<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
---------------
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
555 RIVER OAKS PARKWAY, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices, including Zip Code)
(408) 943-1234
(Registrant's telephone number, including area code)
------------------------
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 November 6, 1996 there were 77,833,083 shares of the registrant's Common
Stock, $0.01 par value outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 28, 1996 and December 30, 1995..................... 1
Condensed Consolidated Statements of Income:
Three and Nine Months Ended September 28, 1996 and September
30, 1995..................................................... 2
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 28, 1996 and September 30,
1995......................................................... 3
Notes to Condensed Consolidated Financial Statements........... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signatures
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets
Cash and cash investments......................................................... $ 83,211 $ 84,867
Short-term investments............................................................ 2,023 11,774
Accounts receivable, net.......................................................... 99,030 88,503
Inventories....................................................................... 7,830 8,203
Prepaid expenses and other........................................................ 25,761 13,576
------------- -------------
Total current assets.............................................................. 217,855 206,923
Property, Plant and Equipment, net.................................................. 149,685 124,103
Software Development Costs, net..................................................... 24,019 25,793
Purchased Software and Intangibles, net............................................. 9,415 8,268
Other Assets........................................................................ 18,041 8,948
------------- -------------
Total assets...................................................................... $ 419,015 $ 374,035
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt................................................. $ 3,422 $ 1,497
Accounts payable and accrued liabilities.......................................... 94,974 91,999
Income taxes payable.............................................................. 6,960 14,524
Deferred revenue.................................................................. 101,072 92,407
------------- -------------
Total current liabilities......................................................... 206,428 200,427
------------- -------------
Long-Term Liabilities
Long-term debt.................................................................... 19,878 1,619
Deferred income taxes............................................................. 2,590 7,307
Minority interest liability....................................................... 15,246 12,167
Other long-term liabilities....................................................... 14,466 18,434
------------- -------------
Total long-term liabilities....................................................... 52,180 39,527
------------- -------------
Stockholders' Equity:
Common stock and capital in excess of par value................................... 351,035 299,544
Treasury stock at cost (39,484 and 35,230 shares, respectively)................... (399,263) (290,884)
Retained earnings................................................................. 209,412 124,471
Accumulated translation adjustment................................................ (777) 950
------------- -------------
Total stockholders' equity........................................................ 160,407 134,081
------------- -------------
Total liabilities and stockholders' equity........................................ $ 419,015 $ 374,035
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
REVENUE
Product.............................................. $ 102,656 $ 74,307 $ 291,214 $ 202,104
Service.............................................. 30,778 16,963 80,405 44,335
Maintenance.......................................... 55,307 48,820 157,578 138,223
------------- ------------- ------------- -------------
Total revenue.................................... 188,741 140,090 529,197 384,662
------------- ------------- ------------- -------------
COSTS AND EXPENSES
Cost of product...................................... 11,767 11,646 35,539 34,163
Cost of service...................................... 21,218 14,463 57,420 38,184
Cost of maintenance.................................. 6,277 4,240 17,707 12,416
Marketing and sales.................................. 55,798 45,519 160,952 130,351
Research and development............................. 29,913 21,695 85,147 65,210
General and administrative........................... 13,786 9,861 40,444 29,066
------------- ------------- ------------- -------------
Total costs and expenses......................... 138,759 107,424 397,209 309,390
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS............................... 49,982 32,666 131,988 75,272
Other income (expense), net.......................... (1,196) 17,208 (2,355) 16,992
------------- ------------- ------------- -------------
Income before provision for income taxes............. 48,786 49,874 129,633 92,264
Provision for income taxes........................... 16,099 13,965 42,779 25,834
------------- ------------- ------------- -------------
NET INCOME........................................... $ 32,687 $ 35,909 $ 86,854 $ 66,430
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER SHARE................................. $ .36 $ .39 $ .95 $ .71
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding........................................ 90,171 91,895 91,095 93,170
