<PAGE> 1
FORM 10-Q
--------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission file number 1-10606
CADENCE DESIGN SYSTEMS, INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0148231
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
555 River Oaks Parkway, San Jose, California 95134
- - -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 943-1234
- - --------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
At October 28, 1994 there were 38,751,031 shares of the registrant's Common
Stock, $0.01 par value outstanding.
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CADENCE DESIGN SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1994 and December 31, 1993 3
Condensed Consolidated Statements of Income:
Three and Nine Months Ended September 30, 1994 and 1993 4
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1994 and 1993 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 16
</TABLE>
2
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CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash investments $ 57,051 $ 61,382
Short-term investments 19,264 31,423
Accounts receivable, net 70,260 101,890
Inventories 5,360 5,744
Prepaid expenses and other assets 14,452 18,036
--------- --------
Total current assets 166,387 218,475
--------- --------
Property, plant and equipment, net 93,172 61,477
Software development costs, net 28,996 31,265
Purchased software and other intangibles, net 10,959 12,787
Other assets 10,089 15,297
--------- --------
Total assets $ 309,603 $339,301
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 2,991 $ 3,962
Accounts payable 11,866 13,513
Accrued liabilities 46,350 51,352
Income taxes payable 6,465 6,541
Deferred revenue 51,297 38,111
--------- --------
Total current liabilities 118,969 113,479
--------- --------
Long-term obligations 2,409 4,001
Lease liabilities 9,763 10,722
Deferred income taxes 2,243 2,243
Other noncurrent liabilities 2,620 2,734
--------- --------
Total long-term liabilities 17,035 19,700
--------- --------
Stockholders' Equity:
Common stock 470 460
Additional paid-in capital 258,522 250,501
Treasury shares at cost
(8,519,384 and 4,857,200 shares, respectively) (109,419) (52,178)
Retained earnings 22,445 8,527
Accumulated translation adjustment 1,581 (1,188)
--------- --------
Total stockholders' equity 173,599 206,122
--------- --------
Total liabilities and stockholders' equity $ 309,603 $339,301
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Product $ 68,017 $ 63,174 $ 191,849 $170,589
Maintenance 41,581 34,442 115,570 91,958
-------- -------- --------- --------
Total revenue 109,598 97,616 307,419 262,547
-------- -------- --------- --------
COST OF REVENUE:
Product 20,078 18,869 59,054 54,652
Maintenance 3,018 3,967 10,152 11,770
-------- -------- --------- --------
Total cost of revenue 23,096 22,836 69,206 66,422
-------- -------- --------- --------
Gross margin 86,502 74,780 238,213 196,125
-------- -------- --------- --------
OPERATING EXPENSES:
Marketing and sales 40,566 41,216 119,008 117,683
Research and development 18,858 17,911 54,146 50,963
General and administrative 9,942 9,635 30,348 28,482
Restructuring costs - - - - - - - - - 13,450
Provision for settlement of litigation - - - - - - 10,054 - - -
Write-off of in-process research and
development 4,653 - - - 4,653 - - -
-------- -------- --------- --------
Total operating expenses 74,019 68,762 218,209 210,578
-------- -------- --------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 12,483 6,018 20,004 (14,453)
Other income, net 160 369 950 1,471
-------- -------- --------- --------
Income (loss) from continuing operations
before provision (benefit) for income
taxes 12,643 6,387 20,954 (12,982)
Provision (benefit) for income taxes 3,160 1,314 5,238 (4,126)
-------- -------- --------- --------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 9,483 5,073 15,716 (8,856)
LOSS FROM DISCONTINUED
OPERATIONS - - - (1,331) - - - (2,886)
-------- -------- --------- --------
NET INCOME (LOSS) $ 9,483 $ 3,742 $ 15,716 $(11,742)
======== ======== ========= ========
NET INCOME (LOSS) PER SHARE
From continuing operations $ .22 $ .11 $ .36 $ (.20)
From discontinued operations - - - (.03) - - - (.07)
-------- -------- --------- --------
Net income (loss) per share $ .22 $ .08 $ .36 $ (.27)
======== ======== ========= ========
Weighted average common and common
equivalent shares outstanding 43,044 45,016 44,330 43,385
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, September 30,
1994 1993
------------- -------------
(Unaudited)
<S> <C> <C>
CASH AND CASH INVESTMENTS AT
BEGINNING OF PERIOD $ 61,382 $ 78,976
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 15,716 (11,742)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 32,655 32,775
Lease liabilities (1,033) (2,488)
Deferred income taxes, noncurrent - - - 5,824
Write-offs of capitalized software development costs,
purchased software and intangibles 807 - - -
