FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 4, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
DELAWARE 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2655 SEELY AVENUE, BUILDING 5, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
At August 7, 1998, there were 212,307,359 shares of the registrant's Common Stock, $0.01 par value outstanding.
CADENCE DESIGN SYSTEMS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets:
July 4, 1998 and January 3, 1998 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income:
Three and Six Months Ended July 4, 1998 and June 28, 1997 . . 4
Condensed Consolidated Statements of Cash Flows:
Six Months Ended July 4, 1998 and June 28, 1997 . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . .19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .22
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . .23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JULY 4, JANUARY 3,
1998 1998
---------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 134,914 $ 207,024
Short-term investments . . . . . . . . . . . . . 125,826 97,180
Accounts receivable, net . . . . . . . . . . . . 230,565 205,006
Prepaid expenses and other . . . . . . . . . . . 79,854 99,849
---------- ----------
Total current assets . . . . . . . . . . . . . 571,159 609,059
Property, plant, and equipment, net. . . . . . . . 230,421 197,421
Software development costs, net. . . . . . . . . . 14,050 15,068
Purchased software and intangibles, net. . . . . . 31,546 10,117
Installment contract receivables . . . . . . . . . 103,966 61,326
Other non-current assets . . . . . . . . . . . . . 135,042 130,859
---------- ----------
$1,086,184 $1,023,850
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . $ 802 $ 794
Accounts payable and accrued liabilities . . . . 148,367 156,426
Income taxes payable . . . . . . . . . . . . . . 8,710 5,161
Deferred revenue . . . . . . . . . . . . . . . . 104,256 106,414
---------- ----------
Total current liabilities. . . . . . . . . . . 262,135 268,795
---------- ----------
Long-term liabilities:
Long-term debt . . . . . . . . . . . . . . . . . 1,048 1,599
Minority interest liability. . . . . . . . . . . 196 121
Other long-term liabilities. . . . . . . . . . . 33,529 26,238
---------- ----------
Total long-term liabilities. . . . . . . . . . 34,773 27,958
---------- ----------
Stockholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . -- --
Common stock and capital in excess of
par value . . . . . . . . . . . . . . . . . . 596,638 502,602
Treasury stock at cost (8,351 and 6,739
shares, respectively) . . . . . . . . . . . . (167,905) (97,285)
Retained earnings. . . . . . . . . . . . . . . . 369,842 328,934
Accumulated translation adjustment . . . . . . . (9,299) (7,154)
---------- ----------
Total stockholders' equity . . . . . . . . . . 789,276 727,097
---------- ----------
$1,086,184 $1,023,850
---------- ----------
---------- ----------
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
------- -------- ------- --------
Revenue:
Product. . . . . . . . . . . . . . . . . . . . . $ 162,547 $ 116,540 $ 316,596 $ 218,863
Services . . . . . . . . . . . . . . . . . . . . 64,727 39,614 117,029 73,368
Maintenance. . . . . . . . . . . . . . . . . . . 64,514 54,312 128,386 105,784
---------- ---------- ---------- ----------
Total revenue . . . . . . . . . . . . . . . . 291,788 210,466 562,011 398,015
---------- ---------- ---------- ----------
Costs and expenses:
Cost of product. . . . . . . . . . . . . . . . . 12,374 10,090 24,711 19,043
Cost of services . . . . . . . . . . . . . . . . 48,351 27,868 88,005 52,062
Cost of maintenance. . . . . . . . . . . . . . . 10,188 5,634 20,531 11,386
Marketing and sales. . . . . . . . . . . . . . . 71,366 59,689 140,611 114,858
Research and development . . . . . . . . . . . . 42,961 33,799 84,668 65,052
General and administrative . . . . . . . . . . . 16,303 13,638 32,824 25,842
Unusual items. . . . . . . . . . . . . . . . . . -- 22,366 85,957 34,114
---------- ---------- ---------- ----------
Total costs and expenses. . . . . . . . . . . 201,543 173,084 477,307 322,357
---------- ---------- ---------- ----------
Income from operations. . . . . . . . . . . 90,245 37,382 84,704 75,658
Other income, net. . . . . . . . . . . . . . . . . 2,576 3,255 5,195 18,011
---------- ---------- ---------- ----------
Income before provision for income taxes . 92,821 40,637 89,899 93,669
Provision for income taxes . . . . . . . . . . . . 26,454 12,191 48,991 28,101
---------- ---------- ---------- ----------
Net income. . . . . . . . . . . . . . . . . $ 66,367 $ 28,446 $ 40,908 $ 65,568
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic net income per share . . . . . . . . . . . . $ 0.31 $ 0.15 $ 0.19 $ 0.36
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted net income per share . . . . . . . . . . . $ 0.28 $ 0.13 $ 0.17 $ 0.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding . . . . 212,210 191,194 211,112 183,564
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and potential common
shares outstanding--assuming dilution . . . . . 236,205 213,732 235,601 206,643
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
JULY 4, JUNE 28,
1998 1997
----------- -----------
Cash and Cash Equivalents at Beginning of Period . . . . . . . $ 207,024 $ 284,512
----------- -----------
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 40,908 65,568
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 41,658 22,959
Deferred income taxes . . . . . . . . . . . . . . . . . . (5,628) (4,242)
Write-offs of equipment and other assets, net . . . . . . 1,751 1,834
Write-off of in-process research and development. . . . . 82,000 4,860
Other long-term liabilities and minority
interest expense. . . . . . . . . . . . . . . . . . . . 7,047 2,798
Gain on sale of subsidiary stock. . . . . . . . . . . . . -- (13,061)
Changes in operating assets and liabilities,
net of effect of acquired and disposed businesses:
Accounts receivable . . . . . . . . . . . . . . . . . (19,629) 6,848
Prepaid expenses and other. . . . . . . . . . . . . . 22,697 (1,727)
Installment contract receivables. . . . . . . . . . . (42,640) (6,500)
Accrued liabilities and payables. . . . . . . . . . . (22,163) 17,615
Income taxes payable. . . . . . . . . . . . . . . . . 48,341 26,139
Deferred revenue. . . . . . . . . . . . . . . . . . . (2,234) (3,578)
----------- -----------
Net cash provided by operating activities . . . . . 152,108 119,513
----------- -----------
Cash Flows from Investing Activities:
Maturities of short-term investments--held-to-maturity . . . 38,498 13,059
Purchases of short-term investments--held-to-maturity . . . (35,843) (57,625)
Maturities of short-term investments--available-for-sale . . 378,049 --
Purchases of short-term investments--available-for-sale. . . (409,350) --
Purchases of property, plant, and equipment. . . . . . . . . (55,822) (46,147)
Capitalization of software development costs . . . . . . . . (11,590) (6,800)
Increase in purchased software, intangibles,
and other assets . . . . . . . . . . . . . . . . . . . . . (18,609) (10,613)
Net proceeds from sale of subsidiary stock . . . . . . . . . -- 18,582
Effect of deconsolidation on cash. . . . . . . . . . . . . . -- (9,536)
Purchase of businesses, net of acquired cash . . . . . . . . (51,313) 42,358
Sale of put warrants . . . . . . . . . . . . . . . . . . . . 23,149 5,688
Purchase of call options . . . . . . . . . . . . . . . . . . (23,149) (5,688)
----------- -----------
Net cash used for investing activities. . . . . . . . (165,980) (56,722)
----------- -----------
Cash Flows from Financing Activities:
Principal payments on capital lease obligations
and long-term debt . . . . . . . . . . . . . . . . . . . . (1,203) (19,529)
Sale of common stock . . . . . . . . . . . . . . . . . . . . 43,411 12,693
Purchases of treasury stock. . . . . . . . . . . . . . . . . (98,103) (21,079)
----------- -----------
Net cash used for financing activities. . . . . . . . (55,895) (27,915)
----------- -----------
Effect of exchange rate changes on cash. . . . . . . . . . . . (2,343) (2,630)
----------- -----------
Increase (decrease) in Cash and Cash Equivalents . . . . . . . (72,110) 32,246
----------- -----------
Cash and Cash Equivalents at End of Period . . . . . . . . . . $ 134,914 $ 316,758
----------- -----------
----------- -----------
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended January 3, 1998.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.
The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts in the consolidated financial statements as of January 3, 1998 and for the three and six months ended June 28, 1997, have been reclassified to conform with the 1998 presentation.
