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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-10606
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CADENCE DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 SEALY AVENUE, BUILDING 5, SAN JOSE, CALIFORNIA 95134
(Address of Principal Executive Offices, including Zip Code)
(408) 943-1234
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
(Title of Each Class) (Names of Each Exchange on which
Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held on March 20, 1998
by non-affiliates of the registrant: $7,224,125,357
Number of shares of common stock outstanding at March 20, 1998: 211,087,339
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting to be held
on May 6, 1998 are incorporated by reference into Part III hereof.
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CADENCE DESIGN SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 10
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 12
Item 6 Selected Financial Data................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 14
Item 7A. Quantitative and Qualitative Disclosures and Market Risk.................................. 26
Item 8. Financial Statements and Supplementary Data............................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 28
Item 11. Executive Compensation.................................................................... 29
Item 12 Security Ownership of Certain Beneficial Owners and Management............................ 29
Item 13. Certain Relationships and Related Transactions............................................ 29
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K......................... 30
Signatures................................................................................ 64
2
PART I.
ITEM 1. BUSINESS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements within the meaning of the Private Securities Reform Act of 1995.
Readers are referred to "Marketing and Sales," "Research and Development,"
"Competition," "Proprietary Technology," "Manufacturing," and "Factors That May
Affect Future Results" sections contained herein, which identify important risk
factors that could cause actual results to differ from those contained in the
forward-looking statements.
OVERVIEW
Cadence Design Systems, Inc. (Cadence or the Company) provides comprehensive
services and technology for the product development requirements of the world's
leading electronics companies. The Company licenses its leading-edge electronic
design automation (EDA) software technology and provides a range of professional
services to companies throughout the world to help optimize its customers'
product development processes. Recently, the Company has expanded the role it
plays with companies that produce electronic products and with an emerging class
of companies that require electronic content in their products, but who may not
have any internal expertise in electronic design. The Company is now a supplier
of "design realization" solutions, which are used by companies to design and
develop integrated circuits (ICs) and systems--including semiconductors,
computer systems and peripherals, telecommunications and networking equipment,
mobile and wireless devices, automotive electronics, consumer products, and
other advanced electronics.
Cadence was formed as a result of the merger of SDA Systems, Inc. into ECAD,
Inc. in May 1988. The Company's executive offices are located at 2655 Sealy
Avenue, Building 5, San Jose, California 95134, and its telephone number at that
location is (408) 943-1234.
ELECTRONIC DESIGN AUTOMATION AND DESIGN SERVICES
Cadence serves the worldwide electronics industry, which is quickly evolving
from a business-to-business mode to more of a consumer electronics market. The
shift of the electronics industry to the consumer electronics market is
evidenced by the incorporation of electronic content in consumer items such as
home appliances, automotive products, entertainment products and games, and
personal communication and organization devices. The electronics industry
presents challenges for developers of electronic products, where time-to-market,
cost, and the need for product diversity become the focus in a fast-paced and
volatile market.
Within the context of this evolution, a significant challenge faced by the
electronics industry is the continuing escalation in complexity of electronic
devices. While manufacturing capabilities at semiconductor "fabs" are developing
technology capable of producing silicon wafers that have the capacity of 100
million transistors, the ability of companies to design and develop integrated
circuits on the available silicon capacity lags behind. Additionally, current
chip designs utilize "deep submicron" (DSM) manufacturing process geometries
that add additional challenges to the design process. DSM figures refer to the
width of the spaces between the wire that connect transistors on a chip, e.g. a
0.25 micron geometry means that the wires are laid 0.25 micron apart (for
reference, the diameter of the period at the end of this sentence is roughly 400
microns). Engineering organizations are addressing the DSM challenge in a number
of ways, including revamping old design methodologies, introducing new EDA tools
and technologies to their design environments, and adopting a "system-on-a-chip"
style of design to take advantage of silicon manufacturing capabilities.
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System-on-a-chip (SOC) design is an emerging trend that is having a
significant impact on costs, time, and business models associated with
developing advanced chips. SOC allows the combination of multiple discrete
functions, previously enabled by individual chips, onto a single piece of
silicon. Much the way individual chips are assembled today on printed circuit
boards (PCBs), an SOC design combines multiple "virtual chips" or blocks of
intellectual property to create a single-chip system.
THE INTEGRATED CIRCUIT AND ELECTRONICS SYSTEM DESIGN PROCESS
The electrical design process involves describing the architectural,
behavioral, functional, and structural attributes of an IC or electronic system.
This process involves describing the product overall system architecture and
then implementing it by creating a design description, simulating the design to
identify electrical defects, and refining the description to meet predetermined
design specifications.
ARCHITECTURAL DEFINITION
A natural evolution of EDA is a top-down design approach known as electronic
systems design automation (ESDA). ESDA products are designed to allow customers
to include product concepts in the EDA environment, accelerating and enhancing
the early phases of system development.
A new approach called virtual prototyping, starts with the creation of a
product prototype in software. Virtual prototyping allows the designer to focus
on what is needed for the product to be successful as opposed to how the design
is implemented.
IMPLEMENTATION--THE DESIGN DESCRIPTION
The first step in the implementation process is creation of the design
description. To handle the complexity of large designs, engineers use a variety
of techniques, including block diagrams, equations or special design description
languages referred to as hardware description languages (HDLs).
STRUCTURAL DESIGN AND SIMULATION
Before an IC or PCB can be manufactured, high level design descriptions must
be detailed into a structural design, in which the engineer specifically defines
components, their interconnections, and associated physical properties.
Structural designs may be created manually or generated using an automated
process called logic synthesis. In structural design, critical design time can
be saved by selecting components from an electronic library and including them
in the design, rather than recreating symbols and data for each design. A
database containing the design electrical characteristics, interconnections, and
specific design rules is automatically created and used as the foundation for
subsequent design steps.
Electronics designers use simulation throughout the electrical design
process to identify design errors before the design is manufactured. In
addition, simulation enables electronics designers to quickly explore design
alternatives, and it can be performed at different levels of design abstraction
and with mixed levels of abstraction. This enables a designer to verify the
conceptual, structural, and performance aspects of the design. A key element in
the simulation process is the use of component libraries containing software
models of commonly used parts.
PHYSICAL DESIGN AND VERIFICATION
When the design is determined to be functionally correct, the designer
generates a non-graphical description called a netlist that details the design
components and interconnections. This netlist becomes the blueprint for physical
design. Next, the physical design team determines the layout and associated
interconnection of the components on the target substrate that will yield the
optimum combination of performance, area, and cost. Once this process is
completed, physical verification tools are used to provide
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a final check of the design implementation before products are released to
manufacturing. Accuracy in this process is essential to avoiding costly
production runs of faulty parts.
ELECTRONIC DESIGN AUTOMATION TOOLS
The Company's product offerings include a variety of EDA tools. These EDA
tools include system level design, custom IC design, deep submicron design,
logic design and verification, and printed circuit board design, which enable
electronic product designers to improve the quality of their products as well as
their productivity. These products apply to one or more steps in the electronics
system design process.
SYSTEM-LEVEL
The Company's Alta-TM- technology allows customers to test their concepts
early in the design process, giving them an opportunity to ensure that their
product design meets required specifications. The Alta Signal Processing
WorkSystem-Registered Trademark- (SPW-Registered Trademark-) toolset provides
electronic companies with a high level of design automation for a number of
application areas, including wireless communications, networking, and
multimedia. Visual Architect-TM- behavioral synthesis, announced in 1997,
provides both system and ASIC designers with a complete and open design flow.
This tool enables communication between the architects of high-performance
systems and the engineers who actually design the chips that are part of the
system design.
CUSTOM IC
The Company's custom layout portfolio is anchored by the
Virtuoso-Registered Trademark- product family, which provides tools for basic
layout editing, design compaction, layout synthesis, and device-level editing.
The Company's analog and mixed-signal design solution is comprised of the
Spectre-Registered Trademark- circuit simulation family and the Analog
Artist-Registered Trademark- design system.
Dracula-Registered Trademark- verification and Diva-TM- verification provide
integral solutions for automated and interactive physical verification. This
enables electronic product designers to perform a final check of their design
before products are released to manufacturing. New releases in 1997 included
Vampire-Registered Trademark- RCX verification and the ConcICe-TM- tools. These
products provide designers of deep submicron ICs with a fast, accurate full-chip
extraction and analysis tool.
DEEP SUBMICRON
Silicon Ensemble-TM- Deep Submicron provides a broad solution for routing
designs that consist of a mixed cell- and gate-based approach. This product
includes several specialized routing engines that deal with complex challenges
like datapath, complex clock trees, crosstalk, and power on ICs.
LOGIC DESIGN AND VERIFICATION
Some of the Company's most popular products are its
Verilog-Registered Trademark- based products. These tools are used by numerous
ASIC vendors and support over 185 ASIC libraries. The NC
Verilog-Registered Trademark- simulator, which achieved a record 25,000
installations worldwide in 1997, gives customers advanced technology,
accelerated simulation performance, and overall productivity needed to verify
today's large, complex system designs in a timely manner.