Accruals for severance and facilities restructure costs - - - 6,833
Decrease in other noncurrent liabilities (140) (14)
Write down and reserve of assets related to restructure - - - 6,617
Write-off of in-process research and development 4,653 - - -
Net changes in current assets and liabilities, net of
business combinations accounted for as a purchase:
Decrease in accounts receivable 35,560 42,461
Decrease (increase) in inventories 340 (446)
Decrease (increase) in prepaid expenses
and other assets 6,391 (11,942)
Decrease in accrued liabilities and payables (2,208) (11,421)
Increase in deferred revenue 12,121 7,750
Increase in deferred taxes - - - 1,221
-------- --------
Net cash provided by operating activities 104,862 65,428
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (47,337) (73,014)
Sale of short-term investments 59,496 39,800
Purchase of property and equipment (10,516) (14,553)
Capitalization of software development costs (8,223) (11,754)
Increase in other assets and purchased
software and intangibles (1,411) (908)
Payment for purchase of third-party interests in
partnerships, net of cash acquired (8,729) - - -
Cash advanced to Redwood prior to acquisition (1,855) - - -
Sale of put warrants 8,051 - - -
Purchase of call options (8,051) - - -
-------- --------
Net cash used for investing activities (18,575) (60,429)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and long-term
obligations (28,571) (6,577)
Sale of common stock, net of notes receivable from
stockholders 8,031 8,178
Purchase of treasury stock, net (69,655) (31,910)
-------- --------
Net cash used for financing activities (90,195) (30,309)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (423) (1,326)
-------- --------
DECREASE IN CASH AND CASH INVESTMENTS (4,331) (26,636)
-------- --------
CASH AND CASH INVESTMENTS AT END OF PERIOD $ 57,051 $ 52,340
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1993.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for
the periods presented. The results for such periods are not necessarily
indicative of the results to be expected for the full fiscal year.
2. ACQUISITION OF THIRD-PARTY INTERESTS IN 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 $9 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 paid off the secured
construction loan with its cash reserves in May 1994.
3. PURCHASE OF REDWOOD DESIGN AUTOMATION, INC.
In August 1994 the Company acquired all of the outstanding stock of Redwood
Design Automation, Inc. ("Redwood") for approximately 419,000 shares of the
Company's common stock. The purchase price also includes $1.8 million of net
advances made to Redwood, prior to the acquisition, which were not repaid.
Redwood was a development stage company formed to design, develop and market
software for use in electronic system design. The acquisition was accounted for
as a purchase, and 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 is reflected as a one-time charge to operations in the
third quarter for the write-off of in-process research and development as it
had not reached technological feasibility. The remaining intangibles of $2.1
million will be amortized over a useful life of two years.
6
<PAGE> 7
The following pro forma information shows the results of operations for the
nine months ended September 30, 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 nine month period ended September 30, 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 nine month
period ended September 30, 1993 with Redwood's nine month fiscal period from
February 1, 1993 through October 31, 1993. The following unaudited pro forma
results include the straight-line amortization of intangibles over a period of
two years.
<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30, September 30,
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Revenue $308,005 $262,672
Net income (loss) from continuing operations $ 12,599 $(13,646)
======== ========
Net income (loss) per share from
continuing operations $ .28 $ (.31)
======== ========
Weighted average common and common
equivalent shares outstanding 44,725 43,804
======== ========
</TABLE>
4. DISCONTINUED OPERATIONS
In December 1993 the Company sold its Automated Systems ("ASI") division. The
operating results of ASI have been reported as discontinued operations in the
consolidated statements of income for all periods presented. Revenue of the
discontinued division was approximately $2.8 million and $8.9 million for the
quarter and nine months ended September 30, 1993, respectively.
5. PURCHASE OF 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
1,050,000 shares of the Company's common stock and a warrant to purchase
1,300,000 shares of the Company's common stock. 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 financial information has not been presented
as the results of operations for Comdisco are not material to the Company's
consolidated financial statements.
