<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 JULY 3, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10606
------------------------
CADENCE DESIGN SYSTEMS, INC.
(Exact name of Registrant as Specified in Its Charter)
------------------------
DELAWARE 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 SEELY AVENUE, BUILDING 5, SAN JOSE, 95134
CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(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 August 6, 1999, there were 243,766,741 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
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
July 3, 1999 and January 2, 1999............................................................ 3
Condensed Consolidated Statements of Income:
Three and Six Months Ended July 3, 1999 and July 4, 1998.................................... 4
Condensed Consolidated Statements of Cash Flows:
Three and Six Months Ended July 3, 1999 and July 4, 1998.................................... 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 37
Item 2. Changes in Securities and Use of Proceeds..................................................... 38
Item 3. Defaults Upon Senior Securities............................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders........................................... 38
Item 5. Other Information............................................................................. 39
Item 6. Exhibits and Reports on Form 8-K.............................................................. 39
Signatures................................................................................................. 40
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................... $ 192,960 $ 209,074
Short-term investments.............................................................. 33,028 40,403
Receivables, net.................................................................... 254,091 305,143
Inventories......................................................................... 9,741 9,903
Prepaid expenses and other.......................................................... 117,408 101,629
------------ ------------
Total current assets.............................................................. 607,228 666,152
Marketable securities................................................................. -- 19,969
Property, plant, and equipment, net................................................... 309,649 274,208
Software development costs, net....................................................... 10,732 13,045
Acquired intangibles, net............................................................. 278,350 286,088
Installment contract receivables...................................................... 104,036 100,529
Other assets.......................................................................... 190,287 180,231
------------ ------------
$ 1,500,282 $ 1,540,222
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases................................. $ 1,615 $ 1,273
Accounts payable and accrued liabilities............................................ 222,066 242,524
Income taxes payable................................................................ 7,858 21,241
Deferred revenue.................................................................... 130,159 106,786
------------ ------------
Total current liabilities......................................................... 361,698 371,824
------------ ------------
Long-term Liabilities:
Long-term debt and capital leases................................................... 1,253 136,380
Deferred income taxes............................................................... 71,543 58,306
Minority interest liability......................................................... 41 377
Other long-term liabilities......................................................... 19,726 25,505
------------ ------------
Total long-term liabilities....................................................... 92,563 220,568
------------ ------------
Stockholders' Equity:
Preferred stock..................................................................... -- --
Common stock and capital in excess of par value..................................... 871,100 817,978
Treasury stock at cost.............................................................. (223,575) (219,417)
Retained earnings................................................................... 408,177 358,322
Unrealized gain (loss) on investments............................................... (31) 125
Accumulated other comprehensive loss................................................ (9,650) (9,178)
------------ ------------
Total stockholders' equity........................................................ 1,046,021 947,830
------------ ------------
$ 1,500,282 $ 1,540,222
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product........................................................ $ 117,890 $ 177,406 $ 305,247 $ 346,337
Services....................................................... 74,943 66,871 147,417 121,342
Maintenance.................................................... 71,360 71,459 146,720 141,845
---------- ---------- ---------- ----------
Total revenue................................................ 264,193 315,736 599,384 609,524
---------- ---------- ---------- ----------
Costs and expenses:
Cost of product................................................ 20,064 22,118 38,600 39,053
Cost of services............................................... 48,844 48,771 96,102 89,150
Cost of maintenance............................................ 12,930 12,399 25,830 24,977
Amortization of acquired intangibles........................... 12,856 2,884 25,570 3,687
Marketing and sales............................................ 82,936 81,199 162,999 159,716
Research and development....................................... 50,359 49,439 101,227 97,131
General and administrative..................................... 20,903 20,002 42,163 39,480
Unusual items.................................................. 19,648 -- 33,840 60,857
---------- ---------- ---------- ----------
Total costs and expenses..................................... 268,540 236,812 526,331 514,051
---------- ---------- ---------- ----------
Income (loss) from operations.............................. (4,347) 78,924 73,053 95,473
Other income, net................................................ 141 3,365 276 6,683
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes.................................................... (4,206) 82,289 73,329 102,156
Provision (benefit) for income taxes............................. (1,199) 22,327 23,474 44,148
---------- ---------- ---------- ----------
Net income (loss).......................................... $ (3,007) $ 59,962 $ 49,855 $ 58,008
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income (loss) per share................................ $ (0.01) $ 0.26 $ 0.21 $ 0.25
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income (loss) per share.............................. $ (0.01) $ 0.23 $ 0.19 $ 0.22
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding....................... 241,978 234,842 241,026 233,681
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and potential common shares
outstanding--assuming dilution................................. 241,978 260,021 257,016 259,529
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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>
SIX MONTHS ENDED
--------------------
JULY 3, JULY 4,
1999 1998
--------- ---------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period............................................. $ 209,074 $ 221,030
--------- ---------
Cash Flows from Operating Activities:
Net income................................................................................. 49,855 58,008
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 76,736 46,117
Deferred income taxes.................................................................... 13,584 (2,023)
Write-off of software development costs, net............................................. 1,441 --
Write-off of prepaid expenses and other.................................................. 642 --
Write-off of equipment, acquired intangibles, and other assets........................... 4,641 1,840
Write-off of acquired in-process technology.............................................. 8,900 56,900
Change in other long-term liabilities and minority interest expense...................... (5,960) 7,047
Equity (income) loss from investments.................................................... 883 (496)
Provisions for doubtful accounts......................................................... 6,250 2,010
Non-cash restructuring charges........................................................... 3,321 452
Write-off of non-current assets.......................................................... 2,145 --
Changes in operating assets and liabilities, net of effect of acquired and disposed
businesses:
Receivables............................................................................ (54,947) 7,448
Inventories............................................................................ 162 5,891
Prepaid expenses and other............................................................. (16,666) 23,224
Installment contract receivables....................................................... 18,980 (84,156)
Accounts payable and accrued liabilities............................................... (9,762) (24,628)
Income taxes payable................................................................... (783) 43,121
Deferred revenue....................................................................... 21,804 (1,739)
--------- ---------
Net cash provided by operating activities............................................ 121,226 139,016
--------- ---------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity..................................... 27,245 38,498
Purchases of short-term investments--held-to-maturity...................................... (57) (35,843)
Maturities of short-term investments--available-for-sale................................... -- 390,078
Purchases of short-term investments--available-for-sale.................................... -- (423,422)
Purchases of property, plant, and equipment................................................ (71,377) (61,067)
Capitalization of software development costs............................................... (13,528) (11,590)
Increase in acquired intangibles and other assets.......................................... (13,452) (19,382)
Investment in venture capital partnership.................................................. (5,770) (2,774)
Cash effect of business acquisitions and dispositions...................................... (2,806) (51,313)
Sale of put warrants....................................................................... 3,609 9,659
Purchase of call options................................................................... (3,609) (9,659)
--------- ---------
Net cash used for investing activities............................................... (79,745) (176,815)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt............................................................... 30,168 --
Principal payments on long-term debt and capital leases.................................... (165,000) (1,584)
Proceeds from issuance of common stock..................................................... 49,642 44,274
Purchases of treasury stock................................................................ (49,125) (98,103)
Proceeds from transfer of financial assets in exchange for cash............................ 77,162 27,163
--------- ---------
Net cash used for financing activities............................................... (57,153) (28,250)
--------- ---------
Effect of exchange rate changes on cash...................................................... (442) (2,846)
--------- ---------
Decrease in Cash and Cash Equivalents........................................................ (16,114) (68,895)
--------- ---------
Cash and Cash Equivalents at End of Period................................................... $ 192,960 $ 152,135
--------- ---------
--------- ---------
</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 Cadence, 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, Cadence 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
Cadence's Annual Report on Form 10-K for the fiscal year ended January 2, 1999.
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 2, 1999 and for the three and six months ended July 4, 1998, have been
reclassified to conform with the 1999 presentation.
ACQUISITIONS
In June 1999, Cadence entered into a merger agreement with OrCAD, Inc.
(OrCAD) and on July 19, 1999, completed its tender offer for all of the issued
and outstanding shares of OrCAD common stock. OrCAD is a supplier of
computer-aided engineering and computer-aided design software and services for
the printed circuit board industry. Pursuant to a cash tender offer Cadence
acquired approximately 96% of the outstanding shares of OrCAD at $13 per share
for a total purchase price of approximately $121 million. In July 1999, Cadence
acquired the balance of the OrCAD shares in a short form cash merger and the
acquisition will be accounted for as a purchase.
In May 1999, Cadence completed its merger with Quickturn Design Systems,
Inc., a Delaware corporation (Quickturn). Quickturn designs, manufactures,
sells, and supports hardware and software products that verify the design of
computer chips and electronic systems. Cadence acquired all of the outstanding
shares of Quickturn common stock in a tax-free, stock-for-stock transaction for
approximately 24.6 million shares of Cadence common stock. The acquisition was
accounted for as a pooling-of-interests. In addition, Cadence assumed
approximately all outstanding stock options and warrants of Quickturn. All prior
period condensed financial statements were restated as if the merger took place
at the beginning of such periods, in accordance with required pooling of
interests accounting and disclosures. For the three month periods ended April 3,
1999 and April 4, 1998, Cadence's revenues and net income (loss) were
approximately $305.2 million and $270.2 million and $51.8 million and $(0.4)
million, respectively. For the three month periods ended March 31, 1999 and
1998, Quickturn's revenues and net income (loss) were approximately $30 million
and $23.6 million and $1.1 million and $(1.6) million, respectively.
In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a
supplier of design verification technology used in system-on-a-chip design.
Cadence acquired all of the outstanding stock of
6
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DAI for approximately 0.6 million shares of Cadence's common stock and $2.9
million of cash. The total purchase price was $25.7 million, and the acquisition
was accounted for as a purchase. In connection with the acquisition, net
intangibles of $24.1 million were acquired. The results of operations of DAI and
the estimated fair value of the assets acquired and liabilities assumed are
included in Cadence's condensed financial statements from the date of
acquisition. Intangibles arising from the acquisition are being amortized on a
straight-line basis over five years.
Management estimates that $8.9 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense in the condensed consolidated statements of
operations upon consummation of the acquisition. The value assigned to acquired
in-process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the acquired in-process technology
into commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the purchased in-process technology.
If these projects are not successfully developed, future revenue, and
profitability of Cadence may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.
Comparative pro forma financial information has not been presented because
the results of operations of DAI were not material to Cadence's condensed
consolidated financial statements.
INVENTORIES
Cadence's inventories include high technology parts and components that were
acquired in connection with the merger with Quickturn.
A summary of inventories follows:
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1999 1999
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Work in process.............................. $ 9,521 $8,798
Raw materials................................ 220 1,105
------- ----------
Total inventories.......................... $ 9,741 $9,903
------- ----------
------- ----------
</TABLE>
7
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
UNUSUAL ITEMS AND RESTRUCTURING
A summary of unusual items and restructuring charges follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------- ----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Restructuring charges.............. $10,703 $ -- $12,888 $ 3,957
Merger costs....................... 8,435 -- 8,435 --
Asset impairment................... 3,510 -- 6,617 --
Litigation settlement.............. (3,000) -- (3,000) --
Write-off of acquired in-process
technology....................... -- -- 8,900 56,900
------- ------- ------- -------
Total unusual items.............. $19,648 $ -- $33,840 $60,857
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
RESTRUCTURING
In the three month period ended July 3, 1999, Cadence recorded $10.7 million
in restructuring charges including severance costs to terminate 49 employees and
costs to consolidate facilities. Severance costs of $8.7 million relate to
restructuring plans primarily aimed at reducing costs after Cadence merged with
Quickturn, further actions taken to restructure the Cadence services business in
Japan, and severance resulting from the resignation of Cadence's Chief Executive
Officer. Facilities consolidation charges of $2 million are the result of the
closure of 15 Quickturn facilities, including $1 million to close and exit the
excess facilities and $1 million of related leasehold improvement abandonment
costs. Closure and exit costs of $1 million include payments required under
lease contracts (less any applicable sublease income) after the properties were
abandoned, lease buyout costs, restoration costs associated with certain lease
arrangements, and costs to maintain facilities during the period after
abandonment. Asset related costs written-off consist of leasehold improvements
to facilities that were abandoned and whose estimated fair market value is zero.
Through July 1999, 80% of the sites have been vacated and the remaining sites
will be vacated primarily during the third and fourth quarter of 1999.
Noncancelable lease payments on vacated facilities will be paid out through
2003.
In the three month period ended April 3, 1999, Cadence recorded $2.2 million
in severance costs to terminate 45 employees. These actions were taken to
complete Cadence's restructuring program initiated in the fourth quarter of
1998. The restructuring plan was primarily aimed at reducing the costs of excess
personnel in its services business, and Cadence anticipates that the actions
taken in the first quarter of 1999 will save an estimated additional $0.6
million in fiscal 1999.
In each of the three month periods ended April 3, 1999 and July 3, 1999, all
termination notices and benefits were communicated to the affected employees
prior to quarter end and all severance benefits are expected to be paid in 1999.
Included in unusual items for the six month period ended July 4, 1998 were
restructuring charges of $4 million related to severance costs associated with
Cadence's international business operations and consolidation and cancellation
of a certain information technology support services contract.
8
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following tables summarize the Company's restructuring activity during
the six months ended July 3, 1999:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 3, 1999
-------------------------------------------------------------
SEVERANCE
AND EXCESS OTHER
BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL
------------ ---------- ------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 2, 1999........... $ 13,114 $ 14,496 $ 2,213 $11,304 $ 41,127
1999 restructuring charges....... 10,885 978 -- 1,025 12,888
Reclassifications................ (515) 179 501 (165) --
Non-cash charges................. (533) (331) (663) (1,794) (3,321)
Cash charges..................... (11,811) (4,914) (1,337) (880) (18,942)
------------ ---------- ------------- ------- --------
Balance, July 3, 1999.............. $ 11,140 $ 10,408 $ 714 $ 9,490 $ 31,752
------------ ---------- ------------- ------- --------
------------ ---------- ------------- ------- --------
</TABLE>
MERGER COSTS AND IN-PROCESS TECHNOLOGY
In connection with the acquisition of Quickturn, Cadence charged to expense
$8.4 million representing merger costs in the three month period ended July 3,
1999. These merger costs represent fees for financial advisors, attorneys, and
accountants.
In connection with the DAI acquisition in the first quarter of 1999, Cadence
immediately charged to expense $8.9 million representing in-process technology
that had not yet reached technological feasibility and had no alternative future
use. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Merger Costs and In-Process Technology."
ASSET IMPAIRMENT
In the three month period ended July 3, 1999, Cadence incurred charges
totaling $3.5 million in connection with the cancellation of an information
technology services contract with a third-party and the abandonment of
capitalized software development costs associated with Cadence products that
will no longer be sold.
In the three month period ended April 3, 1999, Cadence incurred charges
totaling $3.1 million in connection with the abandonment of certain third-party
software licenses that will no longer be used by its design services business
and capitalized software development costs associated with Cadence products that
will no longer be sold.
The impairment losses recorded for the six month period ended July 3, 1999,
were the amounts by which the carrying amounts of the intangible assets exceeded
their fair market values.
LITIGATION SETTLEMENT
On June 23, 1999, Cadence and Mentor Graphics Corporation (Mentor) announced
the settlement of a patent infringement action pending in the United States
District Court for the District of Oregon. In the settlement, the parties agreed
that the District Court in Portland would enter a judgment declaring that
certain Quickturn patents are valid, enforceable, and were infringed by Mentor's
sale of SimExpress products in the United States. Mentor is permanently enjoined
from producing, marketing or selling
9
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SimExpress emulation systems in the United States. In connection with the
settlement, Mentor paid Cadence $3 million.
CREDIT FACILITY
During the six month period ended July 3, 1999, Cadence repaid $135 million
of its revolving credit facility. At July 3, 1999, there were no borrowings
under this revolving credit facility.
COMPREHENSIVE INCOME (LOSS)
"Comprehensive income (loss)" 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>
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------- ----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss).................. $(3,007) $59,962 $49,855 $58,008
Translation loss................... (1,411) (1,179) (472) (2,648)
Unrealized loss on investments..... (104) (8) (156) (25)
------- ------- ------- -------
Comprehensive income (loss)...... $(4,522) $58,775 $49,227 $55,335
------- ------- ------- -------
------- ------- ------- -------
</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. Diluted net income (loss) per share is calculated by dividing net income
(loss) by the sum of the weighted average shares of common stock outstanding and
the incremental number of potential common shares issuable upon the exercise of
outstanding common stock options, warrants, contingent issuances of common
stock, and put warrants computed using the treasury stock method. For periods in
which Cadence had losses, potential common shares from common stock options,
warrants, contingent issuances of common stock, and put warrants are excluded
from the computation of diluted net loss per share as their effect is
antidilutive.
10
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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>
THREE MONTHS SIX MONTHS
ENDED ENDED
---------------- ----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common shares used
to calculate basic net income
(loss) per share................. 241,978 234,842 241,026 233,681
Options.......................... -- 24,873 14,368 25,572
Warrants and other contingent
shares......................... -- 302 307 274
Puts............................. -- 4 1,315 2
------- ------- ------- -------
Weighted average common and
potential common shares used to
calculate diluted net income
(loss) per share................. 241,978 260,021 257,016 259,529
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Had Cadence recorded net income for the three months ended July 3, 1999,
dilutive weighted outstanding options would have been 10.2 million shares and
weighted outstanding warrants and other dilutive contingent shares would have
been 2.6 million shares.
CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
PUT WARRANTS AND CALL OPTIONS
Cadence has authorized two seasoned systematic stock repurchase programs
under which it repurchases common stock to satisfy estimated requirements for
shares to be issued under its Employee Stock Purchase Plan (ESPP) and the 1997
Nonstatutory Stock Option Plan (the 1997 Plan). Such repurchases are intended to
cover Cadence's expected reissuances under the ESPP and the 1997 Plan for the
next 12 months and 24 months, respectively.
As part of its authorized repurchase programs, Cadence has sold put warrants
through private placements. At July 3, 1999, there were 4 million put warrants
outstanding, each of which entitles the holder to sell one share of common stock
to Cadence on a specified date and at a specified price ranging from $13.08 to
$34.59 per share. Additionally, during this same period, Cadence purchased call
options that entitle Cadence to buy shares of common stock at a specified price
to satisfy anticipated stock repurchase requirements under Cadence's systematic
stock repurchase programs. At July 3, 1999, Cadence had 3 million call options
outstanding at prices ranging from $13.33 to $34.84 per share. The put warrants
and call options outstanding at July 3, 1999 are exercisable on various dates
through February 2000, and Cadence has the contractual ability to settle the
options prior to their maturity. At July 3, 1999, the fair value of the call
options was approximately $4.2 million and the fair value of the put warrants
was approximately $36.4 million. The fair value of the put warrants and call
options was estimated by Cadence's investment advisors.
