CADENCE DESIGN SYSTEMS INC, 10-Q, 1999-11-15

CADENCE DESIGN SYSTEMS INC
10-Q, 1999-11-15
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-10606

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CADENCE DESIGN SYSTEMS, INC.
(Exact name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C>
DELAWARE 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

2655 SEELY AVENUE, BUILDING 5, SAN JOSE, CALIFORNIA 95134
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(408) 943-1234
Registrant's Telephone Number, including Area Code

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

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

At November 5, 1999, there were 243,507,017 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:
October 2, 1999 and January 2, 1999....................... 3

Condensed Consolidated Statements of Income:
Three and Nine Months Ended October 2, 1999 and October 3,
1998.................................................... 4

Condensed Consolidated Statements of Cash Flows:
Nine Months Ended October 2, 1999 and October 3, 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...................................................... 37

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 40

Item 2. Changes in Securities and Use of Proceeds................... 41

Item 3. Defaults Upon Senior Securities............................. 41

Item 4. Submission of Matters to a Vote of Security Holders......... 41

Item 5. Other Information........................................... 41

Item 6. Exhibits and Reports on Form 8-K............................ 42

Signatures ............................................................. 43
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)
ASSETS

<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
----------- ----------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 113,358 $ 209,074
Short-term investments.................................... 7,105 40,403
Receivables, net.......................................... 259,363 305,143
Inventories, net.......................................... 12,749 9,903
Prepaid expenses and other................................ 122,159 101,629
---------- ----------
Total current assets.................................... 514,734 666,152
Marketable securities....................................... -- 19,969
Property, plant, and equipment, net......................... 328,948 274,208
Software development costs, net............................. 10,716 13,045
Acquired intangibles, net................................... 377,467 286,088
Installment contract receivables............................ 100,230 100,529
Other assets................................................ 165,404 180,231
---------- ----------
$1,497,499 $1,540,222
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Notes payable and current portion of capital leases....... $ 2,410 $ 1,273
Accounts payable and accrued liabilities.................. 221,304 242,524
Income taxes payable...................................... 10,641 21,241
Deferred revenue.......................................... 139,760 106,786
---------- ----------
Total current liabilities............................... 374,115 371,824
---------- ----------
Long-term Liabilities:
Long-term debt and capital leases......................... 38,782 136,380
Deferred income taxes..................................... 77,642 58,306
Minority interest liability............................... 41 377
Other long-term liabilities............................... 22,992 25,505
---------- ----------
Total long-term liabilities............................. 139,457 220,568
---------- ----------
Stockholders' Equity:
Preferred stock........................................... -- --
Common stock and capital in excess of par value........... 849,937 817,978
Treasury stock at cost.................................... (223,212) (219,417)
Retained earnings......................................... 366,731 358,322
Accumulated other comprehensive loss...................... (9,529) (9,053)
---------- ----------
Total stockholders' equity.............................. 983,927 947,830
---------- ----------
$1,497,499 $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 NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product........................................... $ 80,658 $188,825 $385,905 $535,162
Services.......................................... 73,125 69,772 220,542 191,114
Maintenance....................................... 72,114 75,587 218,834 217,432
-------- -------- -------- --------
Total revenue................................... 225,897 334,184 825,281 943,708
-------- -------- -------- --------
Costs and expenses:
Cost of product................................... 20,405 19,276 59,005 58,329
Cost of services.................................. 47,559 50,230 143,661 139,380
Cost of maintenance............................... 13,613 14,485 39,443 39,462
Amortization of acquired intangibles.............. 16,833 3,114 42,403 6,801
Marketing and sales............................... 88,203 85,441 251,202 245,157
Research and development.......................... 58,447 50,201 159,674 147,332
General and administrative........................ 22,449 23,599 64,612 63,079
Unusual items..................................... 12,171 158,033 46,011 218,890
-------- -------- -------- --------
Total costs and expenses........................ 279,680 404,379 806,011 918,430
-------- -------- -------- --------
Income (loss) from operations................. (53,783) (70,195) 19,270 25,278
Other income, net................................... 520 2,062 796 8,745
-------- -------- -------- --------
Income (loss) before provision (benefit) for
income taxes................................ (53,263) (68,133) 20,066 34,023
Provision (benefit) for income taxes................ (11,817) 12,320 11,657 56,468
-------- -------- -------- --------
Net income (loss)............................. $(41,446) $(80,453) $ 8,409 $(22,445)
======== ======== ======== ========
Basic net income (loss) per share................... $ (0.17) $ (0.34) $ 0.03 $ (0.10)
======== ======== ======== ========
Diluted net income (loss) per share................. $ (0.17) $ (0.34) $ 0.03 $ (0.10)
======== ======== ======== ========
Weighted average common shares outstanding.......... 242,877 234,931 241,643 234,097
======== ======== ======== ========
Weighted average common and potential common shares
outstanding--assuming dilution.................... 242,877 234,931 256,046 234,097
======== ======== ======== ========
</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>
NINE MONTHS ENDED
-----------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ----------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period............ $ 209,074 $ 221,030
--------- ---------
Cash Flows from Operating Activities:
Net income (loss)......................................... 8,409 (22,445)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 117,924 72,241
Deferred income taxes................................... 13,529 36,740
Write-off of software development costs, net............ 1,441 --
Write-off of prepaid expenses and other current
assets................................................. 642 --
Write-off of equipment, acquired intangibles, and other
non-current assets..................................... 10,661 3,117
Write-off of acquired in-process technology............. 20,700 194,100
Change in other long-term liabilities and minority
interest expense....................................... (2,694) 3,861
Equity loss from investments............................ 458 786
Provisions for doubtful accounts........................ 9,114 3,724
Non-cash restructuring charges.......................... 4,740 7,105
Changes in operating assets and liabilities, net of
effect of acquired and disposed businesses:
Receivables, net...................................... (99,041) (92,143)
Inventories, net...................................... (2,846) 3,967
Prepaid expenses and other............................ (15,667) 24,504
Installment contract receivables...................... 39,328 (82,806)
Accounts payable and accrued liabilities.............. (17,314) (22,005)
Income taxes payable.................................. (11,590) 79,375
Deferred revenue...................................... 25,338 (142)
--------- ---------
Net cash provided by operating activities........... 103,132 209,979
--------- ---------
Cash Flows from Investing Activities:
Maturities of short-term investments-held-to-maturity..... 23,591 48,802
Purchases of short-term investments-held-to-maturity...... (43) (35,852)
Maturities of short-term investments-available-for-sale... 24,510 561,423
Purchases of short-term investments-available-for-sale.... (15) (510,312)
Purchases of property, plant, and equipment............... (101,347) (90,042)
Capitalization of software development costs.............. (19,609) (17,316)
Acquired intangibles and other assets..................... (1,878) (85,584)
Investment in venture capital partnership and equity
investments............................................. (5,925) (7,328)
Cash effect of business acquisitions and dispositions..... (96,784) (100,134)
Sale of put warrants...................................... 3,609 14,812
Purchase of call options.................................. (3,609) (14,812)
--------- ---------
Net cash used for investing activities.............. (177,500) (236,343)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt and capital leases........... 98,544 --
Principal payments on long-term debt and capital leases... (195,204) (1,794)
Proceeds from issuance of common stock.................... 55,298 62,198
Purchases of treasury stock............................... (82,223) (150,035)
Proceeds from transfer of financial assets in exchange for
cash.................................................... 102,390 128,280
--------- ---------
Net cash provided by (used for) financing
activities...................................... (21,195) 38,649
--------- ---------
Effect of exchange rate changes on cash..................... (153) (989)
--------- ---------
Increase (decrease) in Cash and Cash Equivalents............ (95,716) 11,296
--------- ---------
Cash and Cash Equivalents at End of Period.................. $ 113,358 $ 232,326
========= =========
</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 nine months ended October 3, 1998, have
been reclassified to conform with the 1999 presentation.

ACQUISITIONS

In July and August 1999, Cadence acquired all of the outstanding stock of
OrCAD, Inc., a Delaware corporation (OrCAD), for cash and assumed all
outstanding stock options. OrCAD is a supplier of computer-aided engineering and
computer-aided design software and services for the printed circuit board
industry. The total purchase price was $131.4 million, and the acquisition was
accounted for as a purchase. In connection with the acquisition, Cadence
acquired net intangibles of $94 million. The results of operations of OrCAD and
the estimated fair value of the assets acquired and liabilities assumed are
included in Cadence's condensed consolidated financial statements from the date
of acquisition. Intangibles arising from the OrCAD acquisition are being
amortized on a straight-line basis over five years.

Management estimates that $11.8 million of the purchase price for OrCAD
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 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 acquired
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.

6
<PAGE>
Comparative pro forma financial information has not been presented because
the results of operations of OrCAD were not material to Cadence's condensed
consolidated financial statements.

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 outstanding stock options and warrants of Quickturn. All prior
period condensed consolidated financial statements have been 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 months 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 months 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), 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 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, Cadence acquired net intangibles
of $24.1 million. The results of operations of DAI and the estimated fair value
of the assets acquired and liabilities assumed are included in Cadence's
condensed consolidated 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 for DAI
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 for
complex computer systems that emulate the performance and operation of computer
chips and electronic systems.

A summary of inventories follows:

<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
(IN THOUSANDS) ---------- ----------
<S> <C> <C>
Raw materials........................................... $11,642 $8,798
Work in process......................................... 1,107 1,105
------- ------
Total inventories, net................................ $12,749 $9,903
======= ======
</TABLE>

7
<PAGE>
UNUSUAL ITEMS AND RESTRUCTURING

A summary of unusual items and restructuring charges follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
(IN THOUSANDS) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restructuring charges............................... $ 371 $ 20,833 $13,274 $ 24,790
Merger costs........................................ -- -- 8,435 --
Asset impairment.................................... -- -- 6,602 --
Litigation settlement............................... -- -- (3,000) --
Write-off of acquired in-process technology......... 11,800 137,200 20,700 194,100
------- -------- ------- --------
Total unusual items............................... $12,171 $158,033 $46,011 $218,890
======= ======== ======= ========
</TABLE>

RESTRUCTURING

In the three months 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 Quickturn 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. At September 30, 1999, approximately 80% of the sites had been
vacated and the remaining sites will be vacated primarily during the fourth
quarter of 1999. Noncancelable lease payments on vacated facilities will be paid
out through 2003.

Included in restructuring charges for the three months ended April 3, 1999,
are $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.

In each of the three months ended April 3, 1999, July 3, 1999, and
October 2, 1999, all termination notices and benefits were communicated to the
affected employees prior to the end of the quarter and substantially all
severance benefits to such affected employees are expected to be paid in 1999.

Included in unusual items for the nine months ended October 3, 1998, were
restructuring charges of $24.8 million, including $20.8 million representing a
reduction in personnel associated with the integration of Cadence's services
organization and the consolidation of facilities. In addition, $4 million
related to severance costs associated with Cadence's international business
operations and its information technology support services contract. In
connection with the restructuring activities, Cadence reduced its workforce by
approximately 101 employees.

8
<PAGE>
The following tables summarize Cadence's restructuring activity during the
nine months ended October 2, 1999:

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 2, 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............... 11,271 978 -- 1,025 13,274
Reclassifications........................ (515) 179 501 (165) --
Non-cash charges......................... (415) (357) (705) (3,263) (4,740)
Cash charges............................. (13,811) (6,647) (1,404) (1,390) (23,252)
-------- ------- ------- ------- --------
Balance, October 2, 1999................... $ 9,644 $ 8,649 $ 605 $ 7,511 $ 26,409
======== ======= ======= ======= ========
</TABLE>

IN-PROCESS TECHNOLOGY

In connection with the OrCAD acquisition in the third quarter of 1999 and
the DAI acquisition in the first quarter of 1999, Cadence charged to expense
$11.8 and $8.9 million, respectively, 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."

MERGER COSTS

In connection with the acquisition of Quickturn in the second quarter of
1999, Cadence charged to expense $8.4 million representing merger costs for fees
of financial advisors, attorneys, and accountants.

ASSET IMPAIRMENT

In the three months 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 months 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 nine months ended October 2, 1999,
were the amounts by which the carrying amounts of the intangible assets exceeded
their fair market values.

LITIGATION SETTLEMENT

In the second quarter of 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 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.