REVENUE RECOGNITION
Effective January 4, 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The adoption of SOP 97-2 did not have a material impact on the Company's consolidated financial position or results of operations.
ACQUISITIONS
In February 1998, the Company acquired all of the outstanding stock of Symbionics Group Limited, a U.K. corporation, for approximately 1 million shares of the Company's common stock and $21.3 million of cash. The total purchase price was $46.1 million, and the acquisition was accounted for as a purchase. In connection with the acquisition, net intangibles of $46 million were acquired, of which $40 million was reflected as a charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use. Intangibles arising from the acquisition are being amortized on a straight-line basis over five years.
In March 1998, the Company acquired all of the outstanding stock of
Excellent Design, Inc., a Japanese corporation, for cash. The total purchase
price was $40.9 million, and the acquisition was accounted for as a purchase.
In connection with the acquisition, net intangibles of $48.7 million were
acquired, of which $42 million was reflected as a charge to operations for
the write-off of in-process research and development that had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use. Intangibles arising from the acquisition are being
amortized on a straight-line basis over five years.
COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which was adopted by the Company in the first quarter of 1998. SFAS No. 130 requires companies to report a new, additional measure of income on the income statement or to create a new financial statement that has the new measure of income on it. "Comprehensive income" includes foreign currency translation gains and losses and other unrealized gains and losses that have been previously excluded from net income and reflected instead in equity.
A summary of comprehensive income follows:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------- -------- ------- --------
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . $ 66,367 $ 28,446 $ 40,908 $ 65,568
Foreign currency translation adjustment. . . . . . (939) 960 (2,145) (2,751)
--------- --------- --------- ---------
Comprehensive income . . . . . . . . . . . . . . . $ 65,428 $ 29,406 $ 38,763 $ 62,817
--------- --------- --------- ---------
--------- --------- --------- ---------
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NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted average shares of common stock outstanding during the period, and for diluted net income per share, net income is divided by the weighted average shares of common stock outstanding and potential common shares during the period. Potential common shares included in the dilution calculation consist of dilutive shares issuable upon the exercise of outstanding common stock options, warrants, and put warrants computed using the treasury stock method.
The following is a reconciliation of the weighted average common shares used to calculate basic net income per share to the weighted average common and potential common shares used to calculate diluted net income per share:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------- -------- ------- --------
(In thousands)
Weighted average common shares used to calculate
basic net income per share . . . . . . . . . . . 212,210 191,194 211,112 183,564
Options . . . . . . . . . . . . . . . . . . . 23,707 22,115 24,222 22,706
Warrants and other contingent shares. . . . . 284 192 265 257
Puts. . . . . . . . . . . . . . . . . . . . . 4 231 2 116
------- ------- ------- -------
Weighted average common and potential common
shares used to calculate diluted net income
per share . . . . . . . . . . . . . . . . . . . 236,205 213,732 235,601 206,643
------- ------- ------- -------
------- ------- ------- -------
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CONTINGENCIES
Refer to Part II, Item 1 for a description of legal proceedings.
PUT WARRANTS AND CALL OPTIONS
The Company has two seasoned authorized stock repurchase programs. Under one program, the Company repurchases common stock to satisfy estimated requirements for shares to be issued under its Employee Stock Purchase Plan (ESPP) over the next 12 months. The shares acquired under the second program will be used to meet the recurring share issuance requirements of the 1997 Stock Option Plan.
As part of its authorized repurchase programs, the Company has sold put warrants through private placements. At July 4, 1998, there were 5.3 million put warrants outstanding which entitle the holder to sell one share of common stock to the Company on a specified date and at a specified price ranging from $24.20 to $35.14 per share. Additionally, during this same period, the Company purchased call options that entitle the Company to buy on a specified date one share of common stock at a specified price. At July 4, 1998, the Company had 3.6 million call options outstanding at prices ranging from $24.44 to $35.39 per share to satisfy anticipated stock repurchase requirements under the Company's systematic repurchase programs. The put warrants and call options outstanding at July 4, 1998 are exercisable on various dates through November 12, 1999.
If exercised, the put warrants will be settled with the issuance of stock equal to the difference between the exercise price and the fair value at the date of exercise. Accordingly, settlement of the put warrants 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 could lead to the disposition by put warrant holders of shares of the Company's common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may impact the price of the Company's common stock. At July 4, 1998, because the put warrants will be settled with stock, if exercised, 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.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. The Company has not yet determined the impact SFAS No. 133 will have on its financial position, results of operations, or cash flows.
In April 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company anticipates that SOP 98-1 will not have a material impact on its consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND "LIQUIDITY AND CAPITAL RESOURCES."
RESULTS OF OPERATIONS
REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------
(In millions)
Product. . . . . . . . . $ 162.6 $ 116.5 39% $ 316.6 $ 218.9 45%
Services . . . . . . . . 64.7 39.6 63% 117.0 73.4 60%
Maintenance. . . . . . . 64.5 54.4 19% 128.4 105.7 21%
-------- -------- -------- --------
Total revenue. . . . . $ 291.8 $ 210.5 39% $ 562.0 $ 398.0 41%
-------- -------- -------- --------
-------- -------- -------- --------
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SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
Product. . . . . . . . . 56% 55% 56% 55% Services . . . . . . . . 22% 19% 21% 18% Maintenance. . . . . . . 22% 26% 23% 27% |
The increase in product revenue of $46.1 million and $97.7 million for the three and six month periods ended July 4, 1998, respectively, when compared to the same periods of 1997, was attributable primarily to increased demand for products used by customers to develop integrated circuits (ICs) and deep submicron designs, including design entry tools, custom layout tools, analog design tools, automatic place-and-route tools, and verification tools.
Services revenue increased $25.1 million and $43.6 million in the three and six month periods ended July 4, 1998, respectively, when compared to the same periods of 1997. The increase in services revenue was primarily the result of increased demand for the Company's services offerings throughout the world.
The increase in maintenance revenue of $10.1 million and $22.7 million for the three and six month periods ended July 4, 1998, respectively, as compared to the same periods of 1997, was attributable primarily to an increase in the Company's installed base of products and the sale of higher priced maintenance contracts which on average require higher support levels.
Revenue from international sources was approximately $164.2 million and $104.8 million, or 56% and 50% of total revenue, for the second quarters of 1998 and 1997, respectively. For the six month period ended July 4, 1998, revenue from international sources was $285.8 million, as compared to $202.1 million for the same period of 1997, representing 51% of total revenue for each period. The increase in total revenue from international sources in the second quarter of 1998 was primarily attributable to strong revenue growth in Europe. Total revenue growth from international sources was partially offset by a $6.6 million negative impact on revenue as a result of the weakening of certain foreign currencies, primarily the Japanese yen, in relation to the U.S. dollar.
COST OF REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------
(In millions)
Product. . . . . . . . . $ 12.4 $ 10.1 23% $ 24.7 $ 19.0 30%
Services . . . . . . . . $ 48.4 $ 27.9 74% $ 88.0 $ 52.1 69%
Maintenance. . . . . . . $ 10.2 $ 5.6 81% $ 20.5 $ 11.4 80%
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COST OF REVENUE AS A PERCENT OF RELATED REVENUE
Product. . . . . . . . . 8% 9% 8% 9% Services . . . . . . . . 75% 70% 75% 71% Maintenance. . . . . . . 16% 10% 16% 11% |
Cost of product revenue includes costs of production personnel, packaging and documentation, and the amortization of capitalized software development costs. Cost of product increased by $2.3 million and $5.7 million for the three and six month periods ended July 4, 1998, respectively, as compared with the same periods of 1997, primarily due to higher amortization costs associated with software development costs.
Cost of services revenue includes personnel and related costs associated with providing services to customers and the infrastructure to manage a services organization, as well as costs to recruit, develop and retain services professionals. Cost of services revenue increased by $20.5 million and $35.9 million for the three and six month periods ended July 4, 1998, respectively, as compared with the same periods of 1997, primarily due to the continued investment in developing new services offerings and the addition of services professionals by the Company, primarily through acquisitions and increased hiring. Services gross margins have been and may continue to be adversely affected by the cost of integrating new service professionals as well as the Company's inability to fully utilize these resources. In addition, services gross margins may continue to be adversely affected by the Company's inability to achieve operating efficiencies with its resources to implement a growing number of services offerings.
