Cadence Annual Report 2006
Cadence Annual Report 2006
AT CADENCE, WE ARE COMMITTED TO INVENTING NEW WAYS TO ENABLE OUR
CUSTOMERS TO ACHIEVE BREAKTHROUGH RESULTS. THIS AMBITIOUS ENDEAVOR
REQUIRES US TO HAVE A DEEP UNDERSTANDING OF THE ELECTRONICS INDUSTRY
AND TO DELIVER HOLISTIC SOLUTIONS THAT ENABLE OUR CUSTOMERS’ SUCCESS.
TOWARD THIS END, WE ARE EXTENDING OUR LEADERSHIP IN ELECTRONIC DESIGN
AUTOMATION TO ADDRESS THE BROADER CHALLENGES ASSOCIATED
WITH DEVELOPING TODAY’S AND TOMORROW’S
ELECTRONICS PRODUCTS.
Michael J. Fister
President and Chief Executive Officer
DEAR FELLOW SHAREHOLDERS:
In 2006, we executed well on our strategy to provide increased value to our customers through our
enterprise-level solutions. I am pleased to report that we also executed well against our financial
targets. Compared to 2005, revenue grew 12 percent to a record $1.48 billion and earnings per
share grew to 46 cents from 16 cents. We generated $421 million of operating cash flow and
repurchased $494 million of Cadence common stock.
CUSTOMER-CENTRIC SOLUTIONS:
PRODUCTIVITY, COMPLEXITY, AND
TIME TO MARKET
CHALLENGES CREATE OPPORTUNITIES:
PLATFORMS, KITS, TIERED PRODUCTS,
AND ADJACENCIES
It is easy to claim to be customer-focused or
customer-led. Delivering on such assertions
is an entirely different matter. Cadence®
fulfills this commitment by leveraging a deep
understanding of customers’ challenges to
invent, develop, and market the world’s most
comprehensive electronic design automation
(EDA) solutions.
Cadence continues to enhance our strong
foundation of technology with a comprehensive
development approach spanning research to
products. We apply this innovative technology
to help our customers address the challenges
they confront. For example, the multimedia
nature of most consumer electronics drives a
corresponding increase in the analog, mixedsignal, and high-performance digital content
within the chips that power these products.
This added complexity significantly impacts
many factors from design to manufacturing.
Cadence addresses these challenges with our
completely revamped Virtuoso® custom design
platform, which promises to drive a significant
product upgrade opportunity.
Until recently, most integrated circuits went
into the manufacture of traditional IT equipment. Today, consumer electronics account
for the largest share of chip consumption,
and this shift presents our customers with a
whole new set of challenges. For example,
with the exceedingly narrow market windows
of consumer products, electronics makers
increasingly place a premium on meeting
aggressive schedules.
Of course, hitting a market window is of
limited value if a product does not function as
intended or lacks the features that users desire.
Today more than ever, our customers must
simultaneously tackle the pressures of meeting
ever tighter time-to-market schedules while
managing exploding product complexity and
achieving ever higher levels of productivity.
Recognizing the intertwined nature of our
customers’ challenges, Cadence has applied
its broad portfolio of products and services to
redefine the role EDA plays in the success of an
electronics company. From idea to realization,
Cadence provides the industry-leading solutions
that help companies create the world’s best
electronic devices. So when Cadence says
“customer-centric,” we not only mean it,
we deliver it.
We are optimizing elements of our broad
portfolio of products and services into Kits
and tiered offerings. Kits help to speed our
customers’ adoption of new technologies. In
parallel, tiered product offerings better align
the customers’ technical requirements with the
capabilities of a given Cadence product, which
not only delivers value to customers more
efficiently but also preserves value for Cadence.
In 2006, we introduced two unique crossplatform solutions that are helping customers
address several of the industry’s biggest
challenges. First, our industry-leading LowPower Solution comprehensively addresses
power challenges across design, verification,
and implementation boundaries. Second, our
Logic Design Team Solution combines into
a single offering all of the key functionality
required when designing and verifying an
integrated circuit.
Beyond these two areas lie additional growth
opportunities. In verification, we are establishing the foundation to bridge the complexities
of hardware and software co-design with
enterprise-level system solutions. With correct
and predictable function a fundamental requirement, Cadence helps customers transcend
a design-centric approach to span both project
management and R&D management.
OPERATIONAL EXCELLENCE:
PROFITABILITY AND EFFICIENCY
In addition to delivering solutions that help
our customers improve their profitability and
efficiency, Cadence also innovates in the way
we operate our own business. In 2006, even
though we already enjoyed the EDA industry’s
best operating margin, we continued to achieve
productivity gains in both development activity
and sales engagements. We also expanded the
reach of our sales channel through partners
who can more efficiently serve the many
regional customers in the ever-changing global
electronics market.
As we proceed in 2007, I believe we are well
positioned for growth. We are leveraging our
excellent technology and product breadth to
deliver unique solutions that enable our customers to overcome their product development
challenges. We strive to be an indispensable
partner in that endeavor. I am excited by the
opportunities that lie ahead and thank our
stakeholders—customers, shareholders, and
employees—for their support in 2006 and
moving forward into 2007.
Sincerely,
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
≤
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 30, 2006
OR
n
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 0-15867
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
77-0148231
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
2655 Seely Avenue, Building 5, San Jose, California
95134
(Zip Code)
(Address of Principal Executive Offices)
(408) 943-1234
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Names of Each Exchange on which Registered
Common Stock, $0.01 par value per share
NASDAQ Global Select Market
Indicate by
Yes [ X ]
Indicate by
Act. Yes [ ]
Act.
Securities registered pursuant to Section 12(g) of the Act:
None
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
No [ ]
check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
No [ X ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
]
(2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [
]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [
] No [ X ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter ended
July 1, 2006 was $4,910,530,182.
On February 3, 2007, approximately 279,823,852 shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Cadence Design Systems, Inc. 2007 Annual Meeting are incorporated by reference
into Part III hereof.
CADENCE DESIGN SYSTEMS, INC.
2006 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I.
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
Item 4.
Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . .
23
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . .
56
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . .
56
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Item 10.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . .
58
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Item 13.
Certain Relationships and Related Transactions and Director Independence . . .
58
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . .
59
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
PART II.
Item 5.
PART III.
PART IV.
Item 15.
PART I.
Item 1. Business
This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report contain
forward-looking statements. Certain of such statements, including, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of
our products, statements regarding our reliance on third parties and other statements using words such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “should,” “will” and
“would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These
statements are predictions based upon our current expectations about future events. Actual results could vary
materially as a result of certain factors, including but not limited to, those expressed in these statements. We refer
you to the “Proprietary Technology,” “Competition,” “Risk Factors,” “Results of Operations,” “Disclosures About
Market Risk” and “Liquidity and Capital Resources” sections contained in this Annual Report and the risks
discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and
uncertainties that could cause actual results to differ materially from those contained in the forward-looking
statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this
Annual Report. All subsequent written or spoken forward-looking statements attributable to our company or
persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forwardlooking statements included in this Annual Report are made only as of the date of this Annual Report. We do not
intend, and undertake no obligation, to update these forward-looking statements.
Overview
We develop electronic design automation, or EDA, software and hardware. We license software, sell or lease
hardware technology and provide design and methodology services throughout the world to help manage and
accelerate electronics product development processes. Our broad range of products and services are used by the
world’s leading electronics companies to design and develop complex integrated circuits, or ICs, and personal and
commercial electronics systems. We have approximately 5,200 employees, in approximately 60 sales offices,
design centers and research and development facilities located around the world.
We were formed as a Delaware corporation in April 1987. Our headquarters is located at 2655 Seely Avenue,
San Jose, California 95134. Our telephone number is (408) 943-1234. Our website can be accessed at
www.cadence.com. We make available free of charge copies of our SEC filings and submissions on the investor
relations page of our website at www.cadence.com as soon as practicable after electronically filing or furnishing
such documents with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and the charters
of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee of our
Board of Directors are also posted on the investor relations page of our website at www.cadence.com. Stockholders
may also request copies of these documents by writing to our Corporate Secretary at the address above.
Factors Driving the Electronic Design Automation Industry
Communications, business productivity and consumer electronics markets drove growth in the electronics
industry for most of the past decade. However, in recent years, the consumer market has been the fastest growing
end market for electronics and the most influential in setting expectations for rapid change, low cost, miniaturization and increasing functionality.
Electronic systems companies respond to these demands by combining subsystems – such as radio frequency
wireless communication, or RF, video signal processing, and embedded computing – onto a single silicon chip,
creating a system-on-chip, or SoC, or onto multiple chips in a single chip package in a format referred to as systemin-package, or SiP. These trends toward subsystem integration have required chip makers to find solutions to
challenges previously addressed by system companies, such as verifying system-level functionality and hardwaresoftware interoperability.
1
SoC designs put many more transistors on each chip, increasing the need for tight control over power
consumption. This is done not only to increase battery life in portable devices, but also to minimize energy cost and
limit heat generation, which threaten the reliability of a device. Evolving semiconductor manufacturing processes
with smaller features (transistors and wires) and lower supply voltages address both of these issues to some degree,
but introduce new challenges of their own. Contemporary portable electronic devices contain chips in which
individual features can be as small as 65 nanometers – about 6/100,000ths of a millimeter. Because of atomic level
interactions in the transistors, these chips continue to consume power from the battery even when the device is
switched off. To overcome these issues, specific “low power” design techniques must be developed and must be
integrated throughout the design flow, from logic design and verification through physical implementation.
Variability in the processes used to manufacture silicon chips has become so pervasive at 65 nanometers and
below that traditional connections between design and manufacturing teams are insufficient to ensure chip
performance and yield. Integrating detailed models of the manufacturing process into the chip design environment
is desirable so engineers can craft the design to avoid or overcome these manufacturing process variations.
Similarly, manufacturing teams can optimize their processes if, along with the design, they are provided with
information about the most critical parts of the chip. However, sharing information between design and manufacturing processes is complicated because current data formats used to describe the chip design differ from data
formats used to describe the manufacturing process and control the manufacturing equipment. Moreover, design
and manufacturing often takes place within two separate companies – one company designs the chip while another
company manufactures it.
These trends pose significant new challenges for the electronics design processes. Specifically, product
performance and size requirements of the mobile consumer electronics market require microelectronic systems to
be smaller, consume less power and provide multiple functions all in one SoC or SiP package. This requires
designers to pay close attention to many electrical, physical and manufacturing effects that were inconsequential in
previous generations of chip designs. The design challenge becomes more complex with each new generation of
electronics, and providers of EDA solutions must deliver products that address these technical challenges, while
improving the efficiency and productivity of the design process.
Operating Segment
Our chief operating decision maker is our President and Chief Executive Officer, or CEO. Our CEO reviews
our consolidated results within only one operating segment.
Products
Our products are engineered to improve our customers’ design productivity and resulting design quality by
providing a comprehensive set of EDA design products. Product revenues include all fees earned from granting
licenses to use our software, and from sales and leases of our hardware products, and exclude revenues derived from
maintenance and services. We offer customers three license types for our software: perpetual, term and subscription.
See “Software Licensing Arrangements” below for additional discussion of our license types.
Product revenue was $982.7 million, or 66% of our total revenue, in 2006, $851.5 million, or 64% of our total
revenue, in 2005 and $729.8 million, or 61% of our total revenue, in 2004.
Product Strategy
With the addition of emerging nanometer design considerations to the already burgeoning set of traditional
design tasks, complex SoC or IC design can no longer be accomplished using a collection of discrete design tools.
What previously consisted of sequential design activities must be merged and accomplished nearly simultaneously
without time-consuming data translation steps. We combine our design technologies into “platforms” for four major
design activities: functional verification, digital IC design, custom IC design and system interconnect. The four
Cadence» design platforms are Incisive» functional verification, Encounter» digital IC design, Virtuoso» custom
design and Allegro» system interconnect platforms. In addition, we augment these platform product offerings with a
comprehensive set of design for manufacturing, or DFM, products that service both the digital and custom IC design
flows. These four platforms, together with our DFM products, comprise our primary product lines.
2
Incisive Functional Verification Platform
The Incisive functional verification platform enables our customers to employ enterprise-level verification
process automation, including verification planning, management and process tracking, with coordination of all
verification activities across teams of specialists and different execution platforms.
The Incisive platform is tailored for three customer segments:
•
•
•
Design engineers using traditional hardware description languages and testing techniques;
Design teams that are also responsible for verification and need more automation; and
Multi-specialist enterprise teams comprised of systems, software, hardware verification, system validation, and logic design teams.
The Incisive platform includes verification process automation technologies, methodologies, and verification
intellectual property, or IP, for many standard protocols. Products include:
•
•
•
•
The Incisive Design Team and Enterprise Manager, which automates and guides the verification process
and then analyzes data, from planning to closure;
The Incisive Design Team and Enterprise Simulator, which offers mixed-language support, dynamic
assertion checking, transaction-level support, HDL analysis and a complete debug environment;
The Incisive Formal Verifier, which shortens design and verification time while improving design
quality by providing a formal means of verifying RTL functional correctness with assertions, without the
need of testbench simulation, and also provides an effective means of providing predictable, fast RTL
block bring-up and assertion-based verification; and
The Palladium» and Extreme» series of emulation and acceleration solutions, which accelerate the
verification process and enable first working silicon with first working software.
The Incisive Plan-to-Closure methodology (supported by technical field experts) is designed to enable the
scalable deployment of best practices and to mitigate our customers’ language, technology and methodology
adoption risks.
Encounter Digital IC Design Platform
The Encounter digital IC design platform enables our customers to implement all aspects of their digital
nanometer-scale designs. It is based on a single user interface and unified in-memory data model, and is specifically
designed to facilitate the analysis and optimization of chip performance, power consumption, and silicon area and
manufacturability throughout our customers’ design processes. The Encounter platform is comprised of the
following core technologies:
•
•
•
•
•
•
Silicon virtual prototyping for enabling designers to plan the complete implementation of a chip before
committing to a specific design strategy;
Global register transfer level, or RTL, and physical synthesis for creating and physically locating logic
on the chip, while simultaneously optimizing performance, power, cost and yield;
Signal integrity and yield-aware routing for connecting high performance physical interconnect between
the logic gates;
Signal integrity and nanometer delay analysis;
Comprehensive design-for-test capability as well as post-silicon test diagnostics; and
Logic equivalence checking and design constraint management capability for designers to verify that
their RTL specification is equivalent to the final IC layout.
Unlike traditional “front-end/back-end” systems, the Encounter platform does not require customers to
perform time-consuming translations between common tasks such as placement, power distribution, routing, and
timing and crosstalk analysis. The Encounter platform supports hierarchical designs, with support for designs
containing hundreds of millions of transistors on a single chip. Since 2005, the Encounter platform has been offered
in three levels: Encounter L, XL and GXL. These levels are scaled to provide customers with technologies tailored
to specific degrees of design complexity in the digital IC space.
3
Virtuoso Custom Design Platform
The Virtuoso custom design platform enables design predictability by ensuring that the circuit design
representation will perform correctly in the final manufactured chip. With the Virtuoso platform, designers are
able to deliver silicon-accurate analog, custom digital, RF, and mixed-signal designs, while addressing the growing
number of physical effects in package, power grid, interconnect, devices and substrate employing a “top-down”
language-based design.
The Virtuoso platform reduces design time by providing:
•
•
•
•
•
•
•
Reference flows for analog, mixed-signal, RF and analog-digital integration focused at the wireless and
analog/mixed-signal markets;
Automatic analog circuit sizing and optimization (including yield optimization);
Multi-mode simulation (digital, analog and RF) using a common syntax and model, and common
equations;
Fast custom layout technologies;
Process migration technology;
Electrical vs. physical effects analysis; and
Physical design integration and silicon analysis for complex custom, cell-based and mixed custom
designs.
The OpenAccessTM database (described below in “Third Party Programs and Initiatives”) is used as a
mechanism for integration across the Virtuoso platform.
With the 2006 introduction of the Virtuoso 6.1.0 platform we completed our Virtuoso platform product
segmentation which began in 2005. The Virtuoso L, XL and GXL offerings provide our customers with a diverse set
of custom design capabilities for entry-level design to the most complex DFM-aware designs.
Allegro System Interconnect Design Platform
The Allegro system interconnect design platform enables design teams to design high-performance interconnect across the domains of IC, package and printed circuit board, or PCB, reducing cost and time to market. The
system interconnect – between input-output buffers and across ICs, packages and PCBs – can be optimized through
the platform’s co-design methodology, reducing both hardware costs and design cycles. Designers use the Allegro
platform’s constraint-driven methodology and advanced capabilities for design capture, signal integrity and
physical implementation. Silicon design-in kits speed time to market by allowing IC companies to shorten new
device adoption time and allowing systems companies to accelerate PCB system design cycles. In 2006, with the
release of our SiP products, we have entered an emerging market designed to accelerate products to market where
designers are looking for alternatives between SoCs and PCBs. In 2006, the Allegro L, XL and GXL products were
introduced along with the XL and GXL offerings for Cadence’s SiP products.
The system interconnect product group includes the Allegro system interconnect platform, the OrCAD»
product line of PCB design products which are engineered for individual or small design team productivity and a
family of IC packaging and SiP technologies. The OrCAD product line is marketed worldwide through a network of
alternative channel partners.
Design for Manufacturing
The physical layout of each IC requires detailed analysis and optimization to ensure that the design can be
manufactured in volume while performing as expected. Some of our products that deliver DFM capabilities for
nanometer SoC design include:
•
Fire & Ice» QX and Assura» RCX extraction products, which take the designer’s physical representation
of an IC and extract the electrical properties of that design representation to enable further analyses, such
as simulation and timing analysis;
4
•
•
•
•
Products in the VoltageStorm» family, which analyze on-chip power distribution for digital, analog and
SoC designs. VoltageStorm detects unanticipated voltage drop, enabling the customer to correct fatal
conditions, thereby preventing extensive troubleshooting and delay during initial manufacturing;
Our physical verification products, including Cadence Physical Verification System, Assura, Diva» and
Dracula», which perform manufacturing design rule checks to ensure the proposed design meets the
requirements of the foundry’s manufacturing process rules;
Mask data preparation tools, such as MaskCompose and QuickView, which help customer mask shops
create mask and reticle layouts for chips being manufactured in nanometer processes; and
Design Virtual Interconnect Predictor, which helps customers understand the impact of chemical-metal
planarization, one of the major steps in the semiconductor manufacturing process, on their chip
performance at advanced silicon geometries.
Kits
Today’s growing silicon complexity creates an array of design challenges for semiconductor and systems
design teams. Among these challenges is the application of EDA technologies to overcome design hurdles in certain
key markets driving the semiconductor industry, particularly the wireless and digital personal entertainment
segments. Cadence kits are designed to allow companies in these sectors to achieve shorter, more predictable design
cycles and greater design productivity by greatly simplifying the application and integration of EDA technologies
and verification IP to address major design challenges in these markets: analog-mixed signal, or AMS, RF, SiP, low
power and verification.
Each kit addresses application-specific design issues by combining a verified methodology and enabling
standards-based IP – all applied to a segment representative design and delivered with application consulting.
Following the introduction of the AMS Methodology and RF Design Methodology Kits, in 2006 we introduced the
RF SiP Methodology Kit and the Functional Verification Kit for ARM.
Verification and Application Specific Programming Services
We offer verification and application specific programming, or ASP, services through Time-to-Market
Engineering, or TtME, services. Our TtME offering provides customers with consulting services, project services
and/or complete turnkey services for verification acceleration and system emulation. QuickCycles allows customers access to our Palladium simulation acceleration and emulation products on a pay-as-you-go basis, either on
the customer internet site or remotely over a high-speed, secure network connection.
Third Party Programs and Initiatives
We recognize that certain of our customers may also use internally-developed design tools or design tools
provided by other EDA companies, as well as IP available from multiple suppliers. We support the integration of
third party design products through our OpenAccess Initiative and Connections» and OpenChoice programs.
OpenAccess is a full-featured EDA database that supports access and manipulation of its internal EDA data via a
fully documented and freely available programming interface. This provides an open application program interface
through which applications developed by our customers, by their other EDA vendors, or by university research
groups can all operate within a single database and with our products. We have licensed the OpenAccess database to
the OpenAccess Coalition, which is operated by the Silicon Integration Initiative, or Si2, an organization of EDA,
electronic system and semiconductor industry leaders focused on improving productivity and reducing cost in
creating and producing integrated silicon systems.
The Connections Program provides other EDA companies with access to our products to ensure that our
products work well with those third party tools. Over 130 EDA providers are members of the Connections Program.
The OpenChoice program was instituted to enable interoperability and facilitate open collaboration with leading
providers of library, processor, memory core and verification IP to build, validate and deliver accurate models
optimized for Cadence design and verification solutions. The program aims to ensure IP quality and provide our
customers with access to optimized IP. A key component of the OpenChoice program is to assist and support library
5
providers in the integration of our design and verification products and model formats into customer-owned tooling,
or COT, library solutions.
In 2006, we formed the Power Forward Initiative with a group of 22 electronics industry leaders who
recognized the urgent need for an automated, power-aware design infrastructure to facilitate the production of
ICs that consume significantly less power. The goal of the group is to participate in the refinement and
standardization of the Common Power Format, or CPF. CPF is a specification language that holistically captures
low-power design intent so that it can be communicated consistently throughout the IC design process. We have
contributed the CPF specification to Si2, which will manage the standardization, maintenance and distribution of
CPF for the benefit of the electronics industry.
In addition, we work with vendors of Application Specific Integrated Circuits, or ASICs, to ensure predictable
and smooth handoff of design data from mutual customers to ASIC implementation. These programs foster
relationships throughout the silicon design chain with leading IP partners, silicon manufacturers and library
provider partners to support both ASIC and COT solutions for our customers. They are integral to providing
complete design chain solutions to IC and electronic systems designers who depend on coordinated offerings from
multiple suppliers.
Maintenance
We provide technical support to our customers to facilitate their use of our software and hardware products. A
high level of customer service and support is critical to the adoption and successful use of our products.
We have a global customer support organization and specialized field application engineering teams located in
each of our operating regions to provide assistance to customers where and when they need it.
Standard maintenance support includes three major components: our Sourcelink» online support portal, which
provides 24 hour access to real-time technical information on our products; contact center support (telephone, email
and web access to our support engineers); and software updates (periodic updates with regression-tested critical
fixes and updated functionality available via CDs or secure internet download).
Maintenance is offered to customers as an integral, non-cancelable component of our subscription license
agreements, or as a separate agreement subject to annual renewal for our term and perpetual license customers.
Some of our customers have relocated, or expanded the presence of their design teams, away from their
headquarters or historical locations to locations in emerging growth regions. Accordingly, to provide responsive and
effective support for these customers, we expect to continue expanding the presence of our own support and
application engineering teams in these emerging growth regions.
Maintenance revenue was $366.3 million, or 25% of our total revenue, in 2006, $351.5 million, or 26% of our
total revenue, in 2005 and $330.7 million, or 28% of our total revenue, in 2004. We expect that maintenance revenue
in 2007 will be generated predominantly from backlog.
Services
We offer a number of fee-based services, including education and engineering services related to IC design and
methodology. These services may be sold separately or sold and performed in conjunction with the sale, lease or
license of our products.
Services revenue was $134.9 million, or 9% of our total revenue, in 2006, $126.2 million, or 9% of our total
revenue, in 2005 and $137.0 million, or 11% of our total revenue, in 2004.
Education Services
Our education services include Internet, classroom and custom courses, the content of which ranges from how
to use the most recent features of our EDA products to instruction in the latest IC design techniques.
6
Engineering Services
We offer engineering services and reusable design technologies to aid customers with the design of complex
ICs. We focus our offerings primarily on SoC devices, including both ASICs and Application Specific Standard
Parts, and on analog and mixed signal ICs. The customers for these services primarily consist of semiconductor and
systems companies developing products for the communications, computing and consumer markets. We offer
engineering capabilities to assist customers from product concept through volume manufacturing.
We also make our design IP portfolio available to customers as part of our technology and services solutions.
These reusable design and methodology components enable us to more efficiently deliver our services, and allow
our customers to reduce the design complexity and time to market for the development of complex SoCs.
In our design and methodology service practices, we leverage our cumulative experience and knowledge of
design practices across many customers and different design environments to improve our own service teams’ and
our customers’ productivity. We work with customers using outsourcing, consultative and collaborative models
depending on their projects and needs. Our Virtual Computer-Aided Design, or VCAD, model enables our
engineering teams at one or more of our locations to virtually work “side-by-side” with our customers’ teams
located elsewhere during the course of their design and engineering projects through a secure private network
infrastructure.
Through collaboration with our customers, we are able to design advanced ICs and gain direct and early
visibility to industry design issues that may not be addressed adequately by today’s EDA solutions. This enables us
to accelerate the development of new software technology and products to meet the market’s current and future
design requirements.
Marketing and Sales
We generally use a direct sales force consisting of sales people and applications engineers to market our
products and provide maintenance and services to existing and prospective customers. Applications engineers
provide technical pre-sales and post-sales support for software products. Due to the complexity of many of our EDA
products and the electronic design process in general, the sales cycle is generally long, requiring three to six months
or more. During the sales cycle, our direct sales force generally provides technical presentations, product
demonstrations and support for on-site customer evaluation of our software. We also use traditional marketing
approaches to promote our products and services, including advertising, direct mail, telemarketing, trade shows,
public relations and the Internet. As EDA products mature and become widely understood by the marketplace, we
selectively utilize value added resellers to broaden our reach and reduce cost of sales. All OrCAD and selected
Incisive products are primarily marketed through these channels. With respect to international sales, we generally
market and support our products and services through our subsidiaries.
Software Licensing Arrangements
We sell software using three license types: subscription, term and perpetual. Customers who prefer to license
technology for a specified, limited period of time will choose either a subscription or term license, and customers
who prefer to have the right to use the technology continuously without time restriction will choose a perpetual
license. Customers who desire rights to remix in new technology during the life of the contract will select a
subscription license, which allows them limited access to unspecified new technology on a when-and-if-available
basis, as opposed to a term or perpetual license which does not include remix rights to new technology. Payment
terms for subscription and term licenses generally provide for payments to be made in installments over the license
period and payment terms for perpetual licenses generally are net 30 days.
Our revenue recognition depends on a number of contract-specific terms and conditions, including the license
type, payment terms, creditworthiness of the customer and other factors as more fully described in this Annual
Report under the heading “Critical Accounting Estimates” under Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Revenue associated with subscription licenses is recognized
over multiple periods during the license term, whereas product revenue associated with term and perpetual licenses
is generally recognized upon the later of the effective date of the license or delivery of the product, assuming all
7
other criteria for revenue recognition have been met. Although it can vary from quarter to quarter, approximately
two-thirds of our product revenue was recognized from backlog during each of the past three years.
Our revenue and results of operations may miss expectations due to a shortfall in product revenue generated
from current transactions or variance in the actual mix of license types executed in any given period, and due to
other contract-specific terms and conditions as discussed above. We are subject to greater credit risk on subscription
and term licenses, as compared to perpetual licenses, due to the installment payment terms generally associated
with those license types. Otherwise, the particular risks to us of one license type versus another type do not vary
considerably.
From time to time we sell receivables generated by our licenses with installment payment terms to third party
financing institutions on a non-recourse or limited-recourse basis.
For a further description of our license agreements, revenue recognition policies and results of operations,
please refer to the discussion under the heading “Critical Accounting Estimates” under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Research and Development
Our investment in research and development was $460.1 million in 2006, $390.7 million in 2005 and
$368.1 million in 2004.
The primary areas of our research and development include SoC design, the design of silicon devices in the
nanometer range, high-performance IC packaging, SiP and PCB design, system-level modeling and verification,
high-performance logic verification technology and hardware/software co-verification. Because the electronics
industry combines rapid innovation with rapidly increasing design and manufacturing complexity, we make
significant investments in enhancing our current products, as well as creating new products and technologies and
integrating those products and technologies together into segmented solutions.
Our future performance depends largely on our ability to maintain and enhance our current product development and commercialization to meet advancing semiconductor manufacturing capability and design complexity,
develop, acquire or interface to new products from third parties, and develop solutions that meet increasingly
demanding productivity, quality, predictability and cost requirements. In addition to our research and development
team, we maintain Cadence Laboratories, an advanced research group responsible for exploring specific new
technologies, moving those technologies into product development and maintaining strong industry relationships.
Manufacturing and Distribution
Our software production consists of configuring the customer’s order, outsourcing the recording of the product
electronically or on CD-ROM, and producing customer-unique access keys that allow customers to use licensed
products. Software and documentation are primarily distributed to customers by secure electronic delivery. User
manuals and other documentation are generally available by secure electronic delivery or on CD-ROM, but are
occasionally supplied in hard copy format.
Cadence performs final assembly and test of its hardware verification, acceleration and emulation products in
San Jose, California. Subcontractors manufacture all major subassemblies, including all individual PCBs and
custom ICs, and supply them to us for qualification and testing prior to their incorporation into the assembled
product.
Proprietary Technology
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights,
trademarks, trade secret laws, licenses and restrictive agreements to establish and protect our proprietary rights in
technology and products. Many of our products include software or other intellectual property licensed from third
parties. We may have to seek new licenses or renew existing licenses for this third party software and other
intellectual property in the future. As part of performing design and methodology services for customers, our design
8
and methodology services business licenses certain software and other intellectual property of third parties,
including that of our competitors.
Competition
We compete in the EDA market for products and maintenance primarily with three companies: Synopsys, Inc.,
Mentor Graphics Corporation and Magma Design Automation, Inc. We also compete with numerous smaller EDA
companies, with manufacturers of electronic devices that have developed or have the capability to develop their own
EDA products, and with numerous electronics design and consulting companies. We generally compete on the basis
of product quality, product features, integration in a platform or compatibility with other tools, price, payment terms
and maintenance offerings.
Our maintenance business flows directly from our product business. The competitive issues associated with
our maintenance business are substantially the same as those for our product business in that every maintenance
contract is the direct result of a product contract, and once we have entered into a product contract, maintenance is
generally purchased by the customer to ensure access to bug fixes and service releases, as and when they are made
available, and other continued support.
Certain competitive factors in the design and methodology services business as described herein differ from
those of the products and maintenance businesses. While we do compete with other EDA companies in the design
and methodology services business, we compete more with independent design and methodology service businesses. These companies vary greatly in focus, geographic location, capability, cost structure and pricing. In
addition, manufacturers of electronic devices may be reluctant to purchase services from independent vendors, such
as Cadence, because they wish to promote their own internal design departments. We compete with these companies
by focusing on the design of complex analog and digital ICs. It is our strategy to use design and methodology
services as a differentiator to further promote our products and maintenance businesses.
Backlog
Our backlog on December 30, 2006 was approximately $1.9 billion, as compared to $1.8 billion on
December 31, 2005. Backlog consists of revenue to be recognized in future fiscal periods after December 30,
2006 from:
•
•
•
•
•
•
Subscription licenses for software products;
Sale or lease of hardware;
Maintenance contracts on hardware and software products;
Orders for hardware and software products sold on perpetual and term licenses on which customers have
delivery dates after December 30, 2006;
Licenses with payments that are outside our customary terms; and
The undelivered portion of design and methodology services contracts.
The substantial majority of our backlog is generated by our product and maintenance businesses because
customer licenses generally include both product and maintenance components. Historically, we have not experienced significant cancellations of our contracts with customers. However, we often reschedule the required
completion dates of design and methodology services contracts which, at times, defers revenue recognition under
those contracts beyond the original expected completion date. Changes in customer license types or payment terms
also can impact the timing of revenue recognition.
Revenue Seasonality
Historically, orders and revenue have been lowest in our first quarter and highest in our fourth quarter, with a
material decline between the fourth quarter of one year and the first quarter of the next year. We expect the first
quarter will remain our lowest quarter for orders and revenues; orders and revenues in other quarters will vary based
on the particular timing and type of licenses entered into with large customers.
9
International Operations
We have approximately 60 sales offices, design centers and research and development facilities located around
the world. We consider customer sales and support requirements, the availability of a skilled workforce, and costs
and efficiencies, among other relative benefits, when determining what operations to locate internationally. For
additional information regarding our international operations, see the discussion under the heading “The effect of
foreign exchange rate fluctuations and other risks to our international operations may seriously harm our financial
condition” in Item 1A, “Risk Factors” and Note 21 to our Consolidated Financial Statements.
Employees
As of December 30, 2006, we employed approximately 5,200 individuals, with approximately 1,900 in sales,
services, marketing, support and manufacturing activities, approximately 2,700 in product research and development and approximately 600 in management, administration and finance. None of our employees are represented by
a labor union, and we have experienced no work stoppages. We believe that our employee relations are good.
Item 1A. Risk Factors
Our business faces many risks. Described below are what we believe to be the material risks that we face. If
any of the events or circumstances described in the following risks actually occurs, our business, financial condition
or results of operations could suffer.
Risks Related to Our Business
We are subject to the cyclical nature of the integrated circuit and electronics systems industries, and any
downturn in these industries may reduce our revenue.
Purchases of our products and services are dependent upon the commencement of new design projects by IC
manufacturers and electronics systems companies. The IC and electronics systems industries are cyclical and are
characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving
standards, short product life cycles and wide fluctuations in product supply and demand.
The IC and electronics systems industries have experienced significant downturns, often connected with, or in
anticipation of, maturing product cycles of both these industries’ and their customers’ products and a decline in
general economic conditions. These downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling prices. Any economic downturn in the
industries we serve could harm our business, operating results or financial condition.
Our failure to respond quickly to technological developments could make our products uncompetitive and
obsolete.
The industries in which we compete experience rapid technology developments, changes in industry standards,
changes in customer requirements and frequent new product introductions and improvements. Currently, the
industries we serve are experiencing several revolutionary trends:
•
Migration to nanometer design: the size of features such as wires, transistors and contacts on ICs
continuously shrink due to the ongoing advances in semiconductor manufacturing processes. Process
feature sizes refer to the width of the transistors and the width and spacing of interconnect on the IC.
Feature size is normally identified by the transistor length, which is shrinking rapidly to 65 nanometers
and smaller. This is commonly referred to in the semiconductor industry as the migration to nanometer
design. It represents a major challenge for participants in the semiconductor industry, from IC design and
design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such proportions is challenging the industry in the application of more
complex physics and chemistry that is needed to realize advanced silicon devices. For EDA tools, models
of each component’s electrical properties and behavior become more complex as do requisite analysis,
design and verification capabilities. Novel design tools and methodologies must be invented quickly to
remain competitive in the design of electronics in the smallest nanometer ranges.
10
•
•
•
•
•
The challenges of nanometer design are leading some customers to work with older, less risky
manufacturing processes. This may reduce their need to upgrade their EDA products and design flows.
The ability to design system-on-a-chip devices, or SoCs, increases the complexity of managing a design
that, at the lowest level, is represented by billions of shapes on the fabrication mask. In addition, SoCs
typically incorporate microprocessors and digital signal processors that are programmed with software,
requiring simultaneous design of the IC and the related software embedded on the IC.
With the availability of seemingly endless gate capacity, there is an increase in design reuse, or the
combining of off-the-shelf design IP with custom logic to create ICs. The unavailability of high-quality
design IP that can be reliably incorporated into a customer’s design with Cadence IC implementation
products and services could reduce demand for our products and services.
Increased technological capability of the Field-Programmable Gate Array, which is a programmable
logic chip, creates an alternative to IC implementation for some electronics companies. This could
reduce demand for Cadence’s IC implementation products and services.
A growing number of low-cost design and methodology services businesses could reduce the need for
some IC companies to invest in EDA products.
If we are unable to respond quickly and successfully to these developments, we may lose our competitive
position, and our products or technologies may become uncompetitive or obsolete. To compete successfully, we
must develop or acquire new products and improve our existing products and processes on a schedule that keeps
pace with technological developments and the requirements for products addressing a broad spectrum of designers
and designer expertise in our industries. We must also be able to support a range of changing computer software,
hardware platforms and customer preferences. We cannot guarantee that we will be successful in this effort.
We have experienced varied operating results, and our operating results for any particular fiscal period are
affected by the timing of significant orders for our software products, fluctuations in customer
preferences for license types and the timing of revenue recognition under those license types.
We have experienced, and may continue to experience, varied operating results. In particular, we have
experienced net losses for some past periods and we may experience net losses in future periods. Various factors
affect our operating results and some of them are not within our control. Our operating results for any period are
affected by the timing of significant orders for our software products because a significant number of licenses for
our software products are in excess of $5.0 million.
Our operating results are also affected by the mix of license types executed in any given period. We license
software using three different license types: subscription, term and perpetual. Product revenue associated with term
and perpetual licenses is generally recognized at the beginning of the license period, whereas product revenue
associated with subscription licenses is recognized over multiple periods during the term of the license. Revenue
may also be deferred under term and perpetual licenses until payments become due and payable from customers
with nonlinear payment terms or as cash is collected from customers with lower credit ratings. In addition, revenue
is impacted by the timing of license renewals, the extent to which contracts contain flexible payment terms and the
mix of license types (i.e., perpetual, term or subscription) for existing customers, which changes could have the
effect of accelerating or delaying the recognition of revenue from the timing of recognition under the original
contract.
We plan operating expense levels primarily based on forecasted revenue levels. These expenses and the impact
of long-term commitments are relatively fixed in the short term. A shortfall in revenue could lead to operating
results below expectations because we may not be able to quickly reduce these fixed expenses in response to these
short-term business changes.
You should not view our historical results of operations as reliable indicators of our future performance. If
revenue or operating results fall short of the levels expected by public market analysts or investors, the trading price
of our common stock could decline dramatically.
11
Our future revenue is dependent in part upon our installed customer base continuing to license or buy
additional products, renew maintenance agreements and purchase additional services.
Our installed customer base has traditionally generated additional new license, service and maintenance
revenues. In future periods, customers may not necessarily license or buy additional products or contract for
additional services or maintenance. Maintenance is generally renewable annually at a customer’s option, and there
are no mandatory payment obligations or obligations to license additional software. If our customers decide not to
renew their maintenance agreements or license additional products or contract for additional services, or if they
reduce the scope of the maintenance agreements, our revenue could decrease, which could have an adverse effect on
our results of operations.
We may not receive significant revenue from our current research and development efforts for several
years, if at all.
Internally developing software products, integrating acquired software products and integrating intellectual
property into existing platforms is expensive, and these investments often require a long time to generate returns.
Our strategy involves significant investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and
development efforts to maintain our competitive position. However, we cannot predict that we will receive
significant, if any, revenue from these investments.
Our failure to attract, train, motivate and retain key employees may make us less competitive in our
industries and therefore harm our results of operations.
Our business depends on the efforts and abilities of our employees. The high cost of training new employees,
not fully utilizing these employees, or losing trained employees to competing employers could reduce our gross
margins and harm our business or operating results. Competition for highly skilled employees can be intense,
particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where our
principal offices are located, and the other locations where we maintain facilities. If economic conditions continue
to improve and job opportunities in the technology industry become more plentiful, we may experience increased
employee attrition and increased competition for skilled employees. To attract, retain and motivate individuals with
the requisite expertise, we may be required to grant large numbers of stock options or other stock-based incentive
awards, which may be dilutive to existing stockholders and increase compensation expense. We may also be
required to pay key employees significant base salaries and cash bonuses, which could harm our operating results.