9
<PAGE>
CREDIT FACILITY

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. As amended in September and November of 1999, the 1998 Facility
is divided between a $177.5 million two year revolving credit facility (the Two
Year Facility) and a $177.5 million 364-day revolving credit facility
convertible into a one year term loan (the 364-Day Facility). The Two Year
Facility expires September 29, 2001. The 364-Day Facility will either expire on
September 27, 2000, be converted to a one year term loan with a maturity date of
September 27, 2001, or, at the request of Cadence and with the agreement 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 1.25% and 1.50%, 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
expenses associated with this borrowing will vary with market rates. In
addition, commitment fees are payable on the unutilized portions of the Two Year
Facility at rates between 0.23% 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 0.18%. The 1998 Facility contains certain financial and other
covenants.

During the nine months ended October 2, 1999, Cadence repaid $100 million of
the $135 million outstanding under the unsecured credit facility at January 2,
1999. At October 2, 1999, there was $35 million outstanding under this unsecured
credit facility which is classified as long-term debt on the accompanying
condensed consolidated balance sheet.

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 ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
(IN THOUSANDS) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss).................................... $(41,446) $(80,453) $8,409 $(22,445)
Translation gain (loss).............................. 186 1,806 (286) (842)
Unrealized gain (loss) on investments................ (34) 197 (190) 172
-------- -------- ------ --------
Comprehensive income (loss)........................ $(41,294) $(78,450) $7,933 $(23,115)
======== ======== ====== ========
</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 issuable upon exercise or
conversion of common stock options, warrants, contingent issuances of common
stock, and put warrants are excluded from the computation of diluted net loss
per share because their effect is antidilutive.

10
<PAGE>
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 ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
(IN THOUSANDS) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares used to calculate
basic net income (loss) per share.................. 242,877 234,931 241,643 234,097
Options............................................ -- -- 12,488 --
Warrants and other contingent shares............... -- -- 301 --
Puts............................................... -- -- 1,614 --
------- ------- ------- -------
Weighted average common and potential common shares
used to calculate diluted net income (loss) per
share.............................................. 242,877 234,931 256,046 234,097
======= ======= ======= =======
</TABLE>

Had Cadence recorded net income for the three months ended October 2, 1999,
dilutive weighted outstanding options would have been 8.7 million shares and
weighted outstanding warrants and other dilutive contingent shares would have
been 2.5 million shares.

Had Cadence recorded net income for the three and nine months ended
October 3, 1998, dilutive weighted outstanding options would have been
20.5 million and 23.9 million shares, respectively, and weighted outstanding
warrants and other dilutive contingent shares would have been 0.6 million and
0.4 million shares, respectively.

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 October 2, 1999, there were 2.9 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 $33.62 per share. Additionally, during the nine months ended
October 2, 1999, 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
October 2, 1999, Cadence had 2.1 million call options outstanding at prices
ranging from $13.33 to $33.87 per share. The put warrants and call options
outstanding at October 2, 1999 are exercisable on various dates through
February 2000, and Cadence has the contractual ability to settle the options
prior to their maturity. At October 2, 1999, the fair value of the call options
was approximately $2.7 million and the fair value of the put warrants was
approximately $19.4 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 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

11
<PAGE>
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 October 2, 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's 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 software products that are licensed and hardware products that are
sold 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. 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
segment's gross margin.

12
<PAGE>
The following tables present information about reported segments for the
three months ended October 2, 1999 and October 3, 1998:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999
---------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
(IN THOUSANDS) -------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 80,658 $73,125 $72,114 $ -- $ 225,897
Cost of revenue....................... 20,405 47,559 13,613 -- 81,577
Amortization of acquired
intangibles......................... 15,513 1,320 -- -- 16,833
-------- ------- ------- --------- ---------
Gross margin........................ 44,740 24,246 58,501 -- 127,487
Marketing and sales................... -- -- -- (88,203) (88,203)
Research and development.............. -- -- -- (58,447) (58,447)
General and administrative............ -- -- -- (22,449) (22,449)
Unusual items......................... -- -- -- (12,171) (12,171)
Other income, net..................... -- -- -- 520 520
-------- ------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes.......... $ 44,740 $24,246 $58,501 $(180,750) $ (53,263)
======== ======= ======= ========= =========
</TABLE>

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
(IN THOUSANDS) --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue............................... $188,825 $69,772 $75,587 $ -- $ 334,184
Cost of revenue....................... 19,276 50,230 14,485 -- 83,991
Amortization of acquired
intangibles......................... 1,769 1,345 -- -- 3,114
-------- ------- ------- --------- ---------
Gross margin........................ 167,780 18,197 61,102 -- 247,079
Marketing and sales................... -- -- -- (85,441) (85,441)
Research and development.............. -- -- -- (50,201) (50,201)
General and administrative............ -- -- -- (23,599) (23,599)
Unusual items......................... -- -- -- (158,033) (158,033)
Other income, net..................... -- -- -- 2,062 2,062
-------- ------- ------- --------- ---------
Income (loss) before provision
(benefit) for income taxes.......... $167,780 $18,197 $61,102 $(315,212) $ (68,133)
======== ======= ======= ========= =========
</TABLE>

13
<PAGE>
The following tables present information about reported segments for the
nine months ended October 2, 1999 and October 3, 1998:

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999
---------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
(IN THOUSANDS) -------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue.............................. $385,905 $220,542 $218,834 $ -- $ 825,281
Cost of revenue...................... 59,005 143,661 39,443 -- 242,109
Amortization of acquired
intangibles........................ 38,464 3,939 -- -- 42,403
-------- -------- -------- --------- ---------
Gross margin....................... 288,436 72,942 179,391 -- 540,769
Marketing and sales.................. -- -- -- (251,202) (251,202)
Research and development............. -- -- -- (159,674) (159,674)
General and administrative........... -- -- -- (64,612) (64,612)
Unusual items........................ -- -- -- (46,011) (46,011)
Other income, net.................... -- -- -- 796 796
-------- -------- -------- --------- ---------
Income (loss) before provision
(benefit) for income taxes......... $288,436 $ 72,942 $179,391 $(520,703) $ 20,066
======== ======== ======== ========= =========
</TABLE>

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
(IN THOUSANDS) --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue.............................. $535,162 $191,114 $217,432 $ -- $ 943,708
Cost of revenue...................... 58,329 139,380 39,462 -- 237,171
Amortization of acquired
intangibles........................ 4,288 2,513 -- -- 6,801
-------- -------- -------- --------- ---------
Gross margin....................... 472,545 49,221 177,970 -- 699,736
Marketing and sales.................. -- -- -- (245,157) (245,157)
Research and development............. -- -- -- (147,332) (147,332)
General and administrative........... -- -- -- (63,079) (63,079)
Unusual items........................ -- -- -- (218,890) (218,890)
Other income, net.................... -- -- -- 8,745 8,745
-------- -------- -------- --------- ---------
Income (loss) before provision
(benefit) for income taxes......... $472,545 $ 49,221 $177,970 $(665,713) $ 34,023
======== ======== ======== ========= =========
</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, sells 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.

15
<PAGE>
RESULTS OF OPERATIONS

REVENUE

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 % CHANGE 1999 1998 % CHANGE
(IN MILLIONS) ---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Product........................... $ 80.7 $188.8 (57)% $385.9 $535.2 (28)%
Services.......................... 73.1 69.8 5% 220.6 191.1 15%
Maintenance....................... 72.1 75.6 (5)% 218.8 217.4 1%
------ ------ ------ ------
Total revenue................... $225.9 $334.2 (32)% $825.3 $943.7 (13)%
====== ====== ====== ======
</TABLE>

SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product........................... 36% 57% 47% 57%
Services.......................... 32% 21% 27% 20%
Maintenance....................... 32% 22% 26% 23%
</TABLE>

The decreases in product revenue of $108.2 million and $149.3 million for
the three and nine months ended October 2, 1999, respectively, when compared to
the same periods of 1998, were attributable primarily to a decrease in demand
for Cadence's products and Cadence's implementation of a new subscription
licensing model during the third quarter of 1999. These decreases were partially
offset by an increase in Quickturn hardware product revenue in the same periods.
The decrease in demand for product was attributable primarily to Integrated
Circuit implementation products, which include place and route, physical design
and verification tools, and Intellectual Property creation products, which
include verilog-based simulation and algorithm design tools. The new
subscription licensing model allows customers access to new technology. Because
Cadence's new model includes undelivered technology, revenue associated with
software products under this subscription model is required to be recognized
ratably over the license period. Total product revenue in the fourth quarter of
1999 is expected to increase from the third quarter and return to year-over-year
growth in the second quarter of 2000. However, there can be no assurance that
this expectation will prove accurate, and actual results may differ materially.
See "Factors That May Affect Future Results."

Services revenue increased $3.4 million and $29.4 million in the three and
nine months ended October 2, 1999, respectively, when compared to the same
periods of 1998. The increase in the three months ended October 2, 1999 was
primarily attributable to increased demand for Cadence's design services, while
the increase in the nine months ended October 2, 1999 was primarily attributable
to increased demand for Cadence's design and methodology services.

Maintenance revenue decreased $3.5 million in the three months ended
October 2, 1999, when compared to the same period in 1998, primarily due to the
transition of the customer base to different license models, including the new
subscription license model implemented in the third quarter of 1999. Maintenance
revenue increased $1.4 million in the nine months ended October 2, 1999, when
compared to the same period in 1998.

16
<PAGE>
REVENUE BY GEOGRAPHY

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 % CHANGE 1999 1998 % CHANGE
(IN MILLIONS) ---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Domestic.......................... $120.4 $179.9 (33)% $404.6 $498.7 (19)%
International..................... 105.5 154.3 (32)% 420.7 445.0 (5)%
------ ------ ------ ------
Total revenue................... $225.9 $334.2 (32)% $825.3 $943.7 (13)%
====== ====== ====== ======
</TABLE>

REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Domestic.......................... 53% 54% 49% 53%
International..................... 47% 46% 51% 47%
</TABLE>

Total revenue from international sources decreased in the three and nine
months ended October 2, 1999, when compared to the same periods in 1998. The
decrease in the three months ended October 2, 1999 was due primarily to a
decrease in international product revenue and maintenance revenue in Japan, as
well as Cadence's implementation of a new subscription licensing model during
the third quarter of 1999. The decrease in international revenue in the nine
months ended October 2, 1999 was due primarily to a decrease in international
product revenue and maintenance revenue in Japan, partially offset by increases
in services revenue in Europe, Japan, and Canada, as well as Cadence's
implementation of a new subscription licensing model during the third quarter of
1999. The new subscription licensing model allows customers access to new
technology. Because Cadence's new model includes undelivered technology, revenue
associated with software products under this subscription model is required to
be recognized ratably over the license period.

Foreign currency exchange rates positively affected reported revenue by
$4.9 million and $12.9 million during the three and nine months ended
October 2, 1999, when compared to the same periods in 1998, and was due
primarily to the strengthening of the Japanese yen in relation to the U.S.
dollar. Foreign currency exchange rates negatively affected reported revenue by
$9.7 million and $20.3 million during the three and nine months ended
October 3, 1998, primarily due to the weakening of the Japanese yen in relation
to the U.S. dollar.

COST OF REVENUE

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 % CHANGE 1999 1998 % CHANGE
(IN MILLIONS) ---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Product........................... $20.4 $19.3 6% $ 59.0 $ 58.3 1%
Services.......................... $47.6 $50.2 (5)% $143.7 $139.4 3%
Maintenance....................... $13.6 $14.5 (6)% $ 39.4 $ 39.5 0%
</TABLE>

COST OF REVENUE AS A PERCENT OF RELATED REVENUE

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Product........................... 25% 10% 15% 11%
Services.......................... 65% 72% 65% 73%
Maintenance....................... 19% 19% 18% 18%
</TABLE>

Cost of product revenue includes costs of production personnel, packaging
and documentation, royalties, and amortization of capitalized software
development costs for software products. Manufacturing

17
<PAGE>
costs associated with Quickturn hardware emulation system products include
materials, labor, and overhead.

Cost of product revenue increased $1.1 million and $0.7 million for the
three and nine months ended October 2, 1999, respectively, when compared to the
same periods in 1998. The increase for the three months ended October 2, 1999,
when compared to the same period in 1998, was primarily attributable to
increased sales of Quickturn products, offset partially by decreases in
royalties and purchased software amortization. The increase for the nine months
ended October 2, 1999, when compared to the same period in 1998, was due
primarily to increased sales of Quickturn products and the amortization of
capitalized software development costs, offset partially by inventory
obsolescence charges of $5.7 million associated with Quickturn's introduction of
the Mercury Design Verification System in the first quarter of 1998.