If exercised, Cadence has the right to settle the put warrants with Cadence
common stock equal to the difference between the exercise price and the fair
value at the date of exercise. Settlement of the put
11
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
warrants with stock could cause Cadence to issue a substantial number of shares,
depending on the exercise price of the put warrants and the per share fair value
of Cadence'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 Cadence's common stock that such holders may have accumulated in
anticipation of the exercise of the put warrants or call options, which may
adversely affect the price of Cadence's common stock. At July 3, 1999, Cadence
had the ability to settle these put warrants with stock and, therefore, no
amount was classified out of stockholders' equity in the condensed consolidated
balance sheets.
SEGMENT REPORTING
In 1998, Cadence adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Under SFAS No. 131, operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker when deciding how to
allocate resources and when assessing performance. Cadence currently has three
operating segments: Products, Services, and Maintenance. Cadence's chief
operating decision making group is the Executive Staff, which includes the
Company President and Chief Executive Officer and his senior staff.
Cadence's business activities are organized on the basis of three operating
segments. The Products segment designs and sells a variety of electronic design
automation products that are licensed to customers. The Services segment offers
methodology and design services either to assist companies in developing
electronic designs or to assume responsibility for the design effort when
customers wish to outsource this work. The Maintenance segment is primarily a
technical support organization, and maintenance agreements are offered to
customers either as part of our product license agreements or separately.
Cadence's organizational structure reflects this segmentation, and segments have
not been aggregated for purposes of this disclosure.
Segment income from operations is defined as gross margin under generally
accepted accounting principles and excludes operating expenses (marketing and
sales, research and development, and general and administrative), unusual items,
other income, net, and income taxes. Profitability information about Cadence's
segments is available only to the extent of gross margin by segment, and
operating expenses and other income and expense items are managed on a
functional basis. There are no differences between the accounting policies used
to measure profit and loss for segments and those used on a consolidated basis.
Revenue is defined as revenue from external customers with no intersegment
revenue or expenses.
Cadence's management does not identify or allocate its assets, including
capital expenditures, by operating segment. Accordingly, assets are not being
reported by segment because the information is not available by segment and is
not reviewed by Cadence's Executive Staff to make decisions about resources to
be allocated among the segments or to assess their performance. Depreciation and
amortization is allocated among the segments in order to determine each
segments' gross margin.
12
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following tables present information about reported segments for the
three months ended July 3, 1999 and July 4, 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 3, 1999
------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
-------- -------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue............................ $117,890 $ 74,943 $71,360 $ -- $264,193
Cost of revenue.................... 20,064 48,844 12,930 -- 81,838
Amortization of acquired
intangibles...................... 11,632 1,224 -- -- 12,856
-------- -------- ----------- --------- --------
Gross margin..................... 86,194 24,875 58,430 -- 169,499
Marketing and sales................ -- -- -- (82,936) (82,936)
Research and development........... -- -- -- (50,359) (50,359)
General and administrative......... -- -- -- (20,903) (20,903)
Unusual items...................... -- -- -- (19,648) (19,648)
Other income, net.................. -- -- -- 141 141
-------- -------- ----------- --------- --------
Income (loss) before provision
(benefit) for income taxes....... $ 86,194 $ 24,875 $58,430 $(173,705) $ (4,206)
-------- -------- ----------- --------- --------
-------- -------- ----------- --------- --------
<CAPTION>
FOR THE THREE MONTHS ENDED JULY 4, 1998
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue............................ $177,406 $ 66,871 $71,459 $ -- $315,736
Cost of revenue.................... 22,118 48,771 12,399 -- 83,288
Amortization of acquired
intangibles...................... 1,769 1,115 -- -- 2,884
-------- -------- ----------- --------- --------
Gross margin..................... 153,519 16,985 59,060 -- 229,564
Marketing and sales................ -- -- -- (81,199) (81,199)
Research and development........... -- -- -- (49,439) (49,439)
General and administrative......... -- -- -- (20,002) (20,002)
Unusual items...................... -- -- -- -- --
Other income, net.................. -- -- -- 3,365 3,365
-------- -------- ----------- --------- --------
Income (loss) before provision
(benefit) for income taxes....... $153,519 $ 16,985 $59,060 $(147,275) $ 82,289
-------- -------- ----------- --------- --------
-------- -------- ----------- --------- --------
</TABLE>
13
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following tables present information about reported segments for the six
months ended July 3, 1999 and July 4, 1998:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 3, 1999
------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
-------- -------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue............................ $305,247 $147,417 $146,720 $ -- $ 599,384
Cost of revenue.................... 38,600 96,102 25,830 -- 160,532
Amortization of acquired
intangibles...................... 22,951 2,619 -- -- 25,570
-------- -------- ----------- --------- ---------
Gross margin..................... 243,696 48,696 120,890 -- 413,282
Marketing and sales................ -- -- -- (162,999) (162,999)
Research and development........... -- -- -- (101,227) (101,227)
General and administrative......... -- -- -- (42,163) (42,163)
Unusual items...................... -- -- -- (33,840) (33,840)
Other income, net.................. -- -- -- 276 276
-------- -------- ----------- --------- ---------
Income (loss) before provision
(benefit) for income taxes....... $243,696 $ 48,696 $120,890 $(339,953) $ 73,329
-------- -------- ----------- --------- ---------
-------- -------- ----------- --------- ---------
<CAPTION>
FOR THE SIX MONTHS ENDED JULY 4, 1998
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue............................ $346,337 $121,342 $141,845 $ -- $ 609,524
Cost of revenue.................... 39,053 89,150 24,977 -- 153,180
Amortization of acquired
intangibles...................... 2,519 1,168 -- -- 3,687
-------- -------- ----------- --------- ---------
Gross margin..................... 304,765 31,024 116,868 -- 452,657
Marketing and sales................ -- -- -- (159,716) (159,716)
Research and development........... -- -- -- (97,131) (97,131)
General and administrative......... -- -- -- (39,480) (39,480)
Unusual items...................... -- -- -- (60,857) (60,857)
Other income, net.................. -- -- -- 6,683 6,683
-------- -------- ----------- --------- ---------
Income (loss) before provision
(benefit) for income taxes....... $304,765 $ 31,024 $116,868 $(350,501) $ 102,156
-------- -------- ----------- --------- ---------
-------- -------- ----------- --------- ---------
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE HEREIN.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE
CERTAIN RISKS AND UNCERTAINTIES. CADENCE'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE FORWARD LOOKING STATEMENTS DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE ACTUAL RESULTS OR PERFORMANCE TO DIFFER MATERIALLY OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN
"RESULTS OF OPERATIONS," "YEAR 2000 UPDATE," "LIQUIDITY AND CAPITAL RESOURCES,"
"FACTORS THAT MAY AFFECT FUTURE RESULTS," AND "DISCLOSURES ABOUT MARKET RISK."
OVERVIEW
Cadence provides software and hardware technology and comprehensive design
and methodology services and technology for the product development requirements
of the world's leading electronics companies. Cadence licenses its leading-edge
electronic design automation (EDA) software and hardware technology and provides
a variety of professional services to companies throughout the world ranging
from methodology services to help optimize performance of the customer's product
to design services to create the actual design of the electronic system for the
customer's product. Cadence is a supplier of "design realization" solutions,
which are used by companies to design and develop complex chips and electronic
systems, including semiconductors, computer systems and peripherals,
telecommunications and networking equipment, mobile and wireless devices,
automotive electronics, consumer products, and other advanced electronics.
In June 1999, Cadence entered into a merger agreement with OrCAD, Inc.
(OrCAD) and on July 19, 1999, completed its tender offer for all of the issued
and outstanding shares of OrCAD common stock. OrCAD is a supplier of
computer-aided engineering and computer-aided design software and services for
the printed circuit board industry. Pursuant to a cash tender offer Cadence
acquired approximately 96% of the outstanding shares of OrCAD at $13 per share
for a total purchase price of approximately $121 million. In July 1999, Cadence
acquired the balance of the OrCAD shares in a short form cash merger and the
acquisition will be accounted for as a purchase.
In May 1999, Cadence completed its merger with Quickturn Design Systems,
Inc., a Delaware corporation (Quickturn). Quickturn designs, manufactures,
sells, and supports hardware and software products that verify the design of
computer chips and electronic systems. Cadence acquired all of the outstanding
shares of Quickturn common stock in a tax-free, stock-for-stock transaction for
approximately 24.6 million shares of Cadence common stock. The acquisition was
accounted for as a pooling of interests. In addition, Cadence assumed all of the
outstanding stock options and warrants of Quickturn. All prior period condensed
financial statements were restated as if the merger took place at the beginning
of such periods, in accordance with required pooling of interests accounting and
disclosures.
In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a
supplier of design verification technology used in system-on-a-chip design.
Cadence acquired all of the outstanding stock of DAI for approximately 0.6
million shares of Cadence's common stock and $2.9 million of cash. The total
purchase price was $25.7 million, and the acquisition was accounted for as a
purchase.
15
<PAGE>
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Product............................ $ 117.9 $ 177.4 (34)% $ 305.3 $ 346.3 (12)%
Services........................... 74.9 66.9 12% 147.4 121.3 21%
Maintenance........................ 71.4 71.4 0% 146.7 141.9 3%
------- ------- ------- -------
Total revenue.................... $ 264.2 $ 315.7 (16)% $ 599.4 $ 609.5 (2)%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product............................ 45% 56% 51% 57%
Services........................... 28% 21% 25% 20%
Maintenance........................ 27% 23% 24% 23%
</TABLE>
The decreases in product revenue of $59.5 million and $41.1 million for the
three and six month periods ended July 3, 1999, respectively, when compared to
the same periods of 1998, were attributable primarily to a decrease in demand
for IC implementation products, which include place and route and physical
design tools, and IP creation products, which include verilog and algorithm
design tools, partially offset by an increase in demand for Quickturn products.
In July 1999, Cadence implemented a new software product licensing model that
will include a new subscription license over a two-year term. This new product
licensing model allows customers to purchase software products with licenses
that have shorter periods and allow access to new technology. Because Cadence's
new model includes undelivered technology, sales of software products under this
model require revenue to be recognized ratably over the license period. Total
revenues in the third quarter are expected to decrease from the current quarter
primarily due to a larger portion of its software being licensed pursuant to the
new subscription license, which will require revenue to be recognized ratably
over the license period. See "Factors That May Affect Future Results."
Services revenue increased $8 million and $26.1 million in the three and six
month periods ended July 3, 1999, respectively, when compared to the same
periods of 1998. The increases in services revenue were primarily the result of
increased demand for Cadence's design services offerings.
Maintenance revenue remained flat for the three month period ended July 3,
1999, and increased $4.8 million for the six month period ended July 3, 1999,
when compared to the same periods of 1998, primarily due to continued growth of
the installed customer base and the renewal of maintenance and support
contracts.
16
<PAGE>
REVENUE BY GEOGRAPHY
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Domestic........................... $ 142.9 $ 150.1 (5)% $ 284.2 $ 318.7 (11)%
International...................... 121.3 165.6 (27)% 315.2 290.8 8%
------- ------- ------- -------
Total revenue...................... $ 264.2 $ 315.7 (16)% $ 599.4 $ 609.5 (2)%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Domestic........................... 54% 48% 47% 52%
International...................... 46% 52% 53% 48%
</TABLE>
Total revenue from international sources decreased in the three month period
ended July 3, 1999, as compared to the same period in 1998. The decrease was due
primarily to a decrease in product and services in Europe, partially offset by
an increase in maintenance in Europe and services in Japan. Total revenue from
international sources increased for the six month period ended July 3, 1999, as
compared to the same period in the prior year, due primarily to higher demand
for products in Japan, services in Japan and Canada, and maintenance in Europe,
partially offset by lower demand for products in Europe in the three month
period ended July 3, 1999.
Differences in the rate of growth of domestic and international revenue,
over the periods presented and as compared geographically, are primarily due to
fluctuations in demand and resulting sales volume of place-and-route, physical
design, and verification products as well as methodology and design services
offerings. Revenue growth is expected to be slower for the remainder of 1999
primarily due to a larger portion of its software being licensed pursuant to
subscription licenses where revenue is recognized ratably over the licence
period.
Foreign currency exchange rates positively affected reported revenue by $3.9
million and $8 million during the three and six month periods ended July 3,
1999, primarily due to the strengthening of the Japanese yen in relation to the
U.S. dollar. Foreign currency exchange rates negatively affected reported
revenue by $6.8 million and $10.7 million during the three and six month periods
ended July 4, 1998, primarily due to the weakening of the Japanese yen in
relation to the U.S. dollar.
COST OF REVENUE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Product............................ $20.1 $22.1 (9)% $38.6 $39.1 (1)%
Services........................... $48.8 $48.8 0% $96.1 $89.2 8%
Maintenance........................ $12.9 $12.4 4% $25.8 $25.0 3%
</TABLE>
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product............................ 17% 12% 13% 11%
Services........................... 65% 73% 65% 73%
Maintenance........................ 18% 17% 18% 18%
</TABLE>
17
<PAGE>
Cost of product revenue includes costs of production personnel, packaging
and documentation, and amortization of capitalized software development costs
for software products. Manufacturing costs associated with Quickturn hardware
emulation system products include materials, labor, and overhead.
Cost of product revenue decreased $2 million and $0.5 million for the three
and six month periods ended July 3, 1999, respectively, as compared to the same
periods of 1998. These decreases were primarily due to inventory obsolescence
charges of $5.7 million in the three month period ended April 4, 1998,
associated with Quickturn's introduction of the Mercury Design Verification
System. The decrease was partially offset by increases in other Quickturn
hardware manufacturing costs of $3.1 million and $3.6 million, increases in
software product royalty expense of $1.7 million and $1.3 million, and increases
in amortization of capitalized software development costs of $1 million and $1.8
million for the three and six month periods ended July 3, 1999, respectively, as
compared to the same periods of 1998.
Product gross margin decreased for the three and six month periods ended
July 3, 1999, compared to the same periods of 1998 primarily due to lower demand
and sales of software products. Product gross margin for the three and six month
periods ended July 3, 1999, also declined due to a higher proportion of hardware
revenue with lower gross margins than software product revenue. The majority of
Cadence's costs of software product revenue do not vary significantly with
changes in revenue. Product gross margin may continue to be adversely affected
during the remainder of 1999 due to expected lower revenue.
Cost of services revenue includes costs associated with providing services
to customers, primarily salaries and costs to recruit, develop, and retain
personnel, and costs to maintain the infrastructure necessary to manage a
services organization. Cost of services revenue remained flat in the three month
period ended July 3, 1999, and increased $6.9 million in the six months ended
July 3, 1999, as compared to the same periods of 1998. The increase in the six
month period ended July 3, 1999 was primarily due to the addition of services
professionals, primarily through acquisitions completed in 1998.
Services gross margin increased for the three and six months ended July 3,
1999, as compared to the same periods of 1998, primarily due to increased
utilization of services capacity and the management of expenses. Services gross
margin has been, and may continue to be, adversely affected by Cadence's
inability to fully utilize its services resources. In addition, services gross
margin may continue to be adversely affected by Cadence's inability to achieve
operating efficiencies when implementing 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 production personnel, packaging, and
documentation of maintenance updates. Cost of maintenance revenue in absolute
dollars and as a percent of related revenue remained relatively flat in the
three and six months ended July 3, 1999, as compared to the same periods of
1998.
AMORTIZATION OF ACQUIRED INTANGIBLES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Amortization of acquired
intangibles...................... $12.9 $2.9 $25.6 $3.7
</TABLE>
AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C> <C>
Amortization of acquired
intangibles...................... 5% 1% 4% 1%
</TABLE>
Amortization of acquired intangibles increased $10 million and $21.9 million
for the three and six months ended July 3, 1999, respectively, as compared to
the same periods in 1998, as a result of the subsequent acquisitions of Ambit
Design Systems, Inc. (Ambit), Symbionics Group Limited, Bell Labs'
18
<PAGE>
Integrated Circuit Design Automation group of Lucent Technologies, Inc. (BLDA),
and Excellent Design, Inc. in 1998, and Design Acceleration, Inc. in the three
month period ended April 3, 1999, which were accounted for using the purchase
method of accounting.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales................ $82.9 $81.2 2% $ 163.0 $ 159.7 2%
Research and development........... $50.4 $49.4 2% $ 101.2 $ 97.1 4%
General and administrative......... $20.9 $20.0 5% $ 42.2 $ 39.5 7%
</TABLE>
EXPENSES AS A PERCENT OF TOTAL REVENUE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales................ 31% 26% 27% 26%
Research and development........... 19% 16% 17% 16%
General and administrative......... 8% 6% 7% 6%
</TABLE>
Marketing and sales expenses increased $1.7 million and $3.3 million for the
three and six month periods ended July 3, 1999, respectively, as compared to the
same periods of 1998. The three month period ended July 3, 1999 increased
primarily due to an increase in sales support costs in Japan and sales
commissions, partially offset by a decrease in salaries and travel expenses. For
the six month period ended July 3, 1999, the increase in sales and marketing
expenses of $3.3 million was primarily the result of an increase in sales
support costs in Japan, partially offset by a decrease in employee related
expenses, including salaries and bonus, and travel. Foreign currency exchange
rates negatively affected reported marketing and sales expenses by $0.9 million
and $1.4 million during the three and six month periods ended July 3, 1999,
primarily due to the strengthening of the Japanese yen in relation to the U.S.
dollar. During the three and six month periods ended July 4, 1998, foreign
currency exchange rates positively affected marketing and sales expenses by $2.1
million and $3.9 million, respectively, primarily due to the weakening of the
Japanese yen in relation to the U.S. dollar.
Cadence's expenses for research and development, prior to the reduction for
capitalization of software development costs, was $57.5 million for the three
months ended July 3, 1999 and $55.6 million for the three months ended July 4,
1998, representing 22% and 18% of total revenue for each quarter, respectively.
For the three and six month periods ended July 3, 1999 and July 4, 1998, Cadence
capitalized $7.1 million and $6.1 million and $13.5 million and $11.6 million of
software development costs, respectively, representing 12% and 11% of total
research and development expenditures made in each of those periods,
respectively. The increase in capitalized software development costs for the
three and six months ended July 3, 1999 resulted primarily from general
increases in new product development.
The increase in net research and development expenses of $1 million for the
three month period ended July 3, 1999, as compared with the same period of 1998,
was primarily attributable to costs related to the operations of Ambit and BLDA.
The increase in research and development expenses of $4.1 million for the six
month period ended July 3, 1999, as compared with the same period of 1998, was
primarily attributable to costs related to the operations of Ambit and BLDA. 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 $0.9 million and $2.7 million
for the three and six months ended July 3, 1999, respectively, as compared to
the same periods of 1998. The increase in the three month period ended July 3,
1999, as compared to the same period in 1998, was primarily attributable
19
<PAGE>
to an increase in bad debt expense of $2.9 million, partially offset by a
decrease in consulting services. The increase for the six months ended July 3,
1999, as compared to the same period in 1998, was primarily attributable to
increases in bad debt expense of $4.7 million and legal expenses of $2.2
million, partially offset by a decrease in consulting and temporary services.
