-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T7Y9M9VbT0wto13Mo4qm4QhEJKZXPbcnPhI42nfPuc/MEAyd8T6EwL93eJGyl20J a8ba6We6zRjggTNt1rmczA== /in/edgar/work/20000815/0000912057-00-037767/0000912057-00-037767.txt : 20000922 0000912057-00-037767.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037767 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADENCE DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000813672 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 770148231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10606 FILM NUMBER: 702942 BUSINESS ADDRESS: STREET 1: 2655 SEELY ROAD BLDG 5 CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089431234 MAIL ADDRESS: STREET 1: 555 RIVER OAKS PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: ECAD INC /DE/ DATE OF NAME CHANGE: 19880609 10-Q 1 a10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-10606 ------------------------ CADENCE DESIGN SYSTEMS, INC. (Exact name of registrant as specified in its charter) ------------------------ DELAWARE 77-0148231 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 2655 SEELY AVENUE, BUILDING 5, SAN 95134 JOSE, CALIFORNIA (zip code) (Address of principal executive offices)
(408) 943-1234 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / At August 4, 2000, there were 246,240,851 shares of the registrant's common stock, $0.01 par value, outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CADENCE DESIGN SYSTEMS, INC. INDEX
PAGE -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets: July 1, 2000 and January 1, 2000................ 3 Condensed Consolidated Statements of Income: Three and Six Months Ended July 1, 2000 and July 3, 1999....................................... 4 Condensed Consolidated Statements of Cash Flows: Six Months Ended July 1, 2000 and July 3, 1999.......................................... 5 Notes to Condensed Consolidated Financial Statements...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................. 31 Item 2. Changes in Securities and Use of Proceeds......... 32 Item 3. Defaults Upon Senior Securities................... 33 Item 4. Submission of Matters to a Vote of Security Holders................................................. 33 Item 5. Other Information................................. 33 Item 6. Exhibits and Reports on Form 8-K.................. 33 Signatures.................................................. 34
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
JULY 1, JANUARY 1, 2000 2000 ----------- ---------- (UNAUDITED) Current Assets: Cash and cash equivalents................................. $ 113,165 $ 111,401 Short-term investments.................................... 6,278 7,357 Receivables, net.......................................... 231,839 248,034 Inventories, net.......................................... 15,219 19,872 Prepaid expenses and other................................ 117,774 93,248 ---------- ---------- Total current assets.................................... 484,275 479,912 Property, plant, and equipment, net......................... 337,755 330,409 Software development costs, net............................. 10,725 10,692 Acquired intangibles, net................................... 366,984 402,154 Installment contract receivables............................ 45,907 84,160 Other assets................................................ 150,087 152,332 ---------- ---------- $1,395,733 $1,459,659 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of capital leases....... $ 3,447 $ 3,924 Accounts payable and accrued liabilities.................. 256,988 265,518 Deferred revenue.......................................... 192,468 152,116 ---------- ---------- Total current liabilities............................... 452,903 421,558 ---------- ---------- Long-term Liabilities: Long-term notes payable and capital leases................ 4,198 25,024 Other long-term liabilities............................... 31,175 26,928 ---------- ---------- Total long-term liabilities............................. 35,373 51,952 ---------- ---------- Stockholders' Equity: Common stock and capital in excess of par value........... 820,225 857,960 Treasury stock at cost.................................... (246,251) (240,748) Retained earnings......................................... 338,063 344,247 Accumulated other comprehensive gain (loss)............... (4,580) 24,690 ---------- ---------- Total stockholders' equity.............................. 907,457 986,149 ---------- ---------- $1,395,733 $1,459,659 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Product........................................... $140,383 $117,890 $245,915 $305,247 Services.......................................... 80,177 74,943 155,992 147,417 Maintenance....................................... 78,122 71,360 154,268 146,720 -------- -------- -------- -------- Total revenue................................... 298,682 264,193 556,175 599,384 -------- -------- -------- -------- Costs and Expenses: Cost of product................................... 20,501 20,064 40,979 38,600 Cost of services.................................. 52,182 48,844 101,183 96,102 Cost of maintenance............................... 15,329 12,930 29,518 25,830 Amortization of acquired intangibles.............. 19,868 12,856 39,534 25,570 Marketing and sales............................... 95,031 82,936 181,198 162,999 Research and development.......................... 65,772 50,359 128,345 101,227 General and administrative........................ 23,751 20,903 46,283 42,163 Unusual items..................................... -- 19,648 -- 33,840 -------- -------- -------- -------- Total costs and expenses........................ 292,434 268,540 567,040 526,331 -------- -------- -------- -------- Income (loss) from operations................. 6,248 (4,347) (10,865) 73,053 Other income, net................................... 1,407 141 2,453 276 -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes................................ 7,655 (4,206) (8,412) 73,329 Provision (benefit) for income taxes................ 2,029 (1,199) (2,229) 23,474 -------- -------- -------- -------- Net income (loss)............................. $ 5,626 $ (3,007) $ (6,183) $ 49,855 ======== ======== ======== ======== Basic net income (loss) per share................... $ 0.02 $ (0.01) $ (0.03) $ 0.21 ======== ======== ======== ======== Diluted net income (loss) per share................. $ 0.02 $ (0.01) $ (0.03) $ 0.19 ======== ======== ======== ======== Weighted average common shares outstanding.......... 244,404 241,978 244,516 241,026 ======== ======== ======== ======== Weighted average common and potential common shares outstanding--assuming dilution.................... 258,583 241,978 244,516 257,016 ======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CADENCE DESIGN SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED ------------------- JULY 1, JULY 3, 2000 1999 -------- -------- Cash and Cash Equivalents at Beginning of Period............ $111,401 $209,074 -------- -------- Cash Flows from Operating Activities: Net income (loss)......................................... (6,183) 49,855 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 95,819 76,736 Asset impairment and write-off of equipment and non-current assets.................................... -- 4,974 Deferred income taxes................................... 14 13,584 Net investment gains on sale, equity loss, and write-downs........................................... (5,124) 2,633 Write-off of acquired in-process technology............. -- 8,900 Minority interest expense............................... -- (126) Provisions for losses on trade accounts receivable...... 883 6,250 Write-off of non-current assets......................... -- 2,145 Changes in operating assets and liabilities, net of effect of acquired businesses: Receivables........................................... (65,265) (54,947) Inventories........................................... (809) 162 Prepaid expenses and other............................ (24,458) (16,666) Installment contract receivables...................... 38,251 18,980 Accounts payable and accrued liabilities.............. 10,682 (6,441) Income taxes payable.................................. -- (783) Deferred revenue...................................... 40,352 21,804 Other long-term liabilities........................... 4,247 (5,834) -------- -------- Net cash provided by operating activities........... 88,409 121,226 -------- -------- Cash Flows from Investing Activities: Maturities of short-term investments--held-to-maturity.... 999 27,245 Purchases of short-term investments--held-to-maturity..... -- (57) Maturities of short-term investments--available-for-sale......................... 1,107 -- Purchases of property, plant, and equipment............... (46,652) (71,377) Capitalization of software development costs.............. (14,714) (13,528) Increase in acquired intangibles and other assets......... (21,848) (13,452) Net investment in venture capital partnership and equity investments............................................. (497) (5,770) Cash effect of business acquisitions...................... (4,503) (2,806) Sale of put warrants...................................... 25,516 3,609 Purchase of call options.................................. (25,516) (3,609) -------- -------- Net cash used for investing activities.............. (86,108) (79,745) -------- -------- Cash Flows from Financing Activities: Proceeds from long-term debt.............................. -- 30,168 Principal payments on long-term debt and capital leases... (21,763) (165,000) Proceeds from issuance of common stock.................... 40,945 49,642 Purchases of treasury stock............................... (98,631) (49,125) Proceeds from transfer of financial assets in exchange for cash.................................................... 80,808 77,162 -------- -------- Net cash provided by (used for) financing activities........................................ 1,359 (57,153) -------- -------- Effect of exchange rate changes on cash..................... (1,896) (442) -------- -------- Net increase (decrease) in cash and cash equivalents........ 1,764 (16,114) -------- -------- Cash and Cash Equivalents at End of Period.................. $113,165 $192,960 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CADENCE DESIGN SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Cadence's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the condensed consolidated financial statements as of January 1, 2000 and for the three and six months ended July 3, 1999 have been reclassified to conform with the July 1, 2000 presentation. INVENTORIES Cadence's inventories include high technology parts and components for complex computer systems that emulate the performance and operation of computer chips and electronic systems. A summary of inventories follows:
JULY 1, JANUARY 1, 2000 2000 -------- ---------- (IN THOUSANDS) Raw materials............................................ $12,615 $19,033 Work in process.......................................... 2,604 839 ------- ------- Total inventories, net................................. $15,219 $19,872 ======= =======
6 RESTRUCTURING The following table summarizes Cadence's restructuring activity during the six months ended July 1, 2000:
FOR THE SIX MONTHS ENDED JULY 1, 2000 ------------------------------------------------------------ SEVERANCE AND EXCESS OTHER BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL --------- ---------- ------------- -------- -------- (IN THOUSANDS) Balance, January 1, 2000..................... $8,013 $6,464 $ 426 $5,861 $20,764 Non-cash charges........................... (110) (71) (62) (3,345) (3,588) Cash charges............................... (1,650) (302) (364) (598) (2,914) ------ ------ ----- ------ ------- Balance, July 1, 2000........................ $6,253 $6,091 $ -- $1,918 $14,262 ====== ====== ===== ====== =======
CREDIT FACILITY In October 1998, Cadence entered into a senior unsecured credit facility, referred to as the 1998 Facility, with a syndicate of banks that allows Cadence to borrow up to $355 million. As amended in September and November of 1999, the 1998 Facility is divided between a $177.5 million two year revolving credit facility, referred to as the Two Year Facility, and a $177.5 million 364-day revolving credit facility convertible into a one year term loan, referred to as the 364-Day Facility. The Two Year Facility expires on September 29, 2001. The 364-Day Facility will either expire on September 27, 2000, be converted to a one year term loan with a maturity date of September 27, 2001, or, at the request of Cadence and with the agreement of the bank group, be renewed for one additional year. Cadence has the option to pay interest based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and (ii) prime rate. As a result, Cadence's interest rate expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unutilized portion of the Two Year Facility at rates between 0.23% and 0.30% based on a pricing grid tied to a financial covenant and on the unutilized portion of the 364-Day Facility at a fixed rate of 0.18%. The 1998 Facility contains certain financial and other covenants. During the six months ended July 1, 2000, Cadence repaid all of the $20 million outstanding under the 1998 Facility at January 1, 2000. At July 1, 2000, there were no borrowings outstanding under the 1998 Facility. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes foreign currency translation gains and losses and other unrealized gains and losses that have been previously excluded from net income (loss) and reflected instead in equity. A summary of comprehensive income (loss) follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS) Net income (loss)...................................... $ 5,626 $(3,007) $ (6,183) $49,855 Translation loss....................................... (1,549) (1,411) (1,667) (472) Unrealized loss on investments......................... (20,826) (104) (27,603) (156) -------- ------- -------- ------- Comprehensive income (loss).......................... $(16,749) $(4,522) $(35,453) $49,227 ======== ======= ======== =======
7 NET INCOME (LOSS) PER SHARE The following is a reconciliation of the weighted average common shares used to calculate basic net income (loss) per share to the weighted average common and potential common shares used to calculate diluted net income (loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS) Weighted average common shares used to calculate basic net income (loss) per share........................... 244,404 241,978 244,516 241,026 Options............................................... 11,996 -- -- 14,368 Warrants and other contingent shares.................. 712 -- -- 307 Puts.................................................. 1,471 -- -- 1,315 ------- ------- ------- ------- Weighted average common and potential common shares used to calculate diluted net income (loss) per share...... 258,583 241,978 244,516 257,016 ======= ======= ======= =======
Had Cadence recorded net income for the six months ended July 1, 2000, dilutive weighted outstanding options would have been 15.4 million and weighted outstanding warrants, puts, and other dilutive contingent shares would have been 1.4 million. CONTINGENCIES Refer to Part II, Item 1 for a description of legal proceedings. PUT WARRANTS AND CALL OPTIONS Cadence has authorized three seasoned systematic stock repurchase programs under which it repurchases common stock to satisfy estimated requirements for shares to be issued under its Employee Stock Purchase Plan, or ESPP, the 1997 Nonstatutory Stock Option Plan, referred to as the 1997 Plan, and the 2000 Nonstatutory Stock Option Plan, referred to as the 2000 Plan. These repurchases are intended to cover Cadence's expected reissuances under the ESPP for the next 12 months and both the 1997 Plan and 2000 Plan for the next 24 months. As part of its authorized repurchase programs, Cadence has sold put warrants through private placements. At July 1, 2000, there were 6.3 million put warrants outstanding, each of which entitles the holder to sell one share of common stock to Cadence on a specified date and at a specified price ranging from $18.02 to $22.31 per share. Additionally, Cadence purchased call options that entitle Cadence to buy shares of its common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence's systematic stock repurchase programs. At July 1, 2000, Cadence had 4.6 million call options outstanding at exercise prices ranging from $18.27 to $22.56 per share. The put warrants and call options outstanding at July 1, 2000 are exercisable on various dates through February 2001 and Cadence has the contractual ability to settle the options prior to their maturity. At July 1, 2000, the fair value of the call options was approximately $12.1 million and the fair value of the put warrants was approximately $16.7 million. The fair value of the put warrants and call options was estimated by Cadence's investment bankers. If exercised, Cadence has the right to settle the put warrants with that number of shares of Cadence common stock having a value equal to the difference between the exercise price and the fair value at the date of exercise. Settlement of the put warrants with common stock could cause Cadence to issue a substantial number of shares, depending on the exercise price of the put warrants and the per share fair value of Cadence's common stock at the time of exercise. In addition, settlement of put warrants in common stock could lead to the disposition by put warrant holders of shares of Cadence's common stock 8 that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may negatively affect the price of Cadence's common stock. At July 1, 2000, because Cadence had the ability to settle these put warrants with common stock, no amount was classified out of stockholders' equity in the condensed consolidated balance sheets. SEGMENT REPORTING The following tables present information about reported segments for the three months ended July 1, 2000 and July 3, 1999:
