CADENCE DESIGN SYSTEMS INC, 10-Q, 2000-05-11

CADENCE DESIGN SYSTEMS INC
10-Q, 2000-05-11
PREPACKAGED SOFTWARE

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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 APRIL 1, 2000
OR

<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

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

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
Incorporation or Organization) Identification No.)

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 May 5, 2000, there were 245,650,622 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:
April 1, 2000 and January 1, 2000......................... 3

Condensed Consolidated Statements of Operations:
Three Months Ended April 1, 2000 and April 3, 1999........ 4

Condensed Consolidated Statements of Cash Flows:
Three Months Ended April 1, 2000 and April 3, 1999........ 5

Notes to Condensed Consolidated Financial Statements........ 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11

Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 28

Item 2. Changes in Securities and Use of Proceeds................... 29

Item 3. Defaults Upon Senior Securities............................. 29

Item 4. Submission of Matters to a Vote of Security Holders......... 29

Item 5. Other Information........................................... 29

Item 6. Exhibits and Reports on Form 8-K............................ 29

Signatures................................................................ 31
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
APRIL 1, JANUARY 1,
2000 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 110,964 $ 111,401
Short-term investments.................................... 7,270 7,357
Receivables, net.......................................... 213,377 248,034
Inventories, net.......................................... 15,570 19,872
Prepaid expenses and other................................ 96,163 93,248
---------- ----------
Total current assets.................................... 443,344 479,912

Property, plant, and equipment, net......................... 339,723 330,409
Software development costs, net............................. 10,702 10,692
Acquired intangibles, net................................... 394,554 402,154
Installment contract receivables............................ 56,134 84,160
Other assets................................................ 161,118 152,332
---------- ----------
$1,405,575 $1,459,659
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases....... $ 3,695 $ 3,924
Accounts payable and accrued liabilities.................. 225,806 265,518
Deferred revenue.......................................... 166,459 152,116
---------- ----------
Total current liabilities............................... 395,960 421,558
---------- ----------
Long-term Liabilities:
Long-term notes payable and capital leases................ 4,494 25,024
Other long-term liabilities............................... 32,910 26,928
---------- ----------
Total long-term liabilities............................. 37,404 51,952
---------- ----------
Stockholders' Equity:
Common stock and capital in excess of par value........... 831,407 857,960
Treasury stock at cost.................................... (209,429) (240,748)
Retained earnings......................................... 332,438 344,247
Accumulated other comprehensive gain...................... 17,795 24,690
---------- ----------
Total stockholders' equity.............................. 972,211 986,149
---------- ----------
$1,405,575 $1,459,659
========== ==========
</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
-------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Product................................................... $105,532 $187,357
Services.................................................. 75,815 72,474
Maintenance............................................... 76,146 75,360
-------- --------
Total revenue........................................... 257,493 335,191
-------- --------
Costs and expenses:
Cost of product........................................... 20,478 18,536
Cost of services.......................................... 49,001 47,258
Cost of maintenance....................................... 14,189 12,900
Amortization of acquired intangibles...................... 19,666 12,714
Marketing and sales....................................... 86,167 80,063
Research and development.................................. 62,573 50,868
General and administrative................................ 22,532 21,260
Unusual items............................................. -- 14,192
-------- --------
Total costs and expenses................................ 274,606 257,791
-------- --------
Income (loss) from operations......................... (17,113) 77,400
Other income, net........................................... 1,046 135
-------- --------
Income (loss) before provision (benefit) for income
taxes............................................... (16,067) 77,535
Provision (benefit) for income taxes........................ (4,258) 24,673
-------- --------
Net income (loss)..................................... $(11,809) $ 52,862
======== ========
Basic net income (loss) per share........................... $ (0.05) $ 0.22
======== ========
Diluted net income (loss) per share......................... $ (0.05) $ 0.20
======== ========
Weighted average common shares outstanding.................. 244,629 240,073
======== ========
Weighted average common and potential common shares
outstanding--assuming dilution............................ 244,629 259,253
======== ========
</TABLE>

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

4
<PAGE>
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
<S> <C> <C>
Cash and Cash Equivalents at Beginning of Period $111,401 $209,074
-------- --------
Cash Flows from Operating Activities:
Net income (loss)......................................... (11,809) 52,862
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 48,839 37,598
Asset impairment and write-off of equipment and
non-current assets.................................... -- 3,091
Deferred income taxes................................... 14 13,716
Investment equity income and write-down of venture
capital partnership................................... (413) 425
Write-off of acquired in-process technology............. -- 8,900
Change in other long-term liabilities and minority
interest expense...................................... 5,982 (1,391)
Provisions for losses on trade accounts receivable...... (366) 2,019
Non-cash restructuring charges.......................... 1,312 1,564
Changes in operating assets and liabilities, net of
effect of acquired businesses:
Receivables........................................... (4,714) (36,484)
Inventories........................................... (1,160) 1,792
Prepaid expenses and other............................ (2,847) (7,190)
Installment contract receivables...................... 29,193 9,538
Accounts payable and accrued liabilities.............. (27,275) (53,021)
Income taxes payable.................................. -- 3,412
Deferred revenue...................................... 14,343 9,527
-------- --------
Net cash provided by operating activities........... 51,099 46,358
-------- --------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity.... 999 20,609
Purchases of short-term investments--held-to-maturity..... -- (44)
Maturities of short-term
investments--available-for-sale......................... 107 --
Purchases of property, plant, and equipment............... (21,730) (32,830)
Capitalization of software development costs.............. (8,810) (6,394)
Increase in acquired intangibles and other assets......... (16,335) (3,624)
Investment in venture capital partnership and equity
investments............................................. (9,487) (2,992)
Cash effect of business acquisitions...................... (4,503) (1,632)
Sale of put warrants...................................... 25,516 3,609
Purchase of call options.................................. (25,516) (3,609)
-------- --------
Net cash used for investing activities................ (59,759) (26,907)
-------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt.............................. -- 30,000
Principal payments on long-term debt and capital leases... (20,693) (80,306)
Proceeds from issuance of common stock.................... 21,041 31,640
Purchases of treasury stock............................... (30,698) (20,784)
Proceeds from transfer of financial assets in exchange for
cash.................................................... 38,799 48,244
-------- --------
Net cash provided by financing activities............. 8,449 8,794
-------- --------
Effect of exchange rate changes on cash..................... (226) 858
-------- --------
Increase (decrease) in Cash and Cash Equivalents............ (437) 29,103
-------- --------
Cash and Cash Equivalents at End of Period.................. $110,964 $238,177
======== ========
</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 1, 2000.