In addition, the NASDAQ Marketplace Rules require stockholder approval for new equity compensation plans
and significant amendments to existing plans, including increases in shares available for issuance under such plans,
and prohibit NASDAQ member organizations from giving a proxy to vote on equity compensation plans unless the
beneficial owner of the shares has given voting instructions. These regulations could make it more difficult for us to
grant equity compensation to employees in the future. To the extent that these regulations make it more difficult or
expensive to grant equity compensation to employees, we may incur increased compensation costs or find it
difficult to attract, retain and motivate employees, which could materially and adversely affect our business.
We have acquired and expect to acquire other companies and businesses and may not realize the expected
benefits of these acquisitions.
We have acquired and expect to acquire other companies and businesses in the future. While we expect to
carefully analyze each potential acquisition before committing to the transaction, we may not be able to integrate
and manage acquired products and businesses effectively. In addition, acquisitions involve a number of risks. If any
of the following events occurs after we acquire another business, it could seriously harm our business, operating
results or financial condition:
•
•
•
Difficulties in combining previously separate businesses into a single unit;
The substantial diversion of management’s attention from day-to-day business when evaluating and
negotiating these transactions and integrating an acquired business;
The discovery, after completion of the acquisition, of liabilities assumed from the acquired business or of
assets acquired for which we cannot realize the anticipated value;
12
•
•
•
•
•
•
The failure to realize anticipated benefits such as cost savings and revenue enhancements;
The failure to retain key employees of the acquired business;
Difficulties related to integrating the products of an acquired business in, for example, distribution,
engineering and customer support areas;
Unanticipated costs;
Customer dissatisfaction with existing license agreements with Cadence which may dissuade them from
licensing or buying products acquired by Cadence after the effective date of the license; and
The failure to understand and compete effectively in markets in which we have limited experience.
In a number of our previously completed acquisitions, we have agreed to make future payments, or earnouts,
based on the performance of the businesses we acquired. The performance goals pursuant to which these future
payments may be made generally relate to achievement by the acquired business of certain specified bookings,
revenue, product proliferation, product development or employee retention goals during a specified period
following completion of the applicable acquisition. Future acquisitions may involve issuances of stock as full
or partial payment of the purchase price for the acquired business, grants of incentive stock or options to employees
of the acquired businesses (which may be dilutive to existing stockholders), expenditure of substantial cash
resources or the incurrence of material amounts of debt.
The specific performance goal levels and amounts and timing of contingent purchase price payments vary with
each acquisition. In connection with our acquisitions completed prior to December 30, 2006, we may be obligated
to pay up to an aggregate of $4.8 million in cash during the next 12 months and an additional $2.0 million in cash in
periods after the next 12 months through August 2008 if certain performance goals related to one or more of the
criteria mentioned above are achieved in full.
The competition in our industries is substantial and we may not be able to continue to successfully compete
in our industries.
The EDA market and the commercial electronics design and methodology services industries are highly
competitive. If we fail to compete successfully in these industries, it could seriously harm our business, operating
results or financial condition. To compete in these industries, we must identify and develop or acquire innovative
and cost-competitive EDA products, integrate them into platforms and market them in a timely manner. We must
also gain industry acceptance for our design and methodology services and offer better strategic concepts, technical
solutions, prices and response time, or a combination of these factors, than those of other design companies and the
internal design departments of electronics manufacturers. We cannot assure you that we will be able to compete
successfully in these industries. Factors that could affect our ability to succeed include:
•
•
•
•
•
•
The development by others of competitive EDA products or platforms and design and methodology
services, which could result in a shift of customer preferences away from our products and services and
significantly decrease revenue;
Decisions by electronics manufacturers to perform design and methodology services internally, rather
than purchase these services from outside vendors due to budget constraints or excess engineering
capacity;
The challenges of developing (or acquiring externally-developed) technology solutions that are adequate
and competitive in meeting the requirements of next-generation design challenges;
The significant number of current and potential competitors in the EDA industry and the low cost of
entry;
Intense competition to attract acquisition targets, which may make it more difficult for us to acquire
companies or technologies at an acceptable price or at all; and
The combination of or collaboration among many EDA companies to deliver more comprehensive
offerings than they could individually.
We compete in the EDA products market primarily with Synopsys, Inc., Mentor Graphics Corporation and
Magma Design Automation, Inc. We also compete with numerous smaller EDA companies, with manufacturers of
electronic devices that have developed or have the capability to develop their own EDA products, and with
numerous electronics design and consulting companies. Manufacturers of electronic devices may be reluctant to
13
purchase design and methodology services from independent vendors such as us because they wish to promote their
own internal design departments.
We may need to change our pricing models to compete successfully.
The highly competitive markets in which we compete can put pressure on us to reduce the prices of our
products. If our competitors offer deep discounts on certain products in an effort to recapture or gain market
segment share or to sell other software or hardware products, we may then need to lower our prices or offer other
favorable terms to compete successfully. Any such changes would be likely to reduce our profit margins and could
adversely affect our operating results. Any substantial changes to our prices and pricing policies could cause sales
and software license revenues to decline or be delayed as our sales force implements and our customers adjust to the
new pricing policies. Some of our competitors may bundle products for promotional purposes or as a long-term
pricing strategy or provide guarantees of prices and product implementations. These practices could, over time,
significantly constrain the prices that we can charge for our products. If we cannot offset price reductions with a
corresponding increase in the number of sales or with lower spending, then the reduced license revenues resulting
from lower prices could have an adverse effect on our results of operations.
We rely on our proprietary technology as well as software and other intellectual property rights licensed to
us by third parties, and we cannot assure you that the precautions taken to protect our rights will be
adequate or that we will continue to be able to adequately secure such intellectual property rights from
third parties.
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights,
trademarks, trade secret laws, licenses and restrictive agreements to establish and protect our proprietary rights in
technology and products. Despite precautions we may take to protect our intellectual property, third parties have
tried in the past, and may try in the future, to challenge, invalidate or circumvent these safeguards. The rights
granted under our patents or attendant to our other intellectual property may not provide us with any competitive
advantages and there is no guarantee that patents will be issued on any of our pending applications and future
patents may not be sufficiently broad to protect our technology. Furthermore, the laws of foreign countries may not
protect our proprietary rights in those countries to the same extent as applicable law protects these rights in the
United States. Many of our products include software or other intellectual property licensed from third parties. We
may have to seek new or renew existing licenses for such software and other intellectual property in the future. Our
design and methodology services business holds licenses to certain software and other intellectual property owned
by third parties, including that of our competitors. Our failure to obtain, for our use, software or other intellectual
property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over
these licenses or rights, could seriously harm our business, operating results or financial condition.
We could lose key technology or suffer serious harm to our business because of the infringement of our
intellectual property rights by third parties or because of our infringement of the intellectual property
rights of third parties.
There are numerous patents in the EDA industry and new patents are being issued at a rapid rate. It is not
always practicable to determine in advance whether a product or any of its components infringes the patent rights of
others. As a result, from time to time, we may be compelled to respond to or prosecute intellectual property
infringement claims to protect our rights or defend a customer’s rights. For example, on November 8, 2006, an
individual filed suit against us, Magma Design Automation, Inc., Dynalith Systems, Inc., Altera Corp., Mentor
Graphics Corp. and Aldec, Inc. in the United States District Court for the Eastern District of Texas. The suit alleges
that certain products of Cadence and the other defendants infringe a patent for an electronic simulation and
emulation system owned by the plaintiff. The plaintiff seeks unspecified damages and attorneys’ fees and costs. We
dispute the plaintiff’s claims and intend to defend the lawsuit vigorously.
Intellectual property infringement claims, regardless of merit, could consume valuable management time,
result in costly litigation, or cause product shipment delays, all of which could seriously harm our business,
operating results or financial condition. In settling these claims, we may be required to enter into royalty or
licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if
available, may not have terms favorable to us. Being compelled to enter into a license agreement with unfavorable
14
terms could seriously harm our business, operating results or financial condition. Any potential intellectual property
litigation could compel us to do one or more of the following:
•
•
•
•
Pay damages (including the potential for treble damages), license fees or royalties (including royalties
for past periods) to the party claiming infringement;
Stop licensing products or providing services that use the challenged intellectual property;
Obtain a license from the owner of the infringed intellectual property to sell or use the relevant
technology, which license may not be available on reasonable terms, or at all; or
Redesign the challenged technology, which could be time-consuming and costly, or not be
accomplished.
If we were compelled to take any of these actions, our business or results of operations may suffer.
If our security measures are breached and an unauthorized party obtains access to customer data, our
information systems may be perceived as being unsecure and customers may curtail or stop their use
of our products and services.
Our products and services involve the storage and transmission of customers’ proprietary information, and
breaches of our security measures could expose us to a risk of loss or misuse of this information, litigation and
potential liability. Because techniques used to obtain unauthorized access or to sabotage information systems
change frequently and generally are not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security
occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose
existing customers and our ability to obtain new customers.
We may not be able to effectively implement our restructuring activities, and our restructuring activities
may not result in the expected benefits, which would negatively impact our future results of operations.
The EDA market and the commercial electronics design and methodology services industries are highly
competitive and change quickly. We have responded to increased competition and changes in the industries in which
we compete, in part, by restructuring our operations and at times reducing the size of our workforce. Despite our
restructuring efforts in prior years, we may not achieve all of the operating expense reductions and improvements in
operating margins and cash flows anticipated from those restructuring activities in the periods contemplated. Our
inability to realize these benefits may result in an inefficient business structure that could negatively impact our
results of operations.
As part of our restructuring activities in prior years, we have reduced the workforce in certain revenuegenerating portions of our business. These reductions in staffing levels could require us to forego certain future
opportunities due to resource limitations, which could negatively affect our long-term revenues.
We cannot assure you that we will not be required to implement further restructuring activities or reductions in
our workforce based on changes in the markets and industries in which we compete or that any future restructuring
efforts will be successful.
The long sales cycle of our products and services makes the timing of our revenue difficult to predict and
may cause our operating results to fluctuate unexpectedly.
We have a long sales cycle that generally extends at least three to six months. The length of the sales cycle may
cause our revenue or operating results to vary from quarter to quarter. The complexity and expense associated with
our business generally require a lengthy customer education, evaluation and approval process. Consequently, we
may incur substantial expenses and devote significant management effort and expense to develop potential
relationships that do not result in agreements or revenue and may prevent us from pursuing other opportunities.
15
In addition, sales of our products and services may be delayed if customers delay approval or commencement
of projects because of:
•
•
The timing of customers’ competitive evaluation processes; or
Customers’ budgetary constraints and budget cycles.
Long sales cycles for acceleration and emulation hardware products subject us to a number of significant risks
over which we have limited control, including insufficient, excess or obsolete inventory, variations in inventory
valuation and fluctuations in quarterly operating results.
Also, because of the timing of large orders and our customers’ buying patterns, we may not learn of bookings
shortfalls, revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal
quarter. These factors may cause our operating results to fluctuate unexpectedly.
The effect of foreign exchange rate fluctuations and other risks to our international operations may
seriously harm our financial condition.
We have significant operations outside the United States. Our revenue from international operations as a
percentage of total revenue was approximately 48% in 2006, 54% in 2005 and 50% in 2004. We expect that revenue
from our international operations will continue to account for a significant portion of our total revenue. We also
transact business in various foreign currencies. Recent economic and political uncertainty and the volatility of
foreign currencies in certain regions, most notably the Japanese yen, European Union euro, British pound and
Indian rupee have had, and may in the future have, a harmful effect on our revenue or operating results.
Fluctuations in the rate of exchange between the United States dollar and the currencies of other countries in
which we conduct business could seriously harm our business, operating results or financial condition. For example,
if there is an increase in the rate at which a foreign currency exchanges into United States dollars, it will take more of
the foreign currency to equal the same amount of United States dollars than before the rate increase. If we price our
products and services in the foreign currency, we will receive fewer United States dollars than we did before the rate
increase went into effect. If we price our products and services in United States dollars, an increase in the exchange
rate will result in an increase in the price for our products and services compared to those products of our
competitors that are priced in local currency. This could result in our prices being uncompetitive in markets where
business is transacted in the local currency.
Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different
from the functional currency of one of our subsidiaries. A subsidiary’s functional currency is generally the currency
in which it primarily conducts its operations, including product pricing, expenses and borrowings. Although we
attempt to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt our
results of operations as expressed in United States dollars.
Our international operations may also be subject to other risks, including:
•
•
•
•
•
•
•
•
•
•
•
The adoption or expansion of government trade restrictions;
Limitations on repatriation of earnings;
Limitations on the conversion of foreign currencies;
Reduced protection of intellectual property rights in some countries;
Recessions in foreign economies;
Longer collection periods for receivables and greater difficulty in collecting accounts receivable;
Difficulties in managing foreign operations;
Political and economic instability;
Unexpected changes in regulatory requirements;
Tariffs and other trade barriers; and
United States and other governments’ licensing requirements for exports, which may lengthen the sales
cycle or restrict or prohibit the sale or licensing of certain products.
We have offices throughout the world, including key research and development facilities outside of the United
States. Our operations are dependent upon the connectivity of our operations throughout the world. Activities that
16
interfere with our international connectivity, such as computer “hacking” or the introduction of a virus into our
computer systems, could significantly interfere with our business operations.
Our operating results could be adversely affected as a result of changes in our effective tax rates.
Our future effective tax rates could be adversely affected by the following:
•
•
•
•
•
•
•
Earnings being lower than anticipated in countries where we are taxed at lower rates as compared to the
United States federal and state statutory tax rates;
An increase in expenses not deductible for tax purposes, including certain stock-based compensation,
write-offs of acquired in-process research and development and impairment of goodwill;
Changes in the valuation of our deferred tax assets and liabilities;
Changes in tax laws or the interpretation of such tax laws;
New accounting standards or interpretations of such standards;
A change in our decision to indefinitely reinvest foreign earnings outside the United States; or
Results of tax examinations by the Internal Revenue Service, or IRS, and state and foreign tax
authorities.
Any significant change in our future effective tax rates could adversely impact our results of operations for
future periods.
We have received examination reports from the Internal Revenue Service proposing deficiencies in certain
of our tax returns, and the outcome of current and future tax examinations may have a material
adverse effect on our results of operations and cash flows.
The IRS and other tax authorities regularly examine our income tax returns. In November 2003, the IRS
completed its field examination of our federal income tax returns for the tax years 1997 through 1999 and issued a
Revenue Agent’s Report, or RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year
period of approximately $143.0 million. The most significant of the disputed adjustments for the tax years 1997
through 1999 relates to transfer pricing arrangements that we have with a foreign subsidiary. We have filed a protest
to certain of the proposed adjustments with the Appeals Office of the IRS where the matter is currently being
considered.
In July 2006, the IRS completed its field examination of our federal income tax returns for the tax years 2000
through 2002 and issued an RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year
period of approximately $324.0 million. In November 2006, the IRS revised the proposed aggregate tax deficiency
for the three-year period to be approximately $318.0 million. The IRS is contesting our qualification for deferred
recognition of certain proceeds received from restitution and settlement in connection with litigation during the
period. The proposed tax deficiency for this item is approximately $152.0 million. The remaining proposed tax
deficiency of approximately $166.0 million is primarily related to proposed adjustments to our transfer pricing
arrangements that we have with foreign subsidiaries and to our deductions for foreign trade income. The IRS took
similar positions with respect to our transfer pricing arrangements in the prior examination period and may make
similar claims against our transfer pricing arrangements in future examinations. We have filed a timely protest with
the IRS and will seek resolution of the issues through the Appeals Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent with applicable tax laws and we are challenging
these proposed adjustments vigorously. The RARs are not final Statutory Notices of Deficiency but the IRS imposes
interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at rates published
by the IRS, which rates are adjusted quarterly and have been between four and ten percent since 1997.
Significant judgment is required in determining our provision for income taxes. The calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax regulations. In determining the
adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from
tax examinations including the RARs for the tax years 1997 through 2002. We provide for tax liabilities on our
Consolidated Balance Sheets unless we consider it probable that additional taxes will not be due. However, the
ultimate outcome of tax examinations, including the total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty. In addition, we cannot assure you that such amount
17
will not be materially different than that which is reflected in our historical income tax provisions and accruals.
Should the IRS or other tax authorities assess additional taxes as a result of a current or a future examination, we
may be required to record charges to operations in future periods that could have a material impact on the results of
operations, financial position or cash flows in the applicable period or periods.
Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material
differences between forecasted and actual tax rates could have a material impact on our results of
operations.
Forecasts of our income tax position and resultant effective tax rate are complex and subject to uncertainty
because our income tax position for each year combines the effects of a mix of profits and losses earned by us and
our subsidiaries in tax jurisdictions with a broad range of income tax rates, as well as benefits from available
deferred tax assets, the impact of various accounting rules and changes to these rules and costs resulting from tax
audits. To forecast our global tax rate, pre-tax profits and losses by jurisdiction are estimated and tax expense by
jurisdiction is calculated. If the mix of profits and losses, our ability to use tax credits, or effective tax rates by
jurisdiction is different than those estimates, our actual tax rate could be materially different than forecasted, which
could have a material impact on our results of operations.
Failure to obtain export licenses could harm our business by rendering us unable to ship products and
transfer our technology outside of the United States.
We must comply with regulations of the United States Department of Commerce and of certain other countries
in shipping our software products and transferring our technology outside the United States and to foreign nationals.
Although we have not had any significant difficulty complying with such regulations so far, any significant future
difficulty in complying could harm our business, operating results or financial condition.
Errors or defects in our products and services could expose us to liability and harm our reputation.
Our customers use our products and services in designing and developing products that involve a high degree
of technological complexity, each of which has its own specifications. Because of the complexity of the systems and
products with which we work, some of our products and designs can be adequately tested only when put to full use
in the marketplace. As a result, our customers or their end users may discover errors or defects in our software or the
systems we design, or the products or systems incorporating our design and intellectual property may not operate as
expected. Errors or defects could result in:
•
•
•
•
•
•
•
Loss of customers;
Loss of market segment share;
Failure to attract new customers or achieve market acceptance;
Diversion of development resources to resolve the problem;
Loss of or delay in revenue;
Increased service costs; and
Liability for damages.
If we become subject to unfair hiring claims, we could be prevented from hiring needed employees, incur
liability for damages and incur substantial costs in defending ourselves.
Companies in our industry whose employees accept positions with competitors frequently claim that these
competitors have engaged in unfair hiring practices or that the employment of these persons would involve the
disclosure or use of trade secrets. These claims could prevent us from hiring employees or cause us to incur liability
for damages. We could also incur substantial costs in defending ourselves or our employees against these claims,
regardless of their merits. Defending ourselves from these claims could also divert the attention of our management
away from our operations.
Our business is subject to the risk of earthquakes, floods and other natural catastrophic events.
Our corporate headquarters, including certain of our research and development operations and certain of our
distribution facilities, is located in the Silicon Valley area of Northern California, which is a region known to
experience seismic activity. In addition, several of our facilities, including our corporate headquarters, certain of our
18
research and development operations, and certain of our distribution operations, are in areas of San Jose, California
that have been identified by the Director of the Federal Emergency Management Agency, or FEMA, as being
located in a special flood area. The areas at risk are identified as being in a one hundred year flood plain, using
FEMA’s Flood Hazard Boundary Map or the Flood Insurance Rate Map. If significant seismic or flooding activity
were to occur, our operations may be interrupted, which would adversely impact our business and results of
operations.
We maintain research and development and other facilities in parts of the world that are not as politically
stable as the United States, and as a result we may face a higher risk of business interruption from
acts of war or terrorism than businesses located only or primarily in the United States.
We maintain international research and development and other facilities, some of which are in parts of the
world that are not as politically stable as the United States. Consequently, we may face a greater risk of business
interruption as a result of terrorist acts or military conflicts than businesses located domestically. Furthermore, this
potential harm is exacerbated given that damage to or disruptions at our international research and development
facilities could have an adverse effect on our ability to develop new or improve existing products as compared to
other businesses which may only have sales offices or other less critical operations abroad. We are not insured for
losses or interruptions caused by acts of war or terrorism.
Risks Related to Our Securities and Indebtedness
Our debt obligations expose us to risks that could adversely affect our business, operating results or
financial condition, and could prevent us from fulfilling our obligations under such indebtedness.
We have a substantial level of debt. As of December 30, 2006, we had $758.4 million of outstanding
indebtedness as follows:
•
•
•
•
$250.0 million related to our 1.375% Convertible Senior Notes due 2011, or the 2011 Notes;
$250.0 million related to our 1.500% Convertible Senior Notes due 2013, or the 2013 Notes and, together
with the 2011 Notes, the Convertible Senior Notes;
$230.4 million related to our Zero Coupon Zero Yield Senior Convertible Notes due 2023, or 2023
Notes; and
$28.0 million related to the term loan incurred by our wholly-owned Irish subsidiary Castlewilder, or the
Term Loan, which we have guaranteed.
The level of our indebtedness, among other things, could:
•
•
•
•
•
•
•
Make it difficult for us to satisfy our payment obligations on our debt as described below;
Make us more vulnerable in the event of a downturn in our business;
Reduce funds available for use in our operations;
Make it difficult for us to incur additional debt or obtain any necessary financing in the future for
working capital, capital expenditures, debt service, acquisitions or general corporate purposes;
Limit our flexibility in planning for or reacting to changes in our business;
Make us more vulnerable in the event of an increase in interest rates if we must incur new debt to satisfy
our obligations under the Convertible Senior Notes, the 2023 Notes or the Term Loan; or
Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors
that have greater access to capital resources.
If we experience a decline in revenue due to any of the factors described in this section entitled “Risk Factors,”
or otherwise, we could have difficulty paying amounts due on our indebtedness. In the case of the 2023 Notes,
although they mature in 2023, the holders of the 2023 Notes may require us to repurchase for cash all or any portion
of the 2023 Notes on August 15, 2008 for 100.25% of the principal amount, August 15, 2013 for 100.00% of the
principal amount and August 15, 2018 for 100.00% of the principal amount. As a result, although the 2023 Notes
mature in 2023, the holders may require us to repurchase the 2023 Notes at an additional premium in 2008, which
makes it probable that we will be required to repurchase the 2023 Notes in 2008 if they have not first been
repurchased by us or are not otherwise converted.
19
If we are prohibited from paying our outstanding indebtedness, we could try to obtain the consent of the lenders
under those arrangements to make such payment, or we could attempt to refinance the borrowings that contain the
restrictions. If we do not obtain the necessary consents or refinance the borrowings, we may be unable to satisfy our
outstanding indebtedness. Any such failure would constitute an event of default under our indebtedness, which
could, in turn, constitute a default under the terms of any other indebtedness then outstanding.
If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which
would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults
under our other indebtedness as well. Any default under our indebtedness could have a material adverse effect on
our business, operating results and financial condition. In addition, a material default on our indebtedness could
suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that
permit incorporation by reference of substantial information regarding us, which could potentially hinder our ability
to raise capital through the issuance of our securities and will increase the costs of such registration to us.
Conversion of the 2023 Notes or the Convertible Senior Notes will dilute the ownership interests of existing
stockholders.
The terms of the 2023 Notes and the Convertible Senior Notes permit the holders to convert the 2023 Notes and
the Convertible Senior Notes into shares of our common stock. The 2023 Notes are convertible into our common
stock initially at a conversion price of $15.65 per share, which would result in an aggregate of approximately
14.7 million shares of our common stock being issued upon conversion, subject to adjustment upon the occurrence
of specified events. The terms of the Convertible Senior Notes stipulate a net share settlement, which upon
conversion of the Convertible Senior Notes requires us to pay the principal amount in cash and the conversion
premium, if any, in shares of our common stock based on a daily settlement amount, calculated on a proportionate
basis for each day of the relevant 20 trading-day observation period. The initial conversion rate for the Convertible
Senior Notes is 47.2813 shares of our common stock per $1,000 principal amount of Convertible Senior Notes,
equivalent to a conversion price of approximately $21.15 per share of our common stock. The conversion price is
subject to adjustment in some events but will not be adjusted for accrued interest, except in limited circumstances.
The conversion of some or all of the 2023 Notes or the Convertible Senior Notes will dilute the ownership interest of
our existing stockholders. Any sales in the public market of the common stock issuable upon conversion could
adversely affect prevailing market prices of our common stock.
Prior to the conversion of the 2023 Notes, if the trading price of our common stock exceeds $22.69 per share
over specified periods, basic net income per share will be diluted. We may redeem for cash all or any part of the 2023
Notes on or after August 15, 2008 for 100.00% of the principal amount. The holders of the 2023 Notes may require
us to repurchase for cash all or any portion of their 2023 Notes on August 15, 2008 for 100.25% of the principal
amount, on August 15, 2013 for 100.00% of the principal amount, or on August 15, 2018 for 100.00% of the
principal amount, by providing to the paying agent a written repurchase notice. The repurchase notice must be
delivered during the period commencing 30 business days prior to the relevant repurchase date and ending on the
close of business on the business day prior to the relevant repurchase date. We may redeem for cash all or any part of
the 2023 Notes on or after August 15, 2008 for 100.00% of the principal amount, except for those 2023 Notes that
holders have required us to repurchase on August 15, 2008 or on other repurchase dates, as described above.
Each $1,000 of principal of the 2023 Notes is initially convertible into 63.879 shares of our common stock,
subject to adjustment upon the occurrence of specified events. Holders of the 2023 Notes may convert their 2023
Notes prior to maturity only if:
•
•
•
•
The price of our common stock reaches $22.69 during certain periods of time specified in the 2023
Notes;
Specified corporate transactions occur;
The 2023 Notes have been called for redemption; or
The trading price of the 2023 Notes falls below a certain threshold.
As a result, although the 2023 Notes mature in 2023, the holders may require us to repurchase their notes at an
additional premium in 2008, which makes it probable that we will be required to repurchase the 2023 Notes in 2008
20
if they have not first been repurchased by us or are not otherwise converted. As of December 30, 2006, none of the
conditions allowing holders of the 2023 Notes to convert had been met.
Each $1,000 of principal of the Convertible Senior Notes is initially convertible into 47.2813 shares of our
common stock, subject to adjustment upon the occurrence of specified events. Holders of the Convertible Senior
Notes may convert their notes at their option on any day prior to the close of business on the scheduled trading day
immediately preceding December 15, 2011 in the case of the 2011 Notes and December 15, 2013 in the case of the
2013 Notes, in each case only if:
•
•
•
The price of our common stock reaches $27.50 during certain periods of time specified in the
Convertible Senior Notes;
Specified corporate transactions occur; or
The trading price of the Convertible Senior Notes falls below a certain threshold.
On and after November 2, 2011, in the case of the 2011 Notes, and November 1, 2013, in the case of 2013
Notes, until the close of business on the scheduled trading day immediately preceding the maturity date of such
Convertible Senior Notes, holders may convert their Convertible Senior Notes at any time, regardless of the
foregoing circumstances. As of December 30, 2006, none of the conditions allowing holders of the Convertible
Senior Notes to convert had been met.
Although the conversion price of the 2023 Notes is currently $15.65 per share, the hedge and warrant
transactions that we entered into in connection with the issuance of the 2023 Notes effectively increased the
conversion price of the 2023 Notes until various dates in 2008 to approximately $23.08 per share, which would
result in an aggregate issuance upon conversion prior to August 15, 2008 of approximately 10.2 million shares of
our common stock. We entered into hedge and warrant transactions to reduce the potential dilution from the
conversion of the 2023 Notes; however, we cannot guarantee that such hedge and warrant instruments will fully
mitigate the dilution. In addition, the existence of the 2023 Notes may encourage short selling by market
participants because the conversion of the 2023 Notes could depress the price of our common stock.
Although the conversion price of the Convertible Senior Notes is currently $21.15 per share, we entered into
hedge and separate warrant transactions to reduce the potential dilution from the conversion of the Convertible
Senior Notes. However, we cannot guarantee that such hedges and warrant instruments will fully mitigate the
dilution. In addition, the existence of the Convertible Senior Notes may encourage short selling by market
participants because the conversion of the Convertible Senior Notes could depress the price of our common stock.
At the option of the 2023 Noteholders and the Convertible Senior Noteholders under certain circumstances,
we may be required to repurchase the 2023 Notes and the Convertible Senior Notes, as the case may
be, in cash or shares of our common stock.
Under the terms of the 2023 Notes and the Convertible Senior Notes, we may be required to repurchase the
2023 Notes and the Convertible Senior Notes following a “fundamental change” in our corporate ownership or
structure, such as a change of control in which substantially all of the consideration does not consist of publicly
traded securities, prior to maturity of the 2023 Notes and the Convertible Senior Notes, as the case may be.
Following a fundamental change, in certain circumstances, we may choose to pay the repurchase price of the 2023
Notes in cash, shares of our common stock or a combination of cash and shares of our common stock. If we choose
to pay all or any part of the repurchase price of the 2023 Notes in shares of our common stock, this would result in
dilution to the holders of our common stock. The repurchase price for the Convertible Senior Notes in the event of a
fundamental change must be paid solely in cash. These repayment obligations may have the effect of discouraging,
delaying or preventing a takeover of our company that may otherwise be beneficial to investors.
Hedge and warrant transactions entered into in connection with the issuance of the Convertible Senior
Notes and the 2023 Notes may affect the value of our common stock.
We entered into hedge transactions with various financial institutions, at the time of issuance of the Convertible
Senior Notes and the 2023 Notes, with the objective of reducing the potential dilutive effect of issuing our common
stock upon conversion of the Convertible Senior Notes and the 2023 Notes. We also entered into separate warrant
transactions with the same financial institutions. In connection with our hedge and warrant transactions, these
21
financial institutions purchased our common stock in secondary market transactions and entered into various
over-the-counter derivative transactions with respect to our common stock. These entities or their affiliates are
likely to modify their hedge positions from time to time prior to conversion or maturity of the Convertible Senior
Notes and the 2023 Notes by purchasing and selling shares of our common stock, other of our securities or other
instruments they may wish to use in connection with such hedging. Any of these transactions and activities could
adversely affect the value of our common stock and, as a result, the number of shares and the value of the common
stock holders will receive upon conversion of the Convertible Senior Notes and the 2023 Notes. In addition, subject
to movement in the price of our common stock, if the hedge transactions settle in our favor, we could be exposed to
credit risk related to the other party with respect to the payment we are owed from such other party.
Rating agencies may provide unsolicited ratings on the Convertible Senior Notes that could reduce the
market value or liquidity of our common stock.
We have not requested a rating of the Convertible Senior Notes from any rating agency and we do not
anticipate that the Convertible Senior Notes will be rated. However, if one or more rating agencies independently
elects to rate the Convertible Senior Notes and assigns the Convertible Senior Notes a rating lower than the rating
expected by investors, or reduces such rating in the future, the market price or liquidity of the Convertible Senior
Notes and our common stock could be harmed. Should a decline in the market price of the Convertible Senior Notes
result, as compared to the price of our common stock, this may trigger the right of the holders of the Convertible
Senior Notes to convert the Convertible Senior Notes into cash and shares of our common stock.
Anti-takeover defenses in our certificate of incorporation and bylaws and certain provisions under Delaware
law could prevent an acquisition of our company or limit the price that investors might be willing to
pay for our common stock.
Our certificate of incorporation and bylaws and certain provisions of the Delaware General Corporation Law
that apply to us could make it difficult for another company to acquire control of our company. For example:
•
•
Our certificate of incorporation allows our board of directors to issue, at any time and without
stockholder approval, preferred stock with such terms as it may determine. No shares of preferred
stock are currently outstanding. However, the rights of holders of any of our preferred stock that may be
issued in the future may be superior to the rights of holders of our common stock.
Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from
engaging in any business combination with a person owning 15% or more of its voting stock, or who is
affiliated with the corporation and owned 15% or more of its voting stock at any time within three years
prior to the proposed business combination, for a period of three years from the date the person became a
15% owner, unless specified conditions are met.
All or any one of these factors could limit the price that certain investors would be willing to pay for shares of
our common stock and could delay, prevent or allow our board of directors to resist an acquisition of our company,
even if a proposed transaction were favored by a majority of our independent stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters is located in San Jose, California, and we own the related land and buildings. We also own
buildings in India. As of December 30, 2006, the total square footage of our owned buildings was approximately
925,000.
In January 2007, we completed the sale of certain of our land and buildings in San Jose, California,
representing 262,500 of our square footage owned as of December 30, 2006. Concurrently with the sale, we
leased back from the purchaser all available space in the buildings. The lease agreement includes an initial term of
two years, with two options to extend the lease for six months each.
22
We lease additional facilities for our sales offices in the United States and various foreign countries, and for our
research and development and design and methodology services facilities worldwide. We sublease certain of these
facilities where space is not fully utilized or has been involved in restructuring activities.
We believe that these facilities and the undeveloped land we own adjacent to our current headquarters are
adequate for our current needs and that suitable additional or substitute space will be available as needed to
accommodate any expansion of our operations.
Item 3. Legal Proceedings
From time to time, we are involved in various disputes and litigation matters that arise in the ordinary course of
business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing,
contract law, distribution arrangements and employee relations matters. Periodically, we review the status of each
significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding
is considered probable and the amount or the range of loss can be estimated, we accrue a liability for the estimated
loss in accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies.” Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such
uncertainties, accruals are based only on the best information available at the time. As additional information
becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise
estimates.
On November 8, 2006, an individual filed suit against us, Magma Design Automation, Inc., Dynalith Systems,
Inc., Altera Corp., Mentor Graphics Corp. and Aldec, Inc. in the United States District Court for the Eastern District
of Texas. The suit alleges that certain products of Cadence and the other defendants infringe a patent for an
electronic simulation and emulation system owned by the plaintiff. The plaintiff seeks unspecified damages and
attorneys’ fees and costs. We dispute the plaintiff’s claims and intend to defend the lawsuit vigorously.
While the outcome of these disputes and litigation matters cannot be predicted with any certainty, management
does not believe that the outcome of any current matters will have a material adverse effect on our consolidated
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The executive officers of Cadence are as follows:
Name
Age
Michael J. Fister
Kevin Bushby
Moshe Gavrielov
52
51
52
James S. Miller, Jr.
44
William Porter
R.L. Smith McKeithen
52
63
Positions and Offices
President, Chief Executive Officer and Director
Executive Vice President, Worldwide Field Operations
Executive Vice President and General Manager, Verification
Division
Executive Vice President, Products and Technologies
Organization
Executive Vice President and Chief Financial Officer
Senior Vice President, General Counsel and Secretary
Executive officers are appointed by the Board of Directors and serve at the discretion of the Board.
MICHAEL J. FISTER has served as President and Chief Executive Officer of Cadence since May 2004.
Mr. Fister has been a member of the Cadence Board of Directors since July 2004. Prior to joining Cadence, from
1987 to 2004, Mr. Fister held several positions with Intel Corporation, most recently as Senior Vice President and
General Manager for the Enterprise Platforms Group. Mr. Fister is a director of Autodesk, Inc.
23
KEVIN BUSHBY has served as Executive Vice President, Worldwide Field Operations of Cadence since
2001. From 1995 to 2001, Mr. Bushby served as Vice President and General Manager, European Operations of
Cadence. Prior to joining Cadence, from 1990 to 1995, Mr. Bushby held several positions with Unisys Corporation,
most recently as Vice President Sales and Marketing, Client Server Systems Division.
MOSHE GAVRIELOV has served as Executive Vice President and General Manager, Verification Division of
Cadence since April 2005. Mr. Gavrielov has over 25 years of technology and business management experience,
including serving as CEO of Verisity Ltd. from 1998 to April 2005 before joining Cadence. Prior to joining Verisity,
Mr. Gavrielov served at LSI Logic from 1988 to 1998 in several executive management positions. Those positions
included Executive Vice President of the products organization, Senior Vice President of international markets,
General Manager of LSI Logic Europe and General Manager of the ASIC division.
JAMES S. MILLER, JR. has served as Executive Vice President, Products and Technologies Organization of
Cadence since February 2006. From 2004 to 2006, Mr. Miller served as Senior Vice President, Development of
Cadence. Prior to joining Cadence, Mr. Miller was at Intel Corporation from 2003 to 2004, where he was most
recently Enterprise Platform Design Manager for both a multiprocessor platform and server memory technology for
the Enterprise Products Group. From 1999 to 2002, Mr. Miller was Vice President of Silicon Development at Silicon
Spice, and later Technical Director with Broadcom Corporation following its acquisition of Silicon Spice. From
1986 to 1998, Mr. Miller was at Intel where he held a number of leadership roles, including management of the
server and workstation chipset organization and the Itanium» processor and Pentium» II processor organizations.
WILLIAM PORTER has served as Executive Vice President and Chief Financial Officer of Cadence since
February 2006. From 1999 to 2006, Mr. Porter served as Senior Vice President and Chief Financial Officer of
Cadence. From 1994 to 1999, Mr. Porter served as Vice President, Corporate Controller and Assistant Secretary of
Cadence. Prior to joining Cadence, Mr. Porter served as Technical Accounting and Reporting Manager and as
Controller of Cupertino Operations with Apple Computer, Inc.
R.L. SMITH MCKEITHEN has served as Senior Vice President, General Counsel and Secretary of Cadence
since 1998. From 1996 to 1998, Mr. McKeithen served as Vice President, General Counsel and Secretary of
Cadence. Prior to joining Cadence, from 1994 to 1996, Mr. McKeithen served as Vice President, General Counsel
and Secretary of Strategic Mapping, Inc., a software company. From 1988 to 1994, Mr. McKeithen served as Vice
President, General Counsel and Secretary of Silicon Graphics, Inc.
24
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol CDNS. We have never
declared or paid any cash dividends on our common stock in the past, and we do not plan to pay cash dividends in the
foreseeable future. As of February 3, 2007, we had approximately 1,150 registered stockholders and approximately
58,715 beneficial owners of our common stock.
The following table sets forth the high and low sales price for Cadence common stock for each calendar quarter
in the two-year period ended December 30, 2006:
High
2006
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
Low
.....
.....
.....
.....
$
$
$
$
18.50
19.47
17.41
18.85
$
$
$
$
16.53
16.55
15.00
16.77
.....
.....
.....
.....
$
$
$
$
15.00
14.80
16.31
18.30
$
$
$
$
12.96
13.50
13.80
15.59
The following graph compares the cumulative 5-year total return to shareholders of Cadence Design Systems,
Inc.’s common stock relative to the cumulative total returns of the S & P 500 Index, the NASDAQ Composite Index
and the S & P Information Technology Index. The graph assumes that the value of the investment in the company’s
common stock and in each of the indexes (including reinvestment of dividends) was $100 on December 29, 2001
and tracks it through December 30, 2006.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cadence Design Systems, Inc., The S & P 500 Index,
The NASDAQ Composite Index And The S & P Information Technology Index
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/29/01
12/28/02
1/3/04
1/1/05
12/31/05
12/30/06
Cadence Design Systems, Inc.