Product gross margin decreased for the three and nine months ended
October 2, 1999, when compared to the same periods in 1998, due primarily to
lower demand and sales of software products, the introduction of a new
subscription licensing model during the third quarter of 1999, and because the
majority of Cadence's cost of software product revenue do not vary significantly
with changes in revenue. Product gross margin for the three and nine months
ended October 2, 1999, also declined due to a higher proportion of hardware
revenue with lower gross margins than software product revenue. Product gross
margin in the fourth quarter of 1999 is expected to increase from the third
quarter and return to year-over-year growth in the second quarter of 2000.
However, there can be no assurance that this expectation will prove accurate,
and actual results may differ materially. See "Factors That May Affect Future
Results."

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 decreased $2.7 million in the
three months ended October 2, 1999, when compared to the same period in 1998,
due primarily to a reduction in employee-related costs, including salaries,
bonus and other employee costs resulting from Cadence's restructuring plan
implemented beginning in the fourth quarter of 1998. Cost of services revenue
increased $4.3 million in the nine months ended October 2, 1999, when compared
to the same period in 1998, due primarily to an increase in employee-related
costs including salaries, bonus and other costs associated with employees
acquired through Cadence's first quarter 1998 business combinations for which
there were no similar reported costs, and an increase in the amortization of
purchased software related to services projects.

Services gross margin increased for the three and nine months ended
October 2, 1999, when compared to the same periods in 1998, due primarily 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, 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 nine months
ended October 2, 1999, when compared to the same periods of 1998.

AMORTIZATION OF ACQUIRED INTANGIBLES

18
<PAGE>
AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C> <C>
Amortization of acquired intangibles................. 7% 1% 5% 1%
</TABLE>

Amortization of acquired intangibles increased $13.7 million and
$35.6 million for the three and nine months ended October 2, 1999, respectively,
when compared to the same periods in 1998, as a result of the acquisitions of
Ambit Design Systems, Inc. (Ambit) and Bell Labs' Integrated Circuit Design
Automation group of Lucent Technologies, Inc. (BLDA) in the third quarter of
1998, DAI in the first quarter of 1999, and OrCAD in the third quarter of 1999,
all of which were accounted for using the purchase method of accounting.

OPERATING EXPENSES

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 % CHANGE 1999 1998 % CHANGE
(IN MILLIONS) ---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales............... $88.2 $85.4 3% $251.2 $245.2 2%
Research and development.......... $58.4 $50.2 16% $159.7 $147.3 8%
General and administrative........ $22.4 $23.6 (5)% $ 64.6 $ 63.1 2%
</TABLE>

EXPENSES AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Marketing and sales............... 39% 26% 30% 26%
Research and development.......... 26% 15% 19% 16%
General and administrative........ 10% 7% 8% 7%
</TABLE>

Marketing and sales expenses increased $2.8 million and $6 million for the
three and nine months ended October 2, 1999, respectively, when compared to the
same periods in 1998. The increase was primarily due to an increase in sales
support costs in Japan, partially offset by lower travel costs. Foreign currency
exchange rates negatively affected reported marketing and sales expenses by
$2 million and $3.6 million during the three and nine months ended October 2,
1999, primarily due to the strengthening of the Japanese yen in relation to the
U.S. dollar. During the three and nine months ended October 3, 1998, foreign
currency exchange rates positively affected marketing and sales expenses by
$2.1 million and $5.9 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 $64.5 million for the three
months ended October 2, 1999 and $55.9 million for the three months ended
October 3, 1998, representing 29% and 17% of total revenue for each quarter,
respectively. For the three and nine months ended October 2, 1999 and
October 3, 1998, Cadence capitalized $6.1 million and $19.6 million and
$5.7 million and $17.3 million of software development costs, respectively,
representing 9% and 11% and 10% 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 nine months ended
October 2, 1999 resulted primarily from general increases in new product
development.

The increase in net research and development expenses of $8.2 million and
$12.3 million for the three and nine months ended October 2, 1999, when compared
with the same periods of 1998, was primarily attributable to employee costs
related to the acquired 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.

19
<PAGE>
General and administrative expenses decreased $1.2 million for the three
months ended October 2, 1999, when compared to the same period in 1998. The
decrease was primarily attributable to lower legal fees of $4 million in the
third quarter of 1999 as compared to the legal fees that Quickturn incurred in
connection with the unsolicited tender offer by Mentor Graphics Corporation
(Mentor) in the third quarter of 1998, offset by increases in bad debt of
$1.2 million and consulting services. The increase in general and administrative
expenses of $1.5 million for the nine months ended October 2, 1999, when
compared to the same period in 1998, was primarily attributable to an increase
in bad debt expense of $5.4 million, partially offset by a decrease of
$4 million in legal fees in the third quarter of 1999 as compared to the legal
fees Quickturn incurred in connection with the unsolicited tender offer of
Quickturn by Mentor in the third quarter of 1998, and decreased consulting
services.

Operating expenses as a percent of total revenue increased primarily due to
the decrease in total revenue as previously discussed. Operating expenses as a
percent of total revenue is expected to decrease in the fourth quarter due to an
expected increase in revenue in the fourth quarter as compared to the third
quarter. There can be no assurance that this expectation will prove accurate,
and actual results may differ materially. See "Factors That May Affect Future
Results."

UNUSUAL ITEMS AND RESTRUCTURING

The following table presents information regarding unusual items for the
three and nine months ended October 2, 1999 and October 3, 1998:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
(IN MILLIONS) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restructuring charges................................ $ 0.4 $ 20.8 $13.3 $ 24.8
Merger costs......................................... -- -- 8.4 --
Asset impairment..................................... -- -- 6.6 --
Litigation settlement................................ -- -- (3.0) --
Write-off of acquired in-process technology.......... 11.8 137.2 20.7 194.1
----- ------ ----- ------
Total unusual items................................ $12.2 $158.0 $46.0 $218.9
===== ====== ===== ======
</TABLE>

RESTRUCTURING

Included in restructuring charges for the three months ended April 3, 1999,
are $2.2 million in severance costs to terminate 45 employees. These actions
were taken to complete Cadence's restructuring

20
<PAGE>
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.

IN-PROCESS TECHNOLOGY

In July and August 1999, Cadence acquired all of the outstanding stock of
OrCAD for cash and assumed all outstanding stock options. The total purchase
price was $131.4 million, and the acquisition was accounted for as a purchase.
OrCAD is a supplier of computer-aided engineering and computer-aided design
software and services for the printed circuit board industry. In connection with
the acquisition, Cadence acquired net intangibles of $94 million.

Upon consummation of the OrCAD acquisition, Cadence immediately charged to
expense $11.8 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 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 acquired in-process
technology. The in-process technology is expected to be commercially viable in
1999 and 2000. Expenditures to complete the in-process technology are expected
to total approximately $2.3 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 additional research and development after they have
reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, OrCAD's in-process research and
development projects in the schematic entry area were related to the development
of an online component catalog and a new schematic design entry interface.
In-process research and development projects in the simulation area were related
to a rearchitecture of the simulation engine and replacement of the digital
kernal. Additional features under development included randomized expressions
and no selection limits. The nature of the efforts to complete these 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 technologies meet their design specifications
including functional, technical, and economic performance requirements.

The net cash flows resulting from the projects underway at OrCAD, which were
used to value the purchased research and development, 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 that the projects
address, Cadence's ability to gain market acceptance in these segments, and the
life cycle of in-process technology.

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Estimated total revenue from the acquired in-process technology peaks in
2001 and declines 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
$10.8 million. The net cash flows generated from the in-process technology are
expected to reflect earnings before interest, taxes, and depreciation of
approximately 32% for the sales generated from in-process technology. However,
there can be no assurance that these assumptions will prove accurate, or that
Cadence will realize the anticipated benefit of the acquisitions. See "Factors
That May Affect Future Results."

The discount applied to the net cash flows to their present value is based
on the weighted average cost of capital (WACC). The WACC calculation produces
the average required rate of return of an investment in an operating enterprise,
based on the required rates of return from investments in various areas of the
enterprise. The rate used to discount the net cash flows from purchased
in-process technology was 22%. The discount rate is 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 these projects, management
believes Cadence will successfully complete each of the major research and
development programs. 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, future revenue and profitability of Cadence may be materially
adversely affected. Additionally, the value of other intangible assets acquired
may become impaired.

To date, OrCAD'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 January 1999, Cadence acquired DAI, 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 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, Cadence acquired net intangibles of $24.1 million.

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 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 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
were 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.

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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 technology peaks in
years 2001-2002 and declines 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. However, 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 required rate of return of an
investment in an operating enterprise, based on the required rates of return
from investments in various areas of the enterprise. The rate used to discount
the net cash flows from purchased in-process technology was 22%. The discount
rate is 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 will 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.

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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 September 1998, Cadence acquired all of the outstanding stock of Ambit
Design Systems, Inc. (Ambit) and Bell Labs' Integrated Circuit Design Automation
Group of Lucent Technologies Inc. (BLDA) for cash.

The total purchase price of Ambit was $255 million and the acquisition was
accounted for as a purchase. Ambit is a leading developer of design automation
technology used in system-on-a-chip (SOC) design.

Upon consummation of the Ambit acquisition, Cadence immediately charged to
expense $106.5 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 purchased 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 in 1999. Expenditures to
complete the in-process technology are expected to total approximately
$15 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.

In September 1998, Cadence acquired BLDA for cash. The total purchase price
of BLDA was $58 million and the acquisition was accounted for as a purchase.

Upon consummation of the BLDA acquisition, Cadence immediately charged to
expense $30.3 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 was
expected to be commercially viable in 2000. Expenditures to complete the
in-process technology were expected to total approximately $5 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, Ambit's and BLDA's 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 upcoming 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).

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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 the in-process
technology 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. Expenditures to complete the in-process
technology 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. However, risks
associated with the research and development are still considered high, and no
assurance can be made that future products will meet market expectations.

MERGER COSTS

In connection with the acquisition of Quickturn in the second quarter of
1999, Cadence charged to expense $8.4 million representing merger costs for
financial advisors, attorneys, and accountants.

ASSET IMPAIRMENT

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services business and capitalized software development costs associated with
Cadence products that will no longer be sold.

The impairment losses recorded for the nine months ended October 2, 1999
were the amounts by which the carrying amounts of the intangible assets exceeded
their fair market values.

LITIGATION SETTLEMENT

OTHER INCOME AND INCOME TAXES

Other income decreased $1.5 million and $7.9 million in the three and nine
months ended October 2, 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 nine months ended
October 2, 1999 was 28.5% and 28.6%, respectively, excluding the effect of the
write-off of acquired in-process technology which is not deductible for income
tax purposes. The effective tax rate for the three and nine months ended
October 3, 1998 was 27.5% and 27.7%, respectively, excluding the effect of the
write-off of acquired in-process technology 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 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 either 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. Although all

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Cadence product remediation activities were completed in October 1999, Cadence
continues its validation efforts for current products, as well as new products,
products acquired through acquisitions and releases through testing and code
reviews.

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 make approximately 70% of Cadence's business computer systems Year 2000
Compliant. In addition, during September 1997, Cadence commenced an
investigation 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. 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. As of September 1999, all critical business applications have been
determined to be Year 2000 Compliant.

In July 1998, Cadence established a cross functional Year 2000 Project Team
to identify and resolve all remaining Year 2000 readiness issues. The remaining
issues consist primarily of assessing the Year 2000 impact of outside vendors,
customers, facilities, and the remaining internal business systems that are not
yet assessed as Year 2000 Compliant. Project plans were developed and included
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 complete. As of September 1999, all inventories and
assessments for the Cadence Year 2000 project were completed. The remediation
(modification or replacement of existing software or systems) efforts are
expected to be completed during November 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 Cadence's 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. These projects are being handled individually outside the
established scope of the Cadence Year 2000 project efforts. The Year 2000
program activities for OrCAD are expected to be completed by the end of
November 1999. The Quickturn Year 2000 efforts are generally expected to be
completed by the end of November 1999, with customer assisted product upgrades
scheduled to take place throughout the remainder of 1999. See "Factors That May
Affect Future Results."

Estimated Year 2000 related costs to resolve the readiness issues will be
approximately $13 million throughout the term of the project. 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 affect Cadence's
estimates for becoming Year 2000 Compliant. 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.

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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. Any failure 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 relies on
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 advent of the Year 2000 will harm its business,
operating results, or financial condition.

