1 ------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 1996 ------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------------ Commission file number 1-10606 CADENCE DESIGN SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0148231 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 555 River Oaks Parkway, San Jose, California 95134 (Address of principal executive offices) (Zip Code) (408) 943-1234 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At April 30, 1996 there were 77,909,685 shares of the registrant's Common Stock, $0.01 par value outstanding.
2 CADENCE DESIGN SYSTEMS, INC. INDEX <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets: March 30, 1996 and December 30, 1995 3 Condensed Consolidated Statements of Income: Three Months Ended March 30, 1996 and April 1, 1995 4 Condensed Consolidated Statements of Cash Flows: Three Months Ended March 30, 1996 and April 1, 1995 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures </TABLE> 2
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) <TABLE> <CAPTION> March 30, December 30, 1996 1995 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS Current Assets: Cash and cash investments $ 73,436 $ 84,867 Short-term investments 9,722 11,774 Accounts receivable, net 90,908 88,503 Inventories 6,620 8,203 Prepaid expenses and other 17,698 13,576 --------- --------- Total current assets 198,384 206,923 Property, Plant and Equipment, net 133,004 124,103 Software Development Costs, net 25,644 25,793 Purchased Software and Intangibles, net 11,221 8,268 Other Assets 10,607 8,948 --------- --------- Total assets $ 378,860 $ 374,035 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of capital lease obligations $ 1,420 $ 1,497 Accounts payable 17,527 17,592 Accrued liabilities 68,527 74,407 Income taxes payable 9,547 14,524 Deferred revenue 114,460 92,407 --------- --------- Total current liabilities 211,481 200,427 --------- --------- Long-Term Liabilities: Long-term portion of capital lease obligations 1,651 1,619 Deferred income taxes 4,701 7,307 Minority interest liability 13,075 12,167 Other long-term liabilities 18,400 18,434 --------- --------- Total long-term liabilities 37,827 39,527 --------- --------- Stockholders' Equity: Common stock and capital in excess of par value 318,122 299,544 Treasury stock at cost (37,679 and 35,231 shares, respectively) (338,534) (290,884) Retained earnings 150,050 124,471 Accumulated translation adjustment (86) 950 --------- --------- Total stockholders' equity 129,552 134,081 --------- --------- Total liabilities and stockholders' equity $ 378,860 $ 374,035 ========= ========= </TABLE> The accompanying notes are an integral part of these statements. 3
4 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> Three Months Ended ----------------------------------- March 30, April 1, 1996 1995 --------- -------- (Unaudited) <S> <C> <C> REVENUE: Product $ 90,182 $ 62,110 Service 23,098 10,477 Maintenance 50,150 43,446 -------- -------- Total revenue 163,430 116,033 -------- -------- COSTS AND EXPENSES: Cost of product 10,887 11,853 Cost of service 17,597 9,213 Cost of maintenance 5,155 3,897 Marketing and sales 52,193 42,220 Research and development 26,013 20,863 General and administrative 13,012 9,498 -------- -------- Total costs and expenses 124,857 97,544 -------- -------- INCOME FROM OPERATIONS 38,573 18,489 Other expense, net 395 423 -------- -------- Income before provision for income taxes 38,178 18,066 Provision for income taxes 12,599 4,516 -------- -------- NET INCOME $ 25,579 $ 13,550 ======== ======== NET INCOME PER SHARE $ .28 $ .14 ======== ======== Weighted average common and common equivalent shares outstanding 91,272 94,733 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 4
5 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> Three Months Ended ---------------------------- March 30, April 1, 1996 1995 --------- -------- (Unaudited) <S> <C> <C> CASH AND CASH INVESTMENTS AT BEGINNING OF PERIOD $ 84,867 $ 75,011 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 25,579 13,550 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,365 11,496 Deferred income taxes, noncurrent (2,606) 476 Write-offs of equipment and other long-term assets 6 241 Increase in other long-term liabilities and minority interest expense 895 582 Changes in current assets and liabilities: Accounts receivable (2,876) 18,277 Inventories (270) (730) Prepaid expenses and other (4,258) (1,501) Accrued liabilities and payables 4,324 (5,861) Deferred revenue 22,496 17,436 -------- -------- Net cash provided by operating activities 55,655 53,966 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of short-term investments 4,072 17,074 Purchases of short-term investments (2,020) (8,484) Purchases of property and equipment (13,616) (8,150) Capitalization of software development costs (3,222) (2,968) Purchased software and intangibles and other assets (6,804) (4,328) -------- -------- Net cash used for investing activities (21,590) (6,856) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (546) (1,028) Sale of common stock 6,450 8,712 Purchases of treasury stock (50,294) (21,376) Purchase of warrant -- (12,125) -------- -------- Net cash used for financing activities (44,390) (25,817) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,106) 1,616 -------- -------- (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS (11,431) 22,909 -------- -------- CASH AND CASH INVESTMENTS AT END OF PERIOD $ 73,436 $ 97,920 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 5