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
(UNAUDITED)
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD.................................... $ 84,867 $ 75,011
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ 86,854 66,430
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 39,755 35,287
Gain on sale of stock of subsidiary............................................. -- (18,873)
Deferred income taxes, noncurrent............................................... (4,718) 5,443
Write-offs of equipment and other long-term assets.............................. 75 2,747
Other long-term liabilities and minority interest expense....................... 1,957 316
Changes in current assets and liabilities:
Accounts receivable........................................................... (11,890) 14,110
Inventories................................................................... (1,480) (2,459)
Prepaid expenses and other.................................................... (12,145) (3,492)
Accrued liabilities and payables.............................................. 35,834 19,356
Deferred revenue.............................................................. 9,679 16,078
------------- -------------
Net cash provided by operating activities................................. 143,921 134,943
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of subsidiary stock........................................ -- 29,920
Maturities of short-term investments.............................................. 17,610 39,296
Purchases of short-term investments............................................... (7,859) (33,069)
Purchases of property and equipment............................................... (42,873) (18,585)
Capitalization of software development costs...................................... (10,210) (8,778)
Increase in purchased software and intangibles and other assets................... (17,166) (8,065)
Sale of put warrants.............................................................. 13,870 1,057
Purchase of call options.......................................................... (13,870) (1,057)
------------- -------------
Net cash provided (used) by investing activities.......................... (60,498) 719
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations and long-term debt................ (1,872) (2,773)
Net proceeds from issuance of long-term debt...................................... 19,763 --
Sale of common stock.............................................................. 16,659 21,568
Purchase of treasury stock........................................................ (113,582) (107,498)
Purchase of warrant............................................................... (4,347) (17,188)
------------- -------------
Net cash used for financing activities.................................... (83,379) (105,891)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................. (1,700) 4,787
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS.................................... (1,656) 34,558
------------- -------------
CASH AND CASH INVESTMENTS AT END OF PERIOD.......................................... $ 83,211 $ 109,569
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 fiscal year ended December 30, 1995.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's fiscal year is determined based upon the 52 - 53 week period
ending on the Saturday closest to December 31.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation" which was adopted by the Company this year. SFAS No. 123 allows
companies that 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 rules under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" but with additional financial statement disclosure. The Company
continues to account for employee stock-based compensation arrangements under
APB Opinion No. 25, and therefore SFAS No. 123 did not have a material impact on
its financial position, results of operations or cash flows.
NET INCOME PER SHARE
Net income per share for each period is calculated by dividing net income by
the weighted average shares of common stock and common stock equivalents
outstanding during the period (calculated using the modified treasury stock
method). Common stock equivalents consist of dilutive shares issuable upon the
exercise of outstanding common stock options and warrants. Fully diluted net
income per share is substantially the same as primary net income per share.
4
<PAGE>
INVENTORIES
Inventories, which consist primarily of test 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 28, DECEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
(UNAUDITED)
Raw materials and supplies...................................... $ 3,963 $ 2,335
Work-in-process................................................. 2,514 3,825
Finished goods.................................................. 1,353 2,043
------ ------
Total......................................................... $ 7,830 $ 8,203
------ ------
------ ------
</TABLE>
NOTE PAYABLE
In May 1996, the Company's wholly owned real estate partnership, River Oaks
Place Associates L.P. (the Partnership), entered into a $20 million long-term
financing arrangement (the ROPA Loan) with a bank. The financing agreement
expires on December 31, 2005, and requires quarterly principal payments
beginning on September 30, 1996 in amounts ranging from $.4 million to $.7
million. The Partnership has the option to pay interest at the London Interbank
Offered Rate (LIBOR) plus 1.5% or the higher of the bank's prime rate plus 0.5%
or the Federal Funds rate plus 1.5%. The ROPA Loan is secured by the real and
personal properties of the Partnership. In connection with the ROPA Loan
agreement, the Company extended its lease agreements with the Partnership until
December 31, 2005 and minimum lease payments under the agreements have been
assigned as security under the ROPA Loan agreement.