SYSTEM DESIGN PRODUCTS
The Allegro-TM- product and SPECCTRA-TM- PCB place-and-route product family
offer broad solutions for the layout of standard PCBs and advanced component
packaging. In 1997, the Company introduced its comprehensive high-speed PCB
solution for Microsoft Windows NT. This enables designers using both UNIX and
Windows NT workstations to share the same design technology. In addition, the
Company
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offers thermal, signal integrity, reliability, and electromagnetic analysis
tools for detecting potential manufacturing problems.
CONNECTIONS PROGRAM
Cadence cooperates with other design automation vendors to deliver
full-scope technology to its customers. Through the Cadence Connections Program,
customers can more easily integrate products and technologies with other EDA
vendors' products and technologies. This enables the flexibility to mix-and-
match third-party and proprietary tools to specifically meet a customer's design
automation needs. Today, more than 100 companies have integrated their tools
with Cadence software. In 1996, the Company furthered this program by
introducing "Platinum" status relationships, whereby Cadence and its Platinum
Partners will jointly deliver integrated design flows.
SERVICES
Cadence offers developers of electronic products a portfolio of services
within the broad categories of consulting services, design services, and
industry services.
CONSULTING SERVICES
Cadence provides a variety of services that help improve design
environments, from training classes and custom software coding to flow and
methodology deployment to complete design process re-engineering. Cadence's
Educational Services offer more than 50 training courses within all areas of
Cadence technology. Cadence's Applications Services help developers of
electronic products to maximize their productivity with Cadence software
applications by transferring knowledge from Cadence applications engineers to
customer design teams in new methodologies and technologies. In addition,
Cadence offers Design Process Service solutions including optimizing existing
product development processes, creating new design methodologies, migrating to
new methodologies based on significant upgrades of EDA technology, constructing
high re-use product development systems, and transferring technological
competency.
DESIGN SERVICES
Cadence offers services to perform design projects for electronic system
components such as integrated circuits or software.
When developers of electronic content lack the experience or resources to do
their own design work, or when they need to keep their internal engineers on
high priority design activities, Cadence's design services help these developers
by doing design work for them. Cadence IC designers are skilled in all areas of
design, including chip architecture, logic design, physical design, and
manufacturing interface/product engineering.
Cadence offers a variety of design services across all aspects of
analog/mixed signal IC and block design realization, including foundry/process
selection and testing from prototype to production.
Cadence's silicon technology services enable semiconductor companies and
users of foundry services to get technologies and products into a manufacturing
environment faster.
INDUSTRY SERVICES
In the high growth communications and multimedia industries, Cadence can
design complete, production ready, reference systems or IC level products for
its customers.
6
MARKETING AND SALES
As of February 28, 1998, Cadence had 481 employees engaged in field sales
and sales support, representing approximately 12% of its total work force. In
North America, Cadence uses a direct sales force consisting of sales people and
applications engineers to license and optimize its products. Cadence's sales
force presents Cadence and its products for licensing to prospective customers,
while applications engineers provide technical pre-sales as well as post-sales
support. Due to the complexity of EDA products, the selling cycle is generally
long, with three to six months or longer being typical. During the sales cycle,
the Company's direct sales force generally provide technical presentations,
product demonstrations, and often, an on-site customer evaluation of Cadence
software.
Internationally (excluding Japan), Cadence markets and supports its products
and services primarily through its subsidiaries and various distributors.
Following a reorganization of the Company's distribution channel in Japan in
1997, the Company now licenses its products through Innotech Corporation
(Innotech) and markets its services through a wholly owned subsidiary. Revenue
from Innotech, in which the Company is an approximate 11% stockholder, did not
exceed 10% of the Company's revenue in 1997. In 1996 and 1995, Innotech
accounted for 14% and 15% of total revenue, respectively.
Revenue from international sources was $470.2 million, $350.2 million, and
$271.8 million, or approximately 51%, 47%, and 50% of total revenue for 1997,
1996, and 1995, respectively. See "Notes to Consolidated Financial Statements"
for a summary of operations by geographic area. Prices for international
customers are quoted from a local currency international price list. The list is
prepared based on the U.S. dollar price list but reflects the higher cost of
doing business outside the United States. International customers are invoiced
in the local currency or U.S. dollars using current exchange rates.
The Company conducts business on a global basis. Accordingly, the Company's
future results could be adversely affected by a variety of uncontrollable and
changing factors including foreign currency exchange rates; regulatory,
political or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; government spending
patterns; and natural disasters, among other factors. Any or all of these
factors could have a material adverse impact on the Company's future
international business in these or other countries. See "Factors That May Affect
Future Results" in Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional risks associated with the
Company having a significant portion of total revenues derived internationally.
Cadence is required to have United States Department of Commerce export
licenses for shipment of its products outside the United States to certain
countries and certain end users. Although to date, Cadence has not encountered
any material difficulty in obtaining these licenses, any difficulty in obtaining
necessary export licenses in the future could have an adverse effect on the
Company's business, results of operations, and financial condition.
RESEARCH AND DEVELOPMENT
For the years 1997, 1996, and 1995, respectively, Cadence's investment in
research and development was $155.4 million, $128.9 million, and $100.4 million
prior to capitalizing $15 million, $13.6 million, and $11.8 million of software
development costs. See "Notes to Consolidated Financial Statements" for a more
complete description of Cadence's capitalization of certain software development
costs.
Cadence is currently developing technology that it will introduce to the EDA
market in 1998 and beyond. Among the primary areas that Cadence is addressing
are SOC design, the design of silicon devices in the deep sub-micron range,
high-speed board design, architectural-level design, high-performance logic
verification technology, and hardware/software co-design. The industry in which
the Company competes is subject to rapid technological developments, evolving
industry standards, changes in customer requirements, and frequent new product
introductions and enhancements. As a result, the Company's success, in part,
depends upon its ability, on a cost-effective and timely basis, to continue to
enhance its existing
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solutions and to develop and introduce new solutions that improve performance,
and reduce total cost of ownership. In order to achieve these objectives, the
Company's management and engineering personnel work closely with customers, to
identify and respond to customer needs, as well as with other innovators of
design products, including universities, laboratories, and corporations. The
Company will also continue to make strategic acquisitions and equity investments
where appropriate. Still, there can be no assurance that the Company will be
able to successfully develop new products to address new customer requirements
and technological changes, or that such products will achieve market acceptance.
Cadence's advanced research and development group, Cadence Laboratories, is
committed to new technological development. This group is chartered with
identifying and developing prototype technologies in emerging design areas which
will offer substantially improved alternatives to current EDA solutions.
COMPETITION
The Company operates in the highly competitive EDA industry and in the
emerging commercial electronic design and consulting markets.
The EDA industry continues to be characterized by falling prices, rapid
technological change, and new market entrants. The Company's success is
dependent upon its ability to develop innovative, cost competitive EDA software
products and bring them to market in a timely manner. The Company competes with
a number of companies--including Avant! Corporation, Mentor Graphics Corp.,
Synopsys, Inc., and Zuken-Redac. The Company also experiences competition from
manufacturers of electronic devices that have the capability to develop their
own EDA software. Some of these companies may have substantially greater
financial, marketing, and technological resources than the Company.
The EDA industry has relatively low barriers to entry and, therefore, the
number of the Company's actual and potential competitors is significant. A
potential competitor who possesses the necessary knowledge of electronic circuit
and systems design, production, and operations could develop competitive EDA
tools using a moderately priced computer workstation and bring such tools to
market quickly. There can be no assurance that development of competitive
products will not result in a shift of customer preferences away from the
Company's products, resulting in a significant decrease in the sales of the
Company's comparable products. In addition, there can be no assurance that the
Company will successfully identify new product opportunities, develop and bring
new products to market in a timely manner, and achieve market acceptance of its
products.
In the electronic design and consulting markets, the Company competes with
numerous consulting companies. This emerging market represents the outsourcing
of an activity by electronic manufacturers that has traditionally been performed
in-house, and is thus subject to the customers' "make versus buy" decisions.
Therefore, the Company's ability to obtain such business is dependent upon its
ability to offer better strategic concepts and technical solutions, lower
prices, a quicker response, or a combination of these factors. There can be no
assurance the Company will be able to effectively compete in this area and any
failure to compete in this area may have a material adverse effect on Cadence's
business, operating results, and financial condition.
The electronic design and consulting service businesses have relatively low
barriers to entry and, therefore, EDA and other electronics companies and
management consulting firms have entered and may continue to enter into this
market. The pricing model for services is susceptible to labor supply and demand
as well as the Company's continuing ability to provide competitive
time-to-market benefits to its customers. Some of the Company's current and
potential competitors may have substantially greater financial, marketing, and
technological resources than the Company. There can be no assurance that the
Company will be able to compete successfully.
8
PROPRIETARY TECHNOLOGY
Cadence's success is dependent, in part, upon its proprietary technology.
