-----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, PVuyHRMEbkLJdO9GOqGHePzd+qiTW8QQfvoL3Vh1svVwTMXie3T6tm42iHad6c78 ZScmwX+qThl00/ban07G+Q== 0000891618-96-000153.txt : 19960329 0000891618-96-000153.hdr.sgml : 19960329 ACCESSION NUMBER: 0000891618-96-000153 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960328 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: 96540395 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 FORM 10-K 1 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 30, 1995 [ ] 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 of (I.R.S. Employer Identification No.) incorporation or organization) 555 River Oaks Parkway, San Jose, California 95134 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 943-1234 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Names of each exchange on which registered - ------------------- ------------------------------------------ Common Stock $.01 par value per share New York Stock Exchange - ------------------------------------- ------------------------------------------ Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held on March 8, 1996 by non-affiliates of the registrant: $1,824,348,281 Number of shares of common stock outstanding at March 8, 1996: 51,866,484 DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the Annual Meeting to be held on May 3, 1996 are incorporated by reference into Part III hereof. 2 CADENCE DESIGN SYSTEMS, INC. 1995 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I. PAGE ---- Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Item 4 A. Executive Officers of the Registrant 9 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 PART III. Item 10. Directors and Executive Officers of the Registrant 20 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 20 PART IV. Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 21 Signatures 45
3 PART I. ITEM 1. BUSINESS Cadence Design Systems, Inc. ("Cadence" or the "Company") develops, markets and supports electronic design automation 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. This combination of products and services, generally referred to as EDA, is used by companies throughout the world to design semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile/wireless devices, automotive components, 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. As Cadence remains the majority stockholder with an ownership percentage of approximately 55%, 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. 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 $25.0 million will be made over the next three to four years. EDA tools are used primarily by electronic designers to develop electronic circuits and systems. Cadence's sophisticated tools are used to analyze, simulate, implement and verify electronic designs. By using these tools to automate significant parts of the design process, electronic engineers can focus their time on developing the intellectual content of the integrated circuit or electronic system, which is at the heart of a company's competitiveness. In addition, powerful design automation software tools let design architects and engineers build abstract models of chips, simulate their behavior, and analyze their physical attributes for acceptable performance. EDA also ensures that the product design can be manufactured and can work as intended. The result is significant productivity and accuracy improvements over earlier generation approaches to design, enabling customers to develop increasingly complex, high-quality electronic products with accelerated time-to-market schedules. As the process of designing advanced silicon and systems has grown increasingly complicated, even with the most sophisticated EDA tools, product developers' resources have become strained in their ability to meet demanding market requirements. In response to this challenge, Cadence has developed a unique approach which combines the industry's most comprehensive line of software tools with an expert team of experienced support, design and process service professionals. This approach not only gives customers access to leading-edge design technology, but also improves the overall productivity of their design process. The Company's services range from advanced tools training to methodology assessment to joint design work with customers and to complete outsourcing of its customers' design work. As an example, in March 1995, the Company signed a $75 million agreement with Unisys Corporation to assume a substantial portion of Unisys' internal silicon design operations. This comprehensive approach to working with customers has been widely accepted in the marketplace, as evidenced by a 132% increase in the Company's service revenue in 1995 as compared to 1994. The third component of Cadence's business model is customer support, which the Company believes is a key factor in successfully marketing EDA products and generating repeat orders. A 1 4 majority of Cadence's customers have purchased one-year renewable maintenance contracts. These product maintenance contracts entitle the customers to product updates, documentation and ongoing support. The backbone of global customer support is the customer response center program. These centers give Cadence customers worldwide access to solution and product experts. A dedicated team of application engineers is available to address customer application issues as well as to provide links between customers and Cadence's product developers. THE ELECTRONIC PRODUCT DEVELOPMENT CYCLE EDA tools assist with the two major functions of the electronic product development cycle: electrical design, often referred to as CAE, and physical design, often referred to as computer aided design ("CAD"). The electrical design process, or CAE, involves describing the behavioral, functional and structural attributes of an IC or electronic system. This process involves creating a design description, simulating the design to assure it is void of electrical defects and refining the description to meet predetermined design specifications. The first step in the CAE process is creation of the design description (often called design entry, design capture or schematic capture). To handle the complexity of large designs, design entry often consists of several levels of design abstraction using a variety of design capture techniques. The most common techniques are the use of block diagrams, equations or special design description languages referred to as Hardware Description Language ("HDL"). For digital designs, the most common HDLs are Verilog(R) 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(R) 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(R) called AHDL in 1994 and is seeking to make it an industry standard. Before an IC or PCB can be manufactured, high level design descriptions must be detailed into a lower level of abstraction referred to as structural design. This process can be done manually or automated using a process called logic synthesis. In structural design, the engineer specifically defines components, their interconnections and associated physical properties. This description can be in a form of a text file produced by logic synthesis or a structural diagram called a schematic. In structural design, critical design time is saved by pulling components from an electronic library and including them in the design, rather than recreating every symbol and all data for each design. A database containing the design's electrical characteristics, interconnections and specific design rules, is automatically created and used as the foundation for subsequent design steps. Simulation is used throughout the CAE process to catch costly design errors before the design is manufactured. In addition, simulation enables engineers to quickly explore various design alternatives. 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. These are either developed and supplied by Cadence, the designer, application specific integrated circuit ("ASIC") vendors or independent modeling companies, that have certified their libraries for use with Cadence's simulation products. When the design is determined to be functionally correct, the designer generates a netlist. A netlist is a non-graphical description, in list form, of all design components and interconnections. The netlist is the link between the CAE design environment and the CAD process. CAE PRODUCTS Cadence is a mainstay in the CAE market primarily based on its strong market presence in logic simulation. Cadence's Verilog(R) HDL logic simulator, Verilog XL(TM), is used by numerous ASIC vendors and supports over 185 ASIC libraries. Cadence also has established a significant position in the VHDL design market with its Leapfrog(TM) VHDL simulator due to its strong performance and robust design environment. 2 5 Cadence was the pioneer in offering a solution for companies that choose to utilize a mixed language (both Verilog(R) HDL and VHDL(R)) design approach with its 1994 introduction of Model Import. This product, sold as an adjunct to either Verilog XL(TM) or Leapfrog(TM), enables designers to import a textual description block of Verilog(R) or VHDL(R) into their native design environment. In 1995, Cadence introduced a next generation mixed language solution based on a unique simulation architecture called INCA(TM). The INCA(TM) architecture utilizes a state of the art simulation technique called native compiled code generation which delivers the fastest throughput of any conventional software approach. Cadence also offers a comprehensive 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(TM) enables designers to make critical tradeoffs between area, power and performance to optimize their design based on specific design requirements. In addition, Synergy(TM) offers advanced design-for-test capability with built in test synthesis support. The combination of Cadence's simulation and synthesis capabilities provide designers with a core design environment that supports the most broadly used top-down design methodology in the industry today. With the advent of deep sub-micron technology, companies need to adopt new methodologies and will require innovative design automation tools to enable the successful completion of complex designs. The key to successfully designing chips implemented in 0.5m technology and below is utilizing knowledge of the physical design process in the logic design space. With its current industry position in IC place and route, Cadence is strongly positioned to develop and deliver next generation logic design tools that will provide designers with these mandatory capabilities. During 1994, Cadence introduced Silicon Synthesis(TM) which provides the ability to optimize logic based on actual physical implementation. This approach enables designers to avoid costly design iterations caused by lack of timing consistency between a logic description and final implementation. In 1995, the Company introduced SiliconQuest(TM), an advanced high level chip planning environment that allows engineers to accurately predict physical effects that are used to provide guidelines for logic optimization. In addition, SiliconQuest(TM) provides a foundation for the methodology shift required to combat deep sub-micron design issues. IC DESIGN PRODUCTS Cadence has long been a leader in the IC CAD market with high performance technology in the custom layout, automatic place and route and verification areas. These technologies are tightly integrated with the Company's suite of CAE tools to offer one of the industry's most comprehensive front-to-back design solutions. The Company's custom layout portfolio is anchored by the Virtuoso(TM) 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(TM) FastChip, which provides the ability to rapidly create cells and blocks for applications including random logic, standard cell blocks and library elements. By automating a significant portion of the layout process, FastChip enables designers to significantly reduce overall design time. In addition, it allows them to perform extensive "what-if" analysis with design variables like placement and aspect ratios that have significant bearing on performance. Cadence's Ensemble(TM) product family provides advanced place and route ("P&R") solutions for gate, cell, block and mixed designs. A significant number of major ASIC vendors use Gate Ensemble(TM) as their internal P&R engine. Cadence offers two products for cell based routing, Cell Ensemble(TM) and Cell3(TM). Built on a channel-based routing architecture, Cell Ensemble(TM) is finely tuned for two layer metal designs. For three layer metal and above, Cell3(TM) is a widely-used solution. Cell3's(TM) innovative area-based architecture is based on the industry's most advanced routing algorithms. For block-based routing, the Company offers Block Ensemble(TM). Cadence's early-1996 introduction of Silicon Ensemble(TM) unveiled a fourth generation P&R system to tackle today's increasingly challenging design problems. Based on Cadence proprietary area-based architecture, Silicon Ensemble(TM) provides a comprehensive solution for routing up designs that consist of a mix of cell and gate-based approaches. In addition, Silicon Ensemble(TM) includes several specialized routing engines to deal with specific design 3 6 challenges like datapath, complex clock trees, crosstalk and low power. The product family is rounded out with one of the industry's fastest placement systems, QPlace(TM). Based on innovative quadratic algorithms, QPlace(TM) has been rapidly accepted throughout the ASIC community. Cadence has long been an industry leader in physical verification based on the overwhelming market adoption of the Company's Dracula(R) product family. Physical verification provides the final check before products are released to manufacturing. Thus, accuracy in the verification process is essential to avoiding costly production runs of faulty parts. Dracula(R) has been the industry's benchmark for accuracy which has been the key to its success. For interactive verification, the Company's Diva(R) product line has also enjoyed significant market success. In 1995, Cadence introduced Vampire(TM) as a solution to next-generation verification design requirements. Vampire(TM) provides advanced hierarchical design capability necessary to successfully verify today's largest chips. SYSTEM DESIGN PRODUCTS The Allegro(TM) product family is the foundation of Cadence's PCB design. The Allegro(TM) line offers complete solutions for layout of standard PCB, hybrid, MCM and advanced component packaging. Products which compliment the Allegro(TM) line (DF/Signoise(TM) for signal integrity, DF/Thermax(TM) for thermal, DF/Viable(TM) for reliability and DF/EMControl(TM) for electromagnetic compliance) round out a suite of analysis tools for detecting potential manufacturing problems. In 1995, the Company introduced BoardQuest(TM), a breakthrough approach to system design planning. BoardQuest(TM) is specifically tailored for the needs of high-speed designers, offering an advanced system to accurately predict thermal, interconnect and electromagnetic effects early in the design process. For analog designers, Cadence offers integrated solutions for analog, mixed signal and microwave IC and system design. The Analog Artist(TM) series provides a comprehensive 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 Spectre(TM)HDL, 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 Spectre(TM)RF, simulation technology utilized specifically for the design of radio frequency applications. For analog system and board level design, Cadence's Analog Workbench(TM) offers tools from top-down design through board design. A key to the success of Analog Workbench(TM) has been the extensive analog model libraries and advanced statistical analysis tools available with the design environment. ELECTRONIC SYSTEMS DESIGN AUTOMATION ("ESDA") PRODUCTS Cadence's Alta Group has developed an entirely new class of software for top-down design known as Electronic Systems Design Automation ("ESDA"). ESDA accelerates and enhances the early phases of system development. The Alta Group, led by its Signal Processing Workbench ("SPW")(R) tool set is able to provide customers with a higher level of design automation for a number of application areas including wireless communications, networking and multi-media. 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, what 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. Alta's product offerings include a large applications library of design blocks, a complete technology base and a visualization and analysis environment. Once the design is conceptualized, Alta's products provide links to implementation which include multiple capabilities that allow the design to be passed downstream to ASIC and IC engineers. CADENCE SPECTRUM SERVICES Cadence offers many levels of design development and support to its customers, ranging from assistance with specific designs to a complete re-engineering of the product development process, and 4 7 possibly a complete outsourcing of a particular design operation. Cadence 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 technical and business service professionals, with extensive design experience, have the flexibility and expertise to manage the design process at any stage, and they work with customers to find the solution that will help them achieve market success. Cadence's services offerings include, in part, 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 unsurpassed 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 March 1, 1996, Cadence had 869 employees engaged in field sales and sales support, representing approximately 29% 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 being typical. Activities during this sales cycle typically consist of a technical presentation, a product demonstration, a design benchmark 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 1995, 1994 and 1993, Innotech accounted for 15%, 10% and 13% of total revenue, respectively. Cadence's systems products are marketed in Japan through a majority-owned subsidiary. Revenue from international sources was $271.8 million, $221.5 million and $183.6 million, or approximately 50%, 52% and 50% of total revenue for 1995, 1994 and 1993, respectively. (See Notes to Consolidated Financial Statements for a summary of operations by geographic area.) Prices for international customers are quoted from an international price list. The list is maintained in U.S. dollars but reflects the higher cost of doing business outside the United States. International customers are invoiced in U.S. dollars using current exchange rates or the local currency. 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 1995, 1994 and 1993, respectively, Cadence's investment in research and development was $100.4 million, $88.2 million and $89.7 million prior to capitalizing $11.8 million, $10.8 million and $15.2 million of software development costs. Cadence began capitalizing certain of 5 8 its software development costs in 1986 in accordance with Statement of Financial Accounting Standards No. 86. 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 1996 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 and high-performance logic verification technology. Customer Partnerships Cadence has established close working relationships with a number of semiconductor manufacturers and electronic system companies based on a business partnership model that has become a central business model for the Company. 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 partnerships 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 Berkeley Laboratories, is committed to new technological development. This group is chartered with identifying and developing prototype technologies in emerging design areas which will offer substantially improved alternatives to current EDA solutions. Cadence Berkeley Laboratories is Cadence's commitment that it is continuing to develop leading-edge technology. COMPETITION The Company faces intense competition in the EDA product market, which continues to be characterized by aggressive pricing practices and new market entrants. The Company competes with other companies, including Mentor Graphics Corp., Synopsys, Inc., Viewlogic Systems, Inc. and Zuken-Redac that sell one or more competing products and with potential customers' internal EDA software development groups. 