LINE OF CREDIT
In April 1996, the Company entered into a senior secured revolving credit
facility (the Facility) which allows the Company to borrow up to $120 million
through April 1999. The security for the Facility includes the majority of the
Company's property, plant and equipment, cash, investments, intangibles, and
certain other assets. The Company has the option to pay interest based upon
LIBOR plus 1.5%, or the higher of the federal funds effective rate plus .5% or
prime. The Company must comply with certain financial covenants and conditions
as defined in the Facility which the Company was in compliance with at September
28, 1996. As of September 28, 1996, the Company had no outstanding borrowings
under the Facility.
COMMITMENTS AND CONTINGENCIES
From time to time the Company is involved in various disputes and litigation
matters which arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, 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
(Avant!, formed by a merger of companies formerly known as ArcSys, Inc. and ISS,
Inc.) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
5
<PAGE>
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO continue to believe that each has meritorious defenses to Avant!'s
amended counterclaims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent Avant! from continuing to market ArcCell and ArcCell XO,
two software lines which the Company alleges were misappropriated. A hearing on
the motion was held on September 10, 1996. The court has not yet issued a
ruling.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's financial position or results of operations.
PUT WARRANTS AND CALL OPTIONS
The Company has an authorized stock repurchase program. In total, as of
September 28, 1996, the Company had authorized the repurchase of 55.6 million
shares, of which approximately 45.1 million shares had been repurchased.
Included in the authorized 55.6 million shares are 4.5 million shares authorized
for repurchase by the Board of Directors in May 1996, that are subject to
certain constraints. The Company repurchases common stock in part to satisfy
estimated requirements for shares to be issued under its employee stock plans,
including a seasoned systematic repurchase program to cover anticipated
reissuances under the Company's employee stock purchase plan (the "ESPP") and an
unseasoned systematic repurchase program for anticipated reissuances of stock
under the Company's stock option plans.
Since 1994, as part of its authorized stock repurchase program, the Company
has sold put warrants through private placements. As of September 28, 1996,
there were outstanding 2.4 million warrants which entitle the holder to sell one
share of common stock to the Company on a specified date at prices ranging from
$34.39 to $36.11 per share. Additionally, during this same period, the Company
purchased call options that entitle the Company to buy on a specified date one
share of common stock, at a specified price. As of September 28, 1996, the
Company had 1.8 million outstanding call options at prices ranging from $34.64
to $36.36 per share to satisfy anticipated stock repurchase requirements under
the Company's systematic repurchase programs.
The Company has the right to settle the put warrants with stock, cash or a
combination of stock and cash equal to the difference between the exercise price
and the fair value at the date of exercise. Settlement of the put warrants with
stock could cause the Company to issue a substantial number of shares, depending
on the exercise price of the put warrants and the per share fair value of the
Company's common stock at the time of exercise. In addition, settlement of put
warrants in stock or cash could lead to the disposition by put warrant holders
of shares of the Company's common stock that such holders may have accumulated
in anticipation of the exercise of the put warrants or call options, which may
impact the trading price of the Company's common stock. At September 28, 1996,
the Company had both the unconditional right and the intent to settle these put
warrants with stock, and therefore, no amount was classified out of
stockholders' equity in the accompanying balance sheet. The effect of the
exercise of these put warrants and call options is reported in stockholders'
equity.
SUBSEQUENT EVENTS
In October 1996, the Company announced a definitive agreement to merge with
High Level Design Systems, Inc. (HLDS) which will entail a tax-free,
stock-for-stock exchange at a fixed ratio of .22 shares of Cadence common stock
for each share of HLDS stock. As consideration for the merger, Cadence expects
to issue approximately 2.6 million shares of the Company's common stock and will
assume all of HLDS's outstanding stock options. The total purchase price,
including acquisition costs, is valued at approximately $99.5 million. The
Company intends to account for the merger as a purchase. The Company estimates,
based on an outside appraisal, that approximately $91.7 million of the purchase
price will be allocated to in
6
<PAGE>
process research and development. Because there can be no assurance that the
Company will be able to successfully complete the development and integration of
the HLDS products or that the acquired technology has any alternative future
use, the acquired in process research and development will be charged to expense
by the Company in the period in which the acquisition is consummated. HLDS is a
leading supplier of IC design planning tools for complex submicron gate-array
and cell-based designs, and is a leader in the emerging market for deep
submicron IC design tools. The merger has been approved by the boards of
directors of both companies and is subject to regulatory and HLDS shareholder
approval.