The Company generally relies upon patents, copyrights, trademarks, and trade
secret laws to establish and maintain its proprietary rights in its technology
and products. Cadence has a program to file applications for and obtain patents
in the United States and in selected foreign countries where a potential market
for Cadence's products exists. Cadence has been issued a number of patents;
other patent applications are currently pending. There can be no assurance that
any of these patents will not be challenged, invalidated or circumvented, or
that any rights granted thereunder will provide competitive advantages to
Cadence. In addition, there can be no assurance that patents will be issued from
pending applications, or that claims allowed on any future patents will be
sufficiently broad to protect Cadence's technology. In addition, the laws of
some foreign countries may not permit the protection of Cadence's proprietary
rights to the same extent as do the laws of the United States. Although Cadence
believes the protection afforded by its patents, patent applications,
copyrights, and trademarks has value, the rapidly changing technology in the EDA
industry makes Cadence's future success dependent primarily on the innovative
skills, technological expertise, and management abilities of its employees
rather than on patent, copyright, and trademark protection.
Many of Cadence's products are designed to include software or other
intellectual property licensed from third parties. While it may be necessary in
the future to seek or renew licenses relating to various aspects of its
products, Cadence believes that based upon past experience and standard industry
practice, such licenses generally could be obtained on commercially reasonable
terms. Because of the existence of a large number of patents in the EDA industry
and the rapid rate of issuance of new patents, it is not economically practical
to determine in advance whether a product or any of its components infringe
patent rights of others. From time to time, Cadence receives notices from or is
sued by third parties regarding patent claims. If infringement is alleged,
Cadence believes that, based upon industry practice, any necessary license or
rights under such patents may be obtained on terms that would not have a
material adverse effect on Cadence's business, operating results, and financial
condition. Nevertheless, there can be no assurance that the necessary licenses
would be available on acceptable terms, if at all, or that Cadence would prevail
in any such challenge. The inability to obtain certain licenses or other rights
or to obtain such licenses or rights on favorable terms, or the need to engage
in litigation could have a material adverse effect on Cadence's business,
operating results, and financial condition.
MANUFACTURING
Cadence's software production operations consist of configuring the proper
version of a product, outsourcing the recording of the product on magnetic tape
or CD-ROM, and producing customer unique access keys which allow customers to
use licensed products. User manuals and other documentation are generally
available on CD-ROM, but are occasionally supplied in hard copy format.
Shipments are generally made within two weeks of receiving an order.
The Company has generally been able to obtain adequate manufacturing
supplies in a timely manner from existing sources, or where necessary, from
alternative sources of supply. A reduction or interruption in supply or a
significant increase in the price of one or more components would adversely
affect the Company's business, operating results, and financial condition and
could damage customer relationships.
EMPLOYEES
As of February 28, 1998, Cadence employed 3,945 persons-including 2,045 in
sales, marketing, support, and manufacturing activities, 1,131 in product
development, and 769 in management, administration, and finance. None of
Cadence's employees is represented by labor unions, and Cadence has experienced
no work stoppages. Cadence believes that its employee relations are good.
Competition in recruiting of personnel in the software industry is intense.
Cadence believes that its future success will depend in part on its continued
ability to recruit, assimilate, and retain highly skilled
9
management, marketing, and technical personnel. To date, the Company believes
that it has been successful in recruiting qualified employees, but there is no
assurance that it will continue to be successful in the future.
ITEM 2. PROPERTIES
The Company's headquarters are located in San Jose, California, and the
Company owns the related land and buildings. The total square footage of the
buildings comprising the Company's headquarters is approximately 554,000 square
feet. In 1998, the Company anticipates the completion of a new building on the
San Jose, California campus with an estimated square footage of approximately
85,000 square feet.
In 1998, the Company anticipates the completion of a new research and
development facility in Noida, India, with an estimated square footage of
approximately 90,000 square feet. Beginning in 1998, new facilities in
Edinburgh, Scotland will be constructed in conjunction with the Company's new
design center. These facilities are anticipated to total approximately 550,000
square feet.
In addition to the Company's headquarters, the Company continues to lease
three buildings with approximately 209,000 square feet in San Jose, California.
Two leases, including approximately 129,000 square feet, expire in March 1998
with the remaining lease expiring in February 1999. Approximately 97,000 of the
square footage of these facilities has been sublet and the remaining capacity is
available for sublet.
Cadence leases additional facilities for its sales offices in the United
States and various foreign countries, and research and development facilities in
San Diego, Santa Cruz, and Berkeley, California, Lawrence, Kansas, and in the
United Kingdom, France, Taiwan, and India. Cadence also leases approximately
100,000 square feet of facilities in Chelmsford, Massachusetts and approximately
85,000 square feet in Sunnyvale, California. In 1998, the Company anticipates
leasing a new design factory in Rancho Bernardo, California, with an estimated
square footage of approximately 77,000 square feet.
Cadence believes that these facilities and the undeveloped land adjacent to
its current headquarters are adequate for its current needs and that suitable
additional or substitute space will be available as needed to accommodate
expansion of the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in various disputes and litigation
matters which 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.
The Company filed a complaint in the United States District Court for the
Northern District of California on December 6, 1995 against Avant! Corporation
(Avant!) and certain of its employees for misappropriation of trade secrets,
copyright infringement, conspiracy, and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's former President and Chief Executive Officer, and with leave
of the court, on January 29, 1998 filed a second amended counterclaim. The
second amended counterclaim alleges, INTER ALIA, that the Company and its former
President and Chief Executive Officer had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anticompetitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its former
President and Chief Executive Officer believe that each has meritorious defenses
to Avant!'s claims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint. The second amended counterclaim
10
remains severed from the Company's complaint and stayed pending resolution of
the Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order enjoining
the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s
Aquarius software infringes Cadence's code and, if so, to enter an order
enjoining the sale of that software. On February 19, 1998, Avant! filed a
petition for WRIT OF CERTIORARI to the United States Supreme Court, requesting a
review of the Ninth Circuit Court's decision. In an order issued on December 19,
1997, as modified on January 26, 1998, the District Court entered an injunction
barring any further infringement of Cadence's copyrights in Design Framework II
software, or selling, licensing or copying such product derived from Design
Framework II, including but not limited to, Avant!'s ArcCell products. The
Company's motion for an injunction covering Avant!'s Aquarius product line
remains pending before the District Court.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5 million bond, in
light of criminal proceedings pending against Avant! and several of its
executives. The District Court has not yet set a trial date for the civil
proceedings. The Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CDN. The Company has never declared or paid any cash dividends on its
common stock in the past, and none are planned to be paid in the future. As of
March 20, 1998, the Company had approximately 2,097 stockholders of record, not
including those held in street or nominee name.
The following table sets forth the high and low sales price for the Common
Stock for each calendar quarter in the two-year period ended January 3, 1998:
HIGH LOW
--------- ---------
1997:
First Quarter........................................................................... $ 21.94 $ 15.69
Second Quarter.......................................................................... $ 19.00 $ 13.38
Third Quarter........................................................................... $ 27.50 $ 16.75
Fourth Quarter.......................................................................... $ 28.75 $ 22.31
1996:
First Quarter........................................................................... $ 15.17 $ 11.50
Second Quarter.......................................................................... $ 21.88 $ 14.84
Third Quarter........................................................................... $ 18.94 $ 11.50
Fourth Quarter.......................................................................... $ 20.69 $ 16.32
12
ITEM 6. SELECTED FINANCIAL DATA
FIVE FISCAL YEARS ENDED JANUARY 3, 1998:
------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue............................................ $ 915,893 $ 741,459 $ 548,418 $ 429,072 $ 368,623
Unusual items(1)................................... $ 44,053 $ 100,543 $ -- $ 14,707 $ 19,650
Income (loss) from operations...................... $ 234,007 $ 91,259 $ 117,860 $ 44,047 $ (8,415)
Income (loss) before cumulative effect of change in
accounting method(2)............................. $ 181,742 $ 29,038 $ 97,270 $ 36,648 $ (12,779)
Net income (loss)(3)............................... $ 169,466 $ 29,038 $ 97,270 $ 36,648 $ (12,779)
Net income (loss) per share--assuming dilution..... $ 0.77 $ 0.16 $ 0.51 $ 0.19 $ (0.07)
Total assets....................................... $ 1,023,850 $ 717,001 $ 374,035 $ 361,048 $ 339,301
Long-term obligations.............................. $ 1,599 $ 20,292 $ 1,619 $ 2,098 $ 4,001
- ------------------------
(1) Unusual items are as follows for each of the years ended 1997, 1996, 1994,
and 1993. There were no unusual items in 1995:
- 1997 included restructuring charges of $34.4 million, $6.6 million for
write-offs of in-process research and development, and $3.1 million for
write-offs of capitalized software development costs.
- 1996 included write-offs of in-process research and development of $95.7
million, $2.7 million for write-offs of capitalized software development
costs, and $2.1 million for restructuring charges.
- 1994 included a provision for litigation settlement of $10.1 million and a
$4.6 million write-off of in-process research and development.