6 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 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 financial statements and the notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 30, 1995. 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 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year is determined based upon the 52 - 53 week period ending on the Saturday closest to December 31. NEW ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation" which was adopted by the Company this year. SFAS No. 123 allows companies that have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing rules under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company continues to account for employee stock-based compensation arrangements under APB Opinion No. 25, and therefore SFAS No. 123 did not have a material impact on its financial position, results of operations or cash flows. NET INCOME PER SHARE Net income per share for each period is calculated by dividing net income by the weighted average shares of common stock and common stock equivalents outstanding during the period (calculated using the modified treasury stock method). Common stock equivalents consist of dilutive shares issuable upon the exercise of outstanding common stock options and warrants. Fully diluted net income per share is substantially the same as primary net income per share. Net income per share has been adjusted to retroactively reflect the three-for-two stock split discussed in the Subsequent Events note to the Notes to Condensed Consolidated Financial Statements. 6
7 INVENTORIES Inventories, which consist primarily of test equipment, are stated at the lower of cost (first-in, first-out method) or market. Cost includes labor, material and manufacturing overhead. Inventories consisted of the following (in thousands): <TABLE> <CAPTION> March 30, December 30, 1996 1995 ----------- ------------ (Unaudited) <S> <C> <C> Raw materials and supplies $2,312 $2,335 Work-in-process 3,363 3,825 Finished goods 945 2,043 ------ ------ Total $6,620 $8,203 ====== ====== </TABLE> COMMITMENTS AND CONTINGENCIES The Company is involved in various disputes and litigation matters which have arisen in the ordinary course of business. These include disputes and lawsuits related to intellectual property, contract law 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 (formerly known as ArcSys, Inc., "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 President and CEO, alleging, inter alia, that the Company and its President and CEO 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 counterclaim also alleges that certain unspecified Company insiders engaged in illegal insider trading with respect to Avant!'s stock. On April 12, 1996, Avant! filed a First Amended Counterclaim against the Company and its President and CEO. The Company and its President and CEO continue to believe that each has meritorious defenses to Avant!'s amended counterclaims, and each intends to defend such action vigorously. On April 19, 1996, the Company filed a motion seeking a preliminary injunction to prevent Avant! from continuing to market ArcCell and ArcCell XO, two software lines which the Company alleges were misappropriated. A hearing on the motion is anticipated to take place in the third quarter of 1996. 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. PUT WARRANTS AND CALL OPTIONS The Company has an authorized stock repurchase program. In total, as of March 30, 1996, the Company had authorized the repurchase of 55.6 million shares of which approximately 43.0 million shares had been repurchased. The Company repurchases common stock in part to satisfy estimated requirements for shares to be issued under its employee stock option and stock purchase plans as well as in connection with acquisitions. Since 1994, as part of its authorized stock repurchase program, the Company sold 15.1 million put warrants through private placement. As of March 30, 1996, 14.4 million of these warrants had expired out of the money. The remaining outstanding .7 million warrants entitle the holder to sell one share of common stock to the Company on a specified date at a specified price ranging from $22.00 to $22.02 per share. Additionally, during this same period, the Company purchased approximately 11.4 million call options that entitled the Company to buy on a specified date one share of common stock, at a specified price. As of March 30, 1996, the Company had repurchased 10.8 million common shares pursuant to the exercise of call options for $112.7 million. The remaining .6 million outstanding call options range in price from $22.22 to $22.24 per share. 7