S & P 500
NASDAQ Composite
S & P Information Technology
* $100 invested on 12/29/01 in stock or on 12/31/01 in index-incuding reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright · 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
December 29,
2001
December 28,
2002
January 3,
2004
January 1,
2005
December 31,
2005
December 30,
2006
Cadence Design Systems, Inc.
100.00
54.38
81.52
61.65
75.54
79.96
S & P 500
NASDAQ Composite
100.00
100.00
77.90
71.97
100.24
107.18
111.15
117.07
116.61
120.50
135.03
137.02
S & P Information Technology
100.00
62.59
92.14
94.50
95.44
103.47
26
SALES OF UNREGISTERED EQUITY SECURITIES
On December 19, 2006, we issued $250.0 million principal amount of 1.375% Convertible Senior Notes Due
2011, or the 2011 Notes, and $250.0 million of 1.500% Convertible Senior Notes Due 2013, or the 2013 Notes and
collectively, the Convertible Senior Notes, to three initial purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional buyers pursuant to SEC Rule 144A. See the discussion under
the heading “Liquidity and Capital Resources – Other Factors Affecting Liquidity and Capital Resources” below
for an additional description of the Convertible Senior Notes, including the aggregate offering price, the aggregate
underwriting discounts and the terms of conversion of the Convertible Senior Notes.
On December 19, 2006, we also sold warrants to various parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private placement pursuant to Section 4(2) of the Securities
Act. See the discussion under the heading “Liquidity and Capital Resources – Other Factors Affecting Liquidity
and Capital Resources” below for an additional description of the warrants, including the aggregate proceeds
received by us and the terms of conversion of the warrants.
ISSUER PURCHASES OF EQUITY SECURITIES
In August 2001, our Board of Directors authorized a program to repurchase shares of our common stock in the
open market with a value of up to $500.0 million in the aggregate, which amount was exhausted during February
2006. In February 2006, our Board of Directors authorized a new program to repurchase shares of our common
stock with a value of up to $500.0 million in the aggregate. In November 2006, our Board of Directors authorized an
additional program to repurchase shares of our common stock with a value of up to $500.0 million in the aggregate.
The following table sets forth the repurchases we made during the three months ended December 30, 2006:
Period
October 1, 2006 –
November 4, 2006 . . . .
November 5, 2006 –
December 2, 2006 . . . .
December 3, 2006 –
December 30, 2006 . . .
Total . . . . . . . . . . . . .
Total Number
of Shares
Purchased *
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
Average
Price Paid
Per Share
Maximum Dollar
Value of Shares that
May Yet
Be Purchased Under
Publicly Announced
Plans or Programs *
(In millions)
2,019,588
$
17.94
1,900,000
$
229.4
4,101,386
$
18.66
4,099,953
$
152.9
7,063,949
$
18.08
6,917,000
$
527.8
13,184,923 $
18.24
12,916,953
* Shares purchased that were not part of our publicly announced repurchase program represent the surrender of
shares of restricted stock to pay income taxes due upon vesting, and do not reduce the dollar value that may
yet be purchased under our publicly announced repurchase programs.
27
Item 6. Selected Financial Data – Unaudited
The following selected consolidated financial data should be read in conjunction with our Consolidated
Financial Statements and the Notes thereto and the information contained in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of
future results.
2006
Five fiscal years ended December 30, 2006
2005
2004
2003
2002
(In thousands, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from operations * . . . . .
Other income (expense), net . . . . . . . .
Net income (loss) *. . . . . . . . . . . . . . .
Net income (loss) per share – assuming
dilution * . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . .
Convertible notes . . . . . . . . . . . . . . . .
Other long-term debt. . . . . . . . . . . . . .
Stockholders’ equity . . . . . . . . . . . . . .
$1,483,895
$ 224,592
$ 70,402
$ 142,592
$1,329,192
$ 118,832
$ 15,097
$ 49,343
$1,197,480
$ 104,148
$ (11,513)
$ 74,474
$1,119,484
$ (21,516)
$ (4,047)
$ (17,566)
$1,287,943
$ 160,579
$ (13,756)
$ 60,339
$
0.46
$3,442,822
$ 730,385
$
---$1,699,291
$
0.16
$3,401,312
$ 420,000
$ 128,000
$1,844,704
$
0.25
$2,989,839
$ 420,000
$
---$1,699,970
$
(0.07)
$2,817,902
$ 420,000
$
61
$1,572,281
$
0.23
$2,426,623
$
---$ 52,659
$1,644,030
* We adopted SFAS No. 123R, “Share-Based Payment” on January 1, 2006 using the modified prospective
transition method. Using the modified prospective transition method, we began recognizing compensation
expense for equity-based awards granted on or after January 1, 2006 and unvested awards granted prior to
January 1, 2006.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K. Certain of such statements, including, without
limitation, statements regarding the extent and timing of future revenues and expenses and customer demand,
statements regarding the deployment of our products, statements regarding our reliance on third parties and other
statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forwardlooking statements. These statements are predictions based upon our current expectations about future events.
Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in
these statements. We refer you to the “Competition,” “Proprietary Technology,” “Risk Factors,” “Results of
Operations,” “Disclosures About Market Risk” and “Liquidity and Capital Resources” sections contained in this
Annual Report and the risks discussed in our other SEC filings, which identify important risks and uncertainties that
could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this
Annual Report. All subsequent written or spoken forward-looking statements attributable to our company or
persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forwardlooking statements included in this Annual Report are made only as of the date of this Annual Report. We do not
intend, and undertake no obligation, to update these forward-looking statements.
Overview
We develop electronic design automation, or EDA, software and hardware. We license software, sell or lease
hardware technology, provide maintenance for our software and hardware and provide design and methodology
services throughout the world to help manage and accelerate electronics product development processes. Our broad
range of products and services are used by the world’s leading electronics companies to design and develop complex
integrated circuits, or ICs, and personal and commercial electronics systems.
28
With the addition of emerging nanometer design considerations to the already burgeoning set of traditional
design tasks, complex SoC or IC design can no longer be accomplished using a collection of discrete design tools.
What previously consisted of sequential design activities must be merged and accomplished nearly simultaneously
without time-consuming data translation steps. We combine our design technologies into “platforms” for four major
design activities: functional verification, digital IC design, custom IC design and system interconnect. The four
Cadence design platforms are Incisive functional verification, Encounter digital IC design, Virtuoso custom design
and Allegro system interconnect platforms. In addition, we augment these platform product offerings with a
comprehensive set of DFM products that service both the digital and custom IC design flows. These four platforms,
together with our DFM products, comprise our primary product lines.
Functional verification was the fastest growing product group of our business in 2006, driven by our Incisive
verification solutions. We offer a complete solution for verification management from planning to closure. During
2006, we also introduced a significant upgrade of our Virtuoso platform. An early adopter program for this platform
helped stimulate demand. This release is the most significant upgrade to the custom product line in many years.
Finally, in late 2006 we introduced the Logic Design Team solution, which combines technology from our Incisive
verification and Encounter digital design platforms to create an integrated, front-end environment for logic
designers.
We have identified certain items that management uses as performance indicators to manage our business,
including revenue, certain elements of operating expenses and cash flow from operations, and we describe these
items more fully below under the heading “Results of Operations” below.
Critical Accounting Estimates
In preparing our Consolidated Financial Statements, we make assumptions, judgments and estimates that can
have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets
and liabilities on our Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical
experience and various other factors that we believe to be reasonable under the circumstances. Actual results could
differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our
assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments
and estimates involved in the accounting for revenue recognition, accounting for income taxes, restructuring
charges and valuation of stock-based awards have the greatest potential impact on our Consolidated Financial
Statements; therefore, we consider these to be our critical accounting estimates. Historically, our assumptions,
judgments and estimates relative to our critical accounting estimates have not differed materially from actual
results. For further information on our significant accounting policies, see Note 2 to our Consolidated Financial
Statements.
Revenue recognition
We apply the provisions of Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended
by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,”
to all product revenue transactions where the software is not incidental. We also apply the provisions of SFAS No. 13,
“Accounting for Leases,” to all hardware lease transactions. We recognize revenue when persuasive evidence of an
arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting
receivable is probable, and vendor-specific objective evidence of fair value, or VSOE, exists.
We license software using three different license types:
•
•
•
Subscription licenses;
Term licenses; and
Perpetual licenses.
Subscription licenses – Our subscription license arrangements offer our customers the right to:
•
Access and use all software products delivered at the outset of an arrangement throughout the entire term
of the arrangement, generally two to three years, with no rights to return;
29
•
•
Use unspecified additional software products that become commercially available during the term of the
arrangement; and
Remix among the software products delivered at the outset of the arrangement, as well as the right to
remix into other unspecified additional software products that may become available during the term of
the arrangement, so long as the cumulative value of all products in use does not exceed the total license
fee determined at the outset of the arrangement. These remix rights may be exercisable multiple times
during the term of the arrangement. The right to remix all software products delivered pursuant to the
license agreement is not considered an exchange or return of software because all software products have
been delivered and the customer has the continuing right to use them.
In general, revenue associated with subscription licenses is recognized ratably over the term of the license
commencing upon the later of the effective date of the arrangement or delivery of the software product. Subscription
license revenue is allocated to product and maintenance revenue. The allocation to maintenance revenue is based on
vendor specific objective evidence, or VSOE, of fair value of the undelivered maintenance that was established in
connection with the sale of our term licenses.
Term licenses – Our term license arrangements offer our customers the right to:
•
•
Access and use all software products delivered at the outset of an arrangement throughout the entire term
of the arrangement, generally two to three years, with no rights to return; and
Remix among the software products delivered at the outset of the arrangement, so long as the cumulative
value of all products in use does not exceed the total license fee determined at the outset of the
arrangement. These remix rights may be exercisable multiple times during the term of the arrangement.
The right to remix all software products delivered pursuant to the license agreement is not considered an
exchange or return of software because all software products have been delivered and the customer has the
continuing right to use them. In general, revenue associated with term licenses is recognized upon the later of the
effective date of the arrangement or delivery of the software product.
Perpetual licenses – Our perpetual licenses consist of software licensed on a perpetual basis with no right to
return or exchange the licensed software. In general, revenue associated with perpetual licenses is recognized upon
the later of the effective date of the license or delivery of the licensed product.
Persuasive evidence of an arrangement – Generally, we use a contract signed by the customer as evidence of
an arrangement for subscription and term licenses and hardware leases. If a contract signed by the customer does not
exist, we have historically used a purchase order as evidence of an arrangement for perpetual licenses, hardware
sales, maintenance renewals and small fixed-price service projects, such as training classes and small methodology
service engagements of approximately $10,000 or less. For all other service engagements, we use a signed
professional services agreement and a statement of work to evidence an arrangement. In cases where both a signed
contract and a purchase order exist, we consider the signed contract to be the most persuasive evidence of the
arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship,
together with binding purchase orders from the distributor on a transaction-by-transaction basis.
Product delivery – Software and the corresponding access keys are generally delivered to customers electronically. Electronic delivery occurs when we provide the customer access to the software. Occasionally, we will
deliver the software on a compact disc with standard transfer terms of free-on-board, or F.O.B., shipping point. Our
software license agreements generally do not contain conditions for acceptance. With respect to hardware, delivery
of an entire system is deemed to occur upon its successful installation. For certain hardware products, installation is
the responsibility of the customer, as the system is fully functional at the time of shipment. For these products,
delivery is deemed to be complete when the products are shipped with freight terms of F.O.B. shipping point.
Fee is fixed or determinable – We assess whether a fee is fixed or determinable at the outset of the arrangement,
primarily based on the payment terms associated with the transaction. We have established a history of collecting
under the original contract without providing concessions on payments, products or services. For our installment
contracts that do not include a substantial up front payment, we may only determine that a fee is fixed or
determinable if the arrangement has payment periods that are equal to or less than the term of the licenses and the
30
payments are collected in equal or nearly equal installments, when evaluated over the entire term of the
arrangement.
Significant judgment is involved in assessing whether a fee is fixed or determinable. We must also make these
judgments when assessing whether a contract amendment to a term arrangement (primarily in the context of a
license extension or renewal) constitutes a concession. Our experience has been that we are able to determine
whether a fee is fixed or determinable for term licenses. While we do not expect that experience to change, if we no
longer were to have a history of collecting under the original contract without providing concessions on term
licenses, revenue from term licenses would be required to be recognized when payments under the installment
contract become due and payable. Such a change could have a material impact on our results of operations.
Collection is probable – We assess the probability of collecting from each customer at the outset of the
arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. We have concluded that collection is not probable for license arrangements executed with customers in
certain countries. If in our judgment collection of a fee is not probable, we defer the revenue until the uncertainty is
removed, which generally means revenue is recognized upon our receipt of cash payment. Our experience has been
that we are able to estimate whether collection is probable. While we do not expect that experience to change, if we
were to determine that collection is not probable for any license arrangement, particularly those with installment
payment terms, revenue from such license would be recognized generally upon the receipt of cash payment. Such a
change could have a material impact on our results of operations.
Vendor-specific objective evidence of fair value – Our VSOE for certain product elements of an arrangement is
based upon the pricing in comparable transactions when the element is sold separately. VSOE for maintenance is
generally based upon the customer’s stated annual renewal rates. VSOE for services is generally based on the price
charged when the services are sold separately. For multiple element arrangements, VSOE must exist to allocate the
total fee among all delivered and undelivered elements of a term or perpetual license arrangement. If VSOE does not
exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence does exist for the undelivered elements, or until all elements
are delivered, whichever is earlier. If VSOE of all undelivered elements exists but VSOE does not exist for one or
more delivered elements, revenue is recognized using the residual method. Under the residual method, the VSOE of
the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue as
the elements are delivered. Our experience has been that we are able to estimate VSOE.
Finance fee revenue – Finance fees result from discounting to present value the product revenue derived from
our installment contracts in which the payment terms extend beyond one year from the effective date of the contract.
Finance fees are recognized using a method that approximates the effective interest method over the relevant license
term and are classified as product revenue. Finance fee revenue represented approximately 2% of total revenue for
each of the years ended December 30, 2006, December 31, 2005 and January 1, 2005. Upon the sale of an
installment contract, we recognize the remaining finance fee revenue associated with the installment contract.
Services revenue – Services revenue consists primarily of revenue received for performing design and
methodology services. These services are not related to the functionality of the products licensed. Revenue from
service contracts is recognized either on the time and materials method, as work is performed, or on the
percentage-of-completion method. For contracts with fixed or not-to-exceed fees, we estimate on a monthly basis
the percentage-of-completion, which is based on the completion of milestones relating to the arrangement. We have
a history of accurately estimating project status and the costs necessary to complete projects. A number of internal
and external factors can affect our estimates, including labor rates, utilization and efficiency variances and
specification and testing requirement changes. If different conditions were to prevail such that accurate estimates
could not be made, then the use of the completed contract method would be required and the recognition of all
revenue and costs would be deferred until the project was completed. Such a change could have a material impact on
our results of operations.
Accounting for income taxes
We provide for the effect of income taxes in our Consolidated Financial Statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income tax expense (benefit) is recognized
31
for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the
tax consequences of events that have been recognized in an entity’s financial statements or tax returns.
We must make significant assumptions, judgments and estimates to determine our current provision for
income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our deferred
tax assets. Our judgments, assumptions and estimates relating to the current provision for income taxes take into
account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits
conducted by foreign and domestic tax authorities. Changes in tax laws or our interpretation of tax laws and
developments in current and future tax audits could significantly impact the amounts provided for income taxes in
our results of operations, financial position or cash flows. Our assumptions, judgments and estimates relating to the
value of our net deferred tax assets take into account predictions of the amount and category of future taxable
income from potential sources including tax planning strategies that would, if necessary, be implemented to prevent
a loss carryforward or tax credit carryforward from expiring unused. Actual operating results and the underlying
amount and category of income in future years could render our current assumptions, judgments and estimates of
recoverable net deferred taxes inaccurate, thus materially affecting our consolidated financial position or results of
operations.
Restructuring charges
We account for restructuring charges in accordance with SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,” as amended. From fiscal 2001 through fiscal 2005, we undertook significant
restructuring initiatives. All restructuring activities initiated prior to fiscal 2003 were accounted for in accordance
with Emerging Issues Task Force, or EITF, No. 94-3, “Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and EITF
No. 88-10, “Costs Associated with Lease Modifications or Terminations.” For restructuring activities initiated after
fiscal 2002, we accounted for the leased facilities in accordance with SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” In addition, for all periods presented, we accounted for the assetrelated portions of these restructurings in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” For all periods presented, the severance and benefits charges were accounted for in
accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits – An Amendment of FASB
Statements No. 5 and 43.”
These restructuring initiatives have required us to make a number of estimates and assumptions related to
losses on excess facilities vacated or consolidated, particularly estimating when, if at all, we will be able to sublet
vacated facilities and, if we do, the sublease terms. Closure and space reduction costs that are part of our
restructuring charges include payments required under leases, less any applicable estimated sublease income after
the facilities are abandoned, lease buyout costs and certain contractual costs to maintain facilities during the
abandonment period.
We regularly evaluate the adequacy of our restructuring accrual, and adjust the balance based on changes in
estimates and assumptions. We may incur future charges for new restructuring activities as well as changes in
estimates to amounts previously recorded.
Valuation of stock-based awards
We account for stock-based compensation in accordance with the fair value recognition provisions of
SFAS No. 123R, “Share-Based Payment.” Under SFAS No. 123R, stock-based compensation expense is measured
at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining
the fair value of stock-based awards at the grant date requires judgment, including estimating the expected volatility
of our stock, the expected term of stock options, the risk-free interest rate for the period, expected dividends and
expected forfeitures. The computation of the expected volatility assumption used in the Black-Scholes pricing
model for option grants is based on implied volatility calculated using an average of the volatility of publicly traded
options for our common stock and our 2023 Notes. We use this approach to determine volatility because options for
our common stock are actively traded, the market prices of both the traded options and underlying shares are
measured at a similar point in time to each other and on a date reasonably close to the grant date of the employee
32
stock options, the traded options have exercise prices that are both near-the-money and close to the exercise price of
the employee stock options, and the remaining maturities of the traded options on which the estimate is based are at
least one year. When establishing the expected life assumption, we review annual historical employee exercise
behavior with respect to option grants having similar vesting periods. In addition, judgment is also required in
estimating the amount of stock-based awards that we expect to be forfeited. We calculate a separate expected
forfeiture rate for both stock options and restricted stock issuances based on historical trends. The valuation of all
options and the expected forfeiture rates for options and restricted stock are calculated based on one employee pool
as there is no significant difference in exercise behavior between classes of employees. If actual results differ
significantly from these estimates, stock-based compensation expense and our results of operations could be
materially affected.
Results of Operations
We primarily generate revenue from licensing our EDA software, selling or leasing our hardware technology,
providing maintenance for our software and hardware and providing design and methodology services. We
principally utilize three license types: subscription, term and perpetual. The different license types provide a
customer with different terms of use for our products, such as:
•
•
•
The right to access new technology;
The duration of the license; and
Payment terms.
Customer decisions regarding these aspects of license transactions determine the license type, timing of
revenue recognition and potential future business activity. For example, if a customer chooses a fixed term of use,
this will result in either a subscription or term license. A business implication of this decision is that, at the
expiration of the license period, the customer must decide whether to continue using the technology and therefore
renew the license agreement. Because larger customers generally use products from two or more of our five product
groups, rarely will a large customer completely terminate its relationship with us at expiration of the license. See the
discussion under the heading “Critical Accounting Estimates” above for an additional description of license types
and timing of revenue recognition.
A substantial portion of our revenue is recognized over multiple periods. As a result, we do not believe that
pricing volatility has been a material component of the change in our revenue from period to period.
The amount of revenue recognized in future periods will depend on, among other things, the terms and timing
of our contract renewals or additional product sales with existing customers, the size of such transactions and sales
to new customers.
The value and duration of contracts, and consequently product revenue recognized, is affected by the
competitiveness of our products. Product revenue recognized in any period is also affected by the extent to which
customers purchase subscription, term or perpetual licenses, and the extent to which contracts contain flexible
payment terms. The timing of revenue recognition is also affected by changes in the extent to which existing
contracts contain flexible payment terms and by changes in contractual arrangements (e.g., subscription to term)
with existing customers.
Revenue and Revenue Mix
We analyze our software and hardware businesses by product group, combining revenues for both product and
maintenance because of their interrelationship. We have formulated a design solution strategy that combines our
design technologies into “platforms,” which are included in the various product groups described below.
Our product groups are:
Functional Verification: Products in this group, which include the Incisive functional verification platform,
are used to verify that the high level, logical specification of an IC design is correct.
Digital IC Design: Products in this group, which include the Encounter digital IC design platform, are used to
accurately convert the high-level, logical specification of a digital IC into a detailed physical blueprint and then
33
detailed design information showing how the IC will be physically implemented. This data is used for creation of
the photomasks used in chip manufacture.
Custom IC Design: Our custom design products, which include the Virtuoso custom design platform, are used
for ICs that must be designed at the transistor level, including analog, radio frequency, memories, high performance
digital blocks and standard cell libraries. Detailed design information showing how an IC will be physically
implemented is used for creation of the photomasks used in chip manufacture.
System Interconnect: This product group consists of our PCB and IC package design products, including the
Allegro and OrCAD products. The Allegro system interconnect platform offering focuses on system interconnect
design platform, which enables consistent co-design of ICs, IC packages and PCBs, while the OrCAD line focuses
on cost-effective, entry-level PCB solutions.
Design for Manufacturing: Included in this product group are our physical verification and analysis products.
These products are used to analyze and verify that the physical blueprint of the integrated circuit has been
constructed correctly and can be manufactured successfully.
Revenue by Year
The following table shows our revenue for the fiscal years 2006, 2005 and 2004 and the percentage change in
revenue between years:
% Change
2006
Product . . . . . . . . . . . . .
Services . . . . . . . . . . . .
Maintenance . . . . . . . . .
$
Total revenue . . . . .
$
2005
(In millions)
982.7 $
134.9
366.3
1,483.9
$
2004
2006 vs. 2005 2005 vs. 2004
851.5 $
126.2
351.5
729.8
137.0
330.7
15%
7%
4%
17%
(8)%
6%
1,329.2 $
1,197.5
12%
11%
2006 compared to 2005
Product revenue was higher in 2006, as compared to 2005, primarily because of increased revenue from
licenses for Functional Verification and Custom IC Design products, partially offset by a small decrease in revenue
from licenses for Design for Manufacturing products. Functional verification was the fastest growing platform in
2006. Services revenue increased in 2006 as compared to 2005 due to an increase in utilization and realization rates
for our services personnel.
2005 compared to 2004
Product revenue was higher in 2005, as compared to 2004, primarily because of increased revenue from
licenses for Digital IC Design, Functional Verification and Custom IC products. Services revenue was lower in
2005, as compared to 2004, due to our reduced capacity to satisfy demand for our design services after having
implemented certain restructuring activities.
34
Revenue by Product Group
The following table shows the percentage of product and related maintenance revenue contributed by each of
our five product groups, and Services and other in fiscal 2006, 2005 and 2004:
2006
2005
2004
Functional Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Digital IC Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Custom IC Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
System Interconnect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Design for Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24%
24%
27%
9%
7%
9%
21%
28%
25%
8%
9%
9%
17%
25%
27%
9%
9%
13%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
As described under the heading “Critical Accounting Estimates” above, certain of our licenses allow
customers the ability to remix among software products. Additionally, we have licensed a combination of our
products to customers with the actual product selection and number of licensed users to be determined at a later
date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected
usage of our products by these customers. The actual usage of our products by these customers may differ and
therefore the revenue allocated in the above table may differ.
Although we believe the methodology of allocating revenue to product groups is reasonable, there can be no
assurance that such allocated amounts reflect the amounts that would result had the customer individually licensed
each specific software solution at the onset of the arrangement. However, during the term of the arrangement, we
reevaluate the allocation of revenue based on actual deployment of our products.
The decrease in percentage of Services and other in 2005, as compared to 2004, is primarily due to
$11.0 million of revenue recognized from the sale of IP in 2004. This sale of IP in 2004 is included in Services
and other in the preceding table and in Product revenue in the accompanying Consolidated Income Statements.
Revenue by Geography
% Change
2006
United States . . . . . . . . .
Other North America . . .
Europe . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . .
Total revenue . . . . .
$
$
2005
(In millions)
765.1 $
31.3
284.4
247.9
155.2
1,483.9 $
613.2 $
20.3
245.0
333.2
117.5
1,329.2 $
2004
2006 vs. 2005 2005 vs. 2004
598.9
27.0
261.9
191.2
118.5
1,197.5
25%
54%
16%
(26)%
32%
12%
2%
(25)%
(6)%
74%
(1)%
11%
Revenue by Geography as a Percentage of Total Revenue
2006
United States . . . . . . . . . . . . . . . . . .
Other North America . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . .
Asia. . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
..............................
..............................
..............................
..............................
..............................
52%
2%
19%
17%
10%
46%
2%
18%
25%
9%
50%
2%
22%
16%
10%
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
35
The rate of revenue change varies geographically primarily due to differences in the timing and size of term
licenses in those regions. No single customer accounted for 10% or more of total revenue in 2006, 2005 or 2004.
Changes in foreign currency exchange rates, primarily due to fluctuations of the Japanese yen in relation to the
United States dollar, caused our revenue to decrease by $12.0 million in 2006, as compared to 2005, and to decrease
by $5.7 million in 2005, as compared to 2004. Additional information about revenue and other financial information
by geography can be found in Note 21 to our Consolidated Financial Statements.
Stock-based Compensation Expense Summary
We adopted SFAS No. 123R on January 1, 2006, which resulted in an increase in stock-based compensation
expense of $64.1 million in 2006 as compared to 2005. Stock-based compensation expense is reflected throughout
our costs and expenses in fiscal 2006, 2005 and 2004 as follows:
2006
Cost of product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
(In millions)
$
---$
0.6
0.4
9.1
19.3
10.5
$ 39.9
$
........ $
0.2
........
4.0
........
2.5
........
23.9
........
50.9
........
22.5
. . . . . . . . $ 104.0
2004
0.1
1.4
0.9
7.5
17.1
4.4
31.4
Cost of Revenue
2006
Product . . . . . . . . .
Services . . . . . . . . .
Maintenance . . . . .
$
$
$
2005
66.8
96.5
63.8
% Change
2006 vs. 2005 2005 vs. 2004
2004
(In millions)
$
79.7
$
91.9
$
59.8
$
$
$
82.0
91.0
53.1
(16)%
5%
7%
(3)%
1%
13%
Cost of Revenue as a Percentage of Related Revenue
2006
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7%
72%
17%
2005
9%
73%
17%
2004
11%
66%
16%
Cost of product includes costs associated with the sale or lease of our hardware and licensing of our software
products. Cost of product primarily includes the cost of employee salary, benefits and other employee-related costs,
including stock-based compensation expense, amortization of acquired intangibles directly related to Cadence
products, the cost of technical documentation and royalties payable to third-party vendors. Cost of product
associated with our hardware products also includes materials, assembly labor and overhead. These additional
manufacturing costs make our cost of hardware product higher, as a percentage of revenue, than our cost of software
product.
A summary of Cost of product in fiscal 2006, 2005 and 2004 is as follows:
2006
Product related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortization of acquired intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cost of product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
36
2005
(In millions)
33.6 $ 29.1
$
33.2
50.6
66.8 $ 79.7
$
2004
38.0
44.0
82.0
2006 compared to 2005
Cost of product decreased $12.9 million in 2006 as compared to 2005, primarily due to:
•
•
A decrease of $17.4 million in amortization of acquired intangibles due to the full amortization of certain
acquired intangibles; partially offset by
An increase of $5.3 million in hardware costs attributable to increased hardware sales.
Cost of product depends primarily upon the extent to which we acquire intangible assets, acquire licenses and
incorporate third-party technology in our products that are licensed or sold in any given period, and the actual mix of
hardware and software product sales in any given period. Assuming no changes to our current portfolio of
intangibles, we expect the Amortization of acquired intangibles component of Cost of product to continue
decreasing as the amortization periods assigned upon the purchase of certain intangibles are completed.
Cost of services primarily includes employee salary, benefits and other employee-related costs, costs to
maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any.
Cost of services increased $4.6 million in 2006 as compared to 2005 primarily due to:
•
•
An increase of $3.4 million in stock-based compensation expense due to our adoption of
SFAS No. 123R; and
An increase of $1.2 million in salary, benefits and other employee-related costs.
Cost of maintenance includes the cost of customer services, such as hot-line and on-site support, employee
salary, benefits and other employee-related costs for certain employees, and documentation of maintenance
updates. Cost of maintenance increased $4.0 million in 2006 as compared to 2005 primarily due to:
•
•
An increase of $2.1 million in stock-based compensation due to our adoption of SFAS No. 123R; and
An increase of $1.0 million in salary, benefits and other employee-related costs.
2005 compared to 2004
Cost of product decreased $2.3 million in 2005, as compared to 2004, primarily due to:
•
•
•
A decrease of $13.5 million in the cost of hardware products sold as a result of sales of products with
lower costs; partially offset by
An increase of $6.6 million in amortization of intangibles due to an increase in acquired intangibles
associated with our acquisition of Verisity; and
An increase of $1.6 million in royalty expenses.
Cost of services increased $0.9 million in 2005, as compared to 2004, primarily due to:
•
•
•
An increase of $3.2 million in salary and benefits costs; partially offset by
A decrease of $1.5 million in other operating expenses; and
A decrease of $0.8 million in stock-based compensation.
Cost of maintenance increased $6.7 million in 2005, as compared to 2004, primarily due to:
•
•
An increase of $3.7 million in salary and benefit costs; and
An increase of $3.1 million in amortization of intangible assets.
Operating Expenses
2006
Marketing and sales . . . . . . . . $
Research and development . . .
General and administrative . . .
Total operating expenses. . $
405.6
460.1
143.3
1,009.0
2005
(In millions)
$
366.2 $
390.7
129.6
$
886.5 $
37
2004
333.1
368.1
87.9
789.1
% Change
2006 vs. 2005 2005 vs. 2004
11%
18%
11%
14%
10%
6%
47%
12%
Operating Expenses as a Percentage of Total Revenue
2006
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27%
31%
10%
2005
2004
28%
29%
10%
28%
31%
7%
Operating Expense Summary
2006 compared to 2005
Overall operating expenses increased $122.5 million in 2006, as compared to 2005, primarily due to:
•
•
An increase of $58.4 million in stock-based compensation expense due to our adoption of
SFAS No. 123R; and
An increase of $49.2 million in salary, benefits and other employee-related costs, primarily due to an
increased number of employees and increases in bonus and commission costs, in part due to our
acquisition of Verisity Ltd., or Verisity, in the second quarter of 2005.
2005 compared to 2004
Operating expenses increased $97.4 million in 2005, as compared to 2004, primarily due to:
•
•
•
•
•
An increase of $63.3 million in employee salary and benefit costs, primarily due to our acquisition of
Verisity and increased bonus and commission costs;
An increase of $9.9 million in stock-based compensation expense due to grants of restricted stock and the
assumption of options in our acquisitions;
An increase of $8.6 million in losses associated with the sale of installment contract receivables; and
An increase of $7.1 million in costs related to the retirement of our Executive Chairman and former
President and Chief Executive Officer in 2005; partially offset by
Our restructuring activities, as discussed below.
Marketing and Sales
2006 compared to 2005
Marketing and sales expenses increased $39.4 million in 2006, as compared to 2005, primarily due to:
•
•
•
An increase of $14.8 million in stock-based compensation expense due to our adoption of
SFAS No. 123R;
An increase of $18.2 million in employee salary, commissions, benefits and other employee-related
costs due to increased hiring of sales and technical personnel, and higher commissions earned resulting
from an increase in 2006 sales performance; and
An increase of $7.8 million in marketing programs and customer-focused conferences due to our new
marketing initiatives and increased travel to visit our customers.
2005 compared to 2004
Marketing and sales expenses increased $33.1 million in 2005, as compared to 2004, primarily due to:
•
•
•
An increase of $29.4 million in employee salary, commission and benefit costs due to increased hiring of
sales and technical personnel and higher employee bonuses and commissions; and
An increase of $1.6 million in stock-based compensation expense due to grants of restricted stock and the
assumption of options in our acquisitions; partially offset by
A decrease of $1.9 million in marketing program costs.
38
Research and Development
2006 compared to 2005
Research and development expenses increased $69.4 million in 2006, as compared to 2005, primarily due to:
•
•
•
•
An increase of $31.6 million in stock-based compensation expense due to our adoption of
SFAS No. 123R;
An increase of $28.3 million in employee salary, benefits and other employee-related costs due to
increased staffing to support product development and higher employee salaries;
An increase of $3.9 million in third-party development costs; and
An increase of $3.3 million in computer equipment lease costs and maintenance costs associated with
third-party software.
2005 compared to 2004
Research and development expense increased $22.6 million in 2005, as compared to 2004, primarily due to:
•
•
•
An increase of $24.0 million in employee salary and benefit costs, primarily due to our acquisition of
Verisity and increased staffing to support product development; and
An increase of $2.2 million in stock-based compensation expense due to grants of restricted stock and the
assumption of options in our acquisitions; partially offset by
A decrease of $3.9 million in depreciation expense.
General and Administrative
2006 compared to 2005
General and administrative expenses increased $13.7 million in 2006, as compared to 2005, primarily due to:
•
•
•
•
An increase of $12.0 million in stock-based compensation expense due to our adoption of
SFAS No. 123R; and
An increase of $9.6 million in losses on the sale of installment contract receivables due to higher discount
rates; partially offset by
A decrease of $7.1 million in costs related to the retirement of our Executive Chairman and former
President and Chief Executive Officer in 2005; and
A decrease of $3.6 million in bad debt expense.
2005 compared to 2004
General and administrative expense increased $41.7 million in 2005, as compared to 2004, primarily due to:
•
•
•
•
•
•
An increase of $9.9 million in employee salary and benefit costs due to higher employee salaries and
increased bonuses;
An increase of $8.6 million in losses on the sale of installment contract receivables due to an increase in
the number of sales of installment contract receivables;
An increase of $7.1 million in costs related to the retirement of our Executive Chairman and former
President and Chief Executive Officer in 2005;
An increase of $6.1 million in stock-based compensation expense due to grants of restricted stock and the
assumption of options in our acquisitions; and
An increase of $5.2 million in legal and consulting services; partially offset by
A decrease of $1.2 million in professional fees related to our annual audit and Sarbanes-Oxley
Section 404 compliance.
39
Amortization of Acquired Intangibles
2006
Amortization of acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23.1
2005
(In millions)
$ 47.8
2004
$
55.7
Assuming no changes to our current portfolio of intangibles, we expect the Amortization of acquired
intangibles to continue decreasing as the amortization periods assigned upon the purchase of certain intangibles
are completed.
2006 compared to 2005
Amortization of acquired intangibles decreased $24.7 million in 2006, as compared to 2005. Amortization of
acquired intangible assets from prior year acquisitions decreased $27.5 million during 2006 due to the full
amortization of certain acquired intangibles. This decrease was partially offset by $2.8 million of amortization of
intangibles acquired during 2006.
2005 compared to 2004
Amortization of acquired intangibles decreased $7.9 million in 2005, as compared to 2004. Amortization of
acquired intangible assets from prior year acquisitions decreased $21.0 million during 2005 due to the full
amortization of certain acquired intangibles. This decrease was partially offset by $13.1 million of amortization of
intangibles acquired during 2005.
Restructuring and Other Charges
We initiated a separate plan of restructuring in each year from 2001 through 2005 in an effort to operate more
efficiently while improving operating margins and cash flows. The restructuring plans initiated each year from 2001
through 2005, or the 2001 Restructuring, 2002 Restructuring, 2003 Restructuring, 2004 Restructuring and 2005
Restructuring, respectively, were intended to decrease costs through workforce reductions and facility and resource
consolidation, in order to improve our cost structure. The 2001 and 2002 Restructurings primarily related to our
design services business and certain other business or infrastructure groups throughout the world. The 2003
Restructuring, 2004 Restructuring and 2005 Restructuring were targeted at reducing costs throughout the company.
The 2004 Restructuring has been completed and there was no remaining balance accrued for this restructuring as of
December 30, 2006.
In addition, we have recorded estimated provisions for termination benefits and outplacement costs, long-term
asset impairments, and other restructuring costs. Each reporting period, we evaluate the adequacy of the lease loss
accrual for each plan of restructuring. We adjust the lease loss accrual for changes in real estate markets or other
factors that may affect estimated costs or sublease income. We also consider executed sublease agreements and
adjust the lease loss accrual if sublease income under the agreement differs from initial estimates.
During 2005, in conjunction with the workforce reduction in our European design services business, we
completed a sale-leaseback transaction involving land and a building in Livingston, Scotland. Proceeds from the
sale were $33.6 million and the total gain on the sale was $3.6 million. We leased back a portion of the facility for
the next two years and another portion for ten years, with an option to terminate the ten year lease after five years.
We deferred the gain on the sale and are recognizing the gain ratably over the maximum lease term of ten years.
40
A summary of restructuring and other charges by plan of restructuring in fiscal years 2006, 2005 and 2004 is as
follows:
Severance
and
Benefits
AssetRelated
Excess
Facilities
(In millions)
Other
Total
2006:
2005 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003, 2002 and 2001 Plans . . . . . . . . . . . . . . .
$
(0.1)
----
$
-------
$
---(0.7)
$
-------
$
(0.1)
(0.7)
Total 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(0.1)
$
----
$
(0.7)
$
----
$
(0.8)
$
20.8
(0.4)
----
$
2.4
-------
$
2.4
---10.1
$
----------
$
25.6
(0.4)
10.1
Total 2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
20.4
$
2.4
$
12.5
$
----
$
35.3
2004:
2004 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003, 2002 and 2001 Plans . . . . . . . . . . . . . . .
$
7.0
(1.3)
$
0.2
(4.0)
$
---2.2
$
9.4
----
$
16.6
(3.1)
Total 2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5.7
$
(3.8)
$
2.2
$
9.4
$
13.5
2005:
2005 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003, 2002 and 2001 Plans . . . . . . . . . . . . . . .
Due to the immateriality of the 2003 Restructuring, 2002 Restructuring and 2001 Restructuring, they have
been combined in the above table.
Frequently, asset impairments are based on significant estimates and assumptions, particularly regarding
remaining useful life and utilization rates. We may incur other charges in the future if management determines that
the useful life or utilization of certain long-lived assets has been reduced.
The initial facility closure and space reduction costs included in these restructurings were comprised of
payments required under leases, less any applicable estimated sublease income after the properties were abandoned,
lease buyout costs and other contractual charges. To estimate the initial lease loss, which is the loss after our cost
recovery efforts from subleasing all or part of a building, management made certain assumptions related to the time
period over which the relevant building would remain vacant and sublease terms, including sublease rates and
contractual common area charges.