- 1993 included restructuring charges of $13.5 million and a $6.2 million
loss from operations of a disposed division.
(2) Income before cumulative effect of change in accounting method in 1997
excluded a $12.3 million charge, net of taxes of $5.3 million, for
reengineering project costs that had been previously capitalized by the
Company associated with its implementation of enterprise-wide information
systems.
(3) Net income included a $9.2 million and a $13.6 million after tax gain on the
sale of stock of a subsidiary in 1997 and 1995, respectively. A $3.1 million
after tax gain on the sale of an equity investment was included in net
income for 1994.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and notes thereto. All references to years represent fiscal years
unless otherwise noted. Except for the historical information contained herein,
the following discussion contains forward looking statements based on current
expectations that involve certain risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below in "Factors That May Affect Future Results," "Disclosures about
Market Risk," and "Liquidity and Capital Resources."
In November 1997, the Company effected a two-for-one stock split in the form
of a stock dividend. Prior periods have been restated to reflect the stock
split.
OVERVIEW
Cadence Design Systems, Inc. (the Company) provides comprehensive services
and technology for the product development requirements of the world's leading
electronics companies. The Company licenses its leading-edge electronic design
automation (EDA) software technology and provides a range of professional
services to companies throughout the world to help optimize its customers'
product development processes. Recently, the Company has expanded the role it
plays with companies that produce electronic products and with an emerging class
of companies that require electronic content in their products, but who may not
have any internal expertise in electronic design. The Company's business
objectives are based on providing complete solutions, which range from
individual software tools to complete outsourcing of design work. The Company is
now a supplier of "design realization" solutions, which are used by companies to
design and develop integrated circuits (ICs) and systems--including
semiconductors, computer systems and peripherals, telecommunications and
networking equipment, mobile and wireless devices, automotive electronics,
consumer products, and other advanced electronics.
In May 1997, the Company merged with Cooper and Chyan Technology, Inc.
(CCT), whose software products are used to design sophisticated integrated
circuits and high-speed printed circuit boards. In connection therewith, the
Company issued approximately 22.8 million shares of common stock. The
acquisition was accounted for as a pooling of interests. The operations of CCT
were not material to the Company's consolidated operations and financial
position; therefore, prior period financial statements were not restated. The
results of CCT from the date of acquisition forward have been recorded in the
Company's consolidated financial statements.
In December 1996, the Company completed the acquisition of High Level Design
Systems, Inc. (HLDS), a company which developed, marketed, and supported EDA
software for the design of high-density, high performance ICs. The acquisition
was accounted for as a purchase and, accordingly, the results of HLDS from the
date of the acquisition forward have been recorded in the Company's consolidated
financial statements.
In November 1996, the Company consummated a secondary public offering
whereby 11.5 million shares of common stock were sold, generating $202.1 million
of net proceeds.
In July 1995, the Company and its wholly-owned subsidiary, Integrated
Measurement Systems, Inc. (IMS), sold to the public approximately 3 million
shares of common stock, of which approximately 2.6 million shares were sold by
the Company as the sole selling stockholder of IMS, and 0.4 million shares were
sold by IMS. As a result of the offering and sale of shares by the Company, the
Company's ownership interest in IMS decreased to approximately 55%. As the
Company remained the majority stockholder at December 28, 1996, the consolidated
financial statements of the Company for fiscal years 1996 and 1995 included the
accounts of IMS after elimination of intercompany accounts and transactions and
minority
14
interest adjustments. In February 1997, the Company and IMS sold 1.7 million
shares of IMS common stock to the public of which 0.95 million were owned by the
Company. As a result, the Company received approximately $18.6 million, reduced
its ownership in IMS to approximately 37%, and began accounting for its
investment in IMS using the equity method of accounting.
RESULTS OF OPERATIONS
REVENUE
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Product............................................ $ 530.5 $ 414.1 $ 292.2 28% 42%
Services........................................... 160.9 114.6 65.9 40% 74%
Maintenance........................................ 224.5 212.8 190.3 5% 12%
--------- --------- ---------
Total revenue.......................................... $ 915.9 $ 741.5 $ 548.4 24% 35%
--------- --------- ---------
--------- --------- ---------
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
Product............................................ 58% 56% 53%
Services........................................... 18% 15% 12%
Maintenance........................................ 24% 29% 35%
In 1997, strong demand for the Company's products and services generated a
24% increase in revenue as compared to the prior year.
Product revenue recorded in 1997 did not include product revenue from IMS,
since IMS' results were not consolidated with the Company in 1997. The product
revenue in 1996 included product revenue of $40.3 million from IMS. The
Company's product revenue includes product revenue for CCT, from the date of
acquisition on May 7, 1997 forward. CCT's product revenues in early 1997, prior
to the acquisition, and in fiscal year 1996, totaled $7.8 million and $27.3
million, respectively. If IMS' sales had been excluded from the 1996 results and
if CCT's product revenue had been included in 1997 and 1996, product revenue
would have shown an increase of $137.2 million or 34% in 1997, as compared to
1996. The increase was primarily driven by increased demand for products used by
customers to develop custom ICs and deep submicron designs--including design
entry tools, place-and-route tools, physical verification tools, and
system-level tools.
The 1996 increase, as compared to 1995, was attributed to increased sales
volume of the Company's automatic place-and-route, physical layout,
verification, and timing-driven design process tools. Also, demand increased for
electronic systems design automation products, produced by the Company's Alta
business unit, which are designed to allow customers to include product concepts
in the EDA environment--thereby accelerating and enhancing the early phases of
system development.
The increases in services revenue in 1997 and 1996 were the result of
significant demand for the Company's services offerings, which provide a range
of solutions to address the product development needs of its customers in North
America, Europe, Japan, and Asia. The increase in 1996 over 1995 was also driven
by the first full year of an outsourcing agreement with Unisys Corporation
(Unisys) pursuant to which the Company assumed a substantial portion of Unisys'
internal silicon design operation. This five-year agreement was signed in March
1995 for a total contract value of at least $75 million.
The increase in maintenance revenue in 1997 and 1996 was attributable to an
increase in the Company's installed base of products. The decreased maintenance
revenue growth rates in 1997 and 1996 were due to customers renewing maintenance
contracts at a slower rate than in the prior years.
15
Revenue from international sources was approximately $470.2 million, $350.2
million, and $271.8 million, or 51%, 47%, and 50% of total revenue for 1997,
1996, and 1995, respectively. In 1997, domestic and international revenue
increased 14% and 34%, respectively, following increases of 41% and 29%,
respectively, in 1996. The increase in total revenue from international sources
in 1997, as compared to 1996, was primarily attributable to product revenue
growth and new services contracts in all regions. The higher percentage increase
in international revenue in 1997, as compared to domestic revenue, was primarily
attributable to an increase in international product revenue in 1997 as compared
to 1996. The increase in international revenue in 1997, as compared to 1996, and
in 1996, as compared to 1995, more than offset the negative impact of $32.4
million and $31.4 million, respectively, on revenue as a result of the weakening
of certain foreign currencies, primarily the Japanese yen, in relation to the
U.S. dollar.
COST OF REVENUE
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Product.......................................... $ 41.5 $ 48.4 $ 44.8 (14)% 8%
Services......................................... $ 114.8 $ 81.0 $ 55.0 42% 47%
Maintenance...................................... $ 26.8 $ 24.1 $ 16.7 11% 44%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
Product.......................................... 8% 12% 15%
Services......................................... 71% 71% 83%
Maintenance...................................... 12% 11% 9%
Cost of product revenue includes costs of production personnel, packaging
and documentation, amortization of capitalized software development costs, and
in 1996 and 1995, costs related to IMS' automated test equipment hardware
business. If IMS's costs had been excluded from the costs incurred in 1996, and
CCT's costs, prior to the acquisition date, had been included in 1996 and early
1997, cost of product would have increased $6.1 million or 17% from 1996 to
1997. The increase was primarily driven by additional costs incurred for the
Company's new European manufacturing facility, increases in software
amortization, and royalty expenses. On the same basis, cost of revenue as a
percent of product sales would have been 9% in 1996. The decreases in cost of
product as a percentage of product revenue in 1997, as compared to 1996, and in
1996, as compared to 1995, were primarily due to revenues growing at a faster
rate than costs. The increase in cost of product in absolute dollars in 1996, as
compared to 1995, was primarily due to increased purchased software amortization
and the write-off of $1.6 million of capitalized software development costs
related to products at the end of their life cycle.
Cost of services revenue includes personnel and related costs associated
with providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop, and retain services
professionals. Cost of services increased in total dollars in both 1997 and 1996
due to investments in services capacity, primarily headcount related, and the
continued development of this line of business. The services gross margin in
1997 remained consistent with 1996 at 29%. Continued investment in the services
business offset operating efficiencies from a larger revenue base. Continued
investment in developing new services offerings and the cost of integrating new
services professionals performing a growing number of services offerings will
continue to put pressure on services gross margins until operating efficiencies
are obtained. The improvement in services gross margins to 29% in 1996, as
compared to 17% in 1995, was due to increased operating efficiencies attained
within existing services offerings.
