<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 MARCH 29, 1997
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 April 30, 1997 there were 88,872,552 shares of the registrant's Common Stock,
$0.01 par value outstanding.
1
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CADENCE DESIGN SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 29, 1997 and December 28, 1996 3
Condensed Consolidated Statements of Income:
Three Months Ended March 29, 1997 and March 30, 1996 4
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 29, 1997 and March 30, 1996 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 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 29, December 28,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash investments $314,885 $284,512
Short-term investments 13,043 1,015
Accounts receivable, net 111,362 148,449
Inventories - - - 8,133
Prepaid expenses and other 50,538 49,026
--------- ---------
Total current assets 489,828 491,135
Property, Plant and Equipment, net 168,303 160,927
Software Development Costs, net 19,636 21,295
Purchased Software and Intangibles, net 10,006 10,267
Other Assets 52,405 33,377
--------- ---------
Total assets $740,178 $717,001
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations and short-term debt $ 20,506 $ 3,349
Accounts payable and accrued liabilities 101,637 116,174
Income taxes payable 3,878 4,901
Deferred revenue 102,316 107,154
--------- ---------
Total current liabilities 228,337 231,578
--------- ---------
Long-Term Liabilities
Long-term debt 2,398 20,292
Minority interest liability 1,701 15,205
Other long-term liabilities 22,594 22,378
--------- ---------
Total long-term liabilities 26,693 57,875
--------- ---------
Stockholders' Equity:
Common stock and capital in excess of par value 634,274 603,430
Treasury stock at cost (31,391 and 31,473 shares, respectively) (332,292) (325,637)
Retained earnings 188,718 151,596
Accumulated translation adjustment (5,552) (1,841)
--------- ---------
Total stockholders' equity 485,148 427,548
--------- ---------
Total liabilities and stockholders' equity $740,178 $717,001
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 29, March 30,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
REVENUE
Product $102,323 $ 90,182
Services 33,753 23,098
Maintenance 51,472 50,150
--------- ---------
Total revenue 187,548 163,430
--------- ---------
COSTS AND EXPENSES
Cost of product 8,951 10,887
Cost of services 24,194 17,597
Cost of maintenance 5,752 5,155
Marketing and sales 55,169 52,193
Research and development 31,252 26,013
General and administrative 12,205 13,012
Unusual items 11,748 - - -
--------- ---------
Total costs and expenses 149,271 124,857
--------- ---------
INCOME FROM OPERATIONS 38,277 38,573
Other income (expense), net 14,755 (395)
--------- ---------
Income before provision for income taxes 53,032 38,178
Provision for income taxes 15,910 12,599
--------- ---------
NET INCOME $ 37,122 $ 25,579
--------- ---------
--------- ---------
NET INCOME PER SHARE $ .37 $ .28
--------- ---------
--------- ---------
Weighted average common and common
equivalent shares outstanding 99,652 91,272
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 29, March 30,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
CASH AND CASH INVESTMENTS AT
BEGINNING OF PERIOD $284,512 $ 84,867
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 37,122 25,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,575 12,365
Deferred income taxes, noncurrent (905) (2,606)
Write-offs of equipment and other long-term assets 87 6
Change in other long-term liabilities and minority
interest expense (12,441) 895
Gain on sale of subsidiary stock (13,061) ---
Write-off of in-process research and development 4,860 ---
Changes in current assets and liabilities:
Accounts receivable 18,472 (2,876)
Inventories --- (270)
Prepaid expenses and other 999 (4,258)
Accrued liabilities and payables 13,316 4,324
Deferred revenue (4,400) 22,496
--------- ---------
Net cash provided by operating activities 57,624 55,655
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments --- 4,072
Purchases of short-term investments (12,028) (2,020)
Purchases of property and equipment (24,590) (13,616)
Capitalization of software development costs (3,259) (3,222)
Net proceeds from sale of subsidiary stock 18,582 ---
Effect of IMS deconsolidation on cash (9,536) ---
Purchased software and intangibles
and other assets (2,076) (6,804)
--------- ---------
Net cash used for investing activities (32,907) (21,590)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations (1,592) (546)
Increase in leases and other debt 794 ---
Sale of common stock 18,727 6,450
Purchases of treasury stock (10,603) (50,294)
--------- ---------
Net cash provided by (used for) financing activities 7,326 (44,390)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,670) (1,106)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
INVESTMENTS 30,373 (11,431)
--------- ---------
CASH AND CASH INVESTMENTS AT END OF PERIOD $314,885 $ 73,436
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<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 28, 1996.
