<PAGE>
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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 APRIL 4, 1998
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)
------------------------
<TABLE>
<CAPTION>
DELAWARE 77-0148231
<S> <C>
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 SEELY AVENUE, BUILDING 5, SAN JOSE, 95134
CALIFORNIA (Zip Code)
(Address of principal executive offices)
</TABLE>
(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 May 8, 1998, there were 212,052,011 shares of the registrant's Common
Stock, $0.01 par value outstanding.
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<PAGE>
CADENCE DESIGN SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
April 4, 1998 and January 3, 1998.......................................................... 3
Condensed Consolidated Statements of Income:
Three Months Ended April 4, 1998 and March 29, 1997........................................ 4
Condensed Consolidated Statements of Cash Flows:
Three Months Ended April 4, 1998 and March 29, 1997........................................ 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 21
Item 5. Other Information............................................................................ 21
Item 6. Exhibits and Reports on Form 8-K............................................................. 22
Signatures................................................................................................. 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1998 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 179,215 $ 207,024
Short-term investments.............................................................. 113,258 97,180
Accounts receivable, net............................................................ 203,222 205,006
Prepaid expenses and other.......................................................... 75,715 99,849
------------ ------------
Total current assets.............................................................. 571,410 609,059
Property, plant, and equipment, net................................................... 218,070 197,421
Software development costs, net....................................................... 14,563 15,068
Purchased software and intangibles, net............................................... 27,054 10,117
Other non-current assets.............................................................. 199,129 192,185
------------ ------------
$ 1,030,226 $ 1,023,850
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 695 $ 794
Accounts payable and accrued liabilities............................................ 126,898 156,426
Income taxes payable................................................................ 2,874 5,161
Deferred revenue.................................................................... 117,033 106,414
------------ ------------
Total current liabilities......................................................... 247,500 268,795
------------ ------------
Long-term liabilities:
Long-term debt...................................................................... 759 1,599
Minority interest liability......................................................... 281 121
Other long-term liabilities......................................................... 31,477 26,238
------------ ------------
Total long-term liabilities....................................................... 32,517 27,958
------------ ------------
Stockholders' equity:
Preferred stock..................................................................... -- --
Common stock and capital in excess of par value..................................... 561,090 502,602
Treasury stock at cost (6,367 and 6,739 shares, respectively)....................... (105,996) (97,285)
Retained earnings................................................................... 303,475 328,934
Accumulated translation adjustment.................................................. (8,360) (7,154)
------------ ------------
Total stockholders' equity........................................................ 750,209 727,097
------------ ------------
$ 1,030,226 $ 1,023,850
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
APRIL 4, MARCH 29,
1998 1997
---------- ----------
Revenue:
Product................................................................................. $ 154,049 $ 102,323
Services................................................................................ 52,302 33,753
Maintenance............................................................................. 63,872 51,472
---------- ----------
Total revenue......................................................................... 270,223 187,548
---------- ----------
Costs and expenses:
Cost of product......................................................................... 12,337 8,951
Cost of services........................................................................ 39,654 24,194
Cost of maintenance..................................................................... 10,343 5,752
Marketing and sales..................................................................... 69,245 55,169
Research and development................................................................ 41,707 31,252
General and administrative.............................................................. 16,521 12,205
Unusual items........................................................................... 85,957 11,748
---------- ----------
Total costs and expenses.............................................................. 275,764 149,271
---------- ----------
Income (loss) from operations....................................................... (5,541) 38,277
Other income (expense), net............................................................... 2,619 14,755
---------- ----------
Income (loss) before provision for income taxes..................................... (2,922) 53,032
Provision for income taxes................................................................ 22,537 15,910
---------- ----------
Net income (loss)................................................................... $ (25,459) $ 37,122
---------- ----------
---------- ----------
Basic net income (loss) per share......................................................... $ (0.12) $ 0.21
---------- ----------
---------- ----------
Diluted net income (loss) per share....................................................... $ (0.12) $ 0.19
---------- ----------
---------- ----------
Weighted average common shares outstanding................................................ 210,014 175,934
---------- ----------
---------- ----------
Weighted average common and potential common shares outstanding--assuming dilution........ 210,014 199,554
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
APRIL 4, MARCH 29,
1998 1997
---------- ----------
Cash and Cash Equivalents at Beginning of Period.......................................... $ 207,024 $ 284,512
---------- ----------
Cash Flows from Operating Activities:
Net income (loss)....................................................................... (25,459) 37,122
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization....................................................... 18,854 13,575
Deferred income taxes............................................................... 38 (905)
Write-offs of equipment and other assets, net....................................... 903 87
Write-off of in-process research and development.................................... 82,000 4,860
Change in other long-term liabilities and minority interest expense................. 4,945 (12,441)