Cost of maintenance revenue includes the cost of customer services such as
hot-line and on-site support and the production cost of the maintenance renewal
process. The increase in cost of maintenance
16
in total dollars, and as a percentage of maintenance revenue in 1997 and 1996,
was principally due to additional on-site support costs necessary to support a
larger installed base. The 1997 costs also increased due to additional costs
associated with the Company's new European manufacturing facility.
OPERATING EXPENSES
% CHANGE
--------------------
1997 1996 1995 97/96 96/95
--------- --------- --------- --------- ---------
(IN MILLIONS)
Marketing and sales................................ $ 257.8 $ 226.5 $ 185.0 14% 22%
Research and development........................... $ 140.4 $ 115.3 $ 88.6 22% 30%
General and administrative......................... $ 56.5 $ 54.4 $ 40.4 4% 34%
OPERATING EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales................................ 28% 31% 34%
Research and development........................... 15% 16% 16%
General and administrative......................... 6% 7% 7%
GENERAL
Operating expenses incurred in 1997 excluded expenses from IMS and included
expenses from CCT for the period from May 7, 1997 through January 3, 1998.
MARKETING AND SALES
The increase in marketing and sales expenses for 1997, as compared to 1996,
was primarily the result of an increase of $24.1 million in employee related
expenses--attributable to increased headcount and commissions, as well as
increases in consulting and other services costs of $6.1 million, management
information systems costs of $5.9 million, and costs associated with business
trips of $5.8 million. These increases were partially offset by a decrease of
$11.9 million related to the deconsolidation of IMS and additionally by the
weakening of certain foreign currencies, primarily the Japanese yen, in relation
to the U.S. dollar which favorably impacted marketing and sales expenses by
approximately $5.6 million in 1997, as compared to the prior year. Marketing and
sales expenses grew from 1995 to 1996 due to an additional $26.6 million of
employee related costs resulting from increased headcount, including
commissions, recruiting, relocations, and a higher volume of pre-sales
activities and advertising. These increases were partially offset by the
weakening of certain foreign currencies, particularly the Japanese yen, which
resulted in a favorable impact of $5.6 million.
RESEARCH AND DEVELOPMENT
The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $155.4 million, $128.9
million, and $100.4 million for 1997, 1996, and 1995, respectively, representing
17%, 17%, and 18% of total revenue, respectively. The expense increases for
1997, as compared to 1996, were primarily attributable to higher salary-related
costs due to an increased headcount of $22.5 million and management information
systems costs of $9.7 million. These increases were partially offset by a
decrease of $7.5 million related to the deconsolidation of IMS. The increase of
$26.7 million in 1996, as compared to 1995, was primarily attributable to higher
salary-related costs due to increased headcount of $15.6 million and $6 million
of higher consulting and recruiting, computer maintenance, and facilities costs.
The Company capitalized approximately $15 million, $13.6 million, and $11.8
million of software development costs in the years 1997, 1996, and 1995,
respectively, which represented approximately 10%, 11%, and 12% of total
research and development expenditures incurred
17
in those years. The amount of capitalized software development costs in any
given period may vary depending on the exact nature of the development
performed.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased in 1997, as compared to 1996,
primarily as a result of increased management information systems costs of $9.6
million, partially offset by decreases in legal expenses of $4.6 million, and a
decrease of $3.5 million resulting from the deconsolidation of IMS. The increase
in 1996, as compared to 1995, was due to higher legal costs of $5.9 million,
higher management information and telecommunication costs of $2.2 million, and
higher outside service costs of $1 million. The percentage change in general and
administrative expenses between 1997 and 1996, as compared to the percentage
change between 1996 and 1995, decreased primarily due to high legal expenses
incurred by the Company in 1996.
UNUSUAL ITEMS AND RESTRUCTURING
Described below are unusual items and restructuring charges in 1997 and
1996. None were recorded in 1995.
1997 1996
--------- ---------
(IN MILLIONS)
Restructuring charges.................................................... $ 34.4 $ 2.1
Write-off of in-process research and development......................... 6.6 95.7
Write-off of capitalized software development costs...................... 3.1 2.7
--------- ---------
Total unusual items.................................................. $ 44.1 $ 100.5
--------- ---------
--------- ---------
Unusual items included restructuring charges of $34.4 million recorded by
the Company in 1997 for the reduction of personnel whose duties were made
redundant, closure of duplicated and excess facilities, fees of financial
advisors, attorneys, and accountants, and other expenses associated with the
merger with CCT and the acquisition of HLDS. Additionally, the Company
restructured its international business operations to reduce the Company's cost
structure and to further integrate and reduce selling and marketing activities.
In connection with the 1997 restructuring activities, the Company reduced its
workforce by approximately 230 employees representing various sales, marketing,
and research and development departments. The majority of the restructuring
charges were utilized during the year, with the exception of facility costs
which will be paid out through the year 2000, and some severance costs and other
restructuring charges to be paid during 1998.
In 1997, the Company wrote off $6.6 million of acquired in-process research
and development associated with its acquisitions of Synthesia AB and Advanced
Microelectronics. These costs reflected research and development which had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. Additionally, the Company wrote off capitalized software
development costs of $3.1 million for products developed by the Company which
were replaced by CCT products or by license of replacement technology.
Included in 1996 unusual items was a $95.7 million write-off of in-process
research and development, $2.7 million of capitalized software development costs
for products developed by the Company which were replaced by HLDS products, as
well as $2.1 million of restructuring charges consisting of employee termination
costs associated with the outsourcing of the Company's management information
technology services, and costs associated with excess facilities. The in-process
research and development had not reached technological feasibility and, in
management's opinion, had no probable alternative future use.
18
Liabilities for excess facilities and other restructuring charges are
included in other current and non-current liabilities, while severance and
benefits liabilities are included in payroll and payroll related accruals.
CHANGE IN ACCOUNTING METHOD
In November 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued Ruling 97-13 "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation," which requires
companies to expense costs incurred for business process reengineering projects.
As a result, the Company recorded a $12.3 million charge in 1997, net of taxes
of $5.3 million, as a cumulative effect of change in accounting method for
reengineering project costs that had been previously capitalized by the Company
associated with its implementation of enterprise-wide information systems.
OTHER INCOME AND EXPENSE
Other income (expense) for 1997, 1996, and 1995 is as follows:
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Interest income...................................................... $ 17.9 $ 4.3 $ 4.8
Gain on sale of IMS stock............................................ 13.1 -- 18.9
Equity earnings in IMS............................................... 1.9 -- --
Minority interest expense............................................ (0.4) (3.0) (1.4)
Gain (loss) on foreign exchange...................................... (1.4) 0.2 (0.1)
Interest expense..................................................... (2.5) (1.9) (2.2)
Other expense, net................................................... (3.0) (0.4) (2.8)
--------- --------- ---------
Total other income (expense)......................................... $ 25.6 $ (0.8) $ 17.2
--------- --------- ---------
--------- --------- ---------
Interest income increased in 1997, as compared to 1996, by $13.6 million,
primarily due to higher average cash and investment balances throughout 1997.
The decrease in 1996, as compared to 1995, was primarily attributable to
prevailing interest rates being lower in 1996, as compared to 1995.
In 1995, an $18.9 million gain was recorded on the sale of approximately 45%
of the stock of IMS, then a previously wholly-owned subsidiary of the Company.
In 1997, the Company sold additional shares of IMS for a $13.1 million gain,
thereby reducing its ownership to approximately 37%. As a result, the Company
began reporting its share of IMS earnings using the equity method of accounting,
which generated $1.9 million in equity income in 1997, and reduced minority
interest expense by $2.6 million in 1997, as compared to 1996. The increase in
minority interest expense in 1996, as compared to 1995, was due to higher
minority interest expense associated with IMS and a Japanese subsidiary.
The loss on foreign exchange increased in 1997, as compared to 1996, due to
unfavorable volatile Asian currencies, primarily the Japanese yen and Korean
won. The increase in other expense in 1997, as compared to 1996, was due
primarily to investment losses. The decrease in 1996, as compared to 1995, was
due primarily to losses recorded for abandoned equipment in 1995.
19
INCOME TAXES
The provision for income taxes and the effective tax rates for 1997, 1996,
and 1995 are as follows:
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Provision for income taxes*.......................................... $ 72.6 $ 61.4 $ 37.8
Effective tax rate................................................... 30% 68% 28%
- ------------------------
* Includes tax benefit in 1997 of $5.3 million on cumulative effect of change in
accounting method.
At January 3, 1998, the Company had total net deferred tax assets of
approximately $88.1 million. Realization of the deferred tax assets will be
dependent on generating sufficient taxable income prior to the expiration of the
loss and tax credit carryforwards. The net valuation allowance decreased by
$10.8 million in 1997. The decrease in valuation allowance for equity and
intangibles of $9.1 million was due to the expected realization of the tax
benefits of stock option deductions generated in prior years. The valuation
allowance provision for income taxes decreased by $1.7 million due to the
realization of net operating losses and tax credits generated in prior years.