Operating expenses as a percent of total revenue increased and may continue
to increase during the remainder of 1999, as compared to 1998, primarily due to
the decrease in total revenue resulting from lower demand for software products
and due to a larger portion of Cadence's software being licensed pursuant to
subscription licenses where revenue is recognized ratably over the license
period.
UNUSUAL ITEMS AND RESTRUCTURING
The following table presents information regarding unusual items for the
quarters ended July 3, 1999 and July 4, 1998:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
----------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Restructuring charges.............. $10.7 $ -- $12.9 $ 4.0
Merger costs....................... 8.4 -- 8.4 --
Asset impairment................... 3.5 -- 6.6 --
Litigation settlement.............. (3.0) -- (3.0) --
Write-off of acquired in-process
technology....................... -- -- 8.9 56.9
------- ------- ------- -------
Total unusual items.............. $19.6 $ -- $33.8 $60.9
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
RESTRUCTURING
In the three month period ended July 3, 1999, Cadence recorded $10.7 million
in restructuring charges including severance costs to terminate 49 employees and
costs to consolidate facilities. Severance costs of $8.7 million relate to
restructuring plans primarily aimed at reducing costs after Cadence merged with
Quickturn, further actions taken to restructure the Cadence services business in
Japan, and severance resulting from the resignation of Cadence's Chief Executive
Officer. Facilities consolidation charges of $2 million are the result of the
closure of 15 Quickturn facilities, including $1 million to close and exit the
excess facilities and $1 million of related leasehold improvement abandonment
costs. Closure and exit costs of $1 million include payments required under
lease contracts (less any applicable sublease income) after the properties were
abandoned, lease buyout costs, restoration costs associated with certain lease
arrangements, and costs to maintain facilities during the period after
abandonment. Asset related costs written-off consist of leasehold improvements
to facilities that were abandoned and whose estimated fair market value is zero.
Through July 1999, 80% of the sites have been vacated and the remaining sites
will be vacated primarily during the third and fourth quarter of 1999.
Noncancelable lease payments on vacated facilities will be paid out through
2003.
In the three month period ended April 3, 1999, Cadence recorded $2.2 million
in severance costs to terminate 45 employees. These actions were taken to
complete Cadence's restructuring program initiated in the fourth quarter of
1998. The restructuring plan was primarily aimed at reducing the costs of excess
personnel in its services business, and Cadence anticipates that the actions
taken in the first quarter of 1999 will save an estimated additional $0.6
million in fiscal 1999.
In each of the three month periods ended April 3, 1999 and July 3, 1999, all
termination notices and benefits were communicated to the affected employees
prior to quarter-end and all severance benefits are expected to be paid in 1999.
20
<PAGE>
Included in unusual items for the six month period ended July 4, 1998 were
restructuring charges of $4 million related to severance costs associated with
Cadence's international business operations and consolidation and cancellation
of a certain information technology support services contract.
MERGER COSTS AND IN-PROCESS TECHNOLOGY
In connection with the acquisition of Quickturn, Cadence charged to expense
$8.4 million representing merger costs in the three month period ended July 3,
1999. These merger costs represent fees for financial advisors, attorneys, and
accountants.
In January 1999, Cadence acquired Design Acceleration, Inc. (DAI). DAI is a
supplier of design verification technology used in system-on-a-chip design.
Cadence acquired all of the outstanding stock of DAI for approximately 0.6
million shares of Cadence's common stock and $2.9 million of cash. The total
purchase price was $25.7 million, and the acquisition was accounted for as a
purchase. In connection with the acquisition, net intangibles of $24.1 million
were acquired.
Upon consummation of the DAI acquisition, Cadence immediately charged to
expense $8.9 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. See
"Notes to Condensed Consolidated Financial Statements." The value was determined
by estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate includes a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process technology under development is expected to be commercially
viable in 1999. Expenditures to complete the in-process technology is expected
to total approximately $0.7 million. These estimates are subject to change,
given the uncertainties of the development process, and no assurance can be
given that deviations from these estimates will not occur. Additionally, these
projects will require expenditures for additional research and development after
they have reached a state of technological and commercial feasibility.
At the time of its acquisition by Cadence, DAI was working on several
significant research and development projects that were intended to provide a
next generation environment for design verification and analysis. These efforts
included the development of a highly automated approach for high-level test
bench creation and analysis, a waveform viewer capable of supporting analog and
mixed signal designs and a tool designed to analyze verification code coverage
at the transactional level. The nature of the efforts to complete these
in-process research and development projects relate, in varying degrees, to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed in-process
technologies meet their design specifications, which include functional,
technical, and economic performance requirements.
The net cash flows generated by the projects underway at DAI, which were
used to value the acquired in-process technology, were based on management's
estimates of revenue, cost of revenue, research and development costs, selling,
general and administrative costs, and income taxes from such projects. The
revenue projections were based on the potential market size for which these
projects are addressing, Cadence's ability to gain market acceptance for these
projects, and the life cycle of in-process technology.
Estimated total revenues from the acquired in-process product areas peak in
years 2001-2002 and decline rapidly thereafter as other new products are
expected to enter the market. In addition, a portion of the anticipated revenue
has been attributed to enhancements of the base technology under development,
and has been excluded from net cash flow calculations. Existing technology was
valued at $11.4 million. The net cash flows generated from the in-process
technology are expected to reflect earnings before interest, taxes, and
depreciation of approximately 60% for the sales generated from in-process
technology. There can be no assurance that these assumptions will prove
accurate, or that Cadence will realize the anticipated benefits of this
acquisition. See "Factors That May Affect Future Results."
The discount applied to the net cash flows to calculate the present value of
such net cash flows was based on the weighted average cost of capital (WACC).
The WACC calculation produces the average
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required rate of return of an investment in an operating enterprise, based on
various required rates of return from investments in various areas of the
enterprise. The discount rate used to discount the net cash flows from purchased
in-process technology was 22%. These discount rates are sometimes higher than
the WACC due to the inherent uncertainties in the estimates, including the
uncertainty surrounding the successful development of the acquired in-process
technology, the useful life of such technology, the profitability levels of such
technology, if any, and the uncertainty of technological advances, all of which
are unknown at this time.
As evidenced by their continued support for research and development
projects, management believes Cadence is well positioned to successfully
complete each of these projects. However, there is risk associated with the
completion of the projects and there is no assurance that each will meet with
either technological or commercial success. If these projects are not
successfully developed, Cadence's business, operating results, and financial
condition may be adversely affected in future periods. In addition, the value of
other intangible assets acquired may become impaired.
To date, DAI's results have not differed significantly from the forecast
assumptions. In addition, Cadence's research and development expenditures since
the acquisition have not differed materially from expectations. Revenue
contribution from the acquired technology falls within an acceptable range of
plans in its role in Cadence's suite of design systems and tools. The risks
associated with the research and development are still considered high and no
assurance can be made that future products will meet market expectations.
In the three months ended April 4, 1998, Cadence acquired all of the
outstanding stock of Excellent Design, Inc., a Japanese corporation (EXD) and
Symbionics Group Limited, a U.K corporation (Symbionics).
The total purchase price of EXD was $40.9 million, and the acquisition was
accounted for as a purchase. EXD provides application-specific integrated
circuit and system-on-a-chip (SOC) design and library development.
Upon consummation of the EXD acquisition, Cadence immediately charged to
expense $28.4 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. The
value was determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects, and discounting the net cash flows back to their
present value. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. At the time of the acquisition, the in-process technology under
development was expected to be commercially viable on dates ranging from the end
of 1998 through the year 2000. Expenditures to complete these projects were
expected to total approximately $7 million. These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. Additionally,
these projects will require expenditures for additional research and development
after they have reached a state of technological and commercial feasibility.
The total purchase price of Symbionics was $46.1 million, and the
acquisition was accounted for as a purchase. Symbionics provides product
development design services to leading electronic manufacturers.
Upon consummation of the Symbionics acquisition, Cadence immediately charged
to expense $28.5 million representing acquired in-process technology that had
not yet reached technological feasibility and had no alternative future use. The
value was determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects, and discounting the net cash flows back to their
present value. The discount rate includes a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. At the time of the acquisition, the in-process technology under
development was expected to be commercially viable on dates ranging from the end
of 1998 through the year 2000.
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Expenditures to complete these projects were expected to total approximately $6
million. These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur. Additionally, these projects will require expenditures
for additional research and development after they have reached a state of
technological and commercial feasibility.
To date, EXDs' and Symbionics' results have not differed significantly from
the forecast assumptions. Cadence's research and development expenditures since
the acquisitions have not differed materially from expectations. Revenue
contribution from the acquired technology falls within an acceptable range of
plans in its role in Cadence's suite of design systems and tools. The risks
associated with the research and development are still considered high, and no
assurance can be made that future products will meet market expectations.
ASSET IMPAIRMENT
In the three month period ended July 3, 1999, Cadence incurred charges
totaling $3.5 million in connection with the cancellation of an information
technology services contract with a third-party and the abandonment of
capitalized software development costs associated with Cadence products that
will no longer be sold.
In the three month period ended April 3, 1999, Cadence incurred charges
totaling $3.1 million in connection with the abandonment of certain third-party
software licenses that will no longer be used by its design services business
and capitalized software development costs associated with Cadence products that
will no longer be sold.
The impairment losses recorded for the six month period ended July 3, 1999,
were the amounts by which the carrying amounts of the intangible assets exceeded
fair market values.
LITIGATION SETTLEMENT
On June 23, 1999, Cadence and Mentor Graphics Corporation (Mentor) announced
the settlement of a patent infringement action pending in the United States
District Court for the District of Oregon. In the settlement, the parties agreed
that the District Court in Portland would enter a judgment declaring that
certain Quickturn patents are valid, enforceable, and were infringed by Mentor's
sale of SimExpress products in the United States. Mentor is permanently enjoined
from producing, marketing or selling SimExpress emulation systems in the United
States. In connection with the settlement Mentor paid Cadence $3 million.
OTHER INCOME AND INCOME TAXES
Other income decreased $3.2 million and $6.4 million in the three and six
months ended July 3, 1999, respectively, as compared to the same periods in
1998, primarily due to a decrease in interest income resulting from a lower
average balance of invested cash and short-term investments and lower interest
rates.
Cadence's estimated effective tax rate for the three and six month periods
ended July 3, 1999 was 28.5%, excluding the effect of the write-off of acquired
in-process technology of $8.9 million, which is not deductible for income tax
purposes. The effective tax rate for the three and six month periods ended July
4, 1998 was 27.1% and 27.8%, respectively, excluding the effect of the write-off
of acquired in-process technology of $56.9 million, which is not deductible for
income tax purposes.
YEAR 2000 UPDATE
The Year 2000 computer issue creates risks for Cadence, the full extent and
scope of which have not yet been fully assessed. In the event that internal
products and systems, or those products and systems
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provided by, or utilized by, third parties do not correctly recognize and
process date data information beyond the year 1999, it could have a material
adverse effect on Cadence's business, operating results and financial condition.
To address Year 2000 issues, Cadence initiated a program designed to address
the most critical Year 2000 items that would affect Cadence's products, its
worldwide business systems, and the operations of the following
functions:research and development, finance, sales, manufacturing, and human
resources. Assessment and remediation efforts regarding these critical items are
proceeding in parallel. Cadence has created a plan to work with critical
suppliers and customers to determine that such suppliers' and customers'
operations and the products and services they provide are Year 2000 capable or
to monitor their progress towards Year 2000 capability. Cadence has commenced
work on contingency plans to address potential problems with its internal
systems and with suppliers, customers, and other third parties.
In 1997, Cadence commenced a program to inventory, assess, remediate, and
test the Year 2000 capability of its products. As a result of those efforts,
Cadence believes that the most current release of Cadence's software products,
as set forth in the Year 2000 Software Compliance List (available on Cadence's
web site), are Year 2000 Compliant. Cadence uses the term "Year 2000 Compliant"
to mean that the software will not: (A) cease to perform due solely to a change
in date to or after January 1, 2000, or (B) generate incorrect or ambiguous data
or results with respect to same-century and/or multi-century formulas,
functions, date values, and date data interfaces. Cadence does not believe that
customers are using a significant amount of products that are not determined to
be Year 2000 Compliant. Cadence continues to further validate current products,
as well as new products, products acquired through acquisitions and releases
through testing and code reviews. All Cadence Year 2000 activities concerning
Cadence's products are expected to be completed by October 1999.
In 1995, Cadence also commenced a worldwide business systems replacement
project with systems that use programs primarily from SAP America, Inc. (SAP),
PeopleSoft, Inc. (PeopleSoft), and Siebel Systems, Inc. (Siebel). The new
systems are expected to make approximately 70% of Cadence's business computer
systems Year 2000 Compliant. In addition, during September 1997, Cadence
commenced an investigation of the condition of Year 2000 readiness for all of
its other internal business applications. This effort began with an inventory to
identify current business applications, an evaluation of their Year 2000
readiness status and development of plans for remediation and testing of all
discovered issues. As of August 1999, of the 60 business application systems
that had been identified, all 60 have been modified or replaced and determined
to be Year 2000 ready. Cadence has identified additional areas requiring Year
2000 assessment, remediation and testing, specifically software interfaces, and
applications used to interact with vendors, as well as applications that are
unique to the various international operations. Cadence expects that all
business critical applications will be Year 2000 Compliant by the end of the
third quarter of 1999.
In July 1998, Cadence established a cross functional Year 2000 Project Team
to identify and resolve all remaining Year 2000 readiness issues. The primary
remaining issues consist of assessing the Year 2000 impact for outside vendors,
customers, facilities, and the remaining internal business systems that are not
yet assessed as Year 2000 compliant. Project plans have been developed and
include the process of identifying and prioritizing critical suppliers and
customers at the direct interface level and communicating with them about their
plans and progress in addressing Year 2000 issues. Detailed evaluations of the
most critical third parties are well underway. It is expected that all Year 2000
project inventories will be completed by August 1999. This effort is being
followed by each business function conducting a focused level of ranking and
functional assessment of its inventory to establish the methods and actions
required to resolve any Year 2000 issues discovered. The assessment efforts are
estimated to be completed by October 1999. The remediation (modification or
replacement of existing software or systems) efforts are expected to be
completed by October 1999 and the testing phases of the Year 2000 Project Plans
are expected to take place throughout most of 1999 and estimated to be
completed, for all business critical items, during the fourth quarter of 1999.
All remaining issues (which are considered low priority or low risk to the
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business) are planned to be addressed as time permits and could continue through
the first half of 2000. Recent acquisitions of Quickturn and OrCAD are
undergoing Year 2000 program evaluations since both companies had existing Year
2000 programs in place prior to the acquisition.
Estimated Year 2000 related costs to resolve remaining readiness issues will
be approximately $13 million. The costs of implementing the SAP, PeopleSoft and
Siebel business application systems are not included in these cost estimates.
The total cost associated with required modifications to become Year 2000
compliant is not expected to have a material adverse effect on Cadence's
business, operating results, and financial condition. Cadence's current
estimates of the amount of time and costs necessary to implement and test its
systems are based on the facts and circumstances existing at this time. The
estimates were derived utilizing multiple assumptions of future events including
the continued availability of certain resources, implementation success, and
other factors. New developments may occur that could affect Cadence's estimates
for Year 2000 compliance. These developments include, but are not limited to:
(a) the availability and cost of personnel trained in this area, (b) the ability
to locate and correct all relevant computer code and equipment, and (c) the
planning and modification success needed to achieve full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000
Update contains forward-looking statements based on current expectations that
involve risks and uncertainties and should be considered in conjunction with the
following. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations of Cadence. Such failures could materially and adversely affect
Cadence's business, operating results, and financial condition. Due in large
part to the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, as well as the lack of remediation and testing for the remaining
internal business systems that are not yet assessed as Year 2000 Compliant,
Cadence is currently unable to determine whether the consequences of Year 2000
issues will have a material impact on Cadence's business, operating results, or
financial condition.
Cadence's risks associated with non-information technology systems and
embedded systems are generally limited to systems that typically involve
environmental control systems, interruptible power systems, elevator systems,
and security systems. Cadence feels confident that through its research,
testing, and corrective actions, any Year 2000 problems caused by these systems
will not have a material adverse effect on its business, operating results, or
financial condition.
The reasonably likely worst case scenario of a Year 2000 problem for all of
Cadence's material systems is that Cadence's operations could be disrupted for a
few days before the problem could be identified and remediated. The reasonably
likely worst case scenario associated with Cadence products for a Year 2000
problem is that a customer project could be delayed for a short period of time
before the problem can be identified and remediated by Cadence's support
process. Because of the small amount of software code that could be involved, it
is anticipated that problems will be remediated within 5 business days from when
the problem is recreated by Cadence's support organization. Cadence uses
contract terms to limit indirect damages that may be incurred by customers,
although no assurance can be given that such terms are enforceable.
The Year 2000 Project is expected to significantly reduce Cadence's level of
uncertainty regarding Year 2000 issues and, in particular, about the Year 2000
readiness of its material internal operations and external agents. In addition,
Cadence believes that the current Year 2000 activities surrounding Cadence's
software products and internal systems have significantly reduced the risk of
any interruption caused by any Year 2000 issues in these areas. However, because
of uncertainties with Year 2000 issues, Cadence is currently unable to determine
whether and to what extent the Year 2000 problem will harm its business,
operating results, or financial condition.
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LIQUIDITY AND CAPITAL RESOURCES
At July 3, 1999, Cadence's principal sources of liquidity consisted of $226
million of cash and short-term investments, compared to $249.5 million at
January 2, 1999, and a $355 million senior unsecured credit facility. As of July
3, 1999, Cadence had no borrowings under its revolving credit facility.
Cash provided by operating activities decreased $17.8 million to $121.2
million for the six months ended July 3, 1999, as compared to the six months
ended July 4, 1998. The decrease was primarily due to decreases in net income
and changes in adjustments to net income and in the balances of operating assets
and liabilities.
At July 3, 1999, Cadence had net working capital of $245.5 million compared
with $294.3 million at January 2, 1999. The working capital decrease was driven
primarily by decreases in receivables of $51.1 million and cash of $23.5 million
and an increase in deferred revenue of $23.4 million, partially offset by
decreases in accounts payable and accrued liabilities of $20.5 million and
income taxes payable of $13.4 million and an increase in prepaid expenses of
$15.8 million. The decrease in receivables was primarily attributable to a
decrease in product revenues while the increase in deferred revenue was due to
an increase in services and maintenance contracts. The increase in prepaid
expenses was due primarily to estimated income tax payments.
In addition to its short-term investments, Cadence's primary investing
activities consisted of purchases of property, plant, and equipment, acquired
intangibles and other assets, capitalization of software development costs,
venture capital partnership investments, and the effect of business acquisitions
and dispositions, which combined represented $106.9 million and $146.1 million
of cash used for investing activities in the six months ended July 3, 1999 and
July 4, 1998, respectively.