Gain on sale of subsidiary stock.................................................... -- (13,061)
Changes in operating assets and liabilities, net of effect of acquired and disposed
businesses:
Accounts receivable............................................................... 7,714 18,472
Prepaid expenses and other........................................................ 23,390 999
Installment contract receivables.................................................. (4,126) --
Accrued liabilities and payables.................................................. (43,632) 3,395
Income taxes payable.............................................................. 23,649 9,921
Deferred revenue.................................................................. 10,543 (4,400)
---------- ----------
Net cash provided by operating activities....................................... 98,819 57,624
---------- ----------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity.................................. 24,180 --
Purchases of short-term investments--held-to-maturity................................... (23,258) (12,028)
Maturities of short-term investments--available-for-sale................................ 189,150 --
Purchases of short-term investments--available-for-sale................................. (206,150) --
Purchases of property, plant, and equipment............................................. (30,890) (24,590)
Capitalization of software development costs............................................ (5,453) (3,259)
Increase in purchased software, intangibles, and other assets........................... (11,229) (2,076)
Net proceeds from sale of subsidiary stock.............................................. -- 18,582
Effect of deconsolidation on cash....................................................... -- (9,536)
Purchase of businesses, net of acquired cash............................................ (51,313) --
Sale of put warrants.................................................................... -- 2,443
Purchase of call options................................................................ -- (2,443)
---------- ----------
Net cash used for investing activities.......................................... (114,963) (32,907)
---------- ----------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations and long-term debt...................... (879) (1,592)
Increase in leases and other debt....................................................... -- 794
Sale of common stock.................................................................... 23,559 18,727
Purchases of treasury stock............................................................. (33,010) (10,603)
---------- ----------
Net cash provided by (used for) financing activities............................ (10,330) 7,326
---------- ----------
Effect of exchange rate changes on cash................................................... (1,335) (1,670)
---------- ----------
Increase (decrease) in Cash and Cash Equivalents.......................................... (27,809) 30,373
---------- ----------
Cash and Cash Equivalents at End of Period................................................ $ 179,215 $ 314,885
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
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 consolidated 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 consolidated financial statements and the notes thereto
included in the Company's annual report on Form 10-K for the fiscal year ended
January 3, 1998.
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 condensed consolidated 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
January 3, 1998 and for the three months ended March 29, 1997, have been
reclassified to conform with the 1998 presentation.
REVENUE RECOGNITION
Effective January 4, 1998, the Company adopted Statement of Position (SOP)
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's consolidated financial position or results of operations.
ACQUISITIONS
In February 1998, the Company acquired all of the outstanding stock of
Symbionics Group Limited, a U.K. corporation, for approximately 1.0 million
shares of the Company's common stock and $21.3 million of cash. The total
purchase price was $46.1 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $46.0 million
were acquired, of which $40.0 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. Intangibles arising from the acquisition are being
amortized on a straight-line basis over five years.
In March 1998, the Company acquired all of the outstanding stock of
Excellent Design, Inc., a Japan corporation, for cash. The total purchase price
was $40.9 million, and the acquisition was accounted for as a purchase. In
connection with the acquisition, net intangibles of $48.7 million were acquired,
of which $42.0 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. Intangibles arising from the acquisition are being
amortized on a straight-line basis over five years.
6
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which was 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" includes 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.
A summary of comprehensive income (loss) follows:
<TABLE>
<CAPTION>
APRIL 4,
1998 MARCH 29, 1997
------------ --------------
<S> <C> <C>
(IN THOUSANDS)
Net income (loss).................................................................. $ (25,459) $ 37,122
Foreign currency translation adjustment............................................ (1,206) (3,711)
------------ -------
Comprehensive income (loss)........................................................ $ (26,665) $ 33,411
------------ -------
------------ -------
</TABLE>
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average shares of common stock outstanding during the
period, and for diluted net income (loss) per share, net income (loss) is
divided by the weighted average shares of common stock outstanding and potential
common shares during the period. Potential common shares included in the diluted
calculation consist of dilutive shares issuable upon the exercise of outstanding
common stock options, warrants, and put warrants computed using the treasury
stock method. For periods in which the Company had losses, potential common
shares from common stock options, warrants, and put warrants are excluded from
the computation of diluted net loss per share as their effect is antidilutive.
The following is a reconciliation of the weighted average common shares used
to calculate basic net income (loss) per share to the weighted average common
and potential common shares used to calculate diluted net income (loss) per
share:
<TABLE>
<CAPTION>
APRIL 4,
1998 MARCH 29, 1997
------------ --------------
<S> <C> <C>
(IN THOUSANDS)
Weighted average common shares used to calculate basic net income (loss) per
share............................................................................ 210,014 175,934
Options............................................................................ -- 23,298
Warrants and other contingent shares............................................... -- 322
------------ -------
Weighted average common and potential common shares used to calculate diluted net
income (loss) per share.......................................................... 210,014 199,554
------------ -------
------------ -------
</TABLE>
Had the Company recorded net income in the first quarter of 1998, dilutive
weighted outstanding options would have been 24.7 million shares and weighted
outstanding warrants and other dilutive contingent shares would have been 0.2
million shares.
CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
7
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PUT WARRANTS AND CALL OPTIONS
The Company has two seasoned authorized stock repurchase programs. Under one
program, the Company repurchases common stock to satisfy estimated requirements
for shares to be issued under its Employee Stock Purchase Plan (ESPP) over the
next 12 months. The shares acquired under the second program will be used to
meet the recurring share issuance requirements of the 1997 Stock Option Plan.
As part of its authorized repurchase programs, the Company has sold put
warrants through private placements. At April 4, 1998, there were 4.8 million
put warrants outstanding which entitle the holder to sell one share of common
stock to the Company on a specified date and at a specified price ranging from
$23.29 to $24.34 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. At April 4, 1998, the Company had
3.4 million call options outstanding at prices ranging from $23.42 to $24.47 per
share to satisfy anticipated stock repurchase requirements under the Company's
systematic repurchase programs. The put warrants and call options outstanding at
April 4, 1998 are exercisable on various dates through February 26, 1999.
The Company has the right to settle the put warrants with stock 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 could lead to the
disposition by put warrant holders of shares of the Company's common stock that
such holders may have accumulated in anticipation of the exercise of the put
warrants or call options, which may impact the price of the Company's common
stock. At April 4, 1998, the Company had the ability to settle these put
warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the consolidated balance sheet. The effect of the
exercise of these put warrants and call options is reported in stockholders'
equity.
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 BASED ON CURRENT EXPECTATIONS
THAT INVOLVE CERTAIN 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" AND "LIQUIDITY AND CAPITAL
RESOURCES."
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1998 1997 % CHANGE
--------- ----------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
Product.......................................................................... $ 154.0 $ 102.3 51%
Services......................................................................... 52.3 33.7 55%
Maintenance...................................................................... 63.9 51.5 24%
--------- -----------
Total revenue................................................................ $ 270.2 $ 187.5 44%
--------- -----------
--------- -----------
</TABLE>
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C>
Product.......................................................... 57% 55%
Services......................................................... 19% 18%
Maintenance...................................................... 24% 27%
</TABLE>
8
<PAGE>
Product revenue in the first quarter of 1997 does not include revenue
generated by Cooper and Chyan Technology, Inc. (CCT), with which the Company
merged during the second quarter of 1997. If CCT's product revenue had been
included in the first quarter of 1997, product revenue would have increased
$43.9 million or 40% in the first quarter of 1998, as compared to the first
quarter of 1997. The increase in product revenue for the first quarter of 1998
was attributable primarily to increased demand for products used by customers to
develop 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 $18.6 million or 55% in the first quarter of
1998, when compared to the first quarter of 1997. The increase in services
revenue was primarily the result of increased demand for the Company's services
offerings throughout the world.
The increase in maintenance revenue for the quarter ended April 4, 1998, as
compared to the quarter ended March 29, 1997, was attributable primarily to an
increase in the Company's installed base of products and the sale of higher
priced maintenance contracts which on average require higher support levels.
Revenue from international sources was approximately $117.0 million and
$95.8 million or 43% and 51% of total revenue for the first quarters of 1998 and
1997, respectively. The increase in total revenue from international sources in
the first quarter of 1998, as compared to the first quarter of 1997, was
attributable to overall revenue growth partially offset by a $3.7 million
negative impact on revenue as a result of the weakening of certain foreign
currencies, primarily the Japanese yen, in relation to the U.S. dollar. The
decrease in revenue from international sources as a percentage of total revenue
for the first quarter of 1998, as compared with the first quarter of 1997, was
due to domestic revenue growing at a faster rate than international revenue.
Domestic revenue was approximately $153.2 million and $91.7 million for the
first quarters of 1998 and 1997, respectively, representing an increase of 67%
from 1997 to 1998. The increase in domestic revenue was attributable to
increased sales volume for products, services, and inclusion of CCT products.
COST OF REVENUE
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1998 1997 % CHANGE
----------- ----------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
Product.......................................................................... $ 12.3 $ 8.9 38%
Services......................................................................... $ 39.7 $ 24.2 64%
Maintenance...................................................................... $ 10.3 $ 5.8 80%
</TABLE>
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
<TABLE>
<S> <C> <C> <C>
Product.......................................................... 8% 9%
Services......................................................... 76% 72%
Maintenance...................................................... 16% 11%
</TABLE>
9
<PAGE>
Cost of product revenue includes costs of production personnel, packaging
and documentation, and the amortization of capitalized software development
costs. Cost of product revenue in the first quarter of 1997 did not include
costs generated by CCT. If CCT's costs were included in the first quarter of
1997, cost of product would have increased by $2.5 million resulting in a change
of 26% between quarters. Cost of product increased for the first quarter of
1998, as compared with the first quarter of 1997, primarily due to higher
amortization costs associated with software development costs.
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 the
continued investment in developing new services offerings and the addition of
services professionals by the Company, primarily through acquisitions and
increased hiring. Services gross margins have been and may continue to be
adversely affected by the Company's inability to fully utilize its services
resources and achieve operating efficiencies with its services resources. In
addition, services gross margins have been adversely affected by the cost of
integrating new services professionals and a growing number of services
offerings.