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 potential competitors to the Company is significant. A potential competitor who possesses the necessary knowledge of electronic circuit and systems design, production and operation could develop EDA tools using a moderately priced computer workstation and bring such tools to market quickly. If such an EDA software tool were to surpass the technology of a tool of the Company, the attention of customers might rapidly shift to the new tool, resulting in a precipitous decline in the sales of the Company's comparable product. The Company has in the past discounted EDA product prices where deemed necessary for competitive reasons or in connection with volume purchase agreements with major customers. In the 6 9 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. 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 can be expanded to include additional Cadence tools or third-party tools. Currently, no major EDA software supplier or consulting organization has demonstrated offerings for the electronic engineering market in as comprehensive of a fashion as Cadence. The Company believes that the infrastructure it has put in place over the past three years has given it a significant lead over other companies that might attempt to emulate its services business model. 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. To help focus its energies on the engineering side and to stress the importance of new technology development to Cadence, the Company has an aggressive invention program which is actively conveyed to the Company's many designers, developers, and other engineering personnel throughout the world. The Company has a very competitive employee invention compensation awards program to promote the disclosure of inventive subject matter for patent protection. Given that name recognition in the community is also very important to Cadence and its engineers, the Company also has an aggressive author incentive awards program to encourage the publication of some of its developments pioneered by the engineering community. Cadence primarily relies 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. Cadence fully intends to remain aggressive with respect to protecting its proprietary technology and 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 tradesecret laws and other traditional intellectual property protection mechanisms. In 1995, Cadence was granted five new patents for a total of 16 issuances and was allowed four additional patents. Further, Cadence has in excess of 25 patent applications pending with more in process. Cadence has an aggressive trademark program extending world-wide and common law rights to protect its good name associated with marks on its goods and services. In 1995, Cadence filed in excess of 35 new trademark applications. In addition, Cadence has also sought federal copyright protection for certain of its products. Cadence does not 7 10 believe that any of its technology infringes that of others nor does Cadence believe that any of its trademarks infringe the marks of others. Although Cadence recognizes that technology development and the protection of such technology is vitally important to maintaining its place within the EDA industry, because of the rapid pace of technological change in the industry, it may very well be that inherent factors such as the knowledge, ability, and experience of the Company's personnel, along with name recognition, and various ongoing product support activities may prove to be more significant in maintaining the Company's competitive edge. 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 purchased 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 March 1, 1996, Cadence employed 3,028 persons, including 1,778 in sales, marketing, support and manufacturing activities, 997 in product development and 253 in management, administration and finance. None of Cadence's employees are 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 515,000. In addition, the Company also owns undeveloped land adjacent to the Company's headquarters, available for future expansion. 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 $2.9 million. The leases related to approximately 129,000 square feet expire in March 1998, and the remaining lease expires in February 1999. Approximately 112,000 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 $8.1 million. Cadence also leases approximately 100,000 square feet of facilities in Chelmsford, Massachusetts for its east coast operations and approximately 70,000 square feet in Sunnyvale, California for its Alta Group operations at a combined annual rate of approximately $1.0 million. Cadence also leases approximately 83,000 square feet in a building in Beaverton, Oregon, at a current annual rental of approximately $.7 million, which houses manufacturing, engineering, marketing and administrative operations for its IMS subsidiary 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. 8 11 ITEM 3. LEGAL PROCEEDINGS 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 (formerly known as ArcSys, 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, alleging, 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 counterclaim also alleges that certain unspecified 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. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES - ---- --- --------------------- Joseph B. Costello 42 President, Chief Executive Officer and Director H. Raymond Bingham 50 Executive Vice President, Chief Financial Officer and Secretary M. Robert Leach 48 Senior Vice President, Spectrum Services John F. Olsen 44 Senior Vice President, Worldwide Sales James E. Solomon 59 Senior Vice President and Principal Technologist Stephen Y. Fong 38 Vice President of Finance and Corporate Treasurer Mark S. Garrett 38 Vice President, Corporate Financial Planning and Analysis William Porter 41 Vice President, Corporate Controller and Assistant Secretary
9 12 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 the Company since May 1988. In addition, Mr. Costello has served as Chief Executive Officer of the Company since June 1988. Previously he served as a director of SDA Systems, Inc. ("SDA"), from May 1987 to May 1988. From March 1986 to March 1987, he served as SDA's President and Chief Operating Officer. H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice President of Finance and Administration and Chief Financial Officer. In February 1994, Mr. Bingham was appointed Secretary. Prior to joining Cadence, he was Executive Vice President and CFO 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 Spectrum Services. Prior to joining Cadence, Mr. Leach was partner-in-charge of the worldwide electronics industry consulting practice for Andersen Consulting for more than 10 years. JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field Operations. Prior to joining Cadence, Mr. Olsen served as a partner for KPMG Peat Marwick for 5 years. JAMES E. SOLOMON has served as director of the Company since May 1988. Mr. Solomon has also served as Senior Vice President and Principal Technologist for the Company since February 1994. Prior to that, he served as Senior Vice President of the Company's Analog Division from February 1993 to February 1994 and as President of the Company's Analog Division from December 1988 to February 1993. Mr. Solomon also served as Co-Chairman of the Board of Directors for the Company from May 1988 until May 1989. As a founder of SDA, Mr. Solomon served as its Chief Executive Officer from its inception in July 1983 to May 1988, as its President from July 1983 to March 1987, and as its Chairman of the Board from March 1987 until its merger with ECAD, Inc. in May 1988. Mr. Solomon is a Director of Integrated Measurement Systems, 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. MARK S. GARRETT joined Cadence in June 1991 as Division Controller/Director of Finance for the Systems Division. Mr. Garrett served in the same position for the CAE Division from January 1992 to December 1992, as Group Director, Technology Development Finance from January 1993 to July 1994, and Group Director, Spectrum Services Business Operations from August 1994 to February 1995. Mr. Garrett was appointed Vice President Financial Planning and Analysis for Cadence in February 1995. Prior to joining Cadence, he held various financial positions at IBM Corporation since June 1979. 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. 10 13 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 30, 1995, the Company had approximately 1,556 stockholders of record, not including those held in street or nominee name. The following table sets forth the high and low sales for the Common Stock for each calendar quarter in the two-year period ended December 30, 1995.
High Low ---- --- 1994: First Quarter $10.42 $ 6.83 Second Quarter $11.25 $ 8.42 Third Quarter $12.17 $ 8.83 Fourth Quarter $14.50 $11.25 1995: First Quarter $18.58 $12.83 Second Quarter $23.25 $16.92 Third Quarter $27.83 $20.67 Fourth Quarter $42.38 $24.08
ITEM 6. SELECTED FINANCIAL DATA Five fiscal years ended December 30, 1995 (In thousands, except per share amounts)
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Revenue $ 548,418 $ 429,072 $ 368,623 $ 418,724 $ 379,476 Unusual items (1) $ -- $ 14,707 $ 19,650 $ (253) $ 55,236 Income (loss) from operations $ 117,860 $ 44,047 $ (8,415) $ 65,710 $ (14,744) Net income (loss) (2) $ 97,270 $ 36,648 $ (12,779) $ 55,360 $ (22,403) Net income (loss) per share $ 1.57 $ .56 $ (.20) $ .80 $ (.38) Total assets $ 374,035 $ 361,048 $ 339,301 $ 367,243 $ 347,074 Long-term obligations and redeemable $ 1,619 $ 2,098 $ 4,001 $ 5,722 $ 14,811 convertible preferred stock
(1) See Notes to Consolidated Financial Statements for further discussion. (2) In addition to unusual items, net income (loss) also 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. 11 14 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 products and services 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 customers and target markets include computer manufacturers, consumer electronics companies, industrial electronics companies, semiconductor manufacturers, ASIC foundries and telecommunications companies throughout the world. 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 remains the majority stockholder, 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 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. In connection with the acquisition, the Company recorded a one-time charge to operations of $4.7 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. The Redwood business is now a part of the Company's Alta Group. In June 1993, the Company acquired the business and certain assets of Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc. The Comdisco business involves the development, marketing and support of digital signal processing software products in the electronic systems design area. The acquisition was accounted for as a purchase and accordingly, the results of Comdisco from the date of the acquisition forward have been recorded in the Company's consolidated financial statements. The Comdisco business is now a part of the Company's Alta Group. In December 1993, the Company sold its Automated Systems ("ASI") division. The operating results of ASI have been reported as a disposal of a division and are included as an unusual item within operating expenses in the consolidated statements of income for all years presented. The loss on disposal of approximately $6.0 million is classified in other income (expense) in the 1993 statement of income. 12 15 RESULTS OF OPERATIONS REVENUE
% Change ------------ 1995 1994 1993 95/94 94/93 ---- ---- ---- ----- ----- (In millions) Product $292.2 $241.5 $224.1 21% 8% Service 65.9 28.4 16.9 132% 68% Maintenance 190.3 159.2 127.6 20% 25% ------ ------ ------ Total revenue $548.4 $429.1 $368.6 28% 16% ====== ====== ====== Sources of Revenue as a Percent of Total Revenue Product 53% 56% 61% Service 12% 7% 4% Maintenance 35% 37% 35%
In 1995, strong demand for the Company's products and services generated a 28% increase in revenues as compared to the prior year. Revenue from international sources was approximately $271.8 million, $221.5 million and $183.6 million or, 50%, 52% and 50% of total revenue for 1995, 1994 and 1993, respectively. In 1995, domestic and international revenue increased 33% and 23%, respectively, following increases of 12% and 21% in 1994. The higher percentage increase in domestic revenue in 1995 as compared to international revenue was primarily attributable to an increase in domestic service revenue in 1995 as compared to 1994. In addition, $11.7 million of the $50.3 million increase in international revenue for the year ended December 30, 1995 was attributable to the favorable impact on revenue of foreign exchange rates as the result of the strengthening of certain foreign currencies in relation to the U.S. dollar as compared to 1994. The increase in product revenue in 1995 reflected increased market acceptance of the Company's products which enable customers to meet complex design challenges, such as deep submicron IC design and high-speed board design. This was exemplified by increased sales volume of its IC, automated test engineering ("ATE"), top-down design ("HDL") and Alta Group's systems design products. The Company's ATE, HDL and Alta Group product offerings also led the increase in 1994 product revenue as compared to 1993. The 1994 increase in Alta Group product revenue was partly due to 1994 including a full year of revenue related to the Comdisco business as compared to 1993 which included only revenue from the date of acquisition forward. The increase in service revenue was the result of significant demand for the Company's service offerings which provide a complete range of solutions to address the product development needs of its customers. The 1995 increase in service 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 the first quarter of 1995 for a total contract value of at least $75 million. The increases in maintenance revenue were attributable to an increase in the Company's installed base of products as well as the Company's continuing success at obtaining customer maintenance renewals. 13 16 COST OF REVENUE
% Change ------------ 1995 1994 1993 95/94 94/93 ---- ---- ---- ----- ----- (In millions) Product $44.8 $52.9 $53.7 (15)% (1)% Service $55.0 $22.6 $15.4 143% 46% Maintenance $16.7 $14.3 $14.9 17% (4)% Cost of Revenue as a Percent of Related Revenue Product 15% 22% 24% Service 83% 80% 91% Maintenance 9% 9% 12%
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 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 reduction in printing and manufacturing expenses 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 service 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 service professionals. Cost of service in absolute dollars has increased each year since 1993 due to the development of this line of business. The increase in cost of service from 1994 to 1995 was also due to additional costs associated with the transfer to the Company of former employees of Unisys pursuant to the outsourcing agreement signed in the first quarter 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 focusing on serving the needs of Unisys, the design and service resources acquired by the Company are also being used to support other customers' design needs. Service gross margins could continue to be adversely affected until the design and service resources acquired from Unisys are more fully utilized through additional revenue contracts. Additionally, the cost of integrating new service professionals performing a growing number of service offerings will also put pressure on service 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 absolute dollars from 1994 to 1995 was principally due to additional costs necessary to support a larger installed base. The decrease in cost of maintenance revenue from 1993 to 1994 was primarily due to the continued streamlining of the maintenance renewal process. 14 17 OPERATING EXPENSES
% Change ------------ 1995 1994 1993 95/94 94/93 ---- ---- ---- ----- ----- (In millions) Marketing and sales $185.0 $163.4 $160.2 13% 2% Research and development $ 88.6 $ 77.4 $ 74.5 14% 4% General and administrative $ 40.4 $ 39.7 $ 38.7 2% 3% Expenses as a Percent of Total Revenue Marketing and sales 34% 38% 43% Research and development 16% 18% 20% General and administrative 7% 9% 11%
MARKETING AND SALES 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. The increase in 1994 as compared to 1993 was the result of increased costs of $4.7 million related to the Alta operations which were offset by cost reductions in other areas. As a percentage of total revenue, sales and marketing expenses were higher in 1993 due to lower revenue levels. RESEARCH AND DEVELOPMENT The Company's investment in research and development, prior to the reduction for capitalization of software development costs, was $100.4 million, $88.2 million and $89.7 million for 1995, 1994 and 1993, respectively, representing 18%, 21% and 24% of total revenue. 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 decrease in 1994 as compared to 1993 was due to lower occupancy costs of $2.5 million and decreased capital equipment costs of $1.5 million offset by increased costs of $2.4 million related to the Alta Group. The Company capitalized approximately $11.8 million, $10.8 million and $15.2 million of software development costs in the years 1995, 1994 and 1993, respectively, which represented approximately 12%, 12% and 17% 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 The decrease in general and administrative costs as a percentage of revenue from 1993 to 1995 was primarily attributable to revenue growing at a faster rate than costs. The increase in absolute costs of $.7 million in 1995 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. The 1994 increase in general and administrative costs was due to higher employee-related costs and operations of the Alta Group totaling $2.5 million offset by cost savings of $1.3 million resulting from lower facility costs. 15 18 OTHER ITEMS
1995 1994 1993 ---- ---- ---- (In millions) Unusual items $ -- $14.7 $19.7 Other income (expense) $17.2 $ 4.8 $(4.4)
UNUSUAL ITEMS The unusual items in 1994 included costs of $4.7 million related to the 1994 third quarter write-off of in-process research and development associated with the Redwood acquisition as Redwood's development efforts had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Also included in the 1994 unusual items was a $10.0 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. Restructuring costs of $13.5 million associated with a planned restructure of certain areas of sales, operations and administration due to business conditions were recorded as an unusual item in March 1993. The restructuring charge primarily reflected costs associated with employee terminations, excess facilities and the write-off of purchased software and intangibles arising from required adjustments to the Company's cost structure necessitated by lower revenue levels. Also included in the restructuring charge was an additional provision for doubtful accounts and the write-off of certain software development costs resulting from changes in the Company's systems product strategy. In December 1993, the Company sold its ASI division, therefore, also included in unusual items for 1993 was the division's loss from operations of $6.2 million. OTHER INCOME AND EXPENSE Interest income was $4.9 million, $3.3 million and $3.2 million for 1995, 1994 and 1993, respectively. The increase in 1995 is primarily due to increased earnings on cash investments resulting from higher interest rates. Interest expense was $2.2 million, $1.0 million and $.7 million for 1995, 1994 and 1993, respectively. The increase in interest expense in 1995 as compared to 1994 and in 1994 as compared to 1993 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. A $6.0 million loss on the disposal of the Company's ASI division was included in 1993 other expense. INCOME TAXES