Although realization is not assured, management believes that it is more likely
than not that the net deferred tax assets will be realized. The amount of the
net deferred tax assets, however, could be reduced or increased in the near term
if actual facts, including the estimate of future taxable income, differ from
those estimated.
The effective tax rate of 30% for 1997 was lower than the effective tax rate
in 1996 due primarily to foreign earnings, which were taxed at lower rates. The
1996 effective tax rate of 33% excluded the write-off of $95.7 million for
in-process research and development costs associated with the HLDS acquisition,
which was not deductible for tax purposes. The increase in the 1996 effective
tax rate, as compared to the 1995 effective tax rate, was primarily due to an
increase in state income taxes and a smaller reduction in the valuation
allowance.
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only safe and high credit
quality securities, 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.
20
The table below presents the carrying value and related weighted average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at January 3, 1998. All investments mature, by policy,
in one year or less.
CARRYING AVERAGE
VALUE INTEREST RATE
----------- ---------------
(IN MILLIONS, EXCEPT FOR
AVERAGE INTEREST RATES)
Investment Securities:
Cash equivalents--fixed rate.................................... $ 81.8 5.76%
Short-term investments--fixed rate.............................. 46.2 5.56%
Short-term investments--variable rate........................... 51.0 6.14%
-----------
Total investment securities................................... 179.0 5.82%
Money market funds--variable.................................... 36.4 5.68%
-----------
Total interest bearing instruments............................ $ 215.4 5.80%
-----------
-----------
FOREIGN CURRENCY RISK
The Company transacts business in various foreign currencies, primarily in
Japan, emerging market countries in Asia, and certain European countries. The
Company has established a foreign currency hedging program, utilizing foreign
currency forward exchange contracts (forward contracts) to hedge certain foreign
currency transaction exposures in Japan, Canada, Asia, and certain European
countries. Under this program, increases or decreases in the Company's foreign
currency transactions are partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.
The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in other income (expense), and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included in
net income as a component of other income (expense). The Company's ultimate
realized gain or loss with respect to currency fluctuations will depend on the
currency exchange rates and other factors in effect as the contracts mature.
The table below provides information as of January 3, 1998 about the
Company's forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature in less than thirty days.
NOTIONAL AVERAGE
AMOUNT CONTRACT RATE
----------- -------------
(IN MILLIONS, EXCEPT FOR
AVERAGE CONTRACT RATES)
Forward Contracts:
Japanese yen.................................................... $ 20.0 129.35
British pound sterling.......................................... $ 5.4 0.61
German deutschemarks............................................ $ 8.1 1.79
French franc.................................................... $ 3.7 5.98
Swedish krona................................................... $ (3.3) 7.82
Canadian dollars................................................ $ 3.1 1.42
Italian lira.................................................... $ 1.6 1,753.48
The unrealized gain (loss) on the outstanding forward contracts at January
3, 1998 was immaterial to the Company's consolidated financial statements. Due
to the short-term nature of the forward contracts,
21
the fair value at January 3, 1998 was negligible. The realized gain (loss) on
these contracts as they matured was not material to the consolidated operations
of the Company.
EQUITY PRICE RISK
The Company, as part of its authorized repurchase program, has purchased
call options that entitle the Company to buy on a specified day one share of
common stock at a specified price to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. Additionally,
the Company has sold put warrants through private placements.
The table below provides information at January 3, 1998 about the Company's
put warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through February 26, 1999.
1998 1999 ESTIMATED
MATURITY MATURITY FAIR VALUE
----------- ----------- -----------
(SHARES AND CONTRACT
AMOUNTS IN MILLIONS)
Put Warrants:
Shares..................................................... 4.5 1.3
Weighted average strike price.............................. $ 23.81 $ 24.20
Contract amount............................................ $ 108 $ 30.3 $ 17.5
Call Options:
Shares..................................................... 3.4 0.9
Weighted average strike price.............................. $ 23.90 $ 24.45
Contract amount............................................ $ 81.2 $ 20.8 $ 20.5
The Company has the right to settle the put warrants with stock. Settlement
of the put warrants with stock could cause the Company to issue a substantial
number of shares, depending on the exercise price of the put warrants and the
per share fair value of the Company's common stock at the time of exercise. In
addition, settlement of the put warrants in stock could lead to the disposition
by put warrant holders of shares of the Company's common stock that such holders
may have accumulated in anticipation of the exercise of the put warrants or call
options, which may impact the price of the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
At January 3, 1998, the Company's principal sources of liquidity consisted
of $304.2 million of cash and short-term investments, as compared with $285.5
million and $96.6 million at December 28, 1996 and December 30, 1995,
respectively, and a three-year, $120 million secured revolving line of credit
agreement. As of January 3, 1998, the Company had no borrowings under the
revolving line of credit.
Cash generated from operating activities increased $23 million in the year
ended January 3, 1998, as compared to the year ended December 28, 1996,
primarily due to higher net income and increases in accrued liabilities and
payables and income taxes payable. This increase was partially offset by
increases in accounts receivable, installment contract receivables, and deferred
income taxes. Cash generated from operating activities decreased $21.8 million
to $175.3 million for the year ended December 28, 1996, as compared to the year
ended December 30, 1995. The decrease was primarily due to increases in accounts
receivable, prepaid expenses and other assets, and lower deferred income taxes,
partially offset by an increase in net income prior to the write-off of
in-process research and development, an increase in accrued liabilities and
payables, and higher deferred revenue
At January 3, 1998, the Company had net working capital of $340.3 million,
as compared with $259.6 million at December 28, 1996. The primary reasons for
the increase were increases in accounts receivable of $56.6 million and in
prepaid expenses and other assets of $50.8 million, partly offset by an
22
increase in accounts payable and accrued liabilities of $40.3 million. The
increase in accounts receivable was attributable to increased billing activity,
primarily due to higher revenue. The increase in accounts payable and accrued
liabilities was primarily attributable to payments expected to be made in early
1998, including bonus and commissions payments, restructuring charges, sales
taxes, and withholdings for issuance of stock under the Company's Employee Stock
Purchase Plan (ESPP).
In addition to its short-term investments, the Company's primary investing
activities were purchases of property and equipment, purchases of software and
intangibles, the capitalization of software development costs, and an investment
in a limited partnership, which combined represented $123 million and $96.4
million of cash used for investing activities in the years ended January 3, 1998
and December 28, 1996, respectively. In 1998, the Company anticipates the
completion of a new building and improvements on the San Jose, California campus
with an estimated cost of approximately $14.5 million. Additionally, new
facilities in Scotland will be constructed in conjunction with the Company's new
design center. If the Company becomes the owner of such facilities, absent of
any financing from any third party, the Company may incur estimated land and
building costs of approximately $115 million over the next seven years.
In May 1997, Cadence announced that its board of directors had rescinded the
Company's previously-announced stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. The Company rescinded the stock repurchase
program in connection with its merger with CCT in order to comply with
requirements for the pooling of interests accounting treatment. Cadence
announced a new seasoned systematic stock repurchase program in September of
1997 in connection with the establishment of the new 1997 Stock Option Plan (the
1997 Plan). The shares acquired by the Company under this new program will be
used to meet the recurring share issuance requirements of the 1997 Plan. The
repurchase authorization for the 1997 Plan is 4 million shares over a two year
period; 2.4 million additional shares are authorized for repurchase for the ESPP
over a two year period. In November 1997, the Company announced a new 10
million-share stock repurchase program. The shares acquired by the Company under
this program will be used for general corporate purposes.
Since 1994, as part of its previously discussed authorized stock repurchase
program, the Company has sold put warrants and purchased call options through
private placements. The Company had a maximum potential obligation related to
the put warrants at January 3, 1998 to buy back 5.8 million shares of its common
stock at an aggregate price of approximately $138.3 million. The put warrants
will expire at various dates from February 1998 through February 1999. The
Company has the ability to settle these put warrants with stock and, therefore,
no amount was classified out of stockholders' equity in the consolidated balance
sheet. The effect of the exercise of these put warrants and call options is
reported in stockholders' equity.
Anticipated cash requirements for 1998 include the repurchase of stock for
the Company's stock repurchase programs and the contemplated additions of
property, plant, and equipment of approximately $85 million, including the new
building and improvements on the San Jose, California campus as discussed
previously.
As part of its overall investment strategy, the Company has committed to
participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $35 million will be made over
the next two to three years. At January 3, 1998, the Company had contributed
approximately $20 million, which is reflected in other assets in the
consolidated balance sheet, net of operating losses.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and its $120 million revolving line of
credit should be sufficient to meet its working capital and capital expenditure
requirements on a short- and long-term basis.
23
NEW ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 129, "Disclosure of Information About Capital Structure." SFAS No.
129 requires companies to disclose certain information about their capital
structure. SFAS No. 129 did not have a material impact on the Company's
consolidated financial statement disclosures.