Also in October 1996, the Company announced a definitive agreement to merge
with Cooper & Chyan Technology, Inc. (CCT), which will entail a tax-free,
stock-for-stock exchange at a fixed ratio of .85 shares of Cadence common stock
for each share of CCT stock. Based on CCT's 12.9 million shares outstanding on
September 30, 1996, Cadence will issue approximately 11.0 million shares in the
merger. In addition, the Company will assume all outstanding stock options of
CCT based upon the exchange ratio of .85. CCT has been applying its core
competency in shape-based constraint-driven PCB routing to IC design, offering
new capabilities for advanced IC design. CCT's technology is a leader in
addressing deep submicron interconnect problems. The merger has been approved by
the boards of directors of both companies and is subject to regulatory and CCT
shareholder approval. The merger is expected to be accounted for as a pooling of
interests.
In connection with and prior to the consummation of the CCT merger, the
Company will rescind its stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. Such repurchases are intended to cover the
Company's expected reissuances under the ESPP for the next 12 months. In
addition, as a condition to closing the CCT merger, the Company intends to
effect a secondary offering of common stock in the open market to cure tainted
shares from stock repurchases made for purposes other than the ESPP.
7
<PAGE>
ITEM 2. 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.
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 30, % SEPTEMBER 28, SEPTEMBER 30, %
1996 1995 CHANGE 1996 1995 CHANGE
------------- ------------- ------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Product............................... $ 102.6 $ 74.3 38% $ 291.2 $ 202.1 44%
Service............................... 30.8 17.0 81% 80.4 44.4 81%
Maintenance........................... 55.3 48.8 13% 157.6 138.2 14%
------ ------ ------ ------
Total revenue......................... $ 188.7 $ 140.1 35% $ 529.2 $ 384.7 38%
------ ------ ------ ------
------ ------ ------ ------
Sources of Revenue as a Percent
- --------------------------------------
of Total Revenue
- --------------------------------------
Product............................... 55% 53% 55% 53%
Service............................... 16% 12% 15% 11%
Maintenance........................... 29% 35% 30% 36%
</TABLE>
The increase in product revenue for the three and nine months ended
September 28, 1996 as compared with the same periods of the prior year was
primarily the result of increased demand for the Company's products which enable
customers to meet complex design challenges, including deep sub-micron IC
design. This was exemplified by increased sales volume of its automatic place
and route, physical layout and verification, and timing-driven design process
tools.
Service revenue increased for the three and nine months ended September 28,
1996 as compared with the same periods of the prior year. The increase in
service revenue in total dollars and as a percentage of total revenue was the
result of increased demand for the Company's Spectrum Services offerings.
Additionally, revenue for the nine months ended September 28, 1996 included a
full nine months of revenue related to the March 1995 outsourcing agreement with
Unisys Corporation (Unisys) to assume substantial portions of Unisys' internal
silicon design operation.
The increase in maintenance revenue in total dollars for the three and nine
month periods ended September 28, 1996, as compared to the three and nine month
periods ended September 30, 1995, was attributable to an increase in the
Company's installed base of products.
International revenue was approximately $96.0 million and $68.3 million or
51% and 49% of total revenue for the three months ended September 28, 1996 and
September 30, 1995, respectively. Revenue from international sources was $262.0
million and $193.3 million for the nine month periods ended September 28, 1996
and September 30, 1995, respectively, representing 50% of total revenue in each
of those periods. The increases in absolute revenues from international sources
when comparing 1996 results to the comparable 1995 periods are attributable to
product revenue growth and new Spectrum Services contracts in all regions. The
increase in international revenue in the third quarter of 1996 compared with the
third quarter of 1995 more than offset the negative impact of $7.5 million on
revenue as the result of the weakening of certain foreign currencies, primarily
the Japanese yen, in relation to the U.S. dollar.