8 The Company has the right to settle the put warrants with stock, cash or a combination of stock and cash equal to the difference between the exercise price and the fair value at the date of exercise. Settlement of the put warrants with stock could cause the Company to issue a substantial number of shares, depending on the amounts of the repurchase obligations and the per share fair value of the Company's common stock at the time of exercise. In addition, settlement of put warrants in stock or cash 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 trading price of the Company's common stock. At March 30, 1996, the Company had both the unconditional right and the intent to settle these put warrants with stock, and therefore, no amount was classified out of stockholders' equity in the accompanying balance sheet. The effect of the exercise of these put warrants and call options is reported in stockholders' equity. SUBSEQUENT EVENTS In April 1996, the Company entered into a senior secured revolving credit facility (the "Facility") which allows the Company to borrow up to $120 million through April 1999. The security for the Facility includes the majority of the Company's property, plant and equipment, cash, investments, intangibles, and certain other assets. The Company has the option to pay interest based upon LIBOR (London Interbank Offering Rate) plus 1.5% or the higher of the federal funds effective rate plus .5% or prime. The Company must comply with certain covenants and conditions as defined in the Facility. As of May 10, 1996, the Company had no outstanding borrowings under the Facility. On May 3, 1996, the Company's Board of Directors declared a three-for-two stock split, payable May 31, 1996, in the form of a dividend of one additional share of the Company's common stock for every two shares owned by stockholders as of the record date, May 16, 1996. Par value remained at $0.01 per share. The stock split will result in the issuance of approximately 26.0 million additional shares of common stock from authorized but unissued shares. Accordingly, all share and per share data have been adjusted to retroactively reflect the stock split. 8
9 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 that involve 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. RESULTS OF OPERATIONS REVENUE <TABLE> <CAPTION> March 30, 1996 April 1, 1995 % Change -------------- ------------- -------- (In millions) <S> <C> <C> <C> Product $ 90.2 $ 62.1 45% Service 23.1 10.5 120% Maintenance 50.1 43.4 15% ------ ------ Total revenue $163.4 $116.0 41% ====== ====== Sources of Revenue as a Percent of Total Revenue Product 55% 54% Service 14% 9% Maintenance 31% 37% </TABLE> Revenue from international sources was approximately $74.9 million and $63.1 million or 46% and 54% of total revenue for the three months ended March 30, 1996 and April 1, 1995, respectively. The increase in domestic revenue as a percentage of total revenue was attributable to increased sales volume in the product and service areas. During the quarter ended March 30, 1996, there was a negative impact of $2.5 million on revenue as the result of the weakening of certain foreign currencies, primarily the Japanese yen, in relation to the U.S. dollar as compared to the quarter ended April 1, 1995. Product revenue for the first quarter ended March 30, 1996 increased 45% compared with the same period of the prior year. The increase in product revenue was primarily the result of increased demand for the Company's products which enable customers to meet complex design challenges, including deep sub-micron IC design. This was exemplified by increased sales volume of its custom layout, automatic place and route and verification products. Service revenue increased significantly in the first quarter of 1996 when compared to the first quarter of 1995. The increase in service revenue was the result of increased demand for the Company's Spectrum Services offerings. Additionally, revenue for the quarter ended March 30, 1996 included a full quarter of revenue related to the March 1995 outsourcing agreement with Unisys Corporation ("Unisys") to assume substantial portions of Unisys' internal silicon design operation. The increase in maintenance revenue for the quarter ended March 30, 1996 as compared to the quarter ended April 1, 1995, was attributable to an increase in the Company's installed base of products as well as the Company's continued effort toward obtaining customer renewals of maintenance. 9