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.
In February 1997, the Company and its subsidiary, Integrated Measurement
Systems, Inc. (IMS), sold to the public 1.7 million shares of common stock which
reduced the Company's ownership in IMS to approximately 37% from 55%. Thus, for
the quarter ended March 29, 1997, the Company's investment in IMS is recorded
using the equity method of accounting. For the prior year quarter the results
of IMS are consolidated with the Company's results.
The Company's fiscal year is determined based upon the 52 - 53 week period
ending on the Saturday closest to December 31.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share",
which will be adopted by the Company in the fourth quarter of 1997. SFAS No.
128 requires companies to compute net income per share under two different
methods, basic and diluted, and to disclose the methodology used for the
calculation. If SFAS No. 128 had been applied by the Company during the first
quarter of 1997 and 1996, basic net income per share would have been $.42 and
$.33, and diluted net income per share would have been $.37 and $.28,
respectively.
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure", which will be adopted by the Company in the fourth quarter
of 1997. SFAS No. 129 requires companies to disclose certain information about
their capital structure. The Company does not anticipate that SFAS No. 129 will
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 using the modified treasury stock method. Common stock
equivalents consist of 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.
6
<PAGE>
INVENTORIES
Due to the change in accounting for IMS described above, no inventories were
recorded at March 29, 1997. Inventories totalling $8.1 million at December 28,
1996, consisting primarily of test equipment, were stated at the lower of cost
(first-in, first-out method) or market. Cost included labor, material and
manufacturing overhead. Inventories consisted of the following (in millions):
raw materials and supplies - $4.0; work-in-process - $3.0, and finished goods -
$1.1.
COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 1996, the Company entered into a merger agreement
with Cooper & Chyan Technology, Inc. (CCT). The transaction will entail a
tax-free, stock-for-stock exchange at a fixed ratio of .85 shares of the
Company's common stock for each share of CCT stock. Based on CCT's 13.2 million
shares outstanding on March 31, 1997, the Company expects to issue approximately
11.2 million shares. In addition, the Company will assume outstanding stock
options of CCT based upon the exchange ratio of .85. The merger, which is
currently awaiting regulatory approval, is expected to be accounted for as a
pooling of interests.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(a company formed by a merger of companies formerly known as ArcSys, Inc. and
ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade
secrets, copyright infringement, conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company and
the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti- competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO believe that each has meritorious defenses to Avant!'s claims, and each
intends to defend such action vigorously. By an order dated July 13, 1996, the
court bifurcated Avant!'s counterclaim from the Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary injunction
to prevent further use of Cadence copyrighted code and trade secrets by Avant!.
On March 18, 1997, the Court issued an order in which it granted in part and
denied in part that motion. The Company has filed an appeal as to certain
aspects of the Court's order. The Court has not yet set a trial date. The
Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and litigation
matters discussed above will not have a material adverse impact on the Company's
financial position or results of operations.
PUT WARRANTS AND CALL OPTIONS
The Company has a seasoned authorized stock repurchase program under which it
repurchases common stock to satisfy estimated requirements for shares to be
issued under its Employee Stock Purchase Plan (ESPP). Such repurchases are
intended to cover the Company's expected reissuances under the ESPP for the
next 12 months. The Company also has an unseasoned systematic repurchase
program for anticipated re-issuances of stock under the Company's stock
option plans. In connection with and prior to the consummation of the merger
with CCT described above, the Company will rescind its stock repurchase
program, with the exception of continued systematic stock repurchases under
its seasoned stock repurchase program for the Company's ESPP.