In connection with the consummation of the merger with Quickturn, Cadence
rescinded its stock repurchase program, with the exception of continued
systematic stock repurchases under its seasoned stock repurchase programs for
Cadence's 1997 Plan and ESPP. In August 1999, the Board of Directors approved a
10,000,000 share expansion of Cadence's existing seasoned systematic repurchase
program. Of this amount, 2,500,000 shares were authorized to meet the share
issuance requirements of Cadence's 1997 Stock Option Plan and 7,500,000 shares
were authorized for Cadence's Employee Stock Purchase Plan. Cadence is now
authorized to repurchase an aggregate of 13,000,000 shares for the 1997 Stock
Option Plan and 13,400,000 shares for the ESPP.
Since 1994, Cadence has sold put warrants and purchased call options through
private placements. See "Notes to Condensed Consolidated Financial Statements."
At July 3, 1999, Cadence has a maximum potential obligation related to put
warrants to buy back 4 million shares of its common stock at an aggregate price
of approximately $87 million. The put warrants will expire at various dates
through February 2000, and Cadence has the contractual ability to settle the
options prior to their maturity. Cadence has the ability to settle these put
warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.
Anticipated cash requirements for the remainder of 1999 include the purchase
of treasury stock through Cadence's seasoned stock repurchase programs and the
contemplated additions of property, plant, and equipment of approximately $50
million.
As part of its overall investment strategy, Cadence has committed to invest
$50 million in a venture capital partnership as a limited partner over the next
three to four years. As of July 3, 1999, Cadence had contributed approximately
$33.5 million to this partnership, which is reflected in other assets in the
accompanying condensed consolidated balance sheets, net of operating losses.
Cadence's $355 million senior unsecured credit facility is divided between a
$177.5 million three year revolving credit facility (the Three Year Facility)
and a $177.5 million 364-day revolving credit facility (the
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364-Day Facility). The 364-Day facility will expire on September 29, 1999, or at
the option of the bank group, be renewed for an additional one year period.
Cadence anticipates that current cash and short-term investment balances,
cash flows from operations, and its revolving credit facility will be sufficient
to meet its working capital requirements on a short-and long-term basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
CADENCE LACKS LONG-TERM EXPERIENCE IN ITS ELECTRONICS DESIGN AND METHODOLOGY
SERVICES BUSINESS
Cadence only recently began to focus on offering electronics design and
methodology services and therefore may not be as experienced in this business as
others. The market for these services is relatively new and rapidly evolving.
Cadence's failure to succeed in these services businesses may seriously harm
Cadence's business, operating results, and financial condition.
THE SUCCESS OF CADENCE'S ELECTRONIC DESIGN AND METHODOLOGY SERVICES
BUSINESSES DEPENDS ON MANY FACTORS THAT ARE BEYOND ITS CONTROL
In order to be successful with its electronics design and methodology
services, Cadence must overcome several factors that are beyond its control,
including the following:
- MANY SERVICE CONTRACTS GENERALLY REPRESENT LARGE AMOUNTS OF
REVENUE. Cadence's electronics design and methodology services contracts
generally represent a relatively large amount of revenue per order.
Therefore, the loss of individual orders could seriously hurt Cadence's
revenue and operating results.
- MANY SERVICE CONTRACTS ARE AT A FIXED PRICE. A substantial portion of
these service contracts are fixed-price contracts. This means that the
customer pays a fixed price that has been agreed upon ahead of time, no
matter how much time or how many resources Cadence must devote to perform
the contract. If Cadence's cost in performing the services consistently
and significantly exceeds the amount the customer has agreed to pay, it
could seriously harm Cadence's business, operating results, and financial
condition.
- CADENCE'S COST OF SERVICE PERSONNEL IS HIGH AND REDUCES GROSS
MARGIN. Gross margins represents the difference between the amount of
revenue from the sale of services and Cadence's cost of providing those
services. Cadence must pay high salaries to professional services
personnel to attract and retain them. This results in a lower gross margin
than the gross margin in Cadence's software business. In addition, the
high cost of training new services personnel or not fully utilizing these
personnel can significantly lower gross margin.
CADENCE'S FAILURE TO RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS COULD
MAKE ITS PRODUCTS UNCOMPETITIVE AND OBSOLETE
The industries in which Cadence competes experience rapid technology
developments, changes in industry standards, changes in customer requirements
and frequent new product introductions and improvements. Currently, the
electronic chip design industry is experiencing several revolutionary trends:
- Developments in manufacturing that enable production of chips with
extremely small spacing between transistors, so-called deep submicron
chips, that challenge the fundamental laws of physics and chemistry.
- The ability of manufacturers to produce chips from 12 inch silicon wafers
as opposed to today's eight inch wafers. This ability to place millions of
additional transistors on each chip requires entirely new software tools
for designers to design for these 12 inch wafers.
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- The ability to design entire electronic systems on a single chip,
so-called System-on-a-Chip or SOC, rather than a circuit board greatly
increases design complexity and requires the ability to design both
hardware and software on a single chip.
If Cadence is unable to respond quickly and successfully to these
developments and changes, Cadence may lose its competitive position and its
products or technologies may become uncompetitive or obsolete. In order to
compete successfully, Cadence must develop or acquire new products and improve
its existing products and processes on a schedule that keeps pace with
technological developments in its industries. Cadence must also be able to
support a range of changing computer software, hardware platforms and customer
preferences. There is no guarantee that Cadence will be successful in this
regard.
CADENCE'S FAILURE TO OBTAIN SOFTWARE OR OTHER INTELLECTUAL PROPERTY LICENSES
OR ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS COULD SERIOUSLY HARM ITS
BUSINESS
Cadence's success depends, in part, upon its proprietary technology. Many of
Cadence's products include software or other intellectual property licensed from
third parties, and Cadence may have to seek new or renew existing licenses for
this software and other intellectual property in the future. Cadence's design
services business also requires it to license software or other intellectual
property of third parties. Cadence's failure to obtain for its use software or
other intellectual property licenses or other intellectual property rights on
favorable terms, or the need to engage in litigation over these licenses or
rights, could seriously harm Cadence's business, operating results, and
financial condition.
Also, Cadence generally relies on patents, copyrights, trademarks and trade
secret laws to establish and protect its proprietary rights in technology and
products. Despite precautions Cadence may take to protect its intellectual
property, Cadence cannot assure you that third parties will not try to
challenge, invalidate, or circumvent these patents. Cadence also cannot assure
you that the rights granted under its patents will provide it with any
competitive advantages, patents will be issued on any of its pending
applications, or future patents will be sufficiently broad to protect Cadence's
technology. Furthermore, the laws of foreign countries may not protect Cadence's
proprietary rights in those countries to the same extent as U.S. law protects
these rights in the United States.
Cadence cannot assure you that its reliance on licenses from or to third
parties, or patent, copyright, trademark, and trade secret protection, will be
enough to be successful and profitable in the industries in which Cadence
competes.
INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST CADENCE COULD SERIOUSLY
HARM ITS BUSINESS
There are numerous patents in the electronic design automation software
industry and new patents are being issued at a rapid rate. It is not always
economically practicable to determine in advance whether a product or any of its
components infringes the patent rights of others. As a result, from time to
time, Cadence may be forced to respond to or prosecute intellectual property
infringement claims to protect its rights or defend a customer's rights. These
claims, regardless of merit, could consume valuable management time, result in
costly litigation or cause product shipment delays, all of which could seriously
harm Cadence's business, operating results, and financial condition. In settling
these claims, Cadence may be required to enter into royalty or licensing
agreements with the third parties claiming infringement. These royalty or
licensing agreements, if available, may not have terms acceptable to Cadence.
Being forced to enter into a license agreement with unfavorable terms could
seriously harm Cadence's business, operating results, and financial condition.
CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED
NUMBER OF SUPPLIERS
Cadence depends on several suppliers for certain key components and board
assemblies used in its hardware-based emulation products. Cadence's inability to
develop alternative sources or to obtain sufficient quantities of these
components or board assemblies could result in delays or deductions in
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product shipments. In particular, Cadence currently relies on Xilinx, Inc. for
the supply of key integrated circuits and on IBM for the hardware components for
both Cadence's CoBALT-TM- product and Mercury Design Verification System-TM-.
With regard to the Mercury Design Verification System-TM-, IBM recently replaced
Cadence's previous supplier. IBM is currently providing the assembly services
for several Mercury components on an order-by-order basis. Cadence is
negotiating with IBM to establish an overall contract, but these negotiations
may not be successfully completed. Other disruptions in supply may also occur.
If there were a reduction or interruption, Cadence's results of operations would
be seriously harmed. Even if Cadence can eventually obtain these components from
alternative sources, a significant amount of time and resources would be
required to redesign Cadence's products to accommodate the alternative supplier.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS COULD HURT CADENCE'S
BUSINESS AND THE MARKET PRICE OF ITS STOCK
Cadence has experienced, and may continue to experience, varied quarterly
operating results. Various factors affect Cadence's quarterly operating results
and some of them are not within Cadence's control, including the mix of products
and services sold, the mix of licenses used to sell products and the timing of
significant orders for its software products by customers. Quarterly operating
results are affected by the mix of products sold because there are significant
differences in margins from the sale of hardware and software products and
products and services. For example, in the past Cadence has realized gross
margins on software product sales of approximately 87% but realizes gross
margins of approximately 73% on hardware product sales and 35% on its
performance of services. In addition, Cadence's quarterly operating results are
affected by the mix of licenses entered into in connection with the sale of
software products. Cadence has three basic licensing models: perpetual,
fixed-term and subscription. Perpetual and fixed-term licenses recognize a
larger portion of the revenue at the beginning of the license period and
subscription licenses recognize revenue ratably over each quarter of the term of
the license. If Cadence customers purchase more software products pursuant to a
subscription agreement in any one quarter, the operating results for that
quarter may be lower that that of comparable quarters in which perpetual and
fixed-term licenses were used for more software products transactions. Finally,
Cadence's quarterly operating results are affected by the timing of significant
orders for its software products because a significant number of contracts for
software products are in excess of $5 million. The failure to close a contract
for the sale of one or more orders of Cadence's software products could
seriously hurt its quarterly operating results.
Cadence's hardware products typically have a lengthy sales cycle, during
which Cadence may expend substantial funds and management effort without any
assurance that a sale will result. Sales of Cadence's hardware products depend,
in significant part, upon the decision of the prospective customer to commence a
project for the design and development of complex computer chips and systems.
Such projects often require significant amounts of time and commitments of
capital. Cadence hardware sales may be delayed if customers delay commencement
of projects. Lengthy hardware sales cycles subject Cadence to a number of
significant risks over which Cadence has little or no control, including
inventory obsolescence and fluctuations in quarterly operating results.
In addition, Cadence bases its expense budgets partially on its expectations
of future revenue. However, it is difficult to predict revenue levels or growth.
Revenue levels that are below Cadence's expectations could seriously hurt
Cadence's business, operating results, and financial condition. If revenue or
operating results fall short of the levels expected by public market analysts
and investors, the trading price of Cadence common stock could decline
dramatically. Also, because of the large order size and its customers' buying
patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or
other failures to meet market expectations until late in a fiscal quarter, which
could cause even more immediate and serious harm to the trading price of Cadence
common stock.
Because Cadence's focus on providing services is relatively recent, it
believes that quarter-to-quarter comparisons of its results of operations may
not be meaningful. Therefore, stockholders should not view Cadence's historical
results of operations as reliable indicators of its future performance.
29
<PAGE>
CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY
INTEGRATE THEM OR THE COMPANIES IT RECENTLY ACQUIRED
Cadence has acquired other businesses before and may do so again. While
Cadence expects to analyze carefully all potential transactions before
committing to them, Cadence cannot assure you that any transaction that is
completed will result in long-term benefits to Cadence or its stockholders or
that Cadence's management will be able to manage the acquired businesses
effectively. In addition, growth through acquisition involves a number of risks.
If any of the following events occurs after Cadence acquires another business,
it could seriously harm Cadence's business, operating results, and financial
condition:
- Difficulties in combining previously separate businesses into a single
unit;
- The substantial diversion of management's attention from day-to-day
business when negotiating these transactions and later integrating an
acquired business;
- The discovery after the acquisition has been completed of liabilities
assumed from the acquired business;
- The failure to realize anticipated benefits such as cost savings and
revenue enhancements;
- Retention of key personnel;
- Difficulties related to assimilating the products of an acquired business.
For example, in distribution, engineering, and customer support areas; and
- The failure to identify or correct a material Year 2000 problem of an
acquired business.
CADENCE'S INTERNATIONAL OPERATIONS MAY SERIOUSLY HARM ITS FINANCIAL
CONDITION BECAUSE OF SEVERAL WEAK FOREIGN ECONOMIES AND THE EFFECT OF
FOREIGN EXCHANGE RATE FLUCTUATIONS
Cadence has operations outside the United States. Cadence's revenue from
international operations as a percentage of total revenue was approximately 53%
and 48% for the six month periods ended July 3, 1999, and July 4, 1998,
respectively. Cadence also transacts business in various foreign currencies.
Recent economic uncertainty and the weakening of foreign currencies in the
Asia-Pacific region has had, and may continue to have, a seriously harmful
effect on Cadence's revenue and operating results.
Fluctuations in the rate of exchange between U.S. Dollars and the currencies
of countries other than the U.S. in which Cadence conducts business could
seriously harm its business, operating results, and financial condition. For
example, if there is an increase in the rate at which a foreign currency
exchanges into U.S. Dollars, it will take more of the foreign currency to equal
a specified amount of U.S. Dollars than before the rate increase. If Cadence
prices its products and services in the foreign currency, it will receive less
in U.S. Dollars than it did before the rate increase went into effect. If
Cadence prices its products and services in U.S. Dollars, an increase in the
exchange rate will result in an increase in the price for Cadence's products and
services compared to those products of its competitors that are priced in local
currency. This could result in Cadence's prices being uncompetitive in markets
where business is transacted in the local currency. Cadence's international
operations may also be subject to other risks, including:
- The adoption and expansion of government trade restrictions;
- Volatile foreign exchange rates and currency conversion risks;
- Limitations on repatriation of earnings;
- Reduced protection of intellectual property rights in some countries;
- Recessions in foreign economies;
- Longer receivables collection periods and greater difficulty in collecting
accounts receivable;
30
<PAGE>
- Difficulties in managing foreign operations;
- Political and economic instability;
- Unexpected changes in regulatory requirements;
- Tariffs and other trade barriers; and
- U.S. government licensing requirements for export as licenses can be
difficult to obtain.
Cadence expects that revenue from its international operations will continue
to account for a significant portion of its total revenue.
Exposure to foreign currency transaction risk can arise when transactions
are conducted in a currency different from the functional currency of a Cadence
subsidiary. A subsidiary's functional currency is the currency in which it
primarily conducts its operations, including product pricing, expenses and
borrowings. Cadence uses foreign currency forward exchange contracts, as part of
its foreign currency hedging program, to help protect against currency exchange
risks. These contracts allow Cadence to buy or sell specific foreign currencies
at specific prices on specific dates. Under this program, increases or decreases
in the value of Cadence's foreign currency transactions are partially offset by
gains and losses on these forward exchange contracts. Although Cadence attempts
to reduce the impact of foreign currency fluctuations, significant exchange rate
movements may hurt Cadence's results of operations as expressed in U.S. Dollars.
Foreign currency exchange risk occurs for some of Cadence's foreign
operations whose functional currency is the local currency. The primary effect
of foreign currency translation on Cadence's results of operations is a
reduction in revenue from a strengthening U.S. Dollar, offset by a smaller
reduction in expenses. Exchange rate gains and losses on the translation into
U.S. Dollars of amounts denominated in foreign currencies are included as a
separate component of stockholders' equity.
CADENCE'S INABILITY TO DEAL EFFECTIVELY WITH THE CONVERSION TO THE EURO MAY
NEGATIVELY IMPACT ITS MARKETING AND PRICING STRATEGIES
On January 1, 1999, 11 member countries of the European Union adopted the
Euro as their common legal currency and established fixed conversion rates
between their sovereign currencies and the Euro. Transactions can be made in
either the sovereign currencies or the Euro until January 1, 2002, when the Euro
must be used exclusively. Currently, only electronic transactions may be
conducted using the Euro. Cadence believes that its internal systems and
financial institution vendors are capable of handling the Euro conversion and is
in the process of examining current marketing and pricing policies and
strategies that may be affected by conversion to the Euro. The cost of this
effort is not expected to materially hurt Cadence's results of operations or
financial condition. However, Cadence cannot assure you that all issues related
to the Euro conversion have been identified and that any additional issues would
not materially hurt Cadence's results of operations or financial condition. For
example, the conversion to the Euro may have competitive implications on
Cadence's pricing and marketing strategies and Cadence may be at risk to the
extent its principal European suppliers and customers are unable to deal
effectively with the impact of the Euro conversion. Cadence has not yet
completed its evaluation of the impact of the Euro conversion on its functional
currency designations.
FAILURE TO OBTAIN EXPORT LICENSES COULD HARM CADENCE'S BUSINESS
Cadence must comply with United States Department of Commerce regulations in
shipping its software products and other technologies outside the United States.
Although Cadence has not had any significant difficulty complying with these
regulations so far, any significant future difficulty in complying could harm
Cadence's business, operating results, and financial condition.
31
<PAGE>
CADENCE'S INABILITY TO COMPETE IN ITS INDUSTRIES COULD SERIOUSLY HARM ITS
BUSINESS
The electronic design automation software and the commercial electronic
design and methodology services industries are highly competitive. If Cadence is
unable to compete successfully in these industries, it could seriously harm
Cadence's business, operating results, and financial condition. To compete in
these industries, Cadence must identify and develop innovative and cost
competitive electronic design automation software products and market them in a
timely manner. It must also gain industry acceptance for its professional
services and offer better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of other design
companies and the internal design departments of electronics manufacturers.
Cadence cannot assure you that it will be able to compete successfully in these
industries. Factors which could affect Cadence's ability to succeed include:
- The development of competitive software products and design and
methodology services could result in a shift of customer preferences away
from Cadence's products and services and cause a significant decrease in
revenue;
- The electronics design and methodology services industries are relatively
new industries and electronics design companies and manufacturers are only
beginning to purchase these services from outside vendors; and
- There are a significant number of current and potential competitors in the
electronic design automation software industry and the cost of entry is
low.
In the electronic design automation software industry, Cadence currently
competes with a number of large companies, including Avant! Corporation, Mentor
Graphics Corporation, Synopsys, Inc. and Zuken-Redac, and numerous small
companies. Cadence also competes with manufacturers of electronic devices that
have developed or have the capability to develop their own electronic design
automation software. Many manufacturers of electronic devices may be reluctant
to purchase services from independent vendors like Cadence because they wish to
promote their own internal design departments. In the electronics design and
methodology services industries, Cadence competes with numerous electronic
design and consulting companies as well as with the internal design capabilities
of electronics manufacturers. Other electronics companies and management
consulting firms continue to enter the electronic design and consulting
industry.
CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY
HARM ITS BUSINESS
The competition for highly skilled employees is intense. Cadence's business
depends on 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. Cadence's failure to attract, train,
motivate, and retain such employees would impair its development of new
products, its ability to provide design and methodology services and the
management of its businesses. This would seriously harm Cadence's business,
operating results, and financial condition.
"YEAR 2000 COMPUTER PROBLEMS" COULD INTERRUPT CADENCE'S BUSINESS OPERATIONS.
The so-called Year 2000 problem occurs when computer programs and embedded
microprocessors fail to process date information correctly beginning in 1999. If
Cadence experiences a Year 2000 problem, it could result in an interruption in,
or a failure of, normal business operations. This could seriously harm Cadence's
business, operating results, and financial condition.
While Cadence has established a Year 2000 project team to identify and
resolve its potential Year 2000 issues, Cadence has not fully assessed the risks
the Year 2000 problem poses to its business. Cadence believes that its own
internally-developed software products generally will not have Year 2000
problems. However, Cadence is uncertain as to the Year 2000 readiness of
third-party suppliers and customers, and products acquired through recent
acquisitions. Because of these uncertainties, Cadence is currently unable
32
<PAGE>
to determine whether and to what extent the Year 2000 problem will harm its
business, operating results, or financial condition.
ANTI-TAKEOVER DEFENSES IN CADENCE'S CHARTER, BY LAWS, AND UNDER DELAWARE LAW
COULD PREVENT AN ACQUISITION OF CADENCE OR LIMIT THE PRICE THAT INVESTORS
MIGHT BE WILLING TO PAY FOR CADENCE COMMON STOCK
Provisions of the Delaware General Corporation Law that apply to Cadence and
its Certificate of Incorporation could make it difficult for another company to
acquire control of Cadence. For example:
- Section 203 of the Delaware General Corporation Law generally prohibits a
Delaware corporation from engaging in any business combination with a
person owning 15% or more of the voting stock of the corporation, or who
is affiliated with the corporation and owned 15% or more of its voting
stock at any time within 3 years prior to the proposed business
combination, for a period of three years from the date the person became a
15% owner, unless specified conditions are met.
- Cadence's Certificate of Incorporation allows the Cadence Board of
Directors to issue at any time and without stockholder approval, preferred
stock with such terms as it may determine. No shares of Cadence preferred
stock are currently outstanding. However, the rights of holders of any
Cadence preferred stock that may be issued in the future may be superior
to the rights of holders of Cadence common stock.
- Cadence has a rights plan, commonly known as a "poison pill," which would
make it difficult for someone to acquire Cadence without the approval of
Cadence's Board of Directors.
All of these factors could limit the price that certain investors would be
willing to pay for shares of Cadence common stock and could delay, prevent or
allow the Board of Directors of Cadence to resist an acquisition of Cadence,
even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Cadence's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt obligations.
Cadence places its investments with high quality credit issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in its
policy, Cadence's first priority is to reduce the risk of principal loss.
Consequently, Cadence seeks to preserve its invested funds by limiting default
risk, market risk and reinvestment risk. Cadence mitigates default risk by
investing in only high quality credit 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.
In October 1998, Cadence entered into a senior unsecured credit facility
(the 1998 Facility) with a syndicate of banks that allows Cadence to borrow up
to $355 million. The 1998 Facility is divided between a $177.5 million three
year revolving credit facility (the Three Year Facility) and a $177.5 million
364-day revolving credit facility convertible to a three year term loan (the
364-Day Facility). The Three Year Facility expires September 29, 2001. The
364-Day Facility will either expire on September 29, 1999 and be converted to a
three year term loan with a maturity date of September 29, 2002 or, at the
option of the bank group, be renewed for an additional one year period. Cadence
has the option to pay interest based on LIBOR plus a spread of between 0.50% and
1.00%, based on a pricing grid tied to a financial covenant, or the higher of
the Federal Funds Rate plus 0.50% or the prime rate. As a result, Cadence's
interest rate
33
<PAGE>
expenses associated with this borrowing will vary with market rates. In
addition, commitment fees are payable on the unutilized portions of the Three
Year Facility at rates between 0.18% and 0.30% based on a pricing grid tied to a
financial covenant and on the unutilized portion of the 364-Day Facility at a
fixed rate of 0.10%. The 1998 Facility contains certain financial and other
covenants.
The table below presents the carrying value and related weighted average
interest rates for Cadence's investment portfolio and its long-term debt
obligations. The carrying value approximates fair value at July 3, 1999. All
investments mature in one year or less.
<TABLE>
<CAPTION>
CARRYING AVERAGE
VALUE INTEREST RATE
----------- ---------------
(IN MILLIONS, EXCEPT FOR
AVERAGE INTEREST RATES)
<S> <C> <C>
Investment Securities:
Cash equivalents--fixed rate....................................... $ 35.0 5.13%
Short-term investments--fixed rate................................. 33.0 6.08%
-----------
Total investment securities...................................... 68.0 5.59%
Cash equivalents--variable rate.................................... 103.8 4.61%
-----------
Total interest bearing instruments............................... $ 171.8 5.00%
-----------
-----------
Debt:
Revolving credit facility.......................................... $ --
-----------
-----------
</TABLE>
INTEREST RATE SWAP RISK
Cadence entered into a 4.8% fixed interest rate-swap in connection with its
accounts receivable financing program to modify the interest rate
characteristics of the receivables sold to a financing institution on a
non-recourse basis. At July 3, 1999, the notional amount was $21.7 million which
will be amortized in quarterly installments of $2.2 million through October
2001. The estimated fair value at July 3, 1999 was immaterial.
FOREIGN CURRENCY RISK
Cadence transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Cadence 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 Cadence's foreign currency transactions are partially
offset by gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. Cadence 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, net, 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, net. Cadence'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 July 3, 1999 about Cadence's
material forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts
34
<PAGE>
(at contract exchange rates) and the weighted average contractual foreign
currency exchange rates. These forward contracts mature prior to July 14, 1999.
<TABLE>
<CAPTION>
NOTIONAL AVERAGE
AMOUNT CONTRACT RATE
----------- -------------
(IN MILLIONS, EXCEPT FOR
AVERAGE CONTRACT RATES)
<S> <C> <C>
Forward Contracts:
Japanese yen....................................................... $ 54.4 118.93
Euro............................................................... $ (26.3) 1.08
British pound sterling............................................. $ 26.3 1.60
Canadian dollars................................................... $ (5.0) 1.48
Swedish krona...................................................... $ (3.1) 8.23
Hong Kong dollars.................................................. $ 2.0 7.76
</TABLE>
The unrealized gain (loss) on the outstanding forward contracts at July 3,
1999 was immaterial to Cadence's condensed consolidated financial statements.
Due to the short-term nature of the forward contracts, the fair value at July 3,
1999 was negligible. The realized gain (loss) on these contracts as they matured
was not material to the consolidated operations of Cadence.
EQUITY PRICE RISK
As part of its authorized repurchase program, Cadence has sold put warrants
through private placements. Additionally, Cadence has purchased call options
that entitle Cadence to buy on a specified day one share of common stock at a
specified price to satisfy anticipated stock repurchase requirements under
Cadence's seasoned systematic repurchase programs.
Cadence repurchases shares of its common stock under stock repurchase
programs in order to make sure it has enough shares for issuance under its
Employee Stock Purchase Plan (ESPP), and its 1997 Stock Option Plan (the 1997
Plan). As part of these repurchase programs, Cadence has purchased and will
purchase call options or has sold and will sell put warrants. This may result in
sales of a large number of shares and consequent decline in the market price of
Cadence common stock.
- Call options allow Cadence to buy shares of its stock on a specified day
at a specified price. If the market price of the stock is greater than the
exercise price of a call option, Cadence will typically exercise the
option and receive shares of stock. If the market price of the stock is
less than the exercise price of a call option, Cadence typically will not
exercise the option.
- Call option issuers may accumulate a substantial number of shares of
Cadence common stock in anticipation of Cadence's exercising its call
option and may dispose of these shares if and when Cadence fails to
exercise its call option. This could cause the market price of Cadence
common stock to fall.
- Put warrants allow the holder to sell to Cadence shares of Cadence common
stock on a specified day at a specified price. Cadence has the right to
settle the put warrants with shares of Cadence common stock valued at the
difference between the exercise price and the fair value of the stock at
the date of exercise.
- Depending on the exercise price of the put warrants and the market price
of the stock at the time of exercise, settlement of the put warrants with
stock could cause Cadence to issue a substantial number of shares to the
holder of the put warrant. The holder may sell these shares in the market,
which could cause the price of Cadence common stock to fall.
- Put warrant holders may accumulate a substantial number of shares of stock
in anticipation of exercising their put warrants and may dispose of these
shares if and when they exercise their put
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<PAGE>
warrants and Cadence issues shares in settlement of their put warrants.
This could also cause the market price of Cadence common stock to fall.
The table below provides information at July 3, 1999 about Cadence'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 2000 and Cadence has the contractual ability to
settle the options prior to their maturity.
<TABLE>
<CAPTION>
1999 2000 ESTIMATED
MATURITY MATURITY FAIR VALUE
----------- ----------- -----------
(SHARES AND CONTRACT
AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Put Warrants:
Shares..................................................... 2.4 1.6
Weighted average strike price.............................. $ 27.11 $ 13.08
Contract amount............................................ $ 65.9 $ 21.1 $ 36.4
Call Options:
Shares..................................................... 1.7 1.3
Weighted average strike price.............................. $ 26.87 $ 13.33
Contract amount............................................ $ 45.7 $ 16.6 $ 4.2
</TABLE>
36
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time Cadence is involved in various disputes and litigation
matters that arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements and employee relations matters.
Cadence filed a complaint in the United States District Court for the
Northern District of California (the District Court) on December 6, 1995 against
Avant! Corporation (Avant!) and certain of its employees for misappropriation of
trade secrets, copyright infringement, conspiracy and other illegal acts.
On January 16, 1996, Avant! filed various counterclaims against Cadence and
Joseph B. Costello, Cadence's former President and Chief Executive Officer
(Costello), and with leave of the court, on January 29, 1998, filed a second
amended counterclaim. The second amended counterclaim alleges, INTER ALIA, that
Cadence and Costello had cooperated with the Santa Clara County, California,
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 Cadence insiders engaged in illegal
insider trading with respect to Avant!'s stock. Cadence and Costello 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 Cadence's complaint and stayed the
counterclaim pending resolution of Cadence's complaint. The counterclaim remains
stayed.
On April 19, 1996, Cadence 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 a preliminary 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 CERTIORARI to the United
States Supreme Court, requesting a review of the Ninth Circuit Court's decision.
The Supreme Court denied that petition without comment. On July 9, 1998, Cadence
filed further motions to enjoin Avant!'s Aquarius product line on copyright and
trade secret grounds. On December 7, 1998, the District Court issued a further
preliminary injunction, which enjoined Avant! from selling its Aquarius product
line. Cadence posted a $10 million bond in connection with the issuance of the
preliminary injunction. On July 30, 1999, the Ninth Circuit Court of Appeal
affirmed the preliminary injunction.
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 related criminal proceedings pending against Avant! and several of its
executives. The District Court's December 7, 1998 order lifted that stay in
part, allowing the matter to proceed to trial as to certain allegations against
Avant! only, but not with respect to certain matters involving the Avant!
executives and other individuals against whom criminal charges are pending.
Cadence intends to pursue its claims vigorously.
On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the United States District Court for
the Northern District of California, entitled SPETT V. CADENCE DESIGN SYSTEMS,
ET AL, civil action no. C 99-2082. The action was brought on behalf of a class
of shareholders who purchased Cadence common stock between November 4, 1998 and
April 20, 1999, and
37
<PAGE>
alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. The lawsuit arises out of Cadence's announcement of its first quarter 1999
financial results. Management intends to vigorously defend the claims.
In February 1998, Aptix Corporation (Aptix) and Meta Systems, Inc. (Meta)
filed a lawsuit against Quickturn Design Systems, Inc. (Quickturn) in the U.S.
District Court, the Northern District of California, alleging infringement of a
U.S. patent owned by Aptix and licensed to Meta. Quickturn named Mentor Graphics
Corporation (Mentor) as a party to this suit and filed a counter claim
requesting the Court to declare the Aptix patent to be unenforceable based on
inequitable conduct during the prosecution of the patent. The case is set for
trial in mid-2000.
On July 21, 1999, Mentor filed suit against Quickturn in the United States
District Court, District of Delaware, alleging patent infringement involving
Quickturn's Mercury hardware emulation systems. The complaint seeks a permanent
injunction and unspecified damages. Cadence intends to vigorously defend the
claims. On July 22, 1999, Quickturn and Cadence filed a complaint against Mentor
and Meta asking for declaratory relief in the United States District Court for
the Northern District of California as well as a Notice of Related Case asking
that the action brought by Mentor be consolidated with the above-described
action involving many of the same questions of fact and law, APTIX CORPORATION
AND META SYSTEMS, INC. V. QUICKTURN DESIGN SYSTEMS, which is pending in the
United States District Court, San Francisco Division.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
Cadence's business, operating results, or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held July 1, 1999, the stockholders of
the Company approved the following matters:
1. A proposal to elect eight (8) directors of the Company to serve for
the ensuing year and until their successors are elected or until such
director's earlier resignation or removal.
<TABLE>
<CAPTION>
NOMINEE IN FAVOR WITHHELD
- ------------------------------------------------------------------ ------------- ----------
<S> <C> <C>
Carol A. Bartz.................................................... 192,645,375 1,710,951
H. Raymond Bingham................................................ 192,594,743 1,761,583
Dr. Leonard Y. W. Liu............................................. 192,570,710 1,785,616
Donald L. Lucas................................................... 192,543,283 1,813,043
Dr. Alberto Sangiovanni-Vincentelli............................... 192,612,414 1,743,912
George M. Scalise................................................. 192,621,621 1,734,705
Dr. John B. Shoven................................................ 192,631,354 1,724,972
Roger S. Siboni................................................... 192,421,802 1,934,524
</TABLE>
2. A proposal for the approval of an amendment to the 1995 Directors
Stock Option Plan (the Directors Plan) to increase the authorized shares of
Cadence Common Stock that can be issued under the Directors Plan by 200,000
shares in each of the next three calendar years (i.e., 2000, 2001 and 2002)
and to amend the definition of "change in control" and clarify the treatment
of options upon a
38
<PAGE>
change in control was approved by a vote of 157,125,427 for, 37,002,859
opposed, and 228,040 withheld.
3. A proposal for the approval of an amendment to the Employee Stock
Purchase Plan (the ESPP), as amended, to increase the number of shares of
common stock authorized for issuance under the ESPP from 17,500,000 to
23,500,000, an increase of 6,000,000 shares, was approved by a vote of
186,568,325 for, 7,621,463 opposed, and 166,538 withheld.
4. A proposal for the ratification of the selection of Arthur Andersen
LLP as independent public accountants for the fiscal year ending January 1,
2000 was approved by a vote of 193,082,230 for, 1,153,796 opposed, and
120,300 withheld.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ------------------------------------------------------------------------------------
<C> <S>
10.48 Executive Termination and Release Agreement dated May 24, 1999, between Cadence and
John R. Harding
10.49 The Registrant's 1995 Directors Stock Option Plan, as amended
May 5, 1999
10.50 The Registrant's 1990 Employee Stock Purchase Plan, as amended May 5, 1999
27.01 Financial data schedule for the period ended July 3, 1999.
</TABLE>
(b) Reports on Form 8-K:
On May 26, 1999 and amended on June 15, 1999, the Registrant filed a Current
Report on Form 8-K reporting the completion of Cadence's agreement to
acquire Quickturn Design Systems, Inc., a Delaware corporation.
On December 10, 1998 and amended on December 22, 1998 and January 6, 1999
and May 20, 1999, the Registrant filed a Current Report on Form 8-K
reporting Cadence's agreement to acquire Quickturn Design Systems, Inc., a
Delaware corporation.
On May 6, 1999, the Registrant filed a Current Report on Form 8-K reporting
Cadence's press release announcing its first quarter 1999 results and
announcing the appointment of H. Raymond Bingham to the position of
President and Chief Executive Officer.
39
<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: August 16, 1999 By: /s/ H. RAYMOND BINGHAM
----------------------------------------
H. RAYMOND BINGHAM
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: August 16, 1999 By: /s/ WILLIAM PORTER
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WILLIAM PORTER
SENIOR VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
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This offer provided on May 24, 1999 This offer is valid until June 15, 1999
EXECUTIVE TERMINATION AND RELEASE AGREEMENT
This Agreement is entered into between John R. Harding ("Executive")
and Cadence Design Systems, Inc., a Delaware corporation (the "Company"), as
of this __ day of ______, 1999.
WHEREAS, the Executive and the Company desire to reach an agreement
concerning the circumstances under which the Executive's employment
relationship with the Company will terminate; and
WHEREAS, the Company desires to be relieved of any and all duties,
obligations, and/or liabilities, if any exist, with respect to Executive,
except for those obligations referred to herein;
NOW THEREFORE, in consideration of the foregoing recitals, the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the Executive and the
Company agree as follows:
1. Executive will no longer serve as President and Chief Executive
Officer of the Company after April 26, 1999. Executive's position as an
officer of the Company and member of the Board of Directors (the "Board")
terminated on the same day.
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2. Executive shall remain a full-time employee with the Company
until May 31, 1999. During this time, Executive will report to and cooperate
with the Board, and shall continue to receive his current base salary, and
shall remain eligible for standard employee benefits, including, but not
limited to, the continued vesting of his stock options and participation in
the Non-Qualified Deferred Compensation Plan ("NQDC"), and the medical and
dental insurance coverage which he elected and pays for under the Cadence
Composition plan.
3. Executive shall, by May 31, 1999, return to the Senior Vice
President of Human Services for the Company, all equipment provided to him by
the Company while he served as a full-time employee, including but not
limited to, any computer hardware or software, facsimile machines, printers,
and phones.
4. PART-TIME EMPLOYMENT PERIOD
4.1 Beginning on June 1, 1999, Executive shall convert from a
full-time to a part-time employee. The Executive will
continue to be employed by the Company as a part-time
employee through May 31, 2000, or until the Executive
resigns his employment in writing, or the Company
terminates Executive's employment for cause (as defined
below), whichever occurs first ("Employment Period"). The
Company shall not terminate Executive's employment during
the Employment Period, except for cause, which is defined
as: (1) Executive's material and willful breach of this
Agreement after written notice of such breach and a
reasonable opportunity to cure such breach; or (2)
Executive's material and willful breach of the
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Employee Invention and Confidential Information
Agreement, which Executive signed on October 28, 1996 (a
copy of which is attached hereto), after written notice
of such breach and a reasonable opportunity to cure such
breach. Unless terminated for cause (which results in
immediate termination), Executive's employment will
terminate at the conclusion of the Employment Period
(the "Termination Date"). Upon termination of
employment, vesting of Executive's stock options shall
cease (except as provided in paragraph 5(b) herein), as
will the company's obligation to provide salary to
Executive and to make COBRA payments on his behalf.