Cost of maintenance revenue includes the cost of customer services such as hot-line and on-site support and the production cost of the maintenance renewal process. Cost of maintenance revenue increased by $4.6 million and $9.1 million for the three and six month periods ended July 4, 1998, respectively, as compared with the same periods of 1997, primarily due to additional costs associated with supporting a larger installed base of products and additional costs to provide higher support levels to customers.
OPERATING EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
July 4, June 28, July 4, June 28,
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- --------- ------- -------- --------
(In millions)
Marketing and sales. . . . . $ 71.4 $ 59.7 20% $ 140.6 $ 114.9 22%
Research and development . . $ 43.0 $ 33.8 27% $ 84.7 $ 65.1 30%
General and administrative . $ 16.3 $ 13.6 20% $ 32.8 $ 25.8 27%
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EXPENSES AS A PERCENT OF TOTAL REVENUE
Marketing and sales. . . . . 24% 28% 25% 29% Research and development . . 15% 16% 15% 16% General and administrative . 6% 6% 6% 6% |
The increase in marketing and sales expenses of $11.7 million in the second quarter of 1998, as compared with the second quarter of 1997, was primarily the result of an increase of $9.1 million in employee related expenses attributable to increased headcount and commissions, as well as an increase in sales support costs in Japan of $1.4 million. The increase in marketing and sales expenses in the second quarter of 1998 was partially offset by a $1.6 million decrease resulting from the weakening of certain foreign currencies in relation to the U.S. dollar in the second quarter of 1998, as compared with the second quarter of 1997. For the six month period ended July 4, 1998, as compared with the same period of 1997, the increase in marketing and sales expenses of $25.7 million was primarily the result of an increase of $17.2 million in employee related expenses attributable to increased headcount and commissions, as well as an increase in sales support costs in Japan of $5.6 million.
The Company's investment in research and development, prior to the reduction for capitalization of software development costs, was $49.1 million and $37.3 million for the second quarters of 1998 and 1997, respectively, representing 17% and 18% of total revenue, respectively. The increase in net research and development expenses for the second quarter of $9.2 million was primarily attributable to employee related costs of $6.9 million due to increased headcount and facilities costs of $3.3 million, partially offset by an increase in the capitalization of software development costs of $2.6 million. The Company capitalized $6.1 million and $3.5 million of software development costs for the second quarters of 1998 and 1997, respectively, which represented 13% and 9%, respectively, of total research and development expenditures made in each of those periods, resulting primarily from general increases in new product development. The increase in net research and development expenses of $19.6 million for the six month period ended July 4, 1998, as compared with the same period of 1997, was primarily the result of an increase of $11.7 million in employee related expenses attributable to increased headcount, facilities costs of $6.7 million and management information systems costs of $4.5 million, partially offset by an increase in the capitalization of software development costs of $4.8 million. For the six month periods ended July 4, 1998 and June 28, 1997, the Company capitalized $11.5 million and $6.8 million of software development costs, which represented 12% and 9%, respectively, of total research and development expenditures made in each of those periods, resulting primarily from general increases in new product development. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed.
General and administrative expenses increased by $2.7 million and $7 million for the three and six month periods ended July 4, 1998, respectively, as compared to the same periods of 1997. This was primarily attributable to an increase in consulting services fees for information services of $2.2 million and $4.1 million for the three and six month periods ended July 4, 1998, respectively, as compared to the same periods of 1997, and an increase in bad debt expense of $1.1 million and $1.9 million, respectively.
UNUSUAL ITEMS
There were no unusual items in the three month period ended July 4, 1998.
For the three month period ended June 28, 1997, the Company incurred approximately $22.4 million of expenses related to its merger with CCT, which were included in unusual items, 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. Additionally, the Company recorded expenses to restructure its international business operations to reduce the Company's cost structure and to further integrate and reduce selling and marketing activities.
In February 1998, the Company acquired all of the outstanding stock of Symbionics Group Limited, a U.K. corporation, for approximately 1 million shares of the Company's common stock and $21.3 million of cash. The total purchase price was $46.1 million, and the acquisition was accounted for as a purchase. In connection with the acquisition, net intangibles of $46 million were acquired, of which $40 million was reflected as a charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use.
In March 1998, the Company acquired all of the outstanding stock of Excellent Design, Inc., a Japanese corporation, for cash. The total purchase price was $40.9 million, and the acquisition was accounted for as a purchase. In connection with the acquisition, net intangibles of $48.7 million were acquired, of which $42 million was reflected as a charge to operations for the write-off of in-process research and development that had not reached technological feasibility and, in management's opinion, had no probable alternative future use.
Included in unusual items for the six month period ended June 28, 1997 were a $4.9 million write-off of in-process research and development associated with an acquisition and a $29.2 million restructuring charge due to the Company's merger with High Level Design Systems, Inc. and CCT, reorganization into business units, and expenses to restructure the Company's international business operations.
OTHER INCOME, NET AND INCOME TAXES
Other income, net of other expenses, remained relatively flat in the three month period ended July 4, 1998, as compared to the same period of 1997. Other income, net of other expenses, decreased by $12.8 million for the six month period ended July 4, 1998, as compared to the same period of 1997, primarily due to the $13.1 million gain on the sale of stock recorded in the first quarter of 1997 and a decrease in interest income of $1.9 million, partially offset by the decrease in interest expense of $1.1 million.
The Company's estimated effective tax rate in the three and six month periods ended July 4, 1998 was 28.5%, excluding the effect of the write-off of in-process research and development of $82.0 million in the first quarter of 1998, which is not deductible for income tax purposes. This compares to 30% for the same periods of the prior year. The decrease in the effective rate was due to the difference in tax rates between domestic and foreign operations.
NEW ACCOUNTING STANDARDS
Effective January 4, 1998, the Company adopted SOP 97-2, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The adoption of SOP 97-2 did not have a material impact on the Company's consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. The Company has not yet determined the impact SFAS No. 133 will have on its financial position, results of operations, or cash flows.
In April 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company anticipates that SOP 98-1 will not have a material impact on its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At July 4, 1998, the Company's principal sources of liquidity consisted of $260.7 million of cash and short-term investments, compared to $304.2 million at January 3, 1998, and a $110 million senior secured revolving credit facility. As of August 7, 1998, the Company had no borrowings under the revolving line of credit.
Cash generated from operating activities increased $32.6 million for the six months ended July 4, 1998, as compared to the six months ended June 28, 1997. The increase was due primarily to increases in net income excluding unusual items and other non-cash charges, partially offset by changes in the balances of operating assets and liabilities.
At July 4, 1998, the Company had working capital of $309 million compared with $340.3 million at January 3, 1998. Working capital reductions were generated primarily by a decrease in cash and short-term investments of $43.5 million. The decrease in cash was primarily due to the repurchase of the Company's stock, capital expenditures, and acquisitions, partially offset by cash generated from operations.
In addition to its short-term investments, the Company's primary investing activities were acquisitions, purchases of property and equipment, purchases of software, intangibles, and other assets, and the capitalization of software development costs that in the aggregate represented $137.3 million and $21.2 million of cash used for investing activities in the six months ended July 4, 1998 and June 28, 1997, respectively. For the six month period ended June 28, 1997, net proceeds related to the sale of Integrated Measurement Systems, Inc. (IMS) stock contributed $18.6 million, which was partially offset by the loss to the Company of IMS cash of $9.5 million due to deconsolidation.
As part of its authorized stock repurchase programs, the Company has sold put warrants and purchased call options through private placements. The Company has a maximum potential obligation related to put warrants at July 4, 1998 to buy back 5.3 million shares of its common stock at an aggregate price of approximately $143.9 million.
Anticipated cash requirements for the remainder of 1998 include the purchase of treasury stock through the exercise of call options for the Company's stock repurchase programs and the contemplated additions of property, plant, and equipment of approximately $45 million.
As part of its overall investment strategy, the Company has committed to participating in a venture capital partnership as a limited partner. The Company's total committed investment of at least $50 million will be made over the next three to four years. As of July 4, 1998, the Company had contributed approximately $22.7 million, which was reflected in other non-current assets in the accompanying condensed consolidated balance sheet, net of operating losses.