Since 1994, as part of its authorized repurchase program, the Company has sold
put warrants through private placements. As of March 29, 1997, there were
outstanding 1.3 million put warrants which entitle the holder to sell one share
of common stock to the Company on a specified date at a specified price ranging
from $34.92 to $36.11 per share. Additionally, during this same period, the
Company purchased call options that entitle the Company to buy on a specified
date one share of common stock, at a specified price. As of March 29, 1997, the
Company had .9 million outstanding call options at prices ranging from $35.17 to
$36.36 per share to satisfy anticipated stock repurchase requirements under the
Company's systematic repurchase programs.
7
<PAGE>
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 March 29, 1997, 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 EVENT
In April 1997, the Company repaid a loan which was classified as short-term and
had an outstanding balance of $19.3 million at March 29, 1997. The original
repayment schedule required various quarterly principal payments through the
year 2005.
8
<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
MARCH 29, MARCH 30, % CHANGE
1997 1996
-------- --------- --------
(In millions)
Product $102.3 $ 90.2 13%
Services 33.7 23.1 46%
Maintenance 51.5 50.1 3%
------ ------ ---
Total revenue $187.5 $163.4 15%
------ ------ ---
------ ------ ---
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
Product 55% 55%
Services 18% 14%
Maintenance 27% 31%
The revenue recorded during the first quarter of 1996 included product revenue
of $9.2 million from IMS. 1997 first quarter results do not include revenue
from IMS since IMS' results are not consolidated in the Company's first quarter
1997 results. If IMS' sales had been excluded from the first quarter of 1996,
product revenue would have shown an increase of 26% in the first quarter of 1997
when compared to the first quarter of 1996. This increase was primarily driven
by increased demand for products used by customers to develop custom integrated
circuits (ICs) and deep submicron designs including design entry tools, custom
layout tools, analog design tools, automatic place-and-route tools, and
verification tools.
Services revenue increased 46% in the first quarter of 1997 when compared to the
first quarter of 1996. The increase in services revenue was the result of
increased demand for the Company's services offerings, in the United States,
Europe, and Japan.
The increase in maintenance revenue for the quarter ended March 29, 1997 as
compared to the quarter ended March 30, 1996, was attributable to an increase in
the Company's installed base of products.
Revenue from international sources was approximately $95.8 million and $74.9
million or 51% and 46% of total revenue for the three months ended March 29,
1997 and March 30, 1996, respectively. Domestic revenue was approximately $91.7
million and $88.5 million for the three months ended March 29, 1997 and March
30, 1996, respectively, representing an increase of 4% from 1996 to 1997. The
increase in domestic revenue was attributable to increased sales volume in the
product and services areas. The increase in total revenue from international
sources in the first quarter of 1997, as compared to the first quarter of 1996,
was attributable to strong revenue growth in Japan despite a $9.0 million
negative impact on revenue as the result of the weakening
of certain foreign currencies, primarily the Japanese yen, in relation to the
U.S. dollar as compared to the quarter ended March 30, 1996.
9
<PAGE>
COST OF REVENUE
MARCH 29, MARCH 30, % CHANGE
1997 1996
-------- --------- --------
(In millions)
Product $ 8.9 $10.9 (18%)
Services $24.2 $17.6 38%
Maintenance $ 5.8 $ 5.2 12%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
Product 9% 12%
Services 72% 76%
Maintenance 11% 10%
Cost of product revenue includes costs of production personnel, packaging and
documentation, amortization of capitalized software development costs and, in
the first quarter of 1996, costs related to IMS' automated test equipment (ATE)
hardware business. If IMS' costs had been excluded from the costs incurred
during the first quarter of 1996, cost of product would have increased 17%.
Additionally, cost of product as a percent of product revenue for the first
quarter of 1996 would have been 9.5%. The increase in cost of product in
absolute dollars, excluding the results of IMS, for the quarter ended March 29,
1997 as compared to the quarter ended March 30, 1996 was primarily due to an
increase in royalty expenses.