As of December 30, 2006, our accrued estimate of the lease loss related to all restructuring activities initiated
since 2001 was $31.3 million. This amount may be adjusted in the future based upon changes in the assumptions
used to estimate the lease loss. Since 2001, we have recorded facilities consolidation charges, net of credits, of
$97.0 million under the 2001 through 2005 Restructurings related to space reductions or facility closures of 49
sites. As of December 30, 2006, 28 of these sites had been vacated and space reductions had occurred at the
remaining 21 sites. We expect to pay all of the facilities-related restructuring liabilities for all our restructuring plans
prior to 2016.
Because the restructuring charges and related benefits are derived from management’s estimates made during
the formulation of the restructurings, based on then-currently available information, our restructuring activities may
not achieve the benefits anticipated on the timetable or at the level contemplated. Demand for our products and
services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty.
Accordingly, additional actions, including further restructuring of our operations, may be required in the future.
Our workforce reduction activities related to the 2004 Restructuring and the 2005 Restructuring were
completed prior to December 31, 2005. We recorded a credit during the twelve months ended December 30,
2006 to remove the remaining severance and benefits accrual related to the 2005 Restructuring. The other activity
41
recorded in each of the restructuring plans for the year ended December 30, 2006 relates to payment of remaining
lease obligations net of sublease payments received and changes in estimate related to lease loss accruals.
We expect to incur an additional $1.0 million to $2.0 million of future costs in connection with the 2005
Restructuring and an additional $3.0 million to $5.0 million of future costs in connection with the 2003
Restructuring, primarily for facilities-related charges, which will be expensed as incurred. The actual amount
of additional costs incurred could vary depending on changes in market conditions and the timing of these
restructuring activities.
Write-off of Acquired In-Process Research and Development
Upon consummation of an acquisition, we immediately charge to expense any acquired in-process research
and development that has not yet reached technological feasibility and has no alternative future use. The value
assigned to acquired in-process research and development is determined by identifying research projects in areas for
which technological feasibility has not been established. The values are determined by estimating costs to develop
the acquired in-process research and development into commercially viable products, estimating the resulting net
cash flows from such projects and discounting the net cash flows back to their present value. The discount rates
utilized include a factor that reflects the uncertainty surrounding successful development of the acquired in-process
research and development.
The following table summarizes our write-offs of acquired in-process research and development charges in
fiscal 2006, 2005 and 2004:
2006
Verisity Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neolinear, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 2004 acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other 2006 acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
........ $
........
........
........
---------0.9
Total in process research and development . . . . . . . . . . . . . . . . . . . . . . . $
0.9
2004
(In millions)
$
9.4
$
---------$
9.4
$
---7.0
2.0
---9.0
The following table summarizes, as of December 30, 2006, the status of in-process research and development
acquired in fiscal 2006, 2005 and 2004:
Discount
Rates
Verisity Inc. . . . . . . . . . . . . . . .
Neolinear, Inc. . . . . . . . . . . . . .
Other 2004 acquisition . . . . . . .
Other 2006 acquisition . . . . . . .
19% to 32%
28%
30%
33%
Commercial
Feasibility
December
December
December
January
2006
2004
2004
2007
Total Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Remaining
Expenditures
Expenditures
Incurred to
to Complete
Complete
In-Process
In-Process
Research and
Research and
Development
Development
(In millions)
$
4.3
$
---7.2
---0.8
---0.3
---$
12.6
$
----
Loss on Extinguishment of Debt
We recorded a Loss on extinguishment of debt of $40.8 million during the year ended December 30, 2006,
which includes a premium paid to repurchase a portion of the 2023 Notes of $38.9 million and a write-off of the
related portion of unamortized deferred costs of issuing the 2023 Notes of $1.9 million.
42
Interest Expense
2006
2005
2004
(In millions)
12.3 $
5.4
$
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6.2
2006 compared to 2005
Interest expense increased $6.9 million in 2006, as compared to 2005, primarily due to the increased interest of
$6.4 million related to the Term Loan.
2005 compared to 2004
Interest expense decreased $0.8 million in 2005, as compared to 2004, primarily due to a decrease of
$0.6 million in imputed interest on acquisition-related payments that occur over time.
Other income (expense), net
Other income (expense), net, for fiscal 2006, 2005 and 2004 was as follows:
2006
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gains on sale of non-marketable securities . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) on trading securities in Cadence’s non-qualified deferred
compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sale of non-marketable securities in Cadence’s non-qualified
deferred compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) on foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telos termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telos management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity loss from investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2005
2004
(In millions)
39.3 $ 15.6
$
5.6
19.9
2.5
5.7
6.7
9.2
6.8
3.7
6.6
(5.0)
2.7
1.9
---(0.9)
(1.2)
(2.5)
0.8
---4.5
(2.6)
(2.4)
(6.5)
(10.9)
(0.9)
---(1.4)
---(2.5)
(16.9)
(4.2)
0.4
70.4
$
15.1
$ (11.5)
The increases in interest income in 2006, as compared to 2005, and in 2005, as compared to 2004, were due to
increases in our Cash and cash equivalents balances as well as higher interest rates applicable to those balances.
In January 2006, KhiMetrics, Inc., a cost method investment held by Telos Venture Partners L.P., a limited
partnership in which we and our 1996 Deferred Compensation Venture Investment Plan Trust were the sole limited
partners, was sold for consideration of $6.53 per share of common stock. Under the purchase agreement, 10% of the
consideration was held in escrow to pay the cost of resolving any claims that could have been asserted against
KhiMetrics on or before the first anniversary of the acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of KhiMetrics in January and February 2007. No gain was
recorded on amounts held in escrow during 2006. In connection with this sale, we received approximately
$20.2 million in cash and recorded a gain of approximately $17.1 million during the year ended December 30, 2006.
In addition, our 1996 Deferred Compensation Venture Investment Plan Trust received $2.9 million in cash and
recorded a gain of $2.5 million during the year ended December 30, 2006.
43
Provision for Income Taxes
The provision for income taxes and the effective tax rates in fiscal 2006, 2005 and 2004 were as follows:
2006
2005
2004
(In millions, except percentages)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99.7 $ 79.1
$ 12.0
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41%
62%
14%
2006 compared to 2005
Our effective tax rate decreased in 2006, as compared to 2005, primarily due to the $30.1 million of nonrecurring federal, state and foreign income taxes incurred upon our 2005 repatriation of $500.0 million of certain
foreign earnings under the American Jobs Creation Act, which increased the 2005 annual effective tax rate by
approximately 23 percentage points.
2005 compared to 2004
Our effective tax rate increased in 2005, as compared to 2004, primarily due to the non-recurring income taxes
related to our 2005 repatriation of certain foreign earnings, and an increase in foreign income tax expense from
operations in 2005.
Outlook for 2007
In July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109,” which prescribes a new recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is effective for fiscal year 2007. The cumulative effect of applying
FIN No. 48 will be reported as an adjustment to the opening balance of retained earnings (or other appropriate
components of equity or net assets on our Consolidated Balance Sheet) for fiscal year 2007. We are currently
studying the transition effects of adopting FIN No. 48 and we are not yet able to assess the impact of FIN No. 48 on
our 2007 financial statements and, therefore, we are not currently able to disclose the expected effect of its adoption
nor our outlook for the fiscal 2007 effective tax rate.
As of December 30, 2006, we had total net deferred tax assets of approximately $150.1 million. Realization of
the deferred tax assets will depend on generating sufficient taxable income of the appropriate character prior to the
expiration of certain net operating loss, capital loss and tax credit carryforwards. Although realization is not
assured, we believe it is more likely than not that the net deferred tax assets will be realized. The amount of the net
deferred tax assets, however, could be reduced or increased in the near term if actual facts, including the estimate of
future taxable income, differ from those estimated.
The IRS and other tax authorities regularly examine our income tax returns. In November 2003, the IRS
completed its field examination of our federal income tax returns for the tax years 1997 through 1999 and issued a
Revenue Agent’s Report, or RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year
period of approximately $143.0 million. The most significant of the disputed adjustments for the tax years 1997
through 1999 relates to transfer pricing arrangements that we have with a foreign subsidiary. We have filed a protest
to certain of the proposed adjustments with the Appeals Office of the IRS where the matter is currently being
considered.
In July 2006, the IRS completed its field examination of our federal income tax returns for the tax years 2000
through 2002 and issued an RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year
period of approximately $324.0 million. In November 2006, the IRS revised the proposed aggregate tax deficiency
for the three-year period to be approximately $318.0 million. The IRS is contesting our qualification for deferred
recognition of certain proceeds received from restitution and settlement in connection with litigation during the
period. The proposed tax deficiency for this item is approximately $152.0 million. The remaining proposed tax
44
deficiency of approximately $166.0 million is primarily related to proposed adjustments to our transfer pricing
arrangements that we have with foreign subsidiaries and to our deductions for foreign trade income. The IRS took
similar positions with respect to our transfer pricing arrangements in the prior examination period and may make
similar claims against our transfer pricing arrangements in future examinations. We have filed a timely protest with
the IRS and will seek resolution of the issues through the Appeals Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent with applicable tax laws and we are challenging
these proposed adjustments vigorously. The RARs are not final Statutory Notices of Deficiency but the IRS imposes
interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at rates published
by the IRS, which rates are adjusted quarterly and have been between four and ten percent since 1997.
Significant judgment is required in determining our provision for income taxes. The calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax regulations. In determining the
adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from
tax examinations including the RARs for the tax years 1997 through 2002. We provide for tax liabilities on our
Consolidated Balance Sheets unless we consider it probable that additional taxes will not be due. However, the
ultimate outcome of tax examinations, including the total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty. In addition, we cannot assure you that such amount
will not be materially different than that which is reflected in our historical income tax provisions and accruals.
Should the IRS or other tax authorities assess additional taxes as a result of a current or a future examination, we
may be required to record charges to operations in future periods that could have a material impact on our results of
operations, financial position or cash flows in the applicable period or periods.
Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our portfolio of Cash and cash
equivalents. While we are exposed to interest rate fluctuations in many of the world’s leading industrialized
countries, our interest income and expense is most sensitive to fluctuations in the general level of United States
interest rates. In this regard, changes in United States interest rates affect the interest earned on our Cash and cash
equivalents and costs associated with foreign currency hedges.
We invest in high quality credit issuers and, by policy, limit the amount of our credit exposure to any one issuer.
As part of our policy, our first priority is to reduce the risk of principal loss. Consequently, we seek to preserve our
invested funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in
only high quality credit securities that we believe to have low credit risk and by positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The short-term
interest-bearing portfolio of Cash and cash equivalents includes only marketable securities with active secondary or
resale markets to ensure portfolio liquidity.
45
All highly liquid investments with a maturity of three months or less at the date of purchase are considered to
be cash equivalents. Investments with maturities greater than three months are classified as available-for-sale and
are considered to be short-term investments. The carrying value of our interest-bearing instruments approximated
fair value as of December 30, 2006. The following table presents the carrying value and related weighted average
interest rates for our interest-bearing instruments, which are all classified as Cash and cash equivalents on our
Consolidated Balance Sheet as of December 30, 2006.
Carrying
Value
Average
Interest Rate
(In millions)
Interest-Bearing Instruments:
Commercial Paper – fixed rate . . . . . . . . . . . . . . . . . .
Cash – variable rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents – variable rate . . . . . . . . . . . . . . . . .
Cash equivalents – fixed rate . . . . . . . . . . . . . . . . . . .
Total interest-bearing instruments . . . . . . . . . . . . . .
................. $
.................
.................
.................
................. $
848.3
46.1
6.0
11.6
912.0
5.43%
2.85%
5.19%
1.64%
5.25%
Foreign Currency Risk
Our operations include transactions in foreign currencies and, therefore, we benefit from a weaker dollar, and
we are adversely affected by a stronger dollar relative to major currencies worldwide. The primary effect of foreign
currency transactions on our results of operations from a weakening United States dollar is an increase in revenue
offset by a smaller increase in expenses. Conversely, the primary effect of foreign currency transactions on our
results of operations from a strengthening United States dollar is a reduction in revenue offset by a smaller reduction
in expenses.
We enter into foreign currency forward exchange contracts with financial institutions to protect against
currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange
contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities
increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange
contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to
changes in foreign exchange rates. These forward contracts are not designated as accounting hedges under
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and, therefore, the unrealized
gains and losses are recognized in Other income, net, in advance of the actual foreign currency cash flows with the
fair value of these forward contracts being recorded as accrued liabilities or other assets.
Our policy governing hedges of foreign currency risk does not allow us to use forward contracts for trading
purposes. Our forward contracts generally have maturities of 90 days or less. The effectiveness of our hedging
program depends on our ability to estimate future asset and liability exposures. We enter into currency forward
exchange contracts based on estimated future asset and liability exposures. Recognized gains and losses with
respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount
of currency forward exchange contracts with actual underlying asset and liability exposures.
46
The following table provides information, as of December 30, 2006, about our forward foreign currency
contracts. The information is provided in United States dollar equivalent amounts. The table presents the notional
amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates
expressed as units of the foreign currency per United States dollar, which in some cases may not be the market
convention for quoting a particular currency. All of these forward contracts matured prior to January 12, 2007.
Notional
Principal
(In millions)
Forward Contracts:
Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
British pound sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European Union euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indian rupee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116.9
41.9
15.3
10.8
19.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
204.8
Estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.0
Weighted
Average
Contract
Rate
117.08
0.51
0.75
44.95
While we actively monitor our foreign currency risks, there can be no assurance that our foreign currency
hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of
operations, cash flows and financial position.
Equity Price Risk
1.375% Convertible Senior Notes Due 2011 and 1.500% Convertible Senior Notes Due 2013
In December 2006, we issued $250.0 million principal amount of 1.375% Convertible Senior Notes Due 2011,
or the 2011 Notes, and $250.0 million of 1.500% Convertible Senior Notes Due 2013, or the 2013 Notes and
collectively, the Convertible Senior Notes, to three initial purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional buyers pursuant to SEC Rule 144A. Concurrently with the
issuance of the Convertible Senior Notes, we entered into hedge transactions with various parties and in separate
transactions, sold warrants to various parties to reduce the potential dilution from the conversion of the Convertible
Senior Notes and to mitigate any negative effect such conversion may have on the price of our common stock. For an
additional description of the Convertible Senior Notes, including the hedge and warrants transactions, see the
discussion under the heading “Liquidity and Capital Resources — Factors Affecting Liquidity and Capital
Resources” below.
Zero Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, we issued $420.0 million principal amount of our 2023 Notes to two initial purchasers in a
private placement pursuant to Section 4(2) of the Securities Act for resale to qualified institutional buyers pursuant
to SEC Rule 144A. Concurrently with the issuance of the 2023 Notes, we entered into hedge transactions with one
of the initial purchasers and in a separate transaction, sold warrants to one of the initial purchasers to reduce the
potential dilution from the conversion of the 2023 Notes and to mitigate any negative effect such conversion may
have on the price of our common stock. For an additional description of the 2023 Notes, including the hedge and
warrants transactions, see the discussion under the heading “Liquidity and Capital Resources — Factors Affecting
Liquidity and Capital Resources” below.
Investments
We have a portfolio of equity investments that includes marketable equity securities and non-marketable
equity securities. Our equity investments are made primarily in connection with our strategic investment program.
47
Under our strategic investment program, from time to time we make cash investments in companies with
technologies that are potentially strategically important to us.
The fair value of our portfolio of available-for-sale marketable equity securities, which are included in Shortterm investments on the accompanying Consolidated Balance Sheets, was $23.7 million as of December 30, 2006
and $33.0 million as of December 31, 2005. While we actively monitor these investments, we do not currently
engage in any hedging activities to reduce or eliminate equity price risk with respect to these equity investments.
Accordingly, we could lose all or part of our investment portfolio of marketable equity securities if there is an
adverse change in the market prices of the companies we invest in.
Our investments in non-marketable equity securities would be negatively affected by an adverse change in
equity market prices, although the impact cannot be directly quantified. Such a change, or any negative change in
the financial performance or prospects of the companies whose non-marketable securities we own, would harm the
ability of these companies to raise additional capital and the likelihood of our being able to realize any gains or
return of our investments through liquidity events such as initial public offerings, acquisitions and private sales.
These types of investments involve a high degree of risk, and there can be no assurance that any company we invest
in will grow or will be successful or that we will be able to liquidate a particular investment when desired.
Accordingly, we could lose all or part of our investment.
Our investments in non-marketable equity securities had a carrying amount of $31.4 million as of December 30, 2006 and $37.9 million as of December 31, 2005. If we determine that an other-than-temporary decline in
fair value exists for a non-marketable equity security, we write down the investment to its fair value and record the
related write-down as an investment loss in our Consolidated Income Statements.
Liquidity and Capital Resources
As of and for the years ended
December 30,
2006
%
Change
December 31,
2005
%
Change
January 1,
2005
(In millions, except percentages)
Cash, cash equivalents and shortterm investments . . . . . . . . . .
Net working capital . . . . . . . . . .
Cash provided by operating
activities . . . . . . . . . . . . . . . .
Cash used for investing activities
Cash provided by (used for)
financing activities . . . . . . . . .
..
..
$
$
958.4
763.9
7%
14%
$
$
894.6
670.5
51%
29%
$
$
593.0
521.0
..
..
$
$
421.2
(111.8)
(1)%
(50)%
$
$
426.3
(222.7)
14%
4%
$
$
372.5
(215.0)
..
$
(233.9)
(214)%
$
205.3
(1,073)%
$
(21.1)
Cash, cash equivalents and short-term investments
As of December 30, 2006, our principal sources of liquidity consisted of $958.4 million of Cash and cash
equivalents and short-term investments, as compared to $894.6 million as of December 31, 2005 and $593.0 million
as of January 1, 2005. The primary sources of our cash in 2006 and 2005 were:
•
•
•
•
•
•
•
•
Customer payments under software licenses and from the sale or lease of our hardware products;
Customer payments for design and methodology services;
Borrowings under the Term Loan;
Proceeds from the sale of receivables and proceeds from the exercise of stock options;
Proceeds from the issuance of the Convertible Senior Notes in 2006;
Proceeds from the separate warrant sale transactions entered into in connection with the issuance of the
Convertible Senior Notes in 2006;
Proceeds from the termination of a portion of the hedge transactions originally entered into in connection
with the issuance of our 2023 Notes; and
Common stock purchases under our employee stock purchase plans.
48
Our primary uses of cash in 2006 and 2005 consisted of:
•
•
•
•
•
•
•
•
Payments relating to payroll, product, services and other operating expenses;
Payments of taxes;
Purchases of property, plant and equipment;
Payments of long-term debt and repurchases of a portion of the 2023 Notes;
Payments made to purchase the hedges in connection with our issuance of the Convertible Senior Notes;
Payments made to terminate a portion of the warrant transactions originally entered in connection with
the issuance of our 2023 notes;
Purchases of treasury stock; and
Payments related to business acquisitions.
Net working capital
Net working capital increased $93.4 million as of December 30, 2006, as compared to December 31, 2005,
primarily due to:
•
•
•
•
•
An increase of $73.0 million in Cash and cash equivalents;
A decrease of $40.8 million in Accounts payable and accrued liabilities;
A decrease of $13.0 million in Current portion of deferred revenue; partially offset by
A decrease of $43.6 million in Accounts receivable, net; and
A decrease of $9.2 million in Short-term investments.
Net working capital increased $149.5 million as of December 31, 2005, as compared to January 1, 2005,
primarily due to:
•
•
•
•
An increase of $301.6 million in Cash and cash equivalents and short-term investments; partially offset
by
A decrease of $102.0 million in Accounts receivable, net;
An increase of $22.6 million in Accounts payable and accrued liabilities; and
An increase of $32.0 million in Current portion of long-term debt.
Cash flows from operating activities
Cash flows from operating activities are provided by net income, adjusted for certain non-cash charges, as well
as changes in the balance of certain assets and liabilities. Our cash flows from operating activities are significantly
influenced by the payment terms set forth in our license agreements and by sales of our receivables.
We have entered into agreements whereby we may transfer accounts receivable to certain financing institutions
on a non-recourse or limited-recourse basis. These transfers are recorded as sales and accounted for in accordance
with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” During 2006, we transferred accounts receivable, net of the losses on the sale of the receivables,
totaling $180.6 million, which approximated fair value, to financing institutions on a non-recourse basis, as
compared to $192.1 million in 2005 and $30.1 million in 2004.
2006 compared to 2005
Net cash provided by operating activities decreased by $5.1 million in 2006, as compared to 2005. The
decrease was primarily due to:
•
•
•
•
•
•
An increase of $71.8 million in payments of Accounts payable and accrued liabilities;
A decrease of $68.3 million in cash received from the collection of Receivables and Installment contract
receivables; and
A decrease of $37.6 million in Depreciation and amortization; partially offset by
An increase of $93.2 million in net income;
An increase of $40.8 million in Loss on extinguishment of debt; and
An increase of $64.1 million in Stock-based compensation.
49
2005 compared to 2004
Net cash provided by operating activities increased by $53.8 million in 2005, as compared to 2004. The
increase was primarily due to:
•
•
•
•
•
An increase of $162.0 million in Proceeds from the sale of receivables; and
A decrease of $18.3 million in payments of Accounts payable and accrued liabilities; partially offset by
A decrease of $25.1 million in net income;
A decrease of $71.9 million in cash received from collection of Receivables and Installment contract
receivables; and
An increase of $14.8 million in Other assets.
Cash flows from investing activities
Our primary investing activities consisted of:
•
•
•
•
Purchases and proceeds from the sale of property, plant and equipment;
Purchases and proceeds from short-term investments;
Acquiring businesses, assets and intangibles; and
Investing in venture capital partnerships and equity investments.
In January 2006, KhiMetrics, Inc., a cost method investment held by Telos Venture Partners L.P., a limited
partnership in which we and our 1996 Deferred Compensation Venture Investment Plan Trust were the sole limited
partners, was sold for consideration of $6.53 per share of common stock. Under the purchase agreement, 10% of the
consideration was held in escrow to pay the cost of resolving any claims that could have been asserted against
KhiMetrics on or before the first anniversary of the acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of KhiMetrics in January and February 2007. No gain was
recorded on amounts held in escrow during 2006. In connection with this sale, we received approximately
$20.2 million in cash and recorded a gain of approximately $17.1 million during the year ended December 30, 2006.
In addition, our 1996 Deferred Compensation Venture Investment Plan Trust received $2.9 million in cash and
recorded a gain of $2.5 million during the year ended December 30, 2006.
2006 compared to 2005
Net cash used for investing activities decreased by $110.9 million in 2006, as compared to 2005. The decrease
was primarily due to:
•
•
•
•
A decrease of $180.8 million in Purchases of short-term investments; and
A decrease of $231.4 million in Cash paid in business combinations, net of cash acquired and acquisition
of intangibles; partially offset by
A decrease of $289.2 million in Proceeds from the sale of short-term investments; and
A decrease of $33.3 million in Proceeds from the sale of property, plant and equipment.
2005 compared to 2004
Net cash used for investing activities increased by $7.7 million in 2005, as compared to 2004. The increase was
primarily due to:
•
•
•
An increase of $182.0 million in Cash paid in business combinations and asset acquisitions, net of cash
acquired; partially offset by
An increase of $141.2 million in Proceeds from the sale of short-term investments, net of Purchases of
short-term investments; and
An increase of $30.0 million in Proceeds from the sale of property, plant and equipment.
Cash flows from financing activities
Financing cash flows consisted primarily of net proceeds from the issuance of the Convertible Senior Notes in
2006, including payments for the hedge transactions and the proceeds from the separate warrant transactions,
50
payments on the Term Loan in 2006, proceeds received from the Term Loan in 2005, the repurchase of treasury
stock and the issuance of stock under certain employee plans in both 2006 and 2005.
2006 compared to 2005
Net cash used for financing activities was $233.9 million in 2006, as compared to net cash provided by
financing activities of $205.3 million in 2005, a decrease of $439.2 million. The decrease was primarily due to:
•
•
•
•
•
•
•
•
An increase of $393.0 million in Purchases of treasury stock;
The repurchase of $228.5 million of the 2023 Notes;
A decrease of $160.0 million in Proceeds from Term Loan;
An increase of $131.9 million in Principal payments on long-term debt, primarily the Term Loan; and
An increase of $119.8 million in Purchase of call options, or hedges, in connection with the Convertible
Senior Notes; partially offset by
An increase of $500.0 million in Proceeds from issuance of the Convertible Senior Notes;
An increase of $55.9 million in Proceeds from sale of call options, or hedges, in connection with the 2023
Notes; and
An increase of $39.4 million in Proceeds from sale of common stock warrants in connection with the
Convertible Senior Notes.
2005 compared to 2004
Net cash provided by financing activities was $205.3 million in 2005, as compared to net cash used for
financing activities of $21.1 million in 2004, an increase of $226.4 million. The increase of cash provided by
financing activities was primarily due to:
•
•
•
An increase of $160.0 million in Proceeds from the Term Loan; and
An increase of $71.2 million in Proceeds from issuances of common stock; partially offset by
An increase of $7.0 million in Purchases of treasury stock.
Other Factors Affecting Liquidity and Capital Resources
Income Taxes
We provide for United States income taxes on the earnings of foreign subsidiaries unless the earnings are
considered permanently invested outside of the United States. As of December 30, 2006, the cumulative amount of
earnings upon which United States income taxes have not been provided was approximately $274.0 million. As of
December 30, 2006, the unrecognized deferred tax liability for these earnings was approximately $84.0 million.
The IRS and other tax authorities regularly examine our income tax returns. In November 2003, the IRS
completed its field examination of our federal income tax returns for the tax years 1997 through 1999 and issued a
Revenue Agent’s Report, or RAR, in which the IRS proposes to assess an aggregate tax deficiency for the three-year
period of approximately $143.0 million. In July 2006, the IRS completed its field examination of our federal income
tax returns for the tax years 2000 through 2002 and issued an RAR, in which the IRS proposes to assess an aggregate
tax deficiency for the three-year period of approximately $324.0 million. In November 2006, the IRS revised the
proposed aggregate tax deficiency for the three-year period to be approximately $318.0 million.
We believe that the proposed IRS adjustments are inconsistent with applicable tax laws and we are challenging
these proposed adjustments vigorously. The RARs are not final Statutory Notices of Deficiency but the IRS imposes
interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at rates published
by the IRS, which rates are adjusted quarterly and have been between four and ten percent since 1997.
For an additional description of the IRS examinations for the years 1997 through 1999 and 2000 through 2002,
see the discussion under the heading “Provision for Income Taxes” above.
51
Term Loan
In December 2005, our Irish subsidiary, Castlewilder, entered into a syndicated term facility agreement, or
Credit Agreement, with Banc of America Securities LLC as lead arranger, and Bank of America, N.A., as
Administrative Agent. The Credit Agreement provides for a three-year $160.0 million unsecured term loan, or Term
Loan. Under the terms of the Credit Agreement, Castlewilder, at its election, may prepay the loan, in whole or in
part, with no prepayment fee. During the year ended December 30, 2006, Castlewilder made quarterly principal
payments of $32.0 million, plus additional prepayments of $100.0 million of the principal amount due under the
loan, thereby reducing principal payments due under the Term Loan in 2007 and 2008. As of December 30, 2006,
scheduled principal payments on the Term Loan due during 2007 are $28.0 million.
1.375% Convertible Senior Notes Due 2011 and 1.500% Convertible Senior Notes Due 2013
In December 2006, we issued $250.0 million principal amount of 1.375% Convertible Senior Notes Due 2011,
or the 2011 Notes, and $250.0 million of 1.500% Convertible Senior Notes Due 2013, or the 2013 Notes, and
collectively, the Convertible Senior Notes, to three initial purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional buyers pursuant to SEC Rule 144A. We received net
proceeds of approximately $487.0 million after transaction fees of approximately $13.0 million, including
$12.0 million of underwriting discounts, that were recorded in Other long-term assets on the Consolidated Balance
Sheet as of December 30, 2006 and are being amortized to interest expense over the term of the Convertible Senior
Notes. A portion of the net proceeds totaling $228.5 million was used to purchase $189.6 million principal amount
of our Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the 2023 Notes.
Holders may convert their Convertible Senior Notes prior to maturity upon the occurrence of one of the
following events:
•
•
•
The price of our common stock reaches $27.50 during certain periods of time specified in the
Convertible Senior Notes;
Specified corporate transactions occur; or
The trading price of the Convertible Senior Notes falls below a certain threshold.
On and after November 2, 2011, in the case of the 2011 Notes, and November 1, 2013, in the case of 2013
Notes, until the close of business on the scheduled trading day immediately preceding the maturity date, holders
may convert their Convertible Senior Notes at any time, regardless of the foregoing circumstances. We may not
redeem the Convertible Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is 47.2813 shares of our common stock per $1,000
principal amount of Convertible Senior Notes, equivalent to a conversion price of approximately $21.15 per share of
our common stock. Upon conversion, a holder will receive the sum of the daily settlement amounts, calculated on a
proportionate basis for each day, during a specified observation period following the conversion date. The daily
settlement amount during each date of the observation period consists of:
•
•
Cash up to the principal amount of the note; and
Our common stock to the extent that the conversion value exceeds the amount of cash paid upon
conversion of the Convertible Senior Notes.
In addition, if a fundamental change occurs prior to maturity, we will, in certain cases, increase the conversion
rate by an amount up to $8.27 per share, for a holder that elects to convert its Convertible Senior Notes in connection
with such fundamental change, which amount will be paid entirely in cash. A fundamental change is any transaction
or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise) in connection with which more than 50% of our common stock is
exchanged for, converted into, acquired for or constitutes solely the right to receive, consideration which is not at
least 90% shares of common stock, or depositary receipts representing such shares, that are:
•
Listed on, or immediately after the transaction or event will be listed on, a United States national
securities exchange; or
52
•
Approved, or immediately after the transaction or event will be approved, for quotation on a United
States system of automated dissemination of quotations of securities prices similar to the NASDAQ
National Market prior to its designation as a national securities exchange.
As of December 30, 2006, none of the conditions allowing the holders of the Convertible Senior Notes to
convert had been met.
Interest on the Convertible Senior Notes began accruing in December 2006 and is payable semi-annually each
December 15th and June 15th.
Concurrently with the issuance of the Convertible Senior Notes, we entered into hedge transactions with
various parties whereby we have the option to purchase up to 23.6 million shares of our common stock at a price of
$21.15 per share, subject to adjustment. These options expire on December 15, 2011, in the case of the 2011 Notes,
and December 15, 2013, in the case of the 2013 Notes, and must be settled in net shares. The aggregate cost of these
hedge transactions was $119.8 million and has been recorded as a reduction to stockholders’ equity in accordance
with EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.” The estimated fair value of the hedges acquired in connection with the issuance of the
Convertible Senior Notes was $118.3 million as of December 30, 2006. Subsequent changes in the fair value of
these hedges will not be recognized as long as the instruments remain classified as equity.
In separate transactions, we also sold warrants to various parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private placement pursuant to Section 4(2) of the Securities
Act. The warrants expire on various dates from February 2012 through April 2012 in the case of the 2011 Notes, and
February 2014 through April 2014 in the case of the 2013 Notes, and must be settled in net shares. We received
$39.4 million in cash proceeds from the sale of these warrants, which has been recorded as a reduction to
stockholders’ equity in accordance with EITF No. 00-19. The estimated fair value of the warrants sold in connection
with the issuance of the Convertible Senior Notes was $42.6 million as of December 30, 2006. Subsequent changes
in the fair value of these warrants will not be recognized as long as the instruments remain classified as equity. The
warrants will be included in diluted earnings per share, or EPS, to the extent the impact is not considered antidilutive.
Zero Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, we issued $420.0 million principal amount of our 2023 Notes to two initial purchasers in a
private placement pursuant to Section 4(2) of the Securities Act for resale to qualified institutional buyers pursuant
to SEC Rule 144A. We received net proceeds of $406.4 million after transaction fees of $13.6 million that were
recorded in Other long-term assets and are being amortized to interest expense using the straight-line method over
five years, which is the duration of the first redemption period. The 2023 Notes were issued by us at par and bear no
interest. The 2023 Notes are convertible into our common stock initially at a conversion price of $15.65 per share,
which would result in an aggregate of 26.8 million shares issued upon conversion, subject to adjustment upon the
occurrence of specified events. In connection with the issuance of the Convertible Senior Notes in December 2006,
we repurchased $189.6 million principal amount of the 2023 Notes, reducing the aggregate number of shares to be
issued upon conversion to 14.7 million.
We may redeem for cash all or any part of the 2023 Notes on or after August 15, 2008 for 100.00% of the
principal amount. The holders of the 2023 Notes may require us to repurchase for cash all or any portion of their
2023 Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the
principal amount or on August 15, 2018 for 100.00% of the principal amount, by providing to the paying agent a
written repurchase notice. The repurchase notice must be delivered during the period commencing 30 business days
prior to the relevant repurchase date and ending on the close of business on the business day prior to the relevant
repurchase date. In addition, we may redeem for cash all or any part of the 2023 Notes on or after August 15, 2008
for 100.00% of the principal amount, except for those 2023 Notes that holders have required us to repurchase on
August 15, 2008 or on other repurchase dates, as described above.
53
Each $1,000 of principal of the 2023 Notes will initially be convertible into 63.8790 shares of our common
stock, subject to adjustment upon the occurrence of specified events. Holders of the 2023 Notes may convert their
2023 Notes prior to maturity only if:
•
•
•
•
The price of our common stock reaches $22.69 during certain periods of time specified in the 2023
Notes;
Specified corporate transactions occur;
The 2023 Notes have been called for redemption; or
The trading price of the 2023 Notes falls below a certain threshold.
In the event of a fundamental change in our corporate ownership or structure, the holders may require us to
repurchase all or any portion of their 2023 Notes for 100.00% of the principal amount. Upon a fundamental change
in our corporate ownership or structure, in certain circumstances we may choose to pay the repurchase price in cash,
shares of our common stock or a combination of cash and shares of our common stock. As of December 30, 2006,
none of the conditions allowing the holders of the 2023 Notes to convert had been met.
In connection with the issuance of the Convertible Senior Notes in December 2006, a portion of the proceeds
were used to purchase in the open market 2023 Notes with a principal balance of $189.6 million for a total purchase
price of $228.5 million. In connection with this purchase, we incurred expenses of $40.8 million for the early
extinguishment of debt. The loss on early extinguishment of debt included the call premium on the purchased 2023
Notes and the write-off of a portion of the unamortized deferred debt issuance costs.
Concurrently with the issuance of the 2023 Notes, we entered into hedge transactions with a financial
institution whereby we originally acquired options to purchase up to 26.8 million shares of our common stock at a
price of $15.65 per share. These options expire on August 15, 2008 and must be settled in net shares. The cost of the
hedge transactions to us was $134.6 million. In connection with the purchase of a portion of the 2023 Notes in
December 2006, we also sold 12.1 million of the hedges that were originally purchased in connection with the 2023
Notes and received proceeds of $55.9 million.
In addition, we sold warrants for our common stock to a financial institution for the purchase of up to
26.8 million shares of our common stock at a price of $23.08 per share. The warrants expire on various dates from
February 2008 through May 2008 and must be settled in net shares. We received $56.4 million in cash proceeds
from the sale of these warrants. In connection with the purchase of a portion of the 2023 Notes in December 2006,
we also purchased 12.1 million of the warrants for our common stock that were originally issued in connection with
the 2023 Notes at a cost of $10.2 million. The remaining outstanding warrants will be included in diluted EPS to the
extent the impact is not considered anti-dilutive.
As of December 30, 2006, the estimated fair value of the remaining hedges acquired in connection with the
issuance of the 2023 Notes was $68.3 million and the estimated fair value of the remaining warrants sold in
connection with the issuance of the 2023 Notes was $12.0 million. Subsequent changes in the fair value of these
hedge and warrant transactions will not be recognized as long as the instruments remain classified as equity.
Sale-leaseback Agreement
In January 2007, we completed the sale of certain land and buildings in San Jose, California for a sale price of
$46.5 million. Concurrently with the sale, we leased back from the purchaser approximately 262,500 square feet of
office space, which represents all available space in the buildings. The lease agreement includes an initial term of
two years, with two options to extend the lease for six months each. We have committed to lease payments related to
this lease of $2.2 million in 2007, $2.4 million in 2008 and $0.2 million in 2009.
We received cash payment for the full sale price in January 2007. During the lease term, we intend to construct
an additional building located on our San Jose, California campus to replace the buildings we sold in this
transaction. We expect to use approximately $22.0 million in cash during 2007 to begin construction on this new
building.
54
Contractual Obligations and Off Balance Sheet Arrangements
A summary of our contractual obligations as of December 30, 2006 is as follows:
Payments Due by Period
Total
Less
Than 1 Year
1-3 Years
3-5 Years
More
Than 5 Years
(In millions)
Operating lease obligations . . . . $
Purchase obligations . . . . . . . . .
Term loan . . . . . . . . . . . . . . . . .
Convertible notes . . . . . . . . . . .
Contractual interest payments . .
Other long-term contractual
obligations . . . . . . . . . . . . . .
135.4
20.7
28.0
730.4
44.2
Total . . . . . . . . . . . . . . . . . . . $
1,237.6
$
33.9
19.6
28.0
---7.9
278.9
$
---$
89.4
44.9
1.1
---230.4
14.4
$
268.7
$
559.5
19.9
------250.0
14.4
$
10.2
$
294.5
36.7
------250.0
7.5
----
$
294.2
As of December 30, 2006, the primary component of Other long-term contractual obligations of $278.9 million
related to income tax and acquisition related liabilities.
We expect that current cash and short-term investment balances and cash flows that are generated from
operations will be sufficient to meet our working capital and other capital requirements for at least the next
12 months.
As of December 30, 2006, we did not have any significant off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC Regulation S-K.
New Accounting Standards
In July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109,” which prescribes a new recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 amends SFAS No. 5, “Accounting for Contingencies,” to eliminate its
applicability to income taxes. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The
cumulative effect of applying FIN No. 48 will be reported as an adjustment to the opening balance of retained
earnings (or other appropriate components of equity or net assets on our Consolidated Balance Sheet) for fiscal
2007. We are currently studying the transition effects of adopting FIN No. 48 and we are not yet able to assess the
impact of FIN No. 48 on our financial statements and, therefore, we are currently not able to disclose the expected
effect of adoption.
In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, “Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which provides
interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB No. 108 is effective for us for the year ended
December 30, 2006. The implementation of SAB No. 108 did not have a material effect on our consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value,
establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. We are currently evaluating the impact of SFAS No. 157, but do
55
not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position, results of
operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A is incorporated by reference from the section of this Annual Report on
Form 10-K entitled “Disclosures About Market Risk” found in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Item 8. Financial Statements and Supplementary Data
The financial statements required by Item 8 are submitted as a separate section of this Annual Report on
Form 10-K. See Item 15, “Exhibits and Financial Statement Schedules.”