LIQUIDITY AND CAPITAL RESOURCES

At October 2, 1999, Cadence's principal sources of liquidity consisted of
$120.5 million of cash and short-term investments, compared to $249.5 million at
January 2, 1999, and a $355 million senior unsecured credit facility. At
October 2, 1999, Cadence had outstanding borrowings of $35 million under its
revolving credit facility.

Cash provided by operating activities decreased $106.8 million to
$103.1 million for the nine months ended October 2, 1999, when compared to the
nine months ended October 3, 1998.

At October 2, 1999, Cadence had net working capital of $140.6 million
compared with $294.3 million at January 2, 1999. The working capital decrease
was driven primarily by decreases in receivables of $45.8 million and cash and
short-term investments of $129 million and an increase in deferred revenue of
$33 million, partially offset by decreases in accounts payable and accrued
liabilities of $21.2 million and income taxes payable of $10.6 million and an
increase in prepaid expenses of $20.5 million. The decrease in receivables was
primarily attributable to a decrease in product revenues while the increase in
deferred revenue was due primarily to an increase in maintenance contracts. The
increase in prepaid expenses was due primarily to estimated income tax payments.

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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 $225.5 million and $300.4 million
of cash used for investing activities in the nine months ended October 2, 1999
and October 3, 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.

Cadence sells put warrants and purchased call options through private
placements. See "Notes to Condensed Consolidated Financial Statements." At
October 2, 1999, Cadence has a maximum potential obligation related to put
warrants to buy back 2.9 million shares of its common stock at an aggregate
price of approximately $54.7 million. The put warrants will expire at various
dates through February 2000, and Cadence has the contractual ability to settle
the put warrants 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.

As part of its overall investment strategy, Cadence has become a limited
partner in a venture capital fund and is committed to invest $50 million in this
partnership over the next three to four years. As of October 2, 1999, Cadence
had contributed approximately $33.9 million to this partnership, which is
reflected in other assets in the accompanying condensed consolidated balance
sheets, net of operating losses.

Anticipated cash requirements for the remainder of 1999 include potential
business acquisitions, purchases of treasury stock through Cadence's seasoned
stock repurchase programs, and contemplated additions of property, plant, and
equipment. Cadence anticipates that current cash and short-term investment
balances, cash flow from operations, and its revolving credit facility will be
sufficient to meet its working capital requirements on a short-and long-term
basis.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

CADENCE LACKS LONG-TERM EXPERIENCE IN ITS ELECTRONICS DESIGN AND METHODOLOGY
SERVICES BUSINESS

Cadence has no long-term experience in 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 margin 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.

- 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

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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 reductions in 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

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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 realized 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's 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 has no long-term experience providing services, 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.

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

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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 then 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
in, for example, 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 significant operations outside the United States. Cadence's
revenue from international operations as a percentage of total revenue was
approximately 51% and 47% for the nine months ended October 2, 1999 and
October 3, 1998, respectively. Cadence also transacts business in various
foreign currencies. Weakening of foreign currencies, particularly 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 the U.S. Dollar 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;

- Difficulties in managing foreign operations;

- Political and economic instability;

- Unexpected changes in regulatory requirements;

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<PAGE>
- Tariffs and other trade barriers; and

- U.S. government licensing requirements for export which make licenses
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.

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

34
<PAGE>
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

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 to
determine whether and to what extent the Year 2000 problem will harm its
business, operating results, or financial condition.

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<PAGE>
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 three 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.

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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 invests in high quality credit issuers and, by policy, limits the
amount of its 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.

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 October 2, 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...................................... $ 7.6 6.21%
Short-term investments................................ 7.1 5.80%
-----
Total fixed rate investment securities.............. 14.7 6.01%
Cash equivalents...................................... 53.9 4.36%
-----
Total interest bearing instruments.................. $68.6 4.71%
=====
Debt:
Revolving credit facility............................. $35.0 8.25%
=====
</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 October 2, 1999, the notional amount was $19.5 million
which will

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be amortized in quarterly installments of $2.2 million through October 2001. The
estimated fair value at October 2, 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, gains
and losses 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 October 2, 1999 about Cadence's
material forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts matured prior to October 14, 1999.

<TABLE>
<CAPTION>
AVERAGE
NOTIONAL CONTRACT
AMOUNT RATE
-------- --------
<S> <C> <C>
Forward Contracts:
(IN MILLIONS, EXCEPT FOR AVERAGE CONTRACT RATES)
Japanese yen........................................ $ 74.6 118.82
British pound sterling.............................. $ 35.5 1.58
Euro................................................ $(28.4) 1.04
Canadian dollars.................................... $ (2.6) 1.49
Hong Kong dollars................................... $ 1.7 7.77
Swedish krona....................................... $ (1.7) 8.47
Singapore dollars................................... $ 1.6 1.68
</TABLE>

While Cadence actively manages its foreign currency risks on an ongoing
basis, there can be no assurance that Cadence's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations, cash flows and financial position.
On a net basis, foreign currency fluctuations did not have a material impact on
Cadence's results of operations and financial position during the three and nine
months ended October 2, 1999. Due to the short-term nature of the forward
contracts, the fair value at October 2, 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

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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 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 October 2, 1999 about Cadence's
outstanding 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......................................... 1.3 1.6
Weighted average strike price.................. $27.19 $13.08
Contract amount................................ $ 33.6 $ 21.1 $19.4
Call Options:
Shares......................................... 0.8 1.3
Weighted average strike price.................. $26.96 $13.33
Contract amount................................ $ 22.9 $ 16.7 $ 2.7
</TABLE>

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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 September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, granted in part, and denied in part, each party's motion
regarding the scope of the June 6, 1994 Release Agreement between the parties.
The Court held that Cadence's copyright infringement claim against Avant! is not
barred by the release and that Cadence may proceed forward on that claim. The
Court also

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held that Cadence's trade secret claim based on Avant!'s use of Cadence's Design
Framework II source code is barred by the release. Both Cadence and Avant!
intend to seek appeal of the ruling and, on October 15, 1999, the District Court
certified its order for interlocutory appeal to the Ninth Circuit. The trial
date has been vacated.

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 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 these 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 for the Northern District of California, Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems (the Aptix litigation), 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 late 2000.

On July 21, 1999, Mentor filed suit against Quickturn in the United States
District Court for 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 motion requesting that the
action brought by Mentor in Delaware be transferred to California for
consolidation with Quickturn's declaratory judgement action and the Aptix/Meta
litigation, both of which involve many of the same questions of fact and law.

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

None.

ITEM 5. OTHER INFORMATION

None.

41
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<S> <C>
10.51 Employment agreement, dated September 16, 1999, between the
Registrant and H. Raymond Bingham.

10.52 Consulting agreement, dated July 1999, between the
Registrant and Alberto Sangiovanni-Vincentelli.

10.53 Amendment, dated September 27, 1999, to the Revolving Credit
Agreement, by and between ABN-AMRO Bank and the
Registrant.

10.54 Amendment, dated November 3, 1999, to the Revolving Credit
Agreement, by and between ABN-AMRO Bank and the
Registrant.

27.01 Financial data schedule for the period ended October 2,
1999.
</TABLE>

(b) Reports on Form 8-K:

None.

42
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

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

DATE: November 15, 1999 By: /s/ H. RAYMOND BINGHAM
--------------------------------- -----------------------------------------
H. Raymond Bingham
PRESIDENT AND CHIEF EXECUTIVE OFFICER

DATE: November 15, 1999 By: /s/ WILLIAM PORTER
--------------------------------- -----------------------------------------
William Porter
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>

<PAGE>
CADENCE DESIGN SYSTEMS, INC.
EMPLOYMENT AGREEMENT
WITH H. RAYMOND BINGHAM

THIS AGREEMENT (the "Agreement") is made effective as of April 26, 1999,
between CADENCE DESIGN SYSTEMS, INC., a Delaware corporation ("Company"), and H.
RAYMOND BINGHAM ("Executive").

WHEREAS, the Company is engaged in the electronic design automation software
business;

WHEREAS, Executive is currently employed by the Company as a senior
executive; and

WHEREAS, the Company desires to secure the services of Executive as
President and Chief Executive Officer, and Executive desires to perform such
services for the Company, on the terms and conditions as set forth herein;

NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements set forth below, it is mutually agreed as follows:

1. EFFECTIVE DATE AND DUTIES.

1.1 EFFECTIVE DATE. The at-will employment of Executive by the Company
hereunder shall commence upon the effective date of this Agreement (the
"Commencement Date") and shall continue thereafter on the same terms and
conditions until terminated.

1.2 DUTIES. Executive shall have such duties as the Board of Directors
of the Company (the "Board") may from time to time prescribe consistent with his
position as President and Chief Executive Officer of the Company (the
"Services"). Executive shall report directly to the Board.

1.3 DEVOTION OF TIME. Executive shall devote his full business time,
attention, energies and best efforts to the business of the Company; provided,
however, that Executive may (1) maintain, and be re-elected to, any seats
Executive currently holds on the board of directors of one or more corporations,
(2) sit on the board of directors of one or more additional corporations with
the reasonable approval of the Board, (3) engage in charitable work, (4) manage
Executive's own investments, and (5) conduct any other activities; provided,
however, that any such activities do not materially conflict with or materially
adversely affect Executive's duties as President and Chief Executive Officer of
the Company.

1.4 OFFICE. The Company shall maintain an office for Executive at the
Company's corporate headquarters, which currently are located in San Jose,
California.

1.5 POSITIONS. The Board has elected Executive to the Board on or
before the Commencement Date and the Board and the Company shall use their best
efforts to have Executive elected and re-elected to the Board at each future
Annual Stockholder Meeting at which Executive's membership on the Board shall be
submitted to the Company's stockholders for their approval which is held during
Executive's period of service as President and Chief Executive Officer of the
Company.

2. COMPENSATION. The Company shall pay to Executive, and Executive shall
accept as full consideration for the Services, compensation consisting of the
following:

2.1 BASE SALARY. Company shall pay Executive Seven Hundred Thousand
Dollars ($700,000) per year base salary ("Base Salary"), payable in installments
in accordance with the Company's normal payroll practices, less such deductions
or withholdings required by law or authorized by Executive. The Board or the
Compensation Committee of the Board (the "Compensation Committee") shall review
the amount of the Base Salary from time to time, but no less frequently than
annually. Any increase approved during the first four (4) months of the
Company's fiscal year shall become retroactively effective as of the beginning
of such fiscal year, and any increase approved thereafter shall become effective
on the date determined by the Board or the Compensation Committee, as
appropriate.

1
<PAGE>
2.2 BONUS. Executive shall participate in the Company's Senior
Executive Bonus Plan, or its successor (the "Bonus Plan") at an annual target
bonus of one hundred percent (100%) of Executive's Base Salary for the Company's
fiscal year with respect to which such bonus shall be determined pursuant to the
terms of such Bonus Plan. Such bonus shall be prorated from the Commencement
Date for the remainder of 1999.

2.3 STOCK OPTIONS. Executive shall be entitled to a grant of an
additional nonqualified stock option for Eight Hundred Fifty Thousand (850,000)
shares under the Company's 1987 Stock Option Plan (the "Stock Option Plan"),
which was awarded by the Compensation Committee on May 7, 1999 (the "Option").
The Option shall be granted at one hundred percent (100%) of the fair market
value of the Company's common stock on the date of grant, shall vest in
accordance with the Company's vesting policy for additional grants to executive
officers of the Company in effect on the date of the grant of the Option by the
Compensation Committee, and shall contain such other terms and conditions as
shall be set forth in that agreement documenting the Option.

2.4 INDEMNIFICATION. In the event Executive is made, or threatened to
be made, a party to any legal action or proceeding, whether civil or criminal,
by reason of the fact that Executive is or was a director or officer of the
Company or serves or served any other corporation or other person which is at
least fifty percent (50%) or more owned by the Company or controlled by the
Company in any capacity at the Company's request, Executive shall be indemnified
by the Company, and the Company shall pay Executive's related expenses when and
as incurred, all to the fullest extent not prohibited by law, as more fully
described in that Indemnification Agreement attached as Exhibit A.

3. BENEFITS. Executive shall receive the same or greater pension, profit
sharing, welfare benefits, fringe benefits, and other benefits and perquisites,
valued in the aggregate, as the Board or the Compensation Committee provides to
another key executive of the Company on the Commencement Date, and shall also
receive any enhancements to any such benefit or perquisite that the Board or the
Compensation Committee may determine to provide to a key executive of the
Company in the future.