10 COST OF REVENUE <TABLE> <CAPTION> March 30, 1996 April 1, 1995 % Change -------------- ------------- -------- (In millions) <S> <C> <C> <C> Product $10.9 $11.9 (8)% Service $17.6 $ 9.2 91% Maintenance $ 5.2 $ 3.9 32% Cost of Revenue as a Percent of Related Revenue Product 12% 19% Service 76% 88% Maintenance 10% 9% </TABLE> Cost of product revenue includes costs of production personnel, packaging and documentation, amortization of capitalized software development costs and costs of the Company's automated test equipment ("ATE") hardware business. The decrease in cost of product in absolute dollars and as a percentage of product revenue for the quarter ended March 30, 1996 as compared to the quarter ended April 1, 1995 was primarily due to consolidation of the software release and production process, partly offset by increased cost of revenue associated with its ATE products resulting from higher product demand. Cost of service 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 service increased in total dollars due to the development of this line of business. Additionally, the costs for the quarter ended March 30, 1996 included a full quarter of expenses related to the March 1995 outsourcing agreement with Unisys Corporation to assume substantial portions of Unisys' internal silicon design operation. As part of this agreement, the Company retained approximately 180 hardware and software designers and acquired fixed assets and certain intangibles. While primarily focused on serving the needs of Unisys, the design and service resources acquired by Cadence are also intended to be used to support other customers' design needs. In the first quarter of 1996, as the Company utilized more of its design and service resources to generate revenue, cost of service as a percentage of service revenue decreased as compared to the prior year. However, until these design and service resources are utilized through additional revenue contracts or until further operating efficiencies are obtained, service gross margins could continue to be adversely affected. Additionally, the cost of integrating new services professionals performing a growing number of service offerings will also put pressure on service gross margins until operating efficiencies are obtained. 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 increased in total dollars due to additional costs necessary to support a larger installed base. 10
11 OPERATING EXPENSES <TABLE> <CAPTION> March 30, 1996 April 1, 1995 % Change -------------- ------------- -------- (In millions) <S> <C> <C> <C> Marketing and sales $52.2 $42.2 24% Research and development $26.0 $20.9 25% General and administrative $13.0 $ 9.5 37% Expenses as a Percent of Total Revenue Marketing and sales 32% 36% Research and development 16% 18% General and administrative 8% 8% </TABLE> The increase in marketing and sales expenses was primarily the result of a $9.6 million increase in employee related expenses attributable to increased headcount and increased commissions and sales incentives due to higher bookings. Marketing and sales expenses were favorably impacted by $.7 million in the quarter ended March 30, 1996 as compared to the quarter ended April 1, 1995 as the result of the weakening of certain foreign currencies in relation to the U.S dollar. The Company's investment in research and development, prior to the reduction for capitalization of software development costs, was $29.2 and $23.8 million for the quarters ended March 30, 1996 and April 1, 1995, respectively, representing 18% and 21% of total revenue. The increase of $5.4 million was driven by an increase of $3.0 million of salary related costs due to increased headcount and an increase of $1.3 million in consulting and other outside services costs. Capitalization of software development costs for the quarters ended March 30, 1996 and April 1, 1995 was $3.2 million and $2.9 million, respectively, which represented 11% and 12% of total research and development expenditures made in each of those periods. 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 in the quarter ended March 30, 1996 as compared to the same period of the prior year primarily as a result of higher legal costs of $1.9 million. In addition, the Company incurred higher outside service and consulting costs of $.5 million and increased headcount related expenses. As compared to the quarter ended April 1, 1995, net other expense was relatively constant at $.4 million for the first quarter ended March 30, 1996. The Company's estimated annual effective tax rate for fiscal 1996 is 33% as compared to an annual effective tax rate of 28% for fiscal 1995. This estimated increase in the tax rate is based on the limited availability of net operating losses and tax credits and the potential effect of earnings generated in countries which have a tax rate greater than the U.S. tax rate. LIQUIDITY AND CAPITAL RESOURCES At March 30, 