CADENCE DESIGN SYSTEMS INC, 10-Q, 1997-11-07

CADENCE DESIGN SYSTEMS INC
10-Q, 1997-11-07
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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 27, 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

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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
incorporation or organization) No.)

555 RIVER OAKS PARKWAY, 95134
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive
offices)

Registrant's telephone number, including area code (408) 943-1234

------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____

At October 31, 1997 there were 208,863,606 shares of the registrant's Common
Stock, $0.01 par value outstanding.

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CADENCE DESIGN SYSTEMS, INC.
INDEX

<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets:
September 27, 1997 and December 28, 1996....................................................... 3

Condensed Consolidated Statements of Income:
Three and Nine Months Ended September 27, 1997 and September 28, 1996.......................... 4

Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 27, 1997 and September 28, 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................................................................................................. 17
</TABLE>

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash investments......................................................................... $ 332,557 $284,512
Short-term investments............................................................................ 49,103 1,015
Accounts receivable, net.......................................................................... 154,290 148,449
Inventories....................................................................................... -- 8,133
Prepaid expenses and other........................................................................ 74,866 49,026
------------- ------------
Total current assets............................................................................ 610,816 491,135

Property, Plant and Equipment, net.................................................................. 193,486 160,927
Software Development Costs, net..................................................................... 17,442 21,295
Purchased Software and Intangibles, net............................................................. 7,572 10,267
Other Non-Current Assets............................................................................ 105,663 33,377
------------- ------------
Total assets.................................................................................... $ 934,979 $717,001
------------- ------------
------------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations...................................................... $ 889 $ 3,349
Accounts payable and accrued liabilities.......................................................... 127,929 116,174
Income taxes payable.............................................................................. 8,962 4,901
Deferred revenue.................................................................................. 101,076 107,154
------------- ------------
Total current liabilities....................................................................... 238,856 231,578
------------- ------------
Long-Term Liabilities
Long-term debt.................................................................................... 1,829 20,292
Minority interest liability....................................................................... 212 15,205
Other long-term liabilities....................................................................... 28,602 22,378
------------- ------------
Total long-term liabilities..................................................................... 30,643 57,875
------------- ------------
Stockholders' Equity
Common stock and capital in excess of par value................................................... 706,135 603,430
Treasury stock at cost............................................................................ (316,792) (325,637)
Retained earnings................................................................................. 280,336 151,596
Accumulated translation adjustment................................................................ (4,199) (1,841)
------------- ------------
Total stockholders' equity...................................................................... 665,480 427,548
------------- ------------
Total liabilities and stockholders' equity.......................................................... $ 934,979 $717,001
------------- ------------
------------- ------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE
Product............................................ $ 135,480 $ 102,656 $ 354,343 $ 291,214
Services........................................... 40,355 30,778 113,723 80,405
Maintenance........................................ 59,031 55,307 164,815 157,578
------------- ------------- ------------- -------------
Total revenue.................................... 234,866 188,741 632,881 529,197
------------- ------------- ------------- -------------

COSTS AND EXPENSES
Cost of product.................................... 11,253 11,767 30,296 35,539
Cost of services................................... 28,520 21,218 80,582 57,420
Cost of maintenance................................ 7,039 6,277 18,425 17,707
Marketing and sales................................ 63,261 55,798 178,119 160,952
Research and development........................... 35,927 29,913 100,979 85,147
General and administrative......................... 14,251 13,786 40,093 40,444
Unusual items...................................... -- -- 34,114 --
------------- ------------- ------------- -------------
Total costs and expenses......................... 160,251 138,759 482,608 397,209
------------- ------------- ------------- -------------

INCOME FROM OPERATIONS............................... 74,615 49,982 150,273 131,988
Other income (expense), net.......................... 4,386 (1,196) 22,397 (2,355)
------------- ------------- ------------- -------------
Income before provision for income taxes............. 79,001 48,786 172,670 129,633
Provision for income taxes........................... 23,700 16,099 51,801 42,779
------------- ------------- ------------- -------------

