revenue Product............................................................. 56% 53% 56% Services............................................................ 15% 12% 7% Maintenance......................................................... 29% 35% 37%
In 1996, strong demand for the Company's products and services generated a 35% increase in revenues as compared to the prior year. The increases in product revenue in 1996 when compared with 1995 and in 1995 when compared with 1994 were primarily the result of increased demand for the Company's products which enable customers to meet complex design challenges, including deep submicron IC design. The 1996 increase was attributed to increased sales volume of its automatic place and route, physical layout and verification, and timing-driven design process tools. Also, demand increased for Electronic Systems Design Automation (ESDA) products, produced by the Company's Alta Group, which are designed to allow customers to include product concepts in the EDA environment by accelerating and enhancing the early phases of system development. The increase in product revenue in 1995 was exemplified by increased sales volume of its IC, automated test equipment (ATE) hardware business, top-down design and Alta Group's systems design products. The increases in services revenue in 1996 and 1995 were the result of significant demand for the Company's Spectrum Services offerings, which provide a range of solutions to address the product development needs of its customers. The 1995 increase in services revenue was driven by an outsourcing agreement with Unisys Corporation (Unisys) to assume a substantial portion of Unisys' internal silicon design operation. This five-year agreement was signed in March 1995 for a total contract value of at least $75 million. The decreased services revenue growth rate in 1996, as compared to 1995, was due to a small services revenue base in 1994. The increase in maintenance revenue was attributable to an increase in the Company's installed base of products. The decreased maintenance revenue growth rate in 1996, as compared to 1995, was due to customers renewing maintenance contracts at a slower rate in 1996 as compared with 1995. Revenue from international sources was approximately $350.2 million, $271.8 million and $221.5 million, or 47%, 50% and 52% of total revenue for 1996, 1995 and 1994, respectively. In 1996, domestic and international revenue increased 41% and 29%, respectively, following increases of 33% and 23% in 1995. The increase in total revenue from international sources in 1996, as compared to 1995, was primarily attributable to product revenue growth and new Spectrum Services contracts in all regions. The higher percentage increase in domestic revenue in 1996, as compared to international revenue, was primarily attributable to an increase in domestic services revenue in 1996 as compared to 1995. The increase in international revenue in 1996, as compared to 1995, more than offset the negative impact of $31.4 million on revenue as the result of the weakening of certain foreign currencies, primarily the Japanese yen, in relation to the U.S. dollar. 14 COST OF REVENUE
% CHANGE -------------------- 1996 1995 1994 96/95 95/94 --------- --------- --------- --------- --------- (In millions) Product................................................................ $ 48.4 $ 44.8 $ 52.9 8% (15)% Services............................................................... $ 81.0 $ 55.0 $ 22.6 47% 143% Maintenance............................................................ $ 24.1 $ 16.7 $ 14.3 44% 17% Cost of Revenue as a Percent of Related Revenue Product................................................................ 12% 15% 22% Services............................................................... 71% 83% 80% Maintenance............................................................ 11% 9% 9%
Cost of product revenue includes costs of production personnel, packaging and documentation, amortization of capitalized software development costs and costs of the Company's ATE hardware business. The increase in cost of product in absolute dollars in 1996, as compared to 1995, was primarily due to the increased cost of revenue associated with its ATE products resulting from higher product demand, as well as increased purchased software amortization and the write-off of $1.6 million of capitalized software development costs related to products at the end of their life cycle. The decrease in cost of product as a percentage of product revenue in 1996, as compared to 1995, was primarily due to revenues growing at a faster rate than costs. The decrease in cost of product in absolute dollars and as a percentage of product revenue in 1995, as compared to 1994, was primarily due to productivity improvements in the software release and production process, and a reduction in printing and manufacturing costs due to decreased demand for manuals, partly offset by increased cost of revenue associated with its ATE products resulting from higher product demand. Cost of services revenue includes personnel and related costs associated with providing services to customers and the infrastructure to manage a services organization, as well as costs to recruit, develop and retain services professionals. Cost of services increased in total dollars in both 1996 and 1995 due to increased services revenue and the continued development of this line of business. The increase in cost of services from 1994 to 1995 was primarily due to additional costs associated with the transfer to the Company of former employees of Unisys pursuant to the outsourcing agreement signed in March of 1995. As part of the Unisys outsourcing agreement, the Company retained approximately 180 hardware and software designers and acquired fixed assets and certain intangibles. While primarily focused on serving the needs of Unisys, the design and services resources acquired by the Company are also being used to support other customers' design needs. The improvement in services gross margins to 29% in 1996, as compared to 17% in 1995, was due to increased operating efficiencies attained within existing services offerings. Continued investment in developing new services offerings and the cost of integrating new services professionals performing a growing number of services offerings will continue to put pressure on services gross margins until operating efficiencies are obtained. Cost of maintenance revenue includes the cost of customer services such as hot-line and on-site support and the production cost of the maintenance renewal process. The increase in cost of maintenance in total dollars and as a percentage of maintenance revenue from 1995 to 1996 was principally due to additional on-site support costs necessary to support a larger installed base. 15 OPERATING EXPENSES
% CHANGE -------------------- 1996 1995 1994 96/95 95/94 --------- --------- --------- --------- --------- (In millions) Marketing and sales.................................................. $ 226.5 $ 185.0 $ 163.4 22% 13% Research and development............................................. $ 115.3 $ 88.6 $ 77.4 30% 14% General and administrative........................................... $ 54.4 $ 40.4 $ 39.7 34% 2% Expenses as a Percent of Total Revenue Marketing and sales.................................................. 31% 34% 38% Research and development............................................. 16% 16% 18% General and administrative........................................... 7% 7% 9%
MARKETING AND SALES The increase in marketing and sales for 1996, as compared to 1995, was primarily the result of an increase of $26.6 million in employee related expenses attributable to increased headcount including commissions, recruiting and relocations, as well as increases in pre-sales activities and advertising. This increase was partially offset by the weakening of certain foreign currencies, primarily the Japanese yen, in relation to the U.S. dollar which favorably impacted marketing and sales expenses by approximately $5.6 million in 1996, as compared to the prior year. Marketing and sales expenses grew from 1994 to 1995 due to an additional $28.2 million of employee related costs resulting from increased headcount, a higher volume of pre-sales activities and increased commissions and sales incentives. Of these increased expenses, $5.1 million was attributable to the effect of the strengthening of certain foreign currencies in relation to the U.S. dollar. These increases were offset by approximately $6.0 million of decreased facilities costs. RESEARCH AND DEVELOPMENT The Company's investment in research and development, prior to the reduction for capitalization of software development costs, was $128.9 million, $100.4 million and $88.2 million for 1996, 1995 and 1994, respectively, representing 17%, 18% and 21% of total revenue. The expense increases for 1996, as compared to 1995, were primarily attributable to higher salary-related costs due to increased headcount of $15.6 million, higher consulting and other outside service costs of $6.0 million, and higher recruiting, computer maintenance and facilities costs. The increase of $12.2 million from 1994, as compared to 1995, was primarily due to personnel costs of $11.0 million associated with increased headcount and incentive compensation, and $1.6 million of higher consulting costs, offset by decreased facilities costs. The Company capitalized approximately $13.6 million, $11.8 million and $10.8 million of software development costs in the years 1996, 1995 and 1994, respectively, which represented approximately 11%, 12% and 12% of total research and development expenditures made in those years. The amount of capitalized software development costs in any given period may vary depending on the exact nature of the development performed. GENERAL AND ADMINISTRATIVE General and administrative expenses increased in 1996, as compared to 1995, primarily as a result of higher legal costs of $5.9 million, higher management information and telecommunication costs of $2.2 million and higher outside service costs of $1.0 million. The decrease in general and administrative costs as a percentage of revenue from 1994 to 1995 was primarily attributable to revenue growing at a faster rate than costs. The increase in absolute costs of $.7 million in 1995, as compared to 1994, was the result of $1.1 million of additional information system costs and $.7 million of additional legal expenses. These costs were offset by reductions in employee-related costs, facilities costs and bad debt expense. 16 OTHER ITEMS
1996 1995 1994 --------- --------- --------- (In millions) Unusual items.......................................................................... $ 100.5 $ -- $ 14.7 Other income (expense)................................................................. $ (.8) $ 17.2 $ 4.8
UNUSUAL ITEMS The unusual items in 1996 and in 1994 included costs of $95.7 million and $4.7 million related to the 1996 fourth quarter write-off and the 1994 third quarter write-off of in-process research and development costs associated with the HLDS acquisition and the Redwood acquisition, respectively, as the acquired in-process research and development had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Included in 1996 unusual items was $2.7 million of capitalized software development costs for products developed by the Company which were replaced by HLDS products, as well as $2.1 million of restructuring charges consisting of employee termination costs associated with the outsourcing of the Company's management information technology services and costs associated with excess facilities. Included in the 1994 unusual items was a $10 million provision for settlement of litigation. In April 1994, the Company entered into agreements to settle two class action lawsuits for a combined settlement of $16.5 million, of which approximately $7.5 million was covered by the Company's insurance carriers. Reflected in the statement of income in 1994 was the net settlement cost of $9.0 million plus $1.0 million for related legal costs. OTHER INCOME AND EXPENSE Interest income was $4.4 million, $4.9 million and $3.3 million for 1996, 1995 and 1994, respectively. The decrease in 1996, as compared to 1995, was primarily attributable to prevailing interest rates being lower in 1996 as compared to 1995. This decrease was partially offset by the increased interest earned in the fourth quarter of 1996 as a result of the net proceeds received in a secondary offering of the Company's common stock in the latter part of the quarter. The increase in 1995 was primarily due to increased earnings on cash investments resulting from higher interest rates during 1995 than during 1994. Interest expense was $1.9 million, $2.2 million and $1.0 million for 1996, 1995 and 1994, respectively. The decrease in interest expense in 1996, as compared to 1995, was attributable to a larger notes payable balance being maintained during a majority of 1995 as compared to 1996. The increase in interest expense in 1995, as compared to 1994, was due to an increase in notes payable related to the purchase of corporate facilities in the first and fourth quarters of 1994. The note payable related to the first facility purchase was paid in full in May 1994, and the note payable related to the second facility purchase was paid in full in October 1995. Included in 1995 other income was an $18.9 million gain on the sale of approximately 45% of the stock of IMS, a previously wholly-owned subsidiary, in an initial public offering. In 1994, other income included a $4.2 million gain related to the sale of an equity investment. INCOME TAXES
1996 1995 1994 --------- --------- --------- (In millions) Provision for income taxes............................................................... $ 61.4 $ 37.8 $ 12.2 Effective tax rate....................................................................... 68% 28% 25%
As of December 28, 1996, the Company had gross deferred tax assets of approximately $48.0 million against which the Company had recorded a valuation allowance of $10.8 million, resulting in net deferred tax assets of $37.2 million. A significant portion of the net operating loss and credit carryforwards which 17 created the deferred tax assets was generated by acquired companies prior to their mergers with the Company and by restructuring charges recorded as a result of these mergers. Approximately $9.0 million of these deferred tax assets will affect equity and intangibles and will not be available to offset future provisions for income taxes. Realization of the net deferred tax assets of $37.2 million is dependent on generating sufficient taxable income prior to the expiration of the loss and tax credit carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets of $37.2 million will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced or increased in the near term if actual facts, including the estimate of future taxable income, differ from those estimated. The 1996 tax rate without the fourth quarter write-off of $95.7 million of in-process research and development costs associated with the HLDS acquisition (which is not deductible for tax purposes) was 33%. The increase in the 1996 tax rate, as compared to the 1995 tax rate, excluding this fourth quarter write-off, was primarily due to an increase in state income taxes and a smaller reduction in the valuation allowance. The increase in the 1995 tax rate, as compared to the 1994 tax rate, was attributable to an increase in foreign earnings which were subject to a higher tax rate than the U.S. tax rate, the related cost of repatriating these earnings and an increase in state income taxes. The Company anticipates that its effective tax rate will remain at 33% in 1997. LIQUIDITY AND CAPITAL RESOURCES At December 28, 1996, the Company's principal sources of liquidity consisted of $285.5 million of cash and short-term investments as compared with $96.6 million and $96.9 million at December 30, 1995 and December 31, 1994, respectively, and a three-year, $120 million secured revolving line of credit agreement. As of December 28, 1996, the Company had no borrowings under the revolving line of credit. Cash generated from operating activities decreased $21.8 million to $175.3 million for the year ended December 28, 1996, as compared to the year ended December 30, 1995. The decrease was primarily due to increases in accounts receivable, prepaid expenses and other, and lower deferred income taxes, partially offset by an increase in net income prior to the write-off of in-process research and development, an increase in accrued liabilities and payables, and higher deferred revenue. Cash generated from operating activities increased $42.7 million in the year ended December 30, 1995, as compared to the year ended December 31, 1994, primarily due to higher net income and increases in accrued liabilities and payables, and deferred revenue, partially offset by increases in accounts receivable and prepaid expenses. At December 28, 1996, the Company had net working capital of $259.6 million compared with $6.5 million at December 30, 1995. The primary reasons for the increase were net proceeds from the Company's secondary public offering of $202.1 million, increases in accounts receivable of $59.9 million and in prepaid expenses and other current assets of $35.5 million, partly offset by an increase in deferred revenue of $14.7 million and an increase in accounts payable and accrued liabilities of $24.2 million. The increase in accounts receivable was attributable to increased billing activity late in the year. The increase in deferred revenue was attributable to increased maintenance renewals and an increase in deferred product revenue. The increase in accounts payable and accrued liabilities was primarily attributable to payments expected to be made in early 1997, including bonus and commissions payments, sales taxes and issuances of stock under the Company's Employee Stock Purchase Plan (ESPP). In addition to its short-term investments, the Company's primary investing activities were purchases of property and equipment, purchases of software and intangibles and the capitalization of software development costs, which combined represented $96.4 million and $45.6 million of cash used for investing activities in the years ended December 28, 1996 and December 30, 1995, respectively. Since 1994, as part of its authorized stock repurchase program, the Company has sold put warrants and purchased call options through private placements. The Company had a maximum potential obligation related to the put warrants at December 28, 1996 to buy back 1.9 million shares of its common stock at an 18 aggregate price of approximately $66.6 million. The put warrants will expire in March 1997 through September 1997. The Company has both the unconditional right and the intent to settle these put warrants with stock and, therefore, no amount was classified out of stockholders' equity in the accompanying balance sheet. The effect of the exercise of these put warrants and call options is reported in stockholders' equity. In connection with and prior to the consummation of the CCT merger, the Company will rescind its stock repurchase program, with the exception of continued systematic stock repurchases under its seasoned stock repurchase program for the Company's ESPP. Such repurchases are intended to cover