FOR THE THREE MONTHS ENDED JULY 1, 2000 -------------------------------------------------------- PRODUCT SERVICES MAINTENANCE OTHER TOTAL -------- -------- ----------- --------- -------- (IN THOUSANDS) Revenue................................ $140,383 $80,177 $78,122 $ -- $298,682 Cost of revenue........................ 20,501 52,182 15,329 -- 88,012 Amortization of acquired intangibles... 10,562 9,306 -- -- 19,868 -------- ------- ------- --------- -------- Gross margin....................... 109,320 18,689 62,793 -- 190,802 Marketing and sales.................... -- -- -- (95,031) (95,031) Research and development............... -- -- -- (65,772) (65,772) General and administrative............. -- -- -- (23,751) (23,751) Other income, net...................... -- -- -- 1,407 1,407 -------- ------- ------- --------- -------- Income (loss) before provision (benefit) for income taxes........... $109,320 $18,689 $62,793 $(183,147) $ 7,655 ======== ======= ======= ========= ======== FOR THE THREE MONTHS ENDED JULY 3, 1999 -------------------------------------------------------- Revenue. $117,890 $ 74,943 $ 71,360 $ -- $264,193 Cost of revenue........................ 20,064 48,844 12,930 -- 81,838 Amortization of acquired intangibles... 11,632 1,224 -- -- 12,856 -------- ------- ------- --------- -------- Gross margin......................... 86,194 24,875 58,430 -- 169,499 Marketing and sales.................... -- -- -- (82,936) (82,936) Research and development............... -- -- -- (50,359) (50,359) General and administrative............. -- -- -- (20,903) (20,903) Unusual items.......................... -- -- -- (19,648) (19,648) Other income, net...................... -- -- -- 141 141 -------- ------- ------- --------- -------- Income (loss) before provision (benefit) for income taxes........... $ 86,194 $24,875 $58,430 $(173,705) $ (4,206) ======== ======= ======= ========= ========
9 The following tables present information about reported segments for the six months ended July 1, 2000 and July 3, 1999:
FOR THE SIX MONTHS ENDED JULY 1, 2000 -------------------------------------------------------- PRODUCT SERVICES MAINTENANCE OTHER TOTAL -------- -------- ----------- --------- -------- (IN THOUSANDS) Revenue............................... $245,915 $155,992 $154,268 $ -- $556,175 Cost of revenue....................... 40,979 101,183 29,518 -- 171,680 Amortization of acquired intangibles......................... 21,140 18,394 -- -- 39,534 -------- -------- -------- --------- -------- Gross margin........................ 183,796 36,415 124,750 -- 344,961 Marketing and sales................... -- -- -- (181,198) (181,198) Research and development.............. -- -- -- (128,345) (128,345) General and administrative............ -- -- -- (46,283) (46,283) Other income, net..................... -- -- -- 2,453 2,453 -------- -------- -------- --------- -------- Income (loss) before provision (benefit) for income taxes.......... $183,796 $ 36,415 $124,750 $(353,373) $ (8,412) ======== ======== ======== ========= ======== FOR THE SIX MONTHS ENDED JULY 3, 1999 -------------------------------------------------------- Revenue. $305,247 $147,417 $ 146,720 $ -- $599,384 Cost of revenue....................... 38,600 96,102 25,830 -- 160,532 Amortization of acquired intangibles......................... 22,951 2,619 -- -- 25,570 -------- -------- -------- --------- -------- Gross margin........................ 243,696 48,696 120,890 -- 413,282 Marketing and sales................... -- -- -- (162,999) (162,999) Research and development.............. -- -- -- (101,227) (101,227) General and administrative............ -- -- -- (42,163) (42,163) Unusual items......................... -- -- -- (33,840) (33,840) Other income, net..................... -- -- -- 276 276 -------- -------- -------- --------- -------- Income (loss) before provision (benefit) for income taxes.......... $243,696 $ 48,696 $120,890 $(339,953) $ 73,329 ======== ======== ======== ========= ========
TALITY CORPORATION On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new, publicly traded company named Tality Corporation, or Tality. In furtherance of this plan, Tality has filed a registration statement with the Securities and Exchange Commission for its initial public offering. The completion of the separation and initial public offering is contingent upon certain conditions, including market conditions. The financial statements and financial information in this Quarterly Report on Form 10-Q do not give effect to the separation, which has not been completed as of the date of this report. We expect that the separation of this business from Cadence, including the transfer of related assets, liabilities and intellectual property rights, will be substantially completed prior to the completion of the initial public offering. Immediately following the separation and initial public offering, Cadence will own approximately 80% of Tality's equity and consolidate its financial results. The full impact of the planned separation, if it occurs, on Cadence's business, operating results, and financial condition cannot be predicted at this time. However, certain incremental expenses are expected to be incurred in future periods as decisions are made regarding the separation. NEW ACCOUNTING STANDARDS In March 2000, the Financial Accounting Standards Board, or FASB, issued interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation", an interpretation of Accounting 10 Pinciples Board, or APB, Opinion No. 25. This interpretation provides guidance regarding the application of APB Opinion No. 25 to stock compensation involving employees. This interpretation is effective July 1, 2000 and is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or SAB 101, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 will be adopted in the fourth quarter of fiscal 2000. The adoption of this statement is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," was issued. The statement defers the effective date of SFAS No. 133 until the first quarter of fiscal 2001. The adoption of this statement is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. CADENCE'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE ACTUAL RESULTS OR PERFORMANCE TO DIFFER MATERIALLY OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN "RESULTS OF OPERATIONS," "LIQUIDITY AND CAPITAL RESOURCES," "FACTORS THAT MAY AFFECT FUTURE RESULTS," AND "DISCLOSURES ABOUT MARKET RISK." OVERVIEW Cadence Design Systems, Inc., or Cadence, provides comprehensive software and other technology and offers design and methodology services for the product development requirements of the world's leading electronics companies. Cadence licenses its leading-edge electronic design automation, or EDA, software and hardware technology and provides a range of services to companies throughout the world to help its customers optimize their product development processes. Cadence is a supplier of products and services which are used by companies to design and develop complex chips and electronic systems including semiconductors, computer systems and peripherals, telecommunications and networking equipment, mobile and wireless devices, automotive electronics, consumer products, and other advanced electronics. TALITY CORPORATION On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new, publicly traded company named Tality Corporation, or Tality. In furtherance of this plan, Tality has filed a registration statement with the Securities and Exchange Commission for its initial public offering. The completion of the separation and initial public offering is contingent upon certain conditions, including market conditions. The financial statements and financial information in this Quarterly Report on Form 10-Q do not give effect to a separation, which has not been completed as of the date of this report. We expect that the separation of this business from Cadence, including the transfer of related assets, liabilities and intellectual property rights, will be substantially completed prior to the completion of the initial public offering. Immediately following the separation and initial public offering, Cadence will own approximately 80% of Tality's equity and consolidate its financial results. As Cadence executes the separation of Tality from Cadence, Cadence is incurring certain incremental costs, primarily for legal and accounting services, strategic business planning, information systems separation, development of compensation and benefits strategies, and recruitment of certain key Tality management. Direct costs of the Tality initial public offering, such as the underwriter's commissions, legal, and accounting fees will be deducted from the proceeds of the offering. The full impact of the planned separation, if it occurs, on Cadence's business, operating results, and financial condition cannot be predicted at this time. However, certain incremental expenses are expected to be incurred in future periods as decisions are made regarding the separation. 12 RESULTS OF OPERATIONS
SIX MONTHS THREE MONTHS ENDED ENDED --------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 % CHANGE 2000 1999 % CHANGE --------- --------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PERCENTAGES) REVENUE Product.................................... $140.4 $117.9 19% $245.9 $305.3 (19)% Services................................... 80.2 74.9 7% 156.0 147.4 6% Maintenance................................ 78.1 71.4 9% 154.3 146.7 5% ------ ------ ------ ------ Total revenue............................ $298.7 $264.2 13% $556.2 $599.4 (7)% ====== ====== ====== ====== SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE Product.................................... 47% 45% 44% 51% Services................................... 27% 28% 28% 25% Maintenance................................ 26% 27% 28% 24%
Product revenue increased $22.5 million and decreased $59.4 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999. The increase in the three months ended July 1, 2000 was primarily due to the increased sales volume of intellectual property creation products, which include mixed signal and simulation products, as well as sales of printed circuit board related product associated with the acquisition of OrCAD, Inc., or OrCAD, which was completed in the third quarter of 1999 and for which there were no similar sales in the comparable period in 1999. The decrease in the six months ended July 1, 2000 was due to an overall decrease in sales volume of Cadence's software products and the implementation of Cadence's software subscription licensing model, first implemented during the third quarter of 1999. The decrease in sales volume of products was primarily attributable to lower sales of integrated circuit implementation products, which include place and route and physical design and verification products, partially offset by sales associated with the OrCAD acquisition. Services revenue increased $5.3 million and $8.6 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to an increase in demand for Cadence's design services and billable hours incurred for design services, partially offset by a decrease in methodology services engagements due to lower staffing levels in the current periods. Increases in design services revenue were primarily due to an increase in the wireless communications area with general increases in each of the other remaining areas, wired communications, information appliances, and industrial electronics. Maintenance revenue increased $6.7 million and $7.6 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to the growth of the installed customer base and the renewal of maintenance and support contracts.
SIX MONTHS THREE MONTHS ENDED ENDED --------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 % CHANGE 2000 1999 % CHANGE --------- --------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PERCENTAGES) REVENUE BY GEOGRAPHY Domestic................................... $160.5 $142.9 12% $312.7 $277.5 13% International.............................. 138.2 121.3 14% 243.5 321.9 (24)% ------ ------ ------ ------ Total revenue............................ $298.7 $264.2 13% $556.2 $599.4 (7)% ====== ====== ====== ====== REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE Domestic................................... 54% 54% 56% 46% International.............................. 46% 46% 44% 54%
13 International revenue increased $16.9 million and decreased $78.4 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999. The increase in the three months ended July 1, 2000 was primarily due to increases in product and maintenance revenue in Europe, partially offset by a decrease in services revenue in Europe and product and maintenance revenue in Japan. The decrease in the six months ended July 1, 2000 was primarily due to decreases in product revenue in Japan and Asia and decreases in services revenue in Europe and Japan. Foreign currency exchange rates positively affected revenue by $2.9 million and $4.6 million during the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar, offset partially by the weakening of the British pound sterling and German deutsche mark in relation to the U.S. dollar. Foreign currency exchange rates positively affected revenue by $3.9 million and $8 million during the three and six months ended July 3, 1999, respectively, primarily due to the strengthening of the Japanese yen in relation to the U.S. dollar.
THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 % CHANGE 2000 1999 % CHANGE --------- --------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PERCENTAGES) COST OF REVENUE Product................................ $20.5 $20.1 2% $ 41.0 $38.6 6% Services............................... $52.2 $48.8 7% $101.2 $96.1 5% Maintenance............................ $15.3 $12.9 19% $ 29.5 $25.8 14% COST OF REVENUE AS A PERCENT OF RELATED REVENUE Product................................ 15% 17% 17% 13% Services............................... 65% 65% 65% 65% Maintenance............................ 20% 18% 19% 18%
Cost of product revenue includes costs of production personnel, packaging and documentation, royalties, and amortization of capitalized software development costs for software products. Manufacturing costs associated with hardware emulation system products include materials, labor, and overhead. Cost of product revenue remained flat for the three months ended July 1, 2000 and increased $2.4 million for the six months ended July 1, 2000, when compared to the same periods in 1999. The increase in cost of product revenue in the six months ended July 1, 2000 was primarily due to higher manufacturing costs associated with emulation system products. Because the majority of Cadence's cost of software product revenue does not vary significantly with changes in revenue, product gross margin increased in the three months ended July 1, 2000, when compared to the same period in 1999, primarily due to an increase in sales volume of software products. Product gross margin decreased in the six months ended July 1, 2000, when compared to the same period in 1999, due to a decrease in sales volume of software products and the implementation of Cadence's software subscription licensing model, which was implemented during the third quarter of 1999. Cost of services revenue includes costs associated with providing services to customers, primarily salaries and costs to recruit, develop, and retain personnel, and costs to maintain the infrastructure necessary to manage a services organization. Cost of services revenue increased $3.4 million and $5.1 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to Cadence's addition of services professionals, in connection with its acquisition of Diablo Research Company LLC, or Diablo, which was completed in the fourth quarter of 1999. Services gross margin remained flat for the three and six months ended July 1, 2000, when compared to the same periods in 1999. Services gross margin has been, and may continue to be, harmed by Cadence's inability to fully utilize its services resources. In addition, services gross margin may continue to be harmed 14 by Cadence's inability to achieve operating efficiencies while implementing a growing number of services offerings. Cost of maintenance revenue includes the cost of customer services, such as hot-line and on-site support, production personnel, packaging, and documentation of maintenance updates. Cost of maintenance revenue increased $2.4 million and $3.7 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, due to increases in employee-related costs and costs associated with the OrCAD acquisition which was completed in the third quarter of 1999 for which there were no similar costs in the first six months of 1999.
THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 2000 2000 --------- --------- -------- -------- (IN MILLIONS) AMORTIZATION OF ACQUIRED INTANGIBLES Amortization of acquired intangibles........................ $19.9 $12.9 $39.5 $25.6 AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE Amortization of acquired intangibles........................ 7% 5% 7% 4%
Amortization of acquired intangibles increased $7 million and $13.9 million in the three and six months ended July 1, 2000, respectively, when compared with the same periods in 1999, primarily due to the 1999 acquisitions of OrCAD and Diablo.