8
<PAGE>
COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 28, SEPTEMBER 30, % SEPTEMBER 28, SEPTEMBER 30, %
1996 1995 CHANGE 1996 1995 CHANGE
--------------- --------------- ------- --------------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Product.............................. $ 11.8 $ 11.6 1% $ 35.5 $ 34.2 4%
Service.............................. 21.2 14.5 47% 57.4 38.2 50%
Maintenance.......................... 6.3 4.2 48% 17.7 12.4 43%
Cost of Revenue as a Percent of
- -------------------------------------
Related Revenue
- -------------------------------------
Product.............................. 11% 16% 12% 17%
Service.............................. 69% 85% 71% 86%
Maintenance.......................... 11% 9% 11% 9%
</TABLE>
Cost of product revenue includes costs of production personnel, packaging
and documentation, amortization of capitalized software development costs and
purchased software costs and costs of the Company's automated test equipment
hardware business. Cost of product increased in the nine month period ended
September 28, 1996 as compared to the same period in the prior year as a result
of the write-off of approximately $1.6 million of capitalized software
development costs related to products at the end of their life cycle. The
decrease in cost of product as a percentage of product revenue for the quarter
and nine months ended September 28, 1996, as compared to the quarter and nine
months ended September 30, 1995, was primarily due to revenues growing at a
faster rate than costs.
Cost of service revenue includes personnel and related costs associated with
providing services to customers and the infrastructure to manage a service
organization, as well as costs to recruit, develop and retain service
professionals. Cost of service increased in total dollars due to increased
service revenue and the continued development of this line of business. During
the first nine months of 1996, as the Company utilized more of its design and
service resources to generate revenue, the cost of service as a percentage of
service revenue decreased as compared to the prior year. Additionally, the costs
for the nine months ended September 28, 1996 included a full nine months of
expenses related to the March 1995 outsourcing agreement with Unisys to assume
substantial portions of Unisys' internal silicon design operation. As part of
this agreement, the Company retained approximately 180 hardware and software
designers and acquired fixed assets and certain intangibles. While primarily
focused on serving the needs of Unisys, the design and service resources
acquired by the Company are also intended to be used to support other customers'
design needs. Continued investment in developing new service offerings and the
cost of integrating new services professionals performing a growing number of
service offerings will continue to 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. Cost of maintenance increased in total dollars and as a percentage of
maintenance revenue due to additional on-site support costs necessary to support
a larger installed base.
9
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 30, % SEPTEMBER 28, SEPTEMBER 30, %
1996 1995 CHANGE 1996 1995 CHANGE
--------------- --------------- ------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Marketing and sales.................. $ 55.8 $ 45.5 23% $ 161.0 $ 130.4 23%
Research and development............. 29.9 21.7 38% 85.1 65.2 31%
General and administrative........... 13.8 9.9 40% 40.4 29.1 39%
Expenses as a Percent of Total
- -------------------------------------
Revenue
- -------------------------------------
Marketing and sales.................. 30% 32% 30% 34%
Research and development............. 16% 15% 16% 17%
General and administrative........... 7% 7% 8% 8%
</TABLE>
The increase in marketing and sales expenses for the three and nine month
periods ended September 28, 1996, as compared to the same periods in the prior
year, was primarily the result of increases in employee related expenses
attributable to increased headcount. Weakening of certain foreign currencies in
relation to the U.S. dollar favorably impacted marketing and sales expenses by
approximately $1.2 million and $4.3 million for the three and nine month periods
ended September 28, 1996, respectively, as compared to the prior year.
The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $33.2 million and $24.6
million for the quarters ended September 28, 1996 and September 30, 1995,
respectively, representing 18% of total revenue in each of those periods.