NET INCOME........................................... $ 55,301 $ 32,687 $ 120,869 $ 86,854
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------

NET INCOME PER SHARE................................. $ .24 $ .18 $ .56 $ .48
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding........................................ 231,388 180,342 214,536 182,190
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD.................................... $ 284,512 $ 84,867
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ 120,869 86,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 41,838 39,755
Deferred income taxes, non-current.............................................. (13,401) (4,718)
Write-offs of equipment and other assets........................................ 2,340 75
Changes in other non-current assets............................................. 913 --
Other long-term liabilities and minority interest............................... 4,957 1,957
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........................................................... (20,696) (11,890)
Inventories................................................................... -- (1,480)
Prepaid expenses and other.................................................... (10,455) (12,145)
Accrued liabilities and payables.............................................. 35,576 14,855
Income taxes payable.......................................................... 55,573 20,979
Deferred revenue.............................................................. (10,206) 9,679
------------- -------------
Net cash provided by operating activities................................... 199,107 143,921
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments............................................ 19,600 17,610
Purchases of short-term investments............................................. (67,688) (7,859)
Purchases of property and equipment............................................. (64,110) (42,873)
Capitalization of software development costs.................................... (11,077) (10,210)
Purchased software and intangibles and other assets............................. (43,713) (17,166)
Net proceeds from sale of subsidiary stock...................................... 18,582 --
Effect of deconsolidation and reorganization on cash............................ (25,118) --
Effect of acquisition on cash................................................... 38,357 --
Sale of put warrants............................................................ -- 13,870
Purchase of call options........................................................ -- (13,870)
------------- -------------
Net cash used for investing activities...................................... (135,167) (60,498)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations and long-term debt.............. (21,795) (1,872)
Net proceeds from issuance of long-term debt.................................... -- 19,763
Increase in capital lease obligations........................................... 1,769 --
Issuance of common stock and other.............................................. 41,383 16,659
Purchase of treasury stock...................................................... (33,138) (113,582)
Purchase of warrant............................................................. -- (4,347)
------------- -------------
Net cash used for financing activities...................................... (11,781) (83,379)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................. (4,114) (1,700)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS.................................... 48,045 (1,656)
------------- -------------
CASH AND CASH INVESTMENTS AT END OF PERIOD.......................................... $ 332,557 $ 83,211
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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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 three months and nine months ended September 27, 1997, the Company's
investment in IMS is recorded using the equity method of accounting. For the
comparable periods of the prior year, the results of IMS are consolidated with
the Company's results.

In May 1997, the Company merged with Cooper & Chyan Technology, Inc. (CCT),
as described below, which merger was treated as a pooling of interests for
accounting purposes.

The Company's fiscal year is determined based upon the 52 - 53 week period
ending on the Saturday closest to December 31.

ACQUISITION

On May 7, 1997, the Company merged with CCT, the software products of which
are used to design sophisticated integrated circuits and high-speed printed
circuit boards. In connection therewith, the Company issued approximately 22.8
million shares of common stock. In addition, approximately 3.8 million shares of
the Company's common stock may be issued in connection with the exercise of CCT
stock options assumed by the Company. The acquisition was accounted for as a
pooling of interests. The operations of CCT were not material to the Company's
consolidated operations and financial position; therefore, prior period
financial statements were not restated. The results of CCT from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements.

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 for the three months and nine
months ended September 27, 1997,

6
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basic net income per share would have been $0.28 and $0.64, respectively, and
diluted net income per share would have been $0.24 and $0.56, respectively. For
the three months and nine months ended September 28, 1996, basic net income per
share would have been $0.21 and $0.56, respectively, and diluted net income per
share would have been $0.18 and $0.48, respectively.

In February 1997, the 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 anticipates that SFAS No. 129 will
not have a material impact on its financial statement disclosures.