4. BENEFITS UPON TERMINATION OF EMPLOYMENT. Executive's employment by the
Company shall terminate immediately upon Executive's receipt of written notice
of termination by the Company, upon the Company's receipt of written notice of
termination by Executive, or upon Executive's death or permanent disability.
Further, at the time of termination of employment, if requested by the Board,
Executive shall submit his written resignation from the Board. "Permanent
disability" shall mean any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than twelve (12) months and which
renders Executive unable to perform effectively the duties and responsibilities
of his office. Except in connection with a termination for Cause (as defined in
Section 4.2), or on account of permanent disability (as defined above) or death,
or a voluntary termination by Executive other than upon or following
Constructive Termination (as defined in Section 4.3), upon execution by
Executive of an effective release of claims substantially in the form attached
as Exhibit B, the final wording of which shall be determined by the Company (the
"Release"), the Company shall provide Executive with termination benefits upon
termination of employment as follows:

4.1 TERMINATION BENEFITS.

(a) The Company shall pay Executive an amount equal to one hundred
and eighty percent (180%) of his Base Salary and annual target bonus in one lump
sum amount. The Company shall use Executive's highest Base Salary and annual
target bonus in effect at any time during the term of this Agreement for
purposes of calculating the payment to Executive under this Section 4.1. All
such amounts shall be paid by the Company as soon as administratively possible
(i.e., no later than fifteen (15) days) following the first point in time that
the Company is no longer prohibited from deducting such payments for income tax
purposes under the provisions of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), but not prior to the eighth day following
Executive's execution of the Release.

2
<PAGE>
Amounts not paid to Executive within fifteen (15) days of Executive's
termination of employment as a result of the application of the preceding
sentence shall be credited to Executive's account under the Company's 1994
Nonqualified Deferred Compensation Plan. Upon payment, such amounts shall be
reduced by applicable withholding taxes and other deductions required by law or
authorized by Executive.

(b) All of the unvested options and other stock awards held by
Executive on the date of such termination (including unvested options and other
stock awards outstanding on the Commencement Date) that would have vested over
the succeeding thirty month (30 month) period had Executive continued to provide
the Services during that period shall immediately vest and become exercisable in
full on the date of Executive's termination of employment. This acceleration
will have no effect on any other provisions of the stock awards, including but
not limited to the provisions of the performance options dealing with the
acceleration of vesting upon the achievement of performance milestones.

(c) For a period of twelve (12) months following termination of
employment, the Company shall continue to provide Executive with, and pay the
full cost of, health, disability and life insurance coverage for Executive, his
spouse and dependents that is commensurate with the coverage then provided to
Executive, his spouse and dependents at the time of termination. The Company
shall structure such health, disability and life insurance coverage as
nontaxable benefits to the maximum extent possible, including, but not limited
to, by characterizing such benefits as coverage to a former employee.
Specifically for health insurance coverage, to the extent permitted by the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and by the
Company's group health insurance policies, the Executive shall elect COBRA
continuation coverage and the Company shall pay Executive and his covered
dependents' COBRA continuation premiums for twelve (12) months following the
date of termination of employment. Executive agrees to notify the General
Counsel of the Company, in writing, immediately upon the commencement of health
benefit coverage which would cause Executive's COBRA continuation coverage to
cease.

This Section 4.1(c) provides only for the Company's payment of COBRA
continuation premiums for the periods specified above. This Section 4.1(c) is
not intended to affect, nor does it affect, the rights of Executive, or
Executive's covered dependents under any applicable law with respect to health
insurance continuation coverage.

(d) The Company shall also provide Executive with the benefits
described in Section 5.5, but only in the event of Executive's involuntary
termination of employment with the Company without Cause.

4.2 DEFINITION OF CAUSE. For purposes of this Agreement, "Cause" shall
be limited to (1) Executive's gross misconduct or fraud in the performance of
the Services; (2) Executive's conviction or guilty plea with respect to any
felony related to his employment (except for motor vehicle violations); or (3)
Executive's material breach of this Agreement or the Employee Proprietary
Information and Inventions Agreement referred to in Section 8 after written
notice delivered to Executive of such breach and failure to cure such breach
within thirty (30) days following Executive's receipt of such notice. The
Company may not terminate Executive's employment for Cause unless and until
there shall have been delivered to Executive a copy of a resolution duly adopted
by the affirmative vote of at least a majority of the Board at a meeting of the
Board called and held for the purpose (after reasonable notice to Executive and
an opportunity for Executive, together with Executive's counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was culpable for the conduct constituting "Cause" and specifying the
particulars thereof.

4.3 CONSTRUCTIVE TERMINATION. Notwithstanding anything in Section 4 or
Section 5 to the contrary, Executive may voluntarily end his employment upon or
within ninety (90) days following the occurrence of an event constituting a
Constructive Termination with full payment of the termination

3
<PAGE>
benefits and option vesting described in Section 4.1. For purposes of this
Agreement, "Constructive Termination" shall mean:

(a) a material adverse change in Executive's position (including
Executive's authority, powers, duties, responsibilities, title and/or reporting
relationship to the Board) causing Executive's position to be of materially less
stature or responsibility, unless Executive consents in writing to such change,
and such a material adverse change shall in all events be deemed to occur if
Executive no longer serves as President and Chief Executive Officer reporting to
the Board, unless Executive consents in writing to such change;

(b) a reduction, without Executive's written consent, in
Executive's level of base compensation (including Base Salary as well as
benefits and perquisites) in effect on the Commencement Date (or such higher
level as may be in effect in the future) by more than ten percent (10%) or a
reduction by more than ten percent (10%) in Executive's target bonus in effect
on the Commencement Date (or such greater target bonus amount as may be in
effect in the future) under the Bonus Plan;

(c) a relocation of Executive's principal place of employment by
more than thirty (30) miles, unless Executive consents in writing to such
relocation;

(d) any material breach by the Company of any provision of this
Agreement after written notice delivered to the Company of such breach and a
reasonable opportunity to cure such breach (which opportunity shall not extend
beyond a period of thirty (30) days from the date of delivery of written
notice); or

(e) any failure by the Company to obtain the assumption of this
Agreement by any successor to the Company.

5. CHANGE IN CONTROL BENEFITS.

5.1 During the period (if any) upon or following a Change in Control
that Executive shall continue to provide the Services, then the terms and
provisions of this Agreement shall continue in full force and effect, the Bonus
Plan shall be interpreted and/or amended to evaluate Executive's achievement of
goals as if the Company continued as an independent entity (unless Executive
agrees in writing to a different form of cash incentive compensation plan), and
Executive shall continue to vest in all of his unvested stock options and other
stock awards as specified in the agreements documenting such options and stock
awards.

Should there occur a Change in Control (as defined below) and
Executive's employment terminates for any reason upon or within three
(3) months prior to the Change in Control or upon or before thirteen (13) months
following a Change in Control, then the following provisions shall become
applicable in lieu of severance benefits otherwise payable under Section 4.

5.2 In the event of (y) a termination of Executive's employment by the
Company other than either for Cause or on account of permanent disability or
death, or (z) a Constructive Termination of employment, upon execution by
Executive of the Release, all the following benefits shall become due and
payable:

(a) The Company shall pay to Executive as severance pay in one lump
sum amount, an amount equal to two hundred and fifty percent (250%) of
Executive's Base Salary and annual target bonus in effect immediately prior to
the time of such termination. The Company shall use Executive's highest Base
Salary and annual target bonus in effect at any time during the term of this
Agreement for purposes of calculating the payment to Executive under this
Section 5.2(a). All such amounts shall be paid by the Company as soon as
administratively possible following such termination (i.e., no later than
fifteen (15) days following such termination or on the date of the closing of a
transaction constituting a Change in Control if at the time of termination the
occurrence of the Change in Control remains uncertain), but not prior to the
eighth day following Executive's execution of the Release. Upon payment, such
amounts shall

4
<PAGE>
be reduced by applicable withholding taxes and all other deductions required by
law or authorized by Executive.

(b) All of the unvested options and other stock awards held by
Executive on the date of such Change in Control (including performance options
without regard as to whether or not any of the performance criteria have been
satisfied and including all other stock awards outstanding on the Commencement
Date) shall immediately vest and become exercisable in full on the date of
Executive's termination of employment, but not prior to the eighth (8th) day
following Executive's execution of the Release, and shall remain exercisable for
the period specified in the applicable option grant.

(c) In the event that Executive's termination occurs within three
(3) months prior to the occurrence of a Change in Control and Executive receives
termination payments pursuant to Section 4 of this Agreement, any payments to
which Executive may be entitled under this Section 5 shall be reduced by the
payments received under Section 4. Notwithstanding the foregoing, for purposes
of this Agreement, any payments made under Section 4 in these circumstances
shall be treated as paid pursuant to this Section 5.

(d) For purposes of this Section 5, a Change in Control shall be
deemed to occur upon the consummation of any one of the following events:

(i) a sale, lease or other disposition of all or substantially
all of the assets of the Company;

(ii) 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 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;

(iii) a merger or consolidation in which the Company is the
surviving corporation and the stockholders of the Company immediately prior to
such transaction 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 transaction;

(iv) any transaction or series of related transactions after
which any person (as such term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), other than any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
subsidiary of the Company, becomes the beneficial owner (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of
voting securities of the Company representing twenty percent (20%) or more of
the combined voting power of all of the voting securities of the Company;

(v) in the event that 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 two-thirds of the Incumbent Board, such new director shall be
considered as a member of the Incumbent Board.); or

(vi) the liquidation or dissolution of the Company.

5
<PAGE>
For purposes of Section 5.2(d)(ii) and Section 5.2(d)(iii) above, any
person who acquired securities of the Company prior to the occurrence of the
specified transaction in contemplation of such transaction and who immediately
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, as appropriate, (or if the Company or the surviving corporation is
a controlled affiliate, then of the appropriate entity as determined above)
shall not be included in the group of stockholders of the Company immediately
prior to such transaction.

5.3 In the event that the benefits payable hereunder to Executive (i)
constitute "parachute payments" within the meaning of Section 280G of the Code,
or any comparable successor provisions, and (ii) but for this Section 5.3 would
be subject to the excise tax imposed by Section 4999 of the Code, or any
comparable successor provisions (the "Excise Tax"), then Executive's benefits
hereunder shall be either

(i) provided to Executive in full, or

(ii) provided to Executive as to such lesser extent which would
result in no portion of such benefits being subject to the
Excise Tax,

whichever of the foregoing amounts, when taking into account applicable federal,
state, local and foreign income and employment taxes, the Excise Tax, and any
other applicable taxes, results in the receipt by Executive, on an after-tax
basis, of the greatest amount of benefits, notwithstanding that all or some
portion of such benefits may be taxable under the Excise Tax. Unless the Company
and Executive otherwise agree in writing, any determination required under this
Section 5.3 shall be made in writing in good faith by a nationally recognized
accounting firm which is then serving as the Company's independent auditors (the
"Accountants"). In the event of a reduction of benefits hereunder, Executive
shall be given the choice of which benefits to reduce. If Executive does not
provide written identification to the Company of which benefits he chooses to
reduce within ten (10) days of his receipt of the Accountants' determination,
and Executive has not disputed the Accountants' determination, then the Company
shall select the benefits to be reduced. For purposes of making the calculations
required by this Section 5.3, the Accountants may make reasonable assumptions
and approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of the Code, and other
applicable legal authority. The Company and Executive shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section 5.3. The Company
shall bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 5.3.

If, notwithstanding any reduction described in this Section 5.3, the IRS
determines that Executive is liable for the Excise Tax as a result of the
receipt of the payment of benefits as described above, then Executive shall be
obligated to pay back to the Company, within thirty (30) days after a final IRS
determination or in the event that Executive challenges the final IRS
determination, a final judicial determination, a portion of the payment equal to
the "Repayment Amount." The Repayment Amount with respect to the payment of
benefits shall be the smallest such amount, if any, as shall be required to be
paid to the Company so that Executive's net after-tax proceeds with respect to
any payment of benefits (after taking into account the payment of the Excise Tax
and all other applicable taxes imposed on such payment) shall be maximized. The
Repayment Amount with respect to the payment of benefits shall be zero if a
Repayment Amount of more than zero would not result in Executive's net after-tax
proceeds with respect to the payment of such benefits being maximized. If the
Excise Tax is not eliminated pursuant to this paragraph, Executive shall pay the
Excise Tax.