the Company's expected re-issuances under the ESPP for the next 12 months. Anticipated cash requirements for 1997 include the purchase of treasury stock through the exercise of call options for the Company's seasoned systematic stock repurchase program and the contemplated additions of property, plant and equipment of approximately $60 million. As part of its overall investment strategy, the Company has committed to participating in a venture capital partnership as a limited partner. The Company's total committed investment of at least $25.0 million will be made over the next two to three years. As of December 28, 1996, the Company had contributed approximately $6.5 million, which is reflected in other assets in the accompanying balance sheet. The Company anticipates that current cash and short-term investment balances, cash flows from operations, and the $120 million revolving line of credit should be sufficient to meet its working capital and capital expenditure requirements on a short and long-term basis. FACTORS THAT MAY AFFECT FUTURE RESULTS Because of rapid technological changes in the EDA industry, the Company's future revenues will depend on its ability to develop or acquire new products and enhance its existing products on a timely basis to keep pace with innovations in technology and to support a range of changing computer software and hardware platforms and customer preferences. Changes in manufacturing technology may render the Company's software tools obsolete. Lack of market acceptance or significant delays in product development could result in a loss of competitiveness of the Company's products, with a resulting loss of revenues. The Company has been involved in a number of significant merger and acquisition transactions. These transactions have been motivated by many factors, including the desire to obtain new technologies, the desire to expand and enhance the Company's product lines and the desire to attract key personnel. Growth through acquisition has several identifiable risks, including risks related to integration of the previously distinct businesses into a single unit, the substantial management time devoted to such activities, undisclosed liabilities, the failure to realize anticipated benefits (such as cost savings and synergies) and issues related to product transition (such as distribution, engineering, and customer support). During the fourth quarter of 1996, the Company acquired HLDS and entered into a merger agreement with CCT (Mergers). Both Mergers have several identifiable risks, including those described above. To maintain and increase profitability, the Company, HLDS, and CCT will need to successfully integrate and streamline overlapping functions. Costs generally associated with this type of integration that may be incurred by the Company include the write-off of capitalized software, severance payments, closing of excess facilities, and disposition of excess equipment. While some of these costs have not been currently identified, any such costs will have an adverse effect on the Company's operating results in the periods in which they are incurred. The Company, HLDS, and CCT each have different systems and procedures in many operational areas that must be rationalized and integrated. There can be no assurance that such integration will be accomplished smoothly, expeditiously or successfully. Failure to effectively accomplish the integration of the operations of the Company, HLDS and CCT could have a material adverse effect on Cadence's results of operations and financial condition. Moreover, uncertainty in the marketplace or customer hesitation relating to the Mergers could negatively affect the Company's results of operations. 19 Among the conditions that must be fulfilled in order to consummate the CCT Merger is the expiration or termination of the waiting period applicable to the CCT Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). The review of the Merger pursuant to the HSR Act may substantially delay the Company's ability to consummate the Merger. There can be no assurance that a challenge to the CCT Merger on antitrust grounds will not be made, or if such a challenge is made, the Company will prevail or would not be required to terminate the merger agreement, divest certain assets, license certain proprietary technology or accept certain conditions in order to consummate the CCT Merger. In addition, the Company has the right to waive the condition that the CCT Merger be qualified for pooling of interests accounting treatment. If the CCT Merger is consummated but fails to qualify for pooling of interests accounting treatment, then the transaction would be accounted for as a purchase. Accounting for the CCT Merger as a purchase could result in a significant intangible asset or a significant charge against results of operations or both, which could materially and adversely affect future results of operations. There can be no assurance that all of the aforementioned conditions will be satisfied or waived, and therefore, there can be no assurance that the CCT Merger will be consummated. During the first quarter of 1997, the Company completed the reorganization of its sales force and other operating groups into business units. These business units (Alta, Deep Submicron, Logic Verification, Full Custom and Performance Engineering) are focused on delivering solutions to customers for specific areas of the design process. Short-term customer uncertainty relating to this reorganization could negatively affect the Company's results of operations. The Company's operating expenses are partially based on its expectations regarding future revenue. The Company's results of operations may be adversely affected if revenue does not materialize in a quarter as anticipated. Since expenses are usually committed in advance of revenues and because only a small portion of expenses vary with revenue, the Company's operating results may be impacted significantly by lower revenue which would be attributable to various factors and could affect quarter to quarter comparisons. The Company's focus on providing services is relatively recent. The percentage revenue growth from this source from 1995 to 1996 may not be indicative of future growth. In addition, a substantial portion of the Company's revenues from services are earned pursuant to fixed price contracts. Variances in costs associated with those contracts could have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company's revenues are not generally seasonal in nature, the Company has experienced, and may continue to experience, decreases in first quarter revenue compared with the preceding fourth quarter, which is believed to result primarily from the capital purchase cycle of the Company's customers. The Company is dependent upon the efforts and abilities of its senior management, its research and development staff and a number of other key management, sales, support, technical and services personnel. As noted above, the Company has recently increased its focus on offering professional services to its customers. To the extent that the Company is not able to attract, retain, train, and motivate highly skilled employees who are able to provide services that satisfy customers' expectations, the Company's business and operating results would be adversely affected. The Company expects that international revenues will continue to account for a significant portion of its total revenues. The Company's international operations involve a number of risks normally associated with such operations, including, among others, adoption and expansion of government trade restrictions, volatile foreign exchange rates, currency conversion risks, limitations on repatriation of earnings, reduced protection of intellectual property rights, the impact of possible recessionary environments in economies outside the U.S., longer receivables collection periods and greater difficulty in accounts receivable collection, difficulties in managing foreign operations, political and economic instability, unexpected changes in regulatory requirements and tariffs and other trade barriers. Currency exchange fluctuations in countries in which the Company conducts business could also materially adversely affect Cadence's business, financial condition and results of operations. The Company enters into foreign currency forward 20 contracts to hedge the impact of foreign currency fluctuations. Although the Company attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may have a material adverse impact on the Company's results of operations. Due to the foregoing, as well as other factors, past financial performance should not be considered an indicator of future performance. In addition, the Company's participation in a highly dynamic industry often results in significant volatility of the Company's common stock price. Any change in revenues or operating results below levels expected by securities analysts for the Company or its competitors, and the timing of the announcement of such shortfalls, could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 14. SUMMARY QUARTERLY DATA-UNAUDITED (In thousands, except per share amounts)
1996 1995 ------------------------------------------ ------------------------------------------ 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST --------- --------- --------- --------- --------- --------- --------- --------- Revenue....................... $ 212,262 $ 188,741 $ 177,026 $ 163,430 $ 163,756 $ 140,090 $ 128,539 $ 116,033 Cost of revenue............... $ 42,807 $ 39,262 $ 37,765 $ 33,639 $ 31,767 $ 30,349 $ 29,451 $ 24,963 Income (loss) from operations (1)......................... $ (40,729) $ 49,982 $ 43,433 $ 38,573 $ 42,588 $ 32,666 $ 24,117 $ 18,489 Net income (loss) (2)......... $ (57,816) $ 32,687 $ 28,588 $ 25,579 $ 30,840 $ 35,909 $ 16,971 $ 13,550 Net income (loss) per share... $ (.72) $ .36 $ .31 $ .28 $ .33 $ .39 $ .18 $ .14
(1) Income (loss) from operations for the fourth quarter ended December 28, 1996 included unusual items totaling $100.5 million, of which $95.7 million was for the write-off of in-process research and development. (2) Net income (loss) included a $13.6 million after tax gain on the sale of stock of a subsidiary in third quarter ended September 30, 1995. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 401(a) as to directors is incorporated by reference from the section entitled "Election of Directors" in the Company's Proxy Statement for its annual stockholders' meeting to be held May 1, 1997. The information required by this Item as to executive officers is included in Part I under "Executive Officers of the Registrant." To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 28, 1996, all section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES - ----------------------------------- --------- ---------------------------------------------------------------------- Joseph B. Costello................. 43 President, Chief Executive Officer and Director H. Raymond Bingham................. 51 Executive Vice President and Chief Financial Officer M. Robert Leach.................... 49 Senior Vice President, Services Darrel A. Mank..................... 49 Senior Vice President, Design Services K.C. Murphy........................ 42 Senior Vice President, Corporate Strategy John F. Olsen...................... 45 Senior Vice President, Worldwide Sales Shane Robison...................... 42 Senior Vice President, Engineering Timothy Q. Unger................... 42 Senior Vice President, Human Resources Anthony Zingale.................... 41 Senior Vice President, Worldwide Marketing R.L. Smith McKeithen............... 52 Vice President, General Counsel and Secretary Stephen Y. Fong.................... 39 Vice President of Finance and Corporate Treasurer William Porter..................... 42 Vice President, Corporate Controller and Assistant Secretary
Executive corporate officers are appointed by the Board of Directors and serve at the discretion of the Board. JOSEPH B. COSTELLO has served as President and a director of Cadence since May 1988. In addition, Mr. Costello has served as Chief Executive Officer of the Company since June 1988. Mr. Costello is also a director of Racotek, Inc. H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, he was Executive Vice President and Chief Financial Officer of Red Lion Hotels and Inns for eight years. Mr. Bingham is a director of Sunstone Hotel Investors, Inc. and Integrated Measurement Systems, Inc. M. ROBERT LEACH joined Cadence in June 1993 as Senior Vice President of Services. Prior to joining the Company, Mr. Leach was partner-in-charge of the worldwide electronics industry consulting practice for Andersen Consulting for more than 10 years. DARREL A. MANK joined Cadence in June 1996 as Senior Vice President, Design Services. From 1991 through 1996, Mr. Mank served as Vice President and General Manager of the portable products division of Cirrus Logic, Inc. 22 K.C. MURPHY joined Cadence in April 1996 as Senior Vice President, Corporate Strategy. Prior to joining the Company, Mr. Murphy worked for 17 years at Advanced Micro Devices where he held various positions, most recently Vice President of Strategic Marketing. JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field Operations, and became Senior Vice President, Worldwide Sales, in April 1996. Prior to joining the Company, Mr. Olsen served as a partner for KPMG Peat Marwick for five years. SHANE V. ROBISON joined Cadence in July 1995 as Senior Vice President, Engineering. Prior to joining the Company, Mr. Robison served as Vice President and General Manager of Apple Computer's Personal Interactive Electronics Division for more than seven years. TIMOTHY Q. UNGER joined Cadence in September 1994 as Vice President, Human Resources, and became Senior Vice President, Human Resources in January 1996. From 1988 through 1994, Mr. Unger was Group Director of Human Resources for Unisys Corporation. ANTHONY ZINGALE joined Cadence in April 1989 and currently holds the position of Senior Vice President, Worldwide Marketing. He previously served the Company as Vice President and General Manager of the HDL Design Group, Vice President of Corporate Marketing and Vice President of Marketing for the Systems Division. Prior to joining the Company, Mr. Zingale was Vice President of Marketing at EDA Systems, Inc., which was acquired by Digital Equipment Corporation. R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General Counsel and Secretary. From 1994 to 1996, he served as Vice President, General Counsel and Secretary of Strategic Mapping, Inc. From 1988 to 1994, he served as Vice President, General Counsel and Secretary of Silicon Graphics, Inc. STEPHEN Y. FONG joined Cadence in November 1995 as Vice President of Finance and Corporate Treasurer. From 1982 to 1995, he held various financial management positions with Syntex Corporation, a multi-national pharmaceutical company based in Palo Alto, California, most recently as Assistant Treasurer. From 1979 to 1982, Mr. Fong was with Deloitte and Touche, most recently as Senior Accountant. WILLIAM PORTER joined Cadence in February 1994 as Vice President, Corporate Controller and Assistant Secretary. From September 1988 to February 1994, Mr. Porter served as Technical Accounting and Reporting Manager and most recently as Controller of Cupertino Operations with Apple Computer Corporation, a worldwide manufacturer of computer equipment. From 1976 until 1988, he held various positions with Arthur Andersen LLP, most recently as Senior Audit Manager. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference from the sections entitled "Compensation of Directors" and "Compensation of Executive Officers" in the Company's Proxy Statement for its annual stockholders' meeting to be held May 1, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement for its annual stockholders' meeting to be held May 1, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the section entitled "Certain Transactions" in the Company's Proxy Statement for its annual stockholders' meeting to be held May 1, 1997. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE --------- (a)1. Financial Statements - Report of Independent Public Accountants........................................................ 30 - Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995....................... 31 - Consolidated Statements of Income for the three fiscal years ended December 28, 1996......................................................................................... 32 - Consolidated Statements of Stockholders Equity for the three fiscal years ended December 28, 1996............................................................................ 33 - Consolidated Statements of Cash Flows for the three fiscal years ended December 28, 1996......................................................................................... 34 - Notes to Consolidated Financial Statements...................................................... 35 (a)2. Financial Statement Schedules II. Valuation and Qualifying Accounts and Reserves................................................ 54 All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. (a)3. Exhibits
24 The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - --------- -------------------------------------------------------------------------------------------------------- 2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the Registrant, Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc. (incorporated by reference to Registrant's Current Report on Form 8-K filed on November 7, 1996 (the November 7, 1996 8-K)). 2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by reference to Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779 filed on November 26, 1996 (the November 26, 1996 Form S-4)) 3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1 Registration Statement (No. 33-13845) originally filed on April 29, 1987 (the 1987 Form S-1)). (b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to the Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988). (c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the 1988 Form S-1)). (d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred Stock as filed with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to Exhibit 3A to the Registrant's Form 8-K originally filed on June 12, 1989 (the 1989 Form 8-K)). (e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit 3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October 7, 1991 (the 1991 Form S-4)). (f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to Exhibit 3.01(f) from the Registrant's Form 10-K for the fiscal year ended December 31, 1991). (g) The Registrant's Amendment of Certificate of Incorporation to increase the number of authorized shares of common stock dated February 1997. 3.02 The Registrant's Bylaws, as currently in effect (as incorporated by reference to Exhibit 3.02 to the 1987 Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K). 4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the 1991 Form S-4). 4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and Savings Bank which includes as exhibits thereto the Certificate of Designations for the Series A Junior Participating Preferred Stock, the form of Right Certificate and the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 1A, 1B and 1C to the Registrant's Form 8-K filed February 16, 1996.)