Cost of services revenue includes personnel and related costs associated with
providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop and retain services
professionals. Cost of services increased in total dollars due to the
investment in additional services professionals to further develop this line of
business, but decreased as a percentage of services revenue as the Company
continued to utilize more of its design and services resources to generate
revenue. However, until these design and services resources are utilized
through additional revenue contracts or until further operating efficiencies are
obtained, services gross margins could be adversely affected. Additionally, the
cost of integrating new services professionals performing a growing number of
services offerings may decrease services gross margins until operating
efficiencies are obtained.
Cost of maintenance revenue includes the cost of customer services such as
hot-line and on-site support and the production cost of the maintenance renewal
process. Cost of maintenance increased in total dollars due to additional costs
necessary to support a larger installed base.
10
<PAGE>
OPERATING EXPENSES
MARCH 29, MARCH 30, % CHANGE
1997 1996
-------- --------- --------
(In millions)
Marketing and sales $ 55.2 $ 52.2 6%
Research and development $ 31.3 $ 26.0 20%
General and administrative $ 12.2 $ 13.0 (6%)
Unusual items $ 11.7 $ - - - - - -
EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales 29% 32%
Research and development 17% 16%
General and administrative 7% 8%
Unusual items 6% - - -
The increase in marketing and sales expenses was primarily the result of an
increase in commissions and sales incentives, partially offset by a decrease in
other employee related expenses. Additionally, expenses decreased $2.6 million
due to the deconsolidation of IMS, partially offset by an increase of $1.5
million related to the merger with High Level Design Systems, Inc. (HLDS) which
occurred during the fourth quarter of 1996. Marketing and sales expenses were
favorably impacted by $.9 million in the quarter ended March 29, 1997, as
compared to the quarter ended March 30, 1996, as the result of the weakening of
certain foreign currencies in relation to the U.S. dollar.
The Company's investment in research and development, prior to the reduction for
capitalization of software development costs, was $34.5 million and $29.2
million for the quarters ended March 29, 1997 and March 30, 1996, respectively,
representing 18% of total revenue in both periods. The increase of $5.3 million
in net research and development was primarily driven by an increase in employee
related costs of $5.6 million due to increased headcount, offset by a reduction
of $2.0 million due to the deconsolidation of IMS. Capitalization of software
development costs was $3.2 million for both the quarters ended March 29, 1997
and March 30, 1996, which represented 9% and 11%, respectively, of total
research and development expenditures made in each of those periods. 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 decreased in the quarter ended March 29,
1997, as compared to the same period of the prior year, due to a decrease in
legal costs of $2.1 million and a reduction of $.6 million due to the
deconsolidation of IMS, offset by increased management information system costs
of $1.7 million.
UNUSUAL ITEMS
In February 1997, the Company acquired all of the outstanding stock of Synthesia
AB (Synthesia) for 57,583 shares of the Company's common stock and cash. The
total purchase price was $4.7 million and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $5.6 million
were acquired, of which $4.9 million was reflected as a one-time charge to
operations for the write-off of in-process research and development that had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use.
The Company incurred $4.8 million of restructuring costs during the quarter,
primarily as a result of its merger with HLDS and the Company's
reorganization into business units. Costs included a provision for the
reduction of its work force, including severance for approximately 114
employees. The majority of the costs were utilized during the first quarter
of 1997; the remainder are expected to be disbursed during the second quarter
of 1997.
In addition, the Company incurred approximately $2.0 million of expenses to
restructure its international business operations.
11
<PAGE>
OTHER INCOME (EXPENSE) AND INCOME TAXES
The increase in other income (expense) of $15.2 million in the first quarter of
1997 as compared to the first quarter of 1996 was primarily due to a $13.1
million gain on the sale of IMS stock recorded by the Company. In addition,
interest income increased by $3.6 million due to increased earnings generated by
a higher cash balance during the first quarter of 1997.