Capitalization of software development costs for the quarters ended September
28, 1996 and September 30, 1995 was $3.3 million and $2.9 million, respectively,
which represented 10% and 12% of total research and development expenditures
made in each of those periods. For the nine months ended September 28, 1996,
gross research and development expenses were $95.3 million compared to $74.0
million for the same period in 1995, after capitalization of $10.2 million and
$8.8 million which represented 11% and 12% of total research and development
expenditures made in those periods, respectively. The expense increases for the
three and nine month periods of 1996 as compared to 1995 were primarily
attributable to increases in salary-related costs due to increased headcount
($4.4 million and $11.3 million, respectively) and higher consulting and other
outside service costs ($1.6 million and $4.8 million, respectively). In any
given period, the amount of capitalized software development costs may vary
depending on the exact nature of the development performed.
General and administrative expenses increased in the three and nine month
periods ended September 28, 1996 as compared to the same periods of the prior
year primarily as a result of higher legal costs of $2.1 million and $5.8
million, respectively, and higher consulting and outside service costs of $1.0
million and $3.3 million, respectively.
Net other expense for the quarter ended September 28, 1996 was $1.2 million
of expense compared with $17.2 million of income for the same period in 1995.
For the nine months ended September 28, 1996, net other expense was $2.4 million
of expense compared with $17.0 million of income for the same period in 1995.
The decrease in net other income for the three month and nine month periods
ended September 28, 1996, as compared to the same periods in the prior year, was
primarily the result of an $18.9 million pre-tax gain from the sale of shares of
common stock of the Company's subsidiary, Integrated Measurement Systems, Inc.
in a registered public offering recorded in the third quarter of the prior year.
The Company's estimated annual effective tax rate for fiscal 1996 is 33% as
compared to an annual effective tax rate of 28% for fiscal 1995. This estimated
increase in the tax rate is based on the limited
10
<PAGE>
availability of net operating losses and tax credits and the potential effect of
earnings generated in countries which have a tax rate greater than the U.S. tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 1996, the Company's principal sources of liquidity
consisted of $85.2 million of cash and short-term investments and a three-year,
$120 million secured revolving line of credit agreement. As of September 28,
1996, the Company had no borrowings under the revolving line of credit.
Cash generated from operating activities increased $9.0 million to $143.9
million for the nine months ended September 28, 1996, as compared to the nine
months ended September 30, 1995. The increase was primarily due to higher net
income and an increase in accrued liabilities and payables, partially offset by
an increase in accounts receivable.
At September 28, 1996, the Company had net working capital of $11.4 million
compared with $6.5 million at December 30, 1995. The primary reasons for the
increase were increases in accounts receivable of $10.5 million and in prepaid
expenses and other current assets of $12.2 million, partly offset by an increase
in deferred revenue of $8.7 million and a decrease in short-term investments of
$9.8 million. The increase in accounts receivable was attributable to increased
billing activity. The increase in deferred revenue was attributable to increased
maintenance renewals and an increase in deferred product revenue in accordance
with the American Institute of Certified Public Accountants Statement of
Position 91-1 entitled "Software Revenue Recognition."
In addition to its short-term investments, the Company's primary investing
activities were purchases of property and equipment, purchases of software and
intangibles and the capitalization of software development costs, which combined
represented $70.2 million and $35.4 million of cash used for investing
activities in the nine months ended September 28, 1996 and September 30, 1995,
respectively.
Since 1994, as part of its authorized stock repurchase program, the Company
has sold put warrants and purchased call options through private placements. The
Company had a maximum potential obligation related to the put warrants at
September 28, 1996 to buy back 2.4 million shares of its common stock at an
aggregate price of approximately $85.8 million. The put warrants will expire in
December 1996 through September 1997. The Company has both the unconditional
right and the intent to settle these put warrants with stock.
In connection with and prior to the consummation of the CCT Merger, the
Company will rescind its stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. Such repurchases are intended to cover the
Company's expected reissuances under the ESPP for the next 12 months. In
addition, as a condition to closing the CCT Merger, the Company intends to
effect a secondary offering of common stock in the open market to cure its
tainted shares from stock repurchases made for purposes other than the ESPP.