6. DISCLOSURE OF NONCASH INVESTING ACTIVITIES
As discussed in Note 2 the Company purchased all third-party interests in two
real estate partnerships for approximately $9 million. In connection with the
acquisition, net assets acquired were as follows (in thousands):
<TABLE>
<S> <C>
Property and other assets $ 36,083
Liabilities assumed (23,576)
Less cash acquired (3,778)
--------
Total $ 8,729
========
</TABLE>
As discussed in Note 3 the Company purchased all the outstanding stock of
Redwood for approximately 419,000 shares of the Company's common stock. The
purchase price also includes $1.8 million of net advances made to Redwood,
prior to the acquisition, which were not repaid. In connection with the
acquisition, net assets acquired were as follows (in thousands):
7
<PAGE> 8
<TABLE>
<S> <C>
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
=======
</TABLE>
7. INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective January 1, 1994 the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". There was no effect on the Company's operating results due to the
adoption of this statement. The Company classifies its investments as
"held-to-maturity" for the purposes of this statement. The investments mature
at various dates through August 1995.
8. NET INCOME (LOSS) PER SHARE
Net income per share for each period is calculated by dividing net income by
the weighted average number of common stock and common stock equivalents
outstanding during the period. 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 shares of common stock. Fully diluted net income
(loss) per share is substantially the same as primary net income (loss) per
share.
9. INVENTORIES
Inventories, which consist primarily of testing equipment, are stated at the
lower of cost (first-in, first-out method) or market. Cost includes labor,
material and manufacturing overhead. Inventories consisted of the following
(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
(Unaudited)
<S> <C> <C>
Raw materials and supplies $1,298 $2,240
Work-in-progress 2,327 2,214
Finished goods 1,735 1,290
------ ------
Total $5,360 $5,744
====== ======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Securities class action lawsuits were filed against the Company and certain of
its officers and directors in the United States District Court for the Northern
District of California, San Jose Division, on April 8 and 9, 1991. The
lawsuits, which were consolidated into a single action, allege violation of
certain federal securities laws by maintaining artificially high market prices
for the Company's common stock through alleged misrepresentations and
nondisclosures regarding the Company's financial condition. Court rulings in
response to the Company's motions to dismiss the lawsuit limited the class
period to include purchasers of the Company's common stock between January 29,
1991 and April 3, 1991.
On March 23, 1993 a separate class action lawsuit was filed against the Company
and certain of its directors and officers in the United States District Court,
Northern District of California, San Jose Division. This lawsuit, which was
consolidated into a single action with two virtually identical lawsuits filed
later in March and in April 1993, alleges violation of certain federal
securities laws by maintaining artificially high market prices for the
Company's common stock through alleged misrepresentations and nondisclosures
regarding the Company's financial condition. On November 18, 1993, the
District Court granted the Company's motion to dismiss the 1993 complaint. The
effect of the ruling was to dismiss the complaint except as to a statement
allegedly made on January 28, 1993, but plaintiffs were granted leave to
further amend their complaint.
8
<PAGE> 9
In April 1994 the Company entered into tentative agreements to settle both of
the above 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. The agreements are subject to negotiation and execution of final
settlement agreements and final court approval. In May 1994, after
negotiation, the Company's secondary insurance carrier agreed to provide
coverage on the second lawsuit. Accordingly, net income for the second quarter
included a credit to operating expenses of approximately $2.1 million for
additional insurance proceeds and the reduction of accruals for legal expenses
relating to the provision taken in the first quarter for settlement of the two
shareholder class action suits. At September 30, 1994, the total settlement
amount has been remitted into escrow.
11. PUT WARRANTS
During the second and third quarters of 1994, the Company, through private
placement, sold four million put warrants. Each warrant entitles the holder
to sell one share of common stock to the Company on a specified date at a
specified price ranging from $13.13 to $16.58 per share. Additionally, during
this same period, the Company purchased three million call options that
entitle the Company to buy on a specified date one share of common stock each,
at prices ranging from $14.94 to $17.83 per share. The Company has the right
to settle the put warrants with stock, or a cash or stock settlement equal to
the difference between the exercise price and market value at the date of
exercise. The put warrants and call options outstanding at September 30, 1994
are exercisable on various dates between April 1995 and September 1995. These
securities had no significant dilutive effect on net income per share for the
periods presented.