SIX MONTHS THREE MONTHS ENDED ENDED --------------------- ------------------- JULY 1, JULY 3, JULY 1, JULY 3, 2000 1999 % CHANGE 2000 1999 % CHANGE --------- --------- -------- -------- -------- -------- (IN MILLIONS, EXCEPT PERCENTAGES) OPERATING EXPENSES Marketing and sales........................ $95.0 $82.9 15% $181.2 $163.0 11% Research and development................... $65.8 $50.4 31% $128.3 $101.2 27% General and administrative................. $23.8 $20.9 14% $ 46.3 $ 42.2 10% EXPENSES AS A PERCENT OF TOTAL REVENUE Marketing and sales........................ 32% 31% 33% 27% Research and development................... 22% 19% 23% 17% General and administrative................. 8% 8% 8% 7%
Marketing and sales expenses increased $12.1 million and $18.2 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to an increase in employee-related costs and costs associated with the 1999 acquisition of OrCAD for which there were no similar costs in the first six months of 1999. Foreign currency exchange rates for the three and six months ended July 1, 2000, when compared to the same periods in 1999, had a negligible effect on reported marketing and sales expense. Cadence's expenses in research and development, prior to the reduction for capitalization of software development costs, were $71.7 million, representing 24% of total revenue, in the three months ended July 1, 2000 and $57.5 million, representing 22% of total revenue, for the three months ended July 3, 1999. For the three and six months ended July 1, 2000, Cadence capitalized software development costs of $6 million and $14.7 million, respectively, representing 8% and 10% of total research and development expenditures, respectively. For the three and six months ended July 3, 1999, Cadence capitalized software development costs of $7.1 million and $13.5 million, respectively, representing 12% and 10% of total research and development expenditures, respectively. The decrease and increase in capitalized software development costs for the three and six month periods ended July 1, 2000, respectively, resulted primarily from increases and decreases in hours incurred on new product development and new product releases. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed. 15 The increase in net research and development expenses of $15.4 million and $27.1 million for the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, was primarily attributable to employee-related costs, consulting costs, and costs associated with the 1999 acquisition of OrCAD for which there were no similar costs in the first six months of 1999. General and administrative expenses increased $2.8 million and $4.1 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to employee-related costs and costs attributable to the OrCAD and Diablo acquisitions, offset partially by a reduction in bad debt expense. UNUSUAL ITEMS The following table presents information regarding unusual items for the three and six months ended July 3, 1999:
THREE MONTHS SIX MONTHS ENDED ENDED JULY 3, JULY 3, 1999 1999 ------------ ---------- (IN MILLIONS) Restructuring charges................................ $10.7 $12.9 Merger costs......................................... 8.4 8.4 Asset impairment..................................... 3.5 6.6 Litigation settlement................................ (3.0) (3.0) Write-off of acquired in-process technology.......... -- 8.9 ----- ----- Total unusual items.............................. $19.6 $33.8 ===== =====
RESTRUCTURING In the three months ended July 3, 1999, Cadence recorded $10.7 million in restructuring charges, including severance costs to terminate 49 employees and to consolidate facilities. Severance costs of $8.7 million relate to restructuring plans primarily aimed at reducing costs after Cadence merged with Quickturn, further actions taken to restructure the Cadence services business in Japan, and severance expense resulting from the resignation of Cadence's former Chief Executive Officer. Facilities consolidation charges of $2 million were incurred in connection with the closure of 15 Quickturn facilities, including $1 million to close and exit the excess facilities and $1 million of related leasehold improvement abandonment costs. Closure and exit costs include payments required under lease contracts, less any applicable sublease income, after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment. Asset related costs written-off consist of leasehold improvements of facilities that were abandoned and whose estimated fair market value is zero. As of July 1, 2000, all of the 15 excess Quickturn sites had been vacated. Noncancelable lease payments on vacated facilities will be paid out through 2003. In the three months ended April 3, 1999, Cadence recorded $2.2 million in severance costs to terminate 45 employees. These actions were taken to complete Cadence's restructuring program initiated in the fourth quarter of 1998. The restructuring plan was primarily aimed at reducing the costs of excess personnel in its services business. Actual amounts of termination benefits, facilities, and other restructuring related payments can be found in Notes to Condensed Consolidated Financial Statements under "RESTRUCTURING." 16 MERGER COSTS In connection with the acquisition of Quickturn, Cadence charged to expense $8.4 million representing merger costs in the three month period ended July 3, 1999. These merger costs represented professional fees for financial advisors, attorneys, and accountants. ASSET IMPAIRMENT In the three months ended July 3, 1999, Cadence incurred charges totaling $3.5 million in connection with the cancellation of an information technology services contract with a third-party and the abandonment of capitalized software development costs associated with Cadence products that will no longer be sold. In the three months ended April 3, 1999, Cadence incurred charges totaling $3.1 million in connection with the abandonment of certain third-party software licenses that will no longer be used by its design services business and capitalized software development costs associated with Cadence products that will no longer be sold. The impairment losses recorded for the six months ended July 3, 1999 were the amounts by which the carrying amounts of the intangible assets exceeded their fair market values. LITIGATION SETTLEMENT In June 1999, Cadence and Mentor Graphics Corporation announced the settlement of a patent infringement action pending in the United States District Court for the District of Oregon. As a result, the court entered a judgment declaring that certain Quickturn patents are valid, enforceable, and were infringed by Mentor's sale of SimExpress products in the U.S. Mentor is permanently enjoined from producing, marketing or selling SimExpress emulation systems in the U.S. In connection with the settlement, Mentor paid Cadence $3 million. IN-PROCESS TECHNOLOGY In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a supplier of design verification technology used in system-on-a-chip, or SOC, design. The total purchase price was $25.7 million and the acquisition was accounted for as a purchase. Upon consummation of the DAI acquisition, Cadence immediately charged to expense $8.9 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. The value was determined by estimating the costs to develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. Certain acquired in-process technology under development at the time of acquisition was initially expected to become commercially viable in 1999, but has since been delayed to 2000 and 2001. Expenditures to complete this in-process technology are expected to total approximately $1.5 million. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. To date, DAI's results have not differed significantly from the forecasted assumptions. In addition, Cadence's research and development expenditures since the acquisition have not differed materially from expectations. Revenue contribution from the acquired technology falls within an acceptable range of plans in its role in Cadence's suite of design systems and tools. The risks associated with the research and 17 development are still considered high and no assurance can be made that these future products will meet market expectations. OTHER INCOME AND INCOME TAXES Other income increased $1.3 million and $2.2 million in the three and six months ended July 1, 2000, respectively, when compared to the same periods in 1999, primarily due to an increase in foreign exchange gains and a decrease in interest income. The decrease in interest income was due to a lower average balance of invested cash and short-term investments. Cadence's estimated effective tax rate for the three and six months ended July 1, 2000 was 26.5%. The effective tax rate for the three and six months ended July 3, 1999 was 28.5%, excluding the effect of the write-off of acquired in-process technology of $8.9 million, which is not deductible for income tax purposes. The decrease in the 2000 effective tax rate when compared to 1999 is primarily due to foreign earnings being taxed at a lower rate. LIQUIDITY AND CAPITAL RESOURCES At July 1, 2000, Cadence's principal sources of liquidity consisted of $119.4 million of cash and short-term investments, compared to $118.8 million at January 1, 2000, and a $355 million senior unsecured credit facility. As of July 1, 2000, Cadence had no outstanding borrowings under the credit facility. Cash provided by operating activities decreased $32.8 million to $88.4 million for the six months ended July 1, 2000, when compared to the six months ended July 3, 1999. The decrease was primarily due to decreases in net income before unusual items, deferred income taxes, receivables, and prepaid expenses, partially offset by increases in depreciation and amortization, installment contract receivables, accounts payable and accrued liabilities, and deferred revenue. At July 1, 2000, Cadence had net working capital of $31.5 million compared with $58.4 million at January 1, 2000. The working capital decrease was driven primarily by a decrease in receivables of $16.2 million and an increase in deferred revenue of $40.4 million, partially offset by an increase in prepaid expenses and other of $24.6 million, and to a lesser extent, a decrease in accounts payable and accrued liabilities of $8.5 million. The increase in prepaid expenses and other was primarily due to an increase in unbilled professional services and prepaid income taxes. In addition to its short-term investments, Cadence's primary investing activities consisted of purchases of property, plant, and equipment, capitalization of software development costs, acquired intangibles and other assets, venture capital partnership investments and equity investments, and business acquisitions, which combined represented $95.8 million and $106.9 million of cash used for investing activities in the six months ended July 1, 2000 and July 3, 1999, respectively. Since 1994, Cadence has sold put warrants and purchased call options through private placements. See "Notes to Condensed Consolidated Financial Statements." At July 1, 2000, Cadence had a maximum potential obligation related to put warrants to repurchase 6.3 million shares of its common stock at an aggregate price of approximately $131 million. The put warrants will expire on various dates through February 2001, and Cadence has the contractual ability to settle the options prior to their maturity. Cadence has the ability to settle these put warrants with stock and, therefore, no amount was classified out of stockholders' equity in the condensed consolidated balance sheets. Anticipated cash requirements for the remainder of 2000 includes working capital, capital expenditures and payment of operating expenses, including marketing and sales expense, research and development expense, general and administrative expense and potential acquisitions of, or investments in, complementary businesses or technologies, and the purchase of treasury stock through Cadence's stock repurchase programs. 18 As part of its overall investment strategy, Cadence has become a limited partner in a venture capital fund and is committed to invest up to $100 million. As of July 1, 2000, Cadence had contributed approximately $45.2 million to this partnership, which is reflected in other assets in the accompanying condensed consolidated balance sheets, net of operating losses. Cadence anticipates that current cash and short-term investment balances, cash flows from operations, and its $355 million revolving credit facility will be sufficient to meet its working capital requirements on a short-and long-term basis. Cadence will continue to fund Tality's operations, as it has done historically, through the date that Tality receives the net proceeds from its planned initial public offering. NEW ACCOUNTING STANDARDS In March 2000, the Financial Accounting Standards Board, or FASB, issued interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation", an interpretation of Accounting Principles Board, or APB, Opinion No. 25. This interpretation provides guidance regarding the application of APB Opinion No. 25 to stock compensation involving employees. This interpretation is effective July 1, 2000 and is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or SAB 101, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 will be adopted in the fourth quarter of fiscal 2000. The adoption of this statement is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. It requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," was issued. The statement defers the effective date of SFAS No. 133 until the first quarter of fiscal 2001. The adoption of this statement is not expected to have a material effect on Cadence's financial position, results of operations, or cash flows. FACTORS THAT MAY AFFECT FUTURE RESULTS The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occurs, our business, operating results, and financial condition could be materially harmed. The risk factors affecting Tality Corporation which, immediately after its separation from Cadence and initial public offering, will remain a subsidiary of Cadence, are described in detail in the Registration Statement on Form S-1 filed by Tality Corporation with the Securities and Exchange Commission on July 17, 2000, as amended. WE ARE IN THE PROCESS OF RESTRUCTURING OUR DESIGN SERVICES GROUP AS A SEPARATE COMPANY, WHICH MAY IMPACT OUR FINANCIAL RESULTS Since 1995, Cadence has operated an internal electronics design services group. On July 17, 2000, Cadence announced its plan to separate its design services group into a separate company focused on 19 providing design solutions and proprietary technology to electronics product companies and integrated circuit manufacturers, and announced the planned initial public offering of the separate company. Upon completion of this offering, Cadence will hold approximately 80% of the voting power of the new company. While Cadence does not currently plan to distribute to Cadence stockholders its equity interests in Tality Corporation or its subsidiaries, it will have the right at any time to convert and thereafter sell some or all of its shares of voting stock. Cadence has agreed with the underwriters not to transfer its equity interests in Tality Corporation and limited partnership units in Tality, LP for 180 days after the date of the initial public offering of Tality Corporation, except with the prior written consent of Goldman, Sachs & Co. After the expiration of this 180-day period, Cadence will no longer be restricted from transferring any of its common stock of Tality Corporation or limited partnership units in Tality, LP to the public or its stockholders. Cadence currently expects that the principal factors that it would consider in determining whether and when to exchange, convert, sell or distribute to its stockholders any of its shares or partnership units include: - The relative market prices of its Tality's common stock and Cadence's common stock; - The ability of an affiliate of Tality to make sales under Rule 144 of the Securities Act of 1933 or under an effective registration statement covering Cadence's shares of Tality's common stock; - The absence of any court order or other regulation prohibiting or restricting such sales; and - Other conditions affecting Tality's business or Cadence's business. CADENCE ALSO RETAINS THE RIGHT TO SELL ANY OR ALL OF ITS TALITY, LP LIMITED PARTNERSHIP UNITS TO ONE OR MORE THIRD PARTIES FOR STRATEGIC OR OTHER REASONS In connection with the separation, Cadence will also enter into a number of agreements governing the business relationships between the companies and the provision of certain services, including provision of certain facilities, and accounting, finance, legal, human resources and other administrative services. As a result, Cadence will be obligated to provide certain services to Tality for the periods defined in the various agreements. CADENCE LACKS LONG-TERM EXPERIENCE IN ITS ELECTRONICS DESIGN AND METHODOLOGY SERVICES BUSINESS Cadence has no long-term experience in offering electronics design and methodology services and therefore may not be as experienced in this business as others. The market for these services is relatively new and rapidly evolving. Cadence expects the expenses of the design services business to increase substantially in connection with Tality's separation from Cadence and as it continues to expand its operations. The rate of growth of the design services group's revenue over prior periods may not continue or increase, and its separation and expansion may prove more expensive than Cadence anticipates. If Tality fails to increase its revenue to offset its expenses, the design services group will continue to experience losses. Cadence's or Tality's failure to succeed in these services businesses may seriously harm Cadence's business, operating results, and financial condition. THE SUCCESS OF CADENCE'S ELECTRONIC DESIGN AND METHODOLOGY SERVICES BUSINESSES DEPENDS ON MANY FACTORS THAT ARE BEYOND ITS CONTROL In order to be successful with its electronics design and methodology services, Cadence must overcome several factors that are beyond its control, including the following: - MANY SERVICE CONTRACTS GENERALLY REPRESENT LARGE AMOUNTS OF REVENUE. Cadence's electronics design and methodology services contracts generally represent a relatively large amount of revenue per order. Therefore, the loss of individual orders could seriously hurt Cadence's revenue and operating results. 20 - CADENCE'S COST OF SERVICES PERSONNEL IS HIGH AND REDUCES GROSS MARGIN. Gross margin represents the difference between the amount of revenue from the sale of services and Cadence's cost of providing those services. Cadence must pay high salaries to professional services personnel to attract and retain them. This results in a lower gross margin than the gross margin in Cadence's software business. In addition, the high cost of training new services personnel or not fully utilizing these personnel can significantly lower gross margin. Additionally, a substantial portion of these services contracts are fixed-price contracts. This means that the customer pays a fixed price that has been agreed upon ahead of time, no matter how much time or how many resources Cadence must devote to perform the contract. If Cadence's cost in performing the services consistently and significantly exceeds the amount the customer has agreed to pay, it could seriously harm Cadence's business, operating results, and financial condition. CADENCE'S FAILURE TO RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS COULD MAKE ITS PRODUCTS UNCOMPETITIVE AND OBSOLETE The industries in which Cadence competes experience rapid technology developments, changes in industry standards, changes in customer requirements and frequent new product introductions and improvements. Currently, the electronic chip design industry is experiencing several revolutionary trends: - The size of features such as wires, transistors, and contacts on chips is shrinking due to advances in semiconductor manufacturing processes. Process feature sizes refer to the width of the transistors and the width and spacing of the interconnect on the chip. Feature size is normally identified by the headline transistor length, which is shrinking from 0.35 microns to 0.18 microns and below. This is commonly referred to in the semiconductor industry as the migration to deep submicron and represents a major challenge for all levels of the semiconductor industry from design and design automation to design of manufacturing equipment and the manufacturing process itself. Shrinkage of transistor length to such infinitesimal proportions (for reference, the diameter of the period at the end of this sentence is approximately 400 microns) is challenging fundamental laws of physics and chemistry. - The ability to design very large chips, in particular integration of entire electronic systems onto a single chip instead of a circuit board (a process that is referred to in the industry as SOC), increases the complexity of managing a design that at the lowest level is represented by billions of shapes on the fabrication mask. In addition, systems typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the silicon chip and the related embedded software on the chip. If Cadence is unable to respond quickly and successfully to these developments and changes, Cadence may lose its competitive position and its products or technologies may become uncompetitive or obsolete. In order to compete successfully, Cadence must develop or acquire new products and improve its existing products and processes on a schedule that keeps pace with technological developments in its industries. Cadence must also be able to support a range of changing computer software, hardware platforms and customer preferences. There is no guarantee that Cadence will be successful in this regard. CADENCE'S FAILURE TO OBTAIN SOFTWARE OR OTHER INTELLECTUAL PROPERTY LICENSES OR ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS COULD SERIOUSLY HARM ITS BUSINESS Cadence's success depends, in part, upon its proprietary technology. Many of Cadence's products include software or other intellectual property licensed from third parties, and Cadence may have to seek new or renew existing licenses for this software and other intellectual property in the future. Cadence's design services business also requires it to license software or other intellectual property of third parties. Cadence's failure to obtain for its use software or other intellectual property licenses or other intellectual property rights on favorable terms, or the need to engage in litigation over these licenses or rights, could seriously harm Cadence's business, operating results, and financial condition. 