The Company anticipates that current cash and short-term investment balances, cash flows from operations, and the $110 million revolving credit facility will be sufficient to meet its working capital requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS
The EDA industry and the commercial electronic design and consulting industry in which the Company competes are subject to rapid technological developments, evolving industry standards, changes in customer requirements, and frequent new product introductions and enhancements. As a result, the Company's future revenues and operating results will depend on its ability to develop or acquire new products and enhance its existing products and processes on a timely basis to keep pace with innovations in technology and to support a range of changing computer software, hardware platforms, and customer preferences. Changes in manufacturing technology may render the Company's software tools obsolete. There can be no assurance that the Company will be able to successfully develop new products to address new customer requirements and technological changes, or that such products will achieve market acceptance. Lack of market acceptance or significant delays in product development could result in a loss of competitiveness of the Company's products, with a resulting loss of revenues.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's operating expenses are partially based on its expectations
regarding future revenue. Since expenses are usually committed in advance of
revenues, and because only a small portion of expenses vary with revenue, the
Company's consolidated results of operations may be disproportionately
impacted by lower than expected revenue. Factors that may affect operating
results include, among other things: (i) the timing and introduction of new
products; (ii) the mix of products and services sold; (iii) the timing of
significant orders from and shipments to or implementations for customers;
(iv) product and services pricing and discounts; (v) the timing of completion
of acquisitions; and (vi) general economic conditions. In addition, the
Company's focus on providing services is relatively recent, and therefore
quarter to quarter comparisons may not be meaningful. For example, the
revenue growth from this source from the 1997 periods to the 1998 periods may
not be indicative of future growth. Although the Company's revenues are not
generally seasonal in nature, the Company has experienced, and may continue
to experience, decreases in first quarter revenue compared with the preceding
fourth quarter, which is believed to result primarily from the budgeting and
expenditure cycles of the Company's customers.
HIGHLY COMPETITIVE MARKET
The Company operates in the highly competitive EDA industry and in the emerging commercial electronic design and consulting markets. The EDA industry continues to be characterized by falling prices, rapid technological change, and new market entrants. The Company's success is dependent upon its ability to develop innovative, cost competitive EDA software products and take them to market in a timely manner. The Company competes with a number of companies, including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., and Zuken-Redac. The Company also experiences competition from manufacturers of electronic devices that have developed and/or have the capability to develop their own EDA software. Some of these companies may have substantially greater financial, marketing, and technological resources than the Company.
The EDA industry has relatively low barriers to entry, and, therefore, the number of the Company's actual and potential competitors is significant. A potential competitor that possesses the necessary knowledge of electronic circuit and systems design, production, and operations could develop competitive EDA tools using a moderately priced computer workstation and take such tools to market quickly. There can be no assurance that development of competitive products will not result in a shift of customer preferences away from the Company's products, resulting in a significant decrease in the sales of the Company's comparable products. In addition, there can be no assurance that the Company will successfully identify new product opportunities, develop and take new products to market in a timely manner and achieve market acceptance of its products. Failure to do so may have a material adverse effect on Cadence's business, operating results, and financial condition.
In the electronic design and consulting markets, the Company competes with numerous EDA and other consulting companies. This emerging market represents the outsourcing of an activity by electronics manufacturers that has traditionally been performed in house, and is thus subject to the customers' "make versus buy" decisions. As a result, the Company's services business must also compete with the internal design capabilities of manufacturers of electronic devices, many of which have substantially greater financial, marketing, and technological resources than the Company. Therefore, the Company's ability to obtain such business is dependent upon its ability to offer better strategic concepts and technical solutions, competitive prices, a quicker response or a combination of these factors. There can be no assurance the Company will be able to effectively compete in this area, and any failure to compete in the electronic design and consulting market may have a material adverse effect on Cadence's business, operating results, and financial condition.
The electronic design and consulting service businesses have relatively low barriers to entry and, therefore, EDA and other electronics companies and management consulting firms have entered and may continue to enter into this market. The pricing model for services is susceptible to supply and demand volatility for labor as well as the Company's continuing ability to provide competitive time-to-market benefits to its customers. Some of the Company's current and potential competitors in the electronic design and consulting services businesses may have substantially greater financial, marketing, and technological resources than the Company. There can be no assurance that the Company will be able to compete successfully in these businesses, and any failure to compete in this business may have a material adverse effect on Cadence's business, operating results, and financial condition.
RISK OF SERVICES BUSINESS
The Company has recently increased its focus on offering electronics design and consulting services. The market for such services in the electronics design area is relatively new and evolving rapidly. In order to increase revenues and sustain operating results from the Company's services business, the Company must continue to gain market acceptance for its professional services, which will depend substantially on its ability to offer better strategic concepts and technical solutions, competitive prices, a timely response or a combination of these factors. Failure to successfully operate its services business would have a material adverse effect on the Company's business, operating results, and financial condition.
The Company's professional services contracts generally reflect a high amount of revenue per order. The loss of individual orders, therefore, could have a significant impact on the revenue and operating results of the Company. The timing of revenue from the Company's services business is also difficult to predict because of the length and variability of the sales and implementation cycles. In addition, a substantial portion of the Company's revenues from services are earned pursuant to fixed price contracts. Variances in costs associated with those contracts could have a material adverse effect on the Company's business, operating results, and financial condition.
The professional services business is labor-intensive. Accordingly, the ability to expand its services business is dependent on its ability to hire and retain adequate professional services personnel. The market for professional services personnel is highly competitive. In general, the high component of salaries in the cost structure of the professional services business results in lower gross margins than in the Company's software business. Services gross margins have been and may continue to be adversely affected by the cost of integrating new service professionals as well as the Company's inability to fully utilize these resources. In addition, services gross margins may continue to be adversely affected by the Company's inability to achieve operating efficiencies with its resources to implement a growing number of services offerings.
RISKS ASSOCIATED WITH MERGERS AND ACQUISITIONS
The Company has been involved, and may in the future be involved, in a number of merger and acquisition transactions. These transactions have been motivated by many factors, including the desire to obtain new technologies, the desire to expand and enhance the Company's product and services lines and the desire to attract personnel. Growth through acquisition has several identifiable risks, including risks related to integration of the previously distinct businesses into a single unit, the substantial management time devoted to such activities, undisclosed liabilities, the failure to realize anticipated benefits (such as cost savings and synergies) and issues related to product transition (such as distribution, engineering and customer support). Realization of any of these risks in connection with an acquisition by the Company could have a material adverse effect on the Company's business, operating results, and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts and abilities of its senior management, its research and development staff and a number of other key management, sales, support, technical, and services personnel. The Company has recently increased its focus on offering professional services to its customers, the growth of which is directly dependent on the attraction and retention of personnel. The market for highly skilled employees is intensely competitive. To the extent that the Company is not able to attract, retain, train, and motivate highly skilled employees, directly or through acquisition, who are able to provide EDA and other design services that satisfy customer's expectations, the Company's business, operating results, and financial condition could be materially adversely affected.
RISKS OF INTERNATIONAL OPERATIONS
The Company expects that international revenues will continue to account for a significant portion of its total revenues. The Company's international operations involve a number of risks normally associated with such operations including, among others, adoption and expansion of government trade restrictions, volatile foreign exchange rates, currency conversion risks, limitations on repatriation of earnings, reduced protection of intellectual property rights, the impact of possible recessionary environments in economies outside the U.S., longer receivables collection periods and greater difficulty in accounts receivable collection, difficulties in managing foreign operations, political and economic instability, unexpected changes in regulatory requirements and tariffs and other trade barriers. In addition, political or economic conditions in a specific country or region, government spending factors and natural disasters could have a material adverse impact on the Company's future international business as well as the Company's international operations. Currency exchange fluctuations in countries in which the Company conducts business could also materially adversely affect the Company's business, operating results, and financial condition. A portion of the Company's international revenues are derived from Asia. Recent economic uncertainty and related weakening of foreign currencies has had, and may continue to have an adverse effect on the Company's revenues and operating results. The Company enters into forward contracts to hedge the short-term impact of foreign currency fluctuations. Although the Company attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may have a material adverse impact on the Company's consolidated results of operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
Cadence's success is dependent, in part, upon its proprietary technology. The Company generally relies upon patents, copyrights, trademarks, and trade secret laws to establish and maintain its proprietary rights in its technology and products. Cadence has a program to file applications for and obtain patents in the United States and in selected foreign countries where a potential market for Cadence's products exists. Cadence has been issued a number of patents; other patent applications are currently pending. There can be no assurance that any of these patents will not be challenged, invalidated or circumvented or that any rights granted thereunder will provide competitive advantages to Cadence. In addition, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect Cadence's technology. In addition, the laws of some foreign countries may not permit the protection of Cadence's proprietary rights to the same extent as do the laws of the United States. Although Cadence believes the protection afforded by its patents, patent applications, copyrights and trademarks has value, the rapidly changing technology in the EDA industry makes Cadence's future success dependent primarily on the innovative skills, technological expertise, and management abilities of its employees rather than on patent, copyright, and trademark protection.