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 percent
of associated revenues primarily due to additional costs associated with
supporting a larger installed base of products and additional costs to provide
higher support levels to customers.
OPERATING EXPENSES
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1998 1997 % CHANGE
----------- ----------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
Marketing and sales.............................................................. $ 69.2 $ 55.2 26%
Research and development......................................................... $ 41.7 $ 31.3 33%
General and administrative....................................................... $ 16.5 $ 12.2 35%
</TABLE>
EXPENSES AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C>
Marketing and sales.............................................. 26% 29%
Research and development......................................... 15% 17%
General and administrative....................................... 6% 7%
</TABLE>
The increase in marketing and sales expenses in the first quarter of 1998,
as compared to the same period of the prior year, was primarily the result of an
increase of $6.2 million in employee related expenses attributable to increased
headcount, commissions, and sales incentives, as well as an increase in sales
support costs in Japan of $2.9 million. The increase in marketing and sales
expenses in the first quarter of 1998 was partially offset by a $1.7 million
decrease resulting from the weakening of certain foreign currencies in relation
to the U.S. dollar in the first quarter of 1998, as compared to the same period
of the prior year.
The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $47.2 million and $34.5
million for the first quarters of 1998 and 1997, respectively, representing 17%
and 18% of total revenue, respectively. The increase in net research and
development expenses was primarily attributable to employee related costs due to
increased headcount of $5.5 million, facility costs of $3.4 million, and
management information systems costs of $1.7 million. The Company capitalized
$5.5 million and $3.2 million of software development costs for the first
quarters of 1998 and 1997, respectively, which represented 12% and 9%,
respectively, of total research and development expenditures made in each of
those periods, resulting primarily from general increases in new
10
<PAGE>
product development. In any given period, the amount of capitalized software
development costs may vary depending on the exact nature of the development
performed.
General and administrative expenses increased in the first quarter of 1998,
as compared to the same period of the prior year, primarily as a result of an
increase in consulting services fees for information services of $1.5 million
and employee related expenses of $1.5 million.
UNUSUAL ITEMS
In February 1998, the Company acquired all of the outstanding stock of
Symbionics Group Limited, a U.K. corporation, for approximately 1.0 million
shares of the Company's common stock and $21.3 million of cash. The total
purchase price was $46.1 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $46.0 million
were acquired, of which $40.0 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.
In March 1998, the Company acquired all of the outstanding stock of
Excellent Design, Inc., a Japan corporation, for cash. The total purchase price
was $40.9 million, and the acquisition was accounted for as a purchase. In
connection with the acquisition, net intangibles of $48.7 million were acquired,
of which $42.0 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.
Additionally, unusual items included restructuring charges of $4.0 million
related to the Company's international business operations and its information
technology support services contract.
Included in unusual items for the first quarter of 1997 were a $4.9 million
write-off of in-process research and development associated with an acquisition,
a $4.8 million restructuring charge due to the Company's merger with High Level
Design Systems, Inc. and reorganization into business units, and $2.0 million of
expenses to restructure the Company's international business operations.
OTHER INCOME (EXPENSE) AND INCOME TAXES
Other income (expense) decreased in the first quarter of 1998, as compared
to the first quarter of 1997, primarily due to the $13.1 million gain on the
sale of IMS stock recorded in the first quarter of 1997. Additionally, interest
income decreased in the first quarter of 1998 due to a lower average balance of
invested cash and lower interest rates.
The Company's estimated effective tax rate in the first quarter of 1998 was
28.5%, excluding the effect of the write-off of in-process research and
development of $82.0 million, which is not deductible for income tax purposes.
This compares to 30% for the same period of the prior year. The decrease in the
effective rate is due to the difference in tax rates between domestic and
foreign operations.
NEW ACCOUNTING STANDARDS
Effective January 4, 1998, the Company adopted Statement of Position (SOP)
97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The adoption of SOP 97-2 did not have a material impact on the
Company's consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At April 4, 1998, the Company's principal sources of liquidity consisted of
$292.5 million of cash and short-term investments, compared to $304.2 million at
January 3, 1998, and a $110 million senior secured
11
<PAGE>
revolving credit facility. As of May 8, 1998, the Company had no borrowings
under the revolving line of credit.
Cash generated from operating activities increased $41.2 million for the
first quarter of 1998, as compared to the first quarter of 1997. The increase
was due primarily to increases in net income excluding unusual items and other
non-cash charges, partially offset by changes in the balances of operating
assets and liabilities.
At April 4, 1998, the Company had working capital of $323.9 million compared
with $340.3 million at January 3, 1998. Working capital increases were driven
primarily by a decrease in accounts payable and accrued liabilities of $29.5
million. Working capital reductions were generated by a decrease in cash and
short-term investments of $11.7 million, a decrease in prepaid expenses and
other of $24.1 million, and an increase in deferred revenues of $10.6 million.