At June 30, 1994 the amount related to the Company's maximum potential
repurchase obligation under the put warrants had been classified as temporary
equity (put warrants) outside of stockholders' equity. During the third
quarter ended September 30, 1994 the Company amended its settlement agreements
with respect to the put warrants to allow for a stock settlement equal to the
difference between the exercise price and market value at the date of exercise.
Accordingly, as the Company, at September 30, 1994, has both the unconditional
right and the intent to settle these put warrants with stock, no amount has
been classified out of stockholders' equity in the accompanying balance sheet.
For information concerning the maximum potential repurchase obligation at
September 30, 1994, see "Liquidity and Capital Resources" in Item 2., below.
12. SUBSEQUENT EVENT
In October 1994 the Company acquired all third-party interests in a real estate
partnership in which it was a 49% limited partner, for approximately $6.1
million in cash. The partnership owns land and buildings which are leased to the
Company and are subject to a secured note in the amount of approximately $23.7
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the third quarter ended September 30, 1994 was $109.6 million
compared with $97.6 million for the same period of the prior year, an increase
of 12%. For the nine months ended September 30, 1994 revenue was $307.4
million, an increase of 17% from revenue of $262.5 million recorded for the
same period of 1993.
Product revenue increased $4.8 million from $63.2 million for the quarter ended
September 30, 1993 to $68.0 million for the quarter ended September 30, 1994.
The increased product revenue is primarily the result of increased demand for
the Company's integrated circuit (IC) and automated test engineering (ATE)
products and increased Spectrum Services consulting revenue. For the nine
month period ended September 30, 1994 product revenue was $191.8 million as
compared to $170.6 million for the same period in 1993. The increase in
product revenue for the nine month period is partially due to improved economic
conditions, increased demand for the Company's products primarily in the IC and
ATE product areas, the addition of Comdisco operations and increased Spectrum
Services consulting revenue. Maintenance revenue increased by $7.1 million and
$23.6 million for the three and nine month periods ended September 30, 1994,
respectively, as
9
<PAGE> 10
compared to the same periods in 1993, in part because of a larger customer
base, continued focus on customer renewals and the addition of Comdisco
operations in June 1993.
Cost of product was $20.1 million and $59.1 million for the three and nine
month periods ended September 30, 1994, respectively, as compared to $18.9
million and $54.7 million for the same periods in 1993. The increase in cost
of product for the quarter ended September 30, 1994 related to the Company's
consulting business, Spectrum Services, and purchased software amortization
and was partially offset by decreased royalty expense. The increase in cost
of product for the nine month period ended September 30, 1994 is partially the
result of increased expenses related to the addition of Comdisco operations
and increased Spectrum Services operations, increased amortization and
write-off of purchased software and intangibles and increased costs associated
with the higher ATE revenue which has lower gross margins. Cost of maintenance
decreased from $4.0 million and $11.8 million for the quarter and nine month
periods ended September 30, 1993, respectively, to $3.0 million and $10.2
million for the same periods in 1994. These decreases resulted primarily from
utilizing a more cost-effective update program and lower cost media in 1994.
As a result of the factors discussed above, gross margin increased from 77% and
75% for the three and nine month periods ended September 30, 1993,
respectively, to 79% and 77% for the same periods in 1994.
Marketing and sales expenses decreased to $40.6 million for the quarter ended
September 30, 1994 as compared to $41.2 million for the same period in 1993.
For the nine months ended September 30, 1994, as compared to the same period in
the prior year, marketing and sales expenses increased from $117.7 million to
$119.0 million. This increase in marketing and sales expense for the nine
month period was primarily due to increased facilities costs and the addition
of Comdisco operations.
Research and development expenses for the quarter ended September 30, 1994 were
$18.9 million as compared to $17.9 million for the same period of the prior
year, an increase of 5%. Capitalization of software development costs for the
quarters ended September 30, 1994 and 1993 was $2.1 million and $3.8 million,
which represented 10% and 18% of total research and development expenditures
made in each of those periods, respectively. For the nine months ended
September 30, 1994, research and development expenses were $54.1 million
compared with $51.0 million for the same period in 1993, after capitalization
of $8.2 million and $11.8 million, which represented 13% and 19% of total
research and development expenditures made in those periods, respectively. The
amount of software development costs capitalized in any given period may vary
depending on the exact nature of the development performed. Gross research and
development expenditures before capitalization decreased from $21.8 million for
the three months ended September 30, 1993 to $21.0 million for the same period
in the current year and decreased from $62.7 million for the nine months ended
September 30, 1993 to $62.4 million for the same period in the current year.