The Company's estimated annual effective tax rate is 30% for 1997 and 33% for
1996. The decrease in the expected rate is due to the difference in tax rates
between domestic and foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company's principal sources of liquidity consisted of
$327.9 million of cash and short-term investments as compared to $285.5 million
at December 28, 1996 and a three-year, $120 million secured revolving line of
credit agreement. As of May 6, 1997, the Company had no borrowings outstanding
under the revolving line of credit.
Cash generated from operating activities increased approximately $2.0 million
for the quarter ended March 29, 1997, as compared to the quarter ended March
30, 1996. The increase was primarily due to increases in net income, accounts
receivable, and accrued liabilities and payables, partially offset by
decreases in deferred revenue and other long-term liabilities and minority
interest expense.
At March 29, 1997, the Company had working capital of $261.5 million compared to
$259.6 million at December 28, 1996. Working capital increases were driven by
an increase in cash and short-term investments of $42.4 million, a decrease in
accounts payable and accrued liabilities of $14.5 million, and a decrease in
deferred revenue of $4.8 million. The increase in cash was primarily due to the
improved collection of accounts receivable which resulted in a decrease in days'
sales outstanding at March 29, 1997. Working capital reductions were generated
by a decrease in accounts receivable of $37.1 million, a decrease in inventories
of $8.1 million, and an increase in short-term debt of $17.2 million.
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 $29.9 million and $23.6 million of cash used for
investing activities in the quarters ended March 29, 1997, and March 30,
1996, respectively. Additionally, $18.6 million in net proceeds related to
the sale of IMS stock increased cash, and was partially offset by the loss to
the Company of IMS' cash of $9.5 million due to deconsolidation, for the
quarter ended March 29, 1997.
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 March
29, 1997 to buy back 1.3 million shares of its common stock at an aggregate
price of approximately $45.8 million.
In connection with and prior to the consummation of the merger with Cooper and
Chyan Technologies (CCT) discussed below, the Company will rescind its stock
repurchase program, with the exception of continued systematic stock repurchases
under its seasoned stock repurchase program for the company's Employee Stock
Purchase Plan (ESPP). Such repurchases are intended to cover the Company's
expected re-issuances under the ESPP for the next 12 months.
Anticipated cash requirements for the remainder of 1997 include the purchase of
treasury stock through the exercise of call options for the Company's seasoned
systematic stock repurchase program and the contemplated additions of property,
plant and equipment of approximately $50 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 $35 million will be made over
the next three to four years. As of March 29, 1997, the Company had contributed
approximately $8.0 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 will
be sufficient to meet its working capital and capital expenditure requirements
on a short and long-term basis.
12
<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 many factors including
the desire to obtain new technologies, the desire to expand and enhance the
Company's product lines and the desire to attract key personnel. Growth through
acquisition has several identifiable risks including risks related to
integration of the previously distinct businesses into a single unit, the
substantial management time devoted to such activities, undisclosed liabilities,
the failure to realize anticipated benefits (such as cost savings and
synergies), and issues related to product transition (such as distribution,
engineering, and customer support).
During the fourth quarter of 1996, the Company entered into a merger agreement
with CCT (the Merger). The Merger has several identifiable risks including
those described above. To maintain and increase profitability, the Company 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, disposition of excess equipment, and merger
transaction costs. While some of these costs are not currently identified, any
such costs will have an adverse effect on the Company's operating results in the
periods in which they are incurred. The Company and CCT 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 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 Merger could negatively affect the Company's results of
operations.