(In millions) 1995 1994 1993 ---- ---- ---- Provision for income taxes $37.8 $12.2 $ -- Effective tax rate 28% 25% --%
As of December 30, 1995, the Company had gross deferred tax assets of approximately $62.6 million against which the Company had recorded a valuation allowance of $47.8 million, resulting in net deferred tax assets of $14.8 million. A significant portion of the net operating loss and credit carryforwards which created the deferred tax assets was generated by acquired companies prior to their merger with the Company and by restructuring charges recorded as a result of these mergers. Approximately $34.2 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 $14.8 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 $14.8 million will be realized. The amount of the net deferred 16 19 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 increase in the 1995 tax rate as compared to 1994 was attributable to an increase in foreign earnings which are 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 1994 effective tax rate reflected a reduction in the valuation allowance primarily from the utilization of net operating losses generated in prior years. In 1993, the Company's tax provision was zero as a result of the operating loss in 1993 and the recording of the benefit of certain foreign withholding and income taxes. The Company anticipates that its effective tax rate will increase to approximately 33% in 1996. LIQUIDITY AND CAPITAL RESOURCES At December 30, 1995, the Company's principal sources of liquidity consisted of $96.6 million of cash and cash investments and short-term investments as compared to $96.9 million and $92.8 million at December 31, 1994 and 1993, respectively. The Company was able to maintain its cash position while repurchasing $163.9 million and $95.1 million of treasury stock and repaying notes payable and long-term debt totaling $26.5 million and $29.2 million in 1995 and 1994, respectively. Cash generated from operating activities increased $42.7 million in 1995 and $57.2 million in 1994. The 1995 increase was driven primarily by higher net income and increases in accrued liabilities and payables and deferred revenue, offset by increases in accounts receivable and prepaid expenses. The increase in 1994 as compared to 1993 was primarily the result of increases in net income and deferred revenue. Working capital at December 30, 1995 was $6.5 million compared with $27.5 million at December 31, 1994. The primary reasons for the decrease in 1995 as compared to 1994 were increases in deferred revenue of $31.2 million and current payables and accrued liabilities of $29.7 million, offset by a decrease in notes payable of $24.9 million and an increase in accounts receivable of $9.9 million. The increase in deferred revenue was attributable to increased maintenance renewals and an increase in deferred product revenue deferred in accordance with the American Institute of Certified Public Accountants Statement of Position 91-1 entitled "Software Revenue Recognition." The increase in current payables and accrued liabilities was due to increased commissions, incentive bonuses and income taxes in 1995. Notes payable decreased in 1995 as the Company repaid a $23.7 million secured loan assumed as part of a 1994 purchase of corporate facilities. Although accounts receivable increased as a result of increased revenue in 1995 as compared to 1994, days sales outstanding decreased from 58 days at December 1994 to 49 days at December 1995 due to improved collection efforts. In addition to its short-term investments, the Company's primary investing activities were the purchase of property, plant and equipment and the capitalization of software development costs, which combined, represented $40.2 million, $26.0 million and $33.7 million of cash used for investing activities in 1995, 1994 and 1993, respectively. In 1995, the Company also generated $29.9 million from the sale of 3.0 million shares of IMS stock in an initial public offering. The Company has an authorized stock repurchase program. In total, as of December 30, 1995, the Company had authorized the repurchase of 34.1 million shares, of which approximately 26.8 million shares had been repurchased. The Company repurchases common stock in part to satisfy estimated requirements for shares to be issued under the Company's employee stock option and stock purchase plans as well as in connection with acquisitions. Past repurchase activity should not be considered an indicator of future repurchases. Since 1994, as part of its authorized repurchase program, the Company has sold 10.1 million put warrants through private placements. As of December 30, 1995, 7.5 million of these warrants had expired out of the money. The remaining outstanding 2.6 million warrants entitle the holder to sell one share of common stock to the Company on a specified date and at a specified price ranging from $24.09 to $33.03 per share. Additionally, during this same period, the Company purchased approximately 7.6 million call options that entitle the Company to buy on a specified date one share of common stock at a specified price. As of December 30, 1995, the Company had repurchased 5.6 million common shares 17 20 pursuant to the exercise of call options for $72.8 million. The remaining 2.0 million outstanding call options range in price from $24.17 to $33.37 per share. 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 amounts of the repurchase obligations 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. As discussed above, financing activities in 1995, 1994 and 1993 related principally to the Company's stock repurchase program and payments of notes payable. The Company's stock repurchases included open market and private purchases, and as discussed above, exercise of call options. In 1995, the Company repurchased a warrant previously issued in connection with an acquisition, equivalent to approximately 1.8 million shares of the Company's common stock for a total cost of $17.2 million. The sale of common stock primarily to the Company's employees as part of its employee benefit plans generated $26.5 million, $13.5 million and $4.3 million in cash during 1995, 1994 and 1993, respectively. Anticipated cash requirements for fiscal 1996 include the purchase of treasury stock through the exercise of the Company's call options and in the open market. The Company has the right to purchase approximately 2.0 million shares through the exercise of call options in 1996 at a cost of approximately $52.3 million. As part of its overall investment strategy, the Company has committed to participate in a venture capital partnership as a limited partner. The Company's total investment of $25.0 million will be made over the next three to four years. Other cash requirements include contemplated additions of capital equipment of approximately $35.0 million. The Company anticipates that current cash and short-term investment balances, cash flows from operations and short and long-term borrowing capabilities will be sufficient to meet its working capital and capital expenditure requirements on a short and long-term basis. The Company's majority owned subsidiary, IMS, has a $10.0 million bank line of credit. The Company is currently in negotiations with various lenders regarding a line of credit, but there can be no assurance that mutually acceptable terms can be reached and that the Company will have a line of credit available in the short-term. To the extent that the Company does not utilize bank lines of credit or borrowings to fund its operations on a short-term basis, the Company may continue to reduce its current cash and may experience future working capital deficits on a short-term basis. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company competes in the highly competitive EDA market which continues to be characterized by aggressive pricing practices, 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's future operating results are dependent on the Company's ability to successfully implement its strategy to help its customers meet their business objectives by optimizing their product development processes. The Company accomplishes this through a combination of technology and services. Inherent in implementing this strategy are a number of risks that the Company must manage and that could affect its future operating results. These risks include the ability to successfully recruit, train and retain its skilled service professionals and the ability to profitably deliver services that meet customer expectations. Growth of the service business is constrained by the Company's ability to hire and train service professionals to keep pace with demand. The Company's profitability could be adversely affected if it is unable to develop its services business as expected. It is anticipated that international revenue will continue to constitute a significant portion of total revenue. International revenues are subject to certain additional risks normally associated with international operations, including, among others, adoption and expansion of government trade 18 21 restrictions, volatile foreign exchange rates, currency conversion risks, limitations on repatriation of earnings and reduced protection of intellectual property rights. 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. The Company's operating expenses are partially based on its expectations of future revenue. The Company's results of operations may be adversely affected if revenue does not materialize in a quarter as expected. Since expense levels 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. Based on the Company's operating history and factors that may cause fluctuations in the quarterly results, quarter to quarter comparisons should not be relied upon as indicators of future performance. Although the Company's revenues are not generally seasonal in nature, the Company has experienced decreases in first quarter revenue versus the preceding fourth quarter which is believed to result primarily from the capital purchase cycle of the Company's customers. 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)
1995 1994 ----------------------------------------- ------------------------------------------ 4th 3rd 2nd 1st 4th 3rd 2nd 1st ----------------------------------------- ------------------------------------------ Revenue $163,756 $140,090 $128,539 $116,033 $121,653 $109,598 $101,043 $ 96,778 Cost of revenue $ 31,767 $ 30,349 $ 29,451 $ 24,963 $ 23,889 $ 22,000 $ 21,595 $ 22,316 Income (loss) from operations (1) $ 42,588 $ 32,666 $ 24,117 $ 18,489 $ 24,043 $ 12,483 $ 13,000 $ (5,479) Net income (loss) (2) $ 30,840 $ 35,909 $ 16,971 $ 13,550 $ 20,932 $ 9,483 $ 10,082 $ (3,849) Net income (loss) per share $ .50 $ .59 $ .27 $ .21 $ .33 $ .15 $ .15 $ (.06)
(1) Income (loss) from operations included unusual items of $4.7 million for the write-off of in-process research and development, a $2.1 million credit to the provision for settlement of litigation established in the first quarter of 1994 and a $12.1 million provision for settlement of litigation in the quarters ended September 30, 1994, June 30, 1994 and March 31, 1994, respectively. (2) In addition to unusual items, net income (loss) also 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 quarters ended September 30, 1995 and December 31, 1994, respectively. 19 22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 as to directors is incorporated by reference from the section entitled "Election of Directors" in the Company's Proxy Statement for its annual stockholders' meeting to be held May 3, 1996. 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 30, 1995, all section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with; except that one report, covering one transaction, was filed late by Mr. Mark Garrett. 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 3, 1996. 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 3, 1996. 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 3, 1996. 20 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 25 - Consolidated Balance Sheets as of December 30, 1995 and December 31,1994 26 - Consolidated Statements of Income for the three fiscal years ended December 30, 1995 27 - Consolidated Statements of Stockholders' Equity for the three fiscal years ended December 30, 1995 28 - Consolidated Statements of Cash Flows for the three fiscal years ended December 30, 1995 29 - Notes to Consolidated Financial Statements 30 (a)2. Financial Statement Schedules II. Valuation and Qualifying Accounts and Reserves 44
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. (a)3. Exhibits The following exhibits are filed herewith: EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1 Registration Statement (No. 33-13845) originally filed on April 29, 1987 (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). (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")). 21 24 EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- (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). 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 Form 8-K filed June 12, 1989). 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 Company 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.) 10.01 The Registrant's 1987 Stock Option Plan, as amended to date, (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994 (the "1994 Form S-8")).* 10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).* 10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant and 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).* 10.04 The Registrant's 1993 Directors Stock Option Plan including the Stock Option Grant (incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).* 10.05 The Registrant's 1995 Directors Stock Option Plan including the Stock Option Grant. * 10.06 The Registrant's 1990 Employee Stock Purchase Plan as amended to date (incorporated by reference to Exhibit 4.03 of the 1994 Form S-8).* 10.07 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the "1994 Form 10-K")).* 10.08 The Registrant's Senior Executive Bonus Plan for 1996.* 10.09 The Registrant's Chief Executive Officer Bonus Plan for 1996.* 10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the 1994 Form 10-K).* 10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan.* 22 25 EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 10.12 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates ("ROPA"), a California limited partnership, and the Registrant, for the Registrant's 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")). 10.13 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K). 10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.15 Lease dated 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")). 10.16 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). 10.17 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). 10.18 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). 10.19 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). 10.20 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).* 10.21 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")).* 10.22 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the 1993 Form 10-K).* 10.23 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).* 23 26 EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 10.24 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")).* 10.25 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by reference to the 1994 Second Quarter Form 10-Q).* 10.26 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). 10.27 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")). 10.28 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). 10.29 Form of Stock Option Agreement for 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).* 10.30 Form of Underwriting Agreement in connection with Integrated Measurement Systems, Inc. public offering (incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1995). 21.01 Subsidiaries of the Registrant 23.01 Consent of Arthur Andersen LLP 27.1 Financial data schedule for the period ended December 30, 1995. _ _ _ _ _ _ _ _ _ _ * A management contract or compensatory plan required to be filed as an exhibit to Form 10-K. (b) Reports on Form 8-K On February 16, 1996, Registrant filed a Current Report on Form 8-K, reporting that its Board of Directors had approved a Stockholder Rights Plan and cancelled its previous Stockholder Rights Plan established in 1989. (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 24 27 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 30, 1995 and December 31, 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 30, 1995. 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 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 1995, 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 19, 1996 25 28 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 1995 AND DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
1995 1994 ---- ---- CURRENT ASSETS: Cash and cash investments .................................................. $ 84,867 $ 75,011 Short-term investments ..................................................... 11,774 21,865 Accounts receivable, less allowances of $7,420 in 1995 and $4,905 in 1994 .. 88,503 78,629 Inventories ................................................................ 8,203 5,137 Prepaid expenses and other ................................................. 13,576 11,293 --------- --------- Total current assets ................................................... 206,923 191,935 PROPERTY, PLANT AND EQUIPMENT, net ............................................. 124,103 122,064 SOFTWARE DEVELOPMENT COSTS, net ................................................ 25,793 27,832 PURCHASED SOFTWARE AND INTANGIBLES, net ........................................ 8,268 10,557 OTHER ASSETS ................................................................... 8,948 8,660 --------- --------- Total assets ........................................................... $ 374,035 $ 361,048 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt ........................ $ 1,497 $ 26,412 Accounts payable ........................................................... 17,592 12,522 Accrued liabilities ........................................................ 74,407 56,359 Income taxes payable ....................................................... 14,524 7,944 Deferred revenue ........................................................... 92,407 61,205 --------- --------- Total current liabilities .............................................. 200,427 164,442 --------- --------- LONG-TERM LIABILITIES: Long-term debt ............................................................. 1,619 2,098 Deferred income taxes ...................................................... 7,307 904 Minority interest liability ................................................ 12,167 883 Other long-term liabilities ................................................ 18,434 16,658 --------- --------- Total long-term liabilities ............................................ 39,527 20,543 --------- --------- 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: 75,863 shares in 1995 and 71,391 shares in 1994 Outstanding: 52,376 shares in 1995 and 56,861 shares in 1994 .......... 299,544 265,173 Treasury stock at cost (23,487 shares in 1995 and 14,530 shares in 1994) ... (290,884) (133,728) Retained earnings .......................................................... 124,471 43,377 Accumulated translation adjustment ......................................... 950 1,241 --------- --------- Total stockholders' equity ............................................. 134,081 176,063 --------- --------- Total liabilities and stockholders' equity ............................. $ 374,035 $ 361,048 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 26 29 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ---- ---- ---- REVENUE: Product ...................................... $292,198 $241,545 $ 224,139 Service ...................................... 65,860 28,365 16,872 Maintenance .................................. 190,360 159,162 127,612 -------- -------- --------- Total revenue ............................ 548,418 429,072 368,623 -------- -------- --------- COSTS AND EXPENSES: Cost of product .............................. 44,793 52,897 53,677 Cost of service .............................. 54,988 22,590 15,431 Cost of maintenance .......................... 16,749 14,313 14,864 Marketing and sales .......................... 185,025 163,408 160,212 Research and development ..................... 88,566 77,381 74,467 General and administrative ................... 40,437 39,729 38,737 Unusual items ................................ -- 14,707 19,650 -------- -------- --------- Total costs and expenses ................. 430,558 385,025 377,038 -------- -------- --------- Income (loss) from operations .................... 117,860 44,047 (8,415) Other income (expense) ........................... 17,237 4,816 (4,364) -------- -------- --------- Income (loss) before provision for income taxes .. 135,097 48,863 (12,779) Provision for income taxes ....................... 37,827 12,215 -- -------- -------- --------- Net income (loss) ................................ $ 97,270 $ 36,648 $ (12,779) ======== ======== ========= Net income (loss) per share ...................... $ 1.57 $ 0.56 $ (.20) ======== ======== ========= Weighted average common and common equivalent shares outstanding ........................... 61,965 65,870 64,590 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 27 30 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995 (IN THOUSANDS)