Summary Quarterly Data – Unaudited
2006
4
th
3
rd
2005
2
nd
1
st
th
rd
4
2nd
1st
$320,911
$ 60,031
$292,537
$ 59,517
3
(In thousands, except per share amounts)
Revenue . . . . . . . . . . . . . . . . . . . $431,020
Cost of revenue * . . . . . . . . . . . . . $ 53,921
$366,148
$ 52,735
$358,513
$ 59,846
$328,214
$ 60,597
$378,363
$ 54,588
$337,381
$ 57,272
Net income * +. . . . . . . . . . . . . . . $ 48,365
$ 42,060
$ 30,388
$ 21,779
$ 26,566
$ 21,271
$
483
$ 1,023
Net income per share — basic * + . . $
Net income per share — diluted * +. . $
$
$
$
$
$
$
$
$
$
$
$
$
0.00
0.00
$
$
0.18
0.16
0.15
0.14
0.11
0.10
0.08
0.07
0.09
0.08
0.08
0.07
0.00
0.00
*
We adopted SFAS No. 123R on January 1, 2006 using the modified prospective transition method. Using
the modified prospective transition method, we began recognizing compensation expense for equity-based
awards granted on or after January 1, 2006 and unvested awards granted prior to January 1, 2006.
+
We recorded a Loss on extinguishment of debt of $40.8 million during the quarter ended December 30,
2006, which includes a premium paid to repurchase a portion of the 2023 Notes of $38.9 million and a
write-off of the related portion of unamortized deferred costs of issuing the 2023 Notes of $1.9 million.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, under the supervision and with the participation of our management, including the Chief
Executive Officer, or CEO, and the Chief Financial Officer, or CFO, of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as
of December 30, 2006.
The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this
evaluation, we sought to identify any significant deficiencies or material weaknesses in our disclosure controls and
procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant
role in our disclosure controls and procedures, and to confirm that any necessary corrective action, including
process improvements, was taken. This type of evaluation is done every fiscal quarter so that our conclusions
concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall
goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications
as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances
warrant.
56
Based on their evaluation as of December 30, 2006, our CEO and CFO have concluded that our disclosure
controls and procedures were effective to provide reasonable assurance that the information required to be disclosed
by us in our reports filed or submitted under the Exchange Act (i) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 30,
2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within Cadence have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our
internal control over financial reporting as of December 30, 2006. In making this assessment, our management used
the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has concluded that, as of December 30, 2006, our internal
control over financial reporting is effective based on these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting,
which is included herein.
Item 9B. Other Information
None.
57
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 as to directors is incorporated herein by reference from the sections
entitled “Proposal 1 – Election of Directors” and “Other Matters – Section 16(a) Beneficial Ownership Reporting
Compliance” in Cadence’s definitive proxy statement for its 2007 Annual Meeting of Stockholders.
The executive officers of Cadence are listed at the end of Part I of this Annual Report on Form 10-K.
The information required by Item 10 as to Cadence’s code of ethics is incorporated herein by reference from
the section entitled “Corporate Governance – Code of Business Conduct” in Cadence’s definitive proxy statement
for its 2007 Annual Meeting of Stockholders.
The information required by Item 10 as to the director nomination process and Cadence’s Audit Committee is
incorporated by reference from the section entitled “Cadence’s Board of Directors – Committees of the Board of
Directors” in Cadence’s definitive proxy statement for its 2007 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference from the sections entitled “Cadence’s
Board of Directors – Compensation of Directors,” “Compensation Committee Report,” “Compensation Committee
Interlocks and Insider Participation,” “Compensation of Executive Officers” and “Potential Payments Upon
Termination or Change-in-Control and Employment Contracts” in Cadence’s definitive proxy statement for its
2007 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by Item 12 is incorporated herein by reference from the sections entitled “Security
Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in
Cadence’s definitive proxy statement for its 2007 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated herein by reference from the sections entitled “Certain
Transactions” and “Cadence’s Board of Directors – Director Independence” in Cadence’s definitive proxy statement for its 2007 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein by reference from the section entitled “Fees Billed
to Cadence by KPMG LLP During Fiscal 2006 and 2005” in Cadence’s definitive proxy statement for its 2007
Annual Meeting of Stockholders.
58
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Page
(a) 1.
(a) 2.
(a) 3.
Financial Statements:
k
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . .
k
Consolidated Balance Sheets as of December 30, 2006 and December 31, 2005 . . . . . . . . . .
k
Consolidated Income Statements for the three fiscal years ended December 30, 2006 . . . . . .
k
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three
fiscal years ended December 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
k
Consolidated Statements of Cash Flows for the three fiscal years ended December 30,
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
k
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other schedules are omitted because they are not required or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
62
63
64
66
67
112
113
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cadence Design Systems, Inc. and
subsidiaries (the Company) as of December 30, 2006 and December 31, 2005, and the related consolidated
statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 30, 2006. In connection with our audit of the consolidated financial statements,
we also have audited the accompanying financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Cadence Design Systems, Inc. and subsidiaries as of December 30, 2006 and December 31,
2005, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 30, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of December 30,
2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2007 expressed
an unqualified opinion on management’s assessment of, and the effective operation of, internal control over
financial reporting.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited management’s assessment, included in the accompanying “Management’s Report on Internal
Control over Financial Reporting” appearing under Item 9A, that Cadence Design Systems, Inc. and subsidiaries
(the Company) maintained effective internal control over financial reporting as of December 30, 2006, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management’s assessment that Cadence Design Systems, Inc. and subsidiaries maintained
effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects,
based on criteria established in Internal Control – Integrated Framework issued by the COSO. Also, in our opinion,
Cadence Design Systems, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 30, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the
COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Cadence Design System, Inc. and subsidiaries as of December 30, 2006 and December 31, 2005, and the related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December 30, 2006, and
our report dated February 23, 2007 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
61
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 30, 2006 and December 31, 2005
(In thousands, except per share amounts)
ASSETS
2006
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 934,342
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,089
Receivables, net of allowances of $3,804 and $10,979, respectively . . . . . . . . . .
238,438
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,179
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,957
Total current assets . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangibles, net . . . . . . . . . . . . . . . . . .
Installment contract receivables. . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.........................
.........................
.........................
.........................
.........................
.........................
2005
$ 861,315
33,276
282,073
28,902
70,736
1,312,005
354,575
1,267,579
112,738
149,584
246,341
1,276,302
356,945
1,232,926
153,847
102,748
278,544
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,442,822
$3,401,312
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,000
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259,790
Current portion of deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260,275
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,000
300,586
273,265
548,065
605,851
.........................
.........................
.........................
.........................
95,018
730,385
---370,063
51,864
420,000
128,000
350,893
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,195,466
950,757
Long-Term Liabilities:
Long-term portion of deferred revenue . . . . . .
Convertible notes . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . .
Stockholders’ Equity:
Preferred stock — $0.01 par value; authorized 400 shares, none issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock — $0.01 par value; authorized 600,000 shares; issued and
outstanding shares: 274,912 as of December 30, 2006; 287,634 as of
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost; 31,006 shares as of December 30, 2006; 4,811 shares as
of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred stock compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----
----
1,398,899
1,299,800
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,699,291
1,844,704
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,442,822
$3,401,312
(544,855)
---832,763
12,484
The accompanying notes are an integral part of these consolidated financial statements.
62
(79,064)
(90,076)
690,171
23,873
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
For the three fiscal years ended December 30, 2006
(In thousands, except per share amounts)
2006
Revenue:
Product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 982,673
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,895
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
366,327
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 851,496
126,169
351,527
$ 729,783
137,046
330,651
1,329,192
1,197,480
79,721
91,893
59,794
366,164
390,740
129,552
47,762
35,334
9,400
82,011
91,001
53,054
333,059
368,078
87,887
55,700
13,542
9,000
1,210,360
1,093,332
1,483,895
Costs and Expenses:
Cost of product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangibles . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of acquired in-process technology . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
66,769
96,497
63,833
405,579
460,064
143,317
23,141
(797)
900
1,259,303
....
....
....
....
224,592
(40,768)
(12,348)
70,402
118,832
---(5,446)
15,097
104,148
---(6,198)
(11,513)
Income before provision for income taxes and cumulative effect of
change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
241,878
99,704
128,483
79,140
86,437
11,963
Net income before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle, net of tax . .
142,174
418
49,343
----
74,474
----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142,592
$
49,343
$
74,474
Net income per share before cumulative effect of change in
accounting principle: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.51
$
0.18
$
0.27
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.46
$
0.16
$
0.25
Net income per share after cumulative effect of change in
accounting principle: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.51
$
0.18
$
0.27
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.46
$
0.16
$
0.25
Weighted average common shares outstanding — basic . . . . . . . . . .
279,354
278,520
271,328
Weighted average common shares outstanding — diluted . . . . . . . . .
312,457
314,383
305,774
The accompanying notes are an integral part of these consolidated financial statements.
63
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the three fiscal years ended December 30, 2006
(In thousands)
Common Stock
Outstanding
Shares
BALANCE, JANUARY 3,
2004 . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . .
Changes in unrealized
holding loss on marketable
securities, net of
reclassification adjustment
(Note 2) and taxes . . . . .
Foreign currency translation
gain . . . . . . . . . . . . . .
Total comprehensive income,
net of taxes . . . . . . . . .
Purchase of treasury stock . .
Issuance of common stock
and re-issuance of treasury
stock under equity
incentive plans, net of
forfeitures . . . . . . . . . .
Stock received for payment
of employee taxes on
vesting of restricted
stock . . . . . . . . . . . . .
Tax benefits from employee
stock transactions . . . . . .
Tax benefits from call
options . . . . . . . . . . . .
Stock issued in connection
with acquisitions . . . . . .
Deferred stock
compensation, net of
forfeitures . . . . . . . . . .
Amortization of deferred
stock compensation . . . . .
BALANCE, JANUARY 1,
2005 . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . .
Changes in unrealized
holding gain on
marketable securities, net
of reclassification
adjustment (Note 2) and
taxes . . . . . . . . . . . . .
Foreign currency translation
loss . . . . . . . . . . . . . .
Total comprehensive income,
net of taxes . . . . . . . . .
Purchase of treasury stock . .
Issuance of common stock
and re-issuance of treasury
stock under equity
incentive plans, net of
forfeitures . . . . . . . . . .
Stock received for payment
of employee taxes on
vesting of restricted
stock . . . . . . . . . . . . .
Tax benefits from employee
stock transactions . . . . . .
Tax benefits from call
options . . . . . . . . . . . .
Stock issued in connection
with acquisitions . . . . . .
Deferred stock
compensation, net of
forfeitures . . . . . . . . . .
Amortization of deferred
stock compensation . . . . .
BALANCE, DECEMBER 31,
2005 . . . . . . . . . . . . . . .
270,147 $
Par Value
and Capital
in Excess
of Par
Deferred
Stock
Compensation
Treasury
Stock
1,144,284 $
(110,094) $
(48,856) $
Accumulated
Other
Comprehensive
Income
Retained
Earnings
566,354 $
20,593 $
----
Total
Stockholders’
Equity
1,572,281
----
----
----
----
74,474
----
----
----
----
----
----
----
----
----
----
11,327
(94,105)
----
----
----
(94,105)
151,776
----
----
----
78,172
----
----
----
(2,854)
(517)
74,474
(517)
11,327
85,284
(7,031)
12,331
(205)
----
(73,604)
----
(2,854)
----
7,108
----
----
----
----
7,108
----
7,742
----
----
----
----
7,742
1,263
14,934
----
----
----
----
14,934
----
44,347
----
(44,347)
----
----
----
----
1,682
----
29,726
----
----
31,408
276,505
1,146,493
640,828
31,403
1,699,970
----
----
----
----
49,343
----
49,343
----
----
----
----
----
1,020
1,020
----
----
----
----
----
(8,550)
(8,550)
(101,070)
----
----
----
(101,070)
87,981
----
----
----
149,435
(55,277)
(63,477)
41,813
(6,150)
17,647
(651)
----
61,454
----
----
----
(10,698)
----
11,715
----
----
----
----
11,715
----
6,167
----
----
----
----
6,167
283
11,883
----
----
----
----
11,883
----
62,793
----
(62,793)
----
----
----
----
36,194
----
----
35,489
---287,634 $
----
(10,698)
(705)
1,299,800 $
(79,064) $
(90,076) $
690,171 $
23,873 $
The accompanying notes are an integral part of these consolidated financial statements.
64
1,844,704
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the three fiscal years ended December 30, 2006
(In thousands)
Common Stock
Par Value
and Capital
in Excess
of Par
Outstanding
Shares
BALANCE, DECEMBER 31,
2005 . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . .
Changes in unrealized
holding gain on
marketable securities, net
of reclassification
adjustment (Note 2) and
taxes . . . . . . . . . . . . .
Foreign currency translation
loss . . . . . . . . . . . . . .
287,634 $
Deferred
Stock
Compensation
Treasury
Stock
1,299,800 $
(79,064) $
(90,076) $
Accumulated
Other
Comprehensive
Income
Retained
Earnings
690,171 $
23,873 $
----
BALANCE, DECEMBER 30,
2006 . . . . . . . . . . . . . . .
1,844,704
----
----
----
----
142,592
----
----
----
----
----
(6,527)
(6,527)
----
----
----
----
----
(4,862)
(4,862)
Total comprehensive income,
net of taxes . . . . . . . . .
Purchase of treasury stock . .
Issuance of common stock
and re-issuance of treasury
stock under equity
incentive plans, net of
forfeitures . . . . . . . . . .
Stock received for payment
of employee taxes on
vesting of restricted
stock . . . . . . . . . . . . .
Purchase of call options in
connection with
convertible notes due 2011
and 2013 (Note 6) . . . . .
Proceeds from sale of call
options in connection with
convertible notes due 2023
(Note 6) . . . . . . . . . . .
Proceeds from sale of
common stock warrants in
connection with
convertible notes due 2011
and 2013 (Note 6) . . . . .
Purchase of common stock
warrants in connection
with convertible notes due
2023 (Note 6) . . . . . . . .
Tax benefits from employee
stock transactions . . . . . .
Tax expense from call
options . . . . . . . . . . . .
Stock issued in connection
with acquisitions . . . . . .
Stock-based compensation
expense . . . . . . . . . . . .
Elimination of unamortized
deferred stock
compensation . . . . . . . .
Total
Stockholders’
Equity
142,592
131,203
(27,917)
16,006
(821)
----
119,479
----
(494,088)
----
----
----
(494,088)
41,791
----
----
----
161,270
(13,494)
----
----
----
(13,494)
----
(119,750)
----
----
----
----
(119,750)
----
55,864
----
----
----
----
55,864
----
39,400
----
----
----
----
39,400
----
(10,201)
----
----
----
----
(10,201)
----
14,741
----
----
----
----
14,741
----
(6,159)
----
----
----
----
(6,159)
10
2,594
----
----
----
----
2,594
----
93,207
----
----
----
----
93,207
----
(90,076)
----
90,076
----
----
----
274,912 $
1,398,899 $
(544,855) $
---- $
832,763 $
12,484 $
The accompanying notes are an integral part of these consolidated financial statements.
65
1,699,291
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three fiscal years ended December 30, 2006
(In thousands)
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in loss from investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of acquired in-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefits from employee stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (expense) from call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions (recoveries) for losses (gains) on trade accounts receivable and sales returns . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment contract receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities:
Proceeds from sale of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of software licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in venture capital partnerships and equity investments . . . . . . . . . . . . . . . . . . .
Cash paid in business combinations and asset acquisitions, net of cash acquired, and
acquisitions of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities:
Proceeds from term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on term loan and long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of convertible notes due 2011 and 2013 . . . . . . . . . . . . . . . . . . . .
Payment of convertible notes due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of convertible notes issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of call options in connection with convertible notes due 2011 and 2013. . . . . . . . .
Proceeds from sale of call options in connection with convertible notes due 2023 . . . . . . . .
Proceeds from sale of common stock warrants in connection with convertible notes due 2011
and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common stock warrants in connection with convertible notes due 2023 . . . . . . .
Tax benefit from employee stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Increase in Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
..
$ 861,315
$ 448,517
$ 309,175
..
142,592
49,343
74,474
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(418)
147,117
40,768
103,986
1,200
(32,903)
2,467
900
194
---(6,159)
29,535
180,580
(6,777)
4,630
---184,717
---39,902
6,492
(18,297)
10,934
9,400
2,352
11,715
6,167
(22,968)
192,079
(1,755)
5,569
---179,205
---31,408
16,944
(7,492)
4,236
9,000
4,142
7,108
7,742
(15,695)
30,070
447
(5,406)
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
92,977
(261,983)
(10,872)
6,128
749
(51,462)
24,444
13,523
421,216
54,928
(155,648)
(7,588)
(8,094)
1,640
20,330
32,616
12,449
426,283
(49,361)
20,556
(3,555)
(3,410)
16,417
2,001
34,878
18,813
372,522
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
7,637
---(147)
26,054
317
(67,636)
(8,409)
(3,800)
14,921
289,225
(180,975)
6,075
33,625
(71,656)
(2,600)
(14,184)
8,301
516,935
(549,835)
9,900
3,625
(61,779)
(4,157)
(22,773)
..
..
(65,778)
(111,762)
(297,128)
(222,697)
(115,170)
(214,953)
.
.
.
.
.
.
.
.
.
.
.
.
.
.
---(132,000)
500,000
(228,480)
(12,032)
(119,750)
55,864
160,000
(62)
----------------
---(370)
------(1,920)
-------
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
39,400
(10,201)
10,712
156,648
(494,088)
(233,927)
(2,500)
73,027
$ 934,342
---------146,481
(101,070)
205,349
3,863
412,798
$ 861,315
---------75,318
(94,105)
(21,077)
2,850
139,342
$ 448,517
The accompanying notes are an integral part of these consolidated financial statements.
66
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2006
NOTE 1. CADENCE
Cadence Design Systems, Inc., or Cadence, licenses electronic design automation, or EDA, software, sells or
leases hardware technology and intellectual property and provides design and methodology services throughout the
world to help manage and accelerate electronic product development processes. Cadence’s broad range of products
and services are used by electronics companies to design and develop complex integrated circuits, or ICs, and
personal and commercial electronic systems.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Cadence’s fiscal year end is the Saturday closest to December 31. Fiscal 2006, 2005 and 2004 were 52-week
years. The consolidated financial statements include the accounts of Cadence and its subsidiaries after elimination
of intercompany accounts and transactions. All consolidated subsidiaries are wholly-owned by Cadence.
Use of Estimates
The preparation of 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 consolidated financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash Equivalents and Short-Term Investments
Cadence considers all highly liquid debt instruments, which could include commercial paper, European Union
euro time deposits, repurchase agreements and certificates of deposit, with remaining maturities of three months or
less at the time of purchase to be cash equivalents. Investments with maturities greater than three months and less
than one year are classified as short-term investments.
Foreign Currency Translation
Cadence transacts business in various foreign currencies. In general, the functional currency of a foreign
operation is the local country’s currency except for Cadence’s principal Irish, Israeli, Hungarian and Dutch
subsidiaries, whose functional currency is the United States dollar. Non-functional currency monetary balances are
re-measured into the functional currency of the subsidiary with any related gain or loss recorded in Other income
(expense), net, in the accompanying Consolidated Income Statements. Assets and liabilities of operations outside
the United States, for which the functional currency is the local currency, are translated into United States dollars
using fiscal year-end exchange rates. Revenue and expenses are translated at the average exchange rates in effect
during each fiscal month during the year. The effects of foreign currency translation adjustments are included in
Stockholders’ Equity as a component of Accumulated other comprehensive income in the accompanying Consolidated Balance Sheets.
Derivative Financial Instruments
Cadence accounts for its foreign currency exchange contracts in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
Cadence enters into foreign currency forward exchange contracts with financial institutions to protect against
currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange
contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities
increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange
67
contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to
changes in foreign exchange rates. The forward contracts are not designated as accounting hedges under
SFAS No. 133 and, therefore, the unrealized gains and losses are recognized in Other income (expense), net,
in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as
accrued liabilities or other assets.
Cadence does not use forward contracts for trading purposes. Cadence’s forward contracts generally have
maturities of 90 days or less. Recognized gains or losses with respect to our current hedging activities will
ultimately depend on how accurately Cadence is able to match the amount of currency forward exchange contracts
with underlying asset and liability exposures.
Allowance for Doubtful Accounts
Cadence makes judgments as to its ability to collect outstanding receivables and provide allowances for the
portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all
significant outstanding invoices and are recorded in operating expenses. For those invoices not specifically
reviewed, provisions are made based on Cadence’s historical bad debt experience. In determining these percentages, Cadence analyzes its historical collection experience and current economic trends. If the historical data
Cadence uses to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect
outstanding receivables, additional provisions may be needed which could cause future results of operations to be
materially affected.
Allowance for Sales Returns
Provisions for sales returns primarily relate to service arrangements and are recorded as a reduction to revenue.
These provisions are made based on historical experience.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market value. Cadence’s
inventories include high technology parts and components for complex computer systems that emulate the
performance and operation of computer IC and electronic systems. These parts and components may be specialized
in nature or subject to rapid technological obsolescence. While Cadence has programs to minimize the required
inventories on hand and considers technological obsolescence when estimating required reserves to reduce recorded
amounts to market values, it is reasonably possible that such estimates could change in the near term. Cadence’s
practice is to reserve for inventory in excess of 12-month demand.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost. Depreciation and amortization are generally provided
over the estimated useful lives, using the straight-line method, as follows:
Computer equipment and related software . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold and building improvements. . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-8 years
10-32 years
Shorter of the lease term or the estimated useful life
3-5 years
3-5 years
Cadence capitalizes the costs of software developed for internal use in compliance with Statement of Position,
or SOP, 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and with
Emerging Issues Task Force, or EITF, Issue 00-2 “Accounting for Web Site Development Costs.” Capitalization of
software developed for internal use and web site development costs begins at the application development phase of
the project. Capitalization of software developed for internal use and web site development costs ends, and
amortization begins, when the computer software is substantially complete and ready for its intended use.
Amortization is recorded on a straight-line basis over the estimated useful life of the software. Cadence capitalized
$24.3 million in 2006, $32.6 million in 2005 and $21.4 million in 2004.
68
Cadence recorded depreciation and amortization expense in the amount of $72.0 million in 2006, $68.8 million
in 2005 and $68.7 million in 2004 for property, plant and equipment.
Software Development Costs
Cadence accounts for software development costs in accordance with SFAS No. 86, “Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed.” Software development costs are capitalized
beginning when a product’s technological feasibility has been established by completion of a working model of the
product and amortization begins when a product is available for general release to customers. The period between
the achievement of technological feasibility and the general release of Cadence’s products has typically been of
short duration. Internally-generated software development costs have not been material.
Cadence capitalized $7.3 million of purchased software during 2006, $0.5 million of purchased software
during 2005 and $10.3 million of purchased software during 2004. Cadence has deemed the purchased software to
have an alternative future use in accordance with SFAS No. 86. Therefore, Cadence begins amortization of
purchased software when the technology is available for general release to customers. Amortization expense for
purchased software was $4.2 million in 2006, $4.4 million in 2005 and $2.2 million in 2004.
Acquired Intangibles, including Goodwill
Acquired intangibles, which include purchased technology and other intangible assets, are stated at cost less
accumulated amortization and are reviewed for impairment whenever events or circumstances indicate that an
impairment may exist. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and
purchased intangibles with indefinite useful lives are not amortized but are reviewed for impairment at least
annually or when events or changes in circumstances indicate that Cadence will not be able to recover the asset’s
carrying amount. Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining
estimated economic life of the underlying products and technologies (original lives assigned are one to ten years).
During the third quarters of 2006, 2005 and 2004, Cadence completed its annual impairment analysis of
goodwill. Based on the results of these impairment reviews, Cadence has determined that no indicators of
impairment existed for its one reporting unit in 2006 and 2005, and two reporting units in 2004 and, accordingly, no
impairment charge was recognized during 2006, 2005 or 2004.
Long-lived Assets
Cadence’s long-lived assets consist of property, plant and equipment and other acquired intangibles, excluding
goodwill. Cadence reviews its long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” For assets to be held and used, Cadence initiates its review
whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future
undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an
impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. During
2006, there were no significant impairments of long-lived assets. During 2005, Cadence abandoned certain assets
and recorded a charge of $2.4 million, which is included in Restructuring and other charges in the accompanying
Consolidated Income Statements. During 2004, Cadence abandoned certain assets and recorded a charge of
$9.4 million on long-lived assets, which charge is included in Restructuring and other charges in the accompanying
Consolidated Income Statements.
Marketable and Non-Marketable Securities
Marketable Securities
Management considers all of its investments in marketable securities as available-for-sale. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses presented net of tax and reported as a separate
component of Stockholders’ equity. Realized gains and losses are determined using the specific identification
method. Gains are recognized when realized and are recorded in the Consolidated Income Statements as Other
income (expense), net. Losses are recognized as realized or when Cadence has determined that an other-than-temporary decline in fair value has occurred.
69
It is Cadence’s policy to review the fair value of these marketable securities on a regular basis to determine
whether its investments in these companies are other-than-temporarily impaired. This evaluation includes, but is not
limited to, reviewing each company’s cash position, financing needs, earnings or revenue outlook, operational
performance, management or ownership changes and competition. If Cadence believes the carrying value of an
investment is in excess of its fair value, and this difference is other-than-temporary, it is Cadence’s policy to write
down the investment to reduce its carrying value to fair value.
Non-Marketable Securities
Cadence’s non-marketable securities include investments in privately-held companies and companies that are
publicly-traded but as to which there are trading restrictions on the shares Cadence owns. To determine the fair value
of publicly-traded securities with trading restrictions, Cadence considers the current market price of the security and
the specific characteristics of the restrictions. To determine the fair value of privately-held investments, Cadence
uses the most recent round of financing or estimates of current fair value using traditional valuation techniques. It is
Cadence’s policy to review the fair value of these investments on a regular basis to determine whether the
investments in these companies are other-than-temporarily impaired. This evaluation includes, but is not limited to,
reviewing each company’s cash position, financing needs, earnings or revenue outlook, operational performance,
management or ownership changes and competition. In the case of privately-held companies, this evaluation is
based on information that Cadence requests from these companies. This information is not subject to the same
disclosure regulations as United States publicly-traded companies, and as such, the basis for these evaluations is
subject to the timing and the accuracy of the data received from these companies. If Cadence believes the carrying
value of an investment is in excess of fair value, and this difference is other-than-temporary, it is Cadence’s policy to
write down the investment to fair value.
Equity Method Investments
Cadence applies the guidance in Accounting Principles Board Opinion, or APB, No. 18, “The Equity Method
of Accounting for Investments in Common Stock,” as amended, and EITF No. 02-14, “Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other Than Common Stock,” to classify investments as
equity method investments. These investments are held in the form of voting preferred stock or convertible debt of
privately-held companies. If Cadence determines that it has the ability to exercise significant influence over the
investee and the investment is in the form of in-substance common stock, the investment is accounted for under the
equity method.
In applying the equity method of accounting, Cadence applies approach (a) of EITF No. 99-10, “Percentage
Used to Determine the Amount of Equity Method Losses.” Accordingly, the portion of equity method loss or
income recorded by Cadence is based on its percentage ownership of each investee’s preferred stock or convertible
debt available to absorb losses or with contractual rights to income. Its level of participation in future financings of
its equity method investees may impact Cadence’s proportional share in future income or losses. Cadence records
its interest in equity method gains and losses in the quarter following incurrence because it is not practicable to
obtain investee financial statements prior to the issuance of Cadence’s Consolidated Financial Statements.
Cost Method Investments
Investments accounted for by Cadence under the cost method of accounting are carried at historical cost and
Cadence periodically evaluates the fair value of each investment to determine if an other-than-temporary decline in
value has occurred.
Nonqualified Deferred Compensation Trust
Executive Officers and Directors may elect to defer compensation payable to them under Cadence’s 1994
Nonqualified Deferred Compensation Plan, or the NQDC. Deferred compensation payments are held in accounts
with values indexed to the performance of selected mutual funds or money market accounts. In accordance with
EITF No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a
Rabbi Trust and Invested,” Cadence consolidates the NQDC trust accounts in its Consolidated Financial
Statements.
70
The selected mutual funds or money market accounts held in the NQDC trust are classified as trading securities
in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Trading
securities are stated at fair value, with the unrealized gains and losses recognized in the Consolidated Income
Statements as Other income (expense), net. These trading securities are classified as Other assets on the
Consolidated Balance Sheets because the securities are not available for Cadence’s use in its operations.
Cadence’s obligation with respect to the NQDC trust is recorded in Other long-term liabilities on its
Consolidated Balance Sheets. Increases and decreases in the NQDC liability are recorded as compensation
expense in the Consolidated Income Statements.
Deferred Revenue
Deferred revenue arises when customers pay for products and/or services in advance of revenue recognition.
Cadence’s deferred revenue consists primarily of unearned revenue on maintenance and product licenses for which
revenue is recognized in installments over the duration of the license. Maintenance on perpetual licenses is
generally renewed annually, billed in full in advance, and the corresponding revenue is recognized over the ensuing
12-month maintenance term. The fees under product licenses for which revenue is not recognized immediately and
for maintenance in connection with term and subscription licenses are generally billed quarterly in advance and the
related revenue is recognized over multiple periods over the ensuing license period.
Comprehensive Income
Other comprehensive income includes foreign currency translation gains and losses and unrealized gains and
losses on marketable securities that are available-for-sale that have been excluded from net income and reflected
instead in stockholders’ equity. Cadence has reported the components of comprehensive income in its Consolidated
Statements of Stockholders’ Equity. Cadence reclassified $6.7 million in 2006, net of $2.7 million of tax,
$9.2 million in 2005, net of $3.7 million of tax, and $6.8 million in 2004, net of $2.7 million of tax, from
unrealized holding gains and losses on marketable securities to realized gains included in Other income (expense),
net, in the accompanying Consolidated Income Statements. The tax expense (benefit) for gross unrealized holding
gains (losses) in marketable equity securities was $(4.4) million in 2006, $(1.2) million in 2005 and $(16.4) million
in 2004.
Revenue Recognition
Cadence applies the provisions of SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” to all product
revenue transactions where the software is not incidental. Cadence also applies the provisions of SFAS No. 13,
“Accounting for Leases,” to all hardware lease transactions. Cadence recognizes revenue when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed or determinable, collection of the resulting
receivable is probable, and vendor-specific objective evidence of fair value, or VSOE, exists.
Cadence licenses software using three different license types:
•
•
•
Subscription licenses;
Term licenses; and
Perpetual licenses.
Subscription licenses – Cadence’s subscription license arrangements offer customers the right to:
•
•
•
Access and use all software products delivered at the outset of an arrangement throughout the entire term
of the arrangement, generally two to three years, with no rights to return;
Use unspecified additional software products that become commercially available during the term of the
arrangement; and
Remix among the software products delivered at the outset of the arrangement, as well as the right to
remix into other unspecified additional software products that may become available during the term of
the arrangement, so long as the cumulative value of all products in use does not exceed the total license
fee determined at the outset of the arrangement. These remix rights may be exercisable multiple times
71
during the term of the arrangement. The right to remix all software products delivered pursuant to the
license agreement is not considered an exchange or return of software because all software products have
been delivered and the customer has the continuing right to use them.
In general, revenue associated with subscription licenses is recognized ratably over the term of the license
commencing upon the later of the effective date of the arrangement or delivery of the software product. Subscription
license revenue is allocated to product and maintenance revenue. The allocation to maintenance revenue is based on
vendor specific objective evidence, or VSOE, of fair value of the undelivered maintenance that was established in
connection with the sale of our term licenses.
Term licenses – Cadence’s term license arrangements offer customers the right to:
•
•
Access and use all software products delivered at the outset of an arrangement throughout the entire term
of the arrangement, generally two to three years, with no rights to return; and
Remix among the software products delivered at the outset of the arrangement, so long as the cumulative
value of all products in use does not exceed the total license fee determined at the outset of the
arrangement. These remix rights may be exercisable multiple times during the term of the arrangement.
The right to remix all software products delivered pursuant to the license agreement is not considered an
exchange or return of software because all software products have been delivered and the customer has the
continuing right to use them. In general, revenue associated with term licenses is recognized upon the later of the
effective date of the arrangement or delivery of the software product.
Perpetual licenses – Cadence’s perpetual licenses consist of software licensed on a perpetual basis with no
right to return or exchange the licensed software. In general, revenue associated with perpetual licenses is
recognized upon the later of the effective date of the license or delivery of the licensed product.
Persuasive evidence of an arrangement – Generally, Cadence uses a contract signed by the customer as
evidence of an arrangement for subscription and term licenses and hardware leases. If a contract signed by the
customer does not exist, Cadence has historically used a purchase order as evidence of an arrangement for perpetual
licenses, hardware sales, maintenance renewals and small fixed-price service projects, such as training classes and
small methodology service engagements of approximately $10,000 or less. For all other service engagements,
Cadence uses a signed professional services agreement and a statement of work to evidence an arrangement. In
cases where both a signed contract and a purchase order exist, Cadence considers the signed contract to be the most
persuasive evidence of the arrangement. Sales through Cadence’s distributors are evidenced by a master agreement
governing the relationship, together with binding purchase orders from the distributor on a transaction-by-transaction basis.
Product delivery – Software and the corresponding access keys are generally delivered to customers electronically. Electronic delivery occurs when Cadence provides the customer access to the software. Occasionally,
Cadence will deliver the software on a compact disc with standard transfer terms of free-on-board, or F.O.B.,
shipping point. Cadence’s software license agreements generally do not contain conditions for acceptance. With
respect to hardware, delivery of an entire system is deemed to occur upon its successful installation. For certain
hardware products, installation is the responsibility of the customer, as the system is fully functional at the time of
shipment. For these products, delivery is deemed to be complete when the products are shipped with freight terms of
F.O.B. shipping point.
Fee is fixed or determinable – Cadence assesses whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated with the transaction. Cadence has established a
history of collecting under the original contract without providing concessions on payments, products or services.
For installment contracts that do not include a substantial up front payment, Cadence may only determine that a fee
is fixed or determinable if the arrangement has payment periods that are equal to or less than the term of the licenses
and the payments are collected in equal or nearly equal installments, when evaluated over the entire term of the
arrangement.
Significant judgment is involved in assessing whether a fee is fixed or determinable. Cadence must also make
these judgments when assessing whether a contract amendment to a term arrangement (primarily in the context of a
72
license extension or renewal) constitutes a concession. Cadence’s experience has been that it is able to determine
whether a fee is fixed or determinable for term licenses. While Cadence does not expect that experience to change, if
Cadence no longer were to have a history of collecting under the original contract without providing concessions on
term licenses, revenue from term licenses would be required to be recognized when payments under the installment
contract become due and payable. Such a change could have a material impact on Cadence’s results of operations.
Collection is probable – Cadence assesses the probability of collecting from each customer at the outset of the
arrangement based on a number of factors, including the customer’s payment history and its current creditworthiness. Cadence has concluded that collection is not probable for license arrangements executed with customers in
certain countries. If in Cadence’s judgment collection of a fee is not probable, Cadence defers the revenue until the
uncertainty is removed, which generally means revenue is recognized upon receipt of cash payment. Cadence’s
experience has been that it is able to estimate whether collection is probable. While Cadence does not expect that
experience to change, if Cadence were to determine that collection is not probable for any license arrangement,
particularly those with installment payment terms, revenue from such license would be recognized generally upon
the receipt of cash payment. Such a change could have a material impact on Cadence’s results of operations.
Vendor-specific objective evidence of fair value – Cadence’s VSOE for certain product elements of an
arrangement is based upon the pricing in comparable transactions when the element is sold separately. VSOE
for maintenance is generally based upon the customer’s stated annual renewal rates. VSOE for services is generally
based on the price charged when the services are sold separately. For multiple element arrangements, VSOE must
exist to allocate the total fee among all delivered and undelivered elements of a term or perpetual license
arrangement. If VSOE does not exist for all elements to support the allocation of the total fee among all delivered
and undelivered elements of the arrangement, revenue is deferred until such evidence does exist for the undelivered
elements, or until all elements are delivered, whichever is earlier. If VSOE of all undelivered elements exists but
VSOE does not exist for one or more delivered elements, revenue is recognized using the residual method. Under
the residual method, the VSOE of the undelivered elements is deferred, and the remaining portion of the
arrangement fee is recognized as revenue as the elements are delivered. Cadence’s experience has been that it
is able to estimate VSOE.
Finance fee revenue – Finance fees result from discounting to present value the product revenue derived from
installment contracts in which the payment terms extend beyond one year from the effective date of the contract.
Finance fees are recognized using a method that approximates the effective interest method over the relevant license
term and are classified as product revenue. Finance fee revenue represented approximately 2% of total revenue for
each of the years ended December 30, 2006, December 31, 2005 and January 1, 2005. Upon the sale of an
installment contract, Cadence recognizes the remaining finance fee revenue associated with the installment
contract.
Services revenue – Services revenue consists primarily of revenue received for performing design and
methodology services. These services are not related to the functionality of the products licensed. Revenue from
service contracts is recognized either on the time and materials method, as work is performed, or on the
percentage-of-completion method. For contracts with fixed or not-to-exceed fees, Cadence estimates on a monthly
basis the percentage-of-completion, which is based on the completion of milestones relating to the arrangement.
Cadence has a history of accurately estimating project status and the costs necessary to complete projects. A number
of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances
and specification and testing requirement changes. If different conditions were to prevail such that accurate
estimates could not be made, then the use of the completed contract method would be required and the recognition
of all revenue and costs would be deferred until the project was completed. Such a change could have a material
impact on Cadence’s results of operations.
Accounting for Income Taxes
Cadence uses the asset and liability method to account for income taxes. Under this method, Cadence is
required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves
estimating actual current tax liabilities together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred
73
tax assets and liabilities, which are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Cadence then assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to
the extent it believes that recovery is not likely, Cadence must establish a valuation allowance. To the extent
Cadence establishes a valuation allowance for deferred tax assets or increases this allowance, Cadence may need to
include an expense within the tax provision of its Consolidated Income Statement.
Significant management judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against net deferred tax assets. The valuation allowance
is based on estimates of taxable income for each jurisdiction in which Cadence operates for the period over which
deferred tax assets will be recoverable. In the event that actual results differ from these estimates or Cadence adjusts
these estimates in future periods, Cadence may need to establish an additional valuation allowance, which could
materially affect its consolidated financial position or results of operations.
Restructuring Charges
Cadence accounts for restructuring charges in accordance with SEC Staff Accounting Bulletin No. 100,
“Restructuring and Impairment Charges,” as amended. From fiscal 2001 through fiscal 2005, Cadence undertook
significant restructuring initiatives. The individual components of the restructuring activities initiated prior to fiscal
2003 were accounted for in accordance with EITF No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),”
and EITF No. 88-10, “Costs Associated with Lease Modifications or Terminations.”