The decrease in cash was primarily due to the repurchase of the Company's stock,
capital expenditures, and acquisitions.
In addition to its short-term investments, the Company's primary investing
activities were acquisitions, purchases of property and equipment, purchases of
software, intangibles, and other assets, and the capitalization of software
development costs that in the aggregate represented $98.9 million and $29.9
million of cash used for investing activities in the first quarters of 1998 and
1997, respectively.
As part of its authorized stock repurchase programs, the Company has sold
put warrants and purchased call options through private placements. The Company
has a maximum potential obligation related to put warrants at April 4, 1998 to
buy back 4.8 million shares of its common stock at an aggregate price of
approximately $114.2 million.
Anticipated cash requirements for the remainder of 1998 include the purchase
of treasury stock through the exercise of call options for the Company's stock
repurchase programs and the contemplated additions of property, plant, and
equipment of approximately $70 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 $50.0 million will be made over
the next three to four years. As of April 4, 1998, the Company had contributed
approximately $22.2 million, which is reflected in other non-current assets in
the accompanying condensed consolidated balance sheet, net of operating losses.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and the $110 million revolving credit
facility will be sufficient to meet its working capital requirements for the
foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The EDA industry and the commercial electronic design and consulting
industry in which the Company competes are subject to rapid technological
developments, evolving industry standards, changes in customer requirements, and
frequent new product introductions and enhancements. As a result, the Company's
future revenues and operating results will depend on its ability to develop or
acquire new products and enhance its existing products and processes on a timely
basis to keep pace with innovations in technology and to support a range of
changing computer software, hardware platforms, and customer preferences.
Changes in manufacturing technology may render the Company's software tools
obsolete. There can be no assurance that the Company will be able successfully
to develop new products to address new customer requirements and technological
changes, or that such products will achieve market acceptance. 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.
12
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's operating expenses are partially based on its expectations
regarding future revenue. Since expenses are usually committed in advance of
revenues, and because only a small portion of expenses vary with revenue, the
Company's consolidated results of operations may be disproportionately impacted
by lower than expected revenue. Factors that may affect operating results
include, among other things: (i) the timing and introduction of new products;
(ii) the mix of products and services sold; (iii) the timing of significant
orders from and shipments to or implementations for customers; (iv) product and
services pricing and discounts; (v) the timing of completion of acquisitions;
and (vi) general economic conditions. In addition, the Company's focus on
providing services is relatively recent, and therefore quarter to quarter
comparisons may not be meaningful. For example, the percentage revenue growth
from this source from 1996 to 1997 may not be indicative of future growth.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced, and may continue to experience, decreases in first
quarter revenue compared with the preceding fourth quarter, which is believed to
result primarily from the budgeting and expenditure cycles of the Company's
customers.
HIGHLY COMPETITIVE MARKET
The Company operates in the highly competitive EDA industry and in the
emerging commercial electronic design and consulting markets. The EDA industry
continues to be characterized by falling prices, rapid technological change, and
new market entrants. The Company's success is dependent upon its ability to
develop innovative, cost competitive EDA software products and take them to
market in a timely manner. The Company competes with a number of companies,
including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., and
Zuken-Redac. The Company also experiences competition from manufacturers of
electronic devices that have developed and/or have the capability to develop
their own EDA software. Some of these companies may have substantially greater
financial, marketing, and technological resources than the Company.
The EDA industry has relatively low barriers to entry, and, therefore, the
number of the Company's actual and potential competitors is significant. A
potential competitor that possesses the necessary knowledge of electronic
circuit and systems design, production, and operations could develop competitive
EDA tools using a moderately priced computer workstation and take such tools to
market quickly. There can be no assurance that development of competitive
products will not result in a shift of customer preferences away from the
Company's products, resulting in a significant decrease in the sales of the
Company's comparable products. In addition, there can be no assurance that the
Company will successfully identify new product opportunities, develop and take
new products to market in a timely manner and achieve market acceptance of its
products.
In the electronic design and consulting markets, the Company competes with
numerous EDA and other consulting companies. This emerging market represents the
outsourcing of an activity by electronics manufacturers that has traditionally
been performed in house, and is thus subject to the customers' "make versus buy"
decisions. As a result, the Company's services business must also compete with
the internal design capabilities of manufacturers of electronic devices, many of
which have substantially greater financial, marketing, and technological
resources than the Company. Therefore, the Company's ability to obtain such
business is dependent upon its ability to offer better strategic concepts and
technical solutions, competitive prices, a quicker response or a combination of
these factors. There can be no assurance the Company will be able to effectively
compete in this area, and any failure to compete in the electronic design and
consulting market may have a material adverse effect on Cadence's business,
operating results, and financial condition.