21 Also, Cadence generally relies on patents, copyrights, trademarks and trade secret laws to establish and protect its proprietary rights in technology and products. Despite precautions Cadence may take to protect its intellectual property, Cadence cannot assure you that third parties will not try to challenge, invalidate, or circumvent these patents. Cadence also cannot assure you that the rights granted under its patents will provide it with any competitive advantages, patents will be issued on any of its pending applications, or future patents will be sufficiently broad to protect Cadence's technology. Furthermore, the laws of foreign countries may not protect Cadence's proprietary rights in those countries to the same extent as U.S. law protects these rights in the U.S. Cadence cannot assure you that its reliance on licenses from or to third parties, or patent, copyright, trademark, and trade secret protection, will be enough to be successful and profitable in the industries in which Cadence competes. INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST CADENCE COULD SERIOUSLY HARM ITS BUSINESS There are numerous patents in the EDA industry and new patents are being issued at a rapid rate. It is not always economically practicable to determine in advance whether a product or any of its components infringes the patent rights of others. As a result, from time to time, Cadence may be forced to respond to or prosecute intellectual property infringement claims to protect its rights or defend a customer's rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm Cadence's business, operating results, and financial condition. In settling these claims, Cadence may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms acceptable to Cadence. Being forced to enter into a license agreement with unfavorable terms could seriously harm Cadence's business, operating results, and financial condition. CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED NUMBER OF SUPPLIERS Cadence depends on several suppliers for certain key components and board assemblies used in its hardware-based emulation products. Cadence's inability to develop alternative sources or to obtain sufficient quantities of these components or board assemblies could result in delays or reductions in product shipments. In particular, Cadence currently relies on Xilinx, Inc. and Taiwan Semiconductor Manufacturing Corporation for the supply of key integrated circuits and on IBM for the hardware components for both Cadence's CoBALT-TM- product and Mercury Design Verification System-TM-. Other disruptions in supply may also occur. If there were such a reduction or interruption, Cadence's results of operations would be seriously harmed. Even if Cadence can eventually obtain these components from alternative sources, a significant delay in Cadence's ability to deliver products would result. FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS COULD HURT CADENCE'S BUSINESS AND THE MARKET PRICE OF ITS STOCK Cadence has experienced, and may continue to experience, varied quarterly operating results. Various factors affect Cadence's quarterly operating results and some of them are not within Cadence's control, including the mix of products and services sold, the mix of licenses used to sell products and the timing of significant orders for its software products by customers. Quarterly operating results are affected by the mix of products sold because there are significant differences in margins from the sale of hardware and software products and services. For example, based on a three-year average in 1999 Cadence had realized gross margins on software product sales of approximately 91% but realized gross margins of approximately 65% on hardware product sales and 32% on its performance of services. In the second quarter of 2000, realized gross margins decreased to approximately 90% for software products and increased to approximately 67% for hardware products and to 35% for services. In addition, Cadence's quarterly operating results are affected by the mix of licenses entered into in connection with the sale of software products. Cadence has three basic licensing models: perpetual, fixed-term, and subscription. Perpetual and fixed-term licenses recognize a larger portion of the revenue at the beginning of the license period and 22 subscription licenses recognize revenue ratably over each quarter of the term of the license. As Cadence customers purchase more software products pursuant to subscription agreements, future operating results may be lower than that of comparable quarters in which perpetual and fixed-term licenses were in greater use for software product transactions. Finally, Cadence's quarterly operating results are affected by the timing of significant orders for its software products because a significant number of contracts for software products are in excess of $5 million. The failure to close a contract for the sale of one or more orders of Cadence's software products could seriously harm its quarterly operating results. Cadence's hardware verification products typically have a lengthy sales cycle, during which Cadence may expend substantial funds and management effort without any assurance that a sale will result. Sales of Cadence's hardware products depend, in significant part, upon the decision of the prospective customer to commence a project for the design and development of complex computer chips and systems. Such projects often require significant commitments of time and capital. Cadence's hardware sales may be delayed if customers delay commencement of projects. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including inventory obsolescence and fluctuations in quarterly operating results. In addition, Cadence bases its expense budgets partially on its expectations of future revenue. However, it is difficult to predict revenue levels or growth. Revenue levels that are below Cadence's expectations could seriously hurt Cadence's business, operating results, and financial condition. If revenue or operating results fall short of the levels expected by public market analysts and investors, the trading price of Cadence common stock could decline dramatically. Also, because of the timing of large orders and its customers' buying patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or other failures to meet market expectations until late in a fiscal quarter, which could cause even more immediate and serious harm to the trading price of Cadence common stock. Because Cadence has no long-term experience providing services, it believes that quarter-to-quarter comparisons of its results of operations may not be meaningful. Therefore, stockholders should not view Cadence's historical results of operations as reliable indicators of its future performance. CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY INTEGRATE THEM OR THE COMPANIES IT RECENTLY ACQUIRED Cadence has acquired other businesses before and may do so again. While Cadence expects to analyze carefully all potential transactions before committing to them, Cadence cannot assure you that any transaction that is completed will result in long-term benefits to Cadence or its stockholders, or that Cadence's management will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after Cadence acquires another business, it could seriously harm Cadence's business, operating results, and financial condition: - Difficulties in combining previously separate businesses into a single unit; - The substantial diversion of management's attention from day-to-day business when negotiating these transactions and then integrating an acquired business; - The discovery after the acquisition has been completed of liabilities assumed from the acquired business; - The failure to realize anticipated benefits such as cost savings and revenue enhancements; - The failure to retain key personnel of the acquired business; and - Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas. 23 CADENCE'S INTERNATIONAL OPERATIONS MAY SERIOUSLY HARM ITS FINANCIAL CONDITION BECAUSE OF SEVERAL WEAK FOREIGN ECONOMIES AND THE EFFECT OF FOREIGN EXCHANGE RATE FLUCTUATIONS Cadence has significant operations outside the United States. Cadence's revenue from international operations as a percentage of total revenue was approximately 46% for the three months ended July 1, 2000 and July 3, 1999. Cadence also transacts business in various foreign currencies. Recent economic uncertainty and the volatility of foreign currencies in certain parts of the Asia-Pacific region, has had, and may continue to have, a seriously harmful effect on Cadence's revenue and operating results. Fluctuations in the rate of exchange between the U.S. dollar and the currencies of countries other than the U.S. in which Cadence conducts business could seriously harm its business, operating results, and financial condition. For example, if there is an increase in the rate at which a foreign currency exchanges into U.S. dollars, it will take more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. If Cadence prices its products and services in the foreign currency, it will receive less in U.S. dollars than it did before the rate increase went into effect. If Cadence prices its products and services in U.S. dollars, an increase in the exchange rate will result in an increase in the price for Cadence's products and services compared to those products of its competitors that are priced in local currency. This could result in Cadence's prices being uncompetitive in markets where business is transacted in the local currency. Cadence's international operations may also be subject to other risks, including: - The adoption and expansion of government trade restrictions; - Volatile foreign exchange rates and currency conversion risks; - Limitations on repatriation of earnings; - Reduced protection of intellectual property rights in some countries; - Recessions in foreign economies; - Longer receivables collection periods and greater difficulty in collecting accounts receivable; - Difficulties in managing foreign operations; - Political and economic instability; - Unexpected changes in regulatory requirements; - Tariffs and other trade barriers; and - U.S. government licensing requirements for export which make licenses difficult to obtain. Cadence expects that revenue from its international operations will continue to account for a significant portion of its total revenue. Exposure to foreign currency transaction risk can arise when transactions are conducted in a currency different from the functional currency of a Cadence subsidiary. A subsidiary's functional currency is the currency in which it primarily conducts its operations, including product pricing, expenses and borrowings. Cadence uses foreign currency forward exchange contracts and purchases foreign currency put options to help protect against currency exchange risks. These forward contracts and put options allow Cadence to buy or sell specific foreign currencies at specific prices on specific dates. Increases or decreases in the value of Cadence's foreign currency transactions are partially offset by gains and losses on these forward contracts and put options. Although Cadence attempts to reduce the impact of foreign currency fluctuations, significant exchange rate movements may hurt Cadence's results of operations as expressed in U.S. dollars. Foreign currency exchange risk occurs for some of Cadence's foreign operations whose functional currency is the local currency. The primary effect of foreign currency translation on Cadence's results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in 24 expenses. Exchange rate gains and losses on the translation into U.S. dollars of amounts denominated in foreign currencies are included as a separate component of stockholders' equity. CADENCE'S INABILITY TO DEAL EFFECTIVELY WITH THE CONVERSION TO THE EURO MAY NEGATIVELY IMPACT ITS MARKETING AND PRICING STRATEGIES On January 1, 1999, 11 member countries of the European Union adopted the Euro as their common legal currency and established fixed conversion rates between their sovereign currencies and the Euro. Transactions can be made in either the sovereign currencies or the Euro until January 1, 2002, when the Euro must be used exclusively. Currently, only electronic transactions may be conducted using the Euro. Cadence believes that its internal systems and financial institution vendors are capable of handling the Euro conversion and is in the process of examining current marketing and pricing policies and strategies that may be affected by conversion to the Euro. The cost of this effort is not expected to materially hurt Cadence's results of operations or financial condition. However, Cadence cannot assure you that all issues related to the Euro conversion have been identified and that any additional issues would not materially hurt Cadence's results of operations or financial condition. For example, the conversion to the Euro may have competitive implications on Cadence's pricing and marketing strategies and Cadence may be at risk to the extent its principal European suppliers and customers are unable to deal effectively with the impact of the Euro conversion. Cadence has not yet completed its evaluation of the impact of the Euro conversion on its functional currency designations. FAILURE TO OBTAIN EXPORT LICENSES COULD HARM CADENCE'S BUSINESS Cadence must comply with U.S. Department of Commerce regulations in shipping its software products and other technologies outside the U.S. Although Cadence has not had any significant difficulty complying with these regulations so far, any significant future difficulty in complying could harm Cadence's business, operating results, and financial condition. CADENCE'S INABILITY TO COMPETE IN ITS INDUSTRIES COULD SERIOUSLY HARM ITS BUSINESS The EDA market and the commercial electronics design and methodology services industries are highly competitive. If Cadence is unable to compete successfully in these industries, it could seriously harm Cadence's business, operating results, and financial condition. To compete in these industries, Cadence must identify and develop innovative and cost competitive electronic design automation software products and market them in a timely manner. It must also gain industry acceptance for its design and methodology services and offer better strategic concepts, technical solutions, prices and response time, or a combination of these factors, than those of other design companies and the internal design departments of electronics manufacturers. Cadence cannot assure you that it will be able to compete successfully in these industries. Factors which could affect Cadence's ability to succeed include: - The development of competitive EDA products and design and methodology services could result in a shift of customer preferences away from Cadence's products and services and significantly decrease revenue; - The electronics design and methodology services industries are relatively new and electronics design companies and manufacturers are only beginning to purchase these services from outside vendors; - The pace of the technology change demands continuous technological development to meet the requirements of next-generation design challenges; and - There are a significant number of current and potential competitors in the EDA industry and the cost of entry is low. In the electronic design automation products industry, Cadence currently competes with a number of large companies, including Avant! Corporation, Mentor Graphics Corporation, Synopsys, Inc. and Zuken- 25 Redac, and numerous small companies. Cadence also competes with manufacturers of electronic devices that have developed or have the capability to develop their own EDA products. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as Cadence because they wish to promote their own internal design departments. In the electronics design and methodology services industries, Cadence competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronic design and methodology services industries. CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM ITS BUSINESS Competition for highly skilled employees is very intense. Cadence's business depends on the efforts and abilities of its senior management, its research and development staff, and a number of other key management, sales, support, technical, and services personnel. The robust economy and opportunities available in other companies has made and could continue to make employee retention and recruiting more difficult for Cadence. Additionally, Cadence expects more than 1,000 of its employees to become employees of Tality in connection with the separation of its design services group. Cadence's failure to attract, train, motivate, and retain key employees would impair its development of new products, its ability to provide design and methodology services and the management of its businesses. This would seriously harm Cadence's business, operating results, and financial condition. IF CADENCE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, CADENCE COULD BE PREVENTED FROM HIRING NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR SUBSTANTIAL COSTS IN DEFENDING OURSELVES Companies in Cadence's 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 personnel or cause us to incur liability for damages. Cadence could also incur substantial costs in defending ourselves or its employees against these claims, regardless of their merits. Defending ourselves from these claims could also divert the attention of its management away from its operations. ERRORS OR DEFECTS IN ITS DESIGNS COULD EXPOSE US TO LIABILITY AND HARM OUR REPUTATION Cadence's clients use its products and services in designing and developing products that involve a high degree of technological complexity, each of which has its own specifications and is based on various industry standards. Because of the complexity of the systems and products with which Cadence works, some of its products and designs can be adequately tested only when put to full use in the marketplace. As a result, its clients or their end users may discover errors or defects in Cadence's software or the systems Cadence designs, or the products or systems incorporating its design and intellectual property may not operate as expected. Errors or defects could result in: - Loss of current clients and loss of or delay in revenue and loss of market share; - Failure to attract new clients or achieve market acceptance; - Diversion of development resources to resolving the problem; - Increased service costs; and - Liability for damages. 26 ANTI-TAKEOVER DEFENSES IN CADENCE'S CHARTER, BY LAWS, AND UNDER DELAWARE LAW COULD PREVENT AN ACQUISITION OF CADENCE OR LIMIT THE PRICE THAT INVESTORS MIGHT BE WILLING TO PAY FOR CADENCE COMMON STOCK Provisions of the Delaware General Corporation Law that apply to Cadence and its Certificate of Incorporation could make it difficult for another company to acquire control of Cadence. For example: - Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met. - Cadence's Certificate of Incorporation allows Cadence's Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any Cadence preferred stock that may be issued in the future may be superior to the rights of holders of its common stock. - Cadence has a rights plan, commonly known as a "poison pill," which would make it difficult for someone to acquire Cadence without the approval of Cadence's Board of Directors. All or any one of these factors could limit the price that certain investors would be willing to pay for shares of Cadence common stock and could delay, prevent or allow Cadence's Board of Directors to resist an acquisition of Cadence, even if the proposed transaction was favored by a majority of Cadence's independent stockholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Cadence's exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. While Cadence is exposed with respect to interest rate fluctuations in many of the world's leading industrialized countries, Cadence's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on Cadence's cash and cash equivalents, short-term and long-term investments, and interest paid on its long-term debt obligations as well as costs associated with foreign currency hedges. Cadence invests in high quality credit issuers and, by policy, limits the amount of its credit exposure to any one issuer. As stated in its policy, Cadence's first priority is to reduce the risk of principal loss. Consequently, Cadence seeks to preserve its invested funds by limiting default risk, market risk, and reinvestment risk. Cadence mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. In October 1998, Cadence entered into a senior unsecured credit facility, referred to as the 1998 Facility, with a syndicate of banks that allows Cadence to borrow up to $355 million. As amended in September and November of 1999, the 1998 Facility is divided between a $177.5 million two year revolving credit facility, referred to as the Two Year Facility, and a $177.5 million 364-day revolving credit facility convertible into a one year term loan, referred to as the 364-Day Facility. The Two Year Facility expires on September 29, 2001. The 364-Day Facility will either expire on September 27, 2000, be converted to a one year term loan with a maturity date of September 27, 2001, or, at the request of Cadence and with the agreement of the bank group, be renewed for one additional year. Cadence has the option to pay interest 27 based on LIBOR plus a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and (ii) prime rate. As a result, Cadence's interest rate expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unutilized portion of the Two Year Facility at rates between 0.23% and 0.30% based on a pricing grid tied to a financial covenant and on the unutilized portion of the 364-Day Facility at a fixed rate of 0.18%. The 1998 Facility contains certain financial and other covenants. The table below presents the carrying value and related weighted average interest rates for Cadence's investment portfolio. All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents; investments with original maturities between three and 12 months are considered to be short-term investments. Investments with original maturities greater than 12 months are considered non-current assets. As of July 1, 2000, substantially all of Cadence's investments have maturities less than 12 months. The carrying value approximated fair value at July 1, 2000.