25
EXHIBIT NUMBER EXHIBIT TITLE - --------- -------------------------------------------------------------------------------------------------------- 9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of John F. Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding (incorporated by reference to Exhibit 99.3 to the November 7, 1996 Form 8-K). 10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan (incorporated by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K). 10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997. 10.03 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).* 10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant and Form of Stock Option Exercise Notice and Agreement (the first document is incorporated by reference to Exhibit 4.02 to the Registrant's 1994 Form S-8 and the latter two documents are incorporated by reference to Exhibit 10.08 - 10.10 to the Registrant s 1988 Form S-1).* 10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).* 10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant. (incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K). 10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997. 10.08 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form 10-K)).* 10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the 1995 Form 10-K). 10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to Exhibit 10.09 to the 1995 Form 10-K). 10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the 1994 Form 10-K).* 10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to Exhibit 10.11 to the 1995 Form 10-K). 10.13 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates (ROPA), a California limited partnership, and the Registrant, for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)). 10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K). 10.15 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).
26
EXHIBIT NUMBER EXHIBIT TITLE - --------- -------------------------------------------------------------------------------------------------------- 10.16 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Separate Property Trusts (P/A Trusts) and Valid Logic Systems Incorporated (Valid) (which merged into the Registrant) for the Registrant's offices at 75 West Plumeria Avenue, San Jose, California (incorporated by reference to Exhibit 10.16 to the Form 10-K for Valid for the fiscal year ended December 30, 1990 (the 1990 Valid Form 10-K)). 10.17 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.17 to the 1990 Valid Form 10-K). 10.18 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's offices at 2835 North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the 1990 Valid Form 10-K). 10.19 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's offices at 2820 Orchard Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the 1990 Valid Form 10-K). 10.20 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.15 to the 1990 Valid Form 10-K). 10.21 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello (incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration statement (No. 33-31673), originally filed on October 18, 1989).* 10.22 Offer letter to H. Raymond Bingham dated May 12, 1993 (incorporated by reference to Exhibit 10.24 to the Form 10-K for the fiscal year ended December 31, 1993 (the 1993 Form 10-K)).* 10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the 1993 Form 10-K).* 10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).* 10.25 Consulting agreement dated May 1, 1994 with Henry E. Johnston, who was made a director on July 5, 1994 by unanimous written consent (incorporated by reference to the Registrant's Form 10-Q for the quarterly period ended June 30, 1994 (the 1994 Second Quarter Form 10-Q)).* 10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by reference to the 1994 Second Quarter Form 10-Q).* 10.27 Letter agreement dated August 17, 1994 by and among Registrant, Morris Management Company (the General Partner), and Morris Associates VI, L.P. (Morris) whereby Registrant acquired all of the interests in River Oaks Place Associates, L.P. (incorporated by reference to the Registrant's Form 8-K filed November 14, 1994). 10.28 Agreement of Merger and Plan of Reorganization by and among Registrant, Simon Software, Inc. and Redwood Design Automation, Inc. (Redwood) dated as of July 8, 1994 (incorporated by reference to the Registrant's Form 10-Q/A, Amendment Number 1 to the 1994 Second Quarter Form 10-Q, filed November 14, 1994 (the 1994 Second Quarter 10-Q/A)). 10.29 Agreement of Merger dated as of August 1, 1994 between Redwood and CDS Corporation (incorporated by reference to the Registrant's 1994 Second Quarter 10-Q/A).
27
EXHIBIT NUMBER EXHIBIT TITLE - --------- -------------------------------------------------------------------------------------------------------- 10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the Registrant's Form 10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)). 10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the first quarter ended March 30, 1996) to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1994). 10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant (incorporated by reference to the March 30, 1996 10-Q). 10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates L.P. (ROPA), a California limited partnership (the Term Loan) (incorporated by reference to the Registrant's Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996 10-Q)). 10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q) 10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's 1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994). 10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third Quarter 10-Q). 10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)). 10.42 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the 1990 Form 10-K). 10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
28
EXHIBIT NUMBER EXHIBIT TITLE - --------- -------------------------------------------------------------------------------------------------------- 10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K). 10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the Registrant, High Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc. (incorporated by reference to the November 7, 1996 8-K). 21.01 Subsidiaries of the Registrant. 23.01 Consent of Arthur Andersen LLP 27.1 Financial data schedule for the period ended December 28, 1996.
- ------------------------ * A management contract or compensatory plan required to be filed as an exhibit to Form 10-K. (b) Reports on Form 8-K On November 7, 1996, the Registrant filed a current report on Form 8-K, announcing the execution of an Agreement and Plan of Merger and Reorganization with High Level Design Systems, Inc. on October 3, 1996, and the execution of an Agreement and Plan of Merger and Reorganization with Cooper & Chyan Technology, Inc. on October 28, 1996. On December 31, 1996, Registrant filed a current Report on Form 8-K, reporting that the Company had completed its acquisition of High Level Design Systems, Inc. On January 13, 1997, Registrant filed a Current Report on Form 8-K, reporting that it has received requests for additional information from the United States Federal Trade Commission with respect to its proposed merger with Cooper & Chyan Technology, Inc. (c) Exhibits The Company hereby files as part of this Form 10-K the Exhibits listed in Item 14.(a)3. above. (d) Financial Statement Schedules See Item 14.(a)2. of this Form 10-K. 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of CADENCE DESIGN SYSTEMS, INC: We have audited the accompanying consolidated balance sheets of Cadence Design Systems, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 28, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cadence Design Systems, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14. (a) 2. is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP San Jose, California January 17, 1997 30 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash investments............................................................. $ 284,512 $ 84,867 Short-term investments................................................................ 1,015 11,774 Accounts receivable, less allowances of $8,772 in 1996 and $7,420 in 1995............. 148,449 88,503 Inventories........................................................................... 8,133 8,203 Prepaid expenses and other............................................................ 49,026 13,576 ----------- ----------- Total current assets................................................................ 491,135 206,923 Property, Plant and Equipment, net...................................................... 160,927 124,103 Software Development Costs, net......................................................... 21,295 25,793 Purchased Software and Intangibles, net................................................. 10,267 8,268 Other Assets............................................................................ 33,377 8,948 ----------- ----------- Total assets........................................................................ $ 717,001 $ 374,035 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable and current portion of long-term debt................................... $ 3,349 $ 1,497 Accounts payable and accrued liabilities.............................................. 116,174 91,999 Income taxes payable.................................................................. 4,901 14,524 Deferred revenue...................................................................... 107,154 92,407 ----------- ----------- Total current liabilities........................................................... 231,578 200,427 ----------- ----------- LONG-TERM LIABILITIES Long-term debt........................................................................ 20,292 1,619 Deferred income taxes................................................................. -- 7,307 Minority interest liability........................................................... 15,205 12,167 Other long-term liabilities........................................................... 22,378 18,434 ----------- ----------- Total long-term liabilities......................................................... 57,875 39,527 ----------- ----------- COMMITMENTS AND CONTINGENCIES Stockholders' Equity Preferred stock -- $.01 par value; authorized 2,000 shares, none issued............... Common stock and capital in excess of $.01 par value Authorized: 150,000 shares Issued: 118,084 shares in 1996 and 113,794 shares in 1995 Outstanding: 86,611 shares in 1996 and 78,564 shares in 1995........................ 603,430 299,544 Treasury stock at cost (31,473 shares in 1996 and 35,230 shares in 1995).............. (325,637) (290,884) Retained earnings..................................................................... 151,596 124,471 Accumulated translation adjustment.................................................... (1,841) 950 ----------- ----------- Total stockholders' equity.......................................................... 427,548 134,081 ----------- ----------- Total liabilities and stockholders' equity.......................................... $ 717,001 $ 374,035 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. 31 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ---------- ---------- ---------- REVENUE Product.................................................................... $ 414,029 $ 292,198 $ 241,545 Services................................................................... 114,620 65,860 28,365 Maintenance................................................................ 212,810 190,360 159,162 ---------- ---------- ---------- Total revenue............................................................ 741,459 548,418 429,072 ---------- ---------- ---------- COSTS AND EXPENSES Cost of product............................................................ 48,383 44,793 52,897 Cost of services........................................................... 80,963 54,988 22,590 Cost of maintenance........................................................ 24,127 16,749 14,313 Marketing and sales........................................................ 226,496 185,025 163,408 Research and development................................................... 115,301 88,566 77,381 General and administrative................................................. 54,387 40,437 39,729 Unusual items.............................................................. 100,543 -- 14,707 ---------- ---------- ---------- Total costs and expenses................................................. 650,200 430,558 385,025 ---------- ---------- ---------- Income from operations....................................................... 91,259 117,860 44,047 Other income (expense), net.................................................. (782) 17,237 4,816 ---------- ---------- ---------- Income before provision for income taxes..................................... 90,477 135,097 48,863 Provision for income taxes................................................... 61,439 37,827 12,215 ---------- ---------- ---------- Net income................................................................... $ 29,038 $ 97,270 $ 36,648 ---------- ---------- ---------- ---------- ---------- ---------- Net income per share......................................................... $ .32 $ 1.05 $ .37 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding............. 91,590 92,948 98,805 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 32 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996 (IN THOUSANDS)
COMMON STOCK ------------------------ PAR VALUE AND TREASURY STOCK ACCUMULATED CAPITAL IN ---------------------- RETAINED TRANSLATION SHARES EXCESS OF PAR SHARES AMOUNT EARNINGS ADJUSTMENT --------- ------------- --------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1993........... 103,588 $ 250,961 (10,929) $ (52,178) $ 8,527 $ (1,188) Purchase of treasury stock........... -- -- (13,441) (95,119) -- -- Issuance of common stock............. 3,498 13,516 1,444 7,231 (1,165) -- Tax benefits from employee stock transactions....................... -- 626 -- -- -- -- Treasury stock issued in connection with acquisitions.................. -- 70 1,131 6,338 (633) -- Translation adjustment............... -- -- -- -- -- 2,429 Net income........................... -- -- -- -- 36,648 -- --------- ------------- --------- ----------- ---------- ------------ BALANCE, DECEMBER 31, 1994........... 107,086 265,173 (21,795) (133,728) 43,377 1,241 Purchase of treasury stock........... -- -- (14,430) (163,928) -- -- Issuance of common stock............. 6,708 26,984 995 6,772 (734) -- Tax benefits from employee stock transactions....................... -- 8,463 -- -- -- -- Purchase of warrant.................. -- (1,746) -- -- (15,442) -- Unrealized gain on investment in subsidiary......................... -- 670 -- -- -- -- Translation adjustment............... -- -- -- -- -- (291) Net income........................... -- -- -- -- 97,270 -- --------- ------------- --------- ----------- ---------- ------------ BALANCE, DECEMBER 30, 1995........... 113,794 299,544 (35,230) (290,884) 124,471 950 Purchase of treasury stock........... -- -- (5,157) (124,204) -- -- Issuance of common stock............. 4,290 30,498 602 5,401 (3) -- Tax benefits from employee stock transactions....................... -- 58,418 -- -- -- -- Purchase of warrant.................. -- (2,437) -- -- (1,910) -- Treasury stock issued in connection with an acquisition................ -- 73,492 2,562 25,906 -- -- Shares issued in secondary offering, net of expenses.................... -- 143,915 5,750 58,144 -- -- Translation adjustment............... -- -- -- -- -- (2,791) Net income........................... -- -- -- -- 29,038 -- --------- ------------- --------- ----------- ---------- ------------ BALANCE, DECEMBER 28, 1996........... 118,084 $ 603,430 (31,473) $ (325,637) $ 151,596 $ (1,841) --------- ------------- --------- ----------- ---------- ------------ --------- ------------- --------- ----------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial statements. 33 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996 (IN THOUSANDS)
1996 1995 1994 ---------- ---------- ---------- CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR................................ $ 84,867 $ 75,011 $ 61,382 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................................. 29,038 97,270 36,648 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 51,742 46,019 44,257 Gain on sale of stock of subsidiary....................................... -- (18,873) -- Deferred income taxes..................................................... (15,943) 5,693 (2,105) Write-off of in-process research and development.......................... 95,700 -- 4,653 Write-off of software development costs and costs related to restructure............................................................. 4,843 -- -- Increase in other long-term liabilities and minority interest expense..... 5,992 3,135 3,985 Write-offs of equipment and other long-term assets........................ 1,719 2,281 1,229 Provisions for doubtful accounts and inventory write-offs................. 2,672 5,821 3,334 Changes in current assets and liabilities, net of effect of acquired businesses: Accounts receivable..................................................... (59,736) (13,760) 22,413 Inventories............................................................. (981) (4,059) (592) Prepaid expenses and other.............................................. (33,091) (2,132) 7,871 Accrued liabilities and payables........................................ 78,836 44,439 10,612 Deferred revenue........................................................ 14,521 31,262 22,133 ---------- ---------- ---------- Net cash provided by operating activities............................. 175,312 197,096 154,438 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities of short-term investments...................................... 18,618 43,296 69,796 Purchases of short-term investments....................................... (7,859) (33,205) (60,238) Purchases of property, plant and equipment................................ (62,089) (28,338) (15,196) Capitalization of software development costs.............................. (13,560) (11,845) (10,790) Change in purchased software and intangibles and other assets............. (20,797) (5,454) 1,129 Net proceeds from sale of subsidiary stock................................ -- 29,920 -- Payment for purchase of third-party interests in partnerships, net of cash acquired................................................................ -- -- (14,624) Cash advanced to a company prior to acquisition........................... -- -- (1,855) Sale of put warrants...................................................... 13,870 1,304 10,321 Purchase of call options.................................................. (13,870) (1,304) (10,321) ---------- ---------- ---------- Net cash used for investing activities................................ (85,687) (5,626) (31,778) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on notes payable and long-term debt.................... (2,676) (26,542) (29,209) Net proceeds from issuance of long-term debt.............................. 19,763 -- -- Sale of common stock...................................................... 226,749 26,500 13,516 Purchases of treasury stock............................................... (124,204) (163,928) (95,119) Purchase of warrant....................................................... (4,347) (17,188) -- ---------- ---------- ---------- Net cash provided by (used for) financing activities.................. 115,285 (181,158) (110,812) ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH....................................... (5,265) (456) 1,781 ---------- ---------- ---------- INCREASE IN CASH AND CASH INVESTMENTS......................................... 199,645 9,856 13,629 ---------- ---------- ---------- CASH AND CASH INVESTMENTS AT END OF YEAR...................................... $ 284,512 $ 84,867 $ 75,011 ---------- ---------- ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest................................................................ $ 2,185 $ 2,423 $ 915 ---------- ---------- ---------- ---------- ---------- ---------- Income taxes (including foreign withholding tax)........................ $ 24,349 $ 12,968 $ 6,885 ---------- ---------- ---------- ---------- ---------- ---------- Non-cash investing and financing activities: Capital lease obligations incurred for equipment........................ $ 3,070 $ 1,149 $ 1,466 ---------- ---------- ---------- ---------- ---------- ---------- Common and treasury stock issued under the Employee Stock Purchase Plan and for an acquisition.............................. $ 110,607 $ 6,522 $ 6,066 ---------- ---------- ---------- ---------- ---------- ---------- Tax benefits from employee stock transactions............................. $ 58,418 $ 8,463 $ 626 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 34 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 1996 THE COMPANY Cadence Design Systems, Inc. (the Company) develops, markets and supports electronic design automation software tools that automate, enhance and accelerate the design and verification of integrated circuits and electronic systems. The Company combines its technology with services to help optimize its customers' product development processes. The Company's products and services are used by companies throughout the world to design and develop electronic circuits and systems, including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products and other advanced electronics. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. The functional currency of all of the Company's foreign subsidiaries is the local currency. Gains and losses resulting from the translation of the subsidiaries' financial statements are reported as a separate component of stockholders' equity. The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year end is the Saturday closest to December 31. Certain prior year financial statement balances have been reclassified to conform to the 1996 presentation. REVENUE RECOGNITION Product revenue consists principally of revenue earned under software license agreements and is generally recognized when the software has been shipped and there are no significant obligations remaining. Revenue from subscription license agreements which include software and maintenance is deferred and recognized ratably over the term of the subscription period. Test equipment revenue is recognized upon shipment of the test equipment. Services revenue consists primarily of revenues received for performing product design development and process improvement, and education and assimilation of software products into the customers' product development process. Services revenue is generally recognized as the services are performed or on the percentage of completion method of accounting, depending upon the nature of the project. Under the percentage of completion method, revenue recognized is that portion of the total contract price that costs expended to date bears to the anticipated final total costs based on current estimates of the costs to complete the project. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized currently. Maintenance revenue consists of fees for providing system updates, user documentation and technical support for software products. Maintenance revenue is recognized ratably over the term of the agreement. 35 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 In 1996, 1995 and 1994, one customer (a distributor), which also holds a minority interest in a subsidiary of the Company, accounted for 14%, 15% and 10% of total revenue, respectively. Outstanding trade accounts receivable from this related party were approximately $3.4 million and $5.4 million at December 28, 1996 and December 30, 1995, respectively. SOFTWARE DEVELOPMENT COSTS, PURCHASED SOFTWARE AND INTANGIBLES The Company capitalizes software development costs in compliance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility of the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in software and hardware technology. Amortization of capitalized software development costs begins when the products are available for general release to customers and is generally computed on a straight-line basis over three years or, if less, the remaining estimated economic life of the product. Purchased software and intangibles are amortized on a straight-line basis over the remaining estimated economic life of the underlying product (two to seven years). It is reasonably possible that the estimates of anticipated future gross revenues, the remaining estimated economic life of the products, or both could differ from those used to assess the recoverability of these costs and result in a write-down of the carrying amount or a shortened life of the costs in the near term. In the accompanying statements of income, amortization is included in cost of product for capitalized software development costs and in either cost of product or cost of services for purchased software costs, as determined by the nature of the underlying transaction. In total, amortization of capitalized and purchased software and intangibles amounted to approximately $22.5 million, $19.7 million and $20.2 million for 1996, 1995 and 1994, respectively. The Company wrote off approximately $4.3 million of capitalized software development costs related to products at the end of their life cycle in 1996, of which $2.7 million related to products that were replaced (or discontinued) as a result of the High Level Design Systems, Inc. (HLDS) acquisition, and wrote off $.8 million of purchased software in 1995 for projects discontinued during that year. NET INCOME PER SHARE Net income per share for each period is calculated by dividing net income by the weighted average shares of common stock and common stock equivalents outstanding during the period (calculated using the modified treasury stock method). Common stock equivalents consist of dilutive shares issuable upon the exercise of outstanding common stock options and warrants. Fully diluted net income per share is substantially the same as primary net income per share. CASH, CASH INVESTMENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid debt instruments, including commercial paper, Euro time deposits, repurchase agreements, and certificates of deposit with an original maturity of ninety days or less to be cash investments. 36 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 Debt instruments included in cash investments consisted of the following:
1996 1995 ---------- --------- (IN THOUSANDS) Commercial paper............................................. $ 112,965 $ -- Certificates of deposit...................................... 4,221 -- Corporate debt securities.................................... -- 2,063 Euro time deposits........................................... 20,000 -- Repurchase agreements........................................ 19,803 6,034 U.S. Government notes........................................ -- 4,450 ---------- --------- $ 156,989 $ 12,547 ---------- --------- ---------- ---------
The Company classifies its short-term investments in debt securities as "held-to-maturity". Accordingly, these investments, which mature through June 1997, are valued using the amortized cost method. The fair value of the investments approximates amortized cost, and as such, the gross unrealized holding gains and losses at December 28, 1996 and December 30, 1995 are not material. Short-term investments consisted of $1.0 million of corporate debt securities at December 28, 1996, and $8.8 million of corporate debt securities and $3.0 million of U.S. Government notes at December 30, 1995. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes labor, material and manufacturing overhead. Inventories are composed of test equipment. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation and amortization are provided over the estimated useful lives, by the straight-line method, as follows: buildings -- 31 years; leasehold and building improvements -- shorter of the lease term or the estimated useful life; equipment -- 2-7 years; and furniture and fixtures -- 3-5 years. FINANCIAL INSTRUMENTS The Company has a seasoned authorized stock repurchase program under which it repurchases common stock to satisfy estimated requirements for shares to be issued under its Employee Stock Purchase Plan (ESPP). Such repurchases are intended to cover the Company's expected reissuances under the ESPP for the next 12 months. The Company also has an unseasoned systematic repurchase program for anticipated re-issuances of stock under the Company's stock option plans. In connection with and prior to the consummation of the merger with Cooper & Chyan Technology, Inc. (CCT) described below, the Company will rescind its stock repurchase program, with the exception of continued systematic stock repurchases under its seasoned stock repurchase program for the Company's ESPP. Since 1994, as part of its authorized repurchase program, the Company has sold put warrants through private placements. As of December 28, 1996, there were outstanding 1.9 million put warrants which entitle the holder to sell one share of common stock to the Company on a specified date and at a specified price ranging from $34.92 to $36.11 per share. Additionally, during this same period, the Company purchased call options that entitle the Company to buy on a specified date one share of common stock at a specified price. As of December 28, 1996, the Company had 1.4 million outstanding call options at prices 37 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 ranging from $35.17 to $36.36 per share to satisfy anticipated stock repurchase requirements under the Company's systematic repurchase programs. The put warrants and call options outstanding at December 28, 1996 are exercisable on various dates through September 1997. At December 28, 1996, the fair value of the call options was approximately $9.7 million and the fair value of the put warrants was approximately $6.3 million. The fair value of put warrants and call options was estimated by the Company's investment bankers. The Company has the right to settle the put warrants with stock, cash or a combination of stock and cash equal to the difference between the exercise price and the fair value at the date of exercise. Settlement of the put warrants with stock could cause the Company to issue a substantial number of shares, depending on the exercise price of the put warrants and the per share fair value of the Company's common stock at the time of exercise. In addition, settlement of put warrants in stock or cash could lead to the disposition by put warrant holders of shares of the Company's common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may impact the price of the Company's common stock. At December 28, 1996, the Company had both the unconditional right and the intent to settle these put warrants with stock and, therefore, no amount was classified out of stockholders' equity in the accompanying balance sheet. The effect of the exercise of these put warrants and call options is reported in stockholders' equity. The Company enters into foreign currency forward exchange contracts (forward contracts) to hedge the impact of foreign currency fluctuations. Due to the short-term nature of these forward contracts, the unrealized gains and losses were not material at December 28, 1996 and will be recorded when realized. The estimated fair value for foreign exchange contracts is primarily based on quoted market prices for the same or similar instruments, adjusted where necessary for maturity differences. The estimated fair value at December 28, 1996 and December 30, 1995 was negligible. The notional amount of the forward contracts was approximately $30.1 million at December 28, 1996. These contracts expired on January 29, 1997. For certain of the Company's financial instruments, including cash and cash investments, short-term investments and debt, the carrying amounts approximate fair value due to their short-term nature. The estimated fair values discussed above may not be representative of actual values that could have been realized as of year-end or that will be realized in the future. CONCENTRATION OF CREDIT RISK Financial instruments which may potentially subject the Company to concentrations of credit risk consist principally of cash investments, short-term investments, accounts receivable, foreign exchange forward contracts, and call options purchased in conjunction with its stock repurchase program. The Company's investment policy limits investments to short-term, low-risk instruments. Concentration of credit risk related to accounts receivable is limited due to the varied customers comprising the Company's customer base and their dispersion across geographies. Credit exposure related to the forward contracts is limited to the unrealized gains on these contracts. Credit exposure on call options is limited to the unrealized gains on the option contracts. All financial instruments are executed with financial institutions with strong credit ratings which minimizes risk of loss due to nonpayment. The Company has not experienced any losses due to credit impairment related to its financial instruments. 38 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 OTHER INCOME (EXPENSE)
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Interest income................................................................. $ 4,362 $ 4,854 $ 3,262 Interest expense................................................................ (1,913) (2,222) (1,045) Gain on sale of IMS stock....................................................... -- 18,873 -- Gain on sale of investment...................................................... -- -- 4,196 Minority interest............................................................... (3,016) (1,341) (485) Gain (loss) on foreign exchange................................................. 164 (117) (204) Other expense, net.............................................................. (379) (2,810) (908) --------- --------- --------- Total other income (expense)................................................ $ (782) $ 17,237 $ 4,816 --------- --------- --------- --------- --------- ---------
39 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 BALANCE SHEET COMPONENTS
1996 1995 ---------- ---------- (IN THOUSANDS) Inventories Raw materials and supplies.............................................................. $ 3,981 $ 2,335 Work-in-process......................................................................... 3,031 3,825 Finished goods.......................................................................... 1,121 2,043 ---------- ---------- Total inventories..................................................................... $ 8,133 $ 8,203 ---------- ---------- ---------- ---------- Property, Plant and Equipment Land.................................................................................... $ 38,848 $ 38,848 Buildings............................................................................... 38,613 38,612 Leasehold and building improvements..................................................... 26,091 23,349 Equipment............................................................................... 161,155 108,911 Furniture and fixtures.................................................................. 23,524 19,834 ---------- ---------- Total cost............................................................................ 288,231 229,554 Less: Accumulated depreciation and amortization......................................... 127,304 105,451 ---------- ---------- Property, plant and equipment, net.................................................... $ 160,927 $ 124,103 ---------- ---------- ---------- ---------- Software Development Costs Cost.................................................................................... $ 58,781 $ 47,944 Less: Accumulated amortization.......................................................... 37,486 22,151 ---------- ---------- Software development costs, net....................................................... $ 21,295 $ 25,793 ---------- ---------- ---------- ---------- Purchased Software and Intangibles Cost.................................................................................... $ 32,226 $ 23,086 Less: Accumulated amortization.......................................................... 21,959 14,818 ---------- ---------- Purchased software and intangibles, net............................................... $ 10,267 $ 8,268 ---------- ---------- ---------- ---------- Accounts Payable and Accrued Liabilities Payroll and payroll related accruals.................................................... $ 65,424 $ 48,668 Other accrued liabilities............................................................... 34,990 25,739 Accounts payable........................................................................ 15,760 17,592 ---------- ---------- Total accounts payable and accrued liabilities........................................ $ 116,174 $ 91,999 ---------- ---------- ---------- ----------
INTEGRATED MEASUREMENT SYSTEMS, INC. In July 1995, the Company and its wholly owned subsidiary, Integrated Measurement Systems, Inc. (IMS) sold to the public approximately 3.0 million shares of common stock at $11 per share in a registered initial public offering. Of these shares, approximately .4 million were sold by IMS and approximately 2.6 million were sold by the Company as the sole selling stockholder of IMS. The sale generated net proceeds to the Company, after underwriting expenses, discounts, commissions and other expenses, of approximately $26.6 million and a pre-tax gain of approximately $18.9 million, which is reflected as other income in the accompanying statement of income. The Company also recognized a $.7 million unrealized gain, net of taxes, which was recorded in stockholders' equity. IMS received net proceeds of approximately 40 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 $3.3 million. As a result of the offering and sale of shares by the Company, the Company's ownership interest in IMS decreased to approximately 55%. The minority interest liability of $13.5 million and $10.6 million related to IMS is recorded in minority interest liability in the accompanying December 28, 1996 and December 30, 1995 balance sheets, respectively. In January 1997, IMS filed a registration statement with the Securities and Exchange Commission with the intent to sell 1.7 million shares to the public of which .9 million are owned by the Company. The sale will result in the Company reducing its ownership in IMS to approximately 37%. ACQUISITIONS HIGH LEVEL DESIGN SYSTEMS, INC. In December 1996, the Company acquired all of the outstanding stock of High Level Design Systems, Inc. (HLDS) for approximately 2.6 million shares of the Company's common stock. The total purchase price was approximately $101.4 million. HLDS developed, marketed and supported electronic design automation software for the design of high-density, high-performance integrated circuits. The acquisition was accounted for as a purchase and, accordingly, the results of HLDS from the date of acquisition forward have been recorded in the Company's consolidated financial statements. In connection with the acquisition, net intangibles of $99.6 million were acquired, of which $95.7 million was reflected as a one-time charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. This one-time charge was reflected in the Company's 1996 statement of income as an unusual item within operating expenses. The remaining intangible of $3.9 million, consisting of goodwill, is included in purchased software and intangibles in the accompanying balance sheets and is being amortized over its estimated useful life of five years. In connection with the acquisition, net assets acquired were as follows (in thousands): Trade accounts receivable and other current assets........ $ 1,840 Intangibles, including in-process research and development............................................. 99,594 Property, equipment and other long-term assets............ 5,945 Current liabilities assumed............................... (5,680) Long-term liabilities assumed............................. (300) --------- Net assets acquired................................... $ 101,399 --------- ---------
The following unaudited pro forma information shows the results of operations for the two fiscal years ended December 28, 1996 as if the HLDS acquisition had occurred at the beginning of each period presented and at the purchase price established in December 1996. The results are not necessarily indicative of what would have occurred had the acquisition actually been made at the beginning of each of the respective periods presented or of future operations of the combined companies. The pro forma results for 1996 combine the Company's results for the year ended December 28, 1996 with the results of HLDS for the period from January 1, 1996 through the date of acquisition and includes the $95.7 million write-off 41 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 discussed above. The following unaudited pro forma results include the straight-line amortization of intangibles over a period of five years.