1996, the Company's principal sources of liquidity consisted of $83.2 million of cash and short-term investments as compared to $111.2 million at April 1, 1995. In addition, subsequent to March 30, 1996, the Company entered into a three year, $120 million secured revolving line of credit agreement. As of May 10, 1996, the Company had no borrowings under the revolving line of credit. Cash generated from operating activities increased $1.7 million for the quarter ended March 30, 1996, as compared to the quarter ended April 1, 1995. The increase was due to higher net income and an increase in accrued liabilities and payables; offset by an increase in accounts receivable. At March 30, 1996, the Company had a working capital deficit of $13.1 million compared with a working capital surplus of $6.5 million at December 30, 1995. The primary reasons for the deficit were increases in deferred revenue of $22.1 million and a decrease in cash and short-term investments of $13.5 million, partly offset by a decrease in accrued liabilities and income taxes payable of $10.9 million. The increase in deferred revenue was attributable to increased maintenance renewals and an increase in deferred product revenue in accordance with the 11
12 American Institute of Certified Public Accountants Statement of Position 91-1 entitled "Software Revenue Recognition." The decrease in cash was primarily due to the Company's stock repurchase activity in the quarter ended March 30, 1996. The decrease in accrued liabilities and income taxes payable was due to commissions and incentive bonus payments during the quarter and payment of income taxes. In addition to its short-term investments, the Company's primary investing activities were purchases of property and equipment, purchases of software and intangibles and the capitalization of software development costs, which combined, represented $23.6 million and $15.4 million of cash used for investing activities in the quarters ended March 30, 1996, and April 1, 1995, respectively. The Company has an authorized stock repurchase program. In total, as of March 30, 1996, the Company had authorized the repurchase of 55.6 million shares, of which approximately 43.0 million shares had been repurchased. The Company repurchases common stock in part to satisfy estimated requirements for shares to be issued under the Company's employee stock option and stock purchase plans as well as in connection with acquisitions. Past repurchase activity should not be considered an indicator of future repurchases. Since 1994, as part of its authorized stock repurchase program, the Company has sold 15.1 million put warrants and purchased 11.4 million call options through private placements. The Company had a maximum potential obligation related to the put warrants at March 30, 1996 to buy back .7 million shares of its common stock at an aggregate price of approximately $16.3 million. The put warrants expired out of the money in April 1996. Anticipated cash requirements for fiscal 1996 include the purchase of treasury stock through the exercise of the Company's call options and in the open market. The Company repurchased .6 million shares through the exercise of call options during April 1996 at a cost of approximately $12.4 million. Other cash requirements for the remainder of fiscal 1996 include 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 $25 million will be made over the next three to four years. As of March 30, 1996, the Company had contributed approximately $2.0 million, which is reflected in other assets in the accompanying balance sheet. The Company anticipates that current cash and short-term investment balances, cash flows from operations, and the $120 million revolving line of credit will be sufficient to meet its working capital and capital expenditure requirements on a short and long-term basis. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company competes in the highly competitive EDA market which continues to be characterized by aggressive pricing practices, 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 services, and to bring them to market in a timely manner. The Company's future operating results are dependent on the Company's ability to successfully implement its strategy to help its customers meet their business objectives by developing custom solutions that leverage and improve the people, process and technology they use for product development. The Company accomplishes this through a combination of technology and services. Inherent in implementing this strategy are a number of risks that the Company must manage and that could affect its future operating results. These risks include the ability to successfully recruit, train and retain its skilled services professionals and the ability to profitably deliver solutions to increasingly complex customer design challenges. Growth of the services business is constrained by the Company's ability to hire and train services professionals to keep pace with demand. The Company's profitability could be adversely affected if it is unable to develop its services business as expected. It is anticipated that international revenue will continue to constitute a significant portion of total revenue. International revenues are subject to certain additional risks normally associated with international operations, including, among others, adoption and expansion of government trade restrictions, volatile foreign exchange 12