The electronic design and consulting service businesses have relatively low
barriers to entry and, therefore, EDA and other electronics companies and
management consulting firms have entered and may continue to enter into this
market. The pricing model for services is susceptible to labor supply and
13
<PAGE>
demand as well as the Company's continuing ability to provide competitive
time-to-market benefits to its customers. Some of the Company's current and
potential competitors in the electronic design and consulting services
businesses may have substantially greater financial, marketing, and
technological resources than the Company. There can be no assurance that the
Company will be able to compete successfully in these businesses, and any
failure to compete in this business may have a material adverse effect on
Cadence's business, operating results, and financial condition.
RISK OF SERVICES BUSINESS
The Company has recently increased its focus on offering electronics design
and consulting services. The market for such services in the electronics design
area is relatively new and evolving rapidly. In order to increase revenues and
sustain operating results from the Company's services business, the Company must
continue to gain market acceptance for its professional services, which will
depend substantially on its ability to offer better strategic concepts and
technical solutions, competitive prices, a timely response or a combination of
these factors. Failure to successfully operate its services business would have
a material adverse effect on the Company's business, operating results, and
financial condition.
The Company's professional services contracts generally reflect a high
amount of revenue per order. The loss of individual orders, therefore, could
have a significant impact on the revenue and operating results of the Company.
The timing of revenue from the Company's services business is also difficult to
predict because of the length and variability of the sales and implementation
cycles. 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, operating results, and financial condition.
The professional services business is labor-intensive. Accordingly, the
ability to expand its services business is dependent on its ability to hire and
retain adequate professional services personnel. The market for professional
services personnel is highly competitive. In general, the high component of
salaries in the cost structure of the professional services business results in
lower gross margins than in the Company's software business.
RISKS ASSOCIATED WITH MERGERS AND ACQUISITIONS
The Company has been involved, and may in the future be involved, in a
number of 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 and services lines and the
desire to attract 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). Realization of any of
these risks in connection with an acquisition by the Company could have a
material adverse effect on the Company's business, operating results, and
financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support, technical, and services personnel. The Company has
recently increased its focus on offering professional services to its customers,
the growth of which is directly dependent on the attraction and retention of
personnel. The market for highly skilled employees is intensely competitive. To
the extent that the Company is not able to attract, retain, train, and motivate
highly skilled employees, directly or through acquisition, who are able to
provide EDA and other design services that satisfy customer's expectations, the
Company's business, operating results, and financial condition could be
materially adversely affected.
14
<PAGE>
RISKS OF INTERNATIONAL 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. In addition, political or
economic conditions in a specific country or region, government spending factors
and natural disasters could have a material adverse impact on the Company's
future international business as well as the Company's international operations.
Currency exchange fluctuations in countries in which the Company conducts
business could also materially adversely affect the Company's business,
operating results, and financial condition. The Company enters into 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 consolidated results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
Cadence's success is dependent, in part, upon its proprietary technology.
The Company generally relies upon patents, copyrights, trademarks, and trade
secret laws to establish and maintain its proprietary rights in its technology
and products. Cadence has a program to file applications for and obtain patents
in the United States and in selected foreign countries where a potential market
for Cadence's products exists. Cadence has been issued a number of patents;
other patent applications are currently pending. There can be no assurance that
any of these patents will not be challenged, invalidated or circumvented or that
any rights granted thereunder will provide competitive advantages to Cadence. In
addition, there can be no assurance that patents will be issued from pending
applications, or that claims allowed on any future patents will be sufficiently
broad to protect Cadence's technology. In addition, the laws of some foreign
countries may not permit the protection of Cadence's proprietary rights to the
same extent as do the laws of the United States. Although Cadence believes the
protection afforded by its patents, patent applications, copyrights and
trademarks has value, the rapidly changing technology in the EDA industry makes
Cadence's future success dependent primarily on the innovative skills,
technological expertise, and management abilities of its employees rather than
on patent, copyright, and trademark protection.
Because of the existence of a large number of patents in the EDA industry
and the rapid rate of issuance of new patents, it is not economically
practicable to determine in advance whether a product or any of its components
infringe patent rights of others. From time to time, Cadence receives notices
from or is sued by third parties regarding patent or other intellectual property
claims or is called upon to defend or indemnify a customer against such a claim
of a third party. If infringement is alleged, Cadence believes that, based upon
industry practice, any necessary license or rights under such patents may be
obtained on terms that would not have a material adverse effect on Cadence's
business, operating results, and financial condition. Nevertheless, there can be
no assurance that the necessary licenses would be available on acceptable terms,
or at all, or that Cadence would prevail in any such challenge. Many of
Cadence's products are designed to include software or other intellectual
property licensed from third parties, and it may be necessary in the future to
seek or renew licenses relating to various aspects of its products. The
inability to obtain certain licenses or other rights or to obtain such licenses
or rights on favorable terms, or the need to engage in litigation could have a
material adverse effect on Cadence's business, operating results, and financial
condition.
15
<PAGE>
RISK OF FAILURE TO OBTAIN EXPORT LICENSES
Cadence is required to comply with the regulations of the United States
Department of Commerce with respect to the shipment of its products and other
technologies outside the United States to certain countries and certain end
users. Although to date, Cadence has not encountered any material difficulty in
complying with these regulations, any difficulty in such compliance in the
future could have an adverse effect on the Company's business, operating
results, and financial condition.