Executive's funds, invested in the NQDC, if any, shall
be treated in accordance with the NQDC.
4.2 During the Employment Period, Executive shall be
compensated at a rate of $2500.00 per month, subject to
standard withholdings and deductions. Such compensation
shall be paid on the Company's regular payroll schedule.
4.3 During the Employment Period, Executive shall report to the
Chairman of the Board, and shall provide such consultation,
advice and assistance as is reasonably requested of him to
ensure a smooth transition of his responsibilities, for up
to a maximum of twenty (20) hours per month. Executive will
be free to accept other employment or consulting
engagements during this period, so long as such employment
or consulting is not inconsistent with
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Executive's obligations under the Invention and
Confidential Information Agreement. The Company will not
require Executive to render services to the Company or
its Board at a time or in a manner which would interfere
with his ability to engage in such employment or
consulting opportunities.
4.4 As a part-time employee, Executive will continue to
receive, if he so elects, the same medical and dental
insurance coverage as is currently in effect for Executive,
at the Company's expense, but will not accrue vacation or
be eligible for any other Company benefits, including but
not limited to, the Employee Stock Purchase Plan, 401(k),
life, and disability insurance, dependent life, and
participation in the NQDC. All such other benefits will
terminate on May 31, 1999, except that Executive's stock
options provided to him under grant numbers 008395, 008901,
009304 and 010775, shall continue to vest during the
Employment Period in accordance with the plans under which
the options were granted. Employee's performance-based
stock options (i.e., option grant numbers 010221 and
010779) shall cease vesting on May 31, 1999. After the
Termination Date, Executive may elect to continue to
receive, at his own expense, the same medical and dental
insurance coverage which the Executive previously elected
for the remainder of the COBRA period.
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4.5 Executive shall fully cooperate with the Company in all
matters relating to the winding up of his pending work on
behalf of the company.
5. EXECUTIVE SEVERANCE AGREEMENT
(a) The parties intend and agree to modify the cash payment
provision of paragraph 4 of the Employment Agreement between Executive
and the Company, dated October 19, 1997 (the "First Agreement") as
follows: Eight days after the execution of this Agreement, Executive
shall receive a lump sum payment in the amount of [$2.1] million, less
taxes and deductions required by law to be withheld. Such payment shall
fully satisfy the company's obligation with respect to the payment of
cash (salary and bonus) detailed in paragraph 4 of the First Agreement.
(b) It is the parties' intent not to modify in any way the stock
acceleration provision in paragraph 4 of the First Agreement.
Accordingly, upon the termination of Executive's employment at the end of
the Employment Period, for any reason, all of the unvested options held
by Executive on the date of such termination that would have vested over
the succeeding twenty-four month period shall immediately vest and become
exercisable in full. However, should a Change in Control (as defined in
the First Agreement) occur during the Employment Period, the stock
acceleration provision of paragraph 4 of the First Agreement shall not
apply. Instead, and in accordance with the First Agreement, all of
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Executive's unvested options shall immediately vest in accordance with
paragraph 5.2 (b) of the First Agreement. In either case, the options
shall remain exercisable for thirty (30) days following Executive's
Termination Date. The acceleration of vesting does not apply to
performance-based stock option grants, specifically, grant numbers 010221
and 010779.
6. GENERAL RELEASE BY EXECUTIVE
(a) The Executive agrees that the payments and benefits provided
herein are in full satisfaction of all obligations of the Company to the
Executive arising out of or in connection with the Executive's employment
and termination of his employment including, without limitation, all
salary, bonuses, accrued vacation, sick pay, and reimbursement of
expenses and two weeks salary as standard termination notice period, and
that the payments and benefits provided herein constitute consideration
for the covenants and releases of the Executive as set forth herein.
The Executive acknowledges that the Executive has no claims
against the Company based on the Executive's employment by the Company or
the Executive's separation therefrom and irrevocably, fully and finally
releases the Company, its subsidiaries and its affiliates, directors,
officers, agents and employees ("Releasees") from all causes of action,
claims, suits, demands or other obligations or liabilities, whether known
or unknown, that Executive ever had, or now has, including but not
limited to, any claims that may be alleged to arise out of or in
connection
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with the Executive's employment with the Company, or separation
therefrom, including, not by way of limitation, any claims for wages,
bonuses, or expense reimbursement, and any claims that any terms of
the Executive's employment with the Company or any circumstances of
the Executive's separation were wrongful, in breach of any obligation
of the Company or in violation of any rights, contractual, statutory,
in tort or otherwise, of the Executive, including but not limited to
rights arising under Title VII of the Civil Rights Act of 1964, as
amended, the California Fair Employment and Housing Act, as amended,
the California Labor Code, the Age Discrimination in Employment Act of
1967, as amended, the Americans with Disabilities Act, the Equal Pay
Act, the Fair Labor Standards Act, as amended, the Executive
Retirement Income and Security Act of 1974, as amended, (except for
Executive's rights under COBRA and Executive's rights to the money in
Executive's 401(k) plan account and deferred compensation plan
account), and any other local, state, or federal law, or law of any
country, governing discrimination in employment, the payment of wages
or benefits, or any other aspect of employment (collectively,
"Claims").
IN THIS REGARD THE EXECUTIVE WAIVES ANY RIGHTS CONFERRED BY
CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
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(b) The release set forth in section (a) above does not and shall
not extend to any obligations of the Company incurred under this
Agreement or to any claims, cross-claims or rights of indemnification
and/or contribution arising from federal securities laws or their state
law counterparts or arising under the Indemnification Agreement referred
to in paragraph 7 below.
(c) The Executive understands that he may take twenty-one (21)
days to consider this Agreement and that he has been advised that he
should consult with an attorney, if he desires to do so, prior to
executing this Agreement. The Executive further acknowledges that he
understands that he may revoke this Agreement within seven (7) days of
his execution of this document and that the consideration to be paid to
the Executive pursuant to this Agreement will be paid only after that
seven (7) day revocation period.
7. Executive shall continue to receive the benefits, and be
subject to the obligations, of the Indemnification Agreement signed by him in
October of 1997, to the extent and for the time period provided for in that
agreement. (A copy of the agreement is attached hereto.) Executive shall
cooperate fully with the Company in defending against any litigation matters
that may be filed or threatened against him or the Company.
8. Executive further agrees that, during the first six (6) months
of the Employment Period, Executive will not and Executive will not assist or
induce any of his affiliates (defined as an employee directly supervised by
Executive, or
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Executive's agent, business partner or co-owner) to, personally or through
others, induce, attempt to induce, solicit or attempt to solicit (on
Executive's own behalf or on behalf of any other person or entity) anyone who
is employed at that time by the Company to leave his or her employment with
the Company, without the prior written approval of the Company's Senior Vice
President of Human Services.
9. Executive further agrees that, for one (1) year following the
execution of this Agreement, Executive will not and Executive will not assist
or induce any of his affiliates (defined as an employee directly supervised
by Executive, or Executive's agent, business partner or co-owner) to, without
the prior written approval of the Company's Senior Vice President of Human
Services, personally or through others, use any trade secret or proprietary
information of the Company or any other improper means to interfere or
attempt to interfere with the relationship or prospective relationship of the
Company with any person or entity that to Executive's knowledge is on the
date of the Agreement, or is expected to become, a customer or client of the
Company.
10. GENERAL RELEASE BY THE COMPANY
(a) The Company acknowledges that the Company is not aware of
the existence of any claims it has against the Executive based on any acts or
omissions arising from or related to the Executive's employment by the
Company or the Executive's separation therefrom and irrevocably, fully and
finally releases the Executive and his heirs, legal representatives and
agents ("Releasees") from all causes of action, claims, suits, demands or
other obligations or liabilities, whether known or unknown, that the Company
ever had,
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or now has, including but not limited to, any claims that may be alleged to
arise out of or in connection with the Executive's employment with the
Company, or separation therefrom, except for claims which may be alleged to
arise out of Executive's unauthorized use or disclosure of the Company's
confidential or proprietary information ("Claims").
IN THIS REGARD, THE COMPANY WAIVES ANY RIGHTS CONFERRED BY
CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES AS FOLLOWS: "A GENERAL
RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS FAVOR WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
(b) The release set forth in section (a) above does not and
shall not extend to any obligations of the Executive incurred under this
Agreement or the Invention and Confidential Information Agreement and shall
not be construed as granting the Executive any license to use any
intellectual property of the Company.
11. The Executive and the Company's officers agree to keep the fact
and terms of this Agreement, including the amount paid to the Executive
pursuant hereto, confidential, except as to Executive's legal advisors, tax
advisors, and spouse, and except for those terms required by law to be
publicly disclosed.
12. Executive and the Company represent and warrant that there has
been no assignment or other transfer of any interest in any Claims which
either party may have against the other.
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13. The parties agree that if either party hereafter commences,
joins in, or in any manner seeks relief through any suit, claim, demand,
charge, complaint or otherwise to enforce this Agreement or, if Executive or
the Company in any manner seek relief for actions arising out of, based upon,
or relating to any of the Claims released hereunder or in any manner asserts
against the Releasees any of the Claims released hereunder, then the
non-prevailing party will pay to the prevailing party in addition to any
other damages caused thereby, all reasonable attorneys' fees incurred by the
prevailing party in bringing, defending or otherwise responding to said suit
or Claim.
14. The Executive agrees not to make any statement, written or
oral, which disparages the Company or any of the Company's employees or
representatives, products, or business practices. Likewise, the Company's
CEO, executive officers, corporate vice presidents, and the members of its
Board shall not make any statement, written or oral, which disparages the
Executive.
15. The Executive acknowledges that during the Executive's
employment with the Company, the Executive has had access to confidential
and/or proprietary information of the Company and of third parties and
acknowledges the Executive's obligation by agreement and/or at common law to
continue to hold such information in confidence and neither disclose and/or
use such information, notwithstanding the termination of the Executive's
employment, and that the Executive has, to the best of his knowledge,
returned to the Company all copies and records in any form of such
information.
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16. The parties further understand and agree that nothing contained
in this Agreement shall constitute or be construed in any way as an admission
of any wrongdoing or liability whatsoever by the Company or the Executive.
17. This Agreement shall be governed and enforced in accordance
with the laws of the State of California.
18. The Company and Executive agree that any dispute regarding the
interpretation or enforcement of this Agreement or any dispute arising out of
Executive's employment following the execution of this Agreement or the
termination of that employment with the Company, except for disputes
regarding the interpretation of the Employee Invention and Confidential
Information Agreement, which Executive signed on October 28, 1996, and
disputes involving the protection of the Company's intellectual property,
shall be decided by confidential, final and binding arbitration conducted by
Judicial Arbitration and Mediation Services ("JAMS") under the then-existing
JAMS rules, rather than by litigation in court, trial by jury, administrative
proceeding, or in any other forum.
19. In the event that any part of this agreement is found to be
void or unenforceable then (a) such provision or part thereof shall, with
respect to such circumstances and in such jurisdiction, be deemed amended to
conform to applicable laws so as to be valid and enforceable to the fullest
possible extent, (b) the invalidity or unenforceability or such provision or
part thereof under such circumstances and in such jurisdiction shall not
affect the validity or enforceability of such provision or part thereof under
any other circumstances or in any other jurisdiction, and (c) such invalidity
or enforceability of such
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provision or part thereof shall not affect the validity or enforceability of
the remainder of such provision or the validity or enforceability of any
other provision of this Agreement as each provision is separable from every
other part of such provision.
20. The Company shall have the right to assign its rights and
obligations under this Agreement only to an entity which acquires
substantially all of the assets of the Company. The rights and obligations of
the Company under this Agreement shall inure to the benefit and shall be
binding upon the successors and permitted assigns of the Company. Executive
shall not have any right to assign his obligations under this Agreement and
shall only be entitled to assign his rights under this Agreement by will or
the laws of descent and distribution.
21. Executive represents and acknowledges that the Executive's
decision to enter into this Agreement has been made voluntarily, knowingly,
and without coercion of any kind.
22. This Agreement is intended by the parties to be a complete and
final expression of their rights and duties respecting the employment of the
Executive by the Company, and the separation of the Executive from the
Company, except that nothing herein is intended to negate the Executive's
continuing obligations under the Company's Employee Invention and
Confidential Information Agreement referenced in paragraph 4.1 above and
nothing herein is intended to negate the Company's and the Executive's
continuing obligations under the Indemnification Agreement referred to in
paragraph 7 above or the stock options referenced in paragraph 5(b) above,
nor is
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it intended to waive any of Executive's obligations under state and federal
trade secret laws. This Agreement may not be modified unless such
modification is embodied in writing, signed by the party against whom the
modification is sought to be enforced.
In witness whereof, the parties hereto have executed this Employment
Termination and Release Agreement, effective eight (8) days after the date it
is signed by Executive below.
JOHN R. HARDING CADENCE DESIGN SYSTEMS, INC.
By:
-------------------- --------------------
RON KIRCHENBAUER
Date: Date:
-------------------- --------------------
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CADENCE DESIGN SYSTEMS, INC.
1995 DIRECTORS STOCK OPTION PLAN
ADOPTED ON OCTOBER 3, 1995
ADJUSTED FOR 3:2 STOCK SPLIT EFFECTIVE OCTOBER 31, 1995
AMENDED AND RESTATED ON FEBRUARY 9, 1996
APPROVED BY STOCKHOLDERS ON MAY 3, 1996
ADJUSTED FOR 3:2 STOCK SPLIT EFFECTIVE MAY 31, 1996
AMENDED ON AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996
AMENDED ON MAY 7, 1997
AMENDED ON OCTOBER 19, 1997
ADJUSTED FOR 2:1 STOCK SPLIT EFFECTIVE NOVEMBER 14, 1997
AMENDED AND RESTATED ON MAY 5, 1999
1. PURPOSE.
(a) The purpose of the 1995 Directors Stock Option Plan (the
"Plan") is to provide a means by which each director of Cadence Design
Systems, Inc., a Delaware corporation (the "Company"), who is not otherwise
at the time of grant an employee of the Company or of any Affiliate of the
Company (each such person being hereafter referred to as a "Non-Employee
Director") will be given an opportunity to purchase stock of the Company
through the grant of options.
(b) The word "Affiliate" as used in the Plan means any corporation
or other entity which is controlled by the Company, which controls the
Company, or which is under common control with the Company.
(c) The Company, by means of the Plan, seeks to retain the services
of persons now serving as Non-Employee Directors of the Company, to secure
and retain the services of persons capable of serving in such capacity, and
to provide incentives for such persons to exert maximum efforts for the
success of the Company.
(d) No option granted under the Plan is intended to be an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration to
a committee, as provided in section 2(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan, to construe, interpret
and administer the Plan and options granted
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under the Plan, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any option, in a manner
and to the extent it shall deem necessary or desirable to make the Plan fully
effective. All decisions of the Board on such matters shall be final, binding
and conclusive on all persons having an interest in such decision.
(c) The Board may delegate administration of the Plan to a
committee composed of not fewer than two (2) members of the Board (the
"Committee"). If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, subject, however, to such resolutions,
not inconsistent with the provisions of the Plan, as may be adopted from time
to time by the Board. The Board may abolish the Committee at any time and
revest in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) The number of shares of the Company's $.01 par value common
stock (the "Common Stock") that may be sold pursuant to options granted under
the Plan shall initially not exceed in the aggregate one million three
hundred fifty thousand (1,350,000) shares of Common Stock, and shall
automatically increase on the first trading day of each calendar year during
the term of the Plan, beginning with the 2000 calendar year and ending with
and including the 2002 calendar year, by an additional two hundred thousand
(200,000) shares of Common Stock. If any option granted under the Plan shall
for any reason expire or otherwise terminate without having been exercised in
full, the stock not purchased under such option shall again become available
for issuance under the Plan. The number of shares of Common Stock authorized
for issuance under the Plan shall be subject to and adjusted by the
provisions of Section 10 relating to adjustments in the capital structure of
the Company.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(a) Each person who first becomes a Non-Employee Director after
October 3, 1995 shall automatically be granted an option to purchase shares
of the Common Stock on the terms and conditions set forth herein. Prior to
May 15, 1997 the number of shares of the Common Stock which shall be subject
to an option granted pursuant to this section 5(a) shall be equal to seven
thousand five hundred (7,500) multiplied by the number of calendar quarters
occurring between the date on which such person begins serving as a director
of the Company and the first July 1 occurring after the date such person
becomes a director of the Company. On and after May 15, 1997 and prior to
October 19, 1997 the number of shares of the Common Stock which shall be
subject to an option granted pursuant to this section 5(a) shall be equal to
seven thousand
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five hundred (7,500) multiplied by the number of calendar quarters occurring
between the date on which such person begins serving as a director of the
Company and the first April 1 occurring after the date such person becomes a
director of the Company. On and after October 19, 1997 the number of shares
of the Common Stock which shall be subject to an option granted pursuant to
this section 5(a) shall be equal to five thousand six hundred twenty-five
(5,625) multiplied by the number of calendar quarters occurring between the
date on which such person begins serving as a director of the Company and the
first April 1 occurring after the date such person becomes a director of the
Company. If a person becomes a Non-Employee Director during a calendar
quarter, he or she shall be treated as serving as a director of the Company
for the entire such calendar quarter only if he or she becomes a Non-Employee
Director during the first half of such calendar quarter.
(b) On July 1, 1996 each person who on that date is then a
Non-Employee Director shall automatically be granted an annual option to
purchase thirty thousand (30,000) shares of Common Stock on the terms and
conditions set forth herein. On July 1, 1997 each person who on that date is
then a Non-Employee Director shall automatically be granted an annual option
to purchase twenty-two thousand five hundred (22,500) shares of Common Stock
on the terms and conditions set forth herein. On April 1 of each year,
commencing with April 1, 1998, each person who on that date is then a
Non-Employee Director shall automatically be granted an annual option to
purchase twenty-two thousand five hundred (22,500) shares of Common Stock on
the terms and conditions set forth herein. If the Non-Employee Director is an
"Active Board Member" on the date the annual option is granted but is not
then serving as the Chairman of the Board, then such director shall
automatically be granted an option to purchase (i) an additional eleven
thousand two hundred fifty (11,250) shares of Common Stock on the terms and
conditions set forth herein if the annual option is granted on July 1, 1997,
(ii) an additional fifteen thousand (15,000) shares of Common Stock on the
terms and conditions set forth herein on each annual option grant date
occurring before October 19, 1997, and (iii) an additional eleven thousand
two hundred fifty (11,250) shares of Common Stock on the terms and conditions
set forth herein on each annual option grant date occurring on or after
October 19, 1997. If the Non-Employee Director is serving as the Chairman of
the Board on the date the annual option is granted, then such director shall
automatically be granted an option to purchase (i) an additional twenty-two
thousand five hundred (22,500) shares of Common Stock on the terms and
conditions set forth herein if the annual option is granted on July 1, 1997,
(ii) an additional thirty thousand (30,000) shares of Common Stock on the
terms and conditions set forth herein on each annual option grant date
occurring before October 19, 1997, and (iii) an additional twenty-two
thousand five hundred (22,500) shares of Common Stock on the terms and
conditions set forth herein on each annual option grant date occurring on or
after October 19, 1997. An "Active Board Member" shall be defined as a
Non-Employee Director who is the chairman of one committee of the Board and
is serving as a member of at least one additional committee of the Board.