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 1, 2000 and for the three months ended April 3, 1999 have been
reclassified to conform with the April 1, 2000 presentation.

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>
APRIL 1, JANUARY 1,
2000 2000
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................ $13,188 $19,033
Work in process.......................................... 2,382 839
------- -------
Total inventories, net................................. $15,570 $19,872
======= =======
</TABLE>

6
<PAGE>
RESTRUCTURING

The following table summarizes Cadence's restructuring activity during the
first quarter of 2000:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 1, 2000
------------------------------------------------------------
SEVERANCE
AND EXCESS OTHER
BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL
--------- ---------- ------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000............ $8,013 $ 6,464 $ 426 $ 5,861 $20,764
Non-cash charges.................. (47) (6) (62) (1,197) (1,312)
Cash charges...................... (901) (127) (364) (82) (1,474)
------ ------- ----- ------- -------
Balance, April 1, 2000.............. $7,065 $ 6,331 $ -- $ 4,582 $17,978
====== ======= ===== ======= =======
</TABLE>

CREDIT FACILITY

In October 1998, Cadence entered into a senior unsecured credit facility,
referred to as 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, or the Two Year Facility, and a $177.5 million 364-day revolving
credit facility convertible into a one year term loan, or the 364-Day Facility.
The Two Year Facility expires on 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 one additional year. 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 three months ended April 1, 2000, Cadence repaid all of the $20
million outstanding under the unsecured credit facility at January 1, 2000. At
April 1, 2000, there were no borrowings outstanding under this unsecured credit
facility.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes foreign currency translation gains and
losses and other unrealized gains and losses that have been previously excluded
from net income (loss) and reflected instead in equity. A summary of
comprehensive income (loss) follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net income (loss)........................................... $(11,809) $52,862
Translation income (loss)................................... (118) 939
Unrealized gain (loss) on investments....................... (6,777) (52)
-------- -------
Comprehensive income (loss)................................. $(18,704) $53,749
======== =======
</TABLE>

7
<PAGE>
NET INCOME (LOSS) PER SHARE

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
-------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Weighted average common shares used to calculate basic net
income (loss) per share 244,629 240,073
Options................................................... -- 18,519
Puts...................................................... -- 401
Warrants and other contingent common shares................. -- 260
------- -------
Weighted average common and potential common shares used to
calculate diluted net income (loss) per share............. 244,629 259,253
======= =======
</TABLE>

Options to purchase 52,173,200 shares of common stock at the weighted
average price of $14.59 per share were outstanding at April 1, 2000, but were
not included in the computation of diluted net loss per share because their
effect would be antidilutive. These options expire at various dates through
2010. Warrants to purchase 140,000 shares of common stock at the weighted
average price of $3.22 were outstanding at April 1, 2000, but were not included
in the computation of diluted net loss per share because their effect would be
antidilutive. These warrants expire in June 2003. Put warrants to purchase
9,127,015 shares of common stock at the weighted average price of $20.71 per
share were outstanding at April 1, 2000, but were not included in the
computation of diluted net loss per share because their effect would be
antidilutive. The put warrants outstanding expire on various dates through
February 2001.

CONTINGENCIES

Refer to Part II, Item 1 for a description of legal proceedings.

PUT WARRANTS AND CALL OPTIONS

Cadence has authorized three 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, or ESPP, the 1997
Nonstatutory Stock Option Plan, referred to as the 1997 Plan, and the 2000
Nonstatutory Stock Option Plan, referred to as the 2000 Plan. Such repurchases
are intended to cover Cadence's expected reissuances under the ESPP and both the
1997 Plan and 2000 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 April 1, 2000, there were 9.1 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 $18.02 to $22.31 per share. Additionally, during this same period, Cadence
purchased call options that entitle Cadence to buy shares of its common stock at
a specified price to satisfy anticipated stock repurchase requirements under
Cadence's systematic stock repurchase programs. At April 1, 2000, Cadence had
6.9 million call options outstanding at prices ranging from $18.27 to $22.56 per
share. The put warrants and call options outstanding at April 1, 2000 are
exercisable on various dates through February 2001 and Cadence has the
contractual ability to settle the options prior to their maturity. At April 1,
2000, the fair value of the call options was approximately $18.4 million and the
fair value of the put warrants was approximately $32.4 million. The fair value
of the put warrants and call options was estimated by Cadence's investment
bankers.