Among the conditions that must be fulfilled in order to consummate the Merger is
the expiration or termination of the waiting period applicable to the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
HSR Act). The review of the Merger pursuant to the HSR Act may substantially
delay the Company's ability to consummate the Merger. There can be no assurance
that a challenge to the Merger on
13
<PAGE>
antitrust grounds will not be made, or if such a challenge is made, the Company
will prevail or would not be required to terminate the merger agreement, divest
certain assets, license certain proprietary technology or accept certain
conditions in order to consummate the Merger. In addition, the Company has the
right to waive the condition that the Merger be qualified for pooling of
interests accounting treatment. If the Merger is consummated but fails to
qualify for pooling of interests accounting treatment, then the transaction
would be accounted for as a purchase. Accounting for the Merger as a purchase
could result in a significant intangible asset or a significant charge against
results of operations or both, which could materially and adversely affect
future results of operations. There can be no assurance that all of the
aforementioned conditions will be satisfied or waived and, therefore, there can
be no assurance that the Merger will be consummated.
During the first quarter of 1997, the Company completed the reorganization of
its sales force and other operating groups into business units. These business
units (Alta, Deep Submicron, Logic Design and Verification, Custom IC and
Performance Engineering) are focused on delivering solutions to customers for
specific areas of the design process. The sales force or customer uncertainty
relating to this reorganization could negatively affect the Company's results of
operations.
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's results of operations may be adversely
affected if revenue does not materialize in a quarter as anticipated. Since
expenses are usually committed in advance of revenues and because only a small
portion of expenses vary with revenue, the Company's operating results may be
impacted significantly by lower revenue which would be attributable to various
factors and could affect quarter to quarter comparisons.
In addition, a substantial portion of the Company's revenues from services are
earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 short-term impact of foreign currency fluctuations. Although the
Company attempts to reduce the impact of foreign currency fluctuations,
significant exchange rate movements may have a material adverse impact on the
Company's results of operations.
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and litigation
matters which have arisen in the ordinary course of business. These include
disputes and lawsuits related to intellectual property, contract law and
employee relations matters.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(a company formed by a merger of companies formerly known as ArcSys, Inc. and
ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade
secrets, copyright infringement, conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company and
the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, INTER ALIA, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti- competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO believe that each has meritorious defenses to Avant!'s claims, and each
intends to defend such action vigorously. By an order dated July 13, 1996, the
court bifurcated Avant!'s counterclaim from the Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary injunction
to prevent further use of Cadence copyrighted code and trade secrets by Avant!.
On March 18, 1997, the Court issued an order in which it granted in part and
denied in part that motion. The Company has filed an appeal as to certain
aspects of the Court's order. The Court has not yet set a trial date. The
Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and litigation
matters discussed above will not have a material adverse impact on the Company's
financial position or results of operations.
ITEM 5. OTHER INFORMATION
On February 18, 1997, the Company issued 57,583 shares of its common stock, $.01
par value per share (the Company Shares), to the stockholders of Synthesia AB, a
Swedish limited liability company (Synthesia), in connection with the Company's
acquisition of 100% of the outstanding stock of Synthesia. The Company also
agreed, subject to certain rights of indemnification and setoff under the
agreement pursuant to which the Synthesia shares were acquired, to issue to the
Synthesia stockholders up to approximately 6,400 additional unregistered shares
of the Company's common stock on December 15, 1997. The Company's primary
purpose in acquiring the Synthesia shares was the acquisition of Synthesia's
behavioral synthesis technology for integration into the Company's product
offerings by its Alta Group business unit.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
27.1 Financial data schedule for the period ended March 29, 1997.
(b) Reports on Form 8-K
On March 6, 1997, Registrant filed a Current Report on Form 8-K
reporting that the Company issued shares of common stock and the
related acquisition of Synthesia AB.
16
<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: MAY 6, 1997 By: /S/ JOSEPH B. COSTELLO
---------------- ------------------------------
JOSEPH B. COSTELLO
President and Chief Executive Officer
DATE: MAY 6, 1997 By: /S/ H. RAYMOND BINGHAM
---------------- ------------------------------
H. RAYMOND BINGHAM
Executive Vice President
and Chief Financial Officer
17
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<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> MAR-29-1997
<CASH> 314,885
<SECURITIES> 13,043
<RECEIVABLES> 111,362
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<PP&E> 284,903
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<COMMON> 301,982
<OTHER-SE> 183,166
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<OTHER-EXPENSES> 110,374
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