(c) In addition to the other options specified in section 5, each
Non-Employee Director who serves on the Venture Committee of the Board on or
after October 3, 1995 shall be granted one (but no more than one) Venture
Committee membership option as follows, and each Non-Employee Director who
serves as chairman of the Venture Committee of the Board on or after October
3, 1995 shall be granted, in addition to the one-time Venture Committee
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membership option, one (but no more than one) Venture Committee chairman's
option as follows:
(i) Each Non-Employee Director who on October 3, 1995 is
serving as a member of the Venture Committee of the Board shall automatically
receive on October 3, 1995 a Venture Committee membership option to purchase
forty-five thousand (45,000) shares of Common Stock on the terms and
conditions set forth herein.
(ii) The Non-Employee Director who on October 3, 1995 is
serving as the chairman of the Venture Committee of the Board shall
automatically receive on October 3, 1995 a Venture Committee chairman's
option to purchase an additional forty-five thousand (45,000) shares of
Common Stock on the terms and conditions set forth herein.
(iii) Each Non-Employee Director who is selected for the first
time to serve on the Venture Committee after October 3, 1995 but before
October 19, 1997 automatically shall, upon the date of his or her initial
selection to serve on the Venture Committee, be granted a Venture Committee
membership option to purchase forty-five thousand (45,000) shares of Common
Stock on the terms and conditions set forth herein.
(iv) Each Non-Employee Director who is selected for the first
time to serve on the Venture Committee on or after October 19, 1997
automatically shall, upon the date of his or her initial selection to serve
on the Venture Committee, be granted a Venture Committee membership option to
purchase thirty-three thousand seven hundred fifty (33,750) shares of Common
Stock on the terms and conditions set forth herein.
(v) Each Non-Employee Director who is selected for the first
time to serve as the chairman of the Venture Committee after October 3, 1995
but before October 19, 1997 automatically shall, upon the date of his or her
initial selection to serve as the chairman of the Venture Committee, be
granted a Venture Committee chairman's option to purchase an additional
forty-five thousand (45,000) shares of Common Stock on the terms and
conditions set forth herein.
(vi) Each Non-Employee Director who is selected for the first
time to serve as the chairman of the Venture Committee after October 19, 1997
automatically shall, upon the date of his or her initial selection to serve
as the chairman of the Venture Committee, be granted a Venture Committee
chairman's option to purchase an additional thirty-three thousand seven
hundred fifty (33,750) shares of Common Stock on the terms and conditions set
forth herein.
The Venture Committee options provided under this section 5(c) are not
subject to adjustment as provided in section 5(a).
(d) (i) Subject to section 5(d)(iii), on January 30, 1996 and
January 30, 1997 each Non-Employee Director who on that date is then serving
as the Chairman of the Board and has completed five (5) years of service as
the Chairman of the Board shall automatically receive an
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option to purchase one hundred thirty-five thousand (135,000) shares of
Common Stock on the terms and conditions set forth herein.
(ii) Subject to section 5(d)(iii), on January 30 of each
year, commencing with January 30, 1998, each Non-Employee Director who on
that date is then serving as the Chairman of the Board and has completed five
(5) years of service as the Chairman of the Board shall automatically receive
an option to purchase one hundred one thousand two hundred fifty (101,250)
shares of Common Stock on the terms and conditions set forth herein.
(iii) No Non-Employee Director shall receive more than one
grant under section 5(d).
(e) If an option would otherwise automatically be granted on or
after October 3, 1995 to a Non-Employee Director under the terms of the
Company's 1993 Directors Option Plan (the "1993 Directors Plan"), but cannot
be granted in full because there are insufficient shares of Common Stock
remaining in the share reserve for the 1993 Directors Plan which neither have
been issued nor are then subject to the term of an outstanding option
previously granted under the 1993 Directors Plan, then an option shall
automatically be granted on the same date to such Non-Employee Director on
the terms and conditions set forth herein. The number of shares of Common
Stock which shall be subject to such an option shall be that number of shares
which would otherwise have been subject to the option granted under the 1993
Directors Plan on the same date, but as to which such an option may not be
granted under the 1993 Directors Plan to such Non-Employee Director solely
because of the lack of sufficient uncommitted shares in the share reserve of
the 1993 Directors Plan as described above.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted
and, unless sooner terminated as set forth herein, expires on the date ten
(10) years from the date of grant (the "Expiration Date"). In any and all
circumstances, an option may be exercised only as to no more than that number
of shares as to which it is exercisable at the time in question under the
provisions of section 6(e).
(b) The exercise price of each option shall be one hundred percent
(100%) of the fair market value of the stock subject to such option on the
date such option is granted. The "fair market value" of the Common Stock
shall be the mean average of the closing price of the Company's common stock
for each of the last twenty trading days prior to the date of the grant of
the option on the national securities exchange, national market system or
other trading market on which the Company's common stock has the highest
average trading volume.
(c) The optionholder may elect to make payment of the exercise
price under one of the following alternatives:
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(i) Payment of the exercise price per share in cash (by
check) at the time of exercise; or
(ii) Provided that at the time of the exercise the Common
Stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of shares of Common Stock already owned by the
optionholder for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims,
encumbrances or security interest, which common stock shall be valued at its
fair market value on the last day on which the Common Stock was actively
traded preceding the date of exercise;
(iii) Payment by the delivery of the optionholder's full
recourse promissory note on such terms as may be determined by the Board
which are not inconsistent with the terms of the Plan; or
(iv) Payment by a combination of the methods of payment
specified in sections 6(c)(i) through 6(c)(iii) above.
For purposes of section 6(c)(ii), the "fair market value" of Common
Stock shall be the closing price of such stock on the last trading day
preceding the date of delivery of such Common Stock to the Company on the
national securities exchange, national market system or other trading market
on which the Common Stock has the highest average trading volume. If the
optionholder uses a promissory note as partial payment of the exercise price
pursuant to section 6(c)(iii), then such principal amount of such note may
not exceed the maximum amount permitted by law (including but not limited to
the limitation under the Delaware General Corporation Law that the par value
of shares of stock may not be paid with a promissory note) and interest shall
be compounded at least annually and shall be charged at no less than the
minimum rate of interest necessary to avoid the treatment as interest, under
any applicable provisions of the Code, of any amounts other than amounts
stated to be interest under the terms of such promissory note.
Notwithstanding the foregoing, this option may be exercised pursuant
to a program developed under Regulation T as promulgated by the Federal
Reserve Board which results in the receipt of cash (or check) by the Company
either prior to the issuance of shares of the Company's common stock or
pursuant to the terms of irrevocable instructions issued by the optionholder
prior to the issuance of shares of the Company's common stock.
(d) Except as otherwise expressly provided in an optionholder's
option agreement, an option shall not be transferable except by will or by
the laws of descent and distribution and shall be exercisable during the
lifetime of the person to whom the option is granted only by such person or
by his guardian or legal representative. The person to whom the Option is
granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the optionholder, shall thereafter be entitled to exercise the
option.
(e) (i) An option granted pursuant to section 5(a) or 5(b) prior
to July 1, 1997 shall vest and become exercisable in full on the first June
30 following the grant of such option;
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<PAGE>
PROVIDED, HOWEVER, the optionholder has continuously served in the same
capacity which entitled him or her to the grant of such option from the date
of grant until and including the next following June 30.
(ii) An option granted pursuant to section 5(a) or 5(b) on or
after July 1, 1997 shall vest and become exercisable in full on the first
March 31 following the grant of such option; PROVIDED, HOWEVER, the
optionholder has continuously served in the same capacity which entitled him
or her to the grant of such option from the date of grant until and including
the next following March 31.
(iii) An option granted pursuant to section 5(c), 5(d) or 5(e)
shall become exercisable in installments over a period of three years from
the date of grant at the rate of one-third (1/3rd) of the total number of
shares subject to such option upon the first anniversary of the date of grant
and subsequently at the rate of one thirty-sixth (1/36th) of the total number
of shares subject to the option a month, in twenty-four (24) equal monthly
installments; PROVIDED, HOWEVER, that the optionholder has, during the entire
period from the grant date to such vesting date, continuously served in the
same capacity which entitled him or her to the grant of such option,
whereupon such option shall become fully exercisable in accordance with its
terms with respect to that portion of the shares represented by that
installment.
(f) The Company may require any optionholder, or any person to whom
an option is transferred under section 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionholder's knowledge and experience in financial and business
matters; and (ii) to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject to the option for
such person's own account and not with any present intention of selling or
otherwise distributing the stock. These requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the issuance
of the shares upon the exercise of the option has been registered under a
then-currently effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or (ii), as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may require any optionholder to provide such
other representations, written assurances or information which the Company
shall determine is necessary, desirable or appropriate to comply with
applicable securities laws as a condition of granting an option to the
optionholder or permitting the optionholder to exercise the option. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including,
but not limited to, legends restricting the transfer of the stock.
(g) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are
not then so registered, the Company has determined that such exercise and
issuance would be exempt from the registration requirements of the Securities
Act.
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7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the
Company shall keep available at all times the number of shares of the Common
Stock required to satisfy such options.
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may
be required to issue and sell shares of Common Stock upon exercise of the
options granted under the Plan; PROVIDED, HOWEVER, that this undertaking
shall not require the Company to register under the Securities Act either the
Plan, any option granted under the Plan, or any stock issued or issuable
pursuant to any such option. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and
sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to options granted
under the Plan shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionholder nor any person to whom an option is
transferred under section 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with respect to, any shares subject to
such option unless and until such person has satisfied all requirements for
exercise of the option pursuant to its terms.
(b) Throughout the term of any option granted pursuant to the Plan,
the Company shall make available to the holder of such option, not later than
one hundred twenty (120) days after the close of each of the Company's fiscal
years during the option term, upon request, such financial and other
information regarding the Company as comprises the annual report to the
stockholders of the Company provided for in the Bylaws of the Company and
such other information regarding the Company as the holder of such option may
request under applicable law.
(c) Nothing in the Plan or in any instrument executed pursuant
thereto shall confer upon any Non-Employee Director any right to continue in
the service of the Company or any Affiliate in any capacity or shall affect
any right of the Company, its Board or stockholders or any Affiliate to
remove any Non-Employee Director pursuant to the Company's Bylaws and the
provisions of the Delaware General Corporation Law (or the laws of the
Company's state of incorporation should that change in the future).
(d) No Non-Employee Director, individually or as a member of a
group, and no beneficiary or other person claiming under or through him,
shall have any right, title or interest in or to any option reserved for the
purposes of the Plan except as to such shares of common stock, if any, as
shall have been reserved for him pursuant to an option granted to him.
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(e) In connection with each option made pursuant to the Plan, it
shall be a condition precedent to the Company's obligation to issue or
transfer shares to a Non-Employee Director, or to evidence the removal of any
restrictions on transfer, that such Non-Employee Director make arrangements
satisfactory to the Company to insure that the amount of any federal or other
withholding tax required to be withheld with respect to such sale or
transfer, or such removal or lapse, is made available to the Company for
timely payment of such tax.
(f) The size of the Plan's share reserve set forth in section 3,
the size of individual option grants described in section 5, and all other
references in the Plan to specific numbers of shares of the Common Stock
reflect and have taken into account (i) the Company's three-for-two (3:2)
stock dividends effective as of October 31, 1995 and May 31, 1996, including
all options granted under the Plan prior to May 31, 1996 and (ii) the
Company's two-for-one (2:1) stock dividend effective as of November 14, 1997,
including all options granted under the Plan prior to November 14, 1997.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the Common Stock subject to the Plan,
or subject to any option granted under the Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other
transaction not involving the receipt of consideration by the Company), the
Plan and outstanding options will be appropriately adjusted in the class(es)
and maximum number of shares subject to the Plan and the class(es) and number
of shares and exercise price per share of stock subject to outstanding
options. Such adjustments shall be made by the Board, the determination of
which shall be final, binding, and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a "transaction
not involving the receipt of consideration by the Company.") No adjustment
shall result in the creation of a fractional share of stock or in an exercise
price per share of stock expressed in units of less than one cent ($.01).
(b) In the event of the occurrence of a Change in Control, to the
extent not prohibited by applicable law, the time during which options
outstanding under the Plan may be exercised shall be accelerated by the Board
to a time prior to or as of the occurrence of such event and the options
terminated if not exercised by the time specified by the Board, which in any
event shall be after the effective time of such acceleration. If the Board
fails to specify a time for acceleration of outstanding options and/or
termination of outstanding options, then the time during which options
outstanding under the Plan may be exercised shall be accelerated to a time
immediately preceding the occurrence of the Change in Control, and the
options terminated if not exercised prior to or upon the occurrence of a
Change in Control defined in section 10(b)(i) or section 10(b)(iii) or within
three (3) months following the occurrence of a Change in Control defined in
section 10(b)(ii), section 10(b)(iv), or section 10(b)(v).
For purposes of the Plan, a "Change in Control" means the happening of
any of the following events:
(i) A dissolution or liquidation of the Company.
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<PAGE>
(ii) A sale of all or substantially all of the assets of the
Company.
(iii) Either a merger or consolidation in which the Company is
not the surviving corporation and the stockholders of the Company immediately
prior to the merger or consolidation fail to possess direct or indirect
beneficial ownership of more than eighty percent (80%) of the voting power of
the securities of the surviving corporation (or if the surviving corporation
is a controlled affiliate of another entity, then the required beneficial
ownership shall be determined with respect to the securities of that entity
which controls the surviving corporation and is not itself a controlled
affiliate of any other entity) immediately following such transaction, or a
reverse merger in which the Company is the surviving corporation and the
stockholders of the Company immediately prior to the reverse merger fail to
possess direct or indirect beneficial ownership of more than eighty percent
(80%) of the securities of the Company (or if the Company is a controlled
affiliate of another entity, then the required beneficial ownership shall be
determined with respect to the securities of that entity which controls the
Company and is not itself a controlled affiliate of any other entity)
immediately following the reverse merger. For purposes of this section
10(b)(iii), any person who acquired securities of the Company prior to the
occurrence of a merger, reverse merger, or consolidation in contemplation of
such transaction and who after such transaction possesses direct or indirect
beneficial ownership of at least ten percent (10%) of the securities of the
Company or the surviving corporation (or if the Company or the surviving
corporation is a controlled affiliate, then of the appropriate entity as
determined above) immediately following such transaction shall not be
included in the group of stockholders of the Company immediately prior to
such transaction.
(iv) An acquisition by any person, entity or group within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions
(excluding any employee benefit plan, or related trust, sponsored or
maintained by the Company or a subsidiary or other controlled affiliate of
the Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least twenty percent (20%) of the
combined voting power entitled to vote in the election of directors.
(v) The individuals who, as of the date immediately
following the Company's 1999 Annual Meeting of Stockholders, are members of
the Board (the "Incumbent Board"), cease for any reason to constitute at
least fifty percent (50%) of the Board. If the election, or nomination for
election by the Company's stockholders, of any new director was approved by a
vote of at least fifty percent (50%) of the Incumbent Board, such new
director shall be considered as a member of the Incumbent Board; PROVIDED,
HOWEVER, that no individual shall be considered a member of the Incumbent
Board if the individual initially assumed office as a result of either an
actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest.
11. AMENDMENT OF THE PLAN.
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(a) The Board at any time, and from time to time, may amend the
Plan and/or some or all outstanding options granted under the Plan. Except as
provided in section 10 relating to adjustments upon changes in stock, no
amendment shall be effective unless approved by the stockholders of the
Company where the amendment would:
(i) Increase the number of shares which may be issued under
the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires
stockholder approval in order for the Plan to comply with the requirements of
Rule 16b-3); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to comply with the
requirements of Rule 16b-3 or any securities exchange or other trading market
on which the Common Stock is actively traded.
(b) Rights and obligations under any option granted before any
amendment of the Plan or of the terms of such option shall not be impaired by
such amendment unless (i) the Company requests the consent of the person
holding the option, and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the date that all of the
shares of the Company's Common Stock have been issued. No options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan
is in effect shall not be altered or impaired by suspension or termination of
the Plan, except with the consent of the holder of the option.
13. EFFECTIVE DATE OF AMENDED AND RESTATED PLAN.
The Plan, in the form as amended and restated herein, shall become
effective upon approval by the stockholders of the Company.
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CADENCE DESIGN SYSTEMS, INC.
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY BOARD OF DIRECTORS NOVEMBER 9, 1998
STOCKHOLDER APPROVAL NOT REQUIRED
TERMINATION DATE: NONE
1. PURPOSE.
(a) The Plan initially was established effective as of January 30,
1990 (the "Initial Plan") and has been amended subsequently from time to
time. The Initial Plan hereby is amended and restated in its entirety as the
Amended and Restated Employee Stock Purchase Plan effective as of the date of
its adoption. The terms of the Initial Plan shall remain in effect and apply
to all Rights granted pursuant to the Initial Plan.
(b) The purpose of the Plan is to provide a means by which
Employees of the Company and certain designated Affiliates may be given an
opportunity to purchase Shares of the Company.
(c) The Company, by means of the Plan, seeks to retain the services
of such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success
of the Company and its Affiliates.
(d) The Company intends that the Rights to purchase Shares granted
under the Plan be considered options issued under an "employee stock purchase
plan," as that term is defined in Section 423(b) of the Code.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the United States Internal Revenue Code of 1986,
as amended.
(d) "COMMITTEE" means a committee of the Board appointed by the
Board in accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means Cadence Design Systems, Inc., a Delaware
corporation.
<PAGE>
(f) "DIRECTOR" means a member of the Board.
(g) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in the Offering Memorandum for eligibility to
participate in the Offering.
(h) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.
(i) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as
that term is defined in Section 423(b) of the Code.
(j) "EXCHANGE ACT" means the United States Securities Exchange Act
of 1934, as amended.
(k) "FAIR MARKET VALUE" means the value of a security, as
determined in good faith by the Board. If the security is listed on the New
York Stock Exchange or any other established stock exchange or traded on the
Nasdaq National Market or the Nasdaq SmallCap Market, then, except as
otherwise provided in the Offering, the Fair Market Value of the security
shall be the closing sales price (rounded up where necessary to the nearest
whole cent) for such security (or the closing bid, if no sales were reported)
as quoted on such exchange or market (or, in the event that the security is
traded on more than one such exchange or market, the exchange or market with
the greatest volume of trading in the relevant security of the Company) on
the trading day occurring on or closest to the relevant determination date,
as reported in THE WALL STREET JOURNAL or such other source as the Board
deems reliable, and on the date as determined more precisely in the Offering
Memorandum.