The decrease for the nine month period was primarily due to cost savings
resulting from the Company's purchase, in the first quarter of 1994 of
previously leased facilities and decreased capital equipment costs which was
partially offset by increased costs related to the addition of Comdisco and
Redwood Operations.
General and administrative expenses increased to $9.9 million for the quarter
ended September 30, 1994 from $9.6 million for the same period in 1993, an
increase of 3%. For the nine months ended September 30, 1994, general and
administrative expenses were $30.3 million as compared to $28.5 million for
the same period in 1993, an increase of 7%. The year over year increase for
the nine month period was primarily the result of increased costs related to
professional services, provision for bad debts and Comdisco operations partly
offset by cost savings resulting from the Company's purchase in the first
quarter of 1994 of previously leased facilities.
In the third quarter of 1994 the Company recorded costs of $4.7 million related
to the write-off of in-process research and development associated with the
Redwood acquisition (see Note 3 of Notes to Condensed Consolidated Financial
Statements).
In March 1994 the Company recorded a provision of $12.1 million for settlement
of the stockholder class action lawsuits filed against the Company and certain
of its officers and directors in 1991 and 1993. This provision was comprised
of $17.9 million for settlement payments and legal costs offset by $5.8 million
of receivables due from the Company's insurance carriers. In May 1994, after
negotiation, the Company's secondary insurance carrier agreed to provide
coverage on the second lawsuit. Accordingly, the results of operations for the
second quarter
10
<PAGE> 11
ended June 30, 1994 included a $2.1 million credit to operating expenses for
the additional insurance proceeds received and the reduction of accruals for
legal expenses relating to the provision taken in the first quarter.
In March 1993 the Company recorded restructuring costs of $13.5 million
associated with a planned restructure of certain areas of sales, operations and
administration due to business conditions. The restructuring charge reflects
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 systems product strategy.
Net other income for the third quarter ended September 30, 1994 was $.2 million
compared with $.4 million for the same period in 1993. For the nine months
ended September 30, 1994, net other income was $1.0 million as compared to $1.5
million for the same period in 1993. The decrease in other income for the nine
month period is primarily the result of increased minority interest expense
related to the Company's Japanese subsidiary.
The Company's estimated annual effective tax rate for fiscal 1994 is 25% as
compared to 26% for the nine months ended September 30, 1993.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1994 the Company's cash and cash
investments and short-term investments decreased $16.5 million from $92.8
million to $76.3 million. This decrease was primarily due to net cash used for
investing and financing activities exceeding net cash generated from operating
activities. Cash provided by operating activities included a $35.6 million
decrease in accounts receivable due to improved collections and a $12.1 million
increase in deferred revenue. The increase in deferred revenue is comprised of
increased deferred maintenance due to a larger customer base and continued
focus on customer renewals and an increase in certain product revenue deferred
in accordance with the American Institute of Certified Public Accountants
Statement of Position 91-1 entitled "Software Revenue Recognition". Cash used
for financing activities included approximately $69.7 million of treasury stock
purchases and an approximate $23.5 million payment of a construction loan.
The Company has an authorized stock repurchase program. Prior to 1993, the
Company authorized the repurchase of up to 2.8 million shares of common stock
in the open market to satisfy its estimated requirements for shares to be
issued under its employee stock option and stock purchase plans. In April
1993, February 1994 and June 1994, the Company authorized the repurchase of an
additional 4.0 million shares, 2.9 million shares and 5.2 million shares,
respectively, of common stock from time to time. Subsequent to September 30,
1994 the Company authorized the additional repurchase of 5.3 million shares.
Some purchases are necessary to satisfy estimated requirements for shares to be
issued under the Company's employee stock option and stock purchase plans. As
part of its authorized stock repurchase program, the Company had a maximum
potential obligation at September 30, 1994 to buy back four million shares of
its common stock at an aggregate price of approximately $60.7 million. These
potential obligations related to the sale of put warrants are exercisable on
various dates between April 1995 and September 1995. The election by the
Company to settle 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 value of the Company's common stock at exercise.
In addition, settlement of put warrants in stock or cash could lead to the
disposition by holders of the put warrants of shares of the Company's common
stock that such holders may have accumulated in anticipation of their exercise
of the put warrants.