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Comprehensive Income," which will be adopted by the Company in the first
quarter of 1998. SFAS No. 130 requires companies to report a new, additional
measure of income on the income statement or to create a new financial statement
that has the new measure of income on it. "Comprehensive Income" is to include
foreign currency translation gains and losses and other unrealized gains and
losses that have been previously excluded from net income and reflected instead
in equity. The Company anticipates that SFAS No. 130 will not have a material
impact on its consolidated financial statements.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be adopted by the Company in its
1998 annual consolidated financial statements. SFAS No. 131 requires companies
to report financial and descriptive information about its reportable operating
segments, including segment profit or loss, certain specific revenue and expense
items, and segment assets, as well as information about the revenues derived
from the Company's products and services, the countries in which the Company
earns revenues and holds assets, and major customers.
In 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition," which will be adopted by the Company in
the first quarter of 1998. SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The Company anticipates that SOP 97-2 will not have a material impact on its
consolidated financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Because of rapid technological changes in the EDA industry, the Company's
future revenues will depend on its ability to develop or acquire new products
and enhance its existing products on a timely basis to keep pace with
innovations in technology and to support a range of changing computer software,
hardware platforms, and customer preferences. Changes in manufacturing
technology may render the Company's software tools obsolete. Lack of market
acceptance or significant delays in product development could result in a loss
of competitiveness of the Company's products, with a resulting loss of revenues.
The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by many
factors, including the desire to obtain new technologies, the desire to expand
and enhance the Company's product and service lines, and the desire to attract
personnel. Growth through acquisition has several identifiable risks, including
risks related to integration of the previously distinct businesses into a single
unit, the substantial management time devoted to such activities, undisclosed
liabilities, the failure to realize anticipated benefits (such as cost savings
and synergies), and issues related to product transition (such as distribution,
engineering, and customer support).
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's consolidated results of operations may
be adversely affected if revenue does not materialize in a quarter as
anticipated. Since expenses are usually committed in advance of revenues, and
because only a small portion of expenses vary with revenue, the Company's
consolidated results of operations may be impacted significantly by lower
revenue which would be attributable to various factors and could affect quarter
to quarter comparisons. The Company's focus on providing services is relatively
recent. The percentage revenue growth from this source from 1996 to 1997 may not
be indicative of future growth.
In addition, a substantial portion of the Company's revenues from services
are earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect
24
on the Company's business, financial condition, and results of operations.
Although the Company's revenues are not generally seasonal in nature, the
Company has experienced, and may continue to experience, decreases in first
quarter revenue compared with the preceding fourth quarter, which is believed to
result primarily from the capital purchase cycle of the Company's customers.
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff, and a number of other key
management, sales, support, technical, and services personnel. As noted above,
the Company has recently increased its focus on offering professional services
to its customers. To the extent that the Company is not able to attract, retain,
train, and motivate highly skilled employees, directly or through acquisition,
who are able to provide services that satisfy customer's expectations, the
Company's business and consolidated results of operations would be adversely
affected.
The Company expects that international revenues will continue to account for
a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements and tariffs, and other trade barriers. Currency exchange
fluctuations in countries in which the Company conducts business could also
materially adversely affect the Company's business, consolidated financial
condition, and consolidated results of operations. The Company enters into
forward contracts to hedge the short-term impact of foreign currency
fluctuations. Although the Company attempts to reduce the impact of foreign
currency fluctuations, significant exchange rate movements may have a material
adverse impact on the Company's consolidated results of operations.
Effective July 1, 1997, the Company reorganized the operation of its
business in Japan, acquiring an equity position in and entering into a long-term
exclusive arrangement for distribution of EDA software products with Innotech
Corporation. The Company will continue to market and provide design services in
Japan through a wholly-owned subsidiary. Future results may be adversely
affected if the Company fails to realize the benefits contemplated by the
reorganization of its Japanese business operations.
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its databases against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion, and other catastrophic events. The Company believes it has taken
prudent measures to reduce the risk of interruption in its operations. However,
there can be no assurance that these measures are sufficient. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, consolidated financial condition, and
consolidated results of operations.
The Company is currently in the process of transitioning to new computer
software for its financial, accounting, project system accounting, and order
management information systems. The successful implementation of these new
systems is crucial to the efficient operation of the Company's business. There
can be no assurance that the Company will implement its new systems in an
efficient and timely manner or that the new systems will be adequate to support
the Company's operations. Problems with installation or initial operation of the
new systems could cause substantial management difficulties in operations
planning, financial reporting, and management, and thus could have a material
adverse effect on the Company's business, consolidated financial condition, and
consolidated results of operations.
The Company believes that all of its most current releases of its products
will not cease to perform nor generate incorrect or ambiguous data or results
solely due to a change in date to or after January 1, 2000, and will calculate
any information dependent on such dates in the same manner, and with the same
functionality, data integrity, and performance, as such products do on or before
December 31, 1999 (collectively, "Year 2000 Compliance"). Year 2000 Compliance
issues may arise with respect to any
25
modifications made to the Company's products by a party other than the Company
or from the combination or use of the Company's products with any other software
programs or hardware devices not provided by the Company, and therefore may
result in unforeseen Year 2000 Compliance problems for some of the Company's
customers, which may have an adverse effect on the Company.
Additionally, as with any company with a computing infrastructure and
utilizing business-application software programs written over many years, the
Company's internal operations may be subject to Year 2000 Compliance issues. The
Company has been implementing enterprise-wide information systems which support
a majority of the Company's operations. These systems are considered to be Year
2000 Compliant and are expected to be used world-wide by April 1998. Based
solely due to a change in date to or after January 1, 2000 thereon, the Company
believes that its internal operations will not be materially adversely impacted.
Due to the foregoing, as well as other factors, past financial performance
should not be considered an indicator of future performance. In addition, the
Company's participation in a highly dynamic industry often results in
significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures about Market Risk" found in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
SUMMARY QUARTERLY DATA--UNAUDITED
1997 1996
---------------------------------------------- ----------------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue.......................... $ 283,013 $ 234,866 $ 210,466 $ 187,548 $ 212,262 $ 188,741 $ 177,026 $ 163,430
Cost of revenue.................. $ 53,795 $ 46,812 $ 43,592 $ 38,897 $ 42,807 $ 39,262 $ 37,765 $ 33,639
Income (loss) from
operations(1).................. $ 83,733 $ 74,615 $ 37,382 $ 38,277 $ (40,729) $ 49,982 $ 43,433 $ 38,573
Income before cumulative effect
of change in accounting
method(2)...................... $ 60,873 $ 55,301 $ 28,446 $ 37,122 $ (57,816) $ 32,687 $ 28,588 $ 25,579
Net income (loss)(3)............. $ 48,597 $ 55,301 $ 28,446 $ 37,122 $ (57,816) $ 32,687 $ 28,588 $ 25,579
Net income (loss) per share--
diluted........................ $ 0.21 $ 0.24 $ 0.13 $ 0.19 $ (0.36) $ 0.18 $ 0.16 $ 0.14
- ------------------------
(1) Income (loss) from operations for 1997 and 1996 included certain unusual
item charges for $44.1 million and $100.5 million, respectively, which
follow:
- For the fourth quarter ended January 3, 1998, unusual items totaled $9.9
million, of which $6.3 million was for restructuring charges, $1.9 million
represented a write-off of capitalized software development costs, and
$1.7 million was for the write-off of in-process research and development.
- For the second quarter ended June 28, 1997, unusual items totaled $22.4
million, of which $21.2 million was for restructuring charges and $1.2
million was a write-off of capitalized software development costs.
- For the first quarter ended March 29, 1997, unusual items totaled $11.8
million, of which $6.9 million was for restructuring charges and $4.9
million represented a write-off of in-process research and development.
- For the fourth quarter ended December 28, 1996, unusual items totaled
$100.5 million, of which $95.7 million was for the write-off of in-process
research and development, $2.7 million represented a write-off of
capitalized software development costs, and $2.1 million was for
restructuring charges.
(2) For the fourth quarter ended January 3, 1998 income before cumulative effect
of change in accounting method excluded a $12.3 million charge, net of taxes
of $5.3 million, for reengineering project costs that had been previously
capitalized by the Company associated with its implementation of
enterprise-wide information systems.
(3) Net income included a $13.1 million after tax gain on the sale of stock of a
subsidiary in first quarter ended March 28, 1997.
27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors is incorporated by
reference from the sections entitled "Election of Directors" and "Compliance
with the Reporting Requirements of Section 16(a)" in the Company's definitive
Proxy Statement for its annual stockholders' meeting to be held May 6, 1998.