1996 1995 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue..................................................... $ 751,453 $ 558,545 Net income.................................................. $ 24,924 $ 94,819 Net income per share........................................ $ .26 $ .99 Weighted average common and common equivalent shares outstanding............................................... 94,309 95,667
REDWOOD DESIGN AUTOMATION, INC. In August 1994, the Company acquired the business and certain assets of Redwood Design Automation, Inc. (Redwood) for approximately .9 million shares of the Company's common stock valued at $4.6 million. Prior to the acquisition of Redwood, the Company advanced $1.8 million to Redwood which was not repaid. Redwood was a development stage company formed to design, develop and market software for use in electronic systems design. The acquisition was accounted for as a purchase and, accordingly, the results of Redwood from the date of acquisition forward have been recorded in the Company's consolidated financial statements. In connection with the acquisition, net intangibles of $6.8 million were acquired, of which $4.7 million was reflected as a one-time charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. This one-time charge was reflected in the Company's 1994 statement of income as an unusual item within operating expenses. The remaining intangibles of $2.1 million were included in purchased software and intangibles. These amounts were fully amortized as of December 28, 1996 after being amortized over their useful life of two years. In connection with the acquisition, net assets acquired were as follows (in thousands): Trade accounts receivable and other current assets........ $ 562 Intangibles, including in-process research and development............................................. 6,756 Property, equipment and other long-term assets............ 541 Current liabilities assumed............................... (1,162) Long-term liabilities assumed............................. (292) --------- Net assets acquired................................... $ 6,405 --------- ---------
The following unaudited pro forma information shows the results of operations for the year ended December 31, 1994 as if the Redwood acquisition had occurred at the beginning of the period presented and at the purchase price established in August 1994. The results are not necessarily indicative of what would have occurred had the acquisition actually been made at the beginning of the period or of future operations of the combined companies. The pro forma results combine the Company's results for the year ended December 31, 1994 with the results of Redwood for the period from January 1, 1994 through the 42 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 date of acquisition. The following unaudited pro forma results include the straight-line amortization of intangibles over a period of two years (in thousands, except per share amount). Revenue................................................... $ 429,658 Net income................................................ $ 33,531 Net income per share...................................... $ .34 Weighted average common and common equivalent shares outstanding............................................. 99,471
REAL ESTATE PARTNERSHIPS In March 1994, the Company acquired all third-party interests in two real estate partnerships in which it was a 46.5% and 80% limited partner, respectively, for approximately $8.7 million in cash and the assumption of a secured construction loan of approximately $23.5 million. The Company leased buildings from one of the limited partnerships, and the second limited partnership owned unencumbered land adjacent to the leased property. The Company repaid the secured construction loan in May 1994. In October 1994, the Company acquired all third-party interests in a third real estate partnership in which it was a 49% limited partner for approximately $5.9 million in cash. The partnership owns land and buildings which are leased to the Company and were subject to a secured note in the amount of approximately $23.7 million which the Company repaid in October 1995. In connection with the acquisition of the partnerships, net assets acquired were as follows (in thousands):
Property and other assets............................................... $ 66,030 Liabilities assumed..................................................... (47,423) Less: Cash acquired..................................................... (3,983) ---------- Net cash paid......................................................... $ 14,624 ---------- ----------
UNUSUAL ITEMS Unusual items included within operating expenses are described below. No unusual items were recorded during 1995.
1996 1994 1993 1992 ---------- --------- --------- --------- (IN THOUSANDS) Write-off of in-process research and development....................... $ 95,700 $ 4,653 $ -- $ -- Write-off of capitalized software development costs for products replaced by HLDS products................................... 2,724 -- -- -- Restructuring costs.................................................... 2,119 -- 13,450 -- Provision for settlement of litigation................................. -- 10,054 -- -- (Income) loss from operations of disposed division..................... -- -- 6,200 (253) ---------- --------- --------- --------- Total unusual items.................................................. $ 100,543 $ 14,707 $ 19,650 $ (253) ---------- --------- --------- --------- ---------- --------- --------- ---------
The unusual items in 1996 and in 1994 included costs of $95.7 million and $4.7 million related to the 1996 fourth quarter write-off and the 1994 third quarter write-off of in-process research and development 43 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 associated with the HLDS acquisition and the Redwood acquisition, respectively. The acquired in-process research and development had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Also included in 1996 unusual items were $2.7 million of capitalized software development costs for products developed by the Company which were replaced by HLDS products in connection with the acquisition of HLDS. The 1996 restructuring costs of $2.1 million include employee termination costs associated with the outsourcing of the Company's management information technology services, as well as costs associated with excess facilities. Included in the 1994 unusual items was an approximately $10 million provision for settlement of litigation. In April 1994, the Company entered into agreements to settle two class action lawsuits for a combined settlement of $16.5 million, of which approximately $7.5 million was covered by the Company's insurance carriers. Reflected in the statement of income in 1994 was the net settlement cost of approximately $9.0 million plus approximately $1.0 million for related legal costs. In December 1993, the Company sold its Automated Systems (ASI) division for a nominal amount of cash and future royalties. During 1996, ASI filed for bankruptcy and it is unknown if the Company will ultimately receive any such royalties. In light of the nominal proceeds received, the sale of ASI resulted in a loss on disposal of approximately $6.0 million. The loss was due principally to the loss on the sale of the net operating assets, as well as amounts accrued for estimated costs to be incurred in connection with the disposal. Loss on operations of ASI totalled $6.2 million in 1993. In March 1993, the Company recorded restructuring costs of approximately $13.5 million associated with a planned restructure of certain areas of sales, operations and administration due to business conditions. The restructuring charge included approximately $4.5 million for employee terminations. The Company terminated approximately 270 employees at an actual total cost of approximately $4.6 million. In addition, the restructuring charge included approximately $3.5 million for excess facilities and approximately $2.1 million for the write-off of purchased software and intangibles arising from required adjustments to the Company's cost structure necessitated by lower revenue levels. Substantially all of the excess facilities accrual was utilized by December 31, 1993. The restructuring charge also included an additional provision for doubtful accounts of approximately $3.0 million, which was utilized by December 31, 1993 and write-off of certain software development costs of $.4 million resulting from changes in the systems product strategy. LINE OF CREDIT AND NOTE PAYABLE In April 1996, the Company entered into a senior secured revolving credit facility (the Facility) which allows the Company to borrow up to $120 million through April 1999. The Facility is secured by the majority of the Company's property, plant and equipment, cash, investments, intangibles, and certain other assets. The Company has the option to pay interest based upon the London Interbank Offered Rate (LIBOR) plus 1.5%, or the higher of the federal funds effective rate plus .5% or prime. The Company must comply with certain financial covenants and conditions as defined in the Facility which the Company was in compliance with at December 28, 1996. As of December 28, 1996, the Company had no outstanding borrowings under the Facility. The Facility has scheduled mandatory reductions. In May 1996, the Company's wholly owned real estate partnership, River Oaks Place Associates L.P. (the Partnership), entered into a $20 million long-term financing arrangement (the ROPA Loan) with a bank. The financing agreement expires on December 31, 2005, and requires quarterly principal payments, which began on September 30, 1996, in amounts ranging from $.4 million to $.7 million. The Partnership has the option to pay interest at the LIBOR plus 1.5% or the higher of the bank's prime rate plus .5% or 44 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 the Federal Funds rate plus 1.5%. The ROPA Loan is secured by the real and personal properties of the Partnership. In connection with the ROPA Loan agreement, the Company extended its lease agreements with the Partnership until December 31, 2005 and minimum lease payments under the agreements have been assigned as security under the ROPA Loan agreement. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following:
1996 1995 --------- --------- (IN THOUSANDS) Capital lease obligations...................................... $ 4,016 $ 3,116 Note payable (ROPA Loan)....................................... 19,625 -- --------- --------- Total........................................................ 23,641 3,116 Less: Current portion.......................................... 3,349 1,497 --------- --------- Long-term debt............................................... $ 20,292 $ 1,619 --------- --------- --------- ---------
The note payable will be repaid as follows (in millions): $1.6 in 1997 and 1998, $1.4 in 1999, $1.7 in 2000, $1.9 in 2001, and $11.4 thereafter. LEASES Equipment and facilities are leased under various capital and operating leases expiring on different dates through the year 2008. Certain of these leases contain renewal options. Rental expense was approximately $12.3 million, $10.7 million and $19.0 million for 1996, 1995 and 1994, respectively. In connection with a previous merger, the Company has closed certain facilities and, accordingly, has accrued for estimated future minimum rent and maintenance costs related to these facilities. Total costs accrued at December 28, 1996 were $5.7 million of which $2.3 million was included in accrued liabilities and $3.4 million was included in other long-term liabilities in the accompanying balance sheet. 45 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 At December 28, 1996, future minimum lease payments under capital and operating leases and the present value of the capital lease payments were as follows:
CAPITAL OPERATING LEASES LEASES --------- ----------- (IN THOUSANDS) For the years: 1997......................................................... $ 2,038 $ 11,043 1998......................................................... 1,394 8,814 1999......................................................... 782 6,238 2000......................................................... 302 4,570 2001......................................................... 53 3,165 Thereafter..................................................... -- 1,641 --------- ----------- Total lease payments........................................... $ 4,569 $ 35,471 ----------- ----------- Less: Amount representing interest (Average rate of 7.5%)...... 553 --------- Present value of lease payments................................ 4,016 Less: Current portion.......................................... 1,800 --------- Long-term portion.............................................. $ 2,216 --------- ---------
The cost of equipment under capital leases included in the balance sheets as property, plant and equipment at December 28, 1996 and December 30, 1995 was approximately $11.0 million and $12.6 million, respectively. Accumulated amortization of the leased equipment at December 28, 1996 and December 30, 1995 was approximately $8.4 million and $10.1 million, respectively. COMMITMENTS AND CONTINGENCIES As part of its overall investment strategy, the Company has committed to participating in a venture capital partnership as a limited partner. The Company's total committed investment of at least $25 million will be made over the next two to three years. As of December 28, 1996, the Company had contributed approximately $6.5 million, which is reflected in other assets in the accompanying balance sheet. During the fourth quarter of 1996, the Company entered into a merger agreement with Cooper & Chyan Technology, Inc. (CCT). The transaction will entail a tax-free, stock-for-stock exchange at a fixed ratio of .85 shares of the Company's common stock for each share of CCT stock. Based on CCT's 13.1 million shares outstanding on December 31, 1996, the Company expects to issue approximately 11.1 million shares. In addition, the Company will assume outstanding stock options of CCT based upon the exchange ratio of .85. The merger, which is currently awaiting regulatory approval, is expected to be accounted for as a pooling of interests. From time to time the Company is involved in various disputes and litigation matters which have arisen in the ordinary course of business. These include disputes and lawsuits related to intellectual property, contract law and employee relations matters. The Company filed a complaint in the United States District Court for the Northern District of California on December 6, 1995 against Avant! Corporation (a company formed by a merger of companies 46 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 formerly known as ArcSys, Inc. and ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade secrets, copyright infringement, conspiracy and other illegalities. On January 16, 1996, Avant! filed various counterclaims against the Company and the Company's President and CEO, and on April 12, 1996, Avant! filed a First Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the Company and its President and CEO had cooperated with the Santa Clara County District Attorney and initiated and pursued its complaint against Avant! for anti-competitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!'s stock price and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The amended counterclaim also alleges that certain Company insiders engaged in illegal insider trading with respect to Avant!'s stock. The Company and its President and CEO 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 counter-claim from the Company's complaint. On April 19, 1996, the Company filed a motion seeking a preliminary injunction to prevent Avant! from continuing to market ArcCell and ArcCell xo, two software lines which the Company alleges were misappropriated. A hearing on the motion was held on September 10, 1996. The Court has not yet issued a ruling. Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse impact on the Company's financial position or results of operations. STOCKHOLDERS' EQUITY STOCK SPLIT In May 1996 and October 1995, the Company's Board of Directors effected three-for-two stock splits payable in the form of a dividend of one additional share of the Company's common stock for every two shares owned by stockholders. Par value remained at $.01 per share. The stock split resulted in the issuance of approximately 25.8 million and 37.8 million additional shares of common stock from authorized but unissued shares in 1996 and 1995, respectively. Accordingly, all share and per share data have been adjusted to retroactively reflect the stock splits. STOCK COMPENSATION PLANS FIXED STOCK OPTION PLANS The Company's Employee Stock Option Plan (the Plan) provides for the issuance of either incentive or non-qualified options to its employees to purchase up to 30,685,050 shares of common stock at an exercise price not less than fair market value of the stock on the date of grant. Options granted under the Plan become exercisable over periods of one to four years and expire five to ten years from the date of grant. The Company's Non-Statutory Stock Option Plan (the Non-Statutory Plan) provides for the issuance of non-qualified options to its employees to purchase up to 12,375,000 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the Non-Statutory Plan become exercisable over a four year period, with one-fourth of the shares vesting one year from the vesting commencement date and the remaining shares vesting in 36 equal monthly installments. Options under the Non-Statutory Plan generally expire ten years from the date of grant. 47 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 Under the Directors Stock Option Plans (the Directors Plans), the Company may grant non-qualified options to its non-employee directors for up to 1,676,248 shares of common stock at an exercise price not less than the fair market value of the stock on the date of grant. Options granted under the Directors Plans have a term of up to ten years. Certain of the option grants vest one year from the date of grant and certain other option grants vest one-third one year from the date of grant and two-thirds ratably over the subsequent two years. The Company has assumed certain options granted to former employees of acquired companies (Acquired Options). The Acquired Options were assumed by the Company outside of the Plan, but all are administered as if assumed under the Plan. All of the Acquired Options have been adjusted to effectuate the conversion under the terms of the Agreements and Plans of Reorganization between the Company and the companies acquired. The Acquired Options generally become exercisable over a four year period and generally expire either five or ten years from the date of grant. No additional options will be granted under any of the acquired companies' plans. A summary of the status of all of the Company's fixed stock option plans as of and during the year ended December 28, 1996 is as follows:
1996 ------------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ ----------------- Outstanding at beginning of year.................... 20,574,794 $ 8.46 Assumption of HLDS options.......................... 506,110 14.89 Granted............................................. 3,539,798 31.99 Exercised........................................... (4,290,058) 5.53 Forfeited........................................... (841,633) 13.04 Expired............................................. (1,794) 4.27 ------------ Outstanding at end of year........................ 19,487,217 $ 6.81 ------------ ------------ Options exercisable at year end..................... 10,149,039 Options available for future grant.................. 4,977,784 Weighted average fair value of options granted during the year........................... $11.80
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE PRICES AT 12/28/96 CONTRACTUAL LIFE PRICE AT 12/28/96 PRICE - ----------------- ------------ ------------------- ------------- ------------ ------------- $.28 - $10.00 10,444,315 8.7 $ 5.11 8,419,146 $ 4.83 $10.01 - $20.00 4,864,326 9.0 15.28 1,520,376 15.14 $20.01 - $30.00 2,261,921 9.1 27.03 168,028 23.87 $30.01 - $40.00 1,895,605 8.9 35.68 41,489 33.41 $40.01 - $46.00 21,050 9.7 40.25 -- -- ------------ ------------ 19,487,217 10,149,039 ------------ ------------ ------------ ------------
48 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 Combined activity for the years ended December 30, 1995 and December 31, 1994 was as follows:
1995 1994 -------------- -------------- SHARES SHARES -------------- -------------- Outstanding at beginning of year.................................................. 22,793,616 25,094,804 Granted........................................................................... 6,483,705 4,604,715 Exercised ($.19 per share to $11.69 per share).................................... (6,708,491) (3,498,376) Cancelled......................................................................... (1,994,036) (3,407,527) -------------- -------------- Outstanding at end of year...................................................... 20,574,794 22,793,616 -------------- -------------- -------------- -------------- Range of exercise prices of outstanding options at end of year.................... $ 0.19-$25.96 $ 0.19-$13.28 Options exercisable at year end................................................... 9,120,039 10,293,154 Options available for future grant................................................ 7,566,197 4,648,079
OPTION AGREEMENTS Prior to 1996, the Company occasionally has issued options outside of the Plan. As of December 28, 1996, options to purchase 55,705 shares were outstanding and exercisable at prices ranging from $4.14 to $5.22 per share. EMPLOYEE STOCK PURCHASE PLAN Under the 1990 ESPP, the Company is authorized to issue up to 6,750,000 shares of common stock to its employees. Under the terms of the ESPP, employees can choose each year to have up to 12% of their annual base earnings plus bonuses withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lesser of the fair market value as of the beginning or the end of the semiannual option periods. Under the ESPP, the Company issued 605,537, 994,728 and 1,444,473 shares to employees in 1996, 1995 and 1994, respectively. The weighted average fair value of shares issued in 1996 was $7.33. PRO FORMA INFORMATION The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for the stock compensation plans (the Plans) described above. Accordingly, no compensation cost has been recognized for the Plans. If compensation cost for the Plans had been determined consistent with SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 --------- --------- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Net Income As Reported $ 29,038 $ 97,270 Pro Forma $ 6,445 $ 87,300 Earnings per share -- primary As Reported $ .32 $ 1.05 Pro Forma $ .07 $ .94 Earnings per share -- fully diluted Pro Forma $ .04 $ .91
Because the method of accounting prescribed by SFAS 123 has not been applied to options granted prior to January 1, 1995, and because the Black-Scholes option valuation model was developed for traded 49 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 options and requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for 1996 and 1995: risk-free interest rate of 6.16% for 1996 and 6.41% for 1995, dividend yields of 0%, volatility factors of the expected market price of the Company's common stock of 35%, and a weighted average expected life of an option of four years. WARRANT In connection with the purchase of the business and certain assets of Comdisco Systems, Inc. (Comdisco), a subsidiary of Comdisco, Inc., in June 1993, the Company issued a warrant (Comdisco Warrant) to purchase 2,925,000 shares of the Company's common stock at $6.45 per share. Pursuant to the original terms of the warrant agreement, during 1996 and 1995, the Company repurchased portions of the warrant applicable to 150,000 and 2,655,000 shares, respectively, for approximately $4.3 million and $17.2 million, respectively. The warrant for the remaining 120,000 shares expires in June 2003 and can be exercised at any time in increments of not less than 50,000 shares. The warrant was valued at the time of issuance at approximately $1.8 million and was included as part of the total purchase price of Comdisco. RESERVED FOR FUTURE ISSUANCE As of December 28, 1996, the Company has reserved the following shares of authorized but unissued common stock for future issuance: Employee stock option plans................................. 23,430,961 Other option agreements..................................... 55,705 Directors stock option plans................................ 978,335 Employee stock purchase plan................................ 1,347,149 Put warrants................................................ 1,883,143 Comdisco Warrant............................................ 120,000 ---------- Total................................................... 27,815,293 ---------- ----------
STOCKHOLDER RIGHTS PLAN On February 9, 1996, the Company adopted a new Stockholder Rights Plan (the Preferred Rights Plan) to protect stockholders' rights in the event of a proposed or actual acquisition of 15% or more of the outstanding shares of the Company's common stock. As part of this plan, each share of the Company's common stock carries a right to purchase one one-thousandth (1/1000) of a share of Series A Junior Participating Preferred Stock (the Right), par value $.01 per share, of the Company at a price of $240 per one one-thousandth of a share, subject to adjustment. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per Right until the occurrence of certain events. The Rights expire on February 20, 2006. Concurrent with the adoption of the Preferred Rights Plan, the Board of Directors amended the Company's 1989 Stockholder Rights Plan to provide for the expiration of the rights thereunder effective February 9, 1996. 50 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 INCOME TAXES The provision for income taxes consisted of the following components:
1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Current Federal.......................................... $ 59,412 $ 11,954 $ 4,624 State............................................ 9,712 4,095 881 Foreign.......................................... 8,258 16,085 8,815 --------- --------- --------- Total current...................................... 77,382 32,134 14,320 --------- --------- --------- Deferred (prepaid) Federal.......................................... (15,309) 4,989 (1,103) State............................................ (750) 201 (384) Foreign.......................................... 116 503 (618) --------- --------- --------- Total deferred (prepaid)........................... (15,943) 5,693 (2,105) --------- --------- --------- Total provision for income taxes............... $ 61,439 $ 37,827 $ 12,215 --------- --------- --------- --------- --------- ---------
Income before income taxes for 1996, 1995 and 1994 included income of approximately $25.3 million, $34.2 million and $19.2 million, respectively, from the Company's foreign subsidiaries. The provision for income taxes is net of the benefit of operating loss carryforwards totaling $2.6 million, $9.7 million and $20.8 million, for 1996, 1995 and 1994, respectively. The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income before income taxes as follows:
1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Provision computed at federal statutory rate.................................. $ 31,667 $ 47,284 $ 17,074 State income tax, net of federal tax effect................................... 5,964 2,662 572 Change in valuation allowance................................................. (11,835) (19,999) (10,457) Research and development tax credit........................................... (207) (494) (379) Foreign income tax at a higher rate........................................... -- 2,129 -- Foreign tax credit............................................................ -- (769) (446) Foreign withholding taxes..................................................... 2,823 3,414 3,446 Amortization of goodwill...................................................... 897 390 2,398 Write-off of in-process research and development.............................. 33,495 -- -- Other......................................................................... (1,365) 3,210 7 ---------- ---------- ---------- Provision for income taxes.................................................... $ 61,439 $ 37,827 $ 12,215 ---------- ---------- ---------- ---------- ---------- ---------- Effective tax rate............................................................ 68% 28% 25% ---------- ---------- ---------- ---------- ---------- ----------
51 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 The components of deferred tax assets and liabilities consisted of the following:
1996 1995 ---------- ---------- (IN THOUSANDS) Deferred tax assets Merger reserves......................................................................... $ 2,228 $ 3,394 Deferred revenue........................................................................ 5,367 5,075 Vacation accrual........................................................................ 3,517 2,902 Net operating losses.................................................................... 7,789 6,202 Tax credits............................................................................. 12,029 32,845 Other................................................................................... 17,063 12,148 ---------- ---------- Total deferred tax assets................................................................. 47,993 62,566 Valuation allowance-provision for income taxes.......................................... (1,714) (13,549) Valuation allowance-equity and intangibles.............................................. (9,041) (34,223) ---------- ---------- Net assets................................................................................ 37,238 14,794 ---------- ---------- Deferred tax liabilities Capitalized software.................................................................... (8,132) (10,091) Other................................................................................... (9,202) (7,273) ---------- ---------- Total deferred tax liabilities............................................................ (17,334) (17,364) ---------- ---------- Total net deferred tax assets (liabilities)............................................... $ 19,904 $ (2,570) ---------- ---------- ---------- ----------
The Company has recorded deferred tax assets of approximately $48.0 million offset by a valuation allowance of $10.8 million. Certain of these deferred tax assets will affect equity and intangibles and will not be available to offset future provisions for income taxes and are identified in the above table as "valuation allowance-equity and intangibles". Realization of the net deferred tax assets of $37.2 million is dependent on generating sufficient taxable income prior to the expiration of the loss and tax credit carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets of $37.2 million will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced or increased in the near term if actual facts, including the estimate of future taxable income, differ from those estimated. The net valuation allowance decreased by $37.0 million in 1996. The decrease in valuation allowance-equity and intangibles of $25.2 million is due to the realization of the tax benefits of stock option deductions generated in prior years. The valuation allowance-provision for income taxes decreased by $11.8 million due to the realization of net operating losses and tax credits generated in prior years. The remaining valuation allowance-provision for income taxes of $1.7 million is due to net operating losses and tax credits of foreign subsidiaries, the use of which is dependent upon generating sufficient taxable income prior to their expiration. The remaining net operating loss carryforwards will expire at various dates from 1997 through 2010 and federal tax credit carryforwards will expire at various dates from 1997 through 2011. The Company's federal income tax returns for 1989 through 1991 have been examined by the Internal Revenue Service (IRS). Tax credits of $15.6 million have been disallowed by the IRS. The Company is contesting these adjustments and is pursuing administrative remedies. Management believes that adequate provision has been made for any deficiency that may result from this examination and that the resolution 52 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 28, 1996 of this matter will not have a material adverse impact on the Company's financial position or results of operations. OPERATIONS BY GEOGRAPHIC AREA The Company operates primarily in one industry segment: the development and marketing of computer-aided design software and related services. The Company's products have been marketed internationally through distributors and through the Company's subsidiaries in Europe and Asia/Pacific. Intercompany revenue results from licenses that are based on a percentage of the subsidiaries' revenue from unaffiliated customers. The following table presents a summary of operations by geographic area.
1996 1995 1994 ----------- ----------- ----------- (In thousands) Revenue Domestic operations(1)................................................... $ 633,997 $ 440,618 $ 344,696 European operations...................................................... 119,455 97,596 79,404 Asia/Pacific operations.................................................. 129,157 107,556 86,022 Eliminations............................................................. (141,150) (97,352) (81,050) ----------- ----------- ----------- Consolidated............................................................... $ 741,459 $ 548,418 $ 429,072 ----------- ----------- ----------- ----------- ----------- ----------- Intercompany revenue (eliminated in consolidation) Domestic operations...................................................... $ 94,156 $ 58,719 $ 58,837 European operations...................................................... 16,984 15,893 9,495 Asia/Pacific operations.................................................. 30,010 22,740 12,718 ----------- ----------- ----------- Consolidated............................................................... $ 141,150 $ 97,352 $ 81,050 ----------- ----------- ----------- ----------- ----------- ----------- Income from operations Domestic operations...................................................... $ 67,222 $ 85,308 $ 25,763 European operations...................................................... 13,257 9,705 7,412 Asia/Pacific operations.................................................. 10,780 22,847 10,872 ----------- ----------- ----------- Consolidated............................................................... $ 91,259 $ 117,860 $ 44,047 ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets Domestic operations...................................................... $ 750,040 $ 396,676 $ 368,226 European operations...................................................... 53,716 50,303 56,343 Asia/Pacific operations.................................................. 59,008 63,680 42,095 Eliminations............................................................. (145,763) (136,624) (105,616) ----------- ----------- ----------- Consolidated............................................................... $ 717,001 $ 374,035 $ 361,048 ----------- ----------- ----------- ----------- ----------- -----------
(1) Domestic operations revenue includes export revenue of approximately $25.0 million, $14.7 million and $12.9 million to Europe for 1996, 1995 and 1994, respectively, and approximately $125.9 million, $90.6 million and $65.4 million to Asia/Pacific for 1996, 1995 and 1994, respectively. 53 SCHEDULE II CADENCE DESIGN SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT BEGINNING OF COSTS AND FROM END OF DESCRIPTION PERIOD EXPENSES RESERVES PERIOD - ----------------------------------------------------------------- ------------ ---------- ---------- ---------- Year Ended December 28, 1996 Allowance for doubtful accounts................................ $7,420 $1,621 $ (269)(1) $8,772 Accrued costs for disposed division............................ 865 -- (219) 646 Accrued restructuring costs.................................... -- 2,119 -- 2,119 Year Ended December 30, 1995 Allowance for doubtful accounts................................ $4,905 $4,827 $(2,312)(1) $7,420 Accrued costs for disposed division............................ 874 -- (9) 865 Year Ended December 31, 1994 Allowance for doubtful accounts................................ $3,471 $2,178 $ (744)(1) $4,905 Accrued restructuring costs.................................... 3,669 -- (3,669) -- Accrued costs for disposed division............................ 1,373 -- (499) 874
(1) Uncollectible accounts written-off 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Cadence Design Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, March 21, 1997. CADENCE DESIGN SYSTEMS, INC. /s/ JOSEPH B. COSTELLO ------------------------------------------- Joseph B. Costello President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capabilities and on the date indicated.
NAME/TITLE DATE - ------------------------------------------------------ ----------------- PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ JOSEPH B. COSTELLO - ------------------------------------------- Joseph B. Costello March 21, 1997 CHIEF FINANCIAL OFFICER /s/ H. RAYMOND BINGHAM - ------------------------------------------- H. Raymond Bingham March 21, 1997 CONTROLLER (Principal Accounting Officer) /s/ WILLIAM PORTER - ------------------------------------------- William Porter March 21, 1997 ADDITIONAL DIRECTORS /s/ CAROL BARTZ - ------------------------------------------- Carol Bartz March 21, 1997 /s/ HENRY E. JOHNSTON - ------------------------------------------- Henry E. Johnston March 21, 1997 /s/ DONALD L. LUCAS - ------------------------------------------- Donald L. Lucas March 21, 1997
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NAME/TITLE DATE - ------------------------------------------------------ ----------------- /s/ DR. LEONARD Y. W. LIU - ------------------------------------------- Dr. Leonard Y. W. Liu March 21, 1997 /s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI - ------------------------------------------- Dr. Alberto Sangiovanni-Vincentelli March 21, 1997 /s/ GEORGE M. SCALISE - ------------------------------------------- George M. Scalise March 21, 1997 /s/ DR. JOHN B. SHOVEN - ------------------------------------------- Dr. John B. Shoven March 21, 1997 /s/ JAMES E. SOLOMON - ------------------------------------------- James E. Solomon March 21, 1997
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EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ----------- ---------------------------------------------------------------------------------------------- ------------- 2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the Registrant, Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc. (incorporated by reference to Registrant's Current Report on Form 8-K filed on November 7, 1996 (the November 7, 1996 8-K)). 2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by reference to Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779 filed on November 26, 1996 (the November 26, 1996 Form S-4)) 3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1 Registration Statement (No. 33-13845) originally filed on April 29, 1987 (the 1987 Form S-1)). (b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to the Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988). (c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the 1988 Form S-1)). (d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred Stock as filed with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to Exhibit 3A to the Registrant's Form 8-K originally filed on June 12, 1989 (the 1989 Form 8-K)). (e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit 3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October 7, 1991 (the 1991 Form S-4)). (f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to Exhibit 3.01(f) from the Registrant's Form 10-K for the fiscal year ended December 31, 1991). (g) The Registrant's Form of Amendment of Certificate of Incorporation to increase the number 62 of authorized shares of common stock dated February 1997. 3.02 The Registrant's Bylaws, as currently in effect (as incorporated by reference to Exhibit 3.02 to the 1987 Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K). 4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the 1991 Form S-4). 4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and Savings Bank which includes as exhibits thereto the Certificate of Designations for the Series A Junior Participating Preferred Stock, the form of Right Certificate and the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 1A, 1B and 1C to the Registrant's Form 8-K filed February 16, 1996.)