In addition to the $76.3 million in cash and cash investments and short-term
investments at September 30, 1994, the Company had available approximately
$15.0 million under equipment lease
11
<PAGE> 12
lines and $17.5 million under bank lines of credit. The Company was not in
compliance with certain financial covenants under its lines of credit as of
September 30, 1994, primarily due to its stock repurchase activity. The items
of noncompliance related to net worth, stock repurchase and current ratio
levels. Subsequent to September 30, 1994, the Company obtained waivers of the
noncompliance from the banks. The Company is currently in the process of
renegotiating the bank lines of credit and has obtained extensions of the
current lines of credit through May and June 1995.
Anticipated cash requirements for the fourth quarter of 1994 and fiscal 1995
include the purchase of treasury stock, payment of $6.1 million for the
purchase of all third-party interests in a real estate partnership (see Note
12) and contemplated additions of capital equipment and the potential payment
of the $23.7 million secured loan assumed as part of the October 1994 real
estate acquisition.
The Company anticipates that current cash and short-term investment balances,
cash flows from operations and unused balances on equipment lease lines and
lines of credit will be sufficient to meet its working capital and capital
expenditure requirements for the foreseeable future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities class action lawsuits were filed against the Company and certain of
its officers and directors in the United States District Court for the Northern
District of California, San Jose Division, on April 8 and 9, 1991. The
lawsuits, which were consolidated into a single action, allege violation of
certain federal securities laws by maintaining artificially high market prices
for the Company's common stock through alleged misrepresentations and
nondisclosures regarding the Company's financial condition. Court rulings in
response to the Company's motions to dismiss the lawsuit limited the class
period to include purchasers of the Company's common stock between January 29,
1991 and April 3, 1991.
On March 23, 1993 a separate class action lawsuit was filed against the Company
and certain of its directors and officers in the United States District Court,
Northern District of California, San Jose Division. This lawsuit, which was
consolidated into a single action with two virtually identical lawsuits filed
later in March and in April 1993, alleges violation of certain federal
securities laws by maintaining artificially high market prices for the
Company's common stock through alleged misrepresentations and nondisclosures
regarding the Company's financial condition. On November 18, 1993, the
District Court granted the Company's motion to dismiss the 1993 complaint. The
effect of the ruling was to dismiss the complaint except as to a statement
allegedly made on January 28, 1993, but plaintiffs were granted leave to
further amend their complaint.
In April 1994 the Company entered into tentative agreements to settle both of
the above 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. The agreements are subject to negotiation and execution of final
settlement agreements and final court approval. In May 1994 after negotiation,
the Company's secondary insurance carrier agreed to provide coverage on the
second lawsuit. Accordingly, net income for the second quarter included a
credit to operating expenses of approximately $2.1 million for additional
insurance proceeds and the reduction of accruals for legal expenses relating to
the provision taken in the first quarter for settlement of the two shareholder
class action suits. At September 30, 1994, the total settlement amount has
been remitted into escrow.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- - ------- -------------
<S> <C>
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 of the Registrant's 1994 Form S-8 and the latter two documents are
incorporated by reference to Exhibit 10.08 - 10.10 of the 1988 Form
S-1).
10.04 The Registrant's 1993 Directors Stock Option Plan including the Stock
Option Grant (incorporated by reference to Exhibit 4.04 of the
Registrant's 1994 Form S-8).
10.05 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).
10.06 The Registrant's Senior Executive Bonus Plan for 1993 (incorporated by
reference to Exhibit 10.07 of the Registrant's Form 10-K for the fiscal
year ended December 31, 1992 (the "1992 Form 10-K")).
10.07 The Registrant's Key Contributor Bonus Plan for 1993 (incorporated by
reference to Exhibit 10.08 of the 1992 Form 10-K).
10.08 The Registrant's Senior Executive Bonus Plan for 1994 (incorporated by
reference to the 1993 Form 10-K).
10.09 The Registrant's Key Contributor Bonus Plan for 1994 (incorporated by
reference to the 1993 Form 10-K).
10.10 The Registrant's Cash or Deferred Profit Sharing Plan, as currently in
effect (certain amendments are incorporated by reference to the 1993
Form 10-K; the Plan itself is incorporated by reference to Exhibit
10.12 to the Registrant's Form S-4 Registration Statement
(No. 33-31673), originally filed on October 18, 1989 (the "1989 Form
S-4")).