8
<PAGE>
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 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 negatively affect the price of
Cadence's common stock. At April 1, 2000, because Cadence had the ability to
settle these put warrants with stock no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.

SEGMENT REPORTING

The following tables present information about reported segments for the
three months ended April 1, 2000 and April 3, 1999:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 1, 2000
--------------------------------------------------------
PRODUCT SERVICES MAINTENANCE OTHER TOTAL
-------- -------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $105,532 $75,815 $76,146 $ -- $257,493
Cost of revenue.......................... 20,478 49,001 14,189 -- 83,668
Amortization of acquired intangibles..... 10,578 9,088 -- -- 19,666
-------- ------- ------- --------- --------
Gross margin........................... 74,476 17,726 61,957 -- 154,159
Marketing and sales...................... -- -- -- (86,167) (86,167)
Research and development................. -- -- -- (62,573) (62,573)
General and administrative............... -- -- -- (22,532) (22,532)
Other income, net........................ -- -- -- 1,046 1,046
-------- ------- ------- --------- --------
Income (loss) before provision (benefit)
for income taxes....................... $ 74,476 $17,726 $61,957 $(170,226) $(16,067)
======== ======= ======= ========= ========

<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 3, 1999
--------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $187,357 $72,474 $75,360 $ -- $335,191
Cost of revenue.......................... 18,536 47,258 12,900 -- 78,694
Amortization of acquired intangibles..... 11,319 1,395 -- -- 12,714
-------- ------- ------- --------- --------
Gross margin........................... 157,502 23,821 62,460 -- 243,783
Marketing and sales...................... -- -- -- (80,063) (80,063)
Research and development................. -- -- -- (50,868) (50,868)
General and administrative............... -- -- -- (21,260) (21,260)
Unusual items............................ -- -- -- (14,192) (14,192)
Other income, net........................ -- -- -- 135 135
-------- ------- ------- --------- --------
Income (loss) before provision (benefit)
for income taxes....................... $157,502 $23,821 $62,460 $(166,248) $ 77,535
======== ======= ======= ========= ========
</TABLE>

NEW ACCOUNTING STANDARDS

9
<PAGE>
which Cadence believes it is in compliance with, the SEC Staff has recently
informally indicated its views related to SAB 101 which may change current
interpretations of software revenue recognition requirements. Such SEC
interpretations could result in many software companies, including Cadence,
recording a cumulative effect of a change in accounting principles retroactive
to January 1, 2000.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value. It
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met and that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," was issued. The statement defers the effective date of
SFAS No. 133 until the first quarter of fiscal 2001. Cadence has not yet
determined the effect SFAS No. 133 will have on its financial position, results
of operations, or cash flows.

10
<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 THOSE 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,"
"LIQUIDITY AND CAPITAL RESOURCES," "FACTORS THAT MAY AFFECT FUTURE RESULTS," AND
"DISCLOSURES ABOUT MARKET RISK."

OVERVIEW

Cadence Design Systems, Inc., or Cadence, provides comprehensive software
and other technology and offers design and methodology services for the product
development requirements of the world's leading electronics companies. Cadence
licenses its leading-edge electronic design automation, or EDA, software and
hardware technology and provides a range of services to companies throughout the
world to help its customers optimize their product development processes.
Cadence is a supplier of products and services 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.

RESULTS OF OPERATIONS

REVENUE

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999 % CHANGE
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Product................................................... $105.5 $187.3 (44)%
Services.................................................. 75.8 72.5 5%
Maintenance............................................... 76.2 75.4 1%
------ ------
Total revenue........................................... $257.5 $335.2 (23)%
====== ======
</TABLE>

SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C>
Product.................................................... 41% 56%
Services................................................... 29% 22%
Maintenance................................................ 30% 22%
</TABLE>

Product revenue decreased $81.8 million in the first quarter of 2000,
compared to the first quarter of 1999, primarily due to the implementation of
Cadence's new software subscription licensing model, first implemented during
the third quarter of 1999 and, to a lesser extent, an overall decrease in sales
volume of Cadence's software products. The decrease in sales volume of products
was primarily attributable to lower sales of integrated circuit implementation
products, which include place and route and physical design and verification
products.

Services revenue increased $3.3 million in the first quarter of 2000,
compared to the first quarter of 1999, primarily due to an increase in demand
for Cadence's design services engagements, partially offset by a decrease in
methodology services engagements. Increases in design services revenue were due
to general

11
<PAGE>
increases in each of the four major areas, wireless communications, wired
communications, information appliances, and industrial electronics. The most
significant increase was in the wireless communications area. Decreases in
methodology services were due to a shortage of delivery resources.

Maintenance revenue remained relatively flat in the first quarter of 2000,
when compared to the first quarter of 1999.

REVENUE BY GEOGRAPHY

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999 % CHANGE
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Domestic.................................................. $152.2 $134.6 13%
International............................................. 105.3 200.6 (47)%
------ ------
Total revenue........................................... $257.5 $335.2 (23)%
====== ======
</TABLE>

REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C>
Domestic................................................... 59% 40%
International.............................................. 41% 60%
</TABLE>

International revenue decreased $95.3 million in the first quarter of 2000,
when compared to the first quarter of 1999, primarily due to decreases in
product and services revenue in Europe and Japan. The decrease in product
revenue is primarily attributable to Cadence's new subscription licensing model.