In September 1997, the FASB issued SFAS No. 130, "Comprehensive Income",
which will be adopted by the Company in the first quarter of 1998. SFAS No. 130
requires companies to report a new, additional measure of income on the income
statement or to create a new financial statement that has the new measure of
income on it. "Comprehensive Income" is to include foreign currency translation
gains and losses and other unrealized gains and losses that have been previously
excluded from net income and reflected instead in equity. The Company
anticipates that SFAS No. 130 will not have a material impact on its financial
statements.

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. Net income per share has
been adjusted to retroactively reflect the two-for-one stock split discussed in
the "Subsequent Event" note below.

INVENTORIES

Due to the change in accounting for IMS described above, no inventories were
recorded at September 27, 1997. Inventories totaling $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.

NOTE PAYABLE

In April 1997, the Company repaid a real estate loan which was classified as
short-term and had an outstanding balance of $19.3 million at the date of
repayment. The original repayment schedule required various quarterly principal
payments through the year 2005.

COMMITMENTS AND CONTINGENCIES

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.

7
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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 former 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 District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order enjoining
the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s
Aquarius software infringes Cadence's code and, if so, to enter an order
enjoining the sale of that software. Avant! has petitioned the Court of Appeals
to reverse and/or rehear such decision.

By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5 million bond, in
light of criminal proceedings pending against Avant! and several of its
executives. The District 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.

DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS

During the second quarter of 1997, in connection with the merger with CCT
described above, the Company rescinded 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 Program (ESPP). The
Company adopted a new systematic stock repurchase program in the third quarter
of 1997. The shares acquired by the Company under this new program will be
untainted shares used to meet the recurring share issuance requirements of the
recently adopted 1997 Stock Option Plan. The repurchase authorization for the
1997 Stock Option Plan is 4.0 million shares over a two year period; 2.4 million
additional shares are authorized for repurchase for the ESPP over a two year
period.

As part of its authorized stock repurchase program, the Company has sold put
warrants through private placements. As of October 31, 1997, there were
outstanding 2.3 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 $46.18 to $48.68 per share. Additionally, the Company has purchased call
options that entitle the Company to buy, on a specified date, one share of
common stock at a specified price. As of October 31, 1997, the Company had 1.7
million outstanding call options at prices ranging from $46.43 to $48.93 per
share to satisfy anticipated stock repurchase requirements under the Company's
seasoned systematic stock repurchase program. There were no put warrants or call
options outstanding at September 27, 1997.

The Company enters into certain foreign currency forward exchange contracts
(forward contracts) to hedge the impact of foreign currency fluctuations. Due to
the short-term nature of these forward contracts, the unrealized gains and
losses were not material at September 27, 1997, and will be recorded when
realized. The Company classifies its short-term investments in debt securities
as "held-to-maturity." Accordingly, these investments are valued using the
amortized cost method.

SUBSEQUENT EVENTS

On October 19, 1997, the Company's Board of Directors declared a two-for-one
stock split, payable November 14, 1997, in the form of a dividend of one
additional share of the Company's common stock for every share owned by
stockholders as of the record date, October 31, 1997. Par value will remain at
$0.01 per share. The stock split will result in the issuance of approximately
104.4 million additional shares of common stock from authorized but unissued
shares and treasury shares. Accordingly, all share and per share data have been
adjusted to retroactively reflect the stock split.

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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 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 % CHANGE 1997 1996 % CHANGE
------------- ------------- --------------- ------------- ------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Product...................... $ 135.5 $ 102.6 32% $ 354.4 $ 291.2 22%
Services..................... 40.4 30.8 31% 113.7 80.4 41%
Maintenance.................. 59.0 55.3 7% 164.8 157.6 5%
------ ------ ------ ------
Total revenue.............. $ 234.9 $ 188.7 24% $ 632.9 $ 529.2 20%
------ ------ ------ ------
------ ------ ------ ------

SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
<S> <C> <C> <C> <C> <C> <C>

Product...................... 58% 55% 56% 55%
Services..................... 17% 16% 18% 15%
Maintenance.................. 25% 29% 26% 30%
</TABLE>