Notwithstanding any other provision of this Section 5.3, if (i) there is
a reduction in the payment of benefits as described in this Section 5.3, (ii)
the IRS later determines that Executive is liable for the Excise Tax, the
payment of which would result in the maximization of Executive's net after-tax
proceeds (calculated as if Executive's benefits had not previously been
reduced), and (iii) Executive pays the Excise Tax, then the Company shall pay to
Executive those benefits which were reduced pursuant to this

6
<PAGE>
subsection contemporaneously or as soon as administratively possible after
Executive pays the Excise Tax so that Executive's net after-tax proceeds with
respect to the payment of benefits are maximized.

5.4 For a period of twelve (12) months following termination of
employment, the Company shall continue to provide Executive with, and pay the
full cost of, health, disability and life insurance coverage for Executive, his
spouse and dependents that is commensurate with the coverage then provided to
Executive at the time of termination. The Company shall structure such health,
disability and life insurance coverage as nontaxable benefits to the maximum
extent possible, including, but not limited to, by characterizing such benefits
as coverage, to a former employee. Specifically for health insurance coverage,
to the extent permitted by the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and by the Company's group health insurance policies, the
Executive shall elect COBRA continuation coverage and the Company shall pay
Executive and his covered dependents' COBRA continuation premiums for twelve
(12) months following the date of termination of employment. Executive agrees to
notify the General Counsel of the Company, in writing, immediately upon the
commencement of health benefit coverage, which would cause Executive's COBRA
continuation coverage to cease.

This Section 5.4 provides only for the Company's payment of COBRA
continuation premiums for the periods specified above. This Section 5.4 is not
intended to affect, nor does it affect, the rights of Executive, or Executive's
covered dependents under any applicable law with respect to health insurance
continuation coverage.

5.5 If Executive is involved in any actual or threatened legal
proceeding to enforce or defend his contractual rights under this Agreement upon
or following the occurrence of a Change in Control, the Company shall reimburse
Executive for all of the reasonable attorney fees and costs and other expenses
incurred by Executive in connection therewith.

6. DISPUTE RESOLUTION. 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 or the termination of that employment with
the Company, except for disputes regarding the interpretation of those
agreements referred to in Section 9 and disputes involving the protection of the
Company's intellectual property, shall be decided by confidential, final and
binding arbitration conducted by the American Arbitration Association ("AAA"),
under the then-existing AAA rules, rather than by litigation in court, trial by
jury, administrative proceeding, or in any other forum.

7. COOPERATION WITH THE COMPANY AFTER TERMINATION OF THE EMPLOYMENT PERIOD.
Following termination of employment by Executive, Executive shall cooperate
with the Company in all matters relating to the winding up of his pending work
on behalf of the Company and the orderly transfer of any such pending work to
other employees of the Company as may be designated by the Company, which period
shall not exceed forty-five (45) days. Executive also agrees to participate as a
witness in any litigation or agency proceeding to which the Company is a party
at the request of the Company upon delivery to Executive of reasonable advance
notice. Furthermore, Executive agrees to return all property of the Company in
his possession or control to the Company within ten (10) days of his termination
of employment, except to the extent that retention of any of such property is
necessary or desirable or convenient in order to permit Executive to satisfy his
obligations under this Section 7.

8. CONFIDENTIALITY. Executive agrees to execute the Employee Proprietary
Rights and Inventions Agreement, attached hereto as Exhibit C, modified as
mutually agreed by Executive and the Company in order to avoid any conflict with
the terms of this Agreement.

9. GENERAL.

9.1 WAIVER. Neither party shall, by mere lapse of time, without giving
notice or taking other action hereunder, be deemed to have waived any breach by
the other party of any of the provisions of this Agreement. Further, the waiver
by either party of a particular breach of this Agreement by the other shall

7
<PAGE>
neither be construed as, nor constitute, a continuing waiver of such breach or
of other breaches of the same or any other provision of this Agreement.

9.2 SEVERABILITY. If for any reason a court of competent jurisdiction
or arbitrator finds any provision of this Agreement to be unenforceable, the
provision shall be deemed amended as necessary to conform to applicable laws or
regulations, or if it cannot be so amended without materially altering the
intention of the parties, the remainder of the Agreement shall continue in full
force and effect as if the offending provision were not contained herein.

9.3 ATTORNEY FEES. The Company shall pay or reimburse Executive for
all reasonable expenses incurred by Executive in connection with the
negotiation, creation and implementation of this Agreement and any other
agreements contemplated by this Agreement.

9.4 MITIGATION. Executive shall not be required to mitigate damages or
reduce the amount of any payment provided under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer or by retirement benefits after the date of
termination, or otherwise.

9.5 NOTICES. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
considered effective either (a) upon personal service or (b) upon delivery by
facsimile and depositing such notice in the U.S. Mail, postage prepaid, return
receipt requested and addressed to the Company in care of the Chairman of the
Board at the Company's principal corporate address, and to Executive at his most
recent address shown on the Company's corporate records, or at any other address
which Executive may specify in any appropriate notice to the Company, or (c)
upon only depositing such notice in the U.S. Mail as described in (b) above.

9.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which taken
together constitutes one and the same instrument and in making proof hereof it
shall not be necessary to produce or account for more than one such counterpart.

9.7 ENTIRE AGREEMENT. The parties hereto acknowledge that each has
read this Agreement, understands it, and agrees to be bound by its terms. The
parties further agree that this Agreement, the exhibits to this Agreement, and
the documents, plans and policies referred to in this Agreement (which are
hereby incorporated by reference) constitute the complete and exclusive
statement of the agreement between the parties and supersedes all proposals
(oral or written), understandings, representations, conditions, covenants, and
all other communications between the parties relating to the subject matter
hereof.

9.8 GOVERNING LAW. This Agreement shall be governed by the law of the
State of California.

9.9 ASSIGNMENT AND SUCCESSORS. The Company shall have the right to
assign its rights and obligations under this Agreement to an entity that
acquires all or 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 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 upon his death, as
permitted by this Agreement, or as otherwise agreed to by the Company.

9.10 DURATION. This Agreement is for no specific term, and either
Executive or the Company may terminate this Agreement in writing at any time,
for any reason or for no reason, with or without prior notice.

9.11 AMENDMENTS. This Agreement and the terms and conditions of the
matters addressed in this Agreement may only be amended in writing executed both
by the Executive and a duly authorized representative of the Company.

8
<PAGE>
9.12 SURVIVAL OF CERTAIN PROVISIONS. Notwithstanding the termination
of this Agreement in accordance with the provisions of Section 9.10 of the
Agreement, the following provisions of the Agreement shall survive its
termination: Executive's obligations under Sections 7 and 8, the Company's
obligations to provide compensation earned through the termination of the
employment relationship under Sections 2 and 3, the Company's obligation to
provide severance benefits under Sections 4 and 5, the Company's obligation to
indemnify Executive pursuant to Section 2.4 and the referenced Indemnification
Agreement, the Company's obligation to reimburse Executive for expenses related
to actual or threatened legal proceedings to the extent provided in
Section 5.5, and the dispute resolution provisions of Section 6.

IN WITNESS WHEREOF, the parties have executed this Agreement on this 16th
day of September, 1999.

<TABLE>
<S> <C>
CADENCE DESIGN SYSTEMS, INC. EXECUTIVE

By: /s/ R. L. Smith McKeithen /s/ H. Raymond Bingham
------------------------------------------ -------------------------------------------
H. Raymond Bingham
Name: R. L. Smith McKeithen
- ------------------------------------------

Title: Sr. VP & General Counsel
- ------------------------------------------
</TABLE>

<PAGE>
[LOGO]

Alberto Sangiovanni-Vincentelli
200 Tunnel Road
Berkeley, CA 94720

Dear Alberto,

We are pleased to offer you an expanded role to include the duties of Chief
Technical Advisor (CTA). With this new position, you will continue your current
roles with Cadence as member of Board of Directors plus duties currently agreed
as a Consultant including: supervision of technical work in the labs,
supervision and management of Cadence European Labs, strategy for entry into
systems companies, supporting the Felix architecture and paradigm, participation
in the Technology Steering Committee, support R&D strategy and organizational
development, support customer relationships in Europe, supervise the COSY
project and support our Services strategies, plus take on the expanded role of
CTA.

Your new consulting agreement will cover your existing responsibilities plus
the new role as CTA. As of June 1, 1999, the new consulting fee will be $275,000
per annum versus the $225,000 you have today. You will also continue to be
eligible to receive a discretionary bonus as you have the past two years. I will
propose a grant of 77,500 options tied to your new role. Your Board of Directors
compensation package will also continue, including both the cash and options
tied to your outside directorship on the Cadence Board of Directors.

Alberto, if you are in agreement with these terms, please sign this letter
below, and return directly to Ron Kirchenbauer.

Sincerely,

/s/ H. Raymond Bingham
H. Raymond Bingham
President and CEO
Cadence Design Systems, Inc.

/s/ Alberto Sangiovanni-Vincentelli
- ---------------------------------
Alberto Sangiovanni-Vincentelli

<PAGE>

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated
as of September 27, 1999, is made among Cadence Design Systems, Inc., a
Delaware corporation (the "Borrower"), the financial institutions listed on
the signature pages hereof under the heading "BANKS" (each a "Bank" and,
collectively, the "Banks"), Bank of America, N.A. (formerly known as Bank of
America National Trust and Savings Association), Bank of Montreal, Bank One,
NA (formerly known as The First National Bank of Chicago), KeyBank National
Association and UBS AG, Stamford Branch, as co-agents, and ABN AMRO Bank
N.V., as agent for the Banks (in such capacity, the "Agent").

The Borrower, the Banks and the Agent are parties to a Credit
Agreement dated as of September 29, 1998 (as amended by a First Amendment to
Credit Agreement dated as of October 16, 1998, the "Credit Agreement"). The
Borrower has requested that the Banks agree to certain amendments to the
Credit Agreement. The Banks have agreed to such request, subject to the
terms and conditions hereof.

Accordingly, the parties hereto agree as follows:

SECTION 1 DEFINITIONS; INTERPRETATION.

(a) TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms used
in this Amendment (including in the Recitals hereof) and not otherwise
defined herein shall have the meanings assigned to them in the Credit
Agreement.

(b) INTERPRETATION. The rules of interpretation set forth in
Section 1.03 of the Credit Agreement shall be applicable to this Amendment
and are incorporated herein by this reference.

SECTION 2 AMENDMENTS TO THE CREDIT AGREEMENT.

(a) AMENDMENTS. The Credit Agreement shall be amended as follows,
effective as of the date of satisfaction of the conditions set forth in
Section 3 (the "Effective Date"):

(i) The definition of "364-day Commitment" set forth in
Section 1.01 of the Credit Agreement shall be amended by deleting the dollar
amount of "$177,500,000" in clause (i) of such definition and substituting
therefor the dollar amount "$150,000,000";

(ii) Section 4.01 of the Credit Agreement shall be amended by
deleting the dollar amount "$177,500,000" in subsection (c) thereof and
substituting therefor the dollar amount "$150,000,000";

(iii) The definition of "APPLICABLE FEE AMOUNT" set forth in
Section 1.01 of the Credit Agreement shall be amended by deleting the term
"3-Year Commitment Fee" and substituting therefor the term "2-Year Commitment
Fee".

<PAGE>

(iv) The definition of "CONSOLIDATED EBITDA" set forth in
Section 1.01 of the Credit Agreement shall be amended by inserting
immediately after the text "which were deducted in determining Consolidated
Net Income," the following new text:

"PLUS the quarterly increase in product license subscription bookings to
the extent not included or reflected in Consolidated Net Income, in each
case,"

(v) The definition of "FINAL MATURITY DATE" set forth in
Section 1.01 of the Credit Agreement shall be amended by deleting the date
"September 29, 2002" and substituting therefor the date "September 29, 2001".

(vi) The definition of "FUNDED DEBT" set forth in Section
1.01 of the Credit Agreement shall be amended by inserting immediately after
the text "Section 9.02(c)" the following new text: "and Section 9.02(e)".

(vii) Section 9.02(b) of the Credit Agreement (captioned
"Minimum Liquidity") shall be deleted in its entirety the following inserted
in its place: "(b) [Intentionally omitted.]"