For restructuring activities initiated after fiscal 2002, Cadence accounted for the leased facilities in accordance
with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” For all periods presented,
Cadence accounted for the asset-related portions of these restructurings in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” In addition, for all periods presented, the
severance and benefits charges were accounted for in accordance with SFAS No. 112, “Employers’ Accounting for
Postemployment Benefits – An Amendment of FASB Statements No. 5 and 43.”
In connection with these restructuring initiatives, cadence has made a number of estimates and assumptions
related to losses on excess facilities vacated or consolidated, particularly the timing of subleases and sublease terms.
Closure and space reduction costs included in the restructuring charges include payments required under leases less
any applicable estimated sublease income after the facilities are abandoned, lease buyout costs and certain
contractual costs to maintain facilities during the period after abandonment.
In addition, Cadence has recorded estimated provisions for termination benefits and outplacement costs, longterm asset impairments, and other restructuring costs. Cadence regularly evaluates the adequacy of its restructuring
accrual, and adjusts the balance based on changes in estimates and assumptions. Cadence may incur future charges
for new restructuring activities as well as for changes in estimates to amounts previously recorded.
Stock-Based Compensation
Cadence adopted SFAS No. 123R “Share-Based Payment,” on January 1, 2006 using the modified prospective
transition method. SFAS No. 123R requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the fair value of those awards on the grant date. Using the
modified prospective transition method of adopting SFAS No. 123R, Cadence began recognizing compensation
expense for equity-based awards granted on or after January 1, 2006 and unvested awards granted prior to January 1,
2006. Prior period stock-based compensation expense recognized under APB No. 25 “Accounting for Stock Issued
to Employees” has been reclassified to conform to the current year presentation.
Under SFAS No. 123R, stock-based compensation expense is measured at the grant date based on the value of
the option or restricted stock and is recognized as expense, less expected forfeitures, over the requisite service
period, which is generally the vesting period. The fair value of each option grant and each purchase right granted
under Cadence’s Employee Stock Purchase Program, or ESPP, is estimated on the date of grant using the Black74
Scholes option pricing model. The fair value of each restricted stock issuance is determined using the fair value of
Cadence’s common stock on the grant date. Cadence recognizes stock-based compensation expense on the straightline method for options and restricted stock that only contain a service condition and on the graded-vesting method
for options and restricted stock that contain both a service and performance condition. See Note 4 for additional
information on performance-based restricted stock awards. Determining the fair value of stock-based awards at the
grant date requires judgment, including estimating:
•
•
•
•
•
The expected volatility of our stock;
The expected term of stock options;
The risk-free interest rate for the period;
Expected dividends; and
Expected forfeitures.
The computation of the expected volatility assumption used in the Black-Scholes pricing model for option
grants is based on implied volatility calculated using an average of the volatility of publicly traded options for
Cadence common stock and the 2023 Notes. Cadence uses this approach to determine volatility because:
•
•
•
•
Options for Cadence’s common stock are actively traded;
The market prices of both the traded options and underlying shares are measured at a similar point in
time to each other and on a date reasonably close to the grant date of the employee stock options;
The traded options have exercise prices that are both near-the-money and close to the exercise price of
the employee stock options; and
The remaining maturities of the traded options on which the estimate is based are at least one year.
When establishing the expected life assumption, Cadence reviews annual historical employee exercise
behavior with respect to option grants having similar vesting periods. The risk-free interest rate for the period
within the expected term of the option is based on the yield of United States Treasury notes in effect at the time of
grant. Cadence has not historically paid dividends, thus the expected dividends used in the calculation are zero.
Judgment is also required in estimating the amount of stock-based awards that Cadence expects to be forfeited.
Cadence calculates a separate expected forfeiture rate for both stock options and restricted stock issuances based on
historical trends.
The valuation of all options, including the expected life of stock options, and the expected forfeiture rates for
options and restricted stock, are calculated based on one employee pool as there is no significant difference in
exercise behavior between classes of employees.
In November 2005, the Financial Accounting Standards Board, or FASB, issued Financial Statement Position,
or FSP, on SFAS No. 123R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.” Effective upon issuance, FSP No. 123R-3 provides for an alternative transition method for calculating the
tax effects of stock-based compensation expense pursuant to SFAS No. 123R. The alternative transition method
provides simplified approaches to establish the beginning balance of a tax benefit pool comprised of the additional
paid-in capital, or APIC, related to the tax effects of employee stock-based compensation expense, and to determine
the subsequent impact on the APIC tax benefit pool and the statement of cash flows of stock-based awards that were
outstanding upon the adoption of SFAS No. 123R. Upon adoption of SFAS No. 123R, Cadence made the election to
calculate the tax effects of stock-based compensation expense using the alternative transition method pursuant to
FSP No. 123R-3 and computed the beginning balance of the APIC tax benefit pool by applying the simplified
method, which resulted in an APIC tax benefit pool windfall position. Accordingly, upon adoption of
SFAS No. 123R, Cadence had cumulative excess tax benefits from stock-based compensation available in APIC
that could be used to offset an equal amount of future tax shortfalls (i.e., when the amount of the tax deductible
stock-based compensation is less than the related stock-based compensation cost).
Concentrations of Credit Risk
Financial instruments, including derivative financial instruments, that may potentially subject Cadence to
concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments, long-term
investments, accounts receivable and forward contracts. Concentration of credit risk related to accounts receivable
75
is limited, due to the varied customers comprising Cadence’s customer base and their dispersion across geographical locations. Credit exposure related to the forward contracts is limited to the realized and unrealized gains on
these contracts. Cadence issued options and warrants to hedge potential dilution of its convertible notes, as
described more fully in Note 6. Changes in the fair value of these hedge and warrant transactions are not marked to
market and are not recognized in Cadence’s Consolidated Income Statement as long as the instruments remain
classified as equity. All financial instruments are executed with financial institutions having strong credit ratings,
which minimizes risk of loss due to nonpayment.
Fair Value of Financial Instruments
The fair value of Cadence’s cash and cash equivalents, short-term investments, receivables, accounts payable
and foreign currency forward exchange contracts approximate their carrying value due to the short-term nature of
these instruments. The fair market values of Cadence’s long-term investments, term loan and installment contract
receivables approximate their carrying values based upon current market rates of interest. The fair value of
Cadence’s convertible notes is influenced by interest rates and Cadence’s stock price and stock price volatility and is
determined by market trading. Based on closing market prices on December 30, 2006, the total fair market value of
Cadence’s Convertible Senior Notes was $505.1 million and the total fair market value of Cadence’s 2023 Notes
was $273.4 million. See Note 6 for the fair value of Cadence’s convertible note hedges and warrants.
Leases
Cadence uses operating leases in its operations. For leases that contain rent escalations or rent concessions,
Cadence records the total rent payable during the lease term on a straight-line basis over the term of the lease.
Cadence records the difference between the rents paid and the straight-line rent as a deferred rent liability in the
accompanying Consolidated Balance Sheets.
Advertising
Cadence expenses the costs of advertising as incurred. Advertising expense was approximately $10.5 million
in 2006, $9.0 million in 2005, and $11.6 million in 2004, and is included in Marketing and sales in the
accompanying Consolidated Income Statements.
New Accounting Standard
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin, or SAB,
No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 is effective for
Cadence for the year ended December 30, 2006. The implementation of SAB No. 108 did not have a material effect
on Cadence’s consolidated financial position or results of operations.
NOTE 3. STOCK COMPENSATION PLANS
Equity Incentive Plans
Cadence’s 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan, 1997 Nonstatutory Stock Incentive
Plan, or 1997 Plan, and 1993 Nonstatutory Stock Incentive Plan, or 1993 Plan (the 2000 Plan, the 1997 Plan and the
1993 Plan are referred to collectively as the Nonstatutory Stock Incentive Plans), provide for the issuance of nonqualified options, incentive stock, stock bonuses and rights to acquire restricted stock to Cadence employees and
consultants who are not executive officers, directors or beneficial owners of 10% or more of Cadence common
stock. The number of shares available for issuance under the 2000 Plan is 50,000,000, under the 1997 Plan is
30,000,000 and under the 1993 Plan is 24,750,000. Options granted under the Nonstatutory Stock Incentive Plans
have an exercise price not less than the fair market value of the stock on the date of grant. Options granted to new
employees become exercisable over a period of up to four years, generally with one-fourth of the shares vesting one
year from the vesting commencement date, and the remaining shares vesting in 36 equal monthly installments
thereafter. Options granted to current employees become exercisable over a period of up to four years, generally
76
vesting in 48 equal monthly installments. Options granted under the Nonstatutory Stock Incentive Plans prior to
October 1, 2006 generally expire ten years from the date of grant. Options granted under the Nonstatutory Stock
Incentive Plans after October 1, 2006 generally expire seven years from the date of grant. Awards of incentive stock
granted under the Nonstatutory Stock Incentive Plans vest at times and in installments approved by the Board of
Directors or its Compensation Committee, on the basis of continued employment, passage of time and/or
performance criteria.
Cadence’s 1987 Stock Incentive Plan, or the 1987 Plan, provides for the issuance of either incentive or nonqualified options and incentive stock. The number of shares available for issuance under the 1987 Plan is
71,370,100 shares, of which only 3,000,000 shares may be issued pursuant to incentive stock awards. Options
granted under the 1987 Plan have an exercise price not less than fair market value of the stock on the date of grant
and become exercisable over periods of up to five years. Options granted under the 1987 Plan prior to October 1,
2006 generally expire ten years from the date of grant. Options granted under the 1987 Plan after October 1, 2006
generally expire seven years from the date of grant. Awards of incentive stock granted under the 1987 Plan vest at
times and in installments set forth in the 1987 Plan and approved by the Board of Directors or its Compensation
Committee, on the basis of continued employment, passage of time and/or performance criteria.
Under the 1995 Directors’ Stock Option Plan, or the Directors’ Plan, Cadence may grant non-qualified options
to its non-employee directors for up to 3,050,000 shares of common stock at an exercise price not less than the fair
market value of the stock on the date of grant. Options granted under the Directors’ Plan have terms of ten years and
vest one year from the date of grant.
Cadence has assumed certain options granted to employees of acquired companies, or Acquired Options. The
Acquired Options were assumed by Cadence outside of its stock option plans, and each option is administered under
the terms of the respective original plans of the acquired companies. All of the Acquired Options have been adjusted
to effectuate the price conversion under the terms of the acquisition agreement between Cadence and the relevant
acquired company. The Acquired Options generally become exercisable over a four or five year period and
generally expire between five and ten years from the date of grant. No additional options will be granted under any
of the acquired companies’ plans.
Employee Stock Purchase Plan (ESPP)
In November 1998, the Board of Directors adopted, and the Cadence stockholders subsequently approved,
Cadence’s Amended and Restated Employee Stock Purchase Plan, which amended and restated the 1990 Employee
Stock Purchase Plan, or the ESPP. Subsequent amendments approved by the Board of Directors and Cadence
stockholders increased the number of shares of common stock authorized for issuance under the ESPP to
46,500,000 shares.
Under the ESPP, substantially all employees may purchase Cadence’s common stock at a price equal to
85 percent of the lower of the fair market value at the beginning of the applicable offering period or at the end of
each applicable purchase period, in an amount up to 12% of their annual base earnings plus bonuses. The offering
periods under the ESPP that began prior to August 1, 2006 were concurrent 24-month offering periods. Each
offering period was divided into four consecutive six-month purchase periods. All offering periods that started
before August 1, 2006 will continue until they are completed or until they are terminated as provided in the
documents governing the ESPP. Participants in the ESPP will remain in the 24-month offering periods until these
offering periods are completed or until such participant withdraws from the ESPP, whichever is earlier. Effective
August 1, 2006, offering periods under the ESPP are six months with a corresponding six month purchase period.
New offering periods begin on each August 1st and February 1st, and those offering periods run consecutively rather
than concurrently. Participants will be converted to the six-month offering periods starting with the next offering
period in which the participants enroll on or after August 1, 2006.
The purchase dates under the ESPP are January 31st and July 31st of each year.
77
Stockholder Rights Plan
Cadence had a stockholder rights plan to protect its stockholders’ rights in the event of a proposed or actual
acquisition of 15% or more of the outstanding shares of Cadence common stock. The rights plan expired on
February 9, 2006.
NOTE 4. STOCK-BASED COMPENSATION
Stock-based compensation expense and the related income tax benefit recognized under SFAS No. 123R in the
Consolidated Income Statements in connection with stock options, restricted stock and the ESPP for the year ended
December 30, 2006 was as follows:
Year Ended
December 30, 2006
(In thousands)
48,288
46,488
9,210
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ESPP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
103,986
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31,895
The adoption of SFAS No. 123R had the following impact for the year ended December 30, 2006:
Year Ended
December 30, 2006
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands,
except per share
amounts)
$
(48,593)
$
(35,275)
$
(0.13)
$
(0.11)
$
(10,712)
As required by SFAS No. 123R, on January 1, 2006, Cadence eliminated the unamortized Deferred stock
compensation of $90.1 million, which in turn reduced Common stock and capital in excess of par value by the same
amount, which had been included in Stockholders’ Equity on Cadence’s Consolidated Balance Sheet as of
December 31, 2005.
Stock Options
The exercise price of each stock option granted under one of Cadence’s equity incentive plans equals the
market price of Cadence’s common stock on the date of grant. The weighted average grant date fair value of options
granted during the year ended December 30, 2006 was $5.58. The weighted average assumptions used in the model
for the year ended December 30, 2006 are outlined in the following table:
Year Ended
December 30, 2006
Dividend
Expected
Risk-free
Expected
yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
None
24.2%
4.80%
5.1
A summary of the changes in stock options outstanding under Cadence’s equity incentive plans during the year
ended December 30, 2006 is presented below:
Weighted
Average
Exercise Price
Shares
Weighted
Average
Remaining
Contractual
Terms
(Years)
Aggregate
Intrinsic
Value
(Dollars and shares in thousands)
Options outstanding as of December 31,
2005 . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired options . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . .
63,946
306
5,338
(9,462)
(4,874)
$
$
$
$
$
15.26
1.93
17.25
12.14
20.18
6.2
$
197,215
Options outstanding as of
December 30, 2006 . . . . . . . . . . . .
55,254
$
15.49
5.8
$
186,089
Options vested as of December 30,
2006 . . . . . . . . . . . . . . . . . . . . . . . . .
40,437
$
15.76
4.9
$
138,314
Options vested as of December 30, 2006
and options expected to vest after
December 30, 2006 . . . . . . . . . . . . . .
52,941
$
15.49
5.7
$
180,383
The total intrinsic value of options exercised during the year ended December 30, 2006 was $55.9 million.
Cash received from stock option exercises during the year ended December 30, 2006 was $114.9 million.
Restricted Stock
Generally, restricted stock awards vest over four years and are subject to the employee’s continuing service to
Cadence. Cadence issues some of its restricted stock with performance-based vesting. The terms of these restricted
stock grants are consistent with grants of restricted stock described above, with the exception that the shares vest not
upon the mere passage of time, but upon the attainment of certain predetermined performance goals. Each period,
Cadence estimates the most likely outcome of such performance goals and recognizes the related stock-based
compensation expense. The amount of stock-based compensation expense recognized in any one period can vary
based on the attainment or estimated attainment of the various performance goals. If such performance goals are not
met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Cadence recorded stock-based compensation expense of $13.1 million during 2006 related to these performancebased restricted stock grants. No expense was recorded in 2005 and 2004 for performance-based restricted stock
grants.
79
A summary of the changes in restricted stock outstanding under Cadence’s equity incentive plans during the
year ended December 30, 2006 is presented below:
Shares
Weighted
Average
Grant Date
Fair Value
(Dollars
6,439
$
3,398
$
(2,409) $
(286) $
Non-vested shares as of December 31, 2005 . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Remaining
Contractual
Terms
(Years)
Aggregate
Intrinsic
Value
and shares in thousands)
15.40
$ 108,947
17.44
15.21
15.74
Non-vested shares as of December 30, 2006 . . . .
7,142
$
16.42
2.7
$ 127,921
Non-vested shares expected to vest after
December 30, 2006 . . . . . . . . . . . . . . . . . . . . . .
6,236
$
16.34
2.6
$ 111,678
As of December 30, 2006, Cadence had $81.4 million of total unrecognized compensation expense, net of
estimated forfeitures, related to restricted stock grants, which amount will be recognized over the remaining
weighted average vesting period of 2.9 years. The total fair value of restricted stock that vested during the year
ended December 30, 2006 was $36.7 million.
Cumulative effect of change in accounting principle, net of tax
During the year ended December 30, 2006, a non-cash benefit of approximately $0.4 million for estimated
forfeitures of restricted stock previously expensed was recorded as of the SFAS No. 123R implementation date as a
one-time cumulative effect of change in accounting principle, net of tax. Pursuant to APB No. 25, stock-based
compensation expense was not previously reduced for estimated future forfeitures, but instead was reversed upon
actual forfeiture.
Employee Stock Purchase Plan (ESPP)
The weighted average estimated grant date fair value of purchase rights granted under the ESPP was $4.32 for
the year ended December 30, 2006. The weighted average assumptions used in the model for the year ended
December 30, 2006 are outlined in the following table:
Year Ended
December 30, 2006
Dividend
Expected
Risk-free
Expected
yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
None
24.0%
4.89%
1.1
The following table presents the shares of common stock issued under Cadence’s ESPP, cash received from the
purchase of these shares and the weighted average purchase price per share during fiscal years 2006, 2005 and 2004:
2006
2005
2004
(In thousands, except per share
amounts)
Cadence shares purchased under the ESPP . . . . . . . . . . . . . . . . . . . . .
3,640
3,913
3,988
Cash received for the purchase of shares under the ESPP . . . . . . . . . . $ 41,619
$ 38,093
$ 34,283
Weighted-average purchase price per share. . . . . . . . . . . . . . . . . . . . . $
11.43
$
9.73
$
8.59
Reserved for Future Issuance
As of December 30, 2006, Cadence had reserved the following shares of authorized but unissued common
stock for future issuance:
Shares
(In thousands)
Employee equity incentive plans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,872
Shares reserved for 2023 convertible notes conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,721
Warrants related to 2023 convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,717
Warrants related to 2011 and 2013 convertible notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,640
Employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,836
Directors stock option plans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,510
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*
124,296
Includes both shares reserved for (i) issuance upon exercise of future option grants and (ii) outstanding but
unexercised options to purchase common stock.
Stock-Based Compensation for Fiscal Years 2005 and 2004
For fiscal years 2005 and 2004, Cadence followed the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended. The table below provides a pro forma illustration of the financial
results of operations as if Cadence had accounted for its grants of employee stock options under the fair value
method of SFAS No. 123:
2005
2004
(In thousands)
Net income (loss)
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Stock-based employee compensation expense included in reported net income,
net of related tax effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Stock-based employee compensation expense determined under fair-value
method for all awards, net related tax effects . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) per share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
$ 49,343
$ 74,474
33,321
23,805
(85,719)
(97,878)
$ (3,055)
$
401
$ 0.18
$ (0.01)
$
$
0.27
0.00
$ 0.16
$ (0.01)
$
$
0.25
0.00
Cadence determined the estimated fair values of its options granted and shares purchased under its ESPP for
fiscal years 2005 and 2004 using the following weighted-average assumptions, assuming a dividend yield of zero
for all periods:
Stock Options
2005
2004
Risk-free interest rate, based on weighted average . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.11%
Volatility factors of the expected market price of Cadence’s common stock . . . . . . . . .
27%
Weighted average expected life of an option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Years
3.42%
36%
5.0 Years
Employee Stock
Purchase Plan
2005
2004
Risk-free interest rate, based on weighted average . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.29%
Volatility factors of the expected market price of Cadence’s common stock . . . . . . . . .
26%
Weighted average expected life of ESPP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Years
1.38%
38%
1.3 Years
For fixed awards, as defined by APB No. 25, Cadence amortized deferred stock-based compensation to
expense using the straight-line method over the period that the stock options and restricted stock vest, which is
generally three to four years. For variable awards, as defined by APB No. 25, stock-based compensation expense
was recognized on an accelerated basis in accordance with FASB Interpretation, or FIN, No. 28, “Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”
Stock Options
A summary of the options granted under Cadence’s equity incentive plans as of and during the years ended
December 31, 2005 and January 1, 2005 is as follows:
2005
Shares
2004
Weighted
Average
Exercise
Price
Shares
(Shares in thousands)
$ 14.84
68,349
$ 13.26
116
$ 15.13
10,549
$ 10.43
(4,636)
$ 16.84
(5,455)
Weighted
Average
Exercise
Price
$
$
$
$
$
14.87
2.91
13.10
9.24
16.48
$ 15.26
$
14.84
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . .
Acquired Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . .
68,923
4,557
7,563
(10,329)
(6,768)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
63,946
Options exercisable at year end . . . . . . . . . . . . . . . . . . . . . .
Options available for future grant . . . . . . . . . . . . . . . . . . . .
Weighted average fair value of options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,634
22,900
44,968
29,878
4.38
$ 4.56
$
68,923
Cadence recorded stock-based compensation expense resulting from its completed acquisitions. Deferred
stock compensation resulting from these acquisitions represented the intrinsic value of the stock option grants to
employees of the acquired companies multiplied by the percentage of the remaining vesting period divided by the
total vesting period. Cadence considered certain stock awards to employees of certain acquired companies to be
variable awards. Accordingly, compensation cost was adjusted each period for increases or decreases in the intrinsic
value of the shares until the final measurement date.
82
During 2005 and 2004, Cadence issued 3,798,161 and 3,470,938 shares, respectively, of restricted stock to
certain employees. The restrictions lapse over a period of three to four years. The fair value of the restricted stock
awards granted was $62.0 million in 2005 and $45.6 million in 2004. The fair value of the restricted stock awards
was recorded as a component of deferred stock compensation and was amortized to stock-based compensation
expense as the restrictions lapse.
Cadence’s SPC Plan provided for the issuance of restricted shares of Cadence common stock to former
employees of Silicon Perspective Corporation, or SPC, who became Cadence employees, upon the satisfaction of
certain performance-based criteria in connection with Cadence’s acquisition of SPC. Restricted shares were first
issued under the SPC Plan in February 2003 and 54% of such issued shares vested immediately. The remaining 46%
vested in 11 equal monthly installments beginning in February 2003 and became fully vested on December 31,
2003. The second issue date was in April 2004, and these shares were fully vested when issued. An aggregate of
approximately 1.6 million shares were issued and recognized as stock-based compensation expense under the SPC
Plan.
Deferred stock compensation included in the accompanying Statements of Stockholders’ Equity consists of
the following for fiscal years 2005 and 2004:
2005
2004
(In thousands)
Restricted stock grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,961
$ 45,605
Restricted stock and acquired options from acquisitions . . . . . . . . . . . . . . . . . . . . . . .
6,796
3,603
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,964)
(4,861)
Deferred stock compensation, net of forfeitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,793
83
$ 44,347
NOTE 5. BALANCE SHEET COMPONENTS
A summary of balance sheet components as of December 30, 2006 and December 31, 2005 is as follows:
2006
2005
(In thousands)
Receivables, net:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,029
$ 200,843
Installment contract receivables – current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131,213
92,209
Total receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for sales returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242,242
(2,067)
(1,737)
293,052
(6,896)
(4,083)
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 238,438
$ 282,073
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,767
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,454
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,958
$ 13,681
8,928
6,293
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,179
$ 28,902
Prepaid Expenses and Other:
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,782
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,175
$ 33,777
36,959
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,957
$ 70,736
Property, Plant and Equipment:
Computer equipment and related software . . . . .
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold and building improvements . . . . . . . .
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets not ready to be placed in service . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . $ 574,089
.........................
89,435
.........................
74,139
.........................
96,917
.........................
55,479
.........................
58,293
.........................
21,991
Total cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
970,343
(615,768)
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,575
Other Assets:
Deferred income taxes . . . . . . . . . . . . . . . . . . . .
Prepaid tax on inter-company royalties . . . . . . . .
Non-marketable securities . . . . . . . . . . . . . . . . .
Non-qualified deferred compensation assets . . . .
Purchased software technology, net . . . . . . . . . .
Other long-term assets . . . . . . . . . . . . . . . . . . . .
$ 532,033
88,935
74,028
83,412
53,646
54,258
20,226
906,538
(549,593)
$ 356,945
. . . . . . . . . . . . . . . . . . . . . . . . . $ 118,459
.........................
15,539
.........................
31,360
.........................
46,808
.........................
10,913
.........................
23,262
$ 126,969
43,186
37,897
47,672
7,937
14,883
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,341
$ 278,544
84
2006
2005
(In thousands)
Accounts Payable and Accrued Liabilities:
Payroll and payroll-related accruals . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable – current . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . $ 149,817
.........................
21,968
.........................
26,153
.........................
61,852
$ 141,742
23,393
48,908
86,543
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259,790
$ 300,586
Other Long-term Liabilities:
Income taxes payable – long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 256,080
Long-term acquisition-related holdbacks and payments . . . . . . . . . . . . . . . . . . . . .
3,204
Non-qualified deferred compensation liability . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,091
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,688
$ 225,909
33,796
48,690
42,498
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 370,063
$ 350,893
NOTE 6. CONVERTIBLE NOTES
1.375% Convertible Senior Notes Due 2011 and 1.500% Convertible Senior Notes Due 2013
In December 2006, Cadence issued $250.0 million principal amount of 1.375% Convertible Senior Notes Due
2011, or the 2011 Notes, and $250.0 million of 1.500% Convertible Senior Notes Due 2013, or the 2013 Notes, and
collectively, the Convertible Senior Notes, to three initial purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional buyers pursuant to SEC Rule 144A. Cadence received net
proceeds of approximately $487.0 million after transaction fees of approximately $13.0 million, including
$12.0 million of underwriting discounts, that were recorded in Other long-term assets on the Consolidated Balance
Sheet as of December 30, 2006 and are being amortized to interest expense over the term of the Convertible Senior
Notes. A portion of the net proceeds totaling $228.5 million was used to purchase $189.6 million principal amount
of Cadence’s Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the 2023 Notes.
Holders may convert their Convertible Senior Notes prior to maturity upon the occurrence of one of the
following events:
•
•
•
The price of Cadence’s common stock reaches $27.50 during certain periods of time specified in the
Convertible Senior Notes;
Specified corporate transactions occur; or
The trading price of the Convertible Senior Notes falls below a certain threshold.
On and after November 2, 2011, in the case of the 2011 Notes, and November 1, 2013, in the case of 2013
Notes, until the close of business on the scheduled trading day immediately preceding the maturity date, holders
may convert their Convertible Senior Notes at any time, regardless of the foregoing circumstances. Cadence may
not redeem the Convertible Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is 47.2813 shares of Cadence common stock per
$1,000 principal amount of Convertible Senior Notes, equivalent to a conversion price of approximately $21.15 per
share of Cadence common stock. Upon conversion, a holder will receive the sum of the daily settlement amounts
calculated on a proportionate basis for each day during a specified observation period following the conversion date.
The daily settlement amount during each date of the observation period consists of:
•
•
Cash up to the principal amount of the note; and
Cadence’s common stock to the extent that the conversion value exceeds the amount of cash paid upon
conversion of the Convertible Senior Notes.
85
In addition, if a fundamental change occurs prior to maturity, Cadence will, in certain cases, increase the
conversion rate by an additional amount up to $8.27 per share, for a holder that elects to convert its Convertible
Senior Notes in connection with such fundamental change, which amount will be paid entirely in cash. A
fundamental change is any transaction or event (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or otherwise) in connection with which more
than 50% of Cadence’s common stock is exchanged for, converted into, acquired for or constitutes solely the right to
receive, consideration which is not at least 90% shares of common stock, or depositary receipts representing such
shares, that are:
•
•
Listed on, or immediately after the transaction or event will be listed on, a United States national
securities exchange; or
Approved, or immediately after the transaction or event will be approved, for quotation on a United
States system of automated dissemination of quotations of securities prices similar to the NASDAQ
National Market prior to its designation as a national securities exchange.
As of December 30, 2006, none of the conditions allowing the holders of the Convertible Senior Notes to
convert had been met.
Cadence evaluated the embedded conversion option in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and concluded that the embedded conversion option contained
within the Convertible Senior Notes should not be accounted for separately because the conversion option is
indexed to Cadence’s common stock and is classified as stockholders’ equity. Furthermore, Cadence evaluated the
terms of the Notes for a beneficial conversion feature in accordance with EITF No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and
EITF No. 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” and concluded there was no
beneficial conversion feature at the commitment date based on the conversion rate of the Convertible Senior Notes
relative to the commitment date stock price.
Interest on the Convertible Senior Notes began accruing in December 2006 and is payable semi-annually each
December 15th and June 15th.
Concurrently with the issuance of the Convertible Senior Notes, Cadence entered into hedge transactions with
various parties whereby Cadence has the option to purchase up to 23.6 million shares of Cadence’s common stock at
a price of $21.15 per share, subject to adjustment. These options expire on December 15, 2011, in the case of the
2011 Notes, and December 15, 2013, in the case of the 2013 Notes, and must be settled in net shares. The aggregate
cost of these hedge transactions was $119.8 million and has been recorded as a reduction to stockholders’ equity in
accordance with EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” The estimated fair value of the hedges acquired in connection with the
issuance of the Convertible Senior Notes was $118.3 million as of December 30, 2006. Subsequent changes in the
fair value of these hedges will not be recognized as long as the instruments remain classified as equity.
In separate transactions, Cadence also sold warrants to various parties for the purchase of up to 23.6 million
shares of Cadence’s common stock at a price of $31.50 per share in a private placement pursuant to Section 4(2) of
the Securities Act. The warrants expire on various dates from February 2012 through April 2012 in the case of the
2011 Notes, and February 2014 through April 2014 in the case of the 2013 Notes, and must be settled in net shares.
Cadence received $39.4 million in cash proceeds from the sale of these warrants, which has been recorded as a
reduction to stockholders’ equity in accordance with EITF No. 00-19. The estimated fair value of the warrants sold
in connection with the issuance of the Convertible Senior Notes was $42.6 million as of December 30, 2006.
Subsequent changes in the fair value of these warrants will not be recognized as long as the instruments remain
classified as equity. The warrants will be included in diluted earnings per share, or EPS, to the extent the impact is
not considered anti-dilutive.
SFAS No. 128, “Earnings per Share” and EITF No. 04-08, “Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings per Share,” requires Cadence to include in
diluted earnings per share the shares of Cadence’s common stock into which the Convertible Senior Notes will be
converted. However, since the Convertible Senior Notes meet the qualification of an Instrument C under
86
EITF No. 90-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” and because cash will be paid for the principal amount of the obligation upon conversion,
the only shares that will be considered for inclusion in diluted EPS are those relating to the excess of the conversion
premium over the principal amount in accordance with SFAS No. 128 and EITF Topic D-72, “Effect of Contracts
That May Be Settled in Stock or Cash on the Computation of Diluted Earnings per Share.” As of December 30,
2006, no shares are included in diluted EPS for the Convertible Senior Notes.
In the event Cadence’s common stock exceeds $21.15 per share, for the first $1.00 the price exceeds $21.15,
there would be dilution of approximately 1.1 million shares, but the impact on the calculation of EPS will vary
depending on when during the quarter the $21.15 per share price is reached. As the share price continues to increase,
dilution would continue to occur but at a declining rate.
Zero Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, Cadence issued $420.0 million principal amount of its 2023 Notes to two initial purchasers in
a private placement pursuant to Section 4(2) of the Securities Act for resale to qualified institutional buyers pursuant
to SEC Rule 144A. Cadence received net proceeds of $406.4 million after transaction fees of $13.6 million that
were recorded in Other long-term assets and are being amortized to interest expense using the straight-line method
over five years, which is the duration of the first redemption period. The 2023 Notes were issued by Cadence at par
and bear no interest. The 2023 Notes are convertible into Cadence common stock initially at a conversion price of
$15.65 per share, which would result in an aggregate of 26.8 million shares issued upon conversion, subject to
adjustment upon the occurrence of specified events. In connection with the issuance of the Convertible Senior Notes
in December 2006, Cadence repurchased $189.6 million principal amount of the 2023 Notes, reducing the
aggregate number of shares to be issued upon conversion to 14.7 million.
Cadence may redeem for cash all or any part of the 2023 Notes on or after August 15, 2008 for 100.00% of the
principal amount. The holders of the 2023 Notes may require Cadence to repurchase for cash all or any portion of
their 2023 Notes on August 15, 2008 for 100.25% of the principal amount, on August 15, 2013 for 100.00% of the
principal amount or on August 15, 2018 for 100.00% of the principal amount, by providing to the paying agent a
written repurchase notice. The repurchase notice must be delivered during the period commencing 30 business days
prior to the relevant repurchase date and ending on the close of business on the business day prior to the relevant
repurchase date. In addition, Cadence may redeem for cash all or any part of the 2023 Notes on or after August 15,
2008 for 100.00% of the principal amount, except for those 2023 Notes that holders have required Cadence to
repurchase on August 15, 2008 or on other repurchase dates, as described above.
Each $1,000 of principal of the 2023 Notes will initially be convertible into 63.8790 shares of Cadence
common stock, subject to adjustment upon the occurrence of specified events. Holders of the 2023 Notes may
convert their 2023 Notes prior to maturity only if:
•
•
•
•
The price of Cadence common stock reaches $22.69 during certain periods of time specified in the 2023
Notes;
Specified corporate transactions occur;
The 2023 Notes have been called for redemption; or
The trading price of the 2023 Notes falls below a certain threshold.
As the fourth conversion feature is linked to the trading price of the 2023 Notes, which are traded in an
observable market that differs from the one in which Cadence’s common stock is traded, the conversion feature
meets the definition of a derivative that must be accounted for separately at fair value. The fair value of this
conversion feature was not material at inception of the 2023 Notes or as of December 30, 2006. As of December 30,
2006, none of the conditions allowing holders of the 2023 Notes to convert had been met.
In the event of a fundamental change in Cadence’s corporate ownership or structure, the holders may require
Cadence to repurchase all or any portion of their 2023 Notes for 100.00% of the principal amount. Upon a
fundamental change in Cadence’s corporate ownership or structure, in certain circumstances Cadence may choose
to pay the repurchase price in cash, shares of Cadence common stock or a combination of cash and shares of
87
Cadence common stock. As of December 30, 2006, none of the conditions allowing the holders of the 2023 Notes to
convert had been met.
In connection with the issuance of the Convertible Senior Notes in December 2006, a portion of the proceeds
were used to purchase in the open market 2023 Notes with a principal balance of $189.6 million for a total purchase
price of $228.5 million. In connection with this purchase, Cadence incurred expenses of $40.8 million for the early
extinguishment of debt. The loss on early extinguishment of debt included the call premium on the purchased 2023
Notes and the write-off of a portion of the unamortized deferred debt issuance costs.
Concurrently with the issuance of the 2023 Notes, Cadence entered into hedge transactions with a financial
institution whereby Cadence originally acquired options to purchase up to 26.8 million shares of Cadence common
stock at a price of $15.65 per share. These options expire on August 15, 2008 and must be settled in net shares. The
cost of the hedge transactions to Cadence was $134.6 million. In connection with the purchase of a portion of the
2023 Notes in December 2006, Cadence also sold 12.1 million of the hedges that were originally purchased in
connection with the 2023 Notes and received proceeds of $55.9 million.
In addition, Cadence sold warrants for its common stock to a financial institution for the purchase of up to
26.8 million shares of Cadence common stock at a price of $23.08 per share. The warrants expire on various dates
from February 2008 through May 2008 and must be settled in net shares. Cadence received $56.4 million in cash
proceeds from the sale of these warrants. In connection with the purchase of a portion of the 2023 Notes in
December 2006, Cadence also purchased 12.1 million of the warrants for its common stock that were originally
issued in connection with the 2023 Notes at a cost of $10.2 million. The remaining outstanding warrants will be
included in diluted EPS to the extent the impact is not considered anti-dilutive.
The costs incurred in connection with the hedge transaction and the proceeds from the sale of the warrants are
included as a net reduction in Common stock and capital in excess of par in the accompanying Consolidated
Balance Sheets as of December 30, 2006 and December 31, 2005, in accordance with the guidance in EITF
No. 00-19. Additionally, the cost to purchase a portion of the warrants and the proceeds received from selling a
portion of the notes hedges in December 2006 have also been recorded to stockholders equity. As of December 30,
2006, the estimated fair value of the remaining hedges acquired in connection with the issuance of the 2023 Notes
was $68.3 million and the estimated fair value of the remaining warrants sold in connection with the issuance of the
2023 Notes was $12.0 million. Subsequent changes in the fair value of these hedge and warrant transactions will not
be recognized as long as the instruments remain classified as equity.
For the year ended December 30, 2006, a weighted average of 26.4 million common shares were included in
diluted EPS for the 2023 Notes. There will be no other impact on basic or dilutive EPS for the 2023 Notes unless the
price of Cadence’s common stock exceeds the warrant strike price of $23.08 per share. Up to $23.08 per share, in
connection with any conversion, the operation of the hedge transactions and sale of the warrants would effectively
result in no impact on basic or dilutive EPS. In the event Cadence’s common stock exceeds $23.08 per share, for the
first $1.00 the price exceeds $23.08, there would be dilution of approximately 0.6 million shares, but the impact on
the calculation of EPS will vary depending on when during the quarter the $23.08 per share price is reached. As the
share price continues to increase, dilution would continue to occur but at a declining rate. If these transactions settle
in Cadence’s favor, Cadence could be exposed to credit risk related to the other party to the transactions.
NOTE 7. TERM LOAN
On December 19, 2005, Castlewilder, a company incorporated in Ireland and a wholly-owned subsidiary of
Cadence, entered into a syndicated term facility agreement, or Credit Agreement, with Banc of America Securities
LLC as lead arranger, and Bank of America, N.A. as Administrative Agent. The Credit Agreement provides for a
three-year $160.0 million unsecured term loan. With the consent of all of the lenders, Castlewilder may, at the end of
the second year of the loan, extend the maturity date to December 31, 2009.
During the year ended December 30, 2006, Castlewilder made scheduled principal payments of $32.0 million,
plus additional prepayments of $100.0 million, reducing the amount of principal due in 2007 and 2008. As of
December 30, 2006, scheduled principal payments on the Term Loan due during 2007 were $28.0 million.
88
During the term of the Credit Agreement, Castlewilder has the option to choose between two interest rates:
•
•
A base rate equal to the higher of the Federal Funds Rate plus a spread of 0.50% or the “prime rate”
publicly announced by Bank of America, N.A.; or
A LIBOR-based rate equal to LIBOR plus a spread of 0.625%.
The loan initially was a base rate loan that converted on December 22, 2005 into a LIBOR-based rate loan,
which accrued interest monthly at a rate of 5.85% as of December 30, 2006. Cadence can change its interest rate
election each Interest Period, as defined in the loan agreement. The margin with respect to the loan (if the loan is a
LIBOR loan) may be increased or decreased depending upon Cadence’s consolidated leverage ratio.