The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
- ------------------------- --- ----------------------------------------------------------------
John R. Harding 42 President, Chief Executive Officer, and Director
H. Raymond Bingham 52 Executive Vice President, Chief Financial Officer, and Director
Michael W. Bealmear 50 Executive Vice President, Worldwide Services
K.C. Murphy 43 Executive Vice President, Strategic Business Group and Corporate
Strategic Planning
John F. Olsen 46 Executive Vice President, Worldwide Sales and Marketing
Shane V. Robison 43 Executive Vice President, Engineering
R.L. Smith McKeithen 54 Vice President, General Counsel, and Secretary
William Porter 43 Vice President, Corporate Controller, and Assistant Secretary
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
JOHN R. HARDING has served as President and Chief Executive Officer and a
director of the Company since October 1997. Mr. Harding joined Cadence in May
1997 as Senior Vice President, Strategic Business Units. Prior to joining the
Company, Mr. Harding served as President and Chief Executive Officer of Cooper &
Chyan Technology, Inc. (CCT), a software company, from December 1994 until its
merger with the Company in May 1997. Before joining CCT, Mr. Harding was with
Zycad Corporation, an electronic design automation company, as Executive Vice
President, Worldwide Sales and Marketing, from January 1992 to October 1994.
H. RAYMOND BINGHAM has served as Executive Vice President and Chief
Financial Officer of the Company since 1993. Mr. Bingham has been a director of
the Company since November 1997. Prior to joining the Company, Mr. Bingham was
Executive Vice President and Chief Financial Officer of Red Lion Hotels and
Inns, an owner operator of a chain of hotels, for eight years. Mr. Bingham is a
director of Sunstone Hotel Investors, Inc. and Integrated Measurement Systems,
Inc.
MICHAEL W. BEALMEAR joined Cadence in August 1997 as Executive Vice
President, Worldwide Services. Prior to joining the Company, Mr. Bealmear was a
Senior Vice President for Worldwide Services at Sybase, Inc., a relational
database company, for three years and was a Senior Vice President and Area
Managing Director for SHL Systemhouse, an information technology consulting
company, for three years.
K.C. MURPHY joined Cadence in April 1996 as Senior Vice President, Corporate
Strategy, and in November 1997 became Executive Vice President, Strategic
Business Group and Corporate Strategic Planning. Prior to joining the Company,
Mr. Murphy worked for 17 years at Advanced Micro Devices, a semiconductor
manufacturer, where he held various positions, most recently Vice President of
Strategic Marketing.
JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field
Operations, and in November 1997 became Executive Vice President, Worldwide
Sales and Marketing. Prior to joining the
28
Company, Mr. Olsen served as a partner for KPMG Peat Marwick LLP, a public
accounting firm, for five years.
SHANE V. ROBISON joined Cadence in July 1995 and in November 1997 became
Executive Vice President, Engineering. Prior to joining the Company, Mr. Robison
served as Vice President and General Manager of the Personal Interactive
Electronics Division of Apple Computer, Inc., a personal computer manufacturer,
for more than seven years.
R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General
Counsel, and Secretary. From 1994 to 1996, he served as Vice President, General
Counsel and Secretary of Strategic Mapping, Inc., a computer based mapping and
demographic database company. From 1988 to 1994, Mr. McKeithen served as Vice
President, General Counsel, and Secretary of Silicon Graphics, Inc., a
manufacturer of workstations, servers, and microprocessors.
WILLIAM PORTER joined Cadence in February 1994 as Vice President, Corporate
Controller, and Assistant Secretary. From September 1988 to February 1994, Mr.
Porter served as Technical Accounting and Reporting Manager and most recently as
Controller of Cupertino Operations with Apple Computer, Inc., a personal
computer company. From 1976 until 1988, he held various positions with Arthur
Andersen LLP, a public accounting firm, most recently as Senior Audit Manager.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Director and Executive Compensation" in the Company's
definitive Proxy Statement for its annual stockholders' meeting to be held May
6, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for its annual
stockholders' meeting to be held May 6, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Transactions" in the Company's definitive Proxy
Statement for its annual stockholders' meeting to be held May 6, 1998.
29
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE
-----
(a)1. FINANCIAL STATEMENTS:
- Report of Independent Public Accountants. 35
- Consolidated Balance Sheets at January 3, 1998 and December 28, 1996. 36
- Consolidated Statements of Income for the three fiscal years ended January 3, 1998. 37
- Consolidated Statements of Stockholders' Equity for the three fiscal years ended January 3, 1998. 38
- Consolidated Statements of Cash Flows for the three fiscal years ended January 3, 1998. 39
- Notes to Consolidated Financial Statements. 40
(a)2. FINANCIAL STATEMENT SCHEDULES:
II. Valuation and Qualifying Accounts and Reserves 63
All other schedules are omitted because they are not required or the required information is shown
in the financial statements or notes thereto.
(a)3. EXHIBITS:
The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of
Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to the Registrant's Form S-1
Registration Statement (No. 33-13845) originally filed on April 29, 1987).
(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the
State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to the
Registrant's Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988).
(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the
State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form
S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the 1988 Form S-1)).
(d) The Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock as
filed with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to
Exhibit 3A to the Registrant's Current Report on Form 8-K (No. 0-15867) originally filed on June 12,
1989 (the 1989 Form 8-K)).
(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit
3.01(e) to the Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October
7, 1991 (the 1991 Form S-4)).
(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with
the Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to
Exhibit 3.01(f) from the Registrant's Form 10-K (No. 1-10606) for the year ended December 31, 1991).
30
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
(g) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the
Secretary of State of the State of Delaware on August 22, 1997 (incorporated by reference to Exhibit
10.49 of the Registrant's Form 10-Q for the third quarter ended September 27, 1997).
3.02 The Registrant's Bylaws, as currently in effect (incorporated by reference to Exhibit 3.02 to the 1987
Form S-1 and as amended by Exhibit 3-b to the 1989 Form 8-K).
4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the
1991 Form S-4).
4.02 Rights Agreement, dated as of February 9, 1996, between the Registrant and Harris Trust and Savings Bank
which includes as exhibits thereto the Certificate of Designation for the Series A Junior Participating
Preferred Stock, the form of Rights Certificate, and the Summary of Rights to Purchase Preferred Shares
(incorporated by reference to Exhibit 1A, 1B, and 1C to the Registrant's Current Report on Form 8-K
filed on February 16, 1996).
10.01 The Registrant's 1987 Stock Option Plan, as amended and restated on February 23, 1998 (incorporated by
reference to the Registrant's Preliminary Proxy Statement filed on March 16, 1998 (the 1998 Preliminary
Proxy Statement)).*
10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under
the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's
Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).*
10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant
and Form of Stock Option Exercise Notice and Agreement (the first document is incorporated by reference
to Exhibit 4.02 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994
(the 1994 Form S-8) and the latter two documents are incorporated by reference to Exhibit 10.08 - 10.10
to the 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.04 of the 1994 Form S-8).*
10.05 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.05 to the Registrant's Form 10-K for the fiscal year ended December 30, 1995
(the 1995 Form 10-K)).*
10.06 The Registrant's 1990 Employee Stock Purchase Plan, as amended on March 4, 1997 (incorporated by
reference to Exhibit 10.07 to the Registrant's Form 10-K for the fiscal year ended December 28, 1996).*
10.07 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by reference to Exhibit 10.08 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1994 (the 1994 Form 10-K)).*
10.08 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the
1995 Form 10-K).*
10.09 The Registrant's Senior Executive Bonus Plan (previously the Chief Executive Officer Bonus Plan for
1996), as amended January 1, 1998 (incorporated by reference to the 1998 Preliminary Proxy Statement).*
10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the
1994 Form 10-K).*
10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K).*
31
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
10.12 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates (ROPA), a
California limited partnership, and the Registrant, for the Registrant's offices at 555 River Oaks
Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K
(No. 1-10606) for the year ended December 31, 1990 (the 1990 Form 10-K)).
10.13 Lease, dated June 29, 1989, by and between ROPA and the Registrant for the Registrant's offices at 575
River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form
10-K).
10.14 Lease, dated June 29, 1989, by and between ROPA and the Registrant for the Registrant's offices at 535
and 545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990
Form 10-K).
10.15 Lease, dated December 19, 1988, by and among the Richard T. Peery and John Arrillaga Separate Trusts and
Valid Logic Systems Incorporated (Valid) (which merged into the registrant) for the Registrant's offices
at 2835 North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the Form
10-K (No. 0-11974) for Valid for the fiscal year ended December 30, 1990).
10.16 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Joseph B. Costello
(incorporated by reference to Exhibit 10.20 to the Registrant's Form S-4 registration statement (No.
33-31673), originally filed on October 18, 1989.
10.17 Offer letter to H. Raymond Bingham, dated May 12, 1993 (incorporated by reference to Exhibit 10.24 to
the Form 10-K for the year ended December 31, 1993 (the 1993 Form 10-K)).*
10.18 Offer letter to M. Robert Leach, dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the
1993 Form 10-K).*
10.19 The 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form
S-8).*
10.20 Consulting agreement, dated October 26, 1993, with Alberto Sangiovanni-Vincentelli (incorporated by
reference to Exhibit 10.29 to the Registrant's Form 10-Q for the second quarter ended June 30, 1994).*
10.21 The Registrant's amended and restated 401(k) Plan (incorporated by reference to Exhibit 10.29 of the
Registrant's Form 10-Q for the