13 rates, currency conversion risks, limitations on repatriation of earnings and reduced protection of intellectual property rights. The Company enters into foreign currency forward contracts to hedge the impact of foreign currency fluctuations. Though 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 results of operations. The Company's operating expenses are partially based on its expectations of future revenue. The Company's results of operations may be adversely affected if revenue does not materialize in a quarter as expected. Since expense levels are usually committed in advance of revenues and because only a small portion of expenses vary with revenue, the Company's operating results may be impacted significantly by lower revenue. Based on the Company's operating history and factors that may cause fluctuations in the quarterly results, quarter to quarter comparisons should not be relied upon as indicators of future performance. Due to the foregoing, as well as other factors, past financial performance should not be considered an indicator of future performance. In addition, the Company's participation in a highly dynamic industry often results in significant volatility of the Company's common stock price. Any change in revenues or operating results below levels expected by securities analysts for the Company or its competitors, and the timing of the announcement of such shortfalls, could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in various disputes and litigation matters which have arisen in the ordinary course of business. These include disputes and lawsuits related to intellectual property, contract law 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 (formerly known as ArcSys, Inc., "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 President and CEO, alleging, inter alia, that the Company and its President and CEO 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 counterclaim also alleges that certain unspecified Company insiders engaged in illegal insider trading with respect to Avant!'s stock. On April 12, 1996, Avant! filed a First Amended Counterclaim against the Company and its President and CEO. The Company and its President and CEO continue to believe that each has meritorious defenses to Avant!'s amended counterclaims, and each intends to defend such action vigorously. On April 19, 1996, the Company filed a motion seeking a preliminary injunction to prevent Avant! from continuing to market ArcCell and ArcCell XO, two software lines which the Company alleges were misappropriated. A hearing on the motion is anticipated to take place in the third quarter of 1996. 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 5. OTHER INFORMATION On May 3, 1996, the Company's Board of Directors effected a three-for-two stock split, payable May 31, 1996, in the form of a dividend of one additional share of the Company's common stock for every two shares owned by stockholders as of the record date, May 16, 1996. Par value remained at $0.01 per share. The stock split will result in the issuance of approximately 26.0 million additional shares of common stock from authorized but 13
14 unissued shares. Accordingly, all share and per share data have been adjusted to retroactively reflect the stock split. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT TITLE LOCATION - ------- ------------- -------- <S> <C> <C> 10.29 The Registrant's amended and restated 401(k) Plan. 16 10.30 Amendment dated May 3, 1996, to Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the Registrant's Form 10-Q for the third quarter ended September 30, 1994). 72 10.31 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant. 77 27.1 Financial data schedule for the period ended March 30, 1996. (b) Reports on Form 8-K On February 16, 1996, Registrant filed a Current Report on Form 8-K, reporting that its Board of Directors had approved a Stockholder Rights Plan and canceled its previous Stockholder Rights Plan established in 1989. </TABLE> 14
15 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: May 10, 1996 By: /s/ Joseph B. Costello ----------------------- ---------------------- JOSEPH B. COSTELLO President and Chief Executive Officer DATE: May 10, 1996 By: /s/ H. Raymond Bingham ----------------------- ---------------------- H. RAYMOND BINGHAM Executive Vice President and Chief Financial Officer 15