The product revenue recorded during the three and nine month periods ended
September 28, 1996 includes product revenue of $10.2 million and $29.5 million,
respectively, from IMS. The three and nine month periods ended September 27,
1997 do not include product revenue from IMS since IMS' results are not
consolidated in the Company's 1997 results. CCT's product revenue for the three
and nine month periods ended September 28, 1996 and for the quarter ended March
29, 1997 totaled $6.9 million, $18.1 million, and $7.8 million, respectively.
The Company's product revenue for these periods did not include product revenue
for CCT, which was acquired by the Company on May 7, 1997. If IMS' sales had
been excluded from the 1996 results and if CCT's product revenue had been
included in the 1996 results and for the three months ended March 29, 1997,
product revenue would have shown increases of $36.2 million or 36% and $82.4
million or 29% for the three and nine month periods ended September 27, 1997,
respectively, compared to the same periods of 1996. The increases were primarily
driven by increased demand for products used by customers to develop custom
integrated circuits (ICs) and deep submicron designs including design entry
tools, place-and-route tools, physical verification tools and system level
tools.

Services revenue increased 31% and 41% in the three and nine month periods
ended September 27, 1997, respectively, when compared to the same periods of
1996. The increase in services revenue was the result of increased demand for
the Company's services offerings in the United States, Europe, Japan, and Asia.

The increase in maintenance revenue for the three and nine month periods
ended September 27, 1997, as compared to the same periods of 1996, was primarily
attributable to an increase in the Company's installed base of products.

Revenue from international sources was approximately $129.6 million and
$96.0 million or 55% and 51% of total revenue for the three months ended
September 27, 1997 and September 28, 1996, respectively. For the nine month
period ended September 27, 1997, revenue from international sources was $327.3
million, as compared to $262.0 million for the nine month period ended September
28, 1996,

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representing 52% and 50% of total revenue for the respective periods. The
increase in total revenue from international sources in the third quarter of
1997, as compared to the third quarter of 1996, was primarily attributable to
strong revenue growth in Europe and Japan despite an $8.0 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.

COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 % CHANGE 1997 1996 % CHANGE
--------------- --------------- --------------- --------------- --------------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Product...................... $ 11.3 $ 11.8 (4)% $ 30.3 $ 35.5 (15)%
Services..................... $ 28.5 $ 21.2 34% $ 80.6 $ 57.4 40%
Maintenance.................. $ 7.0 $ 6.3 12% $ 18.4 $ 17.7 4%

COST OF REVENUE AS A PERCENT OF RELATED REVENUE
<S> <C> <C> <C> <C> <C> <C>

Product...................... 8% 11% 9% 12%
Services..................... 71% 69% 71% 71%
Maintenance.................. 12% 11% 11% 11%
</TABLE>

Cost of product revenue includes costs of production personnel, packaging
and documentation, amortization of capitalized software development costs,
royalties, and, in the three month and nine month periods ended September 28,
1996, costs related to IMS' automated test equipment (ATE) hardware business. If
IMS' costs had been excluded from the costs incurred during the first nine
months of 1996 and if CCT's costs had been included in the 1996 results and for
the three months ended March 29, 1997, cost of product during the first nine
months of 1997 would have increased $4.7 million or 18% due to additional costs
incurred for the Company's new European manufacturing facility and increases in
software amortization costs and royalty expenses. Additionally, cost of product
as a percent of product revenue would have been 9% for both the three month and
nine month periods ended September 28, 1996.

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 revenue increased in total dollars due to costs
associated with increased services revenue and the investment in additional
services professionals to further develop this line of business. Until these
design and services resources are fully utilized through additional revenue
contracts or until further operating efficiencies are obtained, as to which
there can be no assurance, 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 revenue increased in total dollars and as a
percentage of maintenance revenue for the quarter ended September 27, 1997,
compared to the prior year quarter, due to additional costs associated with the
new European manufacturing facility. Cost of maintenance increased in absolute
dollars and remained flat as a percentage of revenue during the nine month
period ended September 27, 1997 compared to the nine month period ended
September 28, 1996.