Anticipated cash requirements for the remaining fiscal 1996 include the
purchase of treasury stock through the exercise of call options for the
Company's systematic stock repurchase program and the contemplated additions of
property, plant and equipment of approximately $15 million.
As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $25.0 million will be made over
the next three to four years. As of September 28, 1996, the Company had
contributed approximately $5.9 million, which is reflected in other assets in
the accompanying balance sheet.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and the $120 million revolving line of
credit should be sufficient to meet its working capital and capital expenditure
requirements on a short and long-term basis.
11
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
Because of rapid technological changes in the EDA industry, the Company's
future revenues will depend on its ability to develop or acquire new products
and enhance its existing products on a timely basis to keep pace with
innovations in technology and to support a range of changing computer software
and hardware platforms and customer preferences. Changes in manufacturing
technology may render the Company's software tools obsolete. Lack of market
acceptance or significant delays in product development could result in a loss
of competitiveness of the Company's products, with a resulting loss of revenues.
The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by a number of
factors, including the desire to obtain new technologies, the desire to expand
and enhance the Company's product lines and the desire to attract key personnel.
Growth through acquisition has several identifiable risks, including risks
related to integration of the previously distinct businesses into a single unit,
the substantial management time devoted to such activities, undisclosed
liabilities, the failure of anticipated benefits, such as cost savings and
synergies, and distribution, engineering, customer support and other issues
related to product transition.
In October 1996, the Company announced definitive merger agreements with
HLDS and CCT (Mergers). Both Mergers are subject to regulatory and shareholder
approval and have several identifiable risks, including those described above.
Following these Mergers, in order to maintain and increase profitability, the
Company, HLDS, and CCT will need to successfully integrate and streamline
overlapping functions. Costs generally associated with this type of integration
that may be incurred by the Company include the write off of capitalized
software, severance payments, closing of excess facilities, and disposition of
excess equipment. While these costs have not been currently identified, any such
costs will have an adverse effect on the Company's operating results in the
periods in which they are incurred. In addition, the Company currently estimates
that approximately $91.7 million of the purchase price paid for HLDS will be
allocated to in-process research and development and will be charged to expense
in the period the acquisition is consummated. The Company, HLDS, and CCT each
have different systems and procedures in many operational areas that must be
rationalized and integrated. There can be no assurance that such integration
will be accomplished smoothly, expeditiously or successfully. Failure to
effectively accomplish the integration of the operations of the Company, HLDS
and CCT could have a material adverse effect on Cadence's results of operations
and financial condition. Moreover, uncertainty in the marketplace or customer
hesitation relating to the Mergers could negatively affect the Company's results
of operations.
Although the companies believe that beneficial synergies will result from
the Mergers, there can be no assurance that the combining of the Company and
HLDS' and CCT's businesses, even if achieved in an efficient and effective
manner, will result in combined results of operations and financial condition
superior to what would have been achieved by each company independently, or as
to the period of time required to achieve such result. The issuance of Cadence
common stock in connection with the Mergers is likely to have a dilutive effect
on the Company's earnings per share.
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's results of operations may be adversely
affected if revenue does not materialize in a quarter as anticipated. Since
expenses are usually committed in advance of revenues and because only a small
portion of expenses vary with revenue, the Company's operating results may be
impacted significantly by lower revenue which would be attributable to various
factors and could affect quarter to quarter comparisons. The Company's focus on
providing services is relatively recent. The percentage revenue growth from this
source from 1995 to 1996 may not be indicative of future growth.
The Company operates in the highly competitive EDA industry, which continues
to be characterized by falling prices, rapid technological change, and new
market entrants. The Company's success is dependent upon its ability to develop
innovative, cost-competitive EDA software products and services, and to bring
them to market in a timely manner. The Company not only competes with other
companies
12
<PAGE>
that sell one or more competing products but with potential customers' internal
EDA software development and design services groups as well. Some of the
Company's competitors may have substantially greater financial, marketing and
technological resources than the Company. There can be no assurance that the
Company will be able to compete successfully.