Because of the existence of a large number of patents in the EDA industry and the rapid rate of issuance of new patents, it is not economically practicable to determine in advance whether a product or any of its components infringe patent rights of others. From time to time, Cadence receives notices from or is sued by third parties regarding patent or other intellectual property claims or is called upon to defend or indemnify a customer against such a claim of a third party. If infringement is alleged, Cadence believes that, based upon industry practice, any necessary license or rights under such patents may be obtained on terms that would not have a material adverse effect on Cadence's business, operating results, and financial condition. Nevertheless, there can be no assurance that the necessary licenses would be available on acceptable terms, or at all, or that Cadence would prevail in any such challenge. Many of Cadence's products are designed to include software or other intellectual property licensed from third parties, and it may be necessary in the future to seek or renew licenses relating to various aspects of its products. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation could have a material adverse effect on Cadence's business, operating results, and financial condition.
RISK OF FAILURE TO OBTAIN EXPORT LICENSES
Cadence is required to comply with the regulations of the United States Department of Commerce with respect to the shipment of its products and other technologies outside the United States to certain countries and certain end users. Although to date, Cadence has not encountered any material difficulty in complying with these regulations, any difficulty in such compliance in the future could have an adverse effect on the Company's business, operating results, and financial condition.
RISKS OF BUSINESS INTERRUPTION
The Company's operations are dependent on its ability to protect its computer equipment and the information stored in its databases against damage by fire, natural disaster, power loss, telecommunications failures, unauthorized intrusion, and other catastrophic events. The Company believes it has taken prudent measures to reduce the risk of interruption in its operations. However, there can be no assurance that these measures will be sufficient. Any damage or failure that causes interruptions in the Company's operations could have a material adverse effect on its business, operating results, and financial condition.
IMPLEMENTATION OF NEW SYSTEMS
The Company is currently in the process of transitioning to new computer software for its financial, accounting, project system accounting, and order management information systems. The successful implementation of these new systems is crucial to the efficient operation of the Company's business. There can be no assurance that the Company will implement its new systems in an efficient and timely manner or that the new systems will be adequate to support the Company's operations. Problems with installation or initial operation of the new systems could cause substantial management difficulties in operations planning, financial reporting, and management and thus could have a material adverse effect on the Company's business, operating results, financial condition, and results of operations.
YEAR 2000 COMPLIANCE
The Company believes that its most current releases of its products will not cease to perform nor generate incorrect or ambiguous data or results solely due to a change in date to or after January 1, 2000, and will calculate any information dependent on such dates in the same manner, and with the same functionality, data integrity and performance, as such products do on or before December 31, 1999 (collectively, "Year 2000 Compliance"). Year 2000 Compliance issues may arise with respect to any modifications made to the Company's products by a party other than the Company or from the combination or use of the Company's products with any other software programs or hardware devices not provided by the Company, and therefore may result in unforeseen Year 2000 Compliance problems for some of the Company's customers, which may have a material adverse effect on the Company's business, operating results, and financial condition.
Additionally, as with any company with a computing infrastructure and utilizing business-application software programs written over many years, the Company's internal operations may be subject to Year 2000 Compliance issues. The Company has been implementing enterprise-wide information systems which support a majority of the Company's operations. These systems are considered to be Year 2000 Compliant and are in use world-wide. Based solely due to a change in date to or after January 1, 2000, the Company believes that its internal operations will not be materially adversely impacted.
STOCK REPURCHASE PROGRAM RISKS
The Company, as part of its authorized stock repurchase program, has purchased call options that entitle the Company to buy on a specified day one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under the Company's systematic repurchase programs. Additionally, the Company has sold put warrants through private placements. If exercised, the put warrants will be settled with the issuance of stock. Accordingly, settlement of the put warrants 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 could lead to the disposition by put warrant holders of shares of the Company's common stock that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may impact the price of the Company's common stock.
VOLATILITY OF STOCK PRICE
Due to the foregoing, as well as other factors, past financial performance should not be considered an indicator of future performance. In addition, the Company's participation in a highly dynamic industry often results in significant volatility of the Company's common stock price. Factors such as fluctuations in revenues or operating results, including failure to meet expectations of securities analysts, announcements of technological innovations or new products by the Company or its competitors, or developments in or disputes regarding patents and proprietary rights could have a significant adverse effect on the trading price of the Company's common stock in any given period. Moreover, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market for technology companies, and which have often been unrelated to the operating performance of such companies. These broad market fluctuations, as well as general economic, political, and market conditions may adversely affect the market price of the Company's common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company is averse to principal loss and seeks to preserve its invested funds by limiting default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only high credit quality securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
The table below presents the carrying value and related weighted average interest rates for the Company's investment portfolio. The carrying value approximates fair value at July 4, 1998. All investments mature in one year or less.
Carrying Average
Value Interest Rate
-------- -------------
(In millions, except for average interest rates)
Investment Securities:
Cash equivalents-fixed rate. . . . . . . . . . . . $ 35.1 5.32%
Short-term investments-fixed rate. . . . . . . . . 66.9 5.69%
Short-term investments-variable rate . . . . . . . 79.3 5.72%
--------
Total investment securities . . . . . . . . . . 181.3 5.63%
Cash equivalents-variable rate . . . . . . . . . . 21.0 5.48%
--------
Total interest bearing instruments. . . . . . . $ 202.3 5.62%
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FOREIGN CURRENCY RISK
The Company transacts business in various foreign currencies, primarily in Japanese yen and certain European currencies. 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 foreign currency transaction gains and losses. 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 July 4, 1998 about the Company's material forward contracts. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts (at contract exchange rates) and the weighted average contractual foreign currency exchange rates. These forward contracts mature in less than thirty days.
Average
Notional Contract
Amount Rate
-------- --------
Forward Contracts:
(In millions, except for average contract rates)
Japanese yen . . . . . . . . . . . . . . . . . . $ 24.4 143.81
German deutschemarks . . . . . . . . . . . . . . $ 4.0 1.79
Italian lira . . . . . . . . . . . . . . . . . . $ 3.5 1,769.65
French francs. . . . . . . . . . . . . . . . . . $ 1.8 6.00
Swedish krona. . . . . . . . . . . . . . . . . . $ 1.2 8.03
Singapore dollars. . . . . . . . . . . . . . . . $ 1.1 1.76
Canadian dollars . . . . . . . . . . . . . . . . $ (2.5) 1.47
British pound sterling . . . . . . . . . . . . . $ (3.0) 0.61
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The unrealized gain (loss) on the outstanding forward contracts at July 4, 1998 was immaterial to the Company's consolidated financial statements. Due to the short-term nature of the forward contracts, the fair value at July 4, 1998 was negligible. The realized gain (loss) on these contracts as they matured was not material to the consolidated operations of the Company.
EQUITY PRICE RISK
The Company, as part of its authorized repurchase program, has purchased call options that entitle the Company to buy on a specified day one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under the Company's systematic repurchase programs. Additionally, the Company has sold put warrants through private placements.
The table below provides information at July 4, 1998 about the Company's put warrants and call options. The table presents the contract amounts and the weighted average strike prices. The put warrants and call options expire at various dates through November 12, 1999.
1998 1999 Estimated
Maturity Maturity Fair Value
-------- -------- ----------
(Shares and contract amounts in millions)
Put Warrants:
Shares . . . . . . . . . . . . . . . . . . 2.4 2.9
Weighted average strike price. . . . . . . $24.33 $29.95
Contract amount. . . . . . . . . . . . . . $ 58.2 $ 85.7 $22.5
Call Options:
Shares . . . . . . . . . . . . . . . . . . 1.7 1.9
Weighted average strike price. . . . . . . $24.45 $30.12
Contract amount. . . . . . . . . . . . . . $ 41.6 $ 57.2 $19.7
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If exercised, the put warrants will be settled 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 adversely impact the price of the Company's common stock.
PART II. OTHER INFORMATION
ITEM 1. 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 and stayed the counterclaim pending resolution of the Company's complaint. The counterclaim remains stayed.