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OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 % CHANGE 1997 1996 % CHANGE
--------------- --------------- --------------- ------------- ------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales.......... $ 63.3 $ 55.8 13% $ 178.1 $ 161.0 11%
Research and development..... $ 35.9 $ 29.9 20% $ 101.0 $ 85.1 19%
General and administrative... $ 14.3 $ 13.8 3% $ 40.1 $ 40.4 (1)%
Unusual items................ $ -- $ -- $ 34.1 $ --

EXPENSES AS A PERCENT OF TOTAL REVENUE
<S> <C> <C> <C> <C> <C> <C>

Marketing and sales.......... 27% 30% 28% 30%
Research and development..... 15% 16% 16% 16%
General and administrative... 6% 7% 6% 8%
Unusual items................ 5%
</TABLE>

The three and nine month periods ended September 27, 1997, do not include
expenses from IMS, but do include expenses from CCT for the period from May 7,
1997 through September 27, 1997.

The increase in marketing and sales expenses for the quarter ended September
27, 1997, as compared to the quarter ended September 28, 1996, was primarily due
to increases in employee related costs of $5.5 million, consulting and other
services costs of $2.1 million, business trip expenses of $1.6 million, and
management information systems costs of $1.4 million. Included in the above
amounts are expenses attributable to CCT of approximately $2.5 million. These
increases were partially offset by a decrease of $2.9 million related to the
deconsolidation of IMS. The increase in marketing and sales expenses for the
nine month period ended September 27, 1997, as compared to the nine month period
ended September 28, 1996, was primarily due to increases in employee related
costs of $12.3 million, business trip expenses of $4.1 million, management
information systems costs of $3.9 million, and consulting and other services
expenses of $2.7 million. These increases were primarily offset by a decrease of
$7.1 million related to the deconsolidation of IMS. Weakening of certain foreign
currencies in relation to the U.S. dollar favorably impacted marketing and sales
expenses by approximately $1.5 million and $3.6 million for the three and nine
month periods ended September 27, 1997, respectively, as compared to the
comparable periods in the prior year.

The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $40.2 million and $33.2
million for the quarters ended September 27, 1997 and September 28, 1996,
respectively, representing 17% and 18% of total revenue. Capitalization of
software development costs for the quarters ended September 27, 1997 and
September 28, 1996 was $4.3 million and $3.3 million, which represented 11% and
10% of gross research and development expenditures made in those periods,
respectively. For the nine months ended September 27, 1997, gross research and
development expenses were $112.1 million compared to $95.3 million for the same
period in 1996. Capitalization of software development costs for the nine months
ended September 27, 1997 and September 28, 1996, respectively, was $11.1 million
and $10.2 million which represented 10% and 11% of gross research and
development expenditures made in those periods, respectively. In any given
period, the amount of capitalized software development costs may vary depending
on the exact nature of the development performed. The expense increase for the
quarter ended September 27, 1997, as compared to the quarter ended September 28,
1996, was primarily attributable to increases in employee related costs of

11
<PAGE>
$6.2 million and depreciation costs of $1.3 million partially offset by a
decrease of $1.7 million related to the deconsolidation of IMS. Included in the
above amounts are expenses attributable to CCT of approximately $3.0 million.
The expense increase for the nine month period ended September 27, 1997, as
compared to the nine month period ended September 28, 1996, was primarily
attributable to increases in employee related expenses of $15.5 million and
facility costs of $3.8 million, primarily offset by decreases of $5.7 million
related to the deconsolidation of IMS and $1.1 million in consulting and other
services costs.

The increase in general and administrative expenses for the quarter ended
September 27, 1997, as compared to the prior year quarter was primarily due to
an increase of $1.4 million in management information system costs partially
offset by a decrease of $1.2 million in legal expenses. For the nine month
period ended September 27, 1997, as compared to the same period of the prior
year, general and administrative expenses decreased slightly, primarily as a
result of a $4.2 million decrease in legal costs and a $2.6 million decrease due
to the deconsolidation of IMS, partially offset by increases in management
information system costs of $4.3 million and employee related expenses of $1.8
million.