Common Stock ------------ Par Value Accumulated and Capital In Treasury Stock Retained Translation Shares Excess of Par Shares Amount Earnings Adjustment ------ -------------- ------- --------- --------- ----------- BALANCE, DECEMBER 31, 1992 ........... 65,865 $ 228,411 -- $ -- $ 21,306 $ (569) Purchase of treasury stock ........... -- -- (7,286) (52,178) -- -- Issuance of common stock ............. 1,619 10,805 -- -- -- -- Tax benefits from employee stock transactions ............. -- 842 -- -- -- -- Common stock issued in connection with acquisition ................ 1,575 9,056 -- -- -- -- Issuance of warrant in connection with acquisition .................... -- 1,847 -- -- -- -- Translation adjustment ............... -- -- -- -- -- (619) Net loss ............................. -- -- -- -- (12,779) -- ------ --------- ------- --------- --------- ------- BALANCE, DECEMBER 31, 1993 ........... 69,059 250,961 (7,286) (52,178) 8,527 (1,188) Purchase of treasury stock ........... -- -- (8,961) (95,119) -- -- Issuance of common stock ............. 2,332 13,516 963 7,231 (1,165) -- Tax benefits from employee stock transactions .............. -- 626 -- -- -- -- Treasury stock issued in connection with acquisitions .............. -- 70 754 6,338 (633) -- Translation adjustment ............... -- -- -- -- -- 2,429 Net income ........................... -- -- -- -- 36,648 -- ------ --------- ------- --------- --------- ------- BALANCE, DECEMBER 31, 1994 ........... 71,391 265,173 (14,530) (133,728) 43,377 1,241 Purchase of treasury stock ........... -- -- (9,620) (163,928) -- -- Issuance of common stock ............. 4,472 26,984 663 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 ........... 75,863 $ 299,544 (23,487) $(290,884) $ 124,471 $ 950 ====== ========= ======= ========= ========= =======
The accompanying notes are an integral part of these consolidated financial statements. 28 31 CADENCE DESIGN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995 (IN THOUSANDS)
1995 1994 1993 ---- ---- ---- CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR ................................... $ 75,011 $ 61,382 $ 78,976 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .......................................................... 97,270 36,648 (12,779) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ........................................... 46,019 44,257 43,966 Gain on sale of stock of subsidiary ..................................... (18,873) -- -- Deferred income taxes ................................................... 5,693 (2,105) (9,849) Write-off of in-process research and development ........................ -- 4,653 -- Accruals and write-down and reserve of assets related to restructure .... -- -- 10,710 Increase in other long-term liabilities and minority interest expense ... 3,135 3,985 1,856 Write-offs of equipment and other long-term assets ...................... 2,281 1,229 3,140 Provisions for doubtful accounts and inventory write-offs ............... 5,821 3,334 3,029 Changes in current assets and liabilities, net of effect of acquired businesses: Accounts receivable ................................................. (13,760) 22,413 28,724 Inventories ......................................................... (4,059) (592) (32) Prepaid expenses and other .......................................... (2,132) 7,871 1,347 Accrued liabilities and payables .................................... 44,439 10,612 16,013 Deferred revenue .................................................... 31,262 22,133 11,134 --------- --------- -------- Net cash provided by operating activities ........................ 197,096 154,438 97,259 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of short-term investments .................................... 43,296 69,796 63,273 Purchases of short-term investments ..................................... (33,205) (60,238) (83,753) Purchases of property, plant and equipment .............................. (28,338) (15,196) (18,500) Capitalization of software development costs ............................ (11,845) (10,790) (15,207) Change in purchased software and intangibles and other assets ........... (5,454) 1,129 (4,228) 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 .................................................... 1,304 10,321 -- Purchase of call options ................................................ (1,304) (10,321) -- --------- --------- -------- Net cash used for investing activities ........................... (5,626) (31,778) (58,415) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable and long-term debt .................. (26,542) (29,209) (8,117) Sale of common stock .................................................... 26,500 13,516 4,283 Purchases of treasury stock ............................................. (163,928) (95,119) (52,178) Purchase of warrant ..................................................... (17,188) -- -- --------- --------- -------- Net cash used for financing activities ........................... (181,158) (110,812) (56,012) --------- --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... (456) 1,781 (426) --------- --------- -------- INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS ................................. 9,856 13,629 (17,594) --------- --------- -------- CASH AND CASH INVESTMENTS AT END OF YEAR ......................................... $ 84,867 $ 75,011 $ 61,382 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest ............................................................ $ 2,423 $ 915 $ 541 ========= ========= ======== Income taxes (including foreign withholding tax) .................... $ 12,968 $ 6,885 $ 3,884 ========= ========= ======== Non-cash investing and financing activities: Capital lease obligations incurred for equipment .................... $ 1,149 $ 1,466 $ 4,441 ========= ========= ======== Common and treasury stock issued under the Employee Stock Purchase Plan .............................................. $ 6,522 $ 6,066 $ 6,522 ========= ========= ======== Tax benefits from employee stock transactions ....................... $ 8,463 $ 626 $ 842 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 29 32 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 1995 THE COMPANY Cadence Design Systems, Inc. (the "Company") develops, markets and supports electronic design automation software products and services 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 customers and target markets include computer manufacturers, consumer electronics companies, industrial electronics companies, semiconductor manufacturers, ASIC foundries and telecommunications companies throughout the world. 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. Effective December 31, 1994, the Company's fiscal year end is the Saturday closest to December 31. 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. Certain prior year financial statement balances have been reclassified to conform to the 1995 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. Service 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. Service revenue is generally recognized as the services are performed or on the percentage of completion method of accounting, depending upon the nature of the project. Under the percentage of completion method, revenue recognized is that portion of the total contract price that costs expended to date bears to the anticipated final total costs based on current estimates of the costs to complete the project. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss would be recognized currently. Maintenance revenue consists of fees for providing system updates, user documentation and technical support for software products. Maintenance revenue is recognized ratably over the term of the agreement. In 1995, 1994 and 1993, one customer (a distributor), which also holds a minority interest in a subsidiary of the Company, accounted for 15%, 10% and 13% of total revenue, respectively. Outstanding trade accounts receivable from this related party were approximately $5.4 million and $3.7 million at December 30, 1995 and December 31, 1994, respectively. 30 33 SOFTWARE DEVELOPMENT COSTS AND 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, 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 service 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 $19.7 million, $20.2 million and $17.1 million for 1995, 1994 and 1993, respectively. The Company wrote off $.8 million of purchased software in 1995 and $1.5 million of capitalized software in 1993 for projects discontinued during the year. NET INCOME (LOSS) 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. Net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding. Fully diluted net income (loss) per share is substantially the same as primary net income (loss) per share. CASH, CASH INVESTMENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid debt instruments and certificates of deposit with an original maturity of ninety days or less to be cash investments. The Company classifies its investments in debt securities as "held-to-maturity". Accordingly, these investments, which mature at various dates through August 1996, 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 30, 1995 and December 31, 1994 are not material. Short-term investments consisted of the following:
1995 1994 ---- ---- (In thousands) Commercial paper $ -- $ 10,795 Certificates of deposit -- 6,031 Corporate debt securities 8,774 -- European certificates of deposit -- 4,004 U.S. Government notes 3,000 -- Other debt securities -- 1,035 --------- --------- Total short-term investments $ 11,774 $ 21,865 ========= =========
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. 31 34 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. Depreciation and amortization are provided over the following estimated useful lives, by the straight-line method. Buildings 31 years Leasehold and building improvements Shorter of the lease term or the estimated useful life Equipment 3 - 6 years Furniture and fixtures 3 - 5 years FINANCIAL INSTRUMENTS The Company has an authorized stock repurchase program. In total, as of December 30, 1995, the Company had authorized the repurchase of 34.1 million shares of which approximately 26.8 million shares had been repurchased. The Company repurchases common stock in part to satisfy estimated requirements for shares to be issued under the Company's employee stock option and stock purchase plans as well as in connection with acquisitions. Since 1994, as part of its authorized repurchase program, the Company sold 10.1 million put warrants through private placement. As of December 30, 1995, 7.5 million of these warrants had expired out of the money. The remaining outstanding 2.6 million warrants entitle the holder to sell one share of common stock to the Company on a specified date and at a specified price ranging from $24.09 to $33.03 per share. Additionally, during this same period, the Company purchased approximately 7.6 million call options that entitle the Company to buy on a specified date one share of common stock at a specified price. As of December 30, 1995, the Company had repurchased 5.6 million common shares pursuant to the exercise of call options for $72.8 million. The remaining 2.0 million outstanding call options range in price from $24.17 to $33.37 per share. 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 amounts of the repurchase obligations 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 30, 1995, the fair value of these call options was approximately $31.2 million and the fair value of the put warrants was approximately $.9 million. The put warrants and call options outstanding at December 30, 1995 are exercisable on various dates through April 1996. Fair value of put warrants and call options was estimated by the Company's investment bankers. At December 30, 1995, 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 30, 1995 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 30, 1995 and December 31, 1994 was negligible. The notional amount of the forward contracts was approximately $30.0 million at December 30, 1995. These contracts expired on January 31, 1996. 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. 32 35 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. NEW ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation" which will be effective for the Company's 1996 fiscal year. SFAS No. 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company plans to continue to account for stock-based compensation arrangements under APB Opinion No. 25, and therefore does not anticipate SFAS No. 123 will have a material impact on its financial position, results of operations or cash flows. OTHER INCOME (EXPENSE)
1995 1994 1993 ---- ---- ---- (In thousands) Interest income $ 4,854 $ 3,262 $ 3,159 Interest expense (2,222) (1,045) (723) Gain on sale of IMS stock 18,873 -- -- Gain on sale of investment -- 4,196 -- Loss on disposal of division (see Unusual Items) -- -- (5,972) Minority interest income (expense) (1,341) (485) 134 Loss on foreign exchange (117) (204) (281) Other expense, net (2,810) (908) (681) --------- ---------- ---------- Total other income (expense) $ 17,237 $ 4,816 $ (4,364) ========= ========== ==========
33 36
BALANCE SHEET COMPONENTS 1995 1994 ---- ---- (In thousands) Inventories Raw materials and supplies $ 2,335 $ 1,268 Work-in-process 3,825 2,250 Finished goods 2,043 1,619 ---------- ---------- Total inventories $ 8,203 $ 5,137 ========== ========== Property, Plant and Equipment Land $ 38,848 $ 38,848 Buildings 38,612 38,612 Leasehold and building improvements 23,349 22,442 Equipment 108,911 101,087 Furniture and fixtures 19,834 19,762 ---------- ---------- Total cost 229,554 220,751 Less: Accumulated depreciation and amortization 105,451 98,687 ---------- ---------- Property, plant and equipment, net $ 124,103 $ 122,064 ========== ========== Software Development Costs Cost $ 47,944 $ 57,921 Less: Accumulated amortization 22,151 30,089 ---------- ---------- Software development costs, net $ 25,793 $ 27,832 ========== ========== Purchased Software and Intangibles Cost $ 23,086 $ 28,242 Less: Accumulated amortization 14,818 17,685 ---------- ---------- Purchased software and intangibles, net $ 8,268 $ 10,557 ========== ========== Accrued Liabilities Payroll and payroll related accruals $ 48,668 $ 35,452 Other accrued liabilities 25,739 20,907 ---------- ---------- Total accrued liabilities $ 74,407 $ 56,359 ========== ==========
INTEGRATED MEASUREMENT SYSTEMS, INC. INITIAL PUBLIC OFFERING 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 $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 $10.6 million related to IMS is recorded in minority interest liability in the accompanying December 30, 1995 balance sheet. 34 37 ACQUISITIONS REDWOOD DESIGN AUTOMATION In August 1994, the Company acquired the business and certain assets of Redwood Design Automation, Inc. ("Redwood") for approximately .6 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 are included in purchased software and intangibles in the accompanying balance sheets and are 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 twelve months ended December 31, 1994 and 1993 as if the Redwood acquisition had occurred at the beginning of each 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 each of the respective periods presented or of future operations of the combined companies. The pro forma results for 1994 combine the Company's results for the twelve month period ended December 31, 1994 with the results of Redwood for the period from January 1, 1994 through the date of acquisition. The pro forma results for 1993 combine the Company's results for the twelve month period ended December 31, 1993 with Redwood's twelve month fiscal period from February 1, 1993 through January 31, 1994. The following unaudited pro forma results include the straight-line amortization of intangibles over a period of two years.
1994 1993 ---- ---- (In thousands) Revenue $429,658 $368,935 Net income (loss) $ 33,531 $(19,051) Net income (loss) per share $ .51 $ (.29) Weighted average common and common equivalent shares outstanding 66,314 65,219
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 35 38 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 ========
COMDISCO SYSTEMS, INC. In June 1993, the Company acquired the business and certain assets of Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc., in exchange for approximately 1.6 million shares of the Company's common stock and a warrant to purchase approximately 1.9 million shares of the Company's common stock valued in total at $10.9 million. The acquisition was accounted for as a purchase. Accordingly, the results of Comdisco from the date of acquisition forward have been recorded in the Company's consolidated financial statements. Comparative pro forma information has not been presented as the results of operations of Comdisco are not material to the Company's consolidated financial statements. The acquisition costs include amounts paid for the net tangible assets of Comdisco and purchased software and other intangibles. The cost in excess of net assets acquired was $6.5 million which is being amortized over seven years and is included in purchased software and intangibles in the accompanying balance sheets. In connection with the acquisition, net assets acquired were as follows (in thousands): Trade accounts receivable and other current assets $ 4,381 Purchased software and other intangibles 6,500 Property, equipment and other long-term assets 1,909 Liabilities assumed (1,887) ------- Net assets acquired in exchange for capital stock $10,903 =======
UNUSUAL ITEMS Unusual items included within operating expenses are described below. No unusual items were recorded during 1995.