On April 19, 1996, the Company filed a motion seeking a preliminary injunction to prevent further use of Cadence copyrighted code and trade secrets by Avant!. On March 18, 1997, the District Court issued an order in which it granted in part and denied in part that motion. On September 23, 1997, the United States Court of Appeals for the Ninth Circuit reversed the District Court's decision and directed the District Court (a) to issue an order enjoining the sale of Avant!'s ArcCell products and (b) to determine whether Avant!'s Aquarius software infringes Cadence's code and, if so, to enter an order enjoining the sale of that software. In an order issued on December 19, 1997, as modified on January 26, 1998, the district court entered an injunction barring any further infringement of Cadence's copyrights in Design Framework II software, or selling, licensing, or copying such product derived from Design Framework II, including but not limited to, Avant!'s ArcCell products. On February 19, 1998, Avant! filed a petition for WRIT OF CERTIORAI to the United States Supreme Court, requesting a review of the Ninth Circuit Court's decision. On April 17, 1998, the Company filed its opposition to Avant!'s Petition with the Supreme Court. That petition was denied without comment by the United States Supreme Court. On July 9, 1998, Cadence filed additional motions seeking to enjoin further sale of Avant!'s Aquarius products on copyright and trade secret grounds. Those motions remain pending.
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. The Company intends to pursue its claim vigorously.
Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse impact on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 6, 1998, the stockholders of the Company approved the following matters:
1. A proposal to elect eight (8) directors of the Company to serve for the ensuing year and until their successors are elected or until such director's earlier resignation or removal.
Nominee In Favor Withheld ------- ----------- -------- Carol A. Bartz . . . . . . . . . . . . . . 184,126,069 214,043 H. Raymond Bingham . . . . . . . . . . . . 184,149,965 190,147 John R. Harding. . . . . . . . . . . . . . 184,150,739 189,373 Dr. Leonard Y. W. Liu. . . . . . . . . . . 184,075,024 265,088 Donald L. Lucas. . . . . . . . . . . . . . 184,133,161 206,951 Dr. Alberto Sangiovanni-Vincentelli. . . . 184,134,510 205,602 George M. Scalise. . . . . . . . . . . . . 184,123,866 216,246 Dr. John B. Shoven . . . . . . . . . . . . 184,106,111 234,001 |
2. A proposal for the approval of an amendment to the Certificate of Incorporation, as amended, to increase the authorized shares of Common Stock of the Company from 300,000,000 to 600,000,000 was approved by a vote of 177,362,155 for, 6,684,396 opposed, and 61,044 withheld.
3. A proposal for the approval of an amendment to the 1987 Stock Option
Plan, as amended, to (a) extend the term of such plan to May 31, 2007, and
(b) increase the number of authorized shares reserved under the plan from
61,370,100 to 71,370,100, an increase of 10,000,000 shares was approved by a
vote of 108,693,000 for, 50,721,131 opposed, and 342,738 withheld.
4. A proposal for the approval of the Senior Executive Bonus Plan was approved by a vote of 181,762,886 for, 2,059,907 opposed, and 284,803 withheld.
5. A proposal for the ratification of the selection of Arthur Andersen LLP as independent public accountants for the fiscal year ending January 2, 1999 was approved by a vote of 184,224,695 for, 86,210 opposed, and 32,807 withheld.
ITEM 5. OTHER INFORMATION
Pursuant to a recent change to the proxy rules, unless a stockholder who wishes to bring a matter before the stockholders at the Company's 1999 annual meeting of stockholders notifies the Company of such matter prior to February 14, 1999, management will have discretionary authority to vote all shares for which it has proxies in opposition to such matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
-------- -------------
3.01 (h) The registrant's Certificate of Retirement of Series A-1
Convertible Preferred Stock as filed with the Secretary of State
of the State of Delaware on May 13, 1998.
3.01 (i) The Registrant's Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of the State
of Delaware on May 13, 1998.
3.01 (j) The Registrant's Restated Certificate of Incorporation as
filed with the Secretary of State of the State of Delaware on
May 13, 1998.
27.01 Financial data schedule for the period ended July 4, 1998.
|
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CADENCE DESIGN SYSTEMS, INC.
(REGISTRANT)
DATE: August 14, 1998 By: /s/ John R. Harding
---------------------------
JOHN R. HARDING
President and Chief Executive Officer
DATE: August 14, 1998 By: /s/ H. Raymond Bingham
---------------------------
H. RAYMOND BINGHAM
Executive Vice President
and Chief Financial Officer
|
EXHIBIT 3.01(h)
CERTIFICATE OF RETIREMENT
OF
SERIES A-1 CONVERTIBLE PREFERRED STOCK
OF
CADENCE DESIGN SYSTEMS, INC.
(Pursuant to Section 243 of the General
Corporation Law of the State of Delaware)
CADENCE DESIGN SYSTEMS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (hereinafter referred to as the "Corporation"), does hereby certify as follows:
FIRST: Article IV of the Corporation's Certificate of Incorporation, as amended, authorizes the issuance of 86,133 shares of Series A-1 Convertible Preferred Stock, $0.01 par value.
SECOND: At a meeting of the Board of Directors of the Corporation, a
resolution was duly adopted that identified shares of the capital stock of the
Corporation, which, to the extent
hereinafter set forth, have the status of retired shares.
THIRD: The retired shares of capital stock of the corporation are identified as being 86,133 shares of Series A-1 Convertible Preferred Stock.
FOURTH: Article IV of the Corporation's Certificate of Incorporation, as amended, prohibits the reissue of shares of Series A-1 Convertible Preferred Stock when so retired; and pursuant to the provisions of Section 243 of the General Corporation Law of the State of Delaware, upon the effective date of the filing of this Certificate as therein provided, the Corporation's Certificate of Incorporation shall be amended so as to effect an elimination of all references to the Series A-1 Convertible Preferred Stock; provided, however, that retirement of such Series of Preferred Stock shall not reduce the total authorized number of shares of Preferred Stock.
IN WITNESS WHEREOF, CADENCE DESIGN SYSTEMS, INC. has caused this Certificate of Retirement to be signed by its Executive Vice President, Chief Financial Officer, and Director this 13 day of May, 1998.
CADENCE DESIGN SYSTEMS, INC.
By: /s/ H. RAYMOND BINGHAM
----------------------
Name: H. Raymond Bingham
Title: Executive Vice President, Chief
Financial Officer, and Director
|
EXHIBIT 3.01(i)
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
CADENCE DESIGN SYSTEMS, INC.
CADENCE DESIGN SYSTEMS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify:
FIRST: The name of the Corporation is Cadence Design Systems, Inc. The Corporation was originally incorporated under the name of ECAD, Inc.
SECOND: The date on which the Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of the State of Delaware is April 8, 1987.
THIRD: The Board of Directors of the Corporation, acting in accordance with the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware, adopted resolutions amending its Certificate of Incorporation as follows:
The first paragraph of Article IV of the Certificate of Incorporation of the Corporation shall be amended and restated to read in its entirety as follows:
"The corporation is authorized to issue two (2) classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Six Hundred Million Four Hundred Thousand (600,400,000) shares. Six Hundred Million (600,000,000) shares shall be Common Stock, each having a par value of one cent ($0.01). Four Hundred Thousand (400,000) shares shall be Preferred Stock, each having a par value of one cent ($0.01). As used herein, the term "Common Stock" or "common shares" shall refer to shares of the corporation's Common Stock and the term "Preferred Stock" shall refer to shares of the corporation's Preferred Stock."
FOURTH: Thereafter, pursuant to a resolution of the Board of Directors, this Certificate of Amendment was submitted to the stockholders of the Corporation for their approval, and was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Cadence Design Systems, Inc. has caused this Certificate of Amendment to be signed by its Executive Vice President, Chief Financial Officer, and Director and attested to by its Secretary this 13 day of May, 1998.
CADENCE DESIGN SYSTEMS, INC.
By: /s/ H. RAYMOND BINGHAM
----------------------
ATTEST:
/s/ R. L. SMITH MCKEITHEN
-------------------------
Secretary
|
EXHIBIT 3.01(j)
RESTATED CERTIFICATE OF INCORPORATION
OF CADENCE DESIGN SYSTEMS, INC.
CADENCE DESIGN SYSTEMS, INC., a corporation organized and existing under the laws of the state of Delaware (the "Corporation") hereby certifies that:
1. The name of the Corporation is Cadence Design Systems, Inc. The Corporation was originally incorporated under the name ECAD, Inc.
2. The date of filing of the Corporation's original Certificate of Incorporation was April 8, 1987.
3. The Restated Certificate of Incorporation of the Corporation as provided in Exhibit A hereto was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation.