Other differences in the rate of revenue growth over the years presented and
when compared geographically are primarily due to fluctuations in sales volume
of place and route and physical design and verification products and for
Cadence's design and methodology services offerings.

Foreign currency exchange rates positively affected reported revenue by $1.8
million during the first quarter of 2000, primarily due to the strengthening of
the Japanese yen in relation to the U.S. dollar, offset partially by the
weakening of the French franc and German deutsche mark. Foreign currency
exchange rates positively affected revenue by $4.1 million during the first
quarter of 1999, primarily due to the strengthening of the Japanese yen in
relation to the U.S. dollar.

COST OF REVENUE

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999 % CHANGE
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Product.................................................... $20.5 $18.5 11%
Services................................................... $49.0 $47.3 4%
Maintenance................................................ $14.2 $12.9 10%
</TABLE>

COST OF REVENUE AS A PERCENT OF RELATED REVENUE

<TABLE>
<S> <C> <C> <C>
Product.................................................... 19% 10%
Services................................................... 65% 65%
Maintenance................................................ 19% 17%
</TABLE>

12
<PAGE>
Cost of product revenue includes costs of production personnel, packaging
and documentation, royalties, and amortization of capitalized software
development costs for software products. Manufacturing costs associated with
hardware emulation system products include materials, labor, and overhead.

Cost of product revenue increased $2 million for the first quarter of 2000,
when compared to the first quarter of 1999, primarily due to higher amortization
of software development costs and costs associated with the acquisition of
OrCAD, Inc., or OrCAD, which was completed in the third quarter of 1999 and for
which there were no similar costs in the first quarter of 1999.

Because the majority of Cadence's cost of software product revenue does not
vary significantly with changes in revenue, product gross margin decreased in
the first quarter of 2000 when compared to the first quarter in 1999, due
primarily to the implementation of Cadence's new software subscription licensing
model, which was implemented during the third quarter of 1999 and, to a lesser
extent, a decrease in sales volume of software products.

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 increased $1.7 million in the
first quarter of 2000, when compared to the first quarter of 1999, primarily due
to Cadence's addition of services professionals, resulting from the acquisition
of Diablo Research Company LLC, or Diablo, which was completed in the fourth
quarter of 1999.

Services gross margin remained flat for the first quarter of 2000, when
compared to the first quarter of 1999. Services gross margin has been, and may
continue to be, harmed by Cadence's inability to fully utilize its services
resources. In addition, services gross margin may continue to be harmed 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 increased $1.3 million in
the first quarter of 2000, when compared to the first quarter of 1999, primarily
due to employee-related costs associated with the OrCAD acquisition which was
completed in the third quarter of 1999 and for which there were no similar costs
in the first quarter of 1999.

AMORTIZATION OF ACQUIRED INTANGIBLES

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Amortization of acquired intangibles........................ $19.7 $12.7
</TABLE>

AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C>
Amortization of acquired intangibles........................ 8% 4%
</TABLE>

Amortization of acquired intangibles increased $7 million in the first
quarter of 2000, when compared with the first quarter of 1999, primarily due to
the 1999 acquisitions of OrCAD and Diablo.

13
<PAGE>
OPERATING EXPENSES

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
-------------------
APRIL 1, APRIL 3,
2000 1999 % CHANGE
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Marketing and sales........................................ $86.2 $80.1 8%
Research and development................................... $62.6 $50.9 23%
General and administrative................................. $22.5 $21.3 6%
</TABLE>

EXPENSES AS A PERCENT OF TOTAL REVENUE

<TABLE>
<S> <C> <C> <C>
Marketing and sales........................................ 34% 24%
Research and development................................... 24% 15%
General and administrative................................. 9% 6%
</TABLE>

Marketing and sales expenses increased $6.1 million in the first quarter of
2000, when compared to the first quarter of 1999, primarily due to an increase
in employee-related costs associated with the 1999 acquisition of OrCAD for
which there were no similar costs in the first quarter of 1999. Foreign currency
exchange rates negatively affected reported marketing and sales expenses by $0.7
million during the first quarter of 2000, primarily due to the strengthening of
the Japanese yen in relation to the U.S. dollar, offset partially by the
weakening of the French franc and German deutsche mark. During the first quarter
of 1999, foreign currency exchange rates negatively affected marketing and sales
expenses by $0.6 million, primarily due to the strengthening of the Japanese yen
in relation to the U.S. dollar.

Cadence's expenses in research and development, prior to the reduction for
capitalization of software development costs, was $71.4 million in the first
quarter of 2000 and $57.3 million for the first quarter of 1999, representing
28% and 17% of total revenue, respectively. Cadence capitalized software
development costs of $8.8 million in the first quarter of 2000 and $6.4 million
in the first quarter of 1999, which represented 12% and 11% of total research
and development expenditures made in each of those periods, respectively. The
increase in capitalized software development costs for the first quarter of 2000
resulted primarily from general increases in new product development. In any
given period, the amount of capitalized software development costs may vary
depending on the exact nature of the development performed.

The increase in net research and development expenses of $11.7 million for
the first quarter of 2000, when compared to the first quarter of 1999, was
primarily attributable to employee-related costs, consulting costs, and costs
attributable to OrCAD.