Because the EDA industry is labor-intensive rather than capital-intensive,
the number of the Company's potential competitors is significant. A potential
competitor who possesses the necessary knowledge of electronic circuit and
systems design, production and operation could develop competitive EDA tools
using a moderately priced computer workstation and bring such tools to market
quickly. There can be no assurance that development of competitive products will
not result in a shift of customer preferences away from the Company's products,
resulting in a significant decrease in the sales of the Company's comparable
product which could materially adversely affect the Company's business,
financial condition and results of operations. If the Company is unable to
compete successfully against current and future competitors, the Company's
business, financial condition and results of operations, will be materially
adversely affected.
The Company has in the past discounted EDA product prices and there can be
no assurance that the Company will not be required to discount EDA product
prices in the future. Any such discount could have a negative effect on the
profit margins of the discounted product and could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support and technical personnel. As noted above, the Company
has recently increased its focus on offering professional services to its
customers. To the extent that the Company is not able to attract, retain, train,
and motivate highly skilled employees who are able to provide services that
satisfy customers' expectations, the Company's business and operating results
would be adversely affected.
The Company relies principally upon trade secrets and copyright laws to
protect its intellectual property rights. In general, the Company seeks to
preserve its trade secrets by licensing (rather than selling) its products, by
using nondisclosure agreements, by limiting access to confidential information
and through other security measures. Despite these precautions, it may be
possible for third parties to copy aspects of the Company's products or to
obtain and use information that Cadence regards as proprietary.
The market price of the Company's common stock has been and may continue to
be volatile. This volatility may result from a number of factors, including
fluctuations in the Company's quarterly revenues and net income, announcements
of technical innovations or new commercial products by the Company or its
competitors, and market conditions in the EDA, semiconductor,
telecommunications, computer hardware and computer software industries. In
addition, the stock market has experienced and continues to experience extreme
price and volume fluctuations which have affected the market prices of
securities, particularly those of technology companies, and which have often
been unrelated to the operating performance of the companies.
The Company expects that international revenues will continue to account for
a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations,
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements and tariffs and other trade barriers. Currency exchange
fluctuations in countries in which the Company conducts business could also
materially adversely affect Cadence's business, financial condition and results
of operations. The Company enters into foreign currency forward contracts to
hedge the impact of foreign currency fluctuations. Although the Company attempts
to reduce
13
<PAGE>
the impact of foreign currency fluctuations, significant exchange rate movements
may have material adverse impact on the Company's results of operations.
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and litigation
matters which arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, 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
(Avant!, formed by a merger of companies formerly known as ArcSys, Inc. and ISS,
Inc.) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO continue to believe that each has meritorious defenses to Avant!'s
amended counterclaims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent Avant! from continuing to market ArcCell and ArcCell XO,
two software lines which the Company alleges were misappropriated. A hearing on
the motion was held on September 10, 1996. The court has not yet issued a
ruling.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's financial position or results of operations.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------------------------------------------------------------------
<S> <C>
27.1 Financial data schedule for the period ended September 28, 1996
(incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on November 7, 1996.)
(b) Reports on Form 8-K
Agreement and Plan of Merger and Reorganization dated as of October 28,
1996, by and among the Registrant, Wyoming Acquisition Sub, Inc., a
Delaware corporation, and Cooper & Chyan Technology, Inc., a Delaware
corporation (incorporated by reference to Registrant's Current Report on
Form 8-K filed on November 7, 1996 (the "November 7, 1996 8-K")).
</TABLE>
15
<PAGE>
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 12, 1996 By: /s/ JOSEPH B. COSTELLO
-----------------------------------------
Joseph B. Costello
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 12, 1996 By: /s/ H. RAYMOND BINGHAM
-----------------------------------------
H. Raymond Bingham
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
16