RISKS OF BUSINESS INTERRUPTION
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its databases against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion, and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures will be sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, operating results, and financial
condition.
IMPLEMENTATION OF NEW SYSTEMS
The Company is currently in the process of transitioning to new computer
software for its financial, accounting, project system accounting, and order
management information systems. The successful implementation of these new
systems is crucial to the efficient operation of the Company's business. There
can be no assurance that the Company will implement its new systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. Problems with installation or initial operation of the
new systems could cause substantial management difficulties in operations
planning, financial reporting, and management and thus could have a material
adverse effect on the Company's business, operating results, financial
condition, and results of operations.
YEAR 2000 COMPLIANCE
The Company believes that its most current releases of its products will not
cease to perform nor generate incorrect or ambiguous data or results solely due
to a change in date to or after January 1, 2000, and will calculate any
information dependent on such dates in the same manner, and with the same
functionality, data integrity and performance, as such products do on or before
December 31, 1999 (collectively, "Year 2000 Compliance"). Year 2000 Compliance
issues may arise with respect to any modifications made to the Company's
products by a party other than the Company or from the combination or use of the
Company's products with any other software programs or hardware devices not
provided by the Company, and therefore may result in unforeseen Year 2000
Compliance problems for some of the Company's customers, which may have a
material adverse effect on the Company's business, operating results, and
financial condition.
Additionally, as with any company with a computing infrastructure and
utilizing business-application software programs written over many years, the
Company's internal operations may be subject to Year 2000 Compliance issues. The
Company has been implementing enterprise-wide information systems which support
a majority of the Company's operations. These systems are considered to be Year
2000 Compliant and are in use world-wide. Based solely due to a change in date
to or after January 1, 2000, the Company believes that its internal operations
will not be materially adversely impacted.
STOCK REPURCHASE PROGRAM RISKS
The Company, as part of its authorized stock repurchase program, has
purchased call options that entitle the Company to buy on a specified day one
share of common stock at a specified price to satisfy anticipated stock
repurchase requirements under the Company's systematic repurchase programs.
Additionally, the Company has sold put warrants through private placements. The
Company has the right to
16
<PAGE>
settle the put warrants with stock. 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 the
put warrants in stock could lead to the disposition by put warrant holders of
shares of the Company's common stock that such holders may have accumulated in
anticipation of the exercise of the put warrants or call options, which may
impact the price of the Company's common stock.
VOLATILITY OF STOCK PRICE
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. Factors such as
fluctuations in revenues or operating results, including failure to meet
expectations of securities analysts, announcements of technological innovations
or new products by the Company or its competitors, or developments in or
disputes regarding patents and proprietary rights could have a significant
adverse effect on the trading price of the Company's common stock in any given
period. Moreover, the stock market has from time to time experienced extreme
price and volume fluctuations, which have particularly affected the market for
technology companies, and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political, and market conditions may adversely affect the
market price of the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only high credit quality
securities that it believes to be low risk and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at April 4, 1998. All investments mature in one year or
less.
<TABLE>
<CAPTION>
CARRYING AVERAGE
VALUE INTEREST RATE
----------- ---------------
<S> <C> <C>
(In millions, except for average interest rates)
Investment Securities:
Cash equivalents-fixed rate.............................................................. $ 117.7 5.60%
Short-term investments-fixed rate........................................................ 45.2 5.63%
Short-term investments-variable rate..................................................... 68.0 5.72%
----------- ---
Total investment securities.............................................................. 230.9 5.64%
Cash equivalents-variable rate........................................................... 16.4 5.02%
----------- ---
Total interest bearing instruments....................................................... $ 247.3 5.60%
----------- ---
----------- ---
</TABLE>
17
<PAGE>
FOREIGN CURRENCY RISK
The Company transacts business in various foreign currencies, primarily in
Japan, emerging market countries in Asia, and certain European countries. The
Company has established a foreign currency hedging program, utilizing foreign
currency forward exchange contracts (forward contracts) to hedge certain foreign
currency transaction exposures in Japan, Canada, Asia, and certain European
countries. Under this program, increases or decreases in the Company's foreign
currency transactions are partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.
The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in other income (expense), and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included in
net income as a component of other income (expense). The Company's ultimate
realized gain or loss with respect to currency fluctuations will depend on the
currency exchange rates and other factors in effect as the contracts mature.
The table below provides information as of April 4, 1998 about the Company's
material forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature in less than thirty days.