1994 1993 1992 1991 ---- ---- ---- ---- (In thousands) Write-off of in-process research and development $ 4,653 $ -- $ -- $ -- Provision for settlement of ligation 10,054 -- -- -- Loss (income) from operations of disposed division -- 6,200 (253) 5,335 Restructuring costs -- 13,450 -- 49,901 ------- ------- ---- ------- Total unusual items $14,707 $19,650 $(253) $55,236 ======= ======= ===== =======
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 Company's operating expenses is the net settlement cost of approximately $9.0 million plus approximately $1.0 million for related legal costs. 36 39 LOSS (INCOME) FROM OPERATIONS OF DISPOSED DIVISION In December 1993, the Company sold its Automated Systems ("ASI") division. ASI was sold for a nominal amount of cash and future royalties. During 1994, ASI filed for Chapter 11 bankruptcy and in 1995, the royalty terms were renegotiated. However, 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. As of December 30, 1995 and December 31, 1994, respectively, the Company had recorded approximately $.9 million and $.9 million in accrued liabilities and approximately $1.0 million and $1.1 million in other long-term liabilities for liabilities associated with the disposed division. The Company had previously reported the operating results of ASI as a discontinued operation in the statement of income. In connection with the filing of a registration statement on Form S-3 to register common stock issued to the stockholders of Comdisco and Redwood, the Securities and Exchange Commission reviewed the Company's 1993 financial statements and requested that the results of operations and the loss on disposal of ASI be reclassified as components of continuing operations since ASI was not deemed a major line of business. As a result, the Company has classified the respective income and loss from operations of the disposed division as unusual items within operations in the accompanying statements of income. The loss of $6.0 million on disposal of the division is classified in other income (expense) in the accompanying 1993 statement of income. Revenue from this division was approximately $11.2 million for the year ending December 31, 1993. RESTRUCTURING COSTS 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. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following:
1995 1994 ---- ---- (In thousands) Capital lease obligations $3,116 $ 4,840 Secured mortgage (Paid in full in October 1995) -- 23,670 ------ ------- Total 3,116 28,510 Less: Current portion 1,497 26,412 ------ ------- Long-term debt $1,619 $ 2,098 ====== =======
37 40 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 $10.7 million, $19.0 million and $20.0 million for 1995, 1994 and 1993, 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 30, 1995 were $7.9 million of which $2.4 million was included in accrued liabilities and approximately $5.5 million was included in other long-term liabilities in the accompanying balance sheet. At December 30, 1995, 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 ------- --------- For the years: (In thousands) 1996 $1,802 $13,235 1997 1,040 12,758 1998 476 7,634 1999 298 3,982 2000 192 2,980 Thereafter -- 4,026 ------ ------- Total lease payments 3,808 $44,615 ======= Less: Amount representing interest (Average rate of 8.7%) 692 ------ Present value of lease payments 3,116 Less: Current portion 1,497 ------ Long-term portion $1,619 ======
The cost of equipment under capital leases included in the balance sheet as property, plant and equipment at December 30, 1995 and December 31, 1994 was approximately $12.6 million and $17.9 million, respectively. Accumulated amortization of the leased equipment at December 30, 1995 and December 31, 1994 was approximately $10.1 million and $13.9 million, respectively. LINE OF CREDIT The Company's majority-owned subsidiary, IMS, has a revolving line of credit with a bank allowing for maximum borrowings of $10.0 million with interest at the bank's prime rate, interbank offering rates plus 1.25%, or banker's acceptance plus 1.25%, at the borrower's option. There were no outstanding borrowings at December 30, 1995 under this agreement. At December 30, 1995, IMS was in full compliance with all covenants and conditions in the agreement. The line of credit expires April 30, 1997. 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 three to four years. 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. 38 41 The Company filed a complaint in the United States District Court for the Northern District of California on December 6, 1995 against Avant! Corporation (formerly known as ArcSys, 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, alleging, 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 counterclaim also alleges that certain unspecified 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. 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 October 1995, the Company's Board of Directors effected a three-for-two stock split 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 $0.01 per share. The stock split resulted in the issuance of approximately 25.2 million additional shares of common stock from authorized but unissued shares. Accordingly, all share and per share data have been adjusted to retroactively reflect the stock split. EMPLOYEE STOCK OPTION PLANS The Company's Employee Stock Option Plan (the "Plan") provides for the issuance of either incentive or nonqualified options 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. During 1993 holders of the Company's options were given the opportunity to exchange previously granted stock options for new common stock options exercisable at $5.87 per share, the fair market value of the common stock on the date of exchange. Under the terms of the new options, one-third of the shares vest one year from the date of grant and the remaining shares vest in 24 equal monthly installments. Options to purchase 7,284,039 shares were exchanged. During 1993, the Company adopted a Non-Statutory Stock Option Plan (the "Non-Statutory Plan"). Options granted under the Non-Statutory Plan become exercisable over a four year period, with one-fourth of the shares vesting one year from the vesting commencement date and the remaining shares vesting in 36 equal monthly installments. The options granted under the Non-Statutory Plan generally expire ten years from the date of grant. In 1995, the Company's Board of Directors' authorized an additional 4.5 million shares to be issued under the 1993 Non-Statutory Plan. Since directors and officers of the Company are not eligible to receive options under the Non-Statutory Plan, stockholder approval is not required nor will it be sought. The Company has assumed certain options granted to former employees of acquired companies ("Acquired Options"). The Acquired Options were assumed by the Company outside of the Plan, but all are administered as if assumed under the Plan. All of the Acquired Options have been adjusted to effectuate the conversion under the terms of the Agreements and Plans of Reorganization between the Company and the companies acquired. The Acquired Options generally become exercisable over a four year period and generally expire either five or ten years from the date of grant. No additional options will be granted under any of the acquired companies' plans. 39 42 Combined activity with respect to all employee stock option plans was as follows:
1995 1994 1993 ---- ---- ---- Options outstanding at beginning of the year 14,836,524 16,296,483 11,752,427 Granted 4,164,970 3,009,810 14,184,242 Exercised ($.28 per share to $17.54 per share) (4,383,800) (2,286,668) (825,077) Canceled (1,324,134) (2,183,101) (8,815,109) ------------- ------------- ------------- Options outstanding at end of the year 13,293,560 14,836,524 16,296,483 ============= ============= ============= Range of exercise price of outstanding options at end of the year $.28 - $38.94 $.28 - $18.29 $.28 - $19.17 ============= ============= ============= Options exercisable at end of the year 5,861,833 6,680,691 3,669,603 ============= ============= ============= Options available for future grant 4,665,241 3,027,885 3,831,959 ============= ============= =============
OPTION AGREEMENTS The Company occasionally has issued options outside of the Plan. As of December 30, 1995, options to purchase 60,470 shares were outstanding under these agreements, of which 51,641 were exercisable at prices ranging from $6.21 to $7.83 per share. DIRECTORS STOCK PLANS The Company's Board of Directors has adopted the 1988, 1993 and 1995 Directors Stock Option Plans (the "Directors Plans") in the indicated years. The 1995 Directors Plan is subject to stockholder approval, which will be sought at the 1996 stockholders' meeting. The Company has reserved 1,117,500 shares of common stock for issuance under these plans. The Directors Plans provide for the issuance of nonqualified stock options to nonemployee directors of the Company with an exercise price equal to the fair market value of the common 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. As of December 30, 1995, options to purchase 362,500 shares of common stock at $6.21 to $36.44 per share were outstanding under the Directors Plans, of which options for 166,552 shares were exercisable at prices ranging from $6.21 to $14.42 per share. Options to purchase 378,890 shares are available for future grant under the Directors Plans. Options to purchase 233,610 shares of common stock have been exercised and 142,500 have expired as of December 30, 1995 under the Directors Plans. No additional options will be granted under the 1988 Directors Plan. EMPLOYEE STOCK PURCHASE PLANS The Company has reserved 4,500,000 shares of common stock for issuance under the 1990 Employee Stock Purchase Plan (the "ESPP"). Under the ESPP the Company's employees may purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value as of the beginning or the end of the semiannual option periods. For 1995, 1994 and 1993, shares issued under the plan were 663,152, 962,982 and 731,912, respectively. WARRANT In connection with the purchase of the business and certain assets of Comdisco, the Company issued a warrant to purchase 1,950,000 shares of the Company's common stock at $9.67 per share. During 1995, the Company repurchased portions of the warrant applicable to 1,770,000 shares for approximately $17.2 million. The warrant for the remaining 180,000 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. 40 43 RESERVED FOR FUTURE ISSUANCE As of December 30, 1995, the Company has reserved the following shares of authorized but unissued common stock for future issuance: Employee stock option plans 17,958,801 Other option agreements 60,470 Directors stock option plans 741,390 Employee stock purchase plan 1,300,229 Put warrants 2,608,126 Comdisco warrant 180,000 ---------- Total 22,849,016 ==========
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. INCOME TAXES The provision for income taxes consisted of the following components:
1995 1994 1993 ---- ---- ---- (In thousands) Current Federal $11,954 $ 4,624 $ 730 State 4,095 881 180 Foreign 16,085 8,815 8,939 ------- ------- ------- Total current 32,134 14,320 9,849 ------- ------- ------- Deferred (prepaid) Federal 4,989 (1,103) (1,749) State 201 (384) (1,220) Foreign 503 (618) (6,880) ------- ------- ------- Total deferred (prepaid) 5,693 (2,105) (9,849) ------- ------- ------- Total provision for income taxes $37,827 $12,215 $ -- ======= ======= =======
Income (loss) before income taxes for 1995, 1994 and 1993 included income of approximately $34.2 million, $19.2 million and $9.2 million, respectively, from the Company's foreign subsidiaries. The provision for income taxes is net of the benefit of operating loss carryforwards totaling $9.7 million, $20.8 million and $2.8 million, for 1995, 1994 and 1993, respectively. 41 44 The provision for income taxes differs from the amount estimated by applying the statutory federal income tax rate to income (loss) before income taxes as follows:
1995 1994 1993 ---- ---- ---- (In thousands) Provision (benefit) computed at federal statutory rate $ 47,284 $ 17,074 $(4,473) State income tax, net of federal tax effect 2,662 572 117 Change in valuation allowance (19,999) (10,457) 7,172 Research and development tax credit (494) (379) (1,270) Foreign income tax at a higher rate 2,129 -- -- Foreign tax credit (769) (446) (6,958) Foreign withholding taxes 3,414 3,446 6,958 Amortization of goodwill 390 2,398 372 Other 3,210 7 (1,918) -------- -------- ------- Provision for income taxes $ 37,827 $ 12,215 $ -- ======== ======== ======= Effective tax rate 28% 25% --% ======== ======== =======
The components of deferred tax assets and liabilities consisted of the following:
1995 1994 ---- ---- (In thousands) Deferred tax assets: Merger reserves $ 3,394 $ 3,829 Net operating losses 6,202 19,146 Tax credits 32,845 33,910 Other 20,125 14,650 -------- -------- Total deferred tax assets 62,566 71,535 Valuation allowance-provision for income taxes (13,549) (33,548) Valuation allowance-equity and intangibles (34,223) (19,713) -------- -------- Net assets 14,794 18,274 -------- -------- Deferred tax liabilities: Capitalized software (10,091) (11,233) Other (7,273) (3,970) -------- -------- Total deferred tax liabilities (17,364) (15,203) -------- -------- Total net deferred tax (liabilities) assets $ (2,570) $ 3,071 ======== ========
The Company has recorded deferred tax assets of $62.6 million offset by a valuation allowance of $47.8 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 $14.8 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 $14.8 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 $5.5 million in 1995. The increase in valuation allowance-equity and intangibles of $14.5 million is due to an increase in the tax benefits related to stock option exercises which are required to be credited to equity in future periods. This increase in the valuation allowance-equity and intangibles was offset by a decrease in the valuation allowance-provision for income taxes of $20.0 million due to the realization of net operating losses and tax credits generated in prior years. 42 45 The remaining net operating loss carryforwards will expire at various dates from 1997 through 2008 and tax credit carryforwards will expire at various dates from 1996 through 2010. The Company's federal income tax returns for 1989 through 1991 have been examined by the Internal Revenue Service ("IRS"). Tax credits of $15.6 million have been disallowed by the IRS. The Company is contesting these adjustments and is pursuing administrative remedies. Management believes that adequate provision has been made for any deficiency that may result from this examination and that the resolution of this matter will not have a material adverse impact on the Company's 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.
1995 1994 1993 ---- ---- ---- (In thousands) Revenue Domestic operations(1) $ 440,618 $ 344,696 $ 298,366 European operations 97,596 79,404 73,181 Asia/Pacific operations 107,556 86,022 69,320 Eliminations (97,352) (81,050) (72,244) --------- --------- --------- Consolidated $ 548,418 $ 429,072 $ 368,623 ========= ========= ========= Intercompany revenue (eliminated in consolidation) Domestic operations $ 58,719 $ 58,837 $ 54,224 European operations 15,893 9,495 9,494 Asia/Pacific operations 22,740 12,718 8,526 --------- --------- --------- Consolidated $ 97,352 $ 81,050 $ 72,244 ========= ========= ========= Income (loss) from operations Domestic operations $ 85,308 $ 25,763 $ (15,124) European operations 9,705 7,412 4,107 Asia/Pacific operations 22,847 10,872 2,602 --------- --------- --------- Consolidated $ 117,860 $ 44,047 $ (8,415) ========= ========= ========= Identifiable assets Domestic operations $ 396,676 $ 368,226 $ 339,897 European operations 50,303 56,343 50,186 Asia/Pacific operations 63,680 42,095 52,401 Eliminations (136,624) (105,616) (103,183) --------- --------- --------- Consolidated $ 374,035 $ 361,048 $ 339,301 ========= ========= =========
(1) Domestic operations revenue includes export revenue of approximately $14.7 million, $12.9 million and $10.1 million to Europe for 1995, 1994 and 1993, respectively, and approximately $90.6 million, $65.4 million and $49.0 million to Asia/Pacific for 1995, 1994 and 1993, respectively. 43 46 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 30, 1995 Allowance for doubtful accounts $4,905 $4,827 $(2,312)(1) $7,420 Accrued costs for disposed division 874 -- (9)(4) 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)(2) -- Accrued costs for disposed division 1,373 -- (499)(4) 874 Year Ended December 31, 1993 Allowance for doubtful accounts $3,154 $5,648 $(5,331)(1) $3,471 Accrued restructuring costs 4,658 7,210 (8,199)(2) 3,669 Accrued costs for disposed division -- 3,382 (2,009)(3) 1,373
(1) Uncollectible accounts written-off (2) Incurred severance and facilities costs relating to the Company's restructuring and a reclassification of $3,500 in 1993 from accrued operating lease obligations to lease liabilities. (3) Reflects a reclassification of $2,009 from accrued liabilities to other noncurrent liabilities. (4) Incurred severance and facilities costs relating to the Company's disposal of a division. 44 47 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 27, 1996. 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 March 27, 1996 - ----------------------------------------------------- Joseph B. Costello CHIEF FINANCIAL OFFICER /s/ H. Raymond Bingham March 27, 1996 - ----------------------------------------------------- H. Raymond Bingham CONTROLLER (Chief Accounting Officer) /s/ William Porter March 27, 1996 - ----------------------------------------------------- William Porter
45 48 ADDITIONAL DIRECTORS /s/ Carol Bartz March 27, 1996 - ----------------------------------------------------- Carol Bartz /s/ Henry E. Johnston March 27, 1996 - ----------------------------------------------------- Henry E. Johnston /s/ Donald L. Lucas March 27, 1996 - ----------------------------------------------------- Donald L. Lucas /s/ Dr. Leonard Y. W. Liu March 27, 1996 - ----------------------------------------------------- Dr. Leonard Y. W. Liu /s/ Dr. Alberto Sangiovanni-Vincentelli March 27, 1996 - ----------------------------------------------------- Dr. Alberto Sangiovanni-Vincentelli /s/ George M. Scalise March 27, 1996 - ----------------------------------------------------- George M. Scalise /s/ Dr. John B. Shoven March 27, 1996 - ----------------------------------------------------- Dr. John B. Shoven /s/ James E. Solomon March 27, 1996 - ----------------------------------------------------- James E. Solomon
46 49
EXHIBIT NUMBER EXHIBIT TITLE LOCATION ------ ------------- -------- 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). (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). 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 Form 8-K filed June 12, 1989). 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 Company 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 9, 1996.) 10.01 The Registrant's 1987 Stock Option Plan, as amended to date, (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994 (the "1994 Form S-8")).*
47 50
EXHIBIT NUMBER EXHIBIT TITLE LOCATION ------ ------------- -------- 10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).* 10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant and 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).* 10.04 The Registrant's 1993 Directors Stock Option Plan including the Stock Option Grant (incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).* 10.05 The Registrant's 1995 Directors Stock Option Plan including the Stock Option Grant. * 51 10.06 The Registrant's 1990 Employee Stock Purchase Plan as amended to date (incorporated by reference to Exhibit 4.03 of the 1994 Form S-8).* 10.07 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the "1994 Form 10-K")).* 10.08 The Registrant's Senior Executive Bonus Plan for 1996.* 58 10.09 The Registrant's Chief Executive Officer Bonus Plan for 1996.* 59 10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the 1994 Form 10-K).* 10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan.* 61 10.12 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates ("ROPA"), a California limited partnership, and the Registrant, for the Registrant's 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")). 10.13 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
48 51
EXHIBIT NUMBER EXHIBIT TITLE LOCATION ------ ------------- -------- 10.14 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K). 10.15 Lease dated 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")). 10.16 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). 10.17 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). 10.18 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). 10.19 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). 10.20 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).* 10.21 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")).* 10.22 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the 1993 Form 10-K).* 10.23 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).* 10.24 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")).*
49 52
EXHIBIT NUMBER EXHIBIT TITLE LOCATION ------ ------------- -------- 10.25 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by reference to the 1994 Second Quarter Form 10-Q).* 10.26 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). 10.27 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")). 10.28 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). 10.29 Form of Stock Option Agreement for 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).* 10.30 Form of Underwriting Agreement in connection with Integrated Measurement Systems, Inc. public offering (incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1995). 21.01 Subsidiaries of the Registrant 71 23.01 Consent of Arthur Andersen LLP 72 27.1 Financial data schedule for the period ended December 30, 1995.