FAIR AVERAGE VALUE INTEREST RATE -------- ------------- (In millions, except for average interest rates) Investment Securities: Short-term investments--fixed rate........................ $ 6.3 5.75% Long-term investments--fixed rate......................... 1.0 6.90% ----- Total short-term and long-term securities............... 7.3 5.91% Cash equivalents--fixed rate.............................. 15.7 6.25% Cash equivalents--variable rate........................... 35.1 5.04% ----- Total interest bearing instruments...................... $58.1 5.48% =====
INTEREST RATE SWAP RISK Cadence entered into a 4.8% fixed interest rate-swap in connection with its accounts receivable financing program to modify the interest rate characteristics of the receivables sold to a financing institution on a non-recourse basis. At July 1, 2000, the notional amount payable was $13 million which will be amortized in quarterly installments of approximately $2.2 million through October 2001. The estimated fair value at July 1, 2000 was immaterial. FOREIGN CURRENCY RISK Cadence's operations include transactions in foreign currencies and, as a result, Cadence benefits from a weaker dollar and is harmed by a stronger dollar relative to major currencies worldwide. Accordingly, the primary effect of foreign currency transactions on Cadence's results of operations is a reduction in revenue from a strengthening U.S. dollar, offset by a smaller reduction in expenses. Cadence enters into foreign currency forward exchange contracts and purchases foreign currency put options with financial institutions primarily to protect against currency exchange risks associated with existing assets and liabilities and probable but not firmly committed transactions, respectively. Forward contracts are not accounted for as hedges and, therefore, the unrealized gains and losses are recognized in other income, net in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities. 28 Cadence purchases put options to hedge the currency exchange risks associated with probable but not firmly committed transactions. Probable but not firmly committed transactions consist of revenue from Cadence's products and maintenance contracts in a currency other than the functional currency. These transactions are made through Cadence's subsidiaries in Ireland and Japan. The premium costs of the put options are recorded in other current assets while the gains and losses are deferred and recognized in income in the same period as the hedged transaction. Gains and losses on accounting hedges realized before the settlement date of the related hedged transaction are also generally deferred and recognized in income in the same period as the hedged transaction. Cadence does not use forward contracts and put options for trading purposes. Cadence's ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the forward contracts and put options mature. The table below provides information as of July 1, 2000 about Cadence's forward contracts and put options. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates. These forward contracts mature prior to August 17, 2000. The put options mature prior to September 30, 2000.
AVERAGE NOTIONAL CONTRACT AMOUNT RATE -------- -------- Forward Contracts: (In millions, except for average contract rates) Japanese yen.............................................. $ 49.9 106.28 Euro...................................................... 31.8 0.94 British pound sterling.................................... 19.9 1.51 Canadian dollars.......................................... 2.9 1.47 Swedish krona............................................. 2.7 8.63 Hong Kong dollars......................................... 0.6 7.79 Singapore dollars......................................... 0.2 1.72 ------ $108.0 ====== Put Option: Japanese yen.............................................. $ 9.3 107.00 ======
While Cadence actively manages its foreign currency risks on an ongoing basis, there can be no assurance that Cadence's foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations, cash flows, and financial position. On a net basis, foreign currency fluctuations did not have a material impact on Cadence's results of operations and financial position during the three months ended July 1, 2000. Due to the short-term nature of the forward contracts and the put option, the fair value at July 1, 2000 was negligible. The realized gain (loss) on the forward contracts and the put option as they matured was not material to the consolidated operations of Cadence. EQUITY PRICE RISK As part of its authorized repurchase program, Cadence has sold put warrants and purchased call options through private placements. The put warrants, if exercised, would entitle the holder to sell shares of Cadence common stock to Cadence at a specified price. Similarly, the call options entitle Cadence to buy shares of Cadence common stock at a specified price. Cadence repurchases shares of its common stock under stock repurchase programs for issuance under its Employee Stock Purchase Plan, or ESPP, its 1997 Stock Option Plan, referred to as the 1997 Plan, and its 2000 Stock Option Plan. As part of these repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants. These transactions may result in sales of a large 29 number of shares and consequent decline in the market price of Cadence common stock. Cadence's stock repurchase program includes the following characteristics: - Call options allow Cadence to buy shares of its common stock on a specified day at a specified price. If the market price of the stock is greater than the exercise price of a call option, Cadence will typically exercise the option and receive shares of its stock. If the market price of the common stock is less than the exercise price of a call option, Cadence typically will not exercise the option. - Call option issuers may accumulate a substantial number of shares of Cadence common stock in anticipation of Cadence's exercising its call option and may dispose of these shares if and when Cadence fails to exercise its call option. This could cause the market price of Cadence common stock to fall. - Put warrants allow the holder to sell to Cadence shares of Cadence common stock on a specified day at a specified price. Cadence has the right to settle the put warrants with shares of Cadence common stock valued at the difference between the exercise price and the fair value of the stock at the date of exercise. - Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, settlement of the put warrants with Cadence common stock could cause Cadence to issue a substantial number of shares to the holder of the put warrant. The holder may sell these shares in the open market, which could cause the price of Cadence common stock to fall. - Put warrant holders may accumulate a substantial number of shares of Cadence common stock in anticipation of exercising their put warrants and may dispose of these shares if and when they exercise their put warrants and Cadence issues shares in settlement of their put warrants. This could also cause the market price of Cadence common stock to fall. The table below provides information at July 1, 2000 about Cadence's outstanding put warrants and call options. The table presents the contract amounts and the weighted average strike prices. The put warrants and call options expire on various dates through February 2001 and Cadence has the contractual ability to settle the options prior to their maturity.
2000 2001 ESTIMATED MATURITY MATURITY FAIR VALUE -------- -------- ---------- (Shares and contract amounts in millions) Put Warrants: Shares.................................................... 6.1 0.2 Weighted average strike price............................. $20.72 $19.77 Contract amount........................................... $127.3 $ 3.7 $16.7 Call Options: Shares.................................................... 4.5 0.1 Weighted average strike price............................. $20.94 $20.02 Contract amount........................................... $ 94.2 $ 2.8 $12.1
30 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, licensing, contract law, distribution arrangements, and employee relations matters. Cadence filed a complaint in the U.S. District Court for the Northern District of California on December 6, 1995 against Avant! Corporation and certain of its employees for misappropriation of trade secrets, copyright infringement, conspiracy, and other illegal acts. On January 16, 1996, Avant! filed various counterclaims against Cadence and Joseph B. Costello, Cadence's former President and Chief Executive Officer, and with leave of the court, on January 29, 1998, filed a second amended counterclaim. The second amended counterclaim alleges, INTER ALIA, that Cadence and Mr. Costello had cooperated with the Santa Clara County, California, District Attorney and initiated and pursued its complaint against Avant! for anticompetitive reasons, engaged in wrongful activity in an attempt to manipulate Avant!'s stock price, and utilized certain pricing policies and other acts to unfairly compete against Avant! in the marketplace. The second amended counterclaim also alleges that certain Cadence insiders engaged in illegal insider trading with respect to Avant!'s stock. Cadence and Mr. Costello believe that they have meritorious defenses to Avant!'s claims, and each intends to defend such action vigorously. By an order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from Cadence's complaint and stayed the counterclaim pending resolution of Cadence's complaint. The counterclaim remains stayed. In an order issued on December 19, 1997, as modified on January 26, 1998, the District Court entered a preliminary injunction barring Avant! from any further infringement of Cadence's copyrights in Design Framework II software, or selling, licensing or copying such product derived from Design Framework II, including, but not limited to, Avant!'s ArcCell products. On December 7, 1998, the District Court issued a further preliminary injunction, which enjoined Avant! from selling its Aquarius product line. Cadence posted a $10 million bond in connection with the issuance of the preliminary injunction. On July 30, 1999, the U.S. Court of Appeals for the Ninth Circuit affirmed the preliminary injunction. By an order dated July 22, 1997, the District Court stayed most activity in the case pending in that court and ordered Avant! to post a $5 million bond in light of related criminal proceedings pending against Avant! and several of its executives. On September 7, 1999, the District Court ruled on the parties' Motions for Summary Adjudication, and granted in part, and denied in part, each party's motion regarding the scope of a June 6, 1994 Release Agreement between the parties. The Court held that Cadence's copyright infringement claim against Avant! is not barred by the release and that Cadence may proceed on that claim. The Court also held that Cadence's trade secret claim based on Avant!'s use of Cadence's Design Framework II source code is barred by the release. The Ninth Circuit has agreed to hear both parties' appeal from the District Court's order. The trial date has been vacated pending a decision on the appeal. On April 30, 1999, Cadence and several of its officers and directors were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Spett v. Cadence Design Systems, et al., civil action no. C 99-2082. The action was brought on behalf of a class of stockholders who purchased Cadence common stock between November 4, 1998 and April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The lawsuit arises out of Cadence's announcement of its first quarter 1999 financial results. In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit against Quickturn Design Systems, Inc. in the U.S. District Court for the Northern District of California. In this lawsuit, entitled Aptix Corporation and Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762 31 WHA, Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the District Court to declare the Aptix patent invalid in view of the prior art and unenforceable based on inequitable conduct during the prosecution of the patent. In June 2000 the District Court entered judgment in favor of Quickturn, dismissing the complaint and declaring the patent unenforceable. The plaintiffs have filed a notice of appeal from the District's Court's judgment. On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District Court for the District of Delaware, alleging that Quickturn's Mercury-TM- hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832 allegedly assigned to Mentor. At Quickturn's request, Cadence was added as a party defendant. Mentor has since asserted that Quickturn's Mercury Plus(Plus-TM-) emulation systems also infringe U.S. Patent Nos. 5,777,489 and 5,790,832. The complaint seeks a permanent injunction and unspecified damages. Cadence intends to vigorously defend itself against these claims. On December 14, 1999, this action was transferred to the U.S. District Court for the Northern District of California, and renumbered Civil Action No. C 99-5464 SI. On February 25, 2000, Cadence and several of its officers were named as defendants in a lawsuit filed in the U.S. District Court for the Northern District of California, entitled Maxick v. Cadence Design Systems, Inc., File No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises out of Cadence's acquisition of OrCAD, which was completed in August 1999. On March 24, 2000, Mentor and Meta and several founders of Meta filed suit against Quickturn and Cadence and a former Quickturn employee in the U.S. District Court for the Northern District of California, Civil Action No. C 00-01030 SI. The suit alleges patent infringement of a U.S. Patent allegedly assigned to Mentor, misappropriation of trade secrets and breach of confidence, and seeks unspecified damages, injunctive relief and the assignment to Mentor of a patent previously issued to Quickturn. Cadence intends to vigorously defend itself against these claims, and has filed a counterclaim for declaratory judgment of invalidity of several patents allegedly assigned to Mentor. Following a motion by Cadence, the former Quickturn employee was dismissed as a party to the action. Discovery in the action has subsequently been consolidated with discovery in Civil Action No. C 99-5464, the Mentor v. Quickturn suit transferred from Delaware. On January 7, 1999, in the suit, Mentor Graphics Corporation, et. al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC, an amended complaint was filed and served by Mentor asserting claims against Cadence, Quickturn Design Systems, Inc. and its Board of Directors for declaratory and injunctive relief for various alleged breaches of fiduciary duty purportedly owned by Quickturn and its Board of Directors to Quickturn's shareholders in connection with the merger between Quickturn and Cadence. Mentor alleged that Cadence aided and abetted Quickturn and its Board of Directors in those purported breaches. Mentor has not prosecuted the matter since January 1999. In May 2000, Mentor advised the Delaware Chancery Court of its objection to the settlement of a companion action brought on behalf of certain Quickturn shareholders. Mentor further advised the court that it would seek an award of attorneys' fees related to its prosecution of the action. At the request of the court, on July 28, 2000, Mentor filed its brief in support of its standing to seek such an award. Cadence intends to vigorously oppose Mentor's request. Management believes that the ultimate resolution of the disputes and litigation matters discussed above will not have a material adverse effect on Cadence's business, operating results, or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 32 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on May 24, 2000, the stockholders of Cadence approved the following matters: 1. A proposal to elect eight (8) directors of Cadence to serve for the ensuing year and until their successors are elected or until such director's earlier resignation or removal.