Castlewilder is obligated to repay the outstanding principal amount of the loan in quarterly installments in
amounts equal to $8.0 million per quarter during 2006, $12.0 million per quarter during 2007 and $20.0 million per
quarter during 2008 (with the quarterly repayment amount to be adjusted to $10.0 million per quarter during 2008
and 2009 if the maturity date of the loan is extended). Castlewilder is also obligated to pay accrued interest on the
last day of each month or other interest period that Castlewilder may select under the terms of the Credit Agreement.
If the loan is converted into a base rate loan, Castlewilder is obligated to pay accrued interest on the last day of each
quarter.
Castlewilder’s obligations under the Credit Agreement are unconditionally guaranteed by Cadence and
Cadence Technology Limited, or CTL, a company incorporated in Ireland and a wholly-owned subsidiary of
Castlewilder, pursuant to guaranties entered into by Cadence and CTL in favor of the lenders on December 19,
2005.
In the event of the following, the Administrative Agent may declare that all or part of the loan, together with
accrued interest and all other amounts accrued and outstanding under the financing documents, to be immediately
due and payable:
•
•
•
•
•
•
•
Non-payment of any amounts due under the financing documents;
Non-compliance with any other provisions of the financing documents;
Any representation or statement made in the financing documents proving to have been incorrect or
misleading at the time it was made;
Certain insolvency events, insolvency proceedings or creditor’s process with respect to Castlewilder and
CTL;
Castlewilder or CTL ceasing to be either direct or indirect wholly-owned subsidiaries of Cadence;
It becoming unlawful for Castlewilder, CTL or Cadence to perform any material obligation under the
financing documents; or
Any default under the Cadence Guaranty.
The Credit Agreement and the CTL Guaranty contain certain customary representations and warranties,
affirmative and negative covenants and indemnification obligations of Castlewilder and CTL. The Credit Agreement also provides for certain tax gross-up payment obligations of Castlewilder. The Cadence Guaranty also
contains representations and warranties, affirmative covenants, negative covenants relating to, among other matters,
incurrence of liens and indebtedness, the making of investments and asset dispositions, as well as a requirement to
maintain a minimum consolidated interest coverage ratio and consolidated leverage ratio. A breach by Castlewilder,
Cadence or CTL of any of these representations, warranties or covenants could cause an event of default under the
applicable financing document and allow the Administrative Agent to declare that all or part of the loan, together
with accrued interest and all other amounts accrued and outstanding under the financing documents, to be
immediately due and payable. The Cadence Guaranty also contains indemnification obligations on the part of
Cadence. As of December 30, 2006, Cadence was in compliance with all of its covenants.
89
NOTE 8. INCOME TAXES
The provision for income taxes consisted of the following components in fiscal 2006, 2005 and 2004:
2006
2005
(In thousands)
2004
Current:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31,533
2,806
35,830
$ 66,179
11,859
24,070
$ 21,057
5,251
1,350
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,169
102,108
27,658
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,447
4,769
(4,681)
(15,439)
(8,988)
1,459
(7,139)
(6,162)
(2,394)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,535
(22,968)
(15,695)
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$ 99,704
$ 79,140
$ 11,963
Income before provision for income taxes included income from Cadence’s foreign subsidiaries of approximately $95.2 million in 2006, $87.1 million in 2005 and $93.6 million in 2004.
The provision for income taxes differs from the amount estimated by applying the statutory federal income tax
rate of 35% to income before provision for income taxes in fiscal 2006, 2005 and 2004 as follows:
2006
2005
2004
(In thousands)
$ 44,969
$ 30,253
702
91
30,082
---63
(28,172)
3,420
3,301
787
760
420
3,150
5,775
4,200
---139
(1,508)
(1,066)
(2,698)
570
(2,328)
(2,265)
(544)
1,002
Provision computed at federal statutory rate . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal tax effect . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on AJCA repatriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxed at a higher (lower) rate . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of in-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis difference in acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of foreign subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 84,657
5,031
---3,719
1,388
877
315
7,438
---(1,529)
783
(3,289)
314
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 99,704
$ 79,140
$ 11,963
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41%
62%
14%
Cadence includes interest expense associated with income tax liabilities within the Provision for income taxes
in its Consolidated Income Statements.
90
The components of deferred tax assets and liabilities consisted of the following as of December 30, 2006 and
December 31, 2005:
2006
2005
(In thousands)
Deferred Tax Assets:
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue recognition and allowance for doubtful accounts . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45,506
31,747
25,974
19,803
17,916
12,609
2,169
22,747
7,426
8,674
-------
$ 49,921
26,334
25,067
21,185
18,912
14,984
13,694
13,022
10,392
9,506
2,757
3,396
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194,571
(5,909)
209,170
(5,125)
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
188,662
204,045
Deferred Tax Liabilities:
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(29,865)
(2,102)
(6,615)
(43,501)
(6,453)
(5,776)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(38,582)
(55,730)
Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$150,080
$148,315
As of December 30, 2006, Cadence had total net deferred tax assets of approximately $150.1 million.
Realization of the deferred tax assets will depend on generating sufficient taxable income of the appropriate
character and in the appropriate jurisdictions prior to the expiration of certain net operating loss, capital loss and tax
credit carryforwards. Although realization is not assured, management believes that it is more likely than not that
the net deferred tax assets will be realized.
The valuation allowance increased by $0.8 million during 2006 based on estimation of realization of deferred
tax assets in future years. As of December 30, 2006, the valuation allowance was $5.9 million and is related to
certain state net operating losses and tax credits, the utilization of which is not likely based on available evidence,
including Cadence’s estimation of future taxable income in these states.
During the fourth quarter of 2005, Cadence completed its evaluation of the repatriation provisions of the
American Jobs Creation Act, or AJCA, which created a temporary one year incentive for United States corporations
to repatriate accumulated earnings of foreign subsidiaries by providing an 85% dividends received deduction for
certain qualifying dividends. Cadence made the determination to repatriate $500.0 million of certain foreign
earnings which were previously considered to be indefinitely reinvested outside of the United States. Cadence has
been and will continue to invest these earnings in the United States pursuant to the AJCA guidelines. Cadence
completed the repatriation and recorded an income tax expense of $30.1 million associated with the repatriation
during the fourth quarter of 2005.
Cadence provides for United States income taxes on the earnings of foreign subsidiaries unless the earnings are
considered permanently invested outside of the United States. As of December 30, 2006, the cumulative amount of
91
earnings upon which United States income taxes have not been provided was approximately $274.0 million. As of
December 30, 2006, the unrecognized deferred tax liability for these earnings was approximately $84.0 million.
Cadence intends to indefinitely reinvest its foreign earnings outside of the United States.
As of December 30, 2006, Cadence had federal and California net operating loss carryforwards of approximately $13.6 million and $2.0 million, respectively, available to reduce future taxable income. The federal net
operating loss carryforwards will expire at various dates from 2008 through 2025. The California net operating loss
carryforwards will expire at various dates from 2012 through 2015. Cadence also has tax effected net operating
losses from states other than California of $2.6 million, net of federal tax benefit, which will expire at various dates
from 2007 through 2025.
As of December 30, 2006, Cadence had federal tax credits of $12.9 million, California credits of $8.1 million,
net of federal tax benefit, credits from states other than California of $4.8 million, net of federal tax benefit and
$0.2 million of tax credits in foreign jurisdictions. Of these tax credits, $9.6 million do not expire and carry forward
indefinitely until utilized and the remaining $16.4 million of tax credits will expire at various dates from 2007
through 2024.
The IRS and other tax authorities regularly examine Cadence’s income tax returns. In November 2003, the IRS
completed its field examination of Cadence’s federal income tax returns for the tax years 1997 through 1999 and
issued a Revenue Agent’s Report, or RAR, in which the IRS proposes to assess an aggregate tax deficiency for the
three-year period of approximately $143.0 million. The most significant of the disputed adjustments for the tax
years 1997 through 1999 relates to transfer pricing arrangements that Cadence has with a foreign subsidiary.
Cadence has filed a protest to certain of the proposed adjustments with the Appeals Office of the IRS where the
matter is currently being considered.
In July 2006, the IRS completed its field examination of Cadence’s federal income tax returns for the tax years
2000 through 2002 and issued an RAR, in which the IRS proposes to assess an aggregate tax deficiency for the
three-year period of approximately $324.0 million. In November 2006, the IRS revised the proposed aggregate tax
deficiency for the three-year period to be approximately $318.0 million. The IRS is contesting Cadence’s
qualification for deferred recognition of certain proceeds received from restitution and settlement in connection
with litigation during the period. The proposed tax deficiency for this item is approximately $152.0 million. The
remaining proposed tax deficiency of approximately $166.0 million is primarily related to proposed adjustments to
Cadence’s transfer pricing arrangements that it has with foreign subsidiaries and to Cadence’s deductions for
foreign trade income. The IRS took similar positions with respect to Cadence’s transfer pricing arrangements in the
prior examination period and may make similar claims against Cadence’s transfer pricing arrangements in future
examinations. Cadence has filed a timely protest with the IRS and will seek resolution of the issues through the
Appeals Office of the IRS.
Cadence believes that the proposed IRS adjustments are inconsistent with applicable tax laws and Cadence is
challenging these proposed adjustments vigorously. The RARs are not final Statutory Notices of Deficiency but the
IRS imposes interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at
rates published by the IRS, which rates are adjusted quarterly and have been between four and ten percent since
1997.
Significant judgment is required in determining Cadence’s provision for income taxes. The calculation of
Cadence’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In
determining the adequacy of Cadence’s provision for income taxes, Cadence regularly assesses the likelihood of
adverse outcomes resulting from tax examinations including the RARs for the tax years 1997 through 2002.
Cadence provides for tax liabilities on its Consolidated Balance Sheets unless Cadence considers it probable that
additional taxes will not be due. However, the ultimate outcome of tax examinations, including the total amount
payable or the timing of any such payments upon resolution of these issues, cannot be predicted with certainty. In
addition, Cadence cannot assure that such amount will not be materially different than that which is reflected in its
historical income tax provisions and accruals. Should the IRS or other tax authorities assess additional taxes as a
result of a current or a future examination, Cadence may be required to record charges to operations in future
periods that could have a material impact on the results of operations, financial position or cash flows in the
applicable period or periods.
92
NOTE 9. ACQUISITIONS
For each of the acquisitions described below, the results of operations and the estimated fair value of the assets
acquired and liabilities assumed have been included in Cadence’s Consolidated Financial Statements from the date
of the acquisition.
Comparative pro forma financial information for all 2006, 2005 and 2004 acquisitions have not been presented
because the results of operations were not material to Cadence’s Consolidated Financial Statements.
2006 Acquisition
In March 2006, Cadence acquired a company for an aggregate initial purchase price of $25.8 million, which
included the payment of cash, the fair value of assumed options and acquisition costs. The preliminary allocation of
the purchase price was recorded as $17.4 million of goodwill, $9.4 million of identifiable intangible assets and
$(1.0) million of net liabilities. The $17.4 million of goodwill recorded in connection with this acquisition is not
expected to be deductible for income tax purposes. Any subsequent adjustments to the purchase price of this
acquired company are included in the “Other” line of the changes of goodwill table in Note 10 below.
2005 Acquisition
Verisity Ltd.
In April 2005, Cadence acquired Verisity Ltd., or Verisity, an Israeli corporation. Verisity was a publicly-held
provider of verification process automation solutions. Cadence purchased Verisity to acquire key personnel and
technology. The aggregate initial purchase price was $325.4 million, which included the payment of $304.6 million
of cash, $10.6 million of assumed options at fair value, $6.9 million of acquisition costs and $3.3 million of contract
termination costs.
The following table summarizes the preliminary allocation of the purchase price for Verisity and the estimated
amortization period for the acquired intangibles:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangibles:
Existing technology and backlog (one to five-year weighted-average useful lives) . . . . . . . .
Agreements and relationships (three to five-year weighted-average useful lives) . . . . . . . . . .
Tradenames / trademarks / patents (seven-year weighted-average useful life) . . . . . . . . . . . .
In-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$
92,574
2,509
12,083
34,000
21,300
4,000
9,400
221,665
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
397,531
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,651
35,451
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,102
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
325,429
Any subsequent adjustments to the purchase price of this acquired company are included in the “Other” line of
the changes of goodwill table in Note 10 below. The $9.4 million of purchase price allocated to acquired in-process
technology was determined through established valuation techniques. The acquired in-process technology was
immediately expensed because technological feasibility had not been established, and no future alternative use
exists. The write-off of acquired in-process technology is a component of operating expenses in the 2005
Consolidated Income Statement.
For tax purposes, approximately $160.0 million of the goodwill is expected to be deductible.
93
2004 Acquisitions
Neolinear, Inc.
In April 2004, Cadence acquired Neolinear, Inc., or Neolinear, a privately-held developer of rapid analog
design technology. Cadence purchased Neolinear to acquire key personnel and technology. As discussed in Note 12,
prior to the acquisition Cadence held an investment in Neolinear of $3.0 million, representing 12% ownership,
which was accounted for under the equity method of accounting. In accordance with SFAS No. 141, “Business
Combinations,” Cadence accounted for the acquisition of Neolinear as a step acquisition. The aggregate initial
purchase price was $78.1 million, which included the payment of cash, the fair value of assumed options and
acquisition costs. The purchase price and goodwill will increase if certain revenue and product development
performance goals are achieved over a period of approximately four years following the acquisition.
The following table summarizes the preliminary allocation of the purchase price for Neolinear and the
estimated amortization period for the acquired intangibles:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangibles:
Existing technology (five-year weighted-average useful life) . . . . . . . . . . . . . . . . . . . . .
Backlog (three-year weighted-average useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patents (five-year weighted-average useful life). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements (three-year weighted-average useful life) . . . . . . . . . . . . . . . .
Trademarks (five-year weighted-average useful life) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
... $
13,383
...
288
...
46
...
...
...
...
...
...
...
19,600
1,700
4,700
7,000
1,200
1,400
38,319
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87,636
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,762
7,783
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,545
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
78,091
Any subsequent adjustments to the purchase price of this acquired company are included in the “Other” line of
the changes of goodwill table in Note 10 below. The $38.3 million of goodwill is not expected to be deductible for
income tax purposes.
Other 2004 Acquisition
During the year ended January 1, 2005, Cadence acquired one other company for an aggregate initial purchase
price of $9.2 million, which included the payment of cash, the fair value of assumed options and acquisition costs.
The $5.9 million of goodwill recorded in connection with this acquisition is not expected to be deductible for
income tax purposes.
Acquisition-Related Earnouts
For many of Cadence’s previously completed acquisitions, payment of a portion of the purchase price is
contingent upon the acquired business’ achievement of certain revenue and product development performance
goals. The portion of the contingent purchase price, or earnout, associated with employee retention is recorded as
compensation expense. The specific performance goal levels, and amounts and timing of earnout payments, vary
with each acquisition.
94
During the year ended December 30, 2006, Cadence recorded $18.6 million of goodwill for achieved earnouts
payable to former stockholders of acquired companies. The $18.6 million of goodwill consisted of $18.5 million in
cash payments and $0.1 million in accrued liabilities on the Consolidated Balance Sheet as of December 30, 2006.
In addition, Cadence recorded $1.4 million in compensation expense related to these earnouts during the year ended
December 30, 2006.
During the year ended December 31, 2005, Cadence recorded $27.5 million of goodwill for earnouts payable
to former stockholders of acquired companies as a result of the achievement of certain performance goals. The
$27.5 million of earnouts consisted of $23.5 million of cash payments made prior to December 31, 2005, the
issuance of 0.1 million shares of Cadence’s common stock valued at $1.3 million and $2.7 million accrued in
Accounts payable and accrued liabilities on the Consolidated Balance Sheet as of December 31, 2005.
In the year ended January 1, 2005, Cadence recorded $40.6 million of goodwill as contingent purchase price
payable to former stockholders of acquired companies as a result of the achievement of certain performance goals.
The $40.6 million of goodwill consisted of $17.0 million of actual cash payments, $7.2 million of accrued cash
payments and the issuance of 1.1 million shares of Cadence’s common stock valued at $16.4 million. In addition,
Cadence recognized stock compensation expense of $1.2 million in connection with these acquisitions in
accordance with Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB No. 25).”
In connection with Cadence’s acquisitions completed prior to December 30, 2006, Cadence may be obligated
to pay up to an aggregate of $4.8 million in cash during the next 12 months and an additional $2.0 million in cash in
periods after the next 12 months through August 2008 if certain revenue and product development performance
goals are achieved.
Write-off of Acquired In-Process Research and Development
Acquired in-process research and development charges represent in-process research and development that
had not reached technological feasibility at the time of acquisition and had no probable alternative future use.
For acquisitions completed during 2006, 2005 and 2004, the purchase price allocated to acquired in-process
research and development was determined through established valuation techniques. The acquired in-process
research and development was immediately expensed because technological feasibility had not been established,
and no future alternative use existed. The write-off of acquired in-process research and development is a component
of operating expenses in the Consolidated Income Statements.
Described below are the write-offs of acquired in-process research and development charges in fiscal 2006,
2005 and 2004.
2006
Verisity Ltd. . . . . . . . . . . . . . . . . . . . . . .
Neolinear, Inc. . . . . . . . . . . . . . . . . . . . . .
Other 2006 acquisition . . . . . . . . . . . . . . .
Other 2004 acquisition . . . . . . . . . . . . . . .
.......................
.......................
.......................
.......................
$ ------900
----
Total in-process research and development. . . . . . . . . . . . . . . . . . . . . .
$900
2005
(In thousands)
$9,400
---------$9,400
2004
$ ---7,000
---2,000
$9,000
NOTE 10. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Cadence conducts an annual
impairment analysis of goodwill, which it completed during the third quarter of 2006. Based on the results of the
impairment review, Cadence determined that no indicators of impairment existed for its reporting unit during 2006.
95
For purposes of SFAS No. 142, Cadence operates under one reporting unit. Cadence’s annual impairment
review process compares the fair value of its reporting unit to its carrying value, including the goodwill related to the
reporting unit. To determine the reporting unit’s fair value, Cadence utilized the market valuation approach in the
current year evaluation.
The market approach provides an estimate of the fair value of Cadence based on the total number of Cadence
common shares outstanding, multiplied by the price per common share. The estimated fair value is then compared
to the carrying value of Cadence’s net assets. If the carrying value of Cadence’s net assets is greater than the
aggregate market value of its common shares outstanding, additional fair value analyses are performed on the
individual intangible assets, including goodwill, to determine if any intangible assets are impaired, and, if so, an
impairment charge is recorded.
The changes in the carrying amount of goodwill for the years ended December 30, 2006 and December 31,
2005 are as follows:
Balance as of January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill resulting from acquisitions during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions due to earnouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to acquired deferred tax assets and taxes payable . . . . . . . . . . . . . . . . . . . . . .
Tax benefits allocable to goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$ 995,065
221,665
27,536
(4,884)
(2,079)
(4,377)
Balance as of December 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,232,926
Goodwill resulting from acquisitions during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions due to earnouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to acquired deferred tax assets and taxes payable . . . . . . . . . . . . . . . . . . . . . .
Tax benefits allocable to goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,393
18,632
(377)
(1,370)
375
Balance as of December 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,267,579
Goodwill resulting from acquisitions during the year includes adjustments to the initial allocation of the
purchase price. During the year ended December 31, 2005, Cadence recorded other adjustments of $4.4 million in
the carrying amount of goodwill primarily as a result of a $3.0 million reduction for foreign currency translation and
a $1.4 million reduction due to adjustments to the initial purchase price of certain acquisitions, which primarily
consists of changes to estimated sublease income from facilities acquired as part of previous acquisitions.
Acquired Intangibles, net
Acquired intangibles with finite lives as of December 30, 2006 were as follows:
Gross Carrying
Amount
Accumulated
Amortization
Existing technology and backlog . . . . . . . . . . . . . . . . .
Agreements and relationships . . . . . . . . . . . . . . . . . . . .
Distribution rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradenames, trademarks and patents . . . . . . . . . . . . . . .
$
625,832
63,153
30,100
26,634
(In thousands)
$
(572,315)
(41,773)
(10,535)
(8,358)
Total acquired intangibles . . . . . . . . . . . . . . . . . . . . .
$
745,719
$
96
(632,981)
Net
$
53,517
21,380
19,565
18,276
$
112,738
Acquired intangibles with finite lives as of December 31, 2005 were as follows:
Gross Carrying
Amount
Accumulated
Amortization
Existing technology and backlog . . . . . . . . . . . . . . . . .
Agreements and relationships . . . . . . . . . . . . . . . . . . . .
Distribution rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradenames, trademarks and patents . . . . . . . . . . . . . . .
$
623,360
63,807
30,100
11,034
(In thousands)
$
(527,858)
(33,824)
(7,525)
(5,247)
Total acquired intangibles . . . . . . . . . . . . . . . . . . . . .
$
728,301
$
(574,454)
Net
$
95,502
29,983
22,575
5,787
$
153,847
Aggregate amortization expense for the fiscal years 2006, 2005 and 2004 was as follows:
2006
Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . .
$
63,251
2005
(In thousands)
$
102,135
2005
$
104,685
Estimated amortization expense for the following fiscal years and thereafter is as follows:
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total estimated amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In thousands)
$
40,960
29,535
20,288
10,079
5,967
5,909
$
112,738
Amortization of costs from existing technology is included in Cost of product and Cost of services.
Amortization of costs from acquired maintenance contracts is included in Cost of maintenance.
NOTE 11. SALES OF INSTALLMENT CONTRACT RECEIVABLES
From time-to-time, Cadence transfers installment contract receivables on a non-recourse or limited-recourse
basis to third party financing institutions. These transfers are recorded as sales and accounted for in accordance with
SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
The following table shows the amounts of accounts receivable transferred to financing institutions on a nonrecourse basis in fiscal 2006, 2005 and 2004:
2006
Accounts receivable transferred . . . . . . . . . . . . . . . . . .
$
200,837
2005
(In thousands)
$
202,757
2004
$
32,150
Losses on the sale of receivables are included in General and administrative expense in the accompanying
Consolidated Income Statements. The recorded losses are determined based on the purchasing financing
institution’s review of the credit strength of the customers whose installment contract receivables are being
transferred by Cadence. The following table presents the losses recorded in fiscal 2006, 2005 and 2004:
2006
Losses on sales of receivables . . . . . . . . . . . . . . . . . . .
$
20,257
2005
(In thousands)
$
10,678
2004
$
2,080
When Cadence sells receivables, it normally retains the servicing rights to the underlying accounts receivable.
The fair value of the retained servicing rights have not been material to Cadence’s Consolidated Financial
Statements.
97
NOTE 12. FINANCIAL INSTRUMENTS
Investments
The following tables summarize Cadence’s cash, cash equivalents, short-term investments and long-term
investments as of December 30, 2006:
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(In thousands)
Classified as Cash and cash equivalents:
Cash and interest bearing deposits. . . . . . . . . . . . . .
$
80,015
$
----
$
----
$ 80,015
Cash equivalents:
Money market mutual funds . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . .
6,023
848,304
-------
-------
6,023
848,304
Total cash equivalents . . . . . . . . . . . . . . . . .
854,327
----
----
854,327
Total Cash and cash equivalents . . . . . . . . . . . . . . .
$ 934,342
$
----
$
----
$934,342
$
434
15,510
31,360
$
---9,749
----
$
---(1,604)
----
$
$
47,304
$
9,749
$
(1,604)
$ 55,449
Classified as investments:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities – available-for-sale . . . . . . . . .
Non-marketable securities . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . .
434
23,655
31,360
Investments Reported as:
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments in Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,089
31,360
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,449
The following table summarizes the fair value and gross unrealized losses related to available-for-sale
securities, aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position as of December 30, 2006:
Less than 12 Months
Fair Value
Marketable securities – available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Gross
Unrealized
Losses
(In thousands)
8,414 $ (1,604)
Market values were determined for each individual security in the investment portfolio. The decline in value of
these investments is related to changes in the market value of the investees’ common stock and is considered to be
temporary in nature.
See Note 2 for Cadence’s policy on recording other-than-temporary declines in its marketable equity
securities. Cadence recognizes realized gains and losses upon sale of investments using the specific identification
method.
98
The following tables summarize Cadence’s cash, cash equivalents, short-term investments and long-term
investments as of December 31, 2005:
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(In thousands)
Classified as Cash and cash equivalents:
Cash and interest bearing deposits. . . . . . . . . . . . . .
$ 104,655
Cash equivalents:
United States agency discount notes . . . . . . . . . .
Money market mutual funds . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . .
19,980
26,096
710,584
Total cash equivalents . . . . . . . . . . . . . . . . .
756,660
Total Cash and cash equivalents . . . . . . . . . . . . . . .
$ 861,315
$
----
$
279
13,974
37,897
$
$
52,150
$
----
$ 104,655
----------
----------
19,980
26,096
710,584
----
----
756,660
$
----
$ 861,315
---19,912
----
$
---(889)
----
$
279
32,997
37,897
19,912
$
(889)
$
71,173
Investments Reported as:
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments in Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
33,276
37,897
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
71,173
Classified as investments:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities – available-for-sale . . . . . . . . .
Non-marketable securities . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . .
$
----
$
Marketable Securities
Net recognized gains from the sale of available-for-sale securities in fiscal 2006, 2005 and 2004 were as
follows:
2006
Available-for-sale Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2005
2004
(In thousands)
6,667
$
9,191 $
6,795
There were no recognized losses from other-than-temporary declines in the market value of available-for-sale
securities in 2006 and 2005. Recognized losses from other-than-temporary declines in the market value of
available-for-sale securities totaled $0.7 million in 2004.
Non-Marketable Securities
Cadence uses either the cost or equity method of accounting to account for its long-term, non-marketable
investment securities, which are included in Other assets on the Consolidated Balance Sheets. Net realized gains on
the sale of non-marketable investments were $19.9 million in 2006, $2.5 million in 2005 and $5.7 million in 2004.
In addition, Cadence’s 1996 Deferred Compensation Venture Investment Plan Trust recorded a gain of $2.7 million
in 2006. If Cadence determines that an other-than-temporary decline exists in a non-marketable equity security,
Cadence writes down the investment to its fair value and records the related write-down as an investment loss in the
Consolidated Income Statements.
99
The following table illustrates the carrying value of Cadence’s non-marketable securities as of December 30,
2006 and December 31, 2005:
Non-Marketable Securities – Application of Cost Method . . . . . . . . . . . . . . . . . . . .
Non-Marketable Securities – Application of Equity Method . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
(In thousands)
$ 29,726 $ 37,897
1,634
---$
31,360
$
37,897
Cost Method Investments
Cadence recorded write-downs due to other-than-temporary declines in value of non-marketable securities
carried on the cost basis of $2.5 million in 2006, $9.7 million in 2005 and $1.5 million in 2004. These write-downs
are included in Other income (expense), net, in the Consolidated Income Statements.
In January 2006, KhiMetrics, Inc., a cost method investment held by Telos Venture Partners L.P., a limited
partnership in which Cadence and its 1996 Deferred Compensation Venture Investment Plan Trust were the sole
limited partners, was sold for consideration of $6.53 per share of common stock. Under the purchase agreement,
10% of the consideration was held in escrow to pay the cost of resolving any claims that could have been asserted
against KhiMetrics on or before the first anniversary of the acquisition. The escrow amount remaining after
resolution of such claims was distributed to the former stockholders of KhiMetrics in January and February 2007.
No gain was recorded on amounts held in escrow during 2006. In connection with this sale, Cadence received
approximately $20.2 million in cash and recorded a gain of approximately $17.1 million during the year ended
December 30, 2006. In addition, Cadence’s 1996 Deferred Compensation Venture Investment Plan Trust received
$2.9 million in cash and recorded a gain of $2.5 million during the year ended December 30, 2006.
Equity Method Investments
Cadence’s voting interest in its equity method investments ranged from approximately 10% to 46% of the
following privately-held companies: Accent S.p.a., CoWare, Inc., FyreStorm, Inc., Shanghai SVA Integrated
Circuits Co., Ltd., Theta Microelectronics, Inc. and ZCIST Co., Ltd.
The following table presents (unaudited) summary financial data of Cadence’s equity method investments held
as of December 30, 2006:
As of December 30, 2006:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...
...
...
...
...
(In thousands)
$
30,143
$
8,448
$
49,182
$
18,017
$
(28,608)
For the year ended December 30, 2006:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...
...
...
...
$
$
$
$
100
52,643
(69,825)
(17,182)
(20,974)
In accordance with the equity method of accounting, Cadence records its proportional share of the investees’
gains or losses in Other income (expense), net. Cadence records its interest in equity method gains and losses in the
quarter following the quarter in which these gains or losses actually occur because it is not practicable to obtain
investee financial statements prior to the issuance of Cadence’s Consolidated Financial Statements. In addition,
Cadence records impairment losses of equity method investments if an other-than-temporary decline in value exists.
These write-downs are included in Other income (expense), net, in the Consolidated Income Statements. Cadence’s
proportional share of its investees’ net losses and impairment losses was as follows:
2006
Proportional share of equity method losses . . . . . . . . . . . .
Impairments of equity method investments . . . . . . . . . . . .
$
$
(1,200)
----
2005
(In thousands)
$
(6,492)
$
(1,271)
2004
$
$
(16,944)
(1,993)
As of December 30, 2006, the difference between the carrying value of Cadence’s investments in these
investee companies and Cadence’s share of the underlying net assets of the investee companies was immaterial.
NOTE 13. LEASE COMMITMENTS
Equipment and facilities are leased under various operating leases expiring at various dates through 2025.
Certain of these leases contain renewal options. Rental expense was $30.5 million in fiscal 2006, $29.0 million in
fiscal 2005 and $25.6 million in fiscal 2004.
As of December 30, 2006, future minimum lease payments under non-cancelable operating leases and
contractual sublease income were as follows:
Operating
Leases
Sub-lease
Income
Net
Operating
Leases
(In thousands)
For the fiscal years:
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
33,942
$
(3,111)
$
30,831
2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,504
17,422
(3,316)
(1,987)
24,188
15,435
2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,336
(814)
10,522
2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 and after . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,509
36,717
(760)
(3,073)
7,749
33,644
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 135,430
$ (13,061)
$ 122,369
Of the $122.4 million in net operating lease payments, $31.3 million was accrued in restructuring expense
prior to December 30, 2006 and will be charged against the restructuring accrual as paid.
NOTE 14. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation matters that arise in the ordinary
course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions,
licensing, contracts, distribution arrangements and employee relations matters. Periodically, Cadence reviews the
status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or
legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a
liability for the estimated loss in accordance with SFAS No. 5, “Accounting for Contingencies.” Legal proceedings
are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are
based only on the best information available at the time. As additional information becomes available, Cadence
reassesses the potential liability related to pending claims and litigation matters and may revise estimates.
101
On November 8, 2006, an individual filed suit against Cadence, Magma Design Automation, Inc., Dynalith
Systems, Inc., Altera Corp., Mentor Graphics Corp. and Aldec, Inc. in the United States District Court for the
Eastern District of Texas. The suit alleges that certain products of Cadence and the other defendants infringe a
patent for an electronic simulation and emulation system owned by the plaintiff. The plaintiff seeks unspecified
damages and attorneys’ fees and costs. Cadence disputes the plaintiff’s claims and intends to defend the lawsuit
vigorously.
While the outcome of these litigation matters cannot be predicted with any certainty, management does not
believe that the outcome of any current matters will have a material adverse effect on Cadence’s consolidated
financial position or results of operations.
Other Contingencies
Cadence provides its customers with a warranty on sales of hardware products for a 90-day period. These
warranties are accounted for in accordance with SFAS No. 5. To date, Cadence has not incurred any significant costs
related to warranty obligations.
Cadence’s product license and services agreements include a limited indemnification provision for claims
from third parties relating to Cadence’s intellectual property. Such indemnification provisions are accounted for in
accordance with SFAS No. 5. The indemnification is generally limited to the amount paid by the customer. To date,
claims under such indemnification provisions have not been significant.
The IRS and other tax authorities regularly examine Cadence’s income tax returns. In November 2003, the IRS
completed its field examination of Cadence’s federal income tax returns for the tax years 1997 through 1999 and
issued a Revenue Agent’s Report, or RAR, in which the IRS proposes to assess an aggregate tax deficiency for the
three-year period of approximately $143.0 million. The most significant of the disputed adjustments for the tax
years 1997 through 1999 relates to transfer pricing arrangements that Cadence has with a foreign subsidiary.
Cadence has filed a protest to certain of the proposed adjustments with the Appeals Office of the IRS where the
matter is currently being considered.
In July 2006, the IRS completed its field examination of Cadence’s federal income tax returns for the tax years
2000 through 2002 and issued an RAR, in which the IRS proposes to assess an aggregate tax deficiency for the
three-year period of approximately $324.0 million. In November 2006, the IRS revised the proposed aggregate tax
deficiency for the three-year period to be approximately $318.0 million. The IRS is contesting Cadence’s
qualification for deferred recognition of certain proceeds received from restitution and settlement in connection
with litigation during the period. The proposed tax deficiency for this item is approximately $152.0 million. The
remaining proposed tax deficiency of approximately $166.0 million is primarily related to proposed adjustments to
Cadence’s transfer pricing arrangements that it has with foreign subsidiaries and to Cadence’s deductions for
foreign trade income. The IRS took similar positions with respect to Cadence’s transfer pricing arrangements in the
prior examination period and may make similar claims against Cadence’s transfer pricing arrangements in future
examinations. Cadence has filed a timely protest with the IRS and will seek resolution of the issues through the
Appeals Office of the IRS.
Cadence believes that the proposed IRS adjustments are inconsistent with applicable tax laws and Cadence is
challenging these proposed adjustments vigorously. The RARs are not final Statutory Notices of Deficiency but the
IRS imposes interest on the proposed deficiencies until the matters are resolved. Interest is compounded daily at
rates published by the IRS, which rates are adjusted quarterly and have been between four and ten percent since
1997.
Significant judgment is required in determining Cadence’s provision for income taxes. The calculation of
Cadence’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In
determining the adequacy of our provision for income taxes, Cadence regularly assesses the likelihood of adverse
outcomes resulting from tax examinations including the RARs for the tax years 1997 through 2002. Cadence
provides for tax liabilities on its Consolidated Balance Sheets unless Cadence considers it probable that additional
taxes will not be due. However, the ultimate outcome of tax examinations, including the total amount payable or the
timing of any such payments upon resolution of these issues, cannot be predicted with certainty. In addition,
102
Cadence cannot assure you that such amount will not be materially different than that which is reflected in its
historical income tax provisions and accruals. Should the IRS or other tax authorities assess additional taxes as a
result of a current or a future examination, Cadence may be required to record charges to operations in future
periods that could have a material impact on the results of operations, financial position or cash flows in the
applicable period or periods.
NOTE 15. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income, the numerator, by the weighted average
number of shares of common stock outstanding, less unvested restricted stock, the denominator, during the period.
Diluted net income per share gives effect to equity instruments considered to be potential common shares, if
dilutive, computed using the treasury stock method of accounting.
Cadence accounts for the effect of its Zero Coupon Zero Yield Senior Convertible Notes due 2023, or the 2023
Notes, in the diluted earnings per common share calculation using the if-converted method of accounting. Under
that method, the 2023 Notes are assumed to be converted to shares (weighted for the number of days outstanding in
the period) at a conversion price of $15.65, and amortization of transaction fees, net of taxes, related to the 2023
Notes is added back to net income.
EITF No. 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the
Effect on Diluted Earnings per Share,” requires Cadence to include in diluted earnings per share the shares of
Cadence’s common stock into which the Convertible Senior Notes will be converted. However, since the
Convertible Senior Notes meet the qualification of an Instrument C under EITF No. 90-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and because cash
will be paid for the principal amount of the obligation upon conversion, the only shares that will be considered for
inclusion in diluted EPS are those relating to the excess of the conversion premium over the principal amount, using
the “if-converted” method. As of December 30, 2006, no shares are included in diluted EPS for the Convertible
Senior Notes.
103
The following table presents the calculation for the numerator and denominator used in the basic and diluted
net income per share computations in fiscal 2006, 2005 and 2004:
Net income before cumulative effect of change in accounting principle . .
2006
2005
2004
(In thousands, except per share
amounts)
$142,174 $ 49,343
$ 74,474
Effect of dilutive securities:
Amortization of 2023 convertible notes transaction fees, net of tax . . . .
1,565
1,564
1,578
Net income before cumulative effect of change in accounting principle,
as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$143,739
$ 50,907
$ 76,052
Net income after cumulative effect of change in accounting principle . . . .
Effect of dilutive securities:
$142,592
$ 49,343
$ 74,474
Amortization of 2023 convertible notes transaction fees, net of tax . . . .
1,565
1,564
1,578
Net income after cumulative effect of change in accounting principle, as
adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,157
$ 50,907
$ 76,052
Weighted average common shares used to calculate basic net income per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
279,354
278,520
271,328
2023 Convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,438
4,699
26,837
7,483
26,837
6,312
Restricted stock and ESPP shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,966
1,543
1,297
Weighted average common and potential common shares used to
calculate diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . .
312,457
314,383
305,774
Weighted average common shares:
Basic net income per share:
Net income per share before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.51
$
0.18
$
0.27
Net income per share after cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.51
$
0.18
$
0.27
Diluted net income per share:
Net income per share before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.46
$
0.16
$
0.25
Net income per share after cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.46
$
0.16
$
0.25
104
The following table presents the potential shares of Cadence common stock outstanding at the end of the fiscal
years 2006, 2005 and 2004 which were not included in the computation of diluted net income per share because
their effect would be antidilutive:
2006
Options to purchase shares of common stock (various expiration dates
through 2016). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants to purchase shares of common stock related to the Convertible
Senior Notes (various expiration dates through 2014) . . . . . . . . . . . . . . . . .
Warrants to purchase shares of common stock related to the 2023 Notes
(various expiration dates through 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total potential common shares excluded . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
(In thousands)
24,077
26,039
33,770
23,640
----
----
14,717
26,829
26,829
62,434
52,868
60,599
NOTE 16. STOCK REPURCHASE PROGRAMS
In August 2001, the Cadence Board of Directors authorized a program to repurchase shares of Cadence’s
common stock in the open market with a value of up to $500.0 million in the aggregate, which amount was
exhausted during February 2006. In February 2006, the Cadence Board of Directors authorized a new program to
repurchase shares of Cadence common stock in the open market with a value of up to $500.0 million in the
aggregate. In November 2006, Cadence’s Board of Directors authorized a new program to repurchase shares of
Cadence’s common stock in the open market with a value of up to an additional $500.0 million in the aggregate.
The table below presents the shares repurchased under Cadence’s stock repurchase programs in fiscal 2006,
2005 and 2004:
2006
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of repurchased shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
27,917
$ 494,088
2004
(In thousands)
6,150
7,031
$ 101,070
$ 94,105
As of December 30, 2006, the remaining repurchase authorization under these stock repurchase programs
totaled $527.8 million.