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EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ----------- ---------------------------------------------------------------------------------------------- ------------- 9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of John F. Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding (incorporated by reference to Exhibit 99.3 to the November 7, 1996 Form58-K). 10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan (incorporated by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K). 10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997. 63 10.03 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).* 10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant and Form of Stock Option Exercise Notice and Agreement (the first document is incorporated by reference to Exhibit 4.02 to the Registrant's 1994 Form S-8 and the latter two documents are incorporated by reference to Exhibit 10.08 - 10.10 to the Registrant's 1988 Form S-1).* 10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).* 10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant. (incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K). 10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997. 70 10.08 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form 10-K)).* 10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the 1995 Form 10-K). 10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to Exhibit 10.09 to the 1995 Form 10-K). 10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the 1994 Form 10-K).* 10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to Exhibit 10.11 to the 1995 Form 10-K). 10.13 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates (ROPA), a California limited partnership, and the Registrant, for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)). 10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
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EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ----------- ---------------------------------------------------------------------------------------------- ------------- 10.15 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.16 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Separate Property Trusts (P/A Trusts) and Valid Logic Systems Incorporated (Valid) (which merged into the Registrant) for the Registrant's offices at 75 West Plumeria Avenue, San Jose, California (incorporated by reference to Exhibit 10.16 to the Form 10-K for Valid for the fiscal year ended December 30, 1990 (the 1990 Valid Form 10-K)). 10.17 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.17 to the 1990 Valid Form 10-K). 10.18 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's offices at 2835 North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the 1990 Valid Form 10-K). 10.19 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's offices at 2820 Orchard Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the 1990 Valid Form 10-K). 10.20 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San Jose, California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.15 to the 1990 Valid Form 10-K). 10.21 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello (incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration statement (No. 33-31673), originally filed on October 18, 1989).* 10.22 Offer letter to H. Raymond Bingham dated May 12, 1993 (incorporated by reference to Exhibit 10.24 to the Form 10-K for the fiscal year ended December 31, 1993 (the 1993 Form 10-K)).* 10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the 1993 Form 10-K).* 10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).* 10.25 Consulting agreement dated May 1, 1994 with Henry E. Johnston, who was made a director on July 5, 1994 by unanimous written consent (incorporated by reference to the Registrant's Form 10-Q for the quarterly period ended June 30, 1994 (the 1994 Second Quarter Form 10-Q)).* 10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by reference to the 1994 Second Quarter Form 10-Q).* 10.27 Letter agreement dated August 17, 1994 by and among Registrant, Morris Management Company (the General Partner), and Morris Associates VI, L.P. (Morris) whereby Registrant acquired all of the interests in River Oaks Place Associates, L.P. (incorporated by reference to the Registrant's Form 8-K filed November 14, 1994).
59
EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ----------- ---------------------------------------------------------------------------------------------- ------------- 10.28 Agreement of Merger and Plan of Reorganization by and among Registrant, Simon Software, Inc. and Redwood Design Automation, Inc. (Redwood) dated as of July 8, 1994 (incorporated by reference to the Registrant's Form 10-Q/A, Amendment Number 1 to the 1994 Second Quarter Form 10-Q, filed November 14, 1994 (the 1994 Second Quarter 10-Q/A)). 10.29 Agreement of Merger dated as of August 1, 1994 between Redwood and CDS Corporation (incorporated by reference to the Registrant's 1994 Second Quarter 10-Q/A). 10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the Registrant's Form 10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)). 10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the first quarter ended March 30, 1996) to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1994). 10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant (incorporated by reference to the March 30, 1996 10-Q). 10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates L.P. (ROPA), a California limited partnership (the Term Loan) (incorporated by reference to the Registrant's Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996 10-Q)). 10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q) 10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996 10-Q). 10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's 1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994). 10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third Quarter 10-Q).
60
EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ----------- ---------------------------------------------------------------------------------------------- ------------- 10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1990 (the 1990 Form 10-K)). 10.42 Amendment Number 2, dated May 31,1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the 1990 Form 10-K). 10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K). 10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K). 10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the Registrant, High Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc. (incorporated by reference to the November 7, 1996 8-K). 21.01 Subsidiaries of the Registrant. 77 23.01 Consent of Arthur Andersen LLP 78 27.1 Financial data schedule for the period ended December 28, 1996. 79
- ------------------------ *A management contract or compensatory plan required to be filed as an exhibit to Form 10-K. 61 EX-3.01 2 EXH.3.01 Exhibit 3.01(g) FORM OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CADENCE DESIGN SYSTEMS, INC. TO BE APPROVED BY STOCKHOLDERS The undersigned, , the of Cadence Design Systems, Inc., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter referred to as the "Corporation"), does hereby certify that the following amendment of the Certificate of Incorporation of the following amendment of the Certificate of Incorporation of the Corporation, as heretofore amended, has been duly adopted by the Board of Directors and the stockholders in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware, said amendment being effected by deleting the introductory paragraph of Article IV of said Certificate of Incorporation, as heretofore amended, and substituting in lieu thereof a new introductory paragraph reading as follows: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 300,400,000, consisting of (1) 300,000,000 shares of Common Stock, par value $.01 per share (hereinafter referred to as "Common Stock" and (2) 400,000 shares of Preferred Stock, par value $.01 per share (hereinafter called the "Preferred Stock"). IN WITNESS WHEREOF, the undersigned has made this certificate under the seal of the Corporation and has signed the same as [state title] thereof this day of , 1997. -------------------------------------- Name: Title: Attest: - --------------------------------------------- Name: Title: 62 EX-10.02 3 EXH.10.02 Exhibit 10.02 CADENCE DESIGN SYSTEMS, INC. 1987 STOCK OPTION PLAN AS ADOPTED APRIL 24, 1987 AS AMENDED MAY 4, 1993 AS AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996 AS AMENDED FEBRUARY 5, 1997 AS APPROVED BY STOCKHOLDERS , 1997 1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the employees of the Company and any parent or subsidiary corporations, and to promote the success of the Company's business. Options granted hereunder may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or "non-statutory stock options," at the discretion of the Board and as reflected in the terms of the written option agreement. 2. DEFINITIONS. As used herein, the following definitions shall apply: A. "BOARD" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. B. "CODE" shall mean the Internal Revenue Code of 1986, as amended. C. "COMMON STOCK" shall mean the Common Stock of the Company. D. "COMPANY" shall mean CADENCE DESIGN SYSTEMS, INC., a Delaware corporation. E. "COMMITTEE" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. F. "CONSULTANT" shall mean any consultants, independent contractors or advisers (provided that such persons render bona fide services not in connection with the offering and sale of securities in capital raising transactions) rendering services to the Company or a Parent or Subsidiary. G. "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the absence of any interruption of termination of service, whether as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence. H. "EMPLOYEE" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee or other compensation paid solely on account of service as a director by the Company shall not be sufficient to constitute "employment" by the Company. I. "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. J. "OPTION" shall mean a stock option granted pursuant to the Plan. K. "OPTIONED STOCK" shall mean the Common Stock subject to an Option. 63 L. "OPTIONEE" shall mean an Employee or Consultant who receives an Option. M. "PARENT" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Internal Revenue Code of 1986, as amended. N. "PLAN" shall mean this 1987 Stock Option Plan. O. "RULE 16B-3" shall mean Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. P. "SHARE" shall mean a share of Common Stock, as adjusted in accordance with Section 11 of the Plan. Q. "SUBSIDIARY" shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of the Plan, the number of shares reserved for issuance under the Plan from and after Febraury 5, 1997 is 11,766,689 shares of Common Stock. This share reserve is comprised of: (x) 3,608,025 shares not subject to options which remain available to be optioned and sold under the Plan as of February 5, 1997, plus (y) 8,158,664 shares underlying options which have been previously granted under the Plan and which remain outstanding as of February 5, 1997, reduced (z) on a share-by-share basis for each share of Common Stock issued upon exercise of an option described in clause (y) above. Shares issued under the Plan may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (A) PROCEDURE. The Plan shall be administered by the Board of Directors of the Company. The Board of Directors may appoint a Committee consisting of not less than two members of the Board of Directors to administer the Plan on behalf of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. One or more of these members may be "Non-Employee Directors" (a director who is receiving no compensation from the Company other than for service on the Board of Directors or who does not receive such additional compensation which exceeds the limits specified in the definition of such term under Rule 16b-3) or "Outside Directors" (a director who is not either a current or former officer of the Company nor a current employee of the Company, and who is receiving no compensation from the Company other than for service on the Board of Directors or who does not receive such additional compensation which exceeds the limits specified in the definition of such term under Section 162(m) of the Code). Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. From time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution therefor, fill vacancies however caused and remove all members of the Committee, and thereafter directly administer the Plan. Notwithstanding anything in this Section 4 to the contrary, at any time the Board or the Committee may delegate to a committee of one or more members of the Board of Directors the authority to grant Options to all Employees and Consultants or any portion or class thereof. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be 64 counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him. (B) POWERS OF THE BOARD. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Incentive Stock Options, in accordance with Section 422 of the Internal Revenue Code of 1986, as amended, or "non-statutory stock options"; (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical) in accordance with the Plan, and, with the consent of the holder thereof with respect to any adverse change, modify or amend each Option; (viii) to accelerate or defer (the latter with the consent of the Optionee) the exercise date of any Option; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (C) EFFECT OF BOARD'S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. 5. ELIGIBILITY. Options may be granted only to Employees or Consultants as defined in Section 2 hereof. An Employee or Consultant who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. Incentive Stock Options may only be granted to Employees. The aggregate fair market value (determined at the time the Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by such individual during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) shall not exceed $100,000. To the extent that the grant of an Option exceeds this limit, the portion of the Option which exceeds such limit shall be treated as a non-statutory stock option. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consultancy by the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment at any time or his consultancy pursuant to the terms of the Consultant's agreement with the Company. No person shall be eligible to be granted Options covering more than 1,330,021 shares of Common Stock in any calendar year (such number representing 1.5% of the issued and outstanding Common Stock of the Company entitled to vote as of the record date for the 1997 Annual Meeting of Stockholders). The foregoing limit shall be adjusted pursuant to the provisions of Section 11. 6. TERM OF THE PLAN. The Plan became effective upon its adoption by the Board of Directors. Subsequently amended, the Plan shall continue in effect until January 31, 2002 unless sooner terminated under Section 13 of the Plan. 7. TERM OF OPTION. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. However, in the case of an Incentive Stock Option granted to an Employee who immediately before the Incentive Stock Option is granted, owns stock 65 representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter time as may be provided in the Stock Option Agreement. 8. EXERCISE PRICE AND CONSIDERATION. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option: (A) Granted to an Employee who, immediately before the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant. (B) Granted to any Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of an Option granted on or after the effective date of registration of any class of equity security of the Company pursuant to Section 12 of the Exchange Act and prior to six months after the termination of such registration, the per Share exercise price shall be not less than 100% of the fair market value per Share on the date of grant. (iii) Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or non-statutory stock option) may be granted with an exercise price lower than set forth in the preceding paragraphs if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (b) The fair market value shall be determined by the Board in its discretion: PROVIDED HOWEVER, that where there is a public market for the Common Stock, the fair market value per Share shall be the average of the high and low prices of the Common Stock on the date of grant, as reported on the New York Stock Exchange. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. EXERCISE OF OPTION. (A) PROCEDURE FOR EXERCISE RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the 66 books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (B) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. If an employee ceases to serve as an Employee or Consultant, he may, but only within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board) after the date he ceases to be an Employee or Consultant of the Company, exercise his Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (C) DEATH OF OPTIONEE. In the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised at any time within three (3) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living three (3) months after the date of death; or (ii) within one (1) month after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within three (3) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. NON-TRANSFERABILITY OF OPTIONS. Except as otherwise expressly provided in the terms of an individual Option which is a non-statutory stock option, the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. Notwithstanding the foregoing, 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 Optionee, shall thereafter be entitled to exercise the Option. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend with respect to the Common Stock or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; 67 PROVIDED, HOWEVER, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance 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 of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of the Company, or in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option will 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 any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board, at its sole discretion, permits acceleration as to all or any part of the Optioned Stock, the aggregate fair market value (determined at the time an Option is granted) of stock with respect to which Incentive Stock Options first become exercisable in the year of such dissolution, liquidation, sale of assets or merger cannot exceed $100,000. Any remaining accelerated Incentive Stock Options shall be treated as non-statutory stock options. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THE PLAN. (A) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, 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 422 of the Code, Rule 16b-3 or any listing requirements of any securities exchange or national market system on which the Common Stock is traded. (B) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not adversely affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of the law, including without limitation, the Securities Act of 1933, as amended; the Securities Exchange Act of 1934, as amended; the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company. Such a representation is required by any of the aforementioned relevant provisions of law. 68 15. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 69 EX-10.07 4 EXH.10.07 Exhibit 10.07 CADENCE DESIGN SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN AS ADOPTED JANUARY 30, 1990 AS AMENDED MAY 7, 1992 AS AMENDED MAY 4, 1993 AS AMENDED MAY 17, 1994 AS AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996 AS AMENDED MARCH, 1997 AS APPROVED BY STOCKHOLDERS , 1997 1. ESTABLISHMENT OF PLAN. Cadence Design Systems, Inc. (the "Company") proposes to grant options for purchase of the Company's Common Stock to eligible employees of the Company and Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (the "Plan"). For purposes of this Plan, "parent corporation" and "Subsidiary" (when used in the plural, "Subsidiaries") shall have the same meaning as "parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends that the Plan shall qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments or replacements of such section), and the Plan shall be so construed. Any term not expressly defined in the Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. Subject to adjustment as provided in Section 14 of the Plan, the aggregate number of shares of Common Stock which may be purchased under this Plan shall not exceed 8,750,000(1) shares of Common Stock of the Company (including the 2,000,000 shares reserved for issuance in March 1997), which may be treasury shares reacquired by the Company or authorized and unissued shares, or a combination of both. 2. PURPOSE. The purpose of the Plan is to provide employees of the Company and Subsidiaries designated by the Board of Directors as eligible to participate in the Plan with a convenient means to acquire an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Subsidiaries, and to provide an incentive for continued employment. 3. ADMINISTRATION. The Plan is administered by the Board of Directors of the Company or by a committee of one or more members of the Board of Directors of the Company designated by the Board of Directors of the Company (in which event all references herein to the Board of Directors shall be to the committee). Subject to the provisions of the Plan and the limitations of Section 423 or the Code or any successor provision in the Code, all questions of interpretation or application of the Plan shall be determined by the Board and its decisions shall be final and binding upon all participants. Members of the Board shall receive no compensation for their services in connection with the administration of the Plan, other than standard fees as established from time to time by the Board of Directors of the Company for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. 