UNUSUAL ITEMS

During the second quarter of 1997, the Company incurred approximately $16.0
million of expenses related to its merger with CCT. Additionally, the Company
recorded expenses totaling approximately $6.4 million to restructure its
international business operations. These costs consisted primarily of legal and
professional fees of $7.1 million, $6.2 million of severance related expenses
for approximately 120 employees, investment banking fees of $3.7 million,
facility costs of $3.3 million, $1.8 million of capitalized software development
costs for products developed by the Company which were replaced by CCT products
and other intangibles, and other miscellaneous costs.

In February 1997, the Company acquired all of the outstanding stock of
Synthesia AB ("Synthesia") for 115,166 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 first
quarter of 1997 primarily as a result of its merger with High Level Design
Systems, Inc. (HLDS), which occurred during the fourth quarter of 1996, 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. Additional disbursements were made during the second and third quarters of
1997; the remainder, facility related costs, will be paid out over the next
three years.

OTHER INCOME (EXPENSE) AND INCOME TAXES

Other income (expense) increased $5.6 million in the quarter ended September
27, 1997, compared to the quarter ended September 28, 1996, primarily due to an
increase in interest income related to higher cash balances in the third quarter
of 1997 compared to 1996. The increase of $24.8 million in the nine months ended
September 27, 1997 compared to the nine months ended September 28, 1996 was
primarily due to a $13.1 million gain on the sale of IMS stock recorded by the
Company in the quarter ended March 29, 1997 and an increase in interest income
of $10.8 million.

The Company's estimated annual effective tax rate is 30% for 1997 and was
33% for 1996. The decrease in the expected rate is due to the difference in tax
rates between domestic and foreign operations.

12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

At September 27, 1997, the Company's principal sources of liquidity
consisted of $381.7 million of cash and short-term investments, compared to
$285.5 million at December 28, 1996, and a three-year, $120 million secured
revolving line of credit agreement. As of November 7, 1997, the Company had no
borrowings under the revolving line of credit.

Cash generated from operating activities increased $55.2 million for the
nine months ended September 27, 1997, as compared to the nine months ended
September 28, 1996. The increase was due primarily to increases in net income,
accrued liabilities and payables, and income taxes payable, partially offset by
decreases in accounts receivable and deferred revenue.

At September 27, 1997, the Company had working capital of $372.0 million
compared with $259.6 million at December 28, 1996. Changes in working capital
were primarily driven by an increase in cash and short-term investments of $96.1
million, an increase in accounts receivable of $5.8 million, a decrease in
inventory of $8.1 million, an increase in prepaid expenses and other of $25.8
million, an increase in accounts payable and accrued liabilities of $11.8
million, and a decrease in deferred revenue of $6.1 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 September 27, 1997.

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 $118.9 million and $70.2 million of cash used for
investing activities in the nine months ended September 27, 1997 and September
28, 1996, respectively. Additionally, cash increased $38.4 million due to the
CCT merger and $18.6 million from net proceeds related to the sale of IMS stock,
and was partially offset by $25.1 million due to the deconsolidation of IMS and
the reorganization of a Japanese subsidiary, for the nine months ended September
27, 1997.

On May 7, 1997 Cadence announced that its board of directors had rescinded
the company's previously announced 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). The Company
rescinded the stock repurchase program in connection with its merger with CCT in
order to comply with requirements for the pooling of interests accounting
treatment. Cadence began a new systematic stock repurchase program in the third
quarter of 1997. The shares acquired by the Company under this new program will
be used to meet the recurring share issuance requirements of the 1997 Stock
Option Plan. The repurchase authorization for the 1997 Stock Option Plan is 4.0
million shares over a two year period; 2.4 million additional shares are
authorized for the ESPP over a two year period.

Anticipated cash requirements for the remainder of 1997 include the
contemplated additions of property, plant and equipment of approximately $25.0
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 $35.0 million will be made over
the next three to four years. As of September 27, 1997, the Company's net
investment in the partnership totaled $11.5 million, which is reflected in other
non-current 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.