NOTE 17. EMPLOYEE AND DIRECTOR BENEFIT PLANS
Cadence maintains a 401(k) savings plan to provide retirement benefits through tax-deferred salary deductions
for all of its United States employees. Cadence may make discretionary contributions, as determined by the Board
of Directors, which cannot exceed a specified percentage of the annual aggregate salaries of those employees
eligible to participate. Cadence made total contributions to the plan of $11.4 million in 2006, $10.8 million in 2005,
and $9.6 million in 2004.
Executive Officers and Directors may also elect to defer compensation payable to them under Cadence’s 1994
Nonqualified Deferred Compensation Plan. Deferred compensation payments are held in accounts with values
indexed to the performance of selected mutual funds or money market accounts. These investments are classified as
trading securities on Cadence’s Consolidated Balance Sheets and gains and losses are recognized as income
(expense) in the Consolidated Income Statements. Net recognized appreciation (depreciation) of trading securities
in fiscal 2006, 2005 and 2004 was as follows:
2006
Trading Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105
$ 3,701
2005
2004
(In thousands)
$ 6,599
$ (4,975)
NOTE 18. STATEMENT OF CASH FLOWS
The supplemental cash flow information for 2006, 2005 and 2004 is as follows:
2006
2005
(In thousands)
2004
Cash Paid (Received) During the Year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,401
$
120
$
Income taxes, including foreign withholding tax . . . . . . . . . . . . . . $
51,930
$
9,430
$
(2,086)
Non-Cash Investing and Financing Activities:
Common and treasury stock issued for acquisitions . . . . . . . . . . . . $
2,594
$
11,883
$
14,934
(6,527)
$
1,020
$
$
----
$
Unrealized gain (loss) of available-for-sale securities, net of
taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued purchased software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
----
186
(517)
6,100
NOTE 19. RESTRUCTURING AND OTHER CHARGES
Cadence initiated a separate plan of restructuring in each year from 2001 through 2005 in an effort to operate
more productively while improving operating margins and cash flows. The restructuring plans initiated each year
from 2001 through 2005, or the 2001 Restructuring, 2002 Restructuring, 2003 Restructuring, 2004 Restructuring
and 2005 Restructuring, respectively, were intended to decrease costs through workforce reductions and facility and
resource consolidation, in order to improve Cadence’s cost structure. The 2001 and 2002 Restructurings primarily
related to Cadence’s design services business and certain other business or infrastructure groups throughout the
world. The 2003 Restructuring, 2004 Restructuring and 2005 Restructuring were targeted at reducing costs
throughout the company. The 2004 Restructuring has been completed and there was no remaining balance accrued
for this restructuring as of December 30, 2006.
The initial facility closure and space reduction costs included in these restructurings were comprised of
payments required under leases, less any applicable estimated sublease income after the properties were abandoned,
lease buyout costs and other contractual charges. To estimate the initial lease loss, which is the loss after Cadence’s
cost recovery efforts from subleasing all or part of a building, Cadence management made certain assumptions
related to the time period over which the relevant building would remain vacant and sublease terms, including
sublease rates and contractual common area charges.
Each reporting period, Cadence evaluates the adequacy of the lease loss accrual for each plan of restructuring.
Cadence adjusts the lease loss accrual for changes in real estate markets or other factors that may affect estimated
costs or sublease income. Cadence also considers executed sublease agreements and adjusts the lease loss accrual if
sublease income under the agreement differs from initial estimates.
During 2005, in conjunction with the workforce reduction in Cadence’s European design services business,
Cadence completed a sale-leaseback transaction involving land and a building in Livingston, Scotland. Proceeds
from the sale were $33.6 million and the total gain on the sale was $3.6 million. Cadence leased back a portion of the
facility for two years following the date of sale and another portion for ten years from the date of sale, with an option
to terminate the ten year lease after five years. Cadence deferred the gain on the sale and is recognizing the gain
ratably over the maximum lease term of ten years.
Since 2001, Cadence has recorded facilities consolidation charges, net of credits, of $97.0 million related to
space reductions or facility closures of 49 sites. As of December 30, 2006, 28 of these sites had been vacated and
space reductions had occurred at the remaining 21 sites. Cadence expects to pay remaining facilities-related
restructuring liabilities for all of its restructuring plans prior to 2016.
As of December 30, 2006, Cadence’s accrued estimate of the lease loss related to all restructuring activities
initiated since 2001 was $31.3 million. This amount may be adjusted in the future based upon changes in the
assumptions used to estimate the lease loss.
106
Total restructuring costs accrued as of December 30, 2006 were $31.3 million, consisting solely of lease losses,
of which $5.1 million was Accounts payable and accrued liabilities and $26.2 million was Other long-term
liabilities.
Restructuring and other charges (credits) recorded by plan of restructuring for fiscal years 2006, 2005 and 2004
are as follows:
Severance
and
Benefits
AssetRelated
Excess
Facilities
(In thousands)
Other
Total
2006:
2005 Plan . . . . . . . . . . . . . . . . . . . . . . .
2003, 2002 and 2001 Plans . . . . . . . . . .
$
(106)
----
$
-------
$
34
(725)
$
-------
$
(72)
(725)
Total 2006 Charges . . . . . . . . . . . . . .
$
(106)
$
----
$
(691)
$
----
$
(797)
$
2,401
$
$
----
$ 25,611
2005: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 Plan . . . . . . . . . . . . . . . . . . . . . . .
$ 20,785
2004 Plan . . . . . . . . . . . . . . . . . . . . . . .
2003, 2002 and 2001 Plans . . . . . . . . . .
Total 2005 Charges . . . . . . . . . . . . . .
2004: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 Plan . . . . . . . . . . . . . . . . . . . . . . .
(343)
---$ 20,442
$
2,377
$
$
206
2003, 2002 and 2001 Plans . . . . . . . . . .
Total 2004 Charges . . . . . . . . . . . . . .
---(24)
7,035
(1,322)
$
5,713
---10,090
(3,757)
-------
(343)
10,066
$ 12,515
$
----
$ 35,334
$
$
9,365
$ 16,606
(3,963)
$
2,425
---2,221
$
2,221
---$
9,365
(3,064)
$ 13,542
Due to the immateriality of the 2003 Restructuring, 2002 Restructuring and 2001 Restructuring, they have
been combined in the above table.
Cadence’s workforce reduction activities related to the 2004 Restructuring and the 2005 Restructuring were
completed prior to December 31, 2005. Cadence recorded a credit during the twelve months ended December 30,
2006 to remove the remaining severance and benefits accrual related to the 2005 Restructuring. The other activity
recorded in each of the restructuring plans for the year ended December 30, 2006 relates to payment of remaining
lease obligations, net of sublease payments received, and changes in the estimate related to lease loss accruals.
107
The following tables present activity for the years ended December 30, 2006, December 31, 2005 and
January 1, 2005 associated with each plan of restructuring.
2005 Restructuring
Severance
and
Benefits
AssetRelated
(In thousands)
---- $
---2,401
2,425
Total
Balance, January 1, 2005 . . . . . . . . . . . . . . . . . . . . . $
Restructuring and other charges, net . . . . . . . . . . .
---20,785
Non-cash charges. . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . .
---(20,471)
Effect of foreign currency translation . . . . . . . . . .
(212)
----
Balance, December 31, 2005 . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net . . . . . . . . . . .
102
(106)
-------
Non-cash charges. . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . .
---(1)
-------
39
(527)
39
(528)
Effect of foreign currency translation . . . . . . . . . .
5
----
50
55
Balance, December 30, 2006 . . . . . . . . . . . . . . . . . . $
----
$
Excess
Facilities
(2,232)
(169)
$
----
$
12
(794)
(2,220)
(21,434)
(53)
(265)
1,590
34
$
---25,611
1,186
1,692
(72)
$
1,186
2004 Restructuring
Severance
and
Benefits
Balance, January 3, 2004 . . . . . . . . . . . . . . . . . . . . . $
----
AssetRelated
$
Other
(In thousands)
---- $
----
Total
$
7,035
-----
206
(174)
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,683)
(30)
----
118
470
(2)
----
-------
116
470
Restructuring and other charges, net . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . .
(343)
(115)
-------
-------
(343)
(115)
Effect of foreign currency translation . . . . . . . . . .
(12)
----
----
(12)
Balance, December 31, 2005 . . . . . . . . . . . . . . . . . . $
----
Effect of foreign currency translation . . . . . . . . . .
Balance, January 1, 2005 . . . . . . . . . . . . . . . . . . . . .
108
$
----
9,365
(9,365)
----
Restructuring and other charges, net . . . . . . . . . . .
Non-cash charges. . . . . . . . . . . . . . . . . . . . . . . . .
$
----
16,606
(9,539)
(6,713)
$
----
2001 Restructuring, 2002 Restructuring and 2003 Restructuring
Balance, January 3, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net . . . . . . . . . . . . . . . .
2001
Restructuring
2002
Restructuring
(In thousands)
2003
Restructuring
$
$
$
20,999
680
Non-cash charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign currency translation . . . . . . . . . . . . . . . .
17,352
(1,580)
21,211
(2,164)
(32)
32
(6,216)
1,139
(6,822)
94
(8,508)
1,022
16,602
5,734
9,012
(411)
11,593
4,743
Non-cash charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---(2,247)
---(1,965)
132
(7,700)
Effect of foreign currency translation . . . . . . . . . . . . . . . .
(1,533)
(14)
(730)
Balance, December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net . . . . . . . . . . . . . . . .
18,556
(24)
6,622
(375)
8,038
(326)
Non-cash charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---(1,825)
---(1,113)
155
(2,405)
Effect of foreign currency translation . . . . . . . . . . . . . . . .
2,008
Balance, January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges, net . . . . . . . . . . . . . . . .
Balance, December 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . .
$
18,715
13
$
5,147
790
$
6,252
The liabilities remaining as of December 30, 2006 in the 2001 Restructuring, 2002 Restructuring and 2003
Restructuring consist primarily of excess facilities liabilities.
NOTE 20. OTHER INCOME (EXPENSE), NET
Other income (expense), net, for fiscal 2006, 2005 and 2004 was as follows:
2006
2005
(In thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains on sale of non-marketable securities (Note 12) . . . . . . . . . . . . . .
$ 39,288
19,875
$ 15,606
2,507
Gains on available-for-sale securities (Note 12) . . . . . . . . . . . . . . . . . .
6,667
9,191
6,795
Gains (losses) on trading securities in Cadence’s non-qualified deferred
compensation trust (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,701
6,599
(4,975)
Gains on sale of non-marketable securities in Cadence’s non-qualified
deferred compensation trust (Note 12) . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) on foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,660
1,949
---4,541
---(1,421)
Equity loss from investments (Note 12) . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of investments (Note 12). . . . . . . . . . . . . . . . . . . . . . . . . .
(1,200)
(2,467)
(6,492)
(10,934)
(16,944)
(4,236)
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(71)
(5,921)
(1,989)
Total other income (expense), net. . . . . . . . . . . . . . . . . . . . . . . . . . .
109
$ 70,402
$ 15,097
2004
$
5,585
5,672
$ (11,513)
NOTE 21. SEGMENT REPORTING
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires disclosures
of certain information regarding operating segments, products and services, geographic areas of operation and
major customers. SFAS No. 131 reporting is based upon the “management approach”: how management organizes
the company’s operating segments for which separate financial information is (i) available and (ii) evaluated
regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO.
Cadence’s CEO reviews Cadence’s consolidated results within one operating segment. In making operating
decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its
subsidiaries. Revenue is attributed to geography based on the country in which the customer is domiciled. Longlived assets are attributed to geography based on the country where the assets are located.
The following tables present a summary of revenue by geography in fiscal 2006, 2005 and 2004:
2006
2005
2004
(In thousands)
North America:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 765,120
Other North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,255
$ 613,186
20,335
$ 598,849
27,025
Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
796,375
633,521
625,874
Europe, Middle East and Africa:
Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,198
72,548
87,324
Other Europe, Middle East, and Africa . . . . . . . . . . . . . . . . . . . .
196,199
172,443
174,533
Total Europe, Middle East, and Africa . . . . . . . . . . . . . . . . . . .
284,397
244,991
261,857
Japan and Asia:
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
247,886
333,233
191,169
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,237
117,447
118,580
Total Japan and Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
403,123
450,680
309,749
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,483,895
$1,329,192
$1,197,480
2005
(In thousands)
2004
$ 613,186
$ 598,849
718,775
716,006
598,631
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,483,895
$1,329,192
$1,197,480
2006
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 765,120
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110
The following tables present a summary of long-lived assets by geography as of December 30, 2006,
December 31, 2005, and January 1, 2005:
2006
2005
(In thousands)
2004
$ 331,229
227
$ 334,943
371
325,184
331,456
335,314
1,163
8,026
9,189
752
7,739
8,491
985
37,417
38,402
Japan and Asia:
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
797
19,405
2,193
14,805
2,787
13,864
Total Japan and Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,202
16,998
16,651
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,575
$ 356,945
$ 390,367
2005
2004
North America:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,076
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108
Total North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe, Middle East and Africa:
Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Europe, Middle East, and Africa . . . . . . . . . . . . . . . . . . . .
Total Europe, Middle East, and Africa . . . . . . . . . . . . . . . . . . .
2006
(In thousands)
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,076 $ 331,229
$ 334,943
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,499
25,716
55,424
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,575
$ 356,945
$ 390,367
No one customer accounted for 10% or more of total revenue in fiscal 2006, 2005 or 2004.
As of December 30, 2006, no one customer accounted for 10% or more of Cadence’s Accounts receivable, net.
As of December 31, 2005, one customer accounted for 20% of Accounts receivable, net.
NOTE 22. SUBSEQUENT EVENT
In January 2007, Cadence completed the sale of certain land and buildings in San Jose, California for a sale
price of $46.5 million. Concurrently with the sale, Cadence leased back from the purchaser approximately
262,500 square feet of office space, which represents all available space in the buildings. The lease agreement
includes an initial term of two years, with two options to extend the lease for six months each. Cadence is obligated
to make lease payments related to this lease of $2.2 million in 2007, $2.4 million in 2008 and $0.2 million in 2009.
Cadence received cash payment for the full sale price in January 2007. During the lease term, Cadence intends
to construct an additional building located on its San Jose, California campus to replace the buildings it sold in this
transaction.
111
CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
Schedule II
Description
Balance at
Beginning
of Period
Addition
Charged to
Charged
(Credited)
to Other
Costs and
Accounts(1) Deductions(2)
Expenses
Balance at
End of
Period
Deducted from asset accounts:
Provisions for losses on trade
accounts receivable and sales
returns:
Year Ended December 30, 2006:
Bad debt allowance . . . . . . . . . . $
Sales return allowance . . . . . . . .
Total . . . . . . . . . . . . . . . . . . $
6,896 $
4,083
10,979 $
(4,431) $
---(4,431) $
---- $
(2,346)
(2,346) $
(398) $
---(398) $
2,067
1,737
3,804
Year Ended December 31, 2005:
Bad debt allowance . . . . . . . . . . $
Sales return allowance . . . . . . . .
Total . . . . . . . . . . . . . . . . . . $
8,151 $
4,583
12,734 $
(647) $
---(647) $
---- $
(500)
(500) $
(608) $
---(608) $
6,896
4,083
10,979
Year Ended January 1, 2005:
Bad debt allowance . . . . . . . . . . $
Sales return allowance . . . . . . . .
Total . . . . . . . . . . . . . . . . . . $
10,967 $
11,626
22,593 $
(220) $
---(220) $
---- $
667
667 $
(2,596) $
(7,710)
(10,306) $
8,151
4,583
12,734
(1) Sales returns offset against revenue and bad debt allowance from acquisitions.
(2) Uncollectible accounts written-off, net of recoveries and sales returns.
112
(a) 3. Exhibits:
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit
Number
3.01
Exhibit Title
(a) The Registrant’s Restated Certificate of Incorporation as filed with the Secretary of State of the State
of Delaware on May 13, 1998 (Incorporated by reference to Exhibit 3.01(j) to the Registrant’s
Form 10-Q (File No. 1-10606) for the quarter ended July 4, 1998).
(b) The Registrant’s Certificate of Designation of Series A Junior Participating Preferred Stock, as
amended on February 1, 2000, as filed with the Secretary of State of the State of Delaware on June 8,
1989 (Incorporated by reference to Exhibit 3A to the Registrant’s Current Report on Form 8-K (File No.
0-15867) filed on June 12, 1989 and amended by Exhibit 4.02 to the Registrant’s Form 10-K (File No. 110606) for the fiscal year ended January 1, 2000 (the “1999 Form 10-K”)).
3.02
The Registrant’s Amended and Restated Bylaws, as currently in effect (Incorporated by reference to
Exhibit 3.02 to the Registrant’s Form 10-Q for the quarter ended March 29, 2003 (the “2003 First
Quarter Form 10-Q”)).
4.01
Specimen Certificate of the Registrant’s Common Stock (Incorporated by reference to Exhibit 4.01 to
the Registrant’s Form S-4 Registration Statement (File No. 33-43400) filed on October 17, 1991).
4.02
Indenture dated as of August 15, 2003 by and between the Registrant and J.P. Morgan Trust Company,
National Association as Trustee, including form of Zero Coupon Zero Yield Senior Convertible Notes
due 2023 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended
September 27, 2003 (the “2003 Third Quarter Form 10-Q”)).
4.03
Indenture dated as of December 19, 2006 by and between the Registrant and Deutsche Bank Trust
Company Americas as Trustee, including form of 1.375% Convertible Senior Notes due 2011.
4.04
Indenture dated as of December 19, 2006 by and between the Registrant and Deutsche Bank Trust
Company Americas as Trustee, including form of 1.500% Convertible Senior Notes due 2013.
4.05
Registration Rights Agreement dated as of December 19, 2006 by and between the Registrant and
Merrill Lynch, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and J.P. Morgan
Securities Inc. as representatives of the initial purchasers named therein.
*10.01
The Registrant’s 1987 Stock Incentive Plan, as amended and restated.
*10.02
Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect
under the Registrant’s 1987 Stock Incentive Plan, as amended and restated (Incorporated by reference
to Exhibit 10.02 to the Registrant’s Form 10-Q for the quarter ended July 3, 2004 (the “2004 Second
Quarter Form 10-Q”)).
*10.03
Form of Nonstatutory Incentive Stock Award Agreement as currently in effect under the Registrant’s
1987 Stock Incentive Plan, as amended and restated (Incorporated by reference to Exhibit 10.03 to the
Registrant’s Form 10-K for the fiscal year ended January 1, 2005 (the “2004 Form 10-K”)).
*10.04
Form of Incentive Stock Award Agreement for performance-based Incentive Stock Awards as currently
in effect under the Cadence Design Systems, Inc. 1987 Stock Incentive Plan, as amended and restated
(Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
February 13, 2006).
10.05
JTA Research Inc. 1998 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the
Registrant’s Form S-8 Registration Statement (File No. 333-85080) filed on March 28, 2002).
*10.07
The Registrant’s Directors 1995 Stock Option Plan, as amended and restated.
*10.08
The Registrant’s Amended and Restated Employee Stock Purchase Plan (Incorporated by reference to
Appendix C to the Registrant’s Definitive Proxy Statement filed on April 3, 2006).
*10.09
The Registrant’s amended and restated Senior Executive Bonus Plan (Incorporated by reference to
Appendix B to the Registrant’s Definitive Proxy Statement filed on April 3, 2006).
113
Exhibit
Number
Exhibit Title
*10.10
The Registrant’s 1994 Deferred Compensation Plan, as amended and restated effective November 1,
2002 (Incorporated by reference to Exhibit 10.08 to the Registrant’s Form 10-K for the fiscal year ended
December 28, 2002 (the “2002 Form 10-K”)).
*10.11
The Registrant’s 1996 Deferred Compensation Venture Investment Plan, as amended and restated
effective January 1, 2001 (Incorporated by reference to Exhibit 10.09 to the Registrant’s Form 10-K for
the fiscal year ended December 29, 2001 (the “2001 Form 10-K”)).
10.12
The Registrant’s 1993 Non-Statutory Stock Incentive Plan, as amended and restated.
10.14
Plato Design Systems Incorporated 2002 Supplemental Stock Option Plan (Incorporated by reference
to Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (File No. 333-87674) filed on
May 7, 2002).
10.15
Distribution Agreement, dated as of April 28, 1997 by and among Cadence Design Systems (Ireland)
Ltd., Cadence Design Systems K.K. and Cadence Design Systems (Japan) B.V. (Incorporated by
reference to Exhibit 10.48 to the Registrant’s Form 10-Q (File No. 1-10606) for the quarter ended
June 28, 1997).
*10.17
Amended and Restated Residential Lease, effective as of February 21, 2007, between 849 College
Avenue, Inc., a subsidiary of the Registrant, and Kevin and Elizabeth Bushby.
10.18
Verplex Systems, Inc. 1998 Stock Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s
Form S-8 Registration Statement (File No. 333-108251) filed on August 27, 2003).
10.19
Get2Chip.Com, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the
Registrant’s Form S-8 Registration Statement (File No. 333-104720) filed on April 24, 2003 (the
“April 2003 Form S-8”)).
10.20
Get2Chip.Com, Inc. 2001 Stock Plan (Incorporated by reference to Exhibit 99.2 to the April 2003
Form S-8).
*10.21
Description of Director Health Care Benefits (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on February 11, 2005).
10.22
Neolinear, Inc. 2004 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registrant’s
Form S-8 Registration Statement (File No. 333-115351) filed on May 10, 2004).
10.23
QDA, Inc. 2003 Stock Option/Stock Issuance Plan (Incorporated by reference to Exhibit 10.23 to the
Registrant’s Form 10-K for the fiscal year ended January 3, 2004 (the “2003 Form 10-K”)).
*10.27
Consulting Agreement between the Registrant and Alberto Sangiovanni-Vincentelli, entered into on
August 17, 2005 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on August 19, 2005).
10.28
Design Acceleration, Inc. 1994 Stock Plan (Incorporated by reference to Exhibit 99 to the Registrant’s
Form S-8 Registration Statement (File No. 333-71717) filed on February 3, 1999).
10.29
Quickturn Design Systems, Inc. 1988 Stock Option Plan, as amended (Incorporated by reference to
Exhibit 99.1 to the Registrant’s Post-Effective Amendment No. 1 on Form S-8 to S-4 Registration
Statement (File No. 333-69589) filed on June 7, 1999 (the “June 1999 Form S-8”)).
10.30
Ambit Design Systems, Inc. 1994 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.30 to the 2003 Form 10-K).
10.31
Ambit Design Systems, Inc. 1996 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.31 to the 2003 Form 10-K).
*10.32
The Registrant’s 2002 Deferred Compensation Venture Investment Plan, as amended (Incorporated by
reference to Exhibit 10.32 to the 2004 Second Quarter Form 10-Q).
114
Exhibit
Number
Exhibit Title
10.33
eTop Design Technology, Inc. 2000 Stock Incentive Plan (Incorporated by reference to Exhibit 99.1 to
the Registrant’s Form S-8 Registration Statement (File No. 333-119335) filed on September 28, 2004).
10.34
Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan (Incorporated by reference to
Exhibit 99.5 to the June 1999 Form S-8).
10.35
Quickturn Design Systems, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.6 to
the June 1999 Form S-8).
*10.37
Employment Agreement between Registrant and Moshe Gavrielov dated January 12, 2005
(Incorporated by reference to Exhibit 10.37 to the Registrant’s Form 10-K for the fiscal year ended
December 31, 2005).
10.38
OrCAD, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the Registrant’s
Form S-8 Registration Statement (File No. 333-85591) filed on August 19, 1999).
*10.39
Employment Agreement, effective as of May 12, 2004, between the Registrant and Michael J. Fister
(Incorporated by reference to Exhibit 10.78 to the 2004 Second Quarter Form 10-Q).
*10.40
Amendment to Employment Agreement, dated as of May 17, 2005, between the Registrant and Michael
J. Fister (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
on May 23, 2005).
10.41
Diablo Research Company LLC 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to
the Registrant’s Form S-8 Registration Statement (File No. 333-93609) filed on December 27, 1999 (the
“December 1999 Form S-8”)).
10.43
The Registrant’s 2000 Nonstatutory Equity Incentive Plan, as amended and restated.
*10.44
Form of Indemnity Agreement between the Registrant and its directors and executive officers
(Incorporated by reference to Exhibit 10.01 to the 2000 Second Quarter Form 10-Q).
*10.45
Employment Agreement, effective as of May 26, 2004, between the Registrant and Kevin Bushby
(Incorporated by reference to Exhibit 10.80 to the 2004 Second Quarter Form 10-Q).
*10.46
Employment Agreement, effective as of May 18, 2004, between the Registrant and R.L. Smith
McKeithen (Incorporated by reference to Exhibit 10.81 to the 2004 Second Quarter Form 10-Q).
10.47
The Registrant’s 1997 Nonstatutory Stock Incentive Plan, as amended and restated.
10.48
Simplex Solutions, Inc. 1995 Stock Plan, as amended (Incorporated by reference to Exhibit 99.1 to the
Registrant’s Post-Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (File
No. 333-88390) filed on July 3, 2002 (the “July 2002 Form S-8”)).
10.49
Simplex Solutions, Inc. 2001 Incentive Stock Plan (Incorporated by reference to Exhibit 99.2 to the July
2002 Form S-8).
10.50
Simplex Solutions, Inc. 2002 Nonstatutory Stock Option Plan (Incorporated by reference to
Exhibit 99.3 to the July 2002 Form S-8).
10.51
Altius Solutions, Inc. 1999 Stock Plan (Incorporated by reference to Exhibit 99.4 to the July 2002
Form S-8).
*10.52
Employment Agreement, effective as of January 1, 2005, between the Registrant and William Porter
(Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
December 30, 2004).
*10.53
Summary of Non-Employee Director Compensation (Incorporated by reference to Exhibit 10.53 to the
2004 Form 10-K).
*10.54
Summary of Non-Employee Director Cash Compensation (Incorporated by reference to Exhibit 10.2 to
the Registrant’s Current Report on Form 8-K filed on August 19, 2005).
115
Exhibit
Number
Exhibit Title
10.55
Term Facility Agreement, dated as of December 19, 2005, among Castlewilder, as borrower, Bank of
America, N.A., as Administrative Agent, Banc of America Securities LLC, as lead arranger and the
lender parties to the Term Facility Agreement (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 21, 2005 (the “December 2005
Form 8-K”)).
10.56
Guaranty, dated as of December 19, 2005, made by the Registrant in favor of Bank of America, N.A. as
the Administrative Agent and the lender parties thereto (Incorporated by reference to Exhibit 10.2 to the
December 2005 Form 8-K).
10.57
Guaranty, dated as of December 19, 2005, made by Cadence Technology Limited in favor of Bank of
America, N.A. as the Administrative Agent and the lender parties to the Term Facility Agreement
(Incorporated by reference to Exhibit 10.3 to the December 2005 Form 8-K).
*10.59
Employment Agreement, effective as of February 15, 2007, between the Registrant and James Miller
(Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
February 22, 2007).
10.61
CadMOS Design Technology, Inc. 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1
to the Registrant’s Form S-8 Registration Statement (File No. 333-56898) filed on March 12, 2001 (the
“March 2001 Form S-8”)).
10.62
CadMOS Design Technology, Inc. Supplemental 2001 Stock Option Plan (Incorporated by reference to
Exhibit 99.2 to the March 2001 Form S-8).
10.63
DSM Technologies, Inc. 2000 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the
Registrant’s Form S-8 Registration Statement (File No. 333-82044) filed on February 4, 2002).
10.64
Silicon Perspective Corporation 1997 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to
the Registrant’s Form S-8 Registration Statement (File No. 333-75874) filed on December 21, 2001).
10.65
The Registrant’s SPC Plan, effective December 20, 2001 (Incorporated by reference to Exhibit 10.65 to
the 2001 Form 10-K).
10.68
BTA Technology, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the
Registrant’s Form S-8 Registration Statement (File No. 333-102648) filed on January 22, 2003 (the
“January 2003 Form S-8”)).
10.69
BTA-Ultima, Inc. 1995 Stock Option Plan (Incorporated by reference to Exhibit 99.2 to the January
2003 Form S-8).
10.70
BTATechnology, Inc. 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.3 to the January
2003 Form S-8).
10.71
Celestry Design Technologies, Inc. 2001 Stock Option Plan (Incorporated by reference to Exhibit 99.4
to the January 2003 Form S-8).
10.72
Celestry Design Technologies, Inc. 2001 Executive Stock Plan (Incorporated by reference to
Exhibit 99.5 to the January 2003 Form S-8).
10.73
Hedge Side Letter, dated as of August 10, 2003, by and between the Registrant and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.73 to the
2003 Form 10-K).
10.74
Warrant Transaction Confirmation, dated August 11, 2003, between the Registrant and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.74 to the
2003 Form 10-K).
10.75
Call Option Transaction Confirmation, dated August 11, 2003, between the Registrant and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.75 to the
2003 Form 10-K).
116
Exhibit
Number
Exhibit Title
10.76
Warrant Transaction Confirmation, dated August 27, 2003, between the Registrant and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.76 to the
2003 Form 10-K).
10.77
Call Option Transaction Confirmation, dated August 27, 2003, between the Registrant and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.77 to the
2003 Form 10-K).
10.78
Amended and Restated Verisity Ltd. 2000 U.S. Share Incentive Plan (Incorporated by reference to
Exhibit 99.1 to the Registrant’s Form S-8 Registration Statement (File No. 333-124025) filed on
April 12, 2005 (the “April 2005 Form S-8”)).
10.79
Verisity Ltd. 1999 Israeli Share Option Plan (Incorporated by reference to Exhibit 99.2 to the April
2005 Form S-8).
10.80
Verisity Ltd. 1997 Israel Share and Stock Option Incentive Plan (Incorporated by reference to
Exhibit 99.3 to the April 2005 Form S-8).
10.81
Verisity Ltd. 1996 U.S. Stock Option Plan (as amended on October 28, 1999) (Incorporated by
reference to Exhibit 99.4 to the April 2005 Form S-8).
10.82
Verisity Ltd. 2000 Israeli Share Option Plan, as amended (Incorporated by reference to Exhibit 99.5 to
the April 2005 Form S-8).
10.83
Amended and Restated Axis Systems Inc. 1997 Stock Plan (Incorporated by reference to Exhibit 99.6 to
the April 2005 Form S-8).
10.84
Convertible Note Hedge Side Letter, dated as of December 14, 2006, between the Registrant and
Morgan Stanley Bank, as agent for Morgan Stanley & Co. International Limited, for the Registrant’s
Convertible Senior Notes due December 15, 2011.
10.85
Convertible Note Hedge Side Letter, dated as of December 14, 2006, between the Registrant and
Morgan Stanley Bank, as agent for Morgan Stanley & Co. International Limited, for the Registrant’s
Convertible Senior Notes due December 15, 2013.
10.86
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and Morgan
Stanley Bank, as agent for Morgan Stanley & Co. International Limited.
10.87
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and Morgan
Stanley Bank, as agent for Morgan Stanley & Co. International Limited.
10.88
Convertible Note Hedge Side Letter, dated December 14, 2006, between the Registrant and J.P. Morgan
Securities Inc., as agent for JP Morgan Chase Bank, National Association, for the Registrant’s
Convertible Senior Notes due December 15, 2011.
10.89
Convertible Note Hedge Side Letter, dated December 14, 2006, between the Registrant and J.P. Morgan
Securities Inc., as agent for JP Morgan Chase Bank, National Association, for the Registrant’s
Convertible Senior Notes due December 15, 2013.
10.90
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and J.P. Morgan
Securities Inc., as agent for JP Morgan Chase Bank, National Association.
10.91
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and J.P. Morgan
Securities Inc., as agent for JP Morgan Chase Bank, National Association.
10.92
Convertible Note Hedge Side Letter, dated December 14, 2006, between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as agent for Merrill Lynch International, for the
Registrant’s Convertible Senior Notes due December 15, 2011.
10.93
Convertible Note Hedge Side Letter, dated December 14, 2006, between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as agent for Merrill Lynch International, for the
Registrant’s Convertible Senior Notes due December 15, 2013.
117
Exhibit
Number
Exhibit Title
10.94
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as agent for Merrill Lynch International.
10.95
Warrant Transaction Confirmation, dated December 14, 2006, between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as agent for Merrill Lynch International.
21.01
Subsidiaries of the Registrant.
23.01
Independent Registered Public Accounting Firm’s Consent.
31.01
Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934.
31.02
Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934.
32.01
Certification of the Registrant’s Chief Executive Officer, Michael J. Fister, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02
Certification of the Registrant’s Chief Financial Officer, William Porter, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement covering executive officers or directors of the
Registrant.
(b) Exhibits:
Cadence hereby files as part of this Form 10-K the Exhibits listed in Item 15. (a) 3 above.
(c) Financial Statement Schedule:
See Item 15. (a) 2 of this Form 10-K.
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/
Michael J. Fister
Michael J. Fister
President, Chief Executive Officer and Director
Dated: February 23, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME/TITLE
DATE
/s/ Michael J. Fister
Michael J. Fister
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 23, 2007
/s/ William Porter
William Porter
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 23, 2007
119
POWER OF ATTORNEY
KNOWALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Michael J. Fister, William Porter and R. L. Smith McKeithen, and each of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
ADDITIONAL DIRECTORS
/s/ Donald L. Lucas
Donald L. Lucas
February 23, 2007
/s/ Dr. Alberto Sangiovanni-Vincentelli
Dr. Alberto Sangiovanni-Vincentelli
February 23, 2007
/s/ George M. Scalise
George M. Scalise
February 23, 2007
/s/ Dr. John B. Shoven
Dr. John B. Shoven
February 23, 2007
/s/ Roger Siboni
Roger Siboni
February 23, 2007
/s/ John A. C. Swainson
John A. C. Swainson
February 23, 2007
/s/ Lip-Bu Tan
Lip-Bu Tan
February 23, 2007
120
STOCKHOLDER INFORMATION
BOARD OF DIRECTORS
Independent Public Accountants
KPMG LLP
500 East Middlefield Road
Mountain View, California 94043
John B. Shoven, PhD
Chairman of the Board,
The Charles R. Schwab Professor of Economics,
Stanford University
Transfer Agent
For information regarding stock ownership, stock
certificates, share transfers, change of address,
stock splits, and tax basis questions, please contact
our transfer agent in writing at:
Michael J. Fister
President and Chief Executive Officer
Mellon Investor Services
P.O. Box 3315
South Hackensack, New Jersey 07606
phone: 800.356.2017
e-mail: shrrelations@melloninvestor.com
Alberto Sangiovanni-Vincentelli, PhD
Professor, The Edgar L. and Harold H. Buttner
Chair of Electrical Engineering,
University of California at Berkeley
Form 10-K
Additional copies of the Company’s Form 10-K, as
filed with the Securities and Exchange Commission
for the year ended December 30, 2006, are available
without charge either by written request to:
EXECUTIVE MANAGEMENT
Cadence Design Systems, Inc.
Investor Relations
2655 Seely Avenue
San Jose, California 95134
or by electronic request through the Investor
Relations area of the Company’s website at
www.cadence.com/company/investor_relations.
Annual Meeting
The Cadence Design Systems, Inc. Annual Meeting of
Stockholders will be held May 9, 2007, at 1:00 p.m.,
Pacific time, at the Company’s headquarters located at:
2655 Seely Avenue, Building 5
San Jose, California 95134
Quarterly Earnings Announcements
Our quarterly earnings announcements, along with
other financial reports and information, are available
on the investor relations area of our website at
www.cadence.com/company/investor_relations.
Copies of these reports can also be requested
electronically from the website.
Investor Relations
For further information on our Company, please
contact Cadence Investor Relations:
Cadence Design Systems, Inc.
Investor Relations
2655 Seely Avenue
San Jose, California 95134
phone: 877.236.5972
email: investor_relations@cadence.com
Donald L. Lucas
Private Venture Capital Investor
George M. Scalise
President,
Semiconductor Industry Association
Roger S. Siboni
Independent Investor
John A. C. Swainson
President and Chief Executive Officer,
CA, Inc.
Lip-Bu Tan
Chairman,
Walden International
Michael J. Fister
President and Chief Executive Officer
R.L. Smith McKeithen
Senior Vice President and General Counsel
Kevin Bushby
Executive Vice President,
Worldwide Field Operations
Debra Muchow
Senior Vice President,
Global Human Resources
Moshe Gavrielov
Executive Vice President and General Manager,
Verification Division
Ted Vucurevich
Senior Vice President and Chief Technology Officer,
Advanced Research and Development
James Miller
Executive Vice President,
Products and Technologies Organization
Jan Willis
Senior Vice President,
Industry Alliances
William Porter
Executive Vice President and Chief Financial Officer
Charlie Huang
Corporate Vice President,
Business Development
Ryoichi Kawashima
President, Cadence Japan
Ajay Malhotra
Senior Vice President,
Marketing
Craig Johnson
Corporate Vice President,
Strategy and Planning
CORPORATE VICE PRESIDENTS
Christopher Tice
Senior Vice President
Jaswinder Ahuja
Thomas Beckley
Richard Brashears
Lung Chu
Tom Cooley
James Cowie
Eric Filseth
Charles Giorgetti
Steven Glaser
James Haddad
Yoav Hollander
Louis Holt
Chi-Ping Hsu
Barton Hughes
Jennifer Jordan
Toshifumi Kaneko
Aurangzeb Khan
Zhihong Liu
Nimish Modi
Kevin Palatnik
Srinivas Raman
Rahul Razdan
Ronald Rohrer
Cadence enables global electronic-design
innovation and plays an essential role in
the creation of today’s integrated circuits
and electronics. Customers use Cadence®
software and hardware, methodologies,
and services to design and verify advanced
semiconductors, consumer electronics,
networking and telecommunications
equipment, and computer systems.
Cadence reported 2006 revenues of
approximately $1.5 billion, and has
approximately 5,200 employees.
CORPORATE HEADQUARTERS
GLOBAL LOCATIONS
Cadence Design Systems, Inc.
2655 Seely Avenue
San Jose, California 95134
408.943.1234
www.cadence.com
Plus 25 office locations throughout
North America and Canada.
Asia Pacific
Beijing
Chengdu
Hsinchu
Hong Kong
Seoul
Shanghai
Shenzhen
Singapore
Taipei
The company is headquartered in San Jose,
California, with sales offices, design centers,
and research facilities around the world
to serve the global electronics industry.
More information about the company,
its products, and services is available at
www.cadence.com.
© 2007 Cadence Design Systems, Inc. All rights reserved. Cadence and Virtuoso are registered trademarks and the
Cadence logo is a trademark of Cadence Design Systems, Inc. All others are properties of their respective holders.
7284 0307 JJ/MK/BW/B/BK/JR/30K
India
Bangalore
Noida
Japan
Yokohama
EMEA
Bracknell
Budapest
Dublin
Feldkirchen
Grenoble
Helsinki
Herzelia
Livingston
Milan
Moscow
Munich
Paris
Rome
Rosh Ha’Ayin
Sophia Antipolis
Stockholm
Was this manual useful for you? yes no
Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Download PDF

advertising