4. ELIGIBILITY. Any employee of the Company or the designated Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under the Plan except the following: a) employees who are not employed by the Company or Subsidiaries on the fifteenth (15th) day of the month before the beginning of such Offering Period; - ------------------------ (1) Adjusted to reflect the 3-2 stock splits which occurred in October 1995 and May 1996. 70 b) employees who are customarily employed for less than 20 hours per week; c) employees who are customarily employed for less than five months in a calendar year; and d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 425(d) of the Code, own stock or hold options to purchase stock or who, as a result of being granted an option under the Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or any of its Subsidiaries. 5. OFFERING DATES. The Board or the committee shall have the authority to determine the terms and conditions of each Offering Period in accordance with the terms of the Plan. The first day of each Offering Period is referred to as the "Offering Date." The last day of each Offering Period is hereinafter referred to as the "Purchase Date." An Offering Period shall begin on the first day of February of each calendar year and shall end on the last day of July of the same year. An Offering Period shall also begin on the first day of August of each calendar year and end on the last day of January of the calendar year immediately following. The Board of Directors or the committee shall have the power to change the duration of Offering Periods with respect to future offerings without stockholder approval if such change is announced to eligible employees at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 6. PARTICIPATION IN THE PLAN. Eligible employees may become participants in an Offering Period under the Plan on the first Offering Date after satisfying the eligibility requirements by delivering a subscription agreement authorizing payroll deductions to the Company or Subsidiary (whichever employs such employee) not later than the 15th day of the month before such Offering Date (unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period). The form of subscription agreement and the person or department to which the subscription agreement must be submitted for processing shall be determined by the Company. An eligible employee who does not deliver a subscription agreement by such date after becoming eligible to participate in such Offering Period under the Plan shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in the Plan by filing the subscription agreement not later than the specified date preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws from the Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreements in order to continue participation in the Plan. Any participant whose option expires and who has not withdrawn from the Plan pursuant to Section 11 below will automatically be re-enrolled in the Plan and granted a new option on the Offering Date of the next Offering Period. 7. GRANT OF OPTION ON ENROLLMENT. An eligible employee who enrolls in the Plan with respect to an Offering Period pursuant to Section 6 hereof, will receive a grant of an option (as of the Offering Date) to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing the amount accumulated in such employee's payroll deduction account during such Offering Period by a lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (the "Entry Price") or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date; provided, however, that the number of shares of the Company's Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (a) the maximum number of shares set by the Board pursuant to Section 10(c) below with respect to the applicable Offering Period, or (b) 200% of the number of shares which could be purchased for the Entry Price with the payroll deductions authorized by a participant and actually withheld with respect to such Offering Period. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 8 hereof. 71 8. PURCHASE PRICE. The purchase price per share at which a share of Common Stock will be sold in Any Offering Period shall be 85% of the lesser of: a) the fair market value on the Offering Date; or b) the fair market value on the Purchase Date. For purposes of the Plan, the term "fair market value" shall mean the closing price in U.S. dollars of a share of the Company's Common Stock as reported on the New York Stock Exchange. However, if the Offering Date or Purchase Date falls on a non-business day then the fair market value of the Common Stock shall be the closing sales price on the immediately preceding business day. 9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF SHARES a) The funds with which participants may purchase shares shall be accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the employee's Compensation in one percent increments of not less than two percent (2%) nor greater than twelve percent (12%). Compensation shall be limited to base salary or wages, cash incentive compensation (including bonuses), and commissions, if any, paid; PROVIDED, HOWEVER, that for purposes of determining a participant's Compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. The Board of Directors or the committee shall have the power to interpret and/or alter the definition of "Compensation" with respect to any or all future Offering Periods. Payroll deductions shall commence on the first payday following the Offering Date and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in the Plan. b) A participant may lower (but not increase) the rate of payroll deductions during an Offering Period by filing a new authorization for payroll deductions, in which case the new rate shall become effective: for the next payroll period commencing more than 15 days after receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one change may be made effective during any Offering Period. A participant may increase or lower the rate of payroll deductions for any subsequent Offering Period by filing a new authorization for payroll deductions not later than the 15th day of the month (or other date specified by the Board of Directors or the committee) before the beginning of such Offering Period. c) All payroll deductions made for a participant are credited to his or her account under the Plan and are deposited with the general funds of the Company; no interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. d) On each Purchase Date, so long as the Plan remains in effect and the participant remains eligible to participate in the Plan, and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under the Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of the Plan. Any cash remaining in a participant's account after such purchase of shares by reason of any limitation on the number of shares that may be purchased under the Plan as set forth in Section 10 hereof 72 which is sufficient to purchase a whole share of the Company's Common Stock, shall be refunded to such participant in cash; PROVIDED, HOWEVER, that any amount remaining in such participant's account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be carried forward, without interest, into the next Offering Period. In the event that the Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in the Plan has terminated prior to such Purchase Date. e) As promptly as practicable after the Purchase Date, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. f) During a participant's lifetime, such participant's option to purchase shares hereunder is exercisable only by him or her. In the event of the participant's death, the rights of such participant's heirs or beneficiaries shall be determined under Section 12 of the Plan. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 10. LIMITATIONS ON SHARES TO BE PURCHASED. a) No employee shall be entitled to purchase stock under the Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary which are intended to satisfy the requirements of Section 423 of the Code, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in the Plan. b) No more than 200% of the number of shares which could be purchased for the Entry Price with the payroll deductions authorized by a participant and actually withheld with respect to a given single Offering Period may be purchased by the participant at the end of such Offering Period. c) No employee shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty days prior to the commencement of any Offering Period, the Board may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the "Maximum Share Amount"). In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount not less than fifteen days prior to the commencement of the next Offering Period. Once the Maximum Share Amount is set, it shall continue to apply in respect of all succeeding Purchase Dates and Offering Periods unless revised by the Board as set forth above. d) If the number of shares to be purchased on a Purchase Date by all employees participating in the Plan exceeds the number of shares then available for issuance under the Plan, the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be practicable and as the Board shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each employee affected thereby. e) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the Offering Period. 73 11. WITHDRAWAL. (a) Each participant may withdraw from an Offering Period under the Plan by signing and delivering notice on a form provided by the Company for such purpose. Such withdrawal may be elected at any time prior to the 15th day of the month in which an Offering Period ends (or other date specified by the Board or committee). (b) Upon withdrawal from the Plan, the accumulated payroll deductions shall be returned to the withdrawn employee and his or her interest in the Plan shall terminate. In the event an employee voluntarily elects to withdraw from the Plan, he or she may not resume his or her participation in the Plan during the same Offering Period, but he or she may participate in any Offering Period under the Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth above for initial participation in the Plan. 12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment for any reason, including retirement or death or the failure of a participant to remain an eligible employee, terminates his or her participation in the Plan immediately. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of his or her death, to his or her legal representative (including a beneficiary designated as permitted under Section 22). For this purpose, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company in the case of sick leave, military leave, or any other leave of absence approved by the Board of Directors of the Company; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute. 13. RETURN OF PAYROLL DEDUCTIONS. In the event an employee's interest in the Plan is terminated by withdrawal, termination of employment or otherwise, or in the event the Plan is terminated by the Board, the Company shall promptly deliver to the employee all payroll deductions credited to his account. No interest shall accrue on the payroll deductions of a participant in the Plan. 14. CAPITAL CHANGES. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock 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 of Common Stock 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 of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will 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 options under the Plan shall terminate as of a date fixed by the Board and give each participant the right to exercise his or her option as to all of the optioned stock, including shares which would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation or a parent or subsidiary of such successor corporation, the Offering Period will 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 74 such instances, and in lieu of assumption or substitution of the option, provide that each participant shall have the right to exercise the option as to all of the optioned stock. If the Board makes an option 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 option shall be fully exercisable for a period of twenty (20) days from the date of such notice (or such other period of time as the Board shall determine), and the option will terminate upon the expiration of such period. 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 of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offering, or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 15. NONASSIGNABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect. 16. REPORTS. Individual accounts will be maintained for each participant in the Plan. Each participant shall receive promptly after the end of each Offering Period a report of his account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Offering Period or returned to the participant. 17. NOTICE OF DISPOSITION. Each participant shall notify the Company if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two years from the Offering Date or within twelve months from the Purchase Date on which such shares were purchased (the "Notice Period"). Unless such participant is disposing of any of such shares during the Notice Period, such participant shall keep the certificates representing such shares in his or her name (and not in the name of a nominee) during the Notice Period. The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to the Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of such legend on certificates. 18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Subsidiary or restrict the right of the Company or any Subsidiary to terminate such employee's employment. 19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal rights and privileges with respect to the Plan so that the Plan qualifies as an "employee stock purchase plan" within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of the Plan which is inconsistent with Section 423 or any successor provision of the Code shall without further act or amendment by the Company or the Board be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in the Plan. 20. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. STOCKHOLDER APPROVAL OF AMENDMENTS. Any required approval of the stockholders of the Company shall be solicited substantially in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. Such approval of an amendment shall be solicited at or prior to the first annual meeting of stockholders held subsequent to the grant to an officer or director of the Company of an option under the Plan as then 75 amended. If such stockholder approval is obtained at a duly held stockholders' meeting, it must be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company, or if such stockholder approval is obtained by written consent, it must be obtained by a majority of the outstanding shares of the Company; PROVIDED, HOWEVER, that approval at a meeting or by written consent may be obtained by a lesser degree of stockholder approval if the Board determines, in its discretion after consultation with the Company's legal counsel, that such lesser degree of stockholder approval will comply with all applicable laws and will not adversely affect the qualification of the Plan under Section 423 of the Code or Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"). 22. DESIGNATION OF BENEFICIARY. a) A participant may file a written designation of a beneficiary who is to receive any shares and 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 Period but prior to delivery to him 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 prior to a Purchase Date. b) Such designation of beneficiary may be changed by the participant 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 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 discretion, may deliver such shares 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. 23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATIONS ON SALE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to, such compliance. 24. APPLICABLE LAW. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of Delaware. 25. AMENDMENT OR TERMINATION OF THE PLAN. This Plan shall be effective July 1, 1990, and shall continue until the earlier to occur of termination by the Board or issuance of all of the shares of Common Stock reserved for issuance under the Plan. The Board of Directors of the Company may at any time amend or terminate the Plan, except that any such termination cannot affect options previously granted under the Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 hereof within 12 months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would constitute an amendment for which stockholder approval is required in order to comply with Rule 16b-3 (or any successor rule) of the Exchange Act or Nasdaq or any securities exchange listing requirements. 76 EX-21.01 5 EXH.21.01 Exhibit 21.01 SUBSIDIARIES OF THE REGISTRANT The Registrant's subsidiaries and the state or country in which each is incorporated or organized, are as follows:
Accent S.r.l................................... Italy Cadence China Limited.......................... Hong Kong Cadence Design Systems (Canada) Ltd............ Canada Cadence Design Systems (India) Private Limited........................................ India Cadence Design Systems (Israel) Ltd............ Israel Cadence Design Systems (S) Pte Ltd............. Singapore Cadence Design Systems AB...................... Sweden Cadence Design Systems AG...................... Switzerland Cadence Design Systems Asia Limited............ Hong Kong Cadence Design Systems B.V..................... Netherlands Cadence Design Systems GmbH.................... Germany Cadence Design Systems K.K..................... Japan Cadence Design Systems S.A..................... France Cadence Design Systems S.r.l................... Italy Cadence Design Systems, Ltd.................... United Kingdom Cadence International Sales Corporation........ U.S. Virgin Islands Cadence Korea Ltd.............................. Korea Cadence Taiwan, Inc............................ Taiwan High Level Design Systems, Inc................. Delaware Integrated Measurement Systems, Inc............ Oregon River Oaks Place Associates.................... California Telos Venture Partners......................... California Seeley Properties, Inc......................... California Valid Europe S.A............................... Belgium
77 EX-23.01 6 EXH.23.01 Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements (File Nos. 33-36110, 33-43025, 33-45001, 33-48371 and 33-53913) on Form S-8. /S/ ARTHUR ANDERSEN LLP -------------------------------------- Arthur Andersen LLP San Jose, California March 21, 1997 78 EX-27.1 7 EXH.27.1 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Exhibit 27.1 FINANCIAL DATA SCHEDULE
PERIOD TYPE YEAR - ------------------------------------------------------------------------------------------- --------------- FISCAL YEAR END............................................................................ DEC-28-1996 PERIOD END................................................................................. DEC-28-1996 CASH....................................................................................... 284,512 SECURITIES................................................................................. 1,015 RECEIVABLES, net........................................................................... 148,449 ALLOWANCES................................................................................. 8,772 INVENTORY.................................................................................. 8,133 CURRENT ASSETS............................................................................. 491,135 PP&E....................................................................................... 288,231 DEPRECIATION............................................................................... 127,304 TOTAL ASSETS............................................................................... 717,001 CURRENT LIABILITIES........................................................................ 231,578 BONDS...................................................................................... 0 COMMON..................................................................................... 277,793 PREFERRED-MANDATORY........................................................................ 0 PREFERRED.................................................................................. 0 OTHER STOCK EQUITY......................................................................... 149,755 TOTAL LIAB AND EQUITY...................................................................... 717,001 SALES...................................................................................... 741,459 TOTAL REVENUES............................................................................. 741,459 COGS....................................................................................... 153,473 TOTAL COSTS................................................................................ 153,473 OTHER EXPENSES............................................................................. 496,727 LOSS-PROVISION............................................................................. 0 INTEREST EXPENSE........................................................................... 1,913 INCOME-PRE-TAX............................................................................. 90,477 INCOME-TAX................................................................................. 61,439 INCOME-CONTINUING.......................................................................... 29,038 DISCONTINUED............................................................................... 0 EXTRAORDINARY.............................................................................. 0 CHANGES.................................................................................... 0 NET INCOME................................................................................. 29,038 EPS-PRIMARY................................................................................ 0.32 EPS-DILUTED................................................................................ 0.32 79
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