NOMINEE IN FAVOR WITHHELD - ------- ----------- --------- Carol A. Bartz.............................................. 215,429,157 994,735 H. Raymond Bingham.......................................... 210,083,179 6,340,713 Dr. Leonard Y. W. Liu....................................... 215,452,707 971,185 Donald L. Lucas............................................. 215,261,253 1,162,639 Dr. Alberto Sangiovanni-Vincentelli......................... 215,442,956 980,936 George M. Scalise........................................... 215,436,453 987,439 Dr. John B. Shoven.......................................... 215,441,858 982,034 Roger S. Siboni............................................. 215,436,538 987,354
2. A proposal for the ratification of the selection of Arthur Andersen LLP as independent public accountants for the fiscal year ending December 30, 2000 was approved by a vote of 216,074,304 for, 204,609 opposed, and 144,979 withheld. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------------------------------------------------------ 2.01 Master Separation Agreement, dated as of July 14, 2000 by and among the registrant, Cadence Holders, Inc. and Tality Corporation. 10.01 Form of Indemnity Agreement between Cadence Design Systems, Inc. and its directors and executive officers. 27.01 Financial data schedule for the period ended July 1, 2000.
(b) Reports on Form 8-K: Cadence filed a Current Report on Form 8-K dated July 17, 2000 announcing the planned separation and initial public offering of its design services group. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CADENCE DESIGN SYSTEMS, INC. (REGISTRANT) DATE: August 15, 2000 By: /s/ H. RAYMOND BINGHAM ------------- --------------------------------------- H. Raymond Bingham PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR DATE: August 15, 2000 By: /s/ WILLIAM PORTER ------------- --------------------------------------- William Porter SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
34 EX-2.01 2 ex-2_01.txt EX 2.01 EXHIBIT 2.01 MASTER SEPARATION AGREEMENT BY AND AMONG CADENCE DESIGN SYSTEMS, INC., TALITY CORPORATION AND CADENCE HOLDINGS, INC. DATED AS OF JULY 14, 2000 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS..........................................................................................2 SECTION 1.1 AFFILIATE............................................................................2 SECTION 1.2 APPLICABLE LAW.......................................................................2 SECTION 1.3 BUSINESS DAY.........................................................................2 SECTION 1.4 CADENCE'S AUDITORS...................................................................2 SECTION 1.5 CADENCE GROUP........................................................................2 SECTION 1.6 CLASS A COMMON STOCK.................................................................2 SECTION 1.7 CLASS B COMMON STOCK.................................................................2 SECTION 1.8 CLASS C COMMON STOCK.................................................................2 SECTION 1.9 CONTRACTS............................................................................2 SECTION 1.10 GOVERNMENTAL APPROVALS...............................................................2 SECTION 1.11 GOVERNMENTAL AUTHORITY...............................................................2 SECTION 1.12 INFORMATION..........................................................................2 SECTION 1.13 IPO CLOSING DATE.....................................................................3 SECTION 1.14 PERSON ............................................................................3 SECTION 1.15 SUBSIDIARY...........................................................................3 SECTION 1.16 TALITY'S AUDITORS....................................................................3 SECTION 1.17 TALITY GROUP.........................................................................3 SECTION 1.18 THIRD-PARTY APPROVALS................................................................3 ARTICLE II SEPARATION..........................................................................................3 SECTION 2.1 SEPARATION DATE......................................................................3 SECTION 2.2 DOCUMENTS TO BE DELIVERED BY CADENCE AND TALITY......................................3 SECTION 2.3 GOVERNMENTAL APPROVALS...............................................................4 SECTION 2.4 THIRD-PARTY APPROVALS................................................................4 SECTION 2.5 NO REPRESENTATIONS OR WARRANTIES.....................................................5 ARTICLE III THE IPO AND REGISTRATION RIGHTS....................................................................5 SECTION 3.1 TRANSACTIONS PRIOR TO THE IPO........................................................5 SECTION 3.2 COOPERATION..........................................................................6 SECTION 3.3 CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO......................................6 SECTION 3.4 REGISTRATION RIGHTS..................................................................7 ARTICLE IV COVENANTS AND OTHER MATTERS........................................................................16 SECTION 4.1 FURTHER INSTRUMENTS.................................................................16 SECTION 4.2 AGREEMENT FOR EXCHANGE OF INFORMATION...............................................16 SECTION 4.3 AUDITORS AND AUDITS; ANNUAL AND QUARTERLY STATEMENTS AND ACCOUNTING.................18 SECTION 4.4 DISPUTE RESOLUTION..................................................................19 SECTION 4.5 NON-SOLICITATION OF EMPLOYEES.......................................................21 SECTION 4.6 EMPLOYEE AGREEMENTS.................................................................21 ARTICLE V MISCELLANEOUS.......................................................................................23
i SECTION 5.1 LIMITATION OF LIABILITY.............................................................23 SECTION 5.2 ENTIRE AGREEMENT....................................................................23 SECTION 5.3 GOVERNING LAW.......................................................................23 SECTION 5.4 TERMINATION.........................................................................23 SECTION 5.5 NOTICES.............................................................................24 SECTION 5.6 COUNTERPARTS........................................................................24 SECTION 5.7 BINDING EFFECT; ASSIGNMENT..........................................................24 SECTION 5.8 SEVERABILITY........................................................................25 SECTION 5.9 FAILURE OR DELAY NOT WAIVER; REMEDIES CUMULATIVE....................................25 SECTION 5.10 AMENDMENT...........................................................................25 SECTION 5.11 AUTHORITY...........................................................................25 SECTION 5.12 INTERPRETATION......................................................................25 SECTION 5.13 CONFLICTING AGREEMENTS..............................................................26 SECTION 5.14 PAYMENT OF EXPENSES.................................................................26
ii MASTER SEPARATION AGREEMENT THIS MASTER SEPARATION AGREEMENT (this "AGREEMENT") is entered into and effective as of July 14 , 2000, by and among Cadence Design Systems, Inc., a Delaware corporation ("CADENCE"), Tality Corporation, a Delaware corporation ("TALITY"), and Cadence Holdings, Inc., a Delaware corporation and wholly owned subsidiary of Cadence ("HOLDINGS"). Capitalized terms used herein and not defined elsewhere herein shall have the meanings ascribed to them in Article I. RECITALS WHEREAS, Cadence currently owns all of the issued and outstanding shares of Tality capital stock; WHEREAS, Cadence has formed Tality to engage in the business of acting as the sole general partner of, and owning both a general and limited partnership interest in, a partnership of which Holdings will be the other initial limited partner (the "PARTNERSHIP"), which will be engaged in the business of providing design engineering services, and intellectual property in connection therewith, to electronic equipment manufacturers, all as described in the Registration Statement (the "TALITY BUSINESS"); WHEREAS, the Boards of Directors of Cadence, Tality and Holdings have each determined that it would be appropriate and desirable for Holdings and Tality to form the Partnership and for Cadence to transfer to the Partnership, on behalf of Holdings, and for the Partnership to receive and assume, directly or indirectly, as a contribution from Holdings, certain assets and liabilities of Cadence associated with the Tality Business (the "SEPARATION"); WHEREAS, Cadence, Holdings and Tality currently contemplate that, immediately following the contribution of such assets to and assumption of such liabilities by the Partnership, Tality shall commence an initial public offering ("IPO") of its Class A Common Stock, par value $0.001 per share (the "CLASS A COMMON STOCK"), pursuant to a registration statement on Form S-1 promulgated by the Securities and Exchange Commission (the "REGISTRATION STATEMENT"); and WHEREAS, the parties intend for this Agreement to set forth the principal arrangements between them regarding the Separation. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: 1 ARTICLE I DEFINITIONS Section 1.1 "AFFILIATE" of any Person means any other Person that controls, is controlled by, or is under common control with, such first Person. As used herein, "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract or otherwise. Section 1.2 "APPLICABLE LAW" means all laws and regulations of Governmental Authorities applicable to the transaction, property or Persons at issue. Section 1.3 "BUSINESS DAY" means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of California. Section 1.4 "CADENCE'S AUDITORS" means Cadence's independent certified public accountants from time to time. Section 1.5 "CADENCE GROUP" means Cadence and each of its Subsidiaries (other than any member of the Tality Group) on and after the Separation Date. "Section 1.6 "CLASS A COMMON STOCK has the meaning set forth in the recitals. "Section 1.7 "CLASS B COMMON STOCK means the Class B Common Stock, par value $0.001 per share, of Tality. "Section 1.8 "CLASS C COMMON STOCK means the Class C Common Stock, par value $0.001 per share, of Tality. Section 1.9 "CONTRACTS" means any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of its property under Applicable Law. Section 1.10 "GOVERNMENTAL APPROVALS" means any notices, reports or other filings to be made with, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority. Section 1.11 "GOVERNMENTAL AUTHORITY" means any federal, state, local, foreign or international court or government of competent jurisdiction, or any political subdivision thereof, or any department, commission, board, bureau, agency, official or other regulatory, administrative body of any such government of competent jurisdiction or political subdivision thereof. Section 1.12 "INFORMATION" means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible form, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, 2 models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data. Section 1.13 "IPO CLOSING DATE" means the date on which the first closing of the IPO occurs. Section 1.14 "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Authority. Section 1.15 "SUBSIDIARY" of any Person means any other Person of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect at least a majority of the board of directors or other body performing similar functions with respect to such other Person is directly or indirectly owned or controlled (including by contract) by such first Person. By way of example and not limitation, the Partnership shall be deemed to be a Subsidiary of Tality. Section 1.16 "TALITY'S AUDITORS" means Tality's independent certified public accountants from time to time. Section 1.17 "TALITY GROUP" means Tality and each of its Subsidiaries on and after the Separation Date. "Section 1.18 "THIRD-PARTY APPROVALS means any notices, consents or authorizations of third parties (other than Governmental Approvals) required to consummate the Separation. ARTICLE II SEPARATION Section 2.1 SEPARATION DATE. Unless otherwise expressly provided in this Agreement, any Ancillary Agreement (as defined in Section 2.2), the Agreement of Limited Partnership of the Partnership or any other agreement among the parties, the effective time and date of each transfer of assets and property, assumption of liability, license, undertaking or other agreement in connection with the Separation shall be 12:00 a.m., Pacific Time, October 1, 2000, or such other date as may be fixed by the Board of Directors of Cadence or a duly authorized officer of Cadence (the "SEPARATION DATE"). Section 2.2 DOCUMENTS TO BE DELIVERED BY CADENCE AND TALITY. On the Separation Date, each of Cadence and Tality shall duly execute and deliver, or shall cause its appropriate Subsidiaries to duly execute and deliver, to the other all of the following agreements, documents and other instruments (collectively, together with all agreements and documents contemplated by such agreements, the "ANCILLARY AGREEMENTS"): 3 (a) The General Assignment and Assumption Agreement in substantially the form attached hereto as EXHIBIT A (the "ASSIGNMENT AGREEMENT"); (b) Certificates representing the stock and/or investments in the Subsidiaries and other holdings of Cadence set forth on Schedule 2.1(b) with stock powers in the form proper for transfer; (c) The Master Intellectual Property Agreement in substantially the form attached hereto as EXHIBIT B; (d) The Employee Matters Agreement in substantially the form attached hereto as EXHIBIT C; (f) The Master Corporate Services Agreement in substantially the form attached hereto as EXHIBIT D; (g) The Real Estate Matters Agreement in substantially the form attached hereto as EXHIBIT E; (h) The Master Confidentiality Agreement in substantially the form attached hereto as EXHIBIT F (the "MASTER CONFIDENTIALITY AGREEMENT"); (i) The Indemnification and Insurance Matters Agreement in substantially the form attached hereto as EXHIBIT G (the "INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT"); (j) The EDA Tools Agreement in substantially the form attached hereto as EXHIBIT H; (k) The Joint Technology Development and Support Agreement in substantially the form attached hereto as EXHIBIT I; (l) The Joint Target Account Agreement in substantially the form attached hereto as EXHIBIT J; (m) The resignation of each individual who is an officer or director of Cadence or any member of the Cadence Group, immediately prior to the Separation Date, and who shall be an employee of Tality from and after the Separation Date; and (n) Such other agreements, documents or instruments as the parties may agree are necessary or desirable in order to achieve the purposes hereof. Section 2.3 GOVERNMENTAL APPROVALS. To the extent that the Separation requires any Governmental Approvals, the parties shall use all commercially reasonable efforts to obtain such Governmental Approvals on or prior to the Separation Date. Section 2.4 THIRD-PARTY APPROVALS. The parties shall use all commercially reasonable efforts to obtain all Third-Party Approvals on or prior to the Separation Date. 4 Section 2.5 NO REPRESENTATIONS OR WARRANTIES. Neither Cadence nor any other member of the Cadence Group makes, either in this Agreement or any Ancillary Agreement, any representation as to, warranty of or covenant with respect to: (a) the value of any asset, property or other thing of value to be transferred to Tality or any of its Subsidiaries; (b) the kind, character, nature or extent of any liabilities to be assumed by Tality or any of its Subsidiaries; (c) the freedom from encumbrance of any asset, property or other thing of value to be transferred to Tality or any of its Subsidiaries; (d) the absence of defenses or freedom from set-offs or counterclaims with respect to any claim to be transferred to Tality or any of its Subsidiaries; or (e) the legal sufficiency of any assignment, document or instrument delivered hereunder to convey title to any asset, property or other thing of value upon its execution and delivery or filing. Except as may be expressly set forth herein or in any Ancillary Agreement, all assets, properties and other things of value to be transferred to, and all liabilities to be assumed by, Tality or any of its Subsidiaries shall be transferred or assumed, as applicable, "AS IS, WHERE IS," and Tality and its Subsidiaries shall bear the economic and legal risk that any conveyance shall prove to be insufficient to vest in Tality and its Subsidiaries good and marketable title, free and clear of any lien, claim, equity or other encumbrance. ARTICLE III THE IPO AND REGISTRATION RIGHTS Section 3.1 TRANSACTIONS PRIOR TO THE IPO. Subject to the conditions set forth in Section 3.3, each of Cadence and Tality shall use all commercially reasonable efforts to consummate the IPO. Such efforts shall include the following: (a) REGISTRATION STATEMENT. Tality shall file the Registration Statement, and such amendments or supplements thereto as may be necessary in order to cause the same to become and remain effective as required by Applicable Law or by the managing underwriters for the IPO (the "UNDERWRITERS"), including filing such amendments to the Registration Statement as may be required by the underwriting agreement to be entered into between Tality and the Underwriters (the "UNDERWRITING AGREEMENT"), the Securities and Exchange Commission (the "COMMISSION") or federal, state or foreign securities laws. Cadence and Tality shall also cooperate in preparing, filing with the Commission and causing to become effective a registration statement registering the Class A Common Stock under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or 5 appropriate in connection with the IPO, the Separation or any of the other transactions contemplated by this Agreement. (b) UNDERWRITING AGREEMENT. Tality shall enter into the Underwriting Agreement, in form and substance reasonably satisfactory to Cadence and Tality, and shall comply with its obligations thereunder. (c) NASDAQ LISTING. Tality shall prepare, file and use all commercially reasonable efforts to seek to make effective an application for quotation of the Class A Common Stock issued in the IPO on the Nasdaq National Market (the "NASDAQ"), subject to official notice of issuance. Section 3.2 COOPERATION. Tality shall consult with, and cooperate in all respects with, Cadence in connection with the pricing of the Class A Common Stock to be offered in the IPO and shall, at Cadence's direction, promptly take any and all actions necessary or desirable to consummate the IPO as contemplated by the Registration Statement and the Underwriting Agreement. Section 3.3 CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. The obligations of the parties to use all commercially reasonable efforts to consummate the IPO shall be conditioned on the satisfaction of all of the following conditions: (a) REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the Commission, and there shall not have been issued or threatened any stop order with respect thereto which remains in effect. (b) BLUE SKY. The actions and filings with regard to state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) shall have been taken and, where applicable, have become effective or been accepted. (c) NASDAQ LISTING. The Class A Common Stock to be issued in the IPO shall have been accepted for quotation on the Nasdaq, upon official notice of issuance. (d) UNDERWRITING AGREEMENT. Tality shall have entered into the Underwriting Agreement and all conditions to the obligations of Tality and the Underwriters thereunder shall have been satisfied or waived. (e) COMMON STOCK OWNERSHIP. Cadence shall be satisfied in its sole discretion that the Cadence Group shall own voting securities of Tality having at least 80% of the voting rights of all Tality securities outstanding immediately following the IPO Closing Date. (f) NO LEGAL RESTRAINTS. No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation or the IPO or any of the other transactions contemplated by this Agreement shall be in effect or been threatened. (g) SEPARATION. The Separation Date shall have occurred. 