(l) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not
a current Employee or Officer of the Company or its parent or subsidiary,
does not receive compensation (directly or indirectly) from the Company or
its parent or subsidiary for services rendered as a consultant or in any
capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K
promulgated pursuant to the Securities Act ("Regulation S-K")), does not
possess an interest in any other transaction as to which disclosure would be
required under Item 404(a) of Regulation S-K, and is not engaged in a
business relationship as to which disclosure would be required under Item
404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee
director" for purposes of Rule 16b-3.
(m) "OFFERING" means the grant of Rights to purchase Shares under
the Plan to Eligible Employees.
(n) "OFFERING DATE" means a date selected by the Board for an
Offering to commence.
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(o) "OFFERING MEMORANDUM" means a memorandum describing the terms
of the then current or otherwise relevant Offering.
(p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in
any capacity other than as a Director, or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
(q) "PARTICIPANT" means an Eligible Employee who holds an
outstanding Right granted pursuant to the Plan or, if applicable, such other
person who holds an outstanding Right granted under the Plan.
(r) "PLAN" means this Amended and Restated Employee Stock Purchase
Plan.
(s) "PURCHASE DATE" means one or more dates established by the
Board during an Offering on which Rights granted under the Plan shall be
exercised and purchases of Shares carried out in accordance with such
Offering.
(t) "RIGHT" means an option to purchase Shares granted pursuant to
the Plan.
(u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3 as in effect with respect to the Company at the time
discretion is being exercised regarding the Plan.
(v) "SECURITIES ACT" means the United States Securities Act of
1933, as amended.
(w) "SHARE" means a share of the common stock of the Company.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
Whether or not the Board has delegated administration, the Board shall have
the final power to determine all questions of policy and expediency that may
arise in the administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:
(i) To determine when and how Rights to purchase Shares
shall be granted and the provisions of each Offering of such Rights (which
need not be identical).
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<PAGE>
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Rights granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent
it shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in Section 14.
(v) Generally, to exercise such powers and to perform such
acts as it deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be
treated as an Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a
Committee of the Board composed of two (2) or more members, all of the
members of which Committee may be, in the discretion of the Board,
Non-Employee Directors and/or Outside Directors. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
including the power to delegate to a subcommittee of two (2) or more Outside
Directors any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or such a subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 13 relating to adjustments
upon changes in securities, the Shares that may be sold pursuant to Rights
granted under the Plan shall not exceed in the aggregate Twenty-Three Million
Five Hundred Thousand (23,500,000) Shares. If any Right granted under the
Plan shall for any reason terminate without having been exercised, the Shares
not purchased under such Right shall again become available for the Plan.
(b) The Shares subject to the Plan may be unissued Shares or Shares
that have been bought on the open market at prevailing market prices or
otherwise.
5. GRANT OF RIGHTS; OFFERING.
(a) The Board may from time to time grant or provide for the grant
of Rights to purchase Shares of the Company under the Plan to Eligible
Employees in an Offering on one or more Offering Dates selected by the Board.
Each Offering shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate, which shall comply with the
requirements of Section 423(b)(5) of the Code that all Employees granted
Rights to purchase Shares under the Plan shall have the same rights and
privileges. The terms and conditions of an
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<PAGE>
Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the Offering Memorandum or otherwise) the period during
which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance
of the provisions contained in Sections 6 through 9, inclusive.
(b) If a Participant has more than one Right outstanding under the
Plan, unless he or she otherwise indicates in agreements or notices delivered
hereunder: (i) each agreement or notice delivered by that Participant will be
deemed to apply to all of his or her Rights under the Plan, and (ii) an
earlier-granted Right (or a Right with a lower exercise price, if two Rights
have identical grant dates) will be exercised to the fullest possible extent
before a later-granted Right (or a Right with a higher exercise price if two
Rights have identical grant dates) will be exercised.
6. ELIGIBILITY.
(a) Rights may be granted only to Employees of the Company or, as
the Board may designated as provided in subsection 3(b), to Employees of an
Affiliate. Except as provided in subsection 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date,
such Employee has been in the employ of the Company or the Affiliate, as the
case may be, for such continuous period preceding such grant as the Board may
require, but in no event shall the required period of continuous employment
be equal to or greater than two (2) years.
(b) The Board may provide that each person who, during the course
of an Offering, first becomes an Eligible Employee will, on a date or dates
specified in the Offering which coincides with the day on which such person
becomes an Eligible Employee or which occurs thereafter, receive a Right
under that Offering, which Right shall thereafter be deemed to be a part of
that Offering. Such Right shall have the same characteristics as any Rights
originally granted under that Offering, as described herein, except that:
(i) the date on which such Right is granted shall be the
"Offering Date" of such Right for all purposes, including determination of
the exercise price of such Right;
(ii) the period of the Offering with respect to such Right
shall begin on its Offering Date and end coincident with the end of such
Offering; and
(iii) the Board may provide that if such person first becomes
an Eligible Employee within a specified period of time before the end of the
Offering, he or she will not receive any Right under that Offering.
(c) No Employee shall be eligible for the grant of any Rights under
the Plan if, immediately after any such Rights are granted, such Employee
owns stock possessing five
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<PAGE>
percent (5%) or more of the total combined voting power or value of all
classes of stock of the Company or of any Affiliate. For purposes of this
subsection 6(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any Employee, and stock which such
Employee may purchase under all outstanding rights and options shall be
treated as stock owned by such Employee.
(d) An Eligible Employee may be granted Rights under the Plan only
if such Rights, together with any other Rights granted under all Employee
Stock Purchase Plans of the Company and any Affiliates, as specified by
Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights
to purchase Shares of the Company or any Affiliate to accrue at a rate which
exceeds twenty five thousand dollars ($25,000) of the fair market value of
such Shares (determined at the time such Rights are granted) for each
calendar year in which such Rights are outstanding at any time.
(e) The Board may provide in an Offering that Employees who are
highly compensated employees within the meaning of Section 423(b)(4)(D) of
the Code shall not be eligible to participate.
7. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an
Offering made under the Plan, shall be granted the Right to purchase up to
the number of Shares purchasable either:
(i) with a percentage designated by the Board not exceeding
fifteen percent (15%) of such Employee's Earnings (as defined by the Board in
each Offering) during the period which begins on the Offering Date (or such
later date as the Board determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than the end of the
Offering; or
(ii) with a maximum dollar amount designated by the Board
that, as the Board determines for a particular Offering, (1) shall be
withheld, in whole or in part, from such Employee's Earnings (as defined by
the Board in each Offering) during the period which begins on the Offering
Date (or such later date as the Board determines for a particular Offering)
and ends on the date stated in the Offering, which date shall be no later
than the end of the Offering and/or (2) shall be contributed, in whole or in
part, by such Employee during such period.
(b) The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and
purchases of Shares carried out in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board
may specify a maximum amount of Shares that may be purchased by any
Participant as well as a maximum aggregate amount of Shares that may be
purchased by all Participants pursuant to such Offering.
6
<PAGE>
In addition, in connection with each Offering that contains more than one
Purchase Date, the Board may specify a maximum aggregate amount of Shares
which may be purchased by all Participants on any given Purchase Date under
the Offering. If the aggregate purchase of Shares upon exercise of Rights
granted under the Offering would exceed any such maximum aggregate amount,
the Board shall make a pro rata allocation of the Shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(d) The purchase price of Shares acquired pursuant to Rights
granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the Shares on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the Shares on the Purchase Date.
8. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may become a Participant in the Plan
pursuant to an Offering by delivering a participation agreement to the
Company within the time specified in the Offering Memorandum, in such form as
the Company provides. Each such agreement shall authorize payroll deductions
of up to the maximum percentage specified by the Board of such Employee's
Earnings during the Offering (as defined in each Offering). The payroll
deductions made for each Participant shall be credited to a bookkeeping
account for such Participant under the Plan and either may be deposited with
the general funds of the Company or may be deposited in a separate account in
the name of, and for the benefit of, such Participant with a financial
institution designated by the Company. To the extent provided in the
Offering, a Participant may reduce (including to zero) or increase such
payroll deductions. To the extent provided in the Offering, a Participant may
begin such payroll deductions after the beginning of the Offering. A
Participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the Participant has not
already had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his
or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board in the Offering. Upon such
withdrawal from the Offering by a Participant, the Company shall distribute
to such Participant all of his or her accumulated payroll deductions (reduced
to the extent, if any, such deductions have been used to acquire Shares for
the Participant) under the Offering, without interest unless otherwise
specified in the Offering, and such Participant's interest in that Offering
shall be automatically terminated. A Participant's withdrawal from an
Offering will have no effect upon such Participant's eligibility to
participate in any other Offerings under the Plan but such
7
<PAGE>
Participant will be required to deliver a new participation agreement in
order to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating Employee's
employment with the Company and its designated Affiliates for any reason
(subject to any post-employment participation period required by law) or
other lack of eligibility. The Company shall distribute to such terminated
Employee all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire Shares for the
terminated Employee) under the Offering, without interest unless otherwise
specified in the Offering. If the accumulated payroll deductions have been
deposited with the Company's general funds, then the distribution shall be
made from the general funds of the Company, without interest. If the
accumulated payroll deductions have been deposited in a separate account with
a financial institution as provided in subsection 8(a), then the distribution
shall be made from the separate account, without interest unless otherwise
specified in the Offering.
(d) Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution,
or by a beneficiary designation as provided in Section 15 and, otherwise
during his or her lifetime, shall be exercisable only by the person to whom
such Rights are granted.
9. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant
Offering, each Participant's accumulated payroll deductions and other
additional payments specifically provided for in the Offering (without any
increase for interest) will be applied to the purchase of Shares up to the
maximum amount of Shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional Shares shall be issued upon the exercise of Rights granted under
the Plan unless specifically provided for in the Offering and permitted by
law.
(b) Unless otherwise specifically provided in the Offering, the
amount, if any, of accumulated payroll deductions remaining in any
Participant's account after the purchase of Shares that is equal to the
amount required to purchase one or more whole Shares on the final Purchase
Date of the Offering shall be distributed in full to the Participant at the
end of the Offering, without interest. If the accumulated payroll deductions
have been deposited with the Company's general funds, then the distribution
shall be made from the general funds of the Company, without interest. If the
accumulated payroll deductions have been deposited in a separate account with
a financial institution as provided in subsection 8(a), then the distribution
shall be made from the separate account, without interest unless otherwise
specified in the Offering.
(c) The amount, if any, of accumulated payroll deductions remaining
in any Participant's account after the purchase of Shares that is less than
the amount required to
8
<PAGE>
purchase one whole Share on the final Purchase Date of the Offering shall be
carried forward, without interest, into the next Offering.
(d) No Rights granted under the Plan may be exercised to any extent
unless the Shares to be issued upon such exercise under the Plan (including
Rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act and the Plan is in material compliance with
all applicable state, foreign and other securities and other laws applicable
to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not
so registered or in such compliance, no Rights granted under the Plan or any
Offering shall be exercised on such Purchase Date, and the Purchase Date
shall be delayed until the Plan is subject to such an effective registration
statement and such compliance, except that the Purchase Date shall not be
delayed more than twelve (12) months and the Purchase Date shall in no event
be more than twenty-seven (27) months from the Offering Date. If, on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no Rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any,
such deductions have been used to acquire Shares) shall be distributed to the
Participants, without interest unless otherwise specified in the Offering. If
the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of
the Company, without interest. If the accumulated payroll deductions have
been deposited in a separate account with a financial institution as provided
in subsection 8(a), then the distribution shall be made from the separate
account, without interest unless otherwise specified in the Offering.
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Rights granted under the Plan, the
Company shall ensure that the amount of Shares required to satisfy such
Rights are available.
(b) The Company shall seek to obtain from each federal, state,
foreign or other regulatory commission or agency having jurisdiction over the
Plan such authority as may be required to issue and sell Shares upon exercise
of the Rights granted under the Plan. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful
issuance and sale of Shares under the Plan, the Company shall be relieved
from any liability for failure to issue and sell Shares upon exercise of such
Rights unless and until such authority is obtained.
11. USE OF PROCEEDS FROM SHARES.
Proceeds from the sale of Shares pursuant to Rights granted under the
Plan shall constitute general funds of the Company.
9
<PAGE>
12. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
(a) A Participant shall not be deemed to be the holder of, or to
have any of the rights of a holder with respect to, Shares subject to Rights
granted under the Plan unless and until the Participant's Shares acquired
upon exercise of Rights under the Plan are recorded in the books of the
Company.
(b) Neither the Plan nor the grant of any Right thereunder shall
confer any right on any Employee to remain in the employ of the Company or
any Affiliate or restrict the right of the Company or any Affiliate to
terminate such Employee's employment.
13. ADJUSTMENTS UPON CHANGES IN SECURITIES.
(a) Subject to any required action by the stockholders of the
Company, the number of Shares covered by each Right under the Plan that has
not yet been exercised and the number of Shares that have been authorized for
issuance under the Plan but have not yet been placed under a Right
(collectively, the "Reserves"), as well as the price per Share covered by
each Right under the Plan that has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split or the payment of stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
Shares effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of Shares subject to a Right.
(b) In the event of the proposed dissolution or liquidation of the
Company, any and all Offerings shall terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the Board.
The Board may, in the exercise of its sole discretion in such instances,
declare that the Rights under the Plan shall terminate as of a date fixed by
the Board and give each Participant the right to exercise his or her Right.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger or consolidation of the Company with or into
another corporation or a parent or subsidiary of such successor corporation
when the Company is not the surviving corporation, or a reverse merger in
which the Company is the surviving corporation but the Shares outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, any and
all Offerings shall terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in
the exercise of its sole discretion in such instances, and in lieu of
assumption or substitution of the Rights, provide that each Participant shall
have the right to exercise his or her Right. If the Board makes a Right
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Board shall notify the Participant that the Right shall
be fully exercisable for a period of twenty
10
<PAGE>
(20) days from the date of such notice (or such other period of time as the
Board shall determine), and the Right shall terminate upon the expiration of
such period.
(c) The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the
price per Share covered by each outstanding Right, in the event that the
Company effects one or more reorganizations, recapitalizations, rights
offering, or other increases or reductions of outstanding Shares, and in the
event of the Company being consolidated with or merged into any other
corporation.
14. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 13 relating to adjustments upon
changes in securities and except as to minor amendments to benefit the
administration of the Plan, to take account of a change in legislation or to
obtain or maintain favorable tax, exchange control or regulatory treatment
for Participants or the Company or any Affiliate, no amendment shall be
effective unless approved by the stockholders of the Company to the extent
stockholder approval is necessary for the Plan to satisfy the requirements of
Section 423 of the Code, Rule 16b-3 under the Exchange Act or any Nasdaq or
other securities exchange listing requirements. Currently under the Code,
stockholder approval within twelve (12) months before or after the adoption
of the amendment is required where the amendment will:
(i) Increase the amount of Shares reserved for Rights under
the Plan;
(ii) Modify the provisions as to eligibility for
participation in the Plan to the extent such modification requires
stockholder approval in order for the Plan to obtain employee stock purchase
plan treatment under Section 423 of the Code; or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code.
(b) It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide Employees
with the maximum benefits provided or to be provided under the provisions of
the Code and the regulations promulgated thereunder relating to Employee
Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it
into compliance therewith.
(c) Rights and obligations under any Rights granted before
amendment of the Plan shall not be impaired by any amendment of the Plan
without the consent of the person to whom such Rights were granted, or except
as necessary to comply with any laws or governmental regulations, or except
as necessary to ensure that the Plan and/or Rights granted under the Plan
comply with the requirements of Section 423 of the Code.
11
<PAGE>
15. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a beneficiary
who is to receive any Shares and/or cash, if any, from the Participant's
account under the Plan in the event of such Participant's death subsequent to
the end of an Offering but prior to delivery to the Participant of such
Shares and cash. In addition, a Participant may file a written designation of
a beneficiary who is to receive any cash from the Participant's account under
the Plan in the event of such Participant's death during an Offering.
(b) The Participant may change such designation of beneficiary at
any time by written notice. In the event of the death of a Participant and in
the absence of a beneficiary validly designated under the Plan who is living
at the time of such Participant's death, the Company shall deliver such
Shares and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its sole discretion, may
deliver such Shares and/or cash to the spouse or to any one or more
dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company
may designate.
16. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan
at any time. Unless sooner terminated, the Plan shall terminate at the time
that all of the Shares subject to the Plan's reserve, as increased and/or
adjusted from time to time, have been issued under the terms of the Plan. No
Rights may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Rights granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except as expressly provided in the Plan or with the consent of the person to
whom such Rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or Rights granted under the Plan comply with the requirements of Section
423 of the Code.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon adoption by the Board.
12
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN HISTORY
ADOPTED JANUARY 30, 1990
APPROVED BY STOCKHOLDERS MAY 11, 1990
1991 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1991
1992 AMENDMENT APPROVED BY STOCKHOLDERS MAY 7, 1992
1993 AMENDMENT APPROVED BY STOCKHOLDERS MAY 4, 1993
1994 AMENDMENT APPROVED BY STOCKHOLDERS MAY 17, 1994
AMENDED AUGUST 1, 1996 TO BECOME EFFECTIVE AUGUST 15, 1996
1997 AMENDMENT APPROVED BY STOCKHOLDERS MAY 1, 1997
AMENDED AND RESTATED NOVEMBER 9, 1998
STOCKHOLDER APPROVAL NOT REQUIRED
AMENDED MAY 5, 1999(1)
1999 AMENDMENT APPROVED BY STOCKHOLDERS _________, 1999
- ---------------------------
(1) The 23,500,000 share reserve includes the 2,000,000 shares reserved
for issuance in March 1997 and has been adjusted to reflect the 3-2 stock
splits which occurred in October 1995 and May 1996 and the 2-1 stock split
which occurred in October 1997.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 192,960
<SECURITIES> 33,028
<RECEIVABLES> 254,091
<ALLOWANCES> 30,795
<INVENTORY> 9,741
<CURRENT-ASSETS> 607,228
<PP&E> 309,649
<DEPRECIATION> 237,227
<TOTAL-ASSETS> 1,500,282
<CURRENT-LIABILITIES> 361,698
<BONDS> 0
0
0
<COMMON> 647,525
<OTHER-SE> 398,496
<TOTAL-LIABILITY-AND-EQUITY> 1,500,282
<SALES> 599,384
<TOTAL-REVENUES> 599,384
<CGS> 186,102
<TOTAL-COSTS> 186,102
<OTHER-EXPENSES> 340,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,658
<INCOME-PRETAX> 73,329
<INCOME-TAX> 23,474
<INCOME-CONTINUING> 49,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,855
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.19
</TABLE>