10.11 Amended and Restated Lease, dated June 29, 1989, by and between River
Oaks Place Associates, a California limited partnership, ("ROPA") 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")).
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- - ------- -------------
<S> <C>
10.12 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).
10.13 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).
10.14 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")).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 Form of Executive Compensation Agreement dated May 1989 between
Registrant and Mr. Costello (incorporated by reference to Exhibit
10.20 to the 1989 Form S-4).
10.20 Offer letter to H. Raymond Bingham dated May 12, 1993 (incorporated
by reference to the 1993 Form 10-K).
10.21 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by
reference to the 1993 Form 10-K).
10.22 Letter agreement dated March 9, 1994 by and among C.T. Properties, Inc.
("General Partner"), Registrant, Montague Investors, L.P. ("Montague")
and David M. Thede ("Thede") whereby Registrant acquired all of
Thede's ownership interests in the C.T. Montague I, L.P. and C.T.
Montague II, L.P. limited partnerships and the General Partner and all
of Montague's interests in C.T. Montague I, L.P. (incorporated by
reference 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).
</TABLE>
14
<PAGE> 15
<TABLE>
EXHIBIT
NUMBER EXHIBIT TITLE
- - ------ -------------
<S> <C>
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).
10.28 Agreement of Merger dated as of August 1, 1994 between Redwood and CDS
Acquisition Corporation (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).
10.29 Form of Stock Option Agreement for Registrant's 1993 Non-Statutory
Stock Option Plan.
27.1 Financial data schedule for the period ended September 30, 1994.
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1994.
</TABLE>
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CADENCE DESIGN SYSTEMS, INC.
(REGISTRANT)
DATE: November 14, 1994 By: /s/ Joseph B. Costello
------------------ --------------------------------------
JOSEPH B. COSTELLO
President and Chief Executive Officer
DATE: November 14, 1994 By: /s/ H. Raymond Bingham
------------------ ---------------------------------------
H. RAYMOND BINGHAM
Executive Vice President
and Chief Financial Officer
16
<PAGE> 1
EXHIBIT 10.29
OPTION NO. __________
CADENCE DESIGN SYSTEMS, INC.
NONSTATUTORY STOCK OPTION GRANT AGREEMENT
CADENCE DESIGN SYSTEMS, INC., a Delaware corporation (the "Company"),
hereby grants as of _______________ ("Date of Grant") to _____________ (the
"Optionee") a nonstatutory stock option to purchase a total of ____ shares of
Common Stock of the Company (the "Shares"), at an exercise price of $__________
per share ("Exercise Price") subject to the terms, definitions and provisions
of this Option and the Company's 1993 Nonstatutory Stock Option Plan (the
"Plan") which is incorporated herein by reference. The terms defined in the
Plan shall have the same defined meanings herein. Vesting of this Option shall
commence on ___________ ("Vesting Commencement Date").
1. Nature of the Option. This Option is a nonstatutory stock
option and is not intended to qualify as an incentive stock option as defined
in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code").
2. Exercise of Option. This Option shall be exercisable during
its term in accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
(a) This option shall become exercisable as to
25% of the Shares one year after the Vesting Commencement Date and as to an
additional 1/48th of the Shares per month thereafter.
(b) This Option may not be exercised for a
fraction of a share.
(c) In the event of Optionee's death, disability
or other termination of employment, the exercisability of the Option is
governed by Section 9 of the Plan and Section 5 and 6 below.
(ii) Method of Exercise. This Option shall be
exercisable by delivery to the Company of an executed written notice in the
form attached hereto, or in such other form as may be approved by the Company,
which shall state the election to exercise the option, the number of Shares in
respect of which the Option is being exercised,
<PAGE> 2
and such other representations and agreements as to the holder's investment
intent with respect to such shares of Common Stock as may be required by the
Company pursuant to the provisions of the Plan. Such written notice shall be
signed by the Optionee and shall be delivered in person or by certified mail to
the Stock Administration Group of the Company and shall be accompanied by
payment of the Exercise Price.
3. Method of Payment. Payment of the Exercise Price shall be
made as follows: (i) by cash or check; or (ii) by delivery of an irrevocable
written commitment from a broker-dealer approved by the Company that is a
member in good standing of the New York Stock Exchange ("NYSE Dealer") to
deliver the exercise price directly to the Company upon receipt of the Shares
or, in the case of a margin loan, upon receipt of a copy of the notice of
exercise of this Option.