(viii) A new Section 9.02(d) shall be inserted into the Credit
Agreement as follows:

"(d) MINIMUM CURRENT RATIO. The Borrower shall maintain as of the
last day of each fiscal quarter a ratio of (i) current assets to (ii)
current liabilities, in each case, of the Borrower and its Subsidiaries on
a consolidated basis, as determined in accordance with GAAP, of not less
than 1.00 to 1.00. For purposes of calculating the Borrower's compliance
with this Section 9.02(d) as of the last day of any fiscal quarter, current
liabilities shall include (A) off-balance sheet Indebtedness having a
maturity of less than one year from such fiscal quarter-end and (B) the
current portion of all Loans then outstanding hereunder."

(ix) A new Section 9.02(e) shall be inserted into the Credit
Agreement as follows:

"(e) MAXIMUM FUNDED DEBT TO EBITDA RATIO. The Borrower shall maintain
as of the last day of each fiscal quarter a ratio of (i) Funded Debt of the
Borrower and its Subsidiaries on a consolidated basis, to (ii) Consolidated
EBITDA for the twelve-month period ended on such date, of not more than
2.00 to 1.00."

(x) Annex I to the Credit Agreement (captioned "Pricing Grid")
shall be amended by (A) deleting the term "3-Year Commitment Fee" in each place
where it appears in Annex I and substituting therefor in each such place the
term "2-Year Commitment Fee" and (B) deleting the pricing grid set forth in
Paragraph I and replacing it with the following pricing grid:

2.
<PAGE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
LEVEL FIXED CHARGE EURODOLLAR 2-YEAR 364-DAY
COVERAGE RATIO RATE SPREAD COMMITMENT FEE COMMITMENT FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Level 1 less than or 1.500% 0.300% 0.175%
equal to 2.00
- ------------------------------------------------------------------------------

Level 2 greater than 1.375% 0.250% 0.175%
2.00 but less
than or equal
to 3.00
- ------------------------------------------------------------------------------

Level 3 greater than 1.250% 0.225% 0.175%
3.00
- ------------------------------------------------------------------------------
</TABLE>

(xi) Schedule 1 of the Credit Agreement shall be amended and
restated in its entirety in the form of Schedule 1 attached hereto.

(b) EXTENSION OF CONVERSION DATE. Pursuant to Section 4.01(c) of
the Credit Agreement, the Borrower has requested, and the Agent and the Banks
hereby unanimously consent to, the extension of the Conversion Date for an
additional one-year period. Accordingly, the new scheduled Conversion Date
shall be September 29, 2000.

(c) DOCUMENTATION AGENT. From and after the Effective Date, Bank
of America, N.A. ("BofA"), shall have the additional designation of
"Documentation Agent" under the Credit Agreement (in such capacity, the
"Documentation Agent"). Notwithstanding BofA's designation as "Documentation
Agent," BofA shall not have any right, power, obligation, liability,
responsibility or duty under the Credit Agreement other than those applicable
to all Banks as such. Without limiting the foregoing, the Documentation
Agent shall not have or be deemed to have any fiduciary relationship with any
Bank. Each Bank acknowledges that it has not relied, and will not rely, on
the Documentation Agent in entering into this Amendment or the Credit
Agreement or in taking or not taking action thereunder.

(d) REFERENCES WITHIN CREDIT AGREEMENT. Each reference in the
Credit Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
Credit Agreement as amended by this Amendment.

SECTION 3 CONDITIONS OF EFFECTIVENESS. The effectiveness of this
Amendment shall be subject to the satisfaction of each of the following
conditions precedent:

(a) EXECUTED AMENDMENT. The Agent shall have received an executed
counterpart of this Amendment from the Borrower and each Bank.

(b) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On the Effective
Date, after giving effect to the amendment of the Credit Agreement
contemplated hereby:

3.
<PAGE>

(i) the representations and warranties contained in Section
4 hereof shall be true and correct on and as of the Effective Date as though
made on and as of such date; and

(ii) no Default shall have occurred and be continuing.

(c) FEES AND EXPENSES. The Borrower shall have paid (i) all fees
in accordance with Section 5 below and (ii) all invoiced costs and expenses
then due in accordance with Section 6(d).

(d) ADDITIONAL DOCUMENTS. The Agent shall have received, in form
and substance satisfactory to it, such additional approvals, opinions,
documents and other information as the Agent or any Bank (through the Agent)
may reasonably request.

SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To
induce the Banks to enter into this Amendment, the Borrower hereby confirms
and restates, as of the date hereof, the representations and warranties made
by it in Section 8.01 of the Credit Agreement and in the other Loan
Documents. For the purposes of this Section 4, (i) each reference in Section
8.01 of the Credit Agreement to "this Agreement," and the words "hereof,"
"herein," "hereunder," or words of like import in such Section, shall mean
and be a reference to the Credit Agreement as amended by this Amendment, and
each reference in such Section to "the Loan Documents" shall mean and be a
reference to the Loan Documents as amended as contemplated hereby, (ii) the
representation and warranty set forth in Section 8.01(p) of the Credit
Agreement shall be deemed instead to refer to the last day of the most recent
fiscal quarter and fiscal year for which financial statements have then been
delivered, (iii) any representations and warranties which relate solely to an
earlier date shall not be deemed confirmed and restated as of the date hereof
(PROVIDED that such representations and warranties shall be true, correct and
complete as of such earlier date), and (iv) the preceding clause (i) shall
take into account any amendments to the Schedules and other disclosures made
in writing by the Borrower to the Agent and the Banks after the Closing Date
and approved by the Agent and the Majority Banks.

SECTION 5 AMENDMENT FEES. The Borrower shall pay to the Agent (a)
for the account of each of the Banks other than the Departing Banks (as
defined in Section 6(b) below) an amendment fee equal to 0.075% of the
Revolving Commitment of each Bank as in effect immediately prior to giving
effect to this Amendment, and (b) for the account of each of the Increasing
Banks (as defined in Section 6(a) below) an additional amendment fee equal to
0.125% of the amount by which the Revolving Commitment of such Increasing
Bank increases immediately after giving effect to this Amendment.

SECTION 6 CERTAIN TRANSITIONAL MATTERS.

(a) On the Effective Date, the amount of Revolving Loans then
outstanding and held by each Bank shall be adjusted to reflect the changes in
the Banks' Pro Rata Shares of the Revolving Loans, subject to Section 5.02 of
the Credit Agreement. Each Bank having Revolving Loans then outstanding and
whose Pro Rata Share in respect of Revolving Loans has been decreased on the
Effective Date as a result of the amendments contemplated hereby shall be
deemed to have assigned on the Effective Date, without recourse, to each Bank
increasing its Revolving Commitment on the Effective Date (each such Bank, an
"Increasing Bank") such

4.
<PAGE>

portion of such Revolving Loans as shall be necessary to effectuate such
adjustment. Each such Bank increasing its Revolving Commitment on the
Effective Date shall (i) be deemed to have assumed such portion of such
Revolving Loans and (ii) fund on the Effective Date such assumed amounts to
the Agent for the account of the assigning Bank in accordance with the
provisions hereof in the amount notified to such Increasing Bank by the
Agent. At the request of any Bank whose Revolving Commitment increases or
decreases as a result of the amendments contemplated hereby, the Borrower
shall promptly provide a replacement Revolving Note to each such requesting
Bank reflecting such Bank's new Revolving Commitment. Each such Bank
requesting a replacement Revolving Note shall, upon its receipt of such
replacement Revolving Note, return its existing Revolving Note, if any, to
the Agent for cancellation.

(b) On the Effective Date, Banque Nationale de Paris, The
Northern Trust Company and Bank of Montreal (the "Departing Banks") shall
cease to be a "Bank" under and for all purposes of the Credit Agreement and
the other Loan Documents, except that each Departing Bank shall retain all of
its rights and benefits under Section 12.04 of the Credit Agreement. For
purposes of the transitional matters described in Section 6(a) above, each
Departing Bank shall be deemed to have a Pro Rata Share of zero percent (0%)
after giving effect to the amendments contemplated hereby.

SECTION 7 MISCELLANEOUS.

(a) NOTICE. The Agent shall notify the Borrower and the Banks of
the occurrence of the Effective Date.

(b) CREDIT AGREEMENT OTHERWISE NOT AFFECTED. Except as expressly
amended pursuant hereto, the Credit Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all respects.
The Banks' and the Agent's execution and delivery of, or acceptance of, this
Amendment and any other documents and instruments in connection herewith
(collectively, the "Amendment Documents") shall not be deemed to create a
course of dealing or otherwise create any express or implied duty by any of
them to provide any other or further amendments, consents or waivers in the
future.

(c) NO RELIANCE BY BORROWER. The Borrower hereby acknowledges and
confirms to the Agent and the Banks that the Borrower is executing this
Amendment and the other Amendment Documents on the basis of its own
investigation and for its own reasons without reliance upon any agreement,
representation, understanding or communication by or on behalf of any other
Person.

(d) COSTS AND EXPENSES. The Borrower agrees to pay to the Agent
on demand the reasonable out-of-pocket costs and expenses of the Agent, and
the reasonable fees and disbursements of counsel to the Agent, in connection
with the negotiation, preparation, execution and delivery of this Amendment
and any other documents to be delivered in connection herewith.

(e) BINDING EFFECT. This Amendment shall be binding upon, inure
to the benefit of and be enforceable by the Borrower, the Agent and each Bank
and their respective successors and assigns

5.
<PAGE>

(f) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.

(g) COMPLETE AGREEMENT; AMENDMENTS. This Amendment, together with
the other Amendment Documents and the other Loan Documents, contains the
entire and exclusive agreement of the parties hereto and thereto with
reference to the matters discussed herein and therein. This Amendment
supersedes all prior commitments, drafts, communications, discussion and
understandings, oral or written, with respect thereto. This Amendment may
not be modified, amended or otherwise altered except in accordance with the
terms of Section 12.01 of the Credit Agreement.

(h) SEVERABILITY. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of
this Amendment shall be prohibited by or invalid under any such law or
regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed
modified to conform to the minimum requirements of such law or regulation,
or, if for any reason it is not deemed so modified, it shall be ineffective
and invalid only to the extent of such prohibition or invalidity without
affecting the remaining provisions of this Amendment, or the validity or
effectiveness of such provision in any other jurisdiction.

(i) COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same agreement.

(j) INTERPRETATION. This Amendment and the other Amendment
Documents are the result of negotiations between and have been reviewed by
counsel to the Agent, the Borrower and other parties, and are the product of
all parties hereto. Accordingly, this Amendment and the other Amendment
Documents shall not be construed against any of the Banks or the Agent merely
because of the Agent's or any Bank's involvement in the preparation thereof.

(k) LOAN DOCUMENTS. This Amendment and the other Amendment
Documents shall constitute Loan Documents.

[SIGNATURE PAGES FOLLOW.]

5A.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.

THE BORROWER

CADENCE DESIGN SYSTEMS, INC.

By -----------------------------------
Name:
Title:

THE AGENT

ABN AMRO BANK N.V., as Administrative and
Syndications Agent

By -----------------------------------
Name:
Title:

THE BANKS

ABN AMRO BANK N.V., as a Bank

By -----------------------------------
Name:
Title:

BANK OF AMERICA, N.A. (formerly known as Bank
of America National Trust and Savings
Association), as Documentation Agent and as a
Bank

By -----------------------------------

Name:
Title:

6.
<PAGE>

BANK ONE, NA (formerly known as The First
National Bank of Chicago)

By -----------------------------------
Name:
Title:

KEYBANK NATIONAL ASSOCIATION

By -----------------------------------
Name:
Title:

UBS AG, STAMFORD BRANCH

By -----------------------------------
Name:
Title:

BARCLAYS BANK PLC

By -----------------------------------
Name:
Title:

7.
<PAGE>

THE INDUSTRIAL BANK OF JAPAN, LIMITED

By -----------------------------------
Name:
Title:

BANKBOSTON, N.A.

By -----------------------------------
Name:
Title:

<PAGE>

THIRD AMENDMENT TO CREDIT AGREEMENT

THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated
as of November 3, 1999, is made among Cadence Design Systems, Inc., a
Delaware corporation (the "Borrower"), the financial institutions listed on
the signature pages hereof under the heading "EXISTING BANKS" (each an
"Existing Bank" and, collectively, the "Existing Banks"), the financial
institutions listed on the signature pages hereof under the heading "NEW
BANKS" (each a "New Bank" and, collectively, the "New Banks"), Bank One, NA
(formerly known as The First National Bank of Chicago), KeyBank National
Association and UBS AG, Stamford Branch, as co-agents, Bank of America, N.A.
(formerly known as Bank of America National Trust and Savings Association),
as documentation agent, and ABN AMRO Bank N.V., as agent for the Banks (in
such capacity, the "Agent").