<TABLE>
<CAPTION>
AVERAGE
NOTIONAL CONTRACT
FORWARD CONTRACTS: AMOUNT RATE
- -------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
(In millions, except for average contract rates)
Japanese yen................................................................................ $ 14.1 125.96
British pound sterling...................................................................... $ 17.3 0.60
German deutschemarks........................................................................ $ 3.3 1.82
Hong Kong dollars........................................................................... $ 1.2 7.75
Swedish krona............................................................................... $ (1.1) 7.93
Singapore dollars........................................................................... $ 1.8 1.61
Italian lira................................................................................ $ 2.2 1,789.88
</TABLE>
The unrealized gain (loss) on the outstanding forward contracts at April 4,
1998 was immaterial to the Company's consolidated financial statements. Due to
the short-term nature of the forward contracts, the fair value at April 4, 1998
was negligible. The realized gain (loss) on these contracts as they matured was
not material to the consolidated operations of the Company.
EQUITY PRICE RISK
The Company, as part of its authorized repurchase program, has purchased
call options that entitle the Company to buy on a specified day one share of
common stock at a specified price to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. Additionally,
the Company has sold put warrants through private placements.
18
<PAGE>
The table below provides information at April 4, 1998 about the Company's
put warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through February 26, 1999.
<TABLE>
<CAPTION>
1998 1999 ESTIMATED
MATURITY MATURITY FAIR VALUE
----------- ----------- -----------
<S> <C> <C> <C>
(Shares and contract amounts in millions)
Put Warrants:
Shares........................................................................... 3.5 1.3
Weighted average strike price.................................................... $ 24.00 $ 24.20
Contract amount.................................................................. $ 83.9 $ 30.3 $ 2.0
Call Options:
Shares........................................................................... 2.6 0.8
Weighted average strike price.................................................... $ 24.11 $ 24.45
Contract amount.................................................................. $ 61.5 $ 20.8 $ 47.5
</TABLE>
The Company has the right to settle the put warrants with stock. 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 the put warrants in stock could lead to the disposition
by put warrant holders of shares of the Company's common stock that such holders
may have accumulated in anticipation of the exercise of the put warrants or call
options, which may impact the price of the Company's common stock.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and litigation
matters which arises in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(Avant!) 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 former President and Chief Executive Officer, and with leave
of the court, on January 29, 1998 filed a second amended counterclaim. The
second amended counterclaim alleges, INTER ALIA, that the Company and its former
President and Chief Executive Officer 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 second 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 Chief Executive Officer 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. In an order issued on December 19, 1997, as
modified on January 26, 1998, the district court entered an injunction barring
any further infringement of Cadence's copyrights in Design Framework II
software, or selling, licensing, or copying such product derived from Design
Framework II, including but not limited to, Avant!'s ArcCell products. On
February 19, 1998, Avant! Filed a petition for WRIT OF CERTIORAI to the United
States Supreme Court, requesting a review of the Ninth Circuit Court's decision.
On April 17, 1998, the Company filed its opposition to Avant!'s Petition with
the Supreme Court.
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 $5.0 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.
ITEM 5. OTHER INFORMATION
In February 1998, the Company issued 1,013,108 shares of its common stock,
$0.01 par value per share, to the stockholders of Symbionics Group Limited
(Symbionics), a U.K. corporation, in connection with the Company's acquisition
of 100% of the outstanding stock of Symbionics. The Company's primary purpose in
acquiring the Symbionics shares was the acquisition of Symbionic's product
development and design services for integration into the Company's services
offerings.
In December 1997, the Company issued an additional 12,796 shares of its
common stock, $0.01 par value per share, to the former stockholders of Synthesia
AB, a Swedish limited liability company
21
<PAGE>
(Synthesia), subject to certain rights of indemnification and setoff under the
agreement of acquisition pursuant to which the Synthesia shares were acquired in
February 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
27.01 Financial data schedule for the period ended April 4, 1998.
</TABLE>
(b) Reports on Form 8-K:
None.
22
<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.
By: /s/ JOHN R. HARDING
-----------------------------------------
JOHN R. HARDING
DATE: May 11, 1998 PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ H. RAYMOND BINGHAM
-----------------------------------------
H. RAYMOND BINGHAM
EXECUTIVE VICE PRESIDENT
DATE: May 11, 1998 AND CHIEF FINANCIAL OFFICER
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Cadence
Design Systems, Inc.'s Quarterly Report on Form 10-Q for the period ended April
4, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 179,215
<SECURITIES> 113,258
<RECEIVABLES> 203,222
<ALLOWANCES> 18,580
<INVENTORY> 0
<CURRENT-ASSETS> 571,410
<PP&E> 371,148
<DEPRECIATION> 153,078
<TOTAL-ASSETS> 1,030,226
<CURRENT-LIABILITIES> 247,500
<BONDS> 0
0
0
<COMMON> 455,094
<OTHER-SE> 295,115
<TOTAL-LIABILITY-AND-EQUITY> 1,030,226
<SALES> 270,223
<TOTAL-REVENUES> 270,223
<CGS> 62,334
<TOTAL-COSTS> 62,334
<OTHER-EXPENSES> 213,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 426
<INCOME-PRETAX> (2,922)
<INCOME-TAX> 22,537
<INCOME-CONTINUING> (25,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,459)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