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

13
<PAGE>
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).

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.

Additionally, 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 the Company'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.

Effective July 1, 1997, the Company reorganized the operation of its
business in Japan, acquiring an equity position in and entering into a long-term
exclusive distribution arrangement for distribution of software tools with
Innotech Corporation. The Company will continue to market and provide design
services in Japan through a wholly-owned subsidiary. Future results may be
adversely affected if the Company fails to realize the benefits contemplated by
the reorganization of its Japanese business 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.

On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's former 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 former 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 former
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.

ITEM 5. OTHER INFORMATION

On October 19, 1997, the Company named John R. Harding as President and
Chief Executive Officer, and a member of the Company's Board of Directors,
replacing Joseph B. Costello who resigned from such posts.

15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- --------- ---------------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
10.49 Form of Amendment of Certificate of Incorporation of Cadence Design Systems, Inc., indicating
the total number of shares of all classes of stock the Corporation has authority to issue,
approved by stockholders on August 22, 1997.

27.1 Financial data schedule for the period ended September 27, 1997.

(b) Reports on Form 8-K

None.
</TABLE>

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.

<TABLE>
<S> <C> <C>
CADENCE DESIGN SYSTEMS, INC.
(REGISTRANT)

DATE: November 7, 1997 By: /s/ JOHN R. HARDING
-----------------------------------------
JOHN R. HARDING
PRESIDENT AND CHIEF EXECUTIVE OFFICER

DATE: November 7, 1997 By: /s/ H. RAYMOND BINGHAM
-----------------------------------------
H. RAYMOND BINGHAM
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>

<PAGE>

FORM OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CADENCE DESIGN SYSTEMS, INC.

TO BE APPROVED BY STOCKHOLDERS

The undersigned, William Porter, the Vice President and Corporate
Controller of Cadence Design Systems, Inc., a corporation duly organized
and existing under the laws of the State of Delaware [hereinafter referred to
as the "Corporation"), does hereby certify that the following amendment of
the Certificate of Incorporation of the following amendment of the
Certificate of Incorporation of the Corporation, as heretofore amended, has
been duly adopted by the Board of Directors and the stockholders in
accordance with the provisions of Section 242 of the General Corporation Law
of the State of Delaware, said amendment being effected by deleting the
introductory paragraph of Article IV of said Certificate of Incorporation,
as heretofore amended, and substituting in lieu thereof a new introductory
paragraph reading as follows:

"The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 300,400,000, consisting of
(1) 300,000,000 shares of Common Stock, par value $.01 per share
(hereinafter referred to as "Common Stock") and (2) 400,000 shares of
Preferred Stock, par value $.01 per share (hereinafter called the
"Preferred Stock").

IN WITNESS WHEREOF, the undersigned has made this certificate under the
seal of the Corporation and has signed the same as Vice President and
Corporate Controller thereof this 22 day of August, 1997.

/s/ William Porter
---------------------------------------
Name: William Porter
Title: Vice President and Corporate
Controller

Attest:

/s/ Kevin Palatnik
- -----------------------------------------
Name: Kevin Palatnik
Title: Vice President, Corporate Financial and Analysis

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 332,557
<SECURITIES> 49,103
<RECEIVABLES> 154,290
<ALLOWANCES> 4,089
<INVENTORY> 0
<CURRENT-ASSETS> 610,816
<PP&E> 322,388
<DEPRECIATION> 128,902
<TOTAL-ASSETS> 934,979
<CURRENT-LIABILITIES> 238,856
<BONDS> 0
0
0
<COMMON> 389,343
<OTHER-SE> 276,137
<TOTAL-LIABILITY-AND-EQUITY> 934,979
<SALES> 632,881
<TOTAL-REVENUES> 632,881
<CGS> 129,303
<TOTAL-COSTS> 129,303
<OTHER-EXPENSES> 353,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> 172,670
<INCOME-TAX> 51,801
<INCOME-CONTINUING> 120,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,869
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56

</TABLE>