General and administrative expenses increased $1.2 million in the first
quarter of 2000, when compared to the first quarter of 1999, primarily due to
costs attributable to OrCAD and Diablo, offset partially by a reduction in bad
debt expense.

14
<PAGE>
UNUSUAL ITEMS

There were no unusual items in the first quarter of 2000. The following
table presents information regarding unusual items for the quarter ended April
3, 1999:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 3,
1999
-------------
(IN MILLIONS)
<S> <C>
Write-off of acquired in-process technology................. $ 8.9
Asset impairment............................................ 3.1
Restructuring charges....................................... 2.2
-----
Total unusual items....................................... $14.2
=====
</TABLE>

ACQUISITIONS AND IN-PROCESS TECHNOLOGY

In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a
supplier of design verification technology used in system-on-a-chip, or SOC,
design. The total purchase price was $25.7 million and the acquisition was
accounted for as a purchase.

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. 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 included a factor that took into
account the uncertainty surrounding the successful development of the acquired
in-process technology. Certain acquired in-process technology under development
at the time of acquisition was initially expected to become commercially viable
in 1999, but has since been delayed to 2000 and 2001. Expenditures to complete
this in-process technology are expected to total approximately $1.5 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, DAI's results have not differed significantly from the forecasted
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 these future products will meet market expectations.

ASSET IMPAIRMENT AND RESTRUCTURING

In the first quarter of 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 loss recorded was the amount by which the carrying amount of the
intangible assets exceeded fair market value.

In addition, Cadence recorded $2.2 million in severance costs to terminate
45 employees. These actions were taken to complete Cadence's restructuring
program initiated in the fourth quarter of 1998. The restructuring plan was
primarily aimed at reducing the cost of excess personnel in its services
business.

15
<PAGE>
Actual amounts of termination benefits, facilities, and other restructuring
related payments can be found in Notes to Condensed Consolidated Financial
Statements under "RESTRUCTURING."

OTHER INCOME AND INCOME TAXES

Other income increased $0.9 million in the first quarter of 2000, when
compared to the first quarter of 1999, primarily due to a decrease in interest
expense of $0.7 million, a decrease in foreign exchange losses of $0.7 million,
and a decrease in interest income of $0.9 million. The decrease in interest
expense was due to a decrease in borrowings under Cadence's unsecured credit
facility. The decrease in interest income was due to a lower average balance of
invested cash and short-term investments.

Cadence's estimated effective tax rate in the first quarter of 2000 was
26.5%. The effective tax rate for the first quarter of 1999 was 28.5%, excluding
the effect of the write-off of acquired in-process technology of $8.9 million,
which is not deductible for income tax purposes. The decrease in the 2000
effective tax rate, when compared to 1999, is primarily due to foreign earnings
being taxed at a lower rate.

LIQUIDITY AND CAPITAL RESOURCES

At April 1, 2000, Cadence's principal sources of liquidity consisted of
$118.2 million of cash and short-term investments, compared to $118.8 million at
January 1, 2000, and a $355 million senior unsecured credit facility. As of
April 1, 2000, Cadence had no outstanding borrowings.

Cash provided by operating activities increased $4.7 million to $51.1
million for the first quarter of 2000 when compared to the first quarter of
1999. The increase was primarily due to increases in depreciation and
amortization, receivables, installment contract receivables, and accounts
payable and accrued liabilities, partially offset by decreases in net income
before unusual items and amortization of acquired intangibles and deferred
income taxes.

At April 1, 2000, Cadence had net working capital of $47.4 million compared
with $58.4 million at January 1, 2000. The working capital decrease was driven
primarily by a decrease in receivables of $34.7 million and an increase in
deferred revenue of $14.3, partially offset by a decrease in accounts payable
and accrued liabilities of $39.7 million. The decrease in accounts payable and
accrued liabilities was primarily attributable to payments made for commissions,
bonuses, and stock purchased under Cadence's Employee Stock Purchase Plan.

In addition to its short-term investments, Cadence's primary investing
activities consisted of purchases of property, plant, and equipment,
capitalization of software development costs, acquired intangibles and other
assets, venture capital partnership investments, and acquisitions, which
combined represented $60.9 million and $47.5 million of cash used for investing
activities in the first quarters of 2000 and 1999, respectively.

Since 1994, Cadence has sold put warrants and purchased call options through
private placements. See "Notes to Condensed Consolidated Financial Statements."
At April 1, 2000, Cadence had a maximum potential obligation related to put
warrants to buy back 9.1 million shares of its common stock at an aggregate
price of approximately $189 million. The put warrants will expire on various
dates through February 2001, and Cadence has the contractual ability to settle
the options prior to their maturity. Cadence has the ability to settle these put
warrants with stock and, therefore, no amount was classified out of
stockholders' equity in the condensed consolidated balance sheets.

Anticipated cash requirements for the remainder of 2000 includes the
purchase of treasury stock through Cadence's stock repurchase programs and the
contemplated additions of property, plant, and equipment of approximately $95
million.

As part of its overall investment strategy, Cadence has become a limited
partner in a venture capital fund and is committed to invest up to $100 million.
As of April 1, 2000, Cadence had contributed

16
<PAGE>
approximately $41.3 million to this partnership, which is reflected in other
assets in the accompanying condensed consolidated balance sheets, net of
operating losses.