4. Restrictions on Exercise. This Option may not be exercised
unless such exercise, the issuance of the Shares upon such exercise and the
method of payment of consideration for the Shares are in compliance with (i)
the Securities Act of 1933, (ii) all applicable state securities laws, (iii)
all other applicable federal and state laws and regulations and (iv) the rules
of any stock exchange or national market system upon which the Shares may then
be listed, as such laws, regulations and rules are in effect on the date of
exercise. As a condition to the exercise of this Option, the Company may
require Optionee to make any representation and warranty to the Company as may
be required by any applicable law or regulation.
5. Termination of Status as an Employee. If Optionee ceases to
serve as an Employee, Optionee may, but only within thirty (30) days after the
date Optionee ceases to be an Employee of the Company, exercise this Option to
the extent that Optionee was entitled to exercise it on the date of such
termination. To the extent that Optionee was not entitled to exercise this
Option on the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, the Option shall terminate.
6. Death of Optionee. In the event of the death of Optionee:
(i) During the term of this Option and while an Employee of
the Company and having been in Continuous Status as an Employee since the date
of grant of the Option, the Option may be exercised, at any
-2-
<PAGE> 3
time within three (3) months following the date of death, by Optionee's estate
or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that would have
accrued had Optionee continued living three (3) months after the date of death;
or
(ii) Within one (1) month after the termination of
Optionee's Continuous Status as an Employee, the Option may be exercised, at
any time within three (3) months following the date of death, by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent that the right to exercise had accrued
at the date of termination.
7. Non-Transferability of Option. This Option may not be
transferred in any manner otherwise than by will or by the laws or descent or
distribution and may be exercised during the lifetime of Optionee only by
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. Notwithstanding any other provision of this
Option, this Option may not be exercised more than ten years from the date of
Grant of this Option, and may be exercised during such term only in accordance
with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of
the date of this Option of some of the federal and California tax consequences
of exercise of this Option and disposition of the Shares. Tax consequences of
other states are beyond the scope of this agreement. Employees should consult
a tax adviser regarding the tax treatment for other states. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(i) Exercise of Nonstatutory Stock Option. If, on the
date the Option is exercised, the fair market value of the Shares is greater
than the Exercise Price, Optionee will then incur a regular federal income tax
liability and a California income tax liability. Optionee will be treated as
having then received compensation income (taxable at ordinary income tax rates)
equal to the excess of the fair market value of the Shares on the date of
exercise over the Exercise Price. The Company will be required to withhold
from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities such amounts as are required by applicable
federal and state tax laws. The compensation income is added to the purchase
price of the shares to form a new cost basis.
-3-
<PAGE> 4
(ii) Disposition of Shares. If the Shares are held for
more than one year, any gain or loss realized on Disposition of the Shares will
be treated as long term capital gain or loss for federal and California income
tax purposes. As of the Date of Grant, capital gains are taxed at a maximum
28% tax rate for federal and taxed at the same rate as ordinary income for
California tax purposes. Capital gains, however, may be offset by capital
losses.
CADENCE DESIGN SYSTEMS, INC.
a Delaware corporation
By:
------------------------------
Its: Treasurer
Optionee acknowledges receipt of a copy of the Plan, a copy of
which is annexed hereto, and represents that he is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under the Plan. Optionee acknowledges that there may be
adverse tax consequences upon exercise of this Option or disposition of the
Shares and that Optionee should consult a tax adviser prior to such exercise or
disposition.
Dated:
-------------------------
-------------------------
Optionee
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 57,051
<SECURITIES> 19,264
<RECEIVABLES> 70,260
<ALLOWANCES> 0
<INVENTORY> 5,360
<CURRENT-ASSETS> 166,387
<PP&E> 183,903
<DEPRECIATION> 90,731
<TOTAL-ASSETS> 309,603
<CURRENT-LIABILITIES> 118,969
<BONDS> 0
<COMMON> 149,573
0
0
<OTHER-SE> 24,026
<TOTAL-LIABILITY-AND-EQUITY> 309,603
<SALES> 307,419
<TOTAL-REVENUES> 307,419
<CGS> 69,206
<TOTAL-COSTS> 69,206
<OTHER-EXPENSES> 218,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,954
<INCOME-TAX> 5,238
<INCOME-CONTINUING> 15,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,716
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