- --------- * A management contract or compensatory plan required to be filed as an exhibit to Form 10-K. 50 EX-10.05 2 1995 DIRECTORS STOCK OPTION PLAN 1 Exhibit 10.05 CADENCE DESIGN SYSTEMS, INC. 1995 DIRECTORS STOCK OPTION PLAN ADOPTED ON OCTOBER 3, 1995, AMENDED AND RESTATED ON FEBRUARY 9, 1996 SUBJECT TO STOCKHOLDER APPROVAL ON MAY 3, 1996 1. PURPOSE. (a) The purpose of the 1995 Directors Stock Option Plan (the "Plan") is to provide a means by which each director of Cadence Design Systems, Inc., a Delaware corporation (the "Company"), who is not otherwise at the time of grant an employee of the Company or of any Affiliate of the Company (each such person being hereafter referred to as a "Non-Employee Director") will be given an opportunity to purchase stock of the Company through the grant of options. (b) The word "Affiliate" as used in the Plan means any corporation or other entity which is controlled by the Company, which controls the Company, or which is under common control with the Company. (c) The Company, by means of the Plan, seeks to retain the services of persons now serving as Non-Employee Directors of the Company, to secure and retain the services of persons capable of serving in such capacity, and to provide incentives for such persons to exert maximum efforts for the success of the Company. (d) No option granted under the Plan is intended to be an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. ADMINISTRATION. (a) The Plan shall be administered by the Board of Directors of the Company (the "Board") unless and until the Board delegates administration to a committee, as provided in section 2(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan, to construe and interpret the Plan and options granted under the Plan, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any option, in a manner and to the extent it shall deem necessary or desirable to make the Plan fully effective. All decisions of the Board on such matters shall be final, binding and conclusive on all persons having an interest in such decision. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the "Committee"). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 3. SHARES SUBJECT TO THE PLAN. 51 2 (a) Subject to the provisions of section 10 relating to adjustments upon changes in stock, the stock that may be sold pursuant to options granted under the Plan shall not exceed in the aggregate four hundred fifty thousand (450,000) shares of the Company's $.01 par value common stock (the "Common Stock"). If any option granted under the Plan shall for any reason expire or otherwise terminate without having been exercised in full, the stock not purchased under such option shall again become available for issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 4. ELIGIBILITY. Options shall be granted only to Non-Employee Directors of the Company. 5. NON-DISCRETIONARY GRANTS. (a) Each person who first becomes a Non-Employee Director after October 3, 1995 shall automatically be granted an option to purchase shares of the Common Stock on the terms and conditions set forth herein. The number of shares of the Common Stock which shall be subject to an option granted pursuant to this section 5(a) shall be equal to 2500 multiplied by the number of calendar quarters occurring between the date on which such person begins serving as a director of the Company and the first July 1 occurring after the date such person becomes a director of the Company. If a person becomes a Non-Employee Director during a calendar quarter, he or she shall be treated as serving as a director of the Company for the entire such calendar quarter only if he or she becomes a Non-Employee Director during the first half of such calendar quarter. (b) On July 1 of each year, commencing with July 1, 1996, each person who on that date is then a Non-Employee Director shall automatically be granted an option to purchase ten thousand (10,000) shares of Common Stock on the terms and conditions set forth herein. If the Non-Employee Director is an "Active Board Member" on that date but is not then serving as the Chairman of the Board, then such director shall automatically be granted an option to purchase an additional five thousand (5,000) shares of Common Stock on the terms and conditions set forth herein. If the Non-Employee Director is serving as the Chairman of the Board on that date, then such director shall automatically be granted an option to purchase an additional ten thousand (10,000) shares of Common Stock on the terms and conditions set forth herein. An "Active Board Member" shall be defined as a Non-Employee Director who is the chairman of one committee of the Board and is serving as a member of at least one additional committee of the Board. (c) Each Non-Employee Director who on October 3, 1995 is serving as a member of the Venture Committee of the Board shall automatically receive on that date an option to purchase fifteen thousand (15,000) shares of Common Stock on the terms and conditions set forth herein. The Non-Employee Director who on October 3, 1995 is serving as the chairman of the Venture Committee of the Board shall automatically receive on that date an option to purchase an additional fifteen thousand (15,000) shares of Common Stock on the terms and conditions set forth herein. In addition, each Non-Employee Director who is selected for the first time to serve on the Venture Committee after October 3, 1995 automatically shall, upon the date of his or her initial selection to serve on the Venture Committee, be granted an option to purchase fifteen thousand (15,000) shares of Common Stock on the terms and conditions set forth herein. Each Non-Employee Director who is selected for the first time to serve as the chairman of the Venture Committee after October 3, 1995 automatically shall, upon the date of his or her initial selection to serve as the chairman of the Venture Committee, be granted an option to purchase an additional fifteen thousand (15,000) shares of Common Stock on the terms and conditions set forth herein. (d) On January 30 of each year, commencing with January 30, 1996, each Non-Employee Director who on that date is then serving as the Chairman of the Board and has completed five (5) years of service as the Chairman of the Board shall automatically receive an option to purchase forty five thousand (45,000) shares of Common Stock on the terms and conditions set forth herein; provided, however, that no such Non-Employee Director shall receive more than one such grant under this paragraph 5(d). 52 3 (e) If an option would otherwise automatically be granted on or after October 3, 1995 to a Non-Employee Director under the terms of the Company's 1993 Directors Option Plan (the "1993 Directors Plan"), but cannot be granted in full because there are insufficient shares of Common Stock remaining in the share reserve for the 1993 Directors Plan which neither have been issued nor are then subject to the term of an outstanding option previously granted under the 1993 Directors Plan, then an option shall automatically be granted on the same date to such Non-Employee Director on the terms and conditions set forth herein. The number of shares of Common Stock which shall be subject to such an option shall be that number of shares which would otherwise have been subject to the option granted under the 1993 Directors Plan on the same date, but as to which such an option may not be granted under the 1993 Directors Plan to such Non-Employee Director solely because of the lack of sufficient uncommitted shares in the share reserve of the 1993 Directors Plan as described above. 6. OPTION PROVISIONS. Each option shall be subject to the following terms and conditions: (a) The term of each option commences on the date it is granted and, unless sooner terminated as set forth herein, expires on the date ten (10) years from the date of grant (the "Expiration Date"). In any and all circumstances, an option may be exercised only as to no more than that number of shares as to which it is exercisable at the time in question under the provisions of section 6(e). (b) The exercise price of each option shall be one hundred percent (100%) of the fair market value of the stock subject to such option on the date such option is granted. The "fair market value" of the Common Stock shall be the mean average of the closing price of the Company's common stock for each of the last twenty trading days prior to the date of the grant of the option on the national securities exchange, national market system or other trading market on which the Company's common stock has the highest average trading volume. (e) The optionee may elect to make payment of the exercise price under one of the following alternatives: (i) Payment of the exercise price per share in cash (by check) at the time of exercise; or (ii) Provided that at the time of the exercise the Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of shares of Common Stock already owned by the optionee, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interest, which common stock shall be valued at its fair market value on the last day on which the Common Stock was actively traded preceding the date of exercise; (iii) Payment by the delivery of the optionee's full recourse promissory note on such terms as may be determined by the Board which are not inconsistent with the terms of the Plan; or (iv) Payment by a combination of the methods of payment specified in subsections 6(c)(i) through 6(c)(iii) above. For purposes of section 6(c)(ii), the "fair market value" of Common Stock shall be the closing price of such stock on the last trading day preceding the date of delivery of such Common Stock to the Company on the national securities exchange, national market system or other trading market on which the Common Stock has the highest average trading volume. If the optionee uses a promissory note as partial payment of the exercise price pursuant to section 6(c)(iii), then such principal amount of such note may not exceed the maximum amount permitted by law (including but not limited to the limitation under the Delaware General Corporation Law that the par value of shares of stock may not be paid with a promissory note) and interest shall be compounded at least annually and shall be charged at no less than the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the terms of such promissory note. 53 4 Notwithstanding the foregoing, this option may be exercised pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which results in the receipt of cash (or check) by the Company either prior to the issuance of shares of the Company's common stock or pursuant to the terms of irrevocable instructions issued by the optionee prior to the issuance of shares of the Company's common stock. (d) An option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and the rules thereunder ("QDRO"), and shall be exercisable during the lifetime of the person to whom the option is granted only by such person, by his guardian or legal representative, or by any transferee pursuant to a QDRO. 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. (e) (i) An option granted pursuant to section 5(a) or 5(b) shall vest and become exercisable in full on the first June 30 following the grant of such option; provided, however, the optionee has continuously served in the same capacity which entitled him or her to the grant of such option from the date of grant until and including the next following June 30. (ii) An option granted pursuant to section 5(c), 5(d) or 5(e) shall become exercisable in installments over a period of three years from the date of grant at the rate of one-third (1/3rd) of the total number of shares subject to such option upon the first anniversary of the date of grant and subsequently at the rate of one thirty-sixth (1/36th) of the total number of shares subject to the option a month, in twenty-four (24) equal monthly installments; provided, however, that the optionee has, during the entire period from the grant date to such vesting date, continuously served in the same capacity which entitled him or her to the grant of such option, whereupon such option shall become fully exercisable in accordance with its terms with respect to that portion of the shares represented by that installment. (f) The Company may require any optionee, or any person to whom an option is transferred under section 6(d), as a condition of exercising any such option: (i) to give written assurances satisfactory to the Company as to the optionee's knowledge and experience in financial and business matters; and (ii) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the option for such person's own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the option has been registered under a then-currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii), as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may require any optionee to provide such other representations, written assurances or information which the Company shall determine is necessary, desirable or appropriate to comply with applicable securities laws as a condition of granting an option to the optionee or permitting the optionee to exercise the option. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) Notwithstanding anything to the contrary contained herein, an option may not be exercised unless the shares issuable upon exercise of such option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 7. COVENANTS OF THE COMPANY. (a) During the terms of the options granted under the Plan, the Company shall keep available at all times the number of shares of the Common Stock required to satisfy such options. 54 5 (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the options granted under the Plan; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any option granted under the Plan, or any stock issued or issuable pursuant to any such option. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such options. 8. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to options granted under the Plan shall constitute general funds of the Company. 9. MISCELLANEOUS. (a) Neither an optionee nor any person to whom an option is transferred under section 6(d) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option unless and until such person has satisfied all requirements for exercise of the option pursuant to its terms. (b) Throughout the term of any option granted pursuant to the Plan, the Company shall make available to the holder of such option, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the option term, upon request, such financial and other information regarding the Company as comprises the annual report to the stockholders of the Company provided for in the Bylaws of the Company and such other information regarding the Company as the holder of such option may request under applicable law. (c) Nothing in the Plan or in any instrument executed pursuant thereto shall confer upon any Non-Employee Director any right to continue in the service of the Company or any Affiliate in any capacity or shall affect any right of the Company, its Board or stockholders or any Affiliate to remove any Non-Employee Director pursuant to the Company's Bylaws and the provisions of the Delaware General Corporation Law (or the laws of the Company's state of incorporation should that change in the future). (d) No Non-Employee Director, individually or as a member of a group, and no beneficiary or other person claiming under or through him, shall have any right, title or interest in or to any option reserved for the purposes of the Plan except as to such shares of common stock, if any, as shall have been reserved for him pursuant to an option granted to him. (e) In connection with each option made pursuant to the Plan, it shall be a condition precedent to the Company's obligation to issue or transfer shares to a Non-Employee Director, or to evidence the removal of any restrictions on transfer, that such Non-Employee Director make arrangements satisfactory to the Company to insure that the amount of any federal or other withholding tax required to be withheld with respect to such sale or transfer, or such removal or lapse, is made available to the Company for timely payment of such tax. (f) The size of the Plan's share reserve set forth in section 3, the size of individual option grants described in section 5, and all other references in the Plan to specific numbers of shares of the Common Stock reflect and have taken into account the Company's three-for-two (3:2) stock dividend effective as of October 31, 1995, including all options granted under the Plan prior to October 31, 1995. 10. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the Common Stock subject to the Plan, or subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the 55 6 Company), the Plan and outstanding options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and exercise price per share of stock subject to outstanding options. Such adjustments shall be made by the Board, the determination of which shall be final, binding, and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a "transaction not involving the receipt of consideration by the Company.") No adjustment shall result in the creation of a fractional share of stock or in an exercise price per share of stock expressed in units of less than one cent ($.01). (b) In the event of: (1) a dissolution, liquidation, or sale of all or substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or groups within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any comparable successor provisions (excluding any employee benefit plan, or related trust, approved or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then to the extent not prohibited by applicable law, the time during which options outstanding under the Plan may be exercised shall be accelerated prior to such event and the options terminated if not exercised after such acceleration and at or prior to such event. 11. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan and/or some or all outstanding options granted under the Plan, provided, however, that the Board shall not amend the Plan more than once every six (6) months, with respect to the provisions of the Plan which relate to the amount, price and timing of grants, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder. Except as provided in section 10 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment would: (i) Increase the number of shares which may be issued under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to comply with the requirements of Rule 16b-3. (b) Rights and obligations under any option granted before any amendment of the Plan shall not be impaired by such amendment unless (i) the Company requests the consent of the person to whom the option was granted and (ii) such person consents in writing. 12. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the date that all of the shares of the Company's Common Stock have been issued. No options may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the option was granted. 56 7 13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE. (a) The Plan shall become effective upon adoption by the Board of Directors on October 3, 1995, subject to the condition subsequent that the Plan is approved by the stockholders of the Company. (b) No option granted under the Plan shall be exercised or exercisable unless and until the Plan has been approved by the Company's stockholders. 57 EX-10.08 3 SENIOR EXECUTIVE BONUS PLAN FOR 1996 1 Exhibit 10.08 CADENCE DESIGN SYSTEMS, INC. SENIOR EXECUTIVE BONUS PLAN JANUARY 1, 1996 - DECEMBER 31, 1996 The purpose of the Senior Executive Bonus Plan is to motivate and reward the Senior Executives of the company to profitably grow Cadence and achieve corporate goals. The plan provides for a cash payment after January 1, 1997. The financial performance will be based on the audited financial statements. The Target Bonus Pool will be made up of the sum of each participant's salary times a percentage as assigned by the Compensation Committee. The Actual Bonus Pool will be a percentage of the Target Bonus Pool determined based on Cadence's performance against Earnings Per Share (EPS) targets. If Earnings Per Share fall outside the target range, the Bonus Pool will be determined at the sole discretion of the Board of Directors. The target bonus for each Senior Executive will be pre-established by the Compensation Committee of the Board of Directors. The individual Senior Executive bonus target will be adjusted in proportion to the adjustment of the Bonus Pool, the portion of 1996 actively employed by Cadence as a Senior Executive and an individual performance factor with a range of .5 to 1.5 as assigned or approved by the Compensation Committee of the Board of Directors. There will be no adjustment for the other Senior Executives if a Senior Executive leaves the Company. The total of the individual bonuses will be controlled to the bonus pool, as adjusted by the Earnings Per Share performance factor. The Board of directors reserves the right to terminate or modify this plan at any time. The plan is only effective for 1996, and any future Senior Executive Bonus or other bonus plan is at the discretion of the Board of Directors. In order for the Bonus to be paid to a Senior Executive, he/she must be in the active employment of Cadence on the date checks are distributed. All forfeitures revert to Cadence. 