Cadence anticipates that current cash and short-term investment balances,
cash flows from operations, and its $355 million revolving credit facility will
be sufficient to meet its working capital requirements on a short-and long-term
basis.

NEW ACCOUNTING STANDARDS

In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," or SAB 101, and amended it in March 2000. Cadence is required to
adopt the provisions of SAB 101 in its second fiscal quarter of 2000. Cadence is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption. While SAB 101 does not supercede the software industry
specific revenue recognition guidance, which Cadence believes it is in
compliance with, the SEC Staff has recently informally indicated its views
related to SAB 101 which may change current interpretations of software revenue
recognition requirements. Such SEC interpretations could result in many software
companies, including Cadence, recording a cumulative effect of a change in
accounting principles retroactive to January 1, 2000.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The following risk factors and other information included in this Quarterly
Report on Form 10-Q should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, operating results, and financial condition could be
materially harmed.

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.

17
<PAGE>
Therefore, the loss of individual orders could seriously hurt Cadence's
revenue and operating results.

- CADENCE'S COST OF SERVICES 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.

Additionally, a substantial portion of these services 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 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:

- The size of features such as wires, transistors, and contacts on chips is
shrinking due to advances in semiconductor manufacturing processes.
Process feature sizes refer to the width of the transistors and the width
and spacing of the interconnect on the chip. Feature size is normally
identified by the headline transistor length, which is shrinking from 0.35
microns to 0.18 microns and below. This is commonly referred to in the
semiconductor industry as the migration to deep submicron and represents a
major challenge for all levels of the semiconductor industry from design
and design automation to design of manufacturing equipment and the
manufacturing process itself. Shrinkage of transistor length to such
infinitesimal proportions (for reference, the diameter of the period at
the end of this sentence is approximately 400 microns) is challenging
fundamental laws of physics and chemistry.

- The ability to design very large chips, in particular integration of
entire electronic systems onto a single chip instead of a circuit board (a
process that is referred to in the industry as SOC), increases the
complexity of managing a design that at the lowest level is represented by
billions of shapes on the fabrication mask. In addition, systems typically
incorporate microprocessors and digital signal processors that are
programmed with software, requiring simultaneous design of the silicon
chip and the related embedded software on the chip.

If Cadence is unable to respond quickly and successfully to these
developments and changes, Cadence may lose its competitive position and its
products or technologies may become uncompetitive or obsolete. In order to
compete successfully, Cadence must develop or acquire new products and improve
its existing products and processes on a schedule that keeps pace with
technological developments in its industries. Cadence must also be able to
support a range of changing computer software, hardware platforms and customer
preferences. There is no guarantee that Cadence will be successful in this
regard.

18
<PAGE>
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 U.S.

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 EDA 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. and Taiwan
Semiconductor Manufacturing Corporation 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-. Other disruptions in supply
may also occur. If there were such 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 delay in
Cadence's ability to deliver products would result.

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,

19
<PAGE>
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 services. For example, based on a three-year average
in 1999 Cadence had realized gross margins on software product sales of
approximately 91% but realized gross margins of approximately 65% on hardware
product sales and 32% on its performance of services. In the first quarter of
2000, realized gross margins decreased to approximately 83% for software
products and increased to approximately 73% for hardware products and to 35% for
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 than that of comparable quarters in which perpetual and fixed-term
licenses were used for more software product 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 harm
its quarterly operating results.

Cadence's hardware verification 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 commitments
of time and 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 timing of large orders 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 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;

20
<PAGE>
- 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;

- The failure to retain key personnel of the acquired business; and

- Difficulties related to assimilating the products of an acquired business
in, for example, distribution, engineering, and customer support areas.

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 41% for the three months ended April 1, 2000 and 60% for the three
months ended April 3, 1999. Cadence also transacts business in various foreign
currencies. Recent economic uncertainty and the volatility of foreign currencies
in certain parts of 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;

- 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.

21
<PAGE>
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 and
purchases foreign currency put options to help protect against currency exchange
risks. These forward contracts and put options allow Cadence to buy or sell
specific foreign currencies at specific prices on specific dates. Increases or
decreases in the value of Cadence's foreign currency transactions are partially
offset by gains and losses on these forward contracts and put options. 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 U.S. Department of Commerce regulations in shipping
its software products and other technologies outside the U.S. 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 EDA market and the commercial electronics design and methodology
services industries are highly competitive. If Cadence is unable to compete
successfully in these industries, it could seriously harm Cadence's business,
operating results, and financial condition. To compete in these industries,
Cadence must identify and develop innovative and cost competitive electronic
design automation software products and market them in a timely manner. It must
also gain industry acceptance for its design and methodology 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

22
<PAGE>
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 EDA products and design and methodology
services could result in a shift of customer preferences away from
Cadence's products and services and significantly decrease revenue;

- The electronics design and methodology services industries are relatively
new and electronics design companies and manufacturers are only beginning
to purchase these services from outside vendors;

- The pace of the technology change demands continuous technological
development to meet the requirements of next-generation design challenges;
and

- There are a significant number of current and potential competitors in the
EDA industry and the cost of entry is low.

In the electronic design automation products 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 EDA products. Many
manufacturers of electronic devices may be reluctant to purchase services from
independent vendors such as 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 methodology services industries.

CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY
HARM ITS BUSINESS

Competition for highly skilled employees is very 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. The robust economy and opportunities
available in other companies has made and could continue to make employee
retention and recruiting more difficult for Cadence. Cadence's failure to
attract, train, motivate, and retain key 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.

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 its voting stock, 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 Cadence's Board of Directors
to issue, at any time and without stockholder approval, preferred stock
with such terms as it may determine. No shares of 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 its common stock.

23
<PAGE>
- 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 or any one 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 Cadence's Board of Directors to resist an acquisition of
Cadence, even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Cadence's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt obligations. While
Cadence is exposed with respect to interest rate fluctuations in many of the
world's leading industrialized countries, Cadence's interest income and expense
is most sensitive to fluctuations in the general level of U.S. interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on
Cadence's cash and cash equivalents, short-term and long-term investments, and
interest paid on its long-term debt obligations as well as costs associated with
foreign currency hedges.

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.

In October 1998, Cadence entered into a senior unsecured credit facility,
referred to as 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, or the Two Year Facility, and a $177.5 million 364-day revolving
credit facility convertible into a one year term loan, or the 364-Day Facility.
The Two Year Facility expires on 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. 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.

The table below presents the carrying value and related weighted average
interest rates for Cadence's investment portfolio. All highly liquid investments
with an original maturity of three months or less at the date of purchase are
considered to be cash equivalents; investments with original maturities between
three and 12 months are considered to be short-term investments. Investments
with original maturities greater than 12 months are considered non-current
assets. As of April 1, 2000, substantially all of Cadence's

24
<PAGE>
investments have maturities less than 12 months. The carrying value approximated
fair value at April 1, 2000.

<TABLE>
<CAPTION>
CARRYING AVERAGE
VALUE INTEREST RATE
-------- -------------
<S> <C> <C>
(In millions, except for average interest rates)
Investment Securities:
Short-term investments--fixed rate........................ $ 7.3 5.68%
Long-term investments--fixed rate......................... 1.0 6.90%
-----
Total short-term and long-term securities............... 8.3 5.83%
Cash equivalents--fixed rate.............................. 20.7 5.39%
Cash equivalents-variable rate............................ 45.7 4.62%
-----
Total interest bearing instruments...................... $74.7 4.97%
=====
</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 April 1, 2000, the notional amount payable was $15.2
million which will be amortized in quarterly installments of approximately $2.2
million through October 2001. The estimated fair value at April 1, 2000 was
immaterial.

FOREIGN CURRENCY RISK

Cadence's operations include transactions in foreign currencies and, as
such, Cadence benefits from a weaker dollar and is harmed by a stronger dollar
relative to major currencies worldwide. Accordingly, the primary effect of
foreign currency transactions on Cadence's results of operations is a reduction
in revenue from a strengthening U.S. dollar, offset by a smaller reduction in
expenses.

Cadence enters into foreign currency forward exchange contracts and
purchases foreign currency put options with financial institutions primarily to
protect against currency exchange risks associated with existing assets and
liabilities and probable but not firmly committed transactions, respectively.
Forward contracts are not accounted for as hedges and, therefore, the unrealized
gains and losses are recognized in other income, net in advance of the actual
foreign currency cash flows with the fair value of these forward contracts being
recorded as accrued liabilities.

Cadence purchases put options to hedge the currency exchange risks
associated with probable but not firmly committed transactions. Probable but not
firmly committed transactions consist of revenue from Cadence's products and
maintenance contracts in a currency other than the functional currency. These
transactions are made through Cadence's subsidiaries in Ireland and Japan. The
premium costs of the put options are recorded in other current assets while the
gains and losses are deferred and recognized in income in the same period as the
hedged transaction. Gains and losses on accounting hedges realized before the
settlement date of the related hedged transaction are also generally deferred
and recognized in income in the same period as the hedged transaction. Cadence
does not use forward contracts and put options for trading purposes. 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 forward
contracts and put options mature.

The table below provides information as of April 1, 2000 about Cadence's
forward contracts and put options. 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

25
<PAGE>
rates. These forward contracts mature prior to June 30, 2000. The put options
mature prior to September 30, 2000.

<TABLE>
<CAPTION>
AVERAGE
NOTIONAL CONTRACT
AMOUNT RATE
-------- --------
<S> <C> <C>
Forward Contracts:
(In millions, except for average contract rates)
Japanese yen.............................................. $ 53.4 104.82
British pound sterling.................................... 27.6 1.59
Euro...................................................... 26.4 1.00
Canadian dollars.......................................... 5.6 1.45
Swedish krona............................................. 2.3 8.71
Singapore dollars......................................... 1.6 1.71
Hong Kong dollars......................................... 0.3 7.78
------
$117.2
======
Put Options:
Japanese yen.............................................. $ 18.6 107.50
======
</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 months
ended April 1, 2000. Due to the short-term nature of the forward contracts and
put options, the fair value at April 1, 2000 was negligible. The realized gain
(loss) on the forward contracts and the put options 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
and purchased call options through private placements. The put warrants, if
exercised, would entitle the holder to sell shares of Cadence common stock to
Cadence at a specified price. Similarly, the call options entitle Cadence to buy
shares of Cadence common stock at a specified price.