4. The Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated by reference.
IN WITNESS WHEREOF, the undersigned has signed this certificate this 13 day of May, 1998, and hereby affirms and acknowledges under penalty of perjury that the filing of this Restated Certificate of Incorporation is the act and deed of Cadence Design Systems, Inc.
CADENCE DESIGN SYSTEMS, INC.
By: /s/ H. RAYMOND BINGHAM
----------------------
Name: H. Raymond Bingham
Title: Executive Vice President,
Chief Financial Officer, and
Director
|
EXHIBIT A
RESTATED
CERTIFICATE OF INCORPORATION
OF
CADENCE DESIGN SYSTEMS, INC.
ARTICLE I
The name of the corporation is Cadence Design Systems, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent in the State of Delaware is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
The corporation is authorized to issue two (2) classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is Six Hundred Million Four Hundred Thousand (600,400,000) shares. Six Hundred Million (600,000,000) shares shall be Common Stock, each having a par value of one cent ($0.01). Four Hundred Thousand (400,000) shares shall be Preferred Stock, each having a par value of one cent ($0.01). As used herein, the term "Common Stock" or "common shares" shall refer to shares of the corporation's Common Stock and the term "Preferred Stock" shall refer to shares of the corporation's Preferred Stock.
The Preferred Stock may be issued in one or more series. The Board of Directors of the corporation (the "Board of Directors") is authorized, subject to any limitations prescribed by the
1.
laws of the State of Delaware, (i) to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock consistent with the limitations of
this Restated Certificate of Incorporation, (ii) to fix the number of shares
comprising any such series and the designation thereof, within the limits and
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, and
(iii) to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any such series subsequent
to the issuance of shares of that series.
400,000 of the authorized shares of Preferred Stock are hereby designated "Series A Junior Participating Preferred Stock." As used herein, the terms "Series A Preferred Stock" and "Series A Preferred shares" shall refer to the shares of the corporation's Series A Junior Participating Preferred Stock.
The rights, preferences, privileges and restrictions granted to or imposed upon the Series A Preferred Stock are as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 400,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the corporation convertible into Series A Preferred Stock.
2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock and of any other stock of the corporation ranking junior to the Series A Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July, and October in each year (each such date being referred to herein as a "Dividend Payment Date"), commencing on the first Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 1000 times the aggregate per share amount of all cash dividends, and 1000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, declared on the Common Stock since the immediately preceding Dividend Payment Date or, with respect to the first Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the corporation shall at any time after February 9, 1996, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect
2.
a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lessor number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) The corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section 1 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Dividend Payment Date and the next subsequent Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable, when, as and if declared, on such subsequent Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative, whether or not earned or declared, on outstanding shares of Series A Preferred Stock from the Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth and except as otherwise required by law, each share of Series A Preferred Stock shall entitle the holder thereof to 1000 votes on all matters upon which the holders of the Common Stock of the corporation are entitled to vote. In the event the corporation shall at any time after February 9, 1996, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes
3.
per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, and except as otherwise required by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
4. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not earned or declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the corporation shall not:
(i) Declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (as to dividends) to the Series A Preferred Stock;
(ii) Declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (as to dividends) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) Redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock or rights, warrants or options to acquire such junior stock;
(iv) Redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors,
4.
after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(b) The corporation shall not permit any subsidiary of the corporation to purchase or otherwise acquire for consideration any share of stock of the corporation unless the corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof.
6. LIQUIDATION, DISSOLUTION OR WINDING-UP. Upon any liquidation,
dissolution or winding up of the corporation, no distribution shall be made
(a) to the holders of the Common Stock or of shares of any other stock of the
corporation ranking junior, upon liquidation, dissolution or winding up, to
the Series A Preferred Stock unless, prior thereof, the holders of shares of
Series A Preferred Stock shall have received $1000 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or
not earned or declared, to the date of such payment, provided that the
holders of shares of Series A Preferred Stock shall be entitled to receive an
aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1000 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (b) to the
holders of shares of stock ranking on a parity upon liquidation, dissolution
or winding up with the Series A Preferred Stock, except distributions made
ratably on the Series A Preferred Stock and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. In the event the
corporation shall at any time after February 9, 1996 declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such
event under the proviso in clause (a) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are converted into, exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly converted into, exchanged for or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted, exchanged or converted. In the event the
5.
corporation shall at any time after February 9, 1996, declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the conversion, exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable from any holder.
9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the corporation, junior to all other series of Preferred Stock and senior to the Common Stock.
10. AMENDMENT. If any proposed amendment to this Restated Certificate of Incorporation would alter, change or repeal any of the preferences, powers or special rights given to the Series A Preferred Stock so as to affect the Series A Preferred Stock adversely, then the holders of the Series A Preferred Stock shall be entitled to vote separately as a class upon such amendment, and the affirmative vote of two-thirds of the outstanding shares of the Series A Preferred Stock, voting separately as a class, shall be necessary for the adoption thereof, in addition to such other vote as may be required by the General Corporation Law of the State of Delaware.
ARTICLE V
Stockholders of the corporation holding a majority of the corporation's outstanding voting stock shall have the power to adopt, amend or repeal the corporation's Bylaws. The Board of Directors shall also have the power to adopt, amend or repeal Bylaws of the corporation, except as such power may be expressly limited by Bylaws adopted by the stockholders.
ARTICLE VI
Election of Directors need not be by written ballot unless the Bylaws of the corporation shall so provide.
ARTICLE VII
A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing
6.
violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.
Any repeal or modification of the foregoing provisions of this Article VII shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such repeal or modification.
ARTICLE VIII
1. DEFINITIONS.
For the purposes of this Article VIII and the following Article IX:
(a) "Affiliate" and "Associate" have the meanings set forth in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on March 15, 1987.
(b) "Beneficially Owns" has the meaning set forth in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on March 15, 1987.
(c) "Business Combination" means (i) any merger,
consolidation, combination or reorganization of the corporation or a
Subsidiary with or into a Related Person or of a Related Person with or into
the corporation or a Subsidiary, (ii) any sale, lease, exchange, transfer,
liquidation or other disposition (in one transaction or a series of
transactions), including without limitation, a mortgage or any other security
device, of assets of the corporation and/or one or more Subsidiaries
(including without limitation any voting securities of a Subsidiary)
constituting a Substantial Part of the corporation, to a Related Person,
(iii) any sale, lease, exchange, transfer, liquidation or other disposition
(in one transaction or a series of transactions), including without
limitation, a mortgage or any other security device, of assets of a Related
Person (including without limitation any voting securities of a subsidiary of
such Related Person) constituting a Substantial Part of such Related Person,
to the corporation and/or one or more Subsidiaries, (iv) the issuance or
transfer of any securities (other than by way of a pro rata distribution to
all shareholders) of the corporation or a Subsidiary to a Related Person
which, when aggregated with all prior issuances and transfers to such Related
Person of securities of the corporation or such Subsidiary during the
preceding 365 days, constitutes five percent (5%) or more of the outstanding
class or series of securities of the corporation or such Subsidiary, (v) the
acquisition by the corporation or a Subsidiary of any securities issued by a
Related Person if, after giving effect thereto, the corporation and its
Subsidiaries would own an aggregate of one percent (1%) or more of (A) the
outstanding shares of any class or series of any security issued by the
Related Person or (B) the outstanding principal amount of any class or series
of any debt security issued by the Related Person (for purposes of such
calculation, the corporation and its Subsidiaries shall be deemed to own at
the time of such calculation any such equity or debt securities of the
Related Person that may then or thereafter be acquired (x) upon the exercise
of any options, warrants or other rights then owned by the corporation or a
Subsidiary or (y) upon
7.
the conversion or exchange of any other security then owned by the corporation or a Subsidiary); (vi) any recapitalization or reorganization that would have the effect, directly or indirectly, of increasing the voting power of a Related Person, and (vii) any agreement, contract or other arrangement providing for any of the transactions described in this definition of a Business Combination.
(d) "Continuing Director" means, as to any Related Person, any member of the Board of Directors who (i) is unaffiliated with and is not the Related Person and (ii) was a member of the Board of Directors either on the Effective Date or prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and who is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors.
(e) "Disinterested Shares" means, as to any Related Person, shares of Voting Stock held by shareholders other than such Related Person.