The Borrower, the Existing Banks and the Agent are parties to a
Credit Agreement dated as of September 29, 1998, as amended by a First
Amendment to Credit Agreement dated as of October 16, 1998, and a Second
Amendment to Credit Agreement dated as of September 27, 1999 (as so amended,
the "Credit Agreement"). The Borrower has requested that the Existing Banks
agree to certain amendments to the Credit Agreement in order to (i) increase
the size of the revolving credit facility available thereunder from
$300,000,000 to $355,000,000 and (ii) permit the New Banks to become parties
to the Credit Agreement. The Existing Banks have agreed to such request,
subject to the terms and conditions hereof.

Accordingly, the parties hereto agree as follows:

SECTION 1 DEFINITIONS; INTERPRETATION.

(b) INTERPRETATION. The rules of interpretation set forth in
Section 1.03 of the Credit Agreement shall be applicable to this Amendment
and are incorporated herein by this reference.

SECTION 2 AMENDMENTS TO THE CREDIT AGREEMENT.

(a) AMENDMENTS. The Credit Agreement shall be amended as follows,
effective as of the date of satisfaction of the conditions set forth in
Section 3 (the "Effective Date"):

(i) The definition of "364-Day Commitment" set forth in
Section 1.01 of the Credit Agreement shall be amended by deleting the dollar
amount "$150,000,000" in clause (i) of such definition and substituting
therefor the dollar amount "$177,500,000";

(ii) The definition of "Conversion Date" set forth in Section
1.01 of the Credit Agreement shall be amended and restated as follows:

<PAGE>

"CONVERSION DATE" means the date which is 364 days after
September 29, 1999."

(iii) Section 4.01(c) of the Credit Agreement shall be amended
by deleting the dollar amount appearing under the heading "Aggregate
Reduction Amount" and substituting therefor the dollar amount "$177,500,000";
and

(iv) Schedule 1 of the Credit Agreement shall be amended and
restated in its entirety in the form of Schedule 1 attached hereto.

(b) REFERENCES WITHIN CREDIT AGREEMENT. Each reference in the
Credit Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
Credit Agreement as amended by this Amendment.

SECTION 3 CONDITIONS OF EFFECTIVENESS. The effectiveness of this
Amendment shall be subject to the satisfaction of each of the following
conditions precedent:

(a) EXECUTED AMENDMENT. The Agent shall have received an executed
counterpart of this Amendment from each of the Borrower, the Existing Banks
and the New Banks.

(b) ADDITIONAL CLOSING DOCUMENTS AND ACTIONS. The Agent shall
have received, in form and substance satisfactory to it, a certificate of a
Responsible Officer of the Borrower dated the Effective Date, stating that
(A) the representations and warranties contained in Section 4 hereof are true
and correct on and as of the Effective Date, and (B) on and as of the
Effective Date, after and giving effect to the amendment of the Credit
Agreement contemplated hereby, no Default shall have occurred and be
continuing.

(c) CORPORATE DOCUMENTS. The Agent shall have received, in form
and substance satisfactory to it, a certificate of the Secretary or Assistant
Secretary of the Borrower, dated the Effective Date, certifying (A) the
resolutions of the Board of Directors of the Borrower authorizing the
execution, delivery and performance of this Amendment and (B) the incumbency,
authority and signatures of each officer of the Borrower authorized to
execute and deliver this Amendment.

(d) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On the Effective
Date, after giving effect to the amendment of the Credit Agreement
contemplated hereby:

(i) the representations and warranties contained in Section
4 hereof shall be true and correct on and as of the Effective Date as though
made on and as of such date; and

(ii) no Default shall have occurred and be continuing.

(e) LEGAL OPINION. The Agent shall have received a legal opinion
from Gibson, Dunn & Crutcher, counsel to the Borrower, in substantially the
form of Exhibit A hereto.

2.
<PAGE>

(f) ADDITIONAL DOCUMENTS. The Agent shall have received, in form
and substance satisfactory to it, such additional approvals, documents and
other information as the Agent or any Existing Bank or New Bank (through the
Agent) may reasonably request.

SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To
induce the Existing Banks and the New Banks to enter into this Amendment, the
Borrower hereby confirms and restates, as of the date hereof, the
representations and warranties made by it in Section 8.01 of the Credit
Agreement and in the other Loan Documents. For the purposes of this Section
4, (i) each reference in Section 8.01 of the Credit Agreement to "this
Agreement," and the words "hereof," "herein," "hereunder," or words of like
import in such Section, shall mean and be a reference to the Credit Agreement
as amended by this Amendment, and each reference in such Section to "the Loan
Documents" shall mean and be a reference to the Loan Documents as amended as
contemplated hereby, (ii) the representation and warranty set forth in
Section 8.01(p) of the Credit Agreement shall be deemed instead to refer to
the last day of the most recent fiscal quarter and fiscal year for which
financial statements have then been delivered, (iii) any representations and
warranties which relate solely to an earlier date shall not be deemed
confirmed and restated as of the date hereof (PROVIDED that such
representations and warranties shall be true, correct and complete as of such
earlier date), and (iv) the preceding clause (i) shall take into account any
amendments to the Schedules and other disclosures made in writing by the
Borrower to the Agent and the Banks after the Closing Date and approved by
the Agent and the Majority Banks.

SECTION 5 REPRESENTATIONS AND WARRANTIES OF NEW BANKS. Each New
Bank represents and warrants to the Agent, the Existing Banks, each other New
Bank and the Borrower that (i) it is duly organized and existing and it has
full power and authority to take, and has taken, all action necessary to
execute and deliver this Amendment and any other documents required or
permitted to be executed or delivered by it in connection with this
Amendment, and to fulfill its obligations hereunder and under the Credit
Agreement; (ii) no notices to, or consents, authorizations or approvals of,
any Person are required for its due execution, delivery and performance of
this Amendment; and apart from any agreements or undertakings or filings
required by the Credit Agreement, no further action by, or notice to, or
filing with, any Person is required of it for such execution, delivery or
performance; (iii) this Amendment has been duly executed and delivered by it
and constitutes the legal, valid and binding obligation of such New Bank,
enforceable against such New Bank in accordance with the terms hereof,
subject, as to enforcement, to bankruptcy, insolvency, moratorium,
reorganization and other laws of general application relating to or affecting
creditors' rights and to general equitable principles; and (iv) it is an
Eligible Assignee.

SECTION 6 NEW BANKS ACCEDE TO CREDIT AGREEMENT. With effect on
and after the Effective Date (as defined in Section 2 hereof), each New Bank
shall be a party to the Credit Agreement and accede to all of the rights and
be obligated to perform all of the obligations of a Bank under the Credit
Agreement, including the requirements concerning confidentiality and the
payment of indemnification, with a Revolving Commitment in the amount set
forth in SCHEDULE 1 hereto opposite the name of such New Bank. Each New Bank
agrees that it shall perform in accordance with their terms all of the
obligations which by the terms of the Credit Agreement are required to be
performed by it as a Bank. Each New Bank hereby appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such powers
under

3.
<PAGE>

the Credit Agreement and the other Loan Documents as are delegated to the
Agent by the Banks pursuant to the terms of the Credit Agreement and such
other Loan Documents.

SECTION 7 CERTAIN TRANSITIONAL MATTERS. The Borrower confirms
that all Interest Periods in respect of Revolving Loans outstanding on the
date hereof are scheduled to expire on November 4, 1999 (the "Transition
Date"). On the Transition Date, the amount of Revolving Loans then
outstanding and held by each Bank shall be adjusted to reflect the changes in
the Banks' Pro Rata Shares of the Revolving Loans, subject to Section 5.02 of
the Credit Agreement. Each Bank having Revolving Loans then outstanding and
whose Pro Rata Share in respect of Revolving Loans has been decreased on the
Effective Date as a result of the amendments contemplated hereby shall be
deemed to have assigned on the Transition Date, without recourse, to each
Bank increasing its Revolving Commitment on the Effective Date (each such
Bank, an "Increasing Bank") such portion of such Revolving Loans as shall be
necessary to effectuate such adjustment. Each such Bank increasing its
Revolving Commitment on the Effective Date shall (i) be deemed to have
assumed such portion of such Revolving Loans and (ii) fund on the Transition
Date such assumed amounts to the Agent for the account of the assigning Bank
in accordance with the provisions hereof in the amount notified to such
Increasing Bank by the Agent. At the request of any Bank whose Revolving
Commitment increases or decreases as a result of the amendments contemplated
hereby, the Borrower shall promptly provide a replacement Revolving Note to
each such requesting Bank reflecting such Bank's new Revolving Commitment.
Each such Bank requesting a replacement Revolving Note shall, upon its
receipt of such replacement Revolving Note, return its existing Revolving
Note, if any, to the Agent for cancellation.

SECTION 8 MISCELLANEOUS.

(a) NOTICE. The Agent shall notify the Borrower, the Existing
Banks and the New Banks of the occurrence of the Effective Date and
thereafter distribute to the Borrower, the Existing Banks and the New Banks
copies of all documents delivered under Section 3.

(b) CREDIT AGREEMENT OTHERWISE NOT AFFECTED. Except as expressly
amended pursuant hereto, the Credit Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all respects.
The Existing Banks', the New Banks' and the Agent's execution and delivery
of, or acceptance of, this Amendment and any other documents and instruments
in connection herewith (collectively, the "Amendment Documents") shall not be
deemed to create a course of dealing or otherwise create any express or
implied duty by any of them to provide any other or further amendments,
consents or waivers in the future.

(c) NO RELIANCE BY BORROWER. The Borrower hereby acknowledges and
confirms to the Agent, the Existing Banks and the New Banks that the Borrower
is executing this Amendment and the other Amendment Documents on the basis of
its own investigation and for its own reasons without reliance upon any
agreement, representation, understanding or communication by or on behalf of
any other Person.

(d) INDEPENDENT CREDIT DECISION BY NEW BANKS. Each New Bank (a)
acknowledges that it has received a copy of the Credit Agreement and the
Schedules and Exhibits thereto, together with copies of the most recent
financial statements referred to in

4.
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Section 8.01(p) of the Credit Agreement, and such other documents and
information as it has deemed appropriate to make its own credit and legal
analysis and decision to enter into this Amendment; and (b) agrees that it
will, independently and without reliance upon the Agent or any other Bank,
and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit and legal decisions in taking or
not taking action under the Credit Agreement and the other Loan Documents.

(e) COSTS AND EXPENSES. The Borrower agrees to pay to the Agent
on demand the reasonable out-of-pocket costs and expenses of the Agent, and
the reasonable fees and disbursements of counsel to the Agent, in connection
with the negotiation, preparation, execution and delivery of this Amendment
and any other documents to be delivered in connection herewith.

(f) BINDING EFFECT. This Amendment shall be binding upon, inure
to the benefit of and be enforceable by the Borrower, the Agent and each Bank
and their respective successors and assigns.

(g) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.

(h) COMPLETE AGREEMENT; AMENDMENTS. This Amendment, together with
the other Amendment Documents and the other Loan Documents, contains the
entire and exclusive agreement of the parties hereto and thereto with
reference to the matters discussed herein and therein. This Amendment
supersedes all prior commitments, drafts, communications, discussion and
understandings, oral or written, with respect thereto. This Amendment may
not be modified, amended or otherwise altered except in accordance with the
terms of Section 12.01 of the Credit Agreement.

(i) SEVERABILITY. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid
under all applicable laws and regulations. If, however, any provision of
this Amendment shall be prohibited by or invalid under any such law or
regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed
modified to conform to the minimum requirements of such law or regulation,
or, if for any reason it is not deemed so modified, it shall be ineffective
and invalid only to the extent of such prohibition or invalidity without
affecting the remaining provisions of this Amendment, or the validity or
effectiveness of such provision in any other jurisdiction.

(j) COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same agreement.

(k) INTERPRETATION. This Amendment and the other Amendment
Documents are the result of negotiations between and have been reviewed by
counsel to the Agent, the Borrower and other parties, and are the product of
all parties hereto. Accordingly, this Amendment and the other Amendment
Documents shall not be construed against any of the

5.
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Banks or the Agent merely because of the Agent's or any Bank's involvement in
the preparation thereof.

(l) LOAN DOCUMENTS. This Amendment and the other Amendment
Documents shall constitute Loan Documents.

[SIGNATURE PAGES FOLLOW.]

6.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.

THE BORROWER

CADENCE DESIGN SYSTEMS, INC.