Cadence repurchases shares of its common stock under stock repurchase
programs for issuance under its Employee Stock Purchase Plan, or ESPP, its 1997
Stock Option Plan, referred to as the 1997 Plan, and its 2000 Stock Option Plan
adopted in February 2000. As part of these repurchase programs, Cadence has
purchased and will purchase call options or has sold and will sell put warrants.
These transactions may result in sales of a large number of shares and
consequent decline in the market price of Cadence common stock. Cadence's stock
repurchase program includes the following characteristics:

- Call options allow Cadence to buy shares of its common 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 its stock. If the market price
of the common 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.

26
<PAGE>
- 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 Cadence common stock at the time of exercise, settlement of the put
warrants with Cadence common 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 open market, which could cause the price of
Cadence common stock to fall.

- Put warrant holders may accumulate a substantial number of shares of
Cadence common 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 April 1, 2000 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 on various dates through February 2001 and Cadence has the
contractual ability to settle the options prior to their maturity.

<TABLE>
<CAPTION>
ESTIMATED
2000 2001 FAIR
MATURITY MATURITY VALUE
-------- -------- ---------
<S> <C> <C> <C>
(Shares and contract amounts in millions)
Put Warrants:
Shares................................................. 8.9 0.2
Weighted average strike price.......................... $20.73 $19.77
Contract amount........................................ $185.3 $ 3.7 $32.4
Call Options:
Shares................................................. 6.8 0.1
Weighted average strike price.......................... $20.96 $20.02
Contract amount........................................ $141.5 $ 2.8 $18.4
</TABLE>

27
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time Cadence is involved in various disputes and litigation
matters that arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements, and employee relations matters.

Cadence filed a complaint in the U.S. District Court for the Northern
District of California on December 6, 1995 against Avant! Corporation 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, 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 Mr. 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 Mr. Costello believe
that they have 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.

In an order issued on December 19, 1997, as modified on January 26, 1998,
the District Court entered a preliminary injunction barring Avant! from 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 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 U.S. Court of Appeals for the Ninth Circuit 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.

On September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, and granted in part, and denied in part, each party's
motion regarding the scope of a 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 on that claim.
The Court also 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. The Ninth
Circuit has agreed to hear both parties' appeal from the District Court's order.
The trial date has been vacated pending a decision on the appeal.

On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the U.S. 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
stockholders 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.

In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit
against Quickturn Design Systems, Inc. in the U.S. District Court for the
Northern District of California. In this lawsuit, entitled Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems, Aptix and Meta Systems allege

28
<PAGE>
infringement by Quickturn of a U.S. patent owned by Aptix and licensed to Meta.
Quickturn named Mentor Graphics Corporation as a party to this suit and filed a
counterclaim requesting the District 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 U.S. District
Court for the 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 these
claims. On July 22, 1999, Quickturn and Cadence filed a complaint against Mentor
and Meta asking for declaratory relief in the U.S. District Court for the
Northern District of California. The action brought by Mentor in Delaware has
been transferred to California for consolidation with Quickturn's declaratory
judgment action.

On February 25, 2000, Cadence and several of its officers were named as
defendants in a lawsuit filed in the U.S. District Court for the Northern
District of California, entitled Maxick v. Cadence Design Systems, Inc., File
No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of
OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities
Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises
out of Cadence's acquisition of OrCAD, which was completed in August 1999.

On March 24, 2000 Mentor and Meta and several founders of Meta filed suit
against Quickturn and Cadence and a former Quickturn employee in the U.S.
District Court for the Northern District of California, File No. C 00-01030 WHA.
The suit alleges patent infringement, misappropriation of trade secrets and
breach of confidence, and seeks unspecified damages, injunctive relief and the
assignment to Mentor of a patent previously issued to Quickturn.

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.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are filed herewith:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<S> <C>
27.01 Financial data schedule for the period ended April 1, 2000.
</TABLE>

29
<PAGE>
(b) Reports on Form 8-K:

On March 15, 2000, the Registrant filed a Current Report on Form 8-K
reporting the date of the Registrant's 2000 Annual Meeting of Stockholders
and the record date for determining stockholders entitled to a vote at the
annual meeting.

30
<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: May 11, 2000 By: /s/ H. RAYMOND BINGHAM
-----------------------------------------
H. Raymond Bingham
President, Chief Executive Officer, and
Director

DATE: May 11, 2000 By: /s/ WILLIAM PORTER
-----------------------------------------
William Porter
Senior Vice President and
Chief Financial Officer
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CADENCE DESIGN SYSTEMS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE
PERIOD ENDED APRIL 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 110,964
<SECURITIES> 7,270
<RECEIVABLES> 213,377
<ALLOWANCES> 41,800
<INVENTORY> 15,570
<CURRENT-ASSETS> 443,344
<PP&E> 621,459
<DEPRECIATION> 281,736
<TOTAL-ASSETS> 1,405,575
<CURRENT-LIABILITIES> 395,960
<BONDS> 0
0
0
<COMMON> 621,978
<OTHER-SE> 350,233
<TOTAL-LIABILITY-AND-EQUITY> 1,405,575
<SALES> 0
<TOTAL-REVENUES> 257,493
<CGS> 0
<TOTAL-COSTS> 103,334
<OTHER-EXPENSES> 171,272
<LOSS-PROVISION> (366)
<INTEREST-EXPENSE> 522
<INCOME-PRETAX> (16,067)
<INCOME-TAX> (4,258)
<INCOME-CONTINUING> (11,809)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,809)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)

</TABLE>