58 EX-10.09 4 CHIEF EXECUTIVE OFFICER BONUS PLAN FOR 1996 1 Exhibit 10.09 CADENCE DESIGN SYSTEMS, INC. CHIEF EXECUTIVE OFFICER BONUS PLAN EFFECTIVE AS OF JANUARY 1, 1996 The purpose of the Chief Executive Officer Bonus Plan (the "Plan") is to motivate and reward that individual who is serving as the Company's Chief Executive Officer ("CEO") to improve the Company's profitability and achieve the established corporate goals of the Company. The Plan provides for a cash payment after the end of the Company's fiscal year ending December 31, 1996 and after the end of each subsequent fiscal year. The Company's financial performance for a given fiscal year will be based on the audited financial statements prepared by the Company's outside accounting firm. Amounts paid under the Plan are intended to be "performance-based compensation" within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the Plan shall be interpreted in accordance with that intent. The target bonus amount for the CEO will be established by the Compensation Committee of the Board of Directors for a given fiscal year within the first ninety (90) days of that fiscal year. The target bonus amount shall be expressed as a percentage of the CEO's base salary for that fiscal year, which base salary shall also be established by the Compensation Committee of the Board of Directors within the first ninety (90) days of that fiscal year. The CEO's actual bonus for a given fiscal year shall be determined by the Company's achievement of the Earnings Per Share ("EPS") target established by the Compensation Committee of the Board of Directors for a given fiscal year within the first ninety (90) days of that fiscal year. For purposes of the Plan, "Earnings Per Share" shall be determined by applying generally accepted accounting principles ("GAAP") and excluding the impact of any significant unusual or non-recurring items. If the Earnings Per Share target is equalled by the Company's performance, then the CEO's actual bonus shall be equal to the target bonus amount for such year. If the Company's performance exceeds the Earnings Per Share target, then the CEO's actual bonus shall be greater than the target bonus amount for such year. If the Company's performance fails to reach the Earnings Per Share target, then the CEO's actual bonus shall be less than the target bonus amount for such year, and in some cases it is possible that no bonus may be paid. The schedule setting forth the relationship between the Company's financial performance for a given fiscal year expressed in terms of Earnings Per Share and the CEO's actual bonus shall be established by the Compensation Committee of the Board of Directors for a given fiscal year within the first ninety (90) days of that fiscal year. In the event that the Company's actual Earnings Per Share for a fiscal year falls between two of the numbers for Earnings Per Share selected by the Compensation Committee of the Board of Directors on the schedule ("EPS Numbers"), then the percentage of the CEO's target bonus amount which will be paid as the CEO's actual bonus (the "amount percentage") shall be determined by the sum of the following two percentages: (1) the "amount percentage" matched with the lower of the two EPS Numbers on the schedule plus (2) the product (rounded to the next higher full percentage point) of the number of percentage points between the "amount percentages" for the two EPS Numbers, multiplied by a fraction, the numerator of which is the difference between the Company's actual Earnings Per Share and the lower EPS Number and the denominator of which is the number of cents between the two EPS Numbers. In no event may the CEO's actual bonus for a given fiscal year exceed $2,000,000. The CEO's actual bonus for a given fiscal year shall be reduced by the amount which the CEO receives with respect to the same fiscal year under the terms of the Company's Senior Executive Bonus Plan for that fiscal year. The amount of the CEO's actual bonus for a given fiscal year shall be certified in writing by the Compensation Committee of the Board of Directors prior to payment. 59 2 Any individual who serves as the Company's Chief Executive Officer for a given fiscal year shall automatically be eligible to participate in the Plan. If an individual becomes Chief Executive Office during a fiscal year, that individual's target bonus amount, base salary, EPS target, and schedule of adjustments to the target bonus amount based upon actual EPS results, shall be established by the Compensation Committee before the first 25% of the remainder of that fiscal year has elapsed. These determinations of the Compensation Committee shall be applied to the period of time remaining in the fiscal year after the individual became Chief Executive Officer, or such shorter period of time within the fiscal year determined by the Compensation Committee. In order to receive a bonus payment under the Plan for a given fiscal year, the individual must be employed by the Company on the date that bonus checks are distributed for that fiscal year, or have terminated employment prior to that time on account of death or disability. The Compensation Committee of the Board of Directors may terminate the Plan at any time, for any or no reason, and may also amend the Plan in order to reduce the amount of the CEO's bonus payment at any time, for any or no reason. The Compensation Committee of the Board of Directors shall be responsible for all matters of interpretation of the terms of the Plan, including the authority to make decisions regarding matters not expressly addressed in the Plan, and the decision of the Compensation Committee shall be final and binding on all persons having an interest in the Plan. 60 EX-10.11 5 1996 DEFERED COMPENSATION VENTURE INVESTMENT PLAN 1 Exhibit 10.11 CADENCE DESIGN SYSTEMS, INC. 1996 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN
TABLE OF CONTENTS PAGE SECTION 1 DEFINITIONS 2 SECTION 2 ELIGIBILITY 4 SECTION 3 DEFERRED COMPENSATION 4 SECTION 4 DESIGNATION OF BENEFICIARY 10 SECTION 5 CHANGE IN CONTROL 10 SECTION 6 TRUST PROVISIONS 11 SECTION 7 AMENDMENT AND TERMINATION 12 SECTION 8 ADMINISTRATION 12 SECTION 9 GENERAL AND MISCELLANEOUS 12
1996 DEFERRED COMPENSATION VENTURE INVESTMENT PLAN CADENCE DESIGN SYSTEMS, INC. a Delaware corporation (referred to hereafter as the "Employer") hereby establishes an unfunded plan for the purpose of providing deferred compensation for a select group of management and highly compensated executives of the Employer. RECITALS WHEREAS, those employees identified by the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer to administer this plan in accordance with Section 8 hereof (hereinafter referred to as the "Committee") as eligible to participate in this Plan (each of whom are referred to hereafter as the "Employee" or collectively as the "Employees") are employed by Employer; and; WHEREAS, Employer desires to adopt an unfunded deferred compensation plan and the Employees desire the Employer to pay certain deferred compensation and/or related benefits to or for the benefit of Employees, or a designated Beneficiary, or both; NOW, THEREFORE, the Employer hereby establishes this deferred compensation plan. 1. DEFINITIONS 61 2 1.1 "ACCOUNT" shall mean the separate account(s) established under this Plan and the Trust for each participating Employee. Employer shall furnish each participant with a statement of his or her account balance at least annually. 1.2 "BENEFICIARY" shall mean the Beneficiary designated by the Employee to receive Employee's deferred compensation benefits in the event of his or her death. 1.3 "CHANGE IN CONTROL" shall have the meaning set forth in Section 5.1 of the Plan. 1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder. 1.5 "COMMITTEE" shall mean the Compensation Committee of the Board of Directors of the Employer or any other committee designated by the Board of Directors of the Employer to administer this Plan in accordance with Section 8 hereof. 1.6 "COMPENSATION" shall mean the base salary and cash bonuses described in Section 3.1. 1.7 "EFFECTIVE DATE" shall mean January 1, 1996. 1.8 "ELIGIBLE COMPENSATION" shall mean projected annual compensation from the Employer, determined on an annual basis by the Employer at or before the beginning of the Plan Year, which may consist of salary, bonus, and/or incentive payments, determined before any deductions under any qualified plan of the Employer (including a Section 401(k) plan or Section 125 plan) and excluding any special or non-recurring compensatory payments such as moving or relocation bonuses or automobile allowances. 1.9 "EMPLOYEE" shall mean each employee of Employer who (a) is a U.S. citizen or is a lawful permanent resident of the U.S., within the meaning of Code Section 7701(b)(1)(A)(i), (b) earns solely U.S. source income from Employer, and (c) is exclusively on Employer's U.S. payroll system; references to Employee herein shall include references to an Employee's Beneficiary where the context so requires. 1.10 "EMPLOYER" shall mean Cadence Design Systems, Inc., a Delaware corporation, and any successor organization thereto. This term shall not include any subsidiaries or affiliates of the Employer. 1.11 "EMPLOYER CONTRIBUTIONS" shall mean the Employer's discretionary contribution, if any, pursuant to Section 3.1(b) of the Plan. 1.12 "PLAN YEAR" shall mean the calendar year beginning each January 1 and ending December 31. 1.13 "PLAN" shall mean the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Plan. 1.14 "PERMANENT DISABILITY" shall mean that the Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or otherwise meets the definition of "Permanent Disability" as set forth in the Employer's Long Term Disability Plan. An Employee will not be considered to have a Permanent Disability unless he or she furnishes proof of such condition sufficient to satisfy the Employer, in its sole discretion. 1.15 "TRUST" or TRUST AGREEMENT" shall mean the Cadence Design Systems, Inc. 1996 Deferred Compensation Venture Investment Trust Agreement, including any amendments thereto, entered into between the Employer and the Trustee to carry out the provisions of the Plan. 1.16 "TRUST FUND" shall mean the cash and other assets and/or properties held and administered by Trustee pursuant to the Trust to carry out the provisions of the Plan. 62 3 1.17 "TRUSTEE" shall mean the designated Trustee acting at any time under the Trust. 2 ELIGIBILITY 2.1 ELIGIBILITY. Eligibility to participate in the Plan shall be limited to Employees of the Employer who (a) have Eligible Compensation of at least $150,000 for the Plan Year, (b) are classified as officers, vice-presidents, directors, or an equivalent title, and (c) have been selected by the Committee to participate in the Plan. Participation in the Plan shall commence as of the effective date of the Employee's enrollment form, which shall be completed and submitted to the Employer in accordance with the provisions of Section 3.3. Nothing in the Plan or in any administrative form used to administer the Plan or Trust shall be construed to require any contributions to the Plan on behalf of the Employee by Employer. The Committee has the discretion to end the eligibility of one or more participating Employees at any time in the sole discretion of the Committee. 3 DEFERRED COMPENSATION 3.1 DEFERRED COMPENSATION. (a) Each participating Employee may elect, in accordance with Section 3.3 of this Plan, to defer annually the receipt of a portion of the Compensation for active service otherwise payable to him or her by Employer during each Plan Year or portion of a Plan Year that the Employee shall be employed by the Employer. Any Compensation deferred by Employee pursuant to Section 3.3 shall be recorded by the Employer in an Account, maintained in the name of the Employee, which Account shall be credited with a dollar amount equal to the total amount of Compensation deferred during each Plan Year under the Plan, together with earnings thereon credited in accordance with Section 3.7 and expenses allocated thereto in accordance with Section 3.8. The amount or percentage of Compensation that Employee elects to defer under Section 3.3 will remain constant for the year of the election and shall not be subject to change during such year. Each such deferral election as to "base salary" or discontinuance of a deferral election as to "base salary" will continue in force for each successive year until or unless suspended or modified by the filing of a subsequent election with the Employer by the Employee in accordance with Section 3.3 of the Plan. Each deferral election as to an Employee's "cash bonus" shall continue in force only for the single year with respect to which it was made and shall not apply to any successive years. Any deferral election with respect to a "cash bonus" must be made prior to the time the amount of the bonus is determined, prior to the end of the period of time as to which the bonus is awarded, and at a time that the amount of any such bonus remains substantially uncertain. All deferrals pursuant to this Section 3.1 shall be fully vested at all times. Deferral elections shall be subject to a minimum dollar and maximum percentage amounts as follows: (i) the minimum annual deferral amount is $10,000, which shall be withheld from the participating Employee's "base salary" and "cash bonus," and (ii) the maximum deferral percentage amount is 80% of the Employee's "base salary" and 100% of the Employee's "cash bonus". For purposes of the Plan, "base salary" for a given Plan Year means an "Employee's regular annual compensation payable during the Plan Year, excluding bonuses, commissions, overtime, incentive payments, non-monetary awards, compensation deferred pursuant to all Section 125 (cafeteria) or Section 401(k) (savings) plans of the Employer and other special compensation, and reduced by the tax withholding obligations imposed on the Employer and any other withholding requirements imposed by law with respect to such amounts. For purposes of the Plan, "cash bonus" shall mean amounts (if any) awarded under the bonus policies maintained by the Employer and any commissions earned on sales. (a) Employer shall not be obligated to make any other contribution to the Plan on behalf of any Employee at any time. Employer may make Employer Contributions to the Plan on behalf of one or more Employees. Employer Contributions, if any, made to Accounts of Employees shall be determined in the sole and absolute discretion of the Employer, and may be made without regard to whether the Employee to whose account such contribution is credited has made, or is making, contributions pursuant to Section 3.1(a). The Employer shall not be bound or obligated to apply any specific formula or basis for calculating 63 4 the amount of any Employer Contributions and Employer shall have sole and absolute discretion as to the allocation of Employer Contributions among participating Employee Accounts. The use of any particular formula or basis for making an Employer Contribution in one Plan Year shall not bind or obligate the Employer to use such formula or basis in any other Plan Year. Employer Contributions may be subject to a substantial risk of forfeiture in accordance with the terms of a vesting schedule, which may be selected by the Employer in its sole and absolute discretion. (b) Amounts deferred under the Plan shall be calculated and withheld from the Employee's base salary and/or cash bonus after such compensation has been reduced to reflect any tax withholding obligations imposed on the Employer, any other withholding requirements imposed by law, salary reduction contributions to the Employer's Code Section 125 (cafeteria) and Code Section 401(k) (savings) plans, but before any reductions for contributions to the Employer's Code Section 423 (employee stock purchase) plan or the Cadence Design Systems, Inc. 1994 Deferred Compensation Plan. 3.2 PAYMENT OF ACCOUNT BALANCES. (a) The Employee shall elect whether he or she will receive distribution of his or her entire Account, subject to tax withholding requirements, (i) upon reaching a specified age, (ii) upon passage of a specified number of years, (iii) upon termination of employment of Employee with Employer, (iv) upon the earlier to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, or (v) upon the later to occur of (A) termination of employment of Employee with Employer or (B) passage of a specified number of years or attainment of a specified age, as elected by Employee in accordance with the form established by the Committee. Such form may permit an election among some or all of the alternatives listed in this Section 3.2, as determined in the Committee's sole discretion. A designation of the time of distribution shall be required as a condition of participation under this Plan. The Employee shall also elect to receive all amounts payable to him or her in a lump sum or in equal monthly installments over a designated period of five or ten years, pursuant to the provisions of Section 3.2(e). These elections shall be made in accordance with Section 3.4 of this Plan. (a) Distribution shall be made to the maximum extent allowable under the election made by Employee, except that no distribution shall be made to the extent that the receipt of such distribution, when combined with the receipt of all other "applicable employee remuneration" (as defined in Code Section 162(m)(4)), would cause any remuneration received by the Employee to be nondeductible by the Employer under Code Section 162(m)(1). The portion of any distributable amount that is not distributed by operation of this Section 3.2(b) shall be distributed in subsequent years in the manner elected by the Employee until the Employee's Account has been fully liquidated. For Employees who have elected to receive payment in a lump sum or over five or ten years, the commencement date of the lump sum payment or the five or ten-year period (whichever is applicable) shall be automatically extended, when necessary to satisfy the requirements of this subsection, for one-year periods until all Account balances have been distributed in the manner elected by the Employee. (b) Upon termination of Employee's employment with Employer by reason of death or Permanent Disability prior to the time when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), Employee or Employee's designated Beneficiary will be entitled to receive all amounts credited to the Account of Employee as of the date of his or her death or Permanent Disability (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Upon termination of Employee's employment with Employer by reason other than death or Permanent Disability prior to the date when payment of Account balances otherwise would commence under the provisions of Section 3.2(a), the Employer may, in the sole discretion of the Committee, distribute to Employee or Employee's designated Beneficiary all amounts credited to the Employee's Account as of the date of such termination (notwithstanding any contrary election to receive distributions under the first sentence of Section 3.2(a)). Said amounts shall be payable in the form determined pursuant to the provisions of Section 3.2(e). (c) Upon the death of Employee prior to complete distribution to him or her of the entire balance of his or her Account (and after the date of termination of employment with Employer), the balance of his or her Account on the date of death shall be payable to Employee's designated Beneficiary pursuant to Section 3.2(e). Notwithstanding any other provision of the Plan to the contrary, except for Section 3.2(f), the Employee's designated Beneficiary may receive the distribution of the remaining portion of such 64 5 deceased Employee's Account in the form of a lump sum if the Beneficiary requests such a distribution and the Committee, in its sole discretion, consents to such a distribution. (d) The Employer shall distribute or direct distribution of the balance of amounts previously credited to Employee's Account, in a lump sum, or in monthly installments over a period of five (5) years or ten (10) years, as Employee shall designate. A designation of the form of distribution shall be required as a condition of participation under this Plan. Distribution of the lump sum or the first installment generally shall be made or commence within ninety (90) days following the date specified in the first sentence of Section 3.2(a). Subsequent installments, if any, shall be made on the first day of each month following the first installment as determined by Employer. The amount of each installment shall be calculated by dividing the Account balance as of the date of the distribution by the number of installments remaining pursuant to the Employee's distribution election. Each such installment, if any, shall take into account earnings credited to the balance of the Account remaining unpaid. The Employee's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan. (e) Notwithstanding any other provisions of the Plan or the Trust to the contrary, no distribution will be made pursuant to the terms of the Plan if the distribution would require either the transfer of a limited partnership interest in Telos Venture Partners, L.P. or any other venture capital investment partnership in which some or all of the assets of the Trust might be invested (the "Partnership") or a distribution of assets from the Partnership. In addition, no distribution will be made if the Committee determines in its sole discretion that the Plan's assets would be insufficient to satisfy any future capital calls anticipated to be made by the General Partner of the Partnership, or if the Employee's Account has any amounts relating to unpaid debt or expenses thereon allocated to such Account. The terms of an Employee's election shall be followed to the fullest extent possible upon the distribution of assets from the Partnership to the Trust as determined in accordance with the terms of the Partnership Agreement. No provision of this Plan or the Trust Agreement (except for those provisions relating to the Insolvency of the Employer as set forth in Article 7 of the Trust Agreement) shall have any impact on the operation of the Partnership. 