(f) "Fair Market Value" means: (i) in the case of stock, the
highest closing sale price during the thirty (30) day period immediately
preceding and including the date in question of a share of such stock on the
Composite Tape for securities listed on the New York Stock Exchange, or, if
such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities Exchange
Act of 1934 on which such stock is listed, or, if such stock is not listed on
any such exchange, the highest closing bid quotation with respect to a share
of such stock during the thirty (30) day period preceding and including the
date in question on the National Association of Securities Dealers, Inc.
Automated Quotation System or any other quotation reporting system then in
general use, or, if no such quotations are available, the Fair Market Value
on the date in question of a share of such stock as determined by the
Continuing Directors in good faith, which determination shall be final; and
(ii) in the case of property other than cash or stock, the fair market value
of such property on the date in question as determined by the Continuing
Directors in good faith, which determination shall be final. In making such
determinations, the Board may rely in good faith upon the books of account or
other records of the corporation or statements prepared by its officers or by
independent accountants or by an appraiser selected with reasonable care by
the Board.
(g) "Related Person" means and includes an individual, corporation, partnership or other person or entity, or any group of two or more of any of the foregoing that have agreed to act together, which, together with its or their Affiliates and Associates, Beneficially Owns, in the aggregate, five percent (5%) (the "Threshold Percentage") or more of the outstanding Voting Stock, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity; provided, however, that the term "Related Person" shall not include any individual, corporation, partnership or other person, entity or group which beneficially owned on March 15, 1987 five percent (5%) or more of the fully diluted capital stock of ECAD, Inc., a California corporation ("Excluded Person") or any Affiliate or Associate of an Excluded Person.
8.
(h) "Subsidiary" means any corporation in which the corporation owns, directly or indirectly, securities which entitle the corporation to elect a majority of the board of directors of such corporation or which otherwise give to the corporation the power to control such corporation.
(i) "Substantial Part" means more than ten percent (10%) of the fair market value of the total consolidated assets of the corporation in question and its subsidiaries as of the end of its most recent fiscal year ending prior to the time the determination is being made.
(j) "Voting Stock" means all outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors of the corporation, and each reference to a percentage or portion of shares of Voting Stock shall refer to such percentage or portion of the votes entitled to be cast by such shares.
2. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
Except as otherwise expressly provided in Section 3 of this Article VIII, in addition to any affirmative vote required by law or by any other provision of this Restated Certificate of Incorporation, and in addition to any voting rights granted to or held by holders of Preferred Stock, the approval or authorization of any Business Combination shall require (A) the affirmative vote of the holders of not less than sixty six percent (66%) of the outstanding shares of Voting Stock, voting together as a single class (the "66% Voting Requirement") and (b) the affirmative vote of the holders of a majority of the Disinterested Shares. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any securities exchange or otherwise.
3. EXCEPTIONS.
(a) Section 2 of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as may be required by law, by any voting rights granted to or held by holders of Preferred Stock and by any other provision of this Restated Certificate of Incorporation, if the Business Combination shall have been approved by a majority of the Continuing Directors, even if the Continuing Directors do not constitute a quorum of the entire Board of Directors, it being understood that this condition shall not be capable of satisfaction unless there is at least one Continuing Director.
(b) The 66% Voting Requirement of Section 2 of this Article VIII shall not be applicable to any particular Business Combination in which shareholders of the corporation, in one or more transactions, are to receive cash, securities or other property in exchange for their shares of capital stock of the corporation, and such Business Combination shall require only such affirmative vote as may be required by law, by any voting rights granted to or held by holders of Preferred Stock and by any other provisions of this Restated Certificate of Incorporation, if all of the following conditions are met:
9.
(i) The aggregate amount of cash plus the Fair Market Value as of the date of the consummation of the Business Combination of any consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following:
(A) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid or agreed to be paid by the Related Person for any shares of Common Stock acquired by it (1) within the period of two (2) years immediately prior to and including the date of the most recent public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction or series of transactions in which it became a Related Person, whichever is higher, or
(B) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Related Person became a Related Person (such latter date is referred to as the "Determination Date"), whichever is higher; and
(ii) The aggregate amount of the cash plus the Fair Market
Value as of the date of the consummation of the Business Combination of any
consideration other than cash to be received per share by holders of shares
of any of a particular class or series of outstanding capital stock, other
than Common Stock, shall be at least equal to the highest of the following
(it being intended that the requirements of this paragraph (b)(ii) of this
Section 3 shall be required to be met with respect to every class or series
of outstanding capital stock other than Common Stock whether or not the
Related Person has previously acquired any shares of that particular class or
series of capital stock):
(A) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid or agreed to be paid by the Related Person for any shares
of such class or series of capital stock acquired by it (1) within the period
of two (2) years immediately prior to and including the Announcement Date or
(2) in the transaction or series of transactions in which it became a Related
Person, whichever is higher, or
(B) (if applicable) the redemption price of the shares of such class or series, or if such shares have no redemption price, the highest amount per share which such class or series was entitled to receive upon liquidation, dissolution or winding up of the corporation as of the Announcement Date or the Determination Date, whichever is higher; or
(C) the Fair Market Value per share of such class or series on the Announcement Date or on the Determination Date, whichever is higher; and
(iii) The consideration to be received by holders of a particular class or series of outstanding capital stock (including, without limitation, Common Stock) shall be in cash or in the same form as the Related Person has previously paid for shares of such class or series of capital stock. If the Related Person has paid for shares of any class or series of capital
10.
stock with varying forms of consideration, the form of consideration for such class or series of capital stock shall be either cash or the form used to acquire the largest number of shares of such class or series of capital stock previously acquired by the Related Person; and
(iv) The Business Combination is approved by the affirmative vote of the holders of a majority of the Disinterested Shares. The price determined in accordance with paragraph (b)(i) and (b)(ii) of this Section 3 shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event.
4. DETERMINATION OF COMPLIANCE.
A majority of the total number of Continuing Directors
shall have the power and duty to determine, on the basis of information known
to them after reasonable inquiry, all facts necessary to determine compliance
with this Article VIII, including, without limitation: (a) whether a person
is a Related Person. (b) the number of shares of capital stock a person
Beneficially Owns, (c) whether a person is an Affiliate or Associate of
another, (d) whether the applicable conditions set forth in paragraph (b) of
Section 3 of this Article VIII have been met with respect to any Business
Combination, and (e) whether the proposed transaction is a Business
Combination. A majority of the Continuing Directors shall have the further
power to interpret all of the other terms and provisions of this Article VIII.
ARTICLE IX
In addition to any affirmative vote required by applicable law and any voting rights granted to or held by the holders of Preferred Stock, any alteration, amendment, repeal or rescission (any "Change") of Article VIII or this Article IX of this Restated Certificate of Incorporation must be approved either (i) by a majority of the authorized number of directors and, if one or more Related Persons exist, by a majority of the directors who are Continuing Directors with respect to all Related Persons, or (ii) by the affirmative vote of the holders of not less than sixty-six percent (66%) of the outstanding Voting Stock of the corporation and, if the Change is proposed by or on behalf of a Related Person or a director affiliated with a Related Person, by the affirmative vote of the holders of a majority of the Disinterested Shares. Subject to the foregoing, the corporation reserves the right to amend, alter, repeal or rescind any provision contained in this Restated Certificate of Incorporation in the manner now or hereafter prescribed by law.
11.
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CADENCE DESIGN SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | JAN 02 1999 |
| PERIOD START | JAN 04 1998 |
| PERIOD END | JUL 04 1998 |
| CASH | 134,914 |
| SECURITIES | 125,826 |
| RECEIVABLES | 230,565 |
| ALLOWANCES | 11,488 |
| INVENTORY | 0 |
| CURRENT ASSETS | 571,159 |
| PP&E | 230,421 |
| DEPRECIATION | 165,795 |
| TOTAL ASSETS | 1,086,184 |
| CURRENT LIABILITIES | 262,135 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 428,733 |
| OTHER SE | 360,543 |
| TOTAL LIABILITY AND EQUITY | 1,086,184 |
| SALES | 562,011 |
| TOTAL REVENUES | 562,011 |
| CGS | 133,247 |
| TOTAL COSTS | 133,247 |
| OTHER EXPENSES | 344,060 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 668 |
| INCOME PRETAX | 89,899 |
| INCOME TAX | 48,991 |
| INCOME CONTINUING | 40,908 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 40,908 |
| EPS PRIMARY | 0.19 |
| EPS DILUTED | 0.17 |