3.3 ELECTION TO DEFER COMPENSATION. Each election of an Employee to defer Compensation as provided in Section 3.1 of the Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, at least twenty (20) days (or such other period of time determined by the Committee and communicated to those Employees who are eligible to participate in the Plan) prior to the beginning of the Plan Year with respect to which the Compensation to be deferred is otherwise payable to Employee; provided, however, that an Employee who is hired or promoted during a Plan Year to a position of eligibility for participation in the Plan shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit the required election documents for the then current Plan Year. Any deferral election made by Employee shall be irrevocable with respect to any Compensation covered by such election, including Compensation payable in the Plan Year in which an election suspending or modifying the prior deferral election for the subsequent Plan Year is delivered to the Employer. The Employer shall withhold the amount or percentage of base salary specified to be deferred in equal amounts for each payroll period and shall withhold the amount or percentage of cash bonus specified to be deferred at the time or times such bonus is or otherwise would be paid to the Employee. The election to defer Compensation shall be in the form established by the Committee in accordance with the terms of the Plan. 3.4 DISTRIBUTION ELECTION. The initial distribution election of an Employee as provided in Section 3.2 of this Plan shall be in writing, signed by the Employee, and delivered to Employer, together with all other documents required under the provisions of this Plan, at least twenty (20) days (or such other period of time determined by the Committee and communicated to those Employees who are eligible to participate in the Plan) prior to the beginning of the Plan Year with respect to which the distribution election is to apply; provided, however, that an Employee who is hired or promoted during a Plan Year to a position of eligibility for participation in the Plan shall have thirty (30) days from the date of notification of eligibility for participation in the Plan in which to submit the required election documents for the then current Plan Year. If permitted by the Committee, an Employee may change the terms of his or her initial distribution election by making a new election, and any such new election will be effective as of the later of the date that is (a) six (6) months following the date the new election is made or (b) the first day of the Plan Year following the Plan Year in which the new election is made and will apply to the Employee's entire Account. 65 6 An Employee may not make a new election once distributions from the Plan have commenced or which would first become effective at a time when distributions from the Plan have commenced. Employee's distribution election shall be in the form established by the Committee in accordance with the terms of the Plan. 3.5 PAYMENT UPON CHANGE IN CONTROL. Notwithstanding any other provision of this Plan, except Section 3.2(f), the aggregate balances credited to and held in the Employees' Accounts shall be distributed to Employees in a lump sum within thirty (30) days following a Change in Control, as defined in Section 5.1. 3.6 EMPLOYEE'S RIGHTS UNSECURED. The right of the Employee or his or her designated Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Employer, and neither the Employee nor his or her designated Beneficiary shall have any rights in or against any amount credited to his or her Account or any specific assets of the Employer, except as otherwise provided in the Trust. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Plan and the Employer or any other person. 3.7 INVESTMENT OF CONTRIBUTIONS. (a) The investment options available to each Employee shall be determined by the Employer and described in a separate written document, a copy of which shall be attached hereto and by this reference is incorporated herein. Initially the Employer intends to invest all of the assets of the Trust to acquire a limited partnership interest in the Partnership, and investment in the Partnership shall be the sole investment option available to Employees. In the event that the Employer makes more than one investment option available to Employees, each Employee shall have the sole and exclusive right to direct the Trustee as to the investment of his or her Accounts among those investment options in accordance with policies and procedures implemented by the Trustee and the terms and conditions of those investment options. Employer shall not be liable for any investment decision made by any Employee while such funds are held by the Trustee. Employer may provide in its sole discretion for the transfer of some or all of the Plan's assets from the Trust to another trust established under the terms of a non-qualified deferred compensation plan sponsored by the Employer in order to provide additional investment options to Employees; provided, however, that prior to any such transfer, Employer shall have determined (after consulting with legal counsel for Employer with respect to the Plan) that such transfer shall not cause any participating Employee to incur any income tax liability with respect to his or her benefits under the Plan and shall not impair the rights of any Employee to accrue and/or receive benefits under the Plan. (a) Accounts shall be credited with the actual financial performance or earnings generated by such investments made by the Trustee in accordance with the terms of the Plan and Trust, until the Account has been fully distributed to the Employee or to the Employee's designated Beneficiary. Notwithstanding the foregoing, Accounts shall be maintained, credited and debited with respect to an investment in the Partnership as provided under the terms of the Partnership Agreement. Furthermore, the Trust's limited partnership interest in the Partnership for a given Plan Year which is acquired with deferrals of Compensation from participating Employees shall be allocated to the Accounts of those participating Employees in the same proportion as the deferred amounts invested in the Partnership for such Plan Year are allocated to those Accounts. The Trust's limited partnership interest in the Partnership for a given Plan Year which is acquired with loan proceeds shall be allocated to the Accounts of those participating Employees who remain employed by the Employer (or a subsidiary or affiliate of the Employer) at the end of such Plan Year in the same proportion as the deferred amounts invested in the Partnership for such Plan Year are allocated to the Accounts of those remaining Employees. (b) Notwithstanding any provision in this Section 3.7 to the contrary, the Committee may determine not to take account of Employee's designated investments, if any, and determine to have the Employee's Account invested in any other manner as the Committee shall determine. The Committee may also designate how the Plan's assets shall be invested for interim short-term periods of time pending investment in the Partnership or following distribution from the Partnership but prior to distribution from the Plan or re-investment in the Plan (or a similar non-qualified deferred compensation plan) in another investment option. 66 7 3.8 ALLOCATION OF EXPENSES (a) Expenses of administering the Plan and the Trust which are paid out of the Trust Fund shall be allocated to the Accounts of participating Employees on a periodic basis determined by the Committee using any method which the Committee determines is fair and equitable to participating Employees. The selection of a given method of allocating expenses among participating Employees' Accounts shall not be deemed to restrict the Committee in any manner whatsoever from selecting a different method for future allocations or to imply that a different method would not be fair and equitable to participating Employees. (b) From time to time the Trustee may borrow funds to satisfy the obligations of the Trust, whether to meet capital calls issued by the General Partner of the Partnership or otherwise. The principal amount of any such loan shall be allocated to the Accounts of participating Employees in a manner which the Committee determines is fair and equitable, and for loan principal used to acquire an interest in the Partnership, is also consistent with the allocation of interests in the Partnership acquired with loan proceeds as described in Section 3.7. The costs associated with interest expenses on that principal amount (and any interest expenses incurred with respect to previously accrued but unpaid interest), any other expenses incurred with respect to that principal amount, as well as the costs associated with repayment of principal, shall be allocated to the same Accounts to which the principal amounts were allocated initially in proportion to the principal amounts allocated to the Accounts at such time. Once additional interest or other expenses are allocated to an Account, such expenses shall be treated as principal with respect to future allocations of expenses related to that debt. Notwithstanding the foregoing, the Committee shall have the authority to establish a different method for allocating costs, expenses, and/or repayment of principal which it concludes is fair and equitable to participating Employees. The selection of a given method of allocating expenses among participating Employees' Accounts shall not be deemed to restrict the Committee in any manner whatsoever from selecting a different method for future allocations or to imply that a different method would not be fair and equitable to participating Employees. 4 DESIGNATION OF BENEFICIARY 4.1 DESIGNATION OF BENEFICIARY. Employee may designate a Beneficiary or Beneficiaries to receive any amount due hereunder by Employee by written notice thereof to Employer at any time prior to his or her death and may revoke or change the Beneficiary designated therein without the Beneficiary's consent by written notice delivered to Employer at any time and from time to time prior to Employee's death. If Employee is married and a resident of a community property state, one half of any amount due hereunder which is the result of an amount contributed to the Plan during such marriage while residing in a community property state is the community property of the Employee's spouse and Employee may designate a Beneficiary or Beneficiaries to receive only the Employee's one-half interest. If Employee shall have failed to designate a Beneficiary, or if no such Beneficiary shall survive him or her, then such amount shall be paid to his or her estate. Designations of Beneficiaries shall be in the form determined by the Committee. 67 8 5 CHANGE IN CONTROL 5.1 CHANGE IN CONTROL. For purposes of this Plan, a "Change of Control" means the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 as amended ("Exchange Act") (other than the Employer, a subsidiary of the Employer or an employee benefit plan sponsored by the Employer or a subsidiary of the Employer, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Employer representing fifty percent (50%) or more of the combined voting power of the Employer's then outstanding securities, where such person's beneficial ownership of the Employer's securities was not initiated by the Employer or approved by the Employer's Board of Directors; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Employer or the merger of the Employer with or into another corporation, where such merger was not initiated by the Employer or approved by the Employer's Board of Directors; or (iii) A change in the composition of the Board of Directors of the Employer, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Employer as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Employer with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Employer or an actual or threatened tender offer with respect to the Employer's publicly traded securities); or (iv) Any liquidation or dissolution of the Employer. 6 TRUST PROVISIONS 6.1 TRUST AGREEMENT. The Employer shall establish the Trust within an administratively reasonable period of time following the adoption of the Plan for the purpose of retaining assets set aside by Employer pursuant to the Trust Agreement for payment of amounts payable pursuant to the Plan. Any benefits not paid from the Trust shall be paid solely from Employer's general funds, and any benefits paid from the Trust shall be credited against and reduce by a corresponding amount the Employer's liability to Employees under the Plan. No special or separate fund, other than the Trust Agreement, shall be required to be established and no other segregation of assets shall be required to be made to assure the payment of any benefits hereunder. All Trust Funds shall be subject to the claims of general creditors of the Employer in the event the Employer is Insolvent as defined in Article 7 of the Trust Agreement. The obligations of the Employer to pay benefits under the Plan constitute an unfunded, unsecured promise to pay and Employee shall have no greater rights than general creditors of the Employer. 7 AMENDMENT AND TERMINATION 7.1 AMENDMENT. The Committee shall have the right to amend this Plan at any time and from time to time, including a retroactive amendment. Any such amendment shall become effective upon the date stated therein, and shall be binding on all Employees, except as otherwise provided in such amendment; 68 9 provided, however, that any such amendment shall not affect adversely benefits payable to an affected Employee without the Employee's written approval. 7.2 TERMINATION. The Committee shall have the right to terminate this Plan at any time and direct the lump sum payments of all assets held by the Trust if the Employer is not Insolvent at that time (as defined in Article 7 of the Trust Agreement), notwithstanding any other provision of the Plan to the contrary (except for Section 3.2(f)). 8 ADMINISTRATION 8.1 ADMINISTRATION. The Committee shall administer and interpret this Plan in accordance with the provisions of the Plan and the Trust Agreement. Any determination or decision by the Committee shall be conclusive and binding on all persons who at any time have or claim to have any interest whatever under this Plan. 8.2 LIABILITY OF COMMITTEE; INDEMNIFICATION. To the maximum extent not prohibited by law, no member of the Committee shall be liable to any person and in any event shall be indemnified by the Employer for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his or her own bad faith or willful misconduct. The Committee may employ legal counsel, consultants, actuaries and agents as it may deem desirable in the administration of the Plan and may rely on the opinion of such counsel or the computations of such consultant or other agent. The Committee shall have the authority to delegate some or all of the powers and responsibilities under the Plan and the Trust Agreement to such person or persons as it shall deem necessary, desirable or appropriate for administration of the Plan. The Committee shall provide for the keeping of written minutes of its actions hereunder which shall be reviewed by the legal counsel engaged by the Committee prior to their finalization. 8.2 EXPENSES. The costs of the establishment of the Plan and the adoption of the Plan by Employer, including but not limited to legal and accounting fees, shall be borne by Employer. The expenses of administering the Plan and the Trust shall be borne by the Trust unless the Employer elects in its sole discretion to pay some or all of those expenses; provided, however, that Employer shall bear, and shall not be reimbursed by, the Trust for any tax liability of Employer associated with the investment of assets by the Trust. 9 GENERAL AND MISCELLANEOUS 9.1 RIGHTS AGAINST EMPLOYER. Except as expressly provided by the Plan, the establishment of this Plan shall not be construed as giving to any Employee or to any person whomsoever, any legal, equitable or other rights against the Employer, or against its officers, directors, agents or stockholders, or as giving to any Employee or Beneficiary any equitable or other interest in the assets, business or shares of Employer stock or giving any Employee the right to be retained in the employment of the Employer. Neither this Plan or any action taken hereunder shall be construed as giving to any Employee the right to be retained in the employ of the Employer or as affecting the right of the Employer to dismiss any Employee. Any benefit paid or payable under the Plan shall not be deemed salary or other compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its Employees, but deferrals under the Plan shall be deemed salary or other compensation for the purpose of computing benefits under other employee benefit plans or other arrangements of the Employer for the benefit of its Employees to the extent provided under the terms of such other plans or arrangements. 9.2 ASSIGNMENT OR TRANSFER. No right, title or interest of any kind in the Plan shall be transferable or assignable by any Employee or Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, or 69 10 be subject to the debts, contracts, liabilities, engagements, or torts of the Employee or Beneficiary. Any attempt to alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. 9.3 SEVERABILITY. If any provision of this Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable, and this Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. 9.4 CONSTRUCTION. The article and section headings and numbers are included only for convenience of reference and are not be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender. 9.5 GOVERNING LAW. The validity and effect of this Plan and the rights and obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of California unless superseded by federal law. 9.6 PAYMENT DUE TO INCOMPETENCE. If the Committee receives evidence that an Employee or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole and absolute discretion, direct the payment to any other person or trust which has been legally appointed by the courts or to any other person determined by the Employer to be a proper recipient on behalf of such person otherwise entitled to payment, or any of them, in such manner and proportion as the Employer may deem proper. Any such payment shall be in complete discharge of the Employer's obligations under this Plan to the extent of such payment. 9.7 TAXES. The Employer may withhold from any benefits payable under this Plan, all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 9.8 ATTORNEY'S FEES. Employer shall pay the reasonable attorney's fees incurred by any Employee in an action brought against Employer to enforce Employee's rights under the Plan, provided that such fees shall only be payable in the event that the Employee prevails in such action. 9.9 PLAN BINDING ON SUCCESSORS/ASSIGNEES. This Plan shall be binding upon and inure to the benefit of the Employer and its successor and assigns and the Employee and the Employee's designee and estate. The Employer has caused its authorized officer to execute this document this 28th day of December, 1995. CADENCE DESIGN SYSTEMS, INC. By: ------------------------- H. Raymond Bingham Executive Vice President and Chief Financial Officer 70 EX-21.01 6 SUBSIDIARIES OF THE REGISTRANT 1 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 Integrated Measurement Systems, Inc. Oregon River Oaks Place Associates California Seeley Properties, Inc. (SIC) California Valid Europe S.A. Belgium
71 EX-23.01 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 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 25, 1996 72 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR DEC-30-1995 JAN-01-1995 DEC-30-1995 84,867 11,774 88,503 7,420 8,203 206,923 229,554 105,451 374,035 200,427 0 0 0 8,660 125,421 374,035 548,418 548,418 116,530 116,530 314,028 0 2,222 135,097 37,827 97,270 0 0 0 97,270 1.57 1.57
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