6 (h) NO TERMINATION. This Agreement shall not have been terminated. .Section 3.4 REGISTRATION RIGHTS (a) DEFINITIONS. For purposes of this Section 3.4 only: (i) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended, (the "SECURITIES ACT"), and the declaration or ordering of effectiveness of such registration statement. (ii) "REGISTRABLE SECURITIES" means (A) any Class A Common Stock or Class C Common Stock issued or issuable upon conversion of Class B Common Stock, or in exchange for Limited Partnership Units in the Partnership originally issued to Cadence or any other member of the Cadence Group (the "LP UNITS"); (B) all shares of Class A Common Stock held by Cadence Group members' officers or employees as of the date on which the Registration Statement was first filed with the Commission; (C) any Class A Common Stock or Class C Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of the securities described in (A) or (B) above; and (D) all other shares of Class A Common Stock or Class C Common Stock hereafter acquired by members of the Cadence Group. Notwithstanding the foregoing, "Registrable Securities" shall exclude any Registrable Securities sold by a Person in a transaction in which rights under this Section 4.4 are not assigned in accordance with this Agreement or any Registrable Securities sold in a public offering, whether sold pursuant to Rule 144 promulgated under the Securities Act, or in a registered offering, or otherwise. (iii) "HOLDER" means any Person owning of record Registrable Securities (or any security convertible into or exchangeable for Registrable Securities), that have not been sold in a public offering and any permitted assignee of such Registrable Securities (or securities convertible into or exchangeable into Registrable Securities) to whom rights under this Section 3.4 have been duly assigned in accordance with this Agreement. (iv) "FORM S-3" means such form under the Securities Act as is in effect on the date hereof, or any successor registration form under the Securities Act subsequently adopted by the Commission, which permits inclusion or incorporation of substantial information by reference to other documents filed by Tality with the Commission. (b) DEMAND REGISTRATION. (i) REQUEST BY HOLDERS. If Tality shall, at any time after the expiration of the 180-day "lock-up" period pursuant to the Underwriting Agreement (the "LOCK-UP EXPIRATION DATE"), receive a written request from Cadence or any subsequent Holder of LP Units originally issued to Cadence or any other member of the Cadence Group (or any Registrable Securities issued in exchange therefor) holding at least ten percent (10%) of the aggregate outstanding number of such LP Units that Tality file a registration statement on form S-1 (or any successor form thereto) under the Securities Act covering the registration of Registrable Securities pursuant to this Section 3.4(b), then Tality shall, within ten (10) Business Days after 7 the receipt of such written request, give written notice of such request ("REQUEST NOTICE") to all Holders, and use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that Holders request to be registered and included in such registration by written notice given by such Holders to Tality within twenty (20) days after receipt of the Request Notice, subject only to the limitations of this Section 3.4(b); PROVIDED, HOWEVER, that the Registrable Securities requested by all Holders to be registered pursuant to such request must be at least ten percent (10%) of all Registrable Securities then held by or issuable to them; and PROVIDED FURTHER, that Tality shall not be obligated to effect any such registration if Tality has, within the six (6) month period preceding the date of such request, already effected a registration under the Securities Act pursuant to this Section 3.4(b) or Section 3.4(d), or in which the Holders had an opportunity to participate pursuant to Section 3.4(c), other than a registration from which the Registrable Securities of Holders have been excluded (with respect to all or any portion of the Registrable Securities the Holders requested be included in such registration) pursuant to Section 3.4(c)(i). (ii) UNDERWRITING. If the Holders initiating the registration request under this Section 3.4(b) (the "INITIATING HOLDERS") intend to distribute the Registrable Securities covered by their request by means of an underwriting, then they shall so advise Tality as a part of their request made pursuant to this Section 3.4(b)(i) and Tality shall include such information in the Request Notice. In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting by the Holders of a majority of the Registrable Securities being registered and reasonably acceptable to Tality (including a market stand-off agreement of up to 180 days if required by such underwriters). Notwithstanding any other provision of this Section 3.4(b), if the underwriter(s) advise(s) Tality in writing that marketing factors require a limitation of the number of securities to be underwritten, then Tality shall so advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be reduced as required by the underwriter(s) and allocated among the Holders of Registrable Securities on a pro rata basis according to the number of Registrable Securities of each Holder requesting registration (including the initiating Holders); PROVIDED, HOWEVER, that the number of Registrable Securities to be included in such underwriting and registration shall not be reduced unless all other securities of Tality and its officers and directors (who are not also officers or directors of Cadence) are first entirely excluded from the underwriting and registration. Any Registrable Securities excluded and withdrawn from such underwriting shall be withdrawn from the registration. (iii) MAXIMUM NUMBER OF DEMAND REGISTRATIONS. Tality shall be obligated to effect only three (3) such registrations pursuant to this Section 3.4(b). (iv) DEFERRAL. Notwithstanding the foregoing, if Tality shall furnish to Holders requesting the filing of a registration statement pursuant to this Section 3.4(b), a 8 certificate signed by the President or Chief Executive Officer of Tality stating that in the good faith judgment of the Board of Directors of Tality, it would be materially detrimental to Tality and its stockholders for such registration statement to be filed, then Tality shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the initiating Holders; PROVIDED, HOWEVER, that Tality may not utilize this right more than once in any twelve (12) month period. (v) EXPENSES. All expenses incurred in connection with any registration pursuant to this Section 3.4(b), including all federal and "blue sky" registration, filing and qualification fees, printer's and accounting fees, and fees and disbursements of counsel for Tality and one counsel for the Holders, reasonably acceptable to Tality (but excluding underwriters' discounts and commissions relating to shares sold by the Holders), shall be borne by Tality. Each Holder participating in a registration pursuant to this Section 3.4(b) shall bear such Holder's proportionate share (based on the total number of shares sold in such registration other than for the account of Tality) of all discounts, commissions or other amounts payable to underwriters or brokers in connection with such offering by the Holders. Notwithstanding the foregoing, Tality shall not be required to bear any expenses of any registration proceeding begun pursuant to this Section 3.4(b) if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered, unless the Holders of a majority of the Registrable Securities agree that such registration constitutes the use by the Holders of one (1) demand registration pursuant to this Section 3.4(b) (in which case such registration shall also constitute the use by all Holders of Registrable Securities of one (l) such demand registration); PROVIDED FURTHER, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition (financial or otherwise), business or prospects of Tality not known to the Holders at the time of their request for such registration and have withdrawn their request for registration with reasonable promptness after learning of such material adverse change, then the Holders shall not be required to pay any of such expenses and such registration shall not constitute the use of a demand registration pursuant to this Section 3.4(b). (c) PIGGYBACK REGISTRATIONS. Tality shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of Tality (including registration statements relating to secondary offerings of securities of Tality, but excluding registration statements relating to any registration under Section 3.4(b) or Section 3.4(d) or to any employee benefit plan or a corporate reorganization) and shall afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities of such Holder. Each Holder desiring to include in any such registration statement all or any part of such Holder's Registrable Securities shall within twenty (20) days after receipt of the above-described notice from Tality, so notify Tality in writing, and in such notice shall inform Tality of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by Tality, such Holder shall nevertheless continue to have the right to include any of such Holder's Registrable Securities in any subsequent registration statement or registration statements as may be filed by Tality with respect to offerings of its securities, all upon the terms and conditions set forth herein. 9 (i) UNDERWRITING. If a registration statement as to which Tality gives notice under this Section 3.4(c) is for an underwritten offering, then Tality shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable Securities to be included in a registration pursuant to this Section 3.4(c) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting (including a market stand-off agreement of up to 180 days if required by such underwriters). Notwithstanding any other provision of this Agreement, if the managing underwriter(s) determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude Registrable Securities from the registration and the underwriting, and the number of shares that may be included in the registration and the underwriting shall be allocated, FIRST to Tality and, SECOND, to each of the Holders requesting inclusion of their Registrable Securities in such registration statement on a pro rata basis based on the total number of Registrable Securities of each such Holder; PROVIDED, HOWEVER, that the right of the underwriters to exclude Registrable Securities from the registration and underwriting as described above shall be restricted so that (A) the number of Registrable Securities included in any such registration is not reduced below twenty-five percent (25%) of the aggregate number of Registrable Securities for which inclusion has been requested; and (B) all shares that are not Registrable Securities and are held by any other Person, including any employee, officer or director (other than a director who is also an officer or director of Cadence) of Tality (or any Subsidiary of Tality) shall first be excluded from such registration and underwriting before any Registrable Securities are so excluded. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to Tality and the underwriter(s), delivered at least ten (10) Business Days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder that is a partnership, the Holder and the partners and retired partners of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing Persons, and for any Holder that is a corporation, the Holder and all corporations that are affiliates of such Holder, shall be deemed to be a single "Holder," and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Holder," as defined in this sentence. (ii) EXPENSES. All expenses incurred in connection with a registration pursuant to this Section 3.4(c), including fees and disbursements of one counsel for the Holders, reasonably acceptable to Tality (but excluding underwriters' and brokers' discounts and commissions relating to shares sold by the Holders), including all federal and "blue sky" registration, filing and qualification fees, printers' and accounting fees, and fees and disbursements of counsel for Tality, shall be borne by Tality. (iii) NOT DEMAND REGISTRATION. Registration pursuant to this Section 3.4(c) shall not be deemed to be a demand registration pursuant to Section 3.4(b) above. Except as otherwise provided herein, there shall be no limit on the number of times the Holders may request registration of Registrable Securities under this Section 3.4(c). 10 (d) FORM S-3 REGISTRATION. In case Tality shall, at any time after the Lock-Up Expiration Date, receive a written request from Cadence or any subsequent Holder of LP Units originally issued to Cadence or any other member of the Cadence Group (or any Registrable Securities issued in exchange therefor) holding at least ten percent (10%) of the aggregate outstanding number of such LP Units that Tality effect a registration on Form S-3, and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, then Tality shall: (i) NOTICE. Promptly give written notice of the proposed registration and the Holder's or Holders' request therefor, and any related qualification or compliance, to all other Holders of Registrable Securities; and (ii) REGISTRATION. As soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within twenty (20) days after Tality provides the notice contemplated by Section 3.4(d)(i); PROVIDED, HOWEVER, that Tality shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.4(d): (A) if Form S-3 is not available to Tality for such offering by the Holders; (B) if the Holders, together with the holders of any other securities of Tality entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $5,000,000; (C) if Tality shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of Tality stating that in the good faith judgment of the Board of Directors of Tality, it would be materially detrimental to Tality and its stockholders for such Form S-3 Registration to be effected at such time, in which event Tality shall have the right to defer the filing of the Form S-3 registration statement no more than once during any twelve month period for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 3.4(d); (D) if Tality has, within the six (6) month period preceding the date of such request, already effected a registration under the Securities Act other than a registration from which the Registrable Securities of Holders have been excluded (with respect to all or any portion of the Registrable Securities the Holders requested be included in such registration) pursuant to Section 3.4(c)(i); or (E) in any particular jurisdiction in which Tality would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (iii) EXPENSES. Tality shall pay all expenses incurred in connection with each registration requested pursuant to this Section 3.4(d), including federal and "blue sky" 11 registration, filing and qualification fees, printers' and accounting fees and fees and disbursements of counsel, including one counsel for the Holders, reasonably acceptable to Tality, but excluding underwriters' or brokers' discounts and commissions relating to shares sold by the Holders. (iv) NOT DEMAND REGISTRATION. Form S-3 registrations shall not be deemed to be demand registrations as described in Section 3.4(b) above. Except as otherwise provided herein, there shall be no limit on the number of times the Holders may request registration of Registrable Securities under this Section 3.4(d). (e) OBLIGATIONS OF TALITY. Whenever required to effect the registration of any Registrable Securities under this Agreement Tality shall, as expeditiously as reasonably possible: (i) REGISTRATION STATEMENT. Prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; PROVIDED, HOWEVER, that Tality shall not be required to keep any such registration statement effective for more than ninety (90) days. (ii) AMENDMENTS AND SUPPLEMENTS. Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (iii) PROSPECTUSES. Furnish to the Holders whose Registrable Securities are requested to be included in the registration such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration. (iv) BLUE SKY. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that Tality shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) UNDERWRITING. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (vi) NOTIFICATION. Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 12 (vii) OPINION AND COMFORT LETTER. Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (A) an opinion, dated as of such date, of the counsel representing Tality for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (B) a "comfort" letter dated as of such date, from the independent certified public accountants of Tality, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. (f) FURNISH INFORMATION. It shall be a condition precedent to the obligations of Tality to take any action pursuant to Section 3.4(b), (c) or (d) that the selling Holders shall furnish to Tality such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be reasonably required to timely effect the Registration of their Registrable Securities. (g) INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 3.4(b), (c) or (d): (i) BY TALITY. To the extent permitted by Applicable Law, Tality shall indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as determined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, as amended, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "VIOLATION"): (A) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (B) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (C) any violation or alleged violation by Tality of the Securities Act, the Exchange Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any federal or state 13 securities law in connection with the offering covered by such registration statement; and Tality shall reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 3.4(g)(i) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Tality (which consent shall not be unreasonably withheld or delayed), nor shall Tality be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (ii) BY SELLING HOLDERS. To the extent permitted by Applicable Law, each selling Holder shall indemnify and hold harmless Tality, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls Tality within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which Tality or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder shall reimburse any legal or other expenses reasonably incurred by Tality or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subsection 3.4(g)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld or delayed); and PROVIDED, FURTHER, that the total amounts payable in indemnity by a Holder under this Section 3.4(g)(ii) in respect of any Violation shall not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (iii) NOTICE. Promptly after receipt by an indemnified party under this Section 3.4(g) of notice of the commencement of any action (including any action by a Governmental Authority), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.4(g), deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an indemnified party shall have the right to 14 retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to an actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of liability to the indemnified party under this Section 3.4(g) to the extent (but only to the extent) the indemnifying party is materially prejudiced as a result thereof, but the omission so to deliver written notice to the indemnified party shall not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.4(g). (iv) DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing indemnity agreements of Tality and the Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement in question becomes effective or the amended prospectus filed with the Commission pursuant to Commission Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any Person if a copy of the Final Prospectus was timely furnished to the indemnified party and was not furnished to the Person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (v) CONTRIBUTION. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (A) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 3.4(g) but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 3.4(g) provides for indemnification in such case, or (B) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 3.4(g); then, and in each such case, Tality and such Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and Tality and other selling Holders are responsible for the remaining portion; PROVIDED, HOWEVER, that, in any such case: (1) no such Holder shall be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (2) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (vi) SURVIVAL. The obligations of Tality and Holders under this Section 3.4(g) shall survive until the fifth anniversary of the completion of any offering of Registrable Securities in a registration statement, regardless of the expiration of any statutes of limitation or extensions of such statutes. 15 (h) TERMINATION OF TALITY'S OBLIGATIONS. Tality shall have no obligations pursuant to Sections 3.4(b) through (d) with respect to any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 3.4(b), (c) or (d) more than seven (7) years after the Separation Date, or, if, in the opinion of independent counsel to Tality (and acceptable to the Holders), all such Registrable Securities proposed to be sold by a Holder may then be sold under Rule 144 in one transaction without exceeding the volume limitations thereunder. (i) NO REGISTRATION RIGHTS TO THIRD PARTIES. Without the prior written consent of Cadence, Tality covenants and agrees that it shall not grant, or cause or permit to be created, for the benefit of any Person any registration rights of any kind (whether similar to the demand, "piggyback" or Form S-3 registration rights described in this Section 3.4 or otherwise) relating to any equity securities of Tality, other than rights that are subordinate in right to those granted hereunder. ARTICLE IV COVENANTS AND OTHER MATTERS Section 4.1 FURTHER INSTRUMENTS. At the request of Tality, and without further consideration, Cadence shall execute and deliver, and shall cause all other members of the Cadence Group to execute and deliver, to Tality and its Subsidiaries such other instruments of transfer, conveyance, assignment, substitution and confirmation and take such action as Tality may reasonably deem necessary in order to effectively transfer, convey and assign to Tality and its Subsidiaries and confirm Tality's and its Subsidiaries' title to all of the assets and rights contemplated to be transferred to Tality and its Subsidiaries pursuant to this Agreement and the Ancillary Agreements to put Tality and its Subsidiaries in actual possession and operating control thereof and to permit Tality and its Subsidiaries to exercise all rights with respect thereto (including rights under contracts and other arrangements as to which the consent of any third party to the transfer thereof shall not have previously been obtained). At the request of Cadence and without further consideration, Tality shall execute and deliver, and shall cause all other members of the Tality Group to execute and deliver, to Cadence and its Subsidiaries all instruments, assumptions, novations, undertakings, substitutions or other documents and take such other action as Cadence may reasonably deem necessary in order to have Tality fully and unconditionally assume and discharge the liabilities contemplated to be assumed by Tality and its Subsidiaries under this Agreement and the Ancillary Agreements and to relieve each member of the Cadence Group of any liability or obligation with respect thereto and evidence the same to third parties. Neither Cadence nor Tality shall be obligated, in connection with the foregoing, to expend money other than reasonable out-of-pocket expenses, attorneys' fees and disbursements and recording or similar fees. Furthermore, each party hereto, at the request of the other party, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements. Section 4.2 AGREEMENT FOR EXCHANGE OF INFORMATION. (a) GENERALLY. Each of Cadence and Tality agrees to provide, or cause to be provided, to the other, at any time before or after the Separation Date, as soon as 16 reasonably practicable after written request therefor, any Information in the possession or under the control of such party that the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party; (ii) for use in any other judicial, regulatory, administrative or other proceeding, or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements; (iii) to comply with its obligations under this Agreement or any Ancillary Agreement; or (iv) in connection with the ongoing businesses of Cadence or Tality, as the case may be; PROVIDED, HOWEVER, that if a party determines that providing its Information to the other party could be commercially detrimental to such party, violate any law or agreement, or waive any attorney-client privilege, the parties shall take all reasonable measures to permit its compliance with such disclosure obligation in a manner that avoids any such harm or consequence. (b) INTERNAL ACCOUNTING CONTROLS; FINANCIAL INFORMATION. After the Separation Date, each party shall (i) maintain in effect at its own cost and expense adequate systems and controls for its business to the extent necessary to enable the other party to satisfy its reporting, accounting, audit and other obligations; and (ii) provide, or cause to be provided, to the other party and its Subsidiaries in such form as requested and at no charge to the requesting party, all financial and other data and information as the requesting party determines necessary or advisable in order to prepare its financial statements and reports or filings with any Governmental Authority. (c) OWNERSHIP OF INFORMATION. Any Information owned by a party that is provided to a requesting party pursuant to this Section 4.2 shall remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring ownership or license rights in any such Information or varying an attorney-client or other privilege applicable to such Information. (d) LIMITATION OF LIABILITY. No member of either the Cadence Group or the Tality Group shall have any liability to a member of the Tality Group or Cadence Group, respectively, in the event that any Information exchanged or provided pursuant to this Section 4.2 is found to be incomplete or inaccurate, in the absence of gross negligence or willful misconduct by the party providing such Information. (e) OTHER AGREEMENTS PROVIDING FOR EXCHANGE OF INFORMATION. The rights and obligations granted under this Section 4.2 are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in this Agreement and any Ancillary Agreement, including the Master Confidentiality Agreement. (f) PRODUCTION OF WITNESSES; RECORDS; COOPERATION. After the Separation Date, except in the case of a legal or other proceeding by one party hereto against the other party (which shall be governed by such discovery rules as may be applicable under Section 4.4 or otherwise), each party hereto shall use all commercially reasonable efforts to make available to the other party, upon written request, the former, current and future 17 directors, officers, employees, other personnel and agents of such party as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any legal, administrative or other proceeding in which the requesting party may from time to time be involved, regardless of whether any such legal, administrative or other proceeding is a matter with respect to which indemnification may be sought hereunder. The requesting party shall bear all costs and expenses in connection therewith. Section 4.3 AUDITORS AND AUDITS; ANNUAL AND QUARTERLY STATEMENTS AND ACCOUNTING. For so long as Cadence is required in accordance with United States generally accepted accounting principles to consolidate Tality's results of operations and financial position: (a) SELECTION OF AUDITORS. Tality shall ensure that Tality's Auditors are the same as Cadence's Auditors. (b) FISCAL YEAR. Tality shall ensure that its fiscal year for financial, accounting and federal, state and local income tax purposes shall be the same as Cadence's fiscal year. (c) DATE OF AUDITORS' OPINION AND QUARTERLY REVIEWS. Tality shall use all commercially reasonable efforts to enable and cause the Tality Auditors to complete their audit such that they shall date their opinion on Tality's audited annual financial statements on the same date that Cadence's Auditors date their opinion on Cadence's audited annual financial statements, and to enable Cadence to meet its timetable for the printing, filing and public dissemination of Cadence's annual financial statements. Tality shall use all commercially reasonable efforts to enable and cause the Tality Auditors to complete their quarterly review procedures such that they shall provide clearance on Tality's quarterly financial statements on the same date that Cadence's Auditors provide clearance on Cadence's quarterly financial statements. (d) ANNUAL, QUARTERLY AND OTHER FINANCIAL STATEMENTS. Tality shall provide to Cadence on a timely basis all Information that Cadence requests to meet its schedule for the preparation, printing, filing and public dissemination of Cadence's annual, quarterly and other financial statements. Without limiting the generality of the foregoing, Tality shall provide all required financial Information with respect to Tality and its Subsidiaries to Tality's Auditors in a sufficient and reasonable time and in sufficient detail to permit Tality's Auditors to take all steps and perform all reviews necessary to provide sufficient assistance to Cadence's Auditors with respect to financial Information to be included or contained in Cadence's annual, quarterly and other financial statements. Similarly, Cadence shall provide to Tality on a timely basis all financial Information that Tality reasonably requires to meet its schedule for the preparation, printing, filing and public dissemination of Tality's annual and quarterly financial statements. Without limiting the generality of the foregoing, Cadence shall provide all required financial Information with respect to Cadence and its Subsidiaries to Cadence's Auditors in a sufficient and reasonable time and in sufficient detail to permit Cadence's Auditors to take all steps and 18 perform all reviews necessary to provide sufficient assistance to Tality's Auditors with respect to Information to be included or contained in Tality's annual and quarterly financial statements. (e) IDENTITY OF PERSONNEL PERFORMING THE ANNUAL AUDIT AND QUARTERLY REVIEWS. Tality shall authorize Tality's Auditors to make available to Cadence's Auditors both the personnel who performed or shall perform the annual audits and quarterly reviews of Tality and work papers related to the annual audits and quarterly reviews of Tality, in all cases within a reasonable time prior to Tality's Auditors' opinion date, so that Cadence's Auditors are able to perform the procedures they consider necessary to take responsibility for the work of Tality's Auditors as it relates to Cadence's Auditors' report on Cadence's financial statements, all within sufficient time to enable Cadence to meet its timetable for the printing, filing and public dissemination of Cadence's annual and quarterly statements. Similarly, Cadence shall authorize Cadence's Auditors to make available to Tality's Auditors both the personnel who performed or shall perform the annual audits and quarterly reviews of Cadence and work papers related to the annual audits and quarterly reviews of Cadence, in all cases within a reasonable time prior to Cadence's Auditors' opinion date, so that Tality's Auditors are able to perform the procedures they consider necessary to take responsibility for the work of Cadence's Auditors as it relates to Tality's Auditors' report on Tality's statements, all within sufficient time to enable Tality to meet its timetable for the printing, filing and public dissemination of Tality's annual and quarterly financial statements. (f) ACCESS TO BOOKS AND RECORDS. Tality shall, as requested by Cadence, provide Cadence's internal auditors and their designees access to Tality's and its Subsidiaries' books and records so that Cadence may conduct reasonable audits relating to the financial statements provided by Tality pursuant hereto as well as to the internal accounting controls and operations of Tality and its Subsidiaries. Similarly, Cadence shall provide Tality's internal auditors and their designees access to Cadence's and its Subsidiaries' books and records so that Tality may conduct reasonable audits relating to the financial statements provided by Cadence pursuant hereto as well as to the internal accounting controls and operations of Cadence and its Subsidiaries. (g) NOTICE OF CHANGE IN ACCOUNTING PRINCIPLES. Tality shall provide Cadence with as much prior notice as reasonably practicable (but in no event less than 30 days notice) of any proposed determination of, or any significant changes in, its accounting estimates, principles or methods from those in effect on the Separation Date. Tality shall consult with Cadence and, if requested by Cadence, Tality shall consult with Cadence's Auditors with respect to any such proposed determination or change. Section 4.4 DISPUTE RESOLUTION. (a) NEGOTIATION/MEDIATION. If a dispute, controversy or claim (a "DISPUTE") arises between the parties or any of their Subsidiaries relating to the interpretation or performance of this Agreement or any Ancillary Agreement, or any grounds for the termination hereof, duly authorized officers or employees of each party shall meet to attempt in good faith to negotiate a resolution of the Dispute prior to pursuing other 19 available remedies. The date of receipt of written notice of a dispute given by one party to the other with a request for a meeting between the parties shall be referred to herein as the "DISPUTE RESOLUTION COMMENCEMENT DATE." Discussions and correspondence relating to trying to resolve such Dispute shall be treated as confidential information developed for the purpose of settlement and shall be exempt from discovery or production and shall not be admissible in court or any arbitration proceeding. If the parties are unable to resolve the Dispute within thirty (30) days after the Dispute Resolution Commencement Date, and either party wishes to pursue its rights relating to such Dispute, then the Dispute shall be mediated by a mutually acceptable mediator appointed pursuant to the mediation rules of JAMS/Endispute within thirty (30) days after written notice by one party to the other demanding non-binding mediation. Neither party may unreasonably withhold consent to the selection of a mediator or the location of the mediation. The parties shall share the costs of the mediation equally, except that each party shall bear its own costs and expenses, including attorneys' fees and expenses, witness fees and expenses, travel expenses, and preparation costs. The parties may also agree to replace mediation with some other form of non-binding or binding alternative dispute resolution ("ADR"). (b) ARBITRATION. Any Dispute which the parties cannot resolve through mediation within ninety (90) days after the Dispute Resolution Commencement Date, unless otherwise mutually agreed in writing, shall be submitted to final and binding arbitration under the then current Commercial Arbitration Rules of the American Arbitration Association (the "AAA"), by one (1) arbitrator in Santa Clara County, California. Such arbitrator shall be selected by the mutual agreement of the parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The arbitrator shall be instructed to prepare and deliver a written, reasoned opinion stating his decision within thirty (30) days of the completion of the arbitration. The prevailing party in such arbitration shall be entitled to expenses, including costs and reasonable attorneys' and other professional fees, incurred in connection with the arbitration (but excluding any costs and fees associated with prior negotiation or mediation). The decision of the arbitrator shall be final and non-appealable and may be enforced in any court of competent jurisdiction. The use of any ADR procedures shall not be construed under the doctrine of laches, waiver or estoppel to adversely affect the rights of either party. (c) EXCEPTIONS. Any Dispute regarding any of the following matters is not required to be negotiated, mediated or arbitrated prior to seeking relief from a court of competent jurisdiction: breach of any obligation of confidentiality; or any other claim where interim relief from the court is sought to prevent serious and irreparable injury to one of the parties or to others. However, the parties to the Dispute shall make a good faith effort to negotiate and mediate such Dispute, according to the above procedures, while such court action is pending. (d) CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties shall continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Section 5.4 with respect to all matters not subject to any particular Dispute. 20 Section 4.5 NON-SOLICITATION OF EMPLOYEES. For a period of one (1) year following the Separation Date, Tality agrees (and shall cause its Subsidiaries) not to solicit or recruit or hire employees of any member of the Cadence Group, without the prior consent of Cadence's Senior Vice President of Human Resources (or his or her designee). Notwithstanding the foregoing, this prohibition on solicitation, recruitment or hiring shall not apply to actions taken by any member of the Tality Group either (a) solely as a result of an employee's affirmative response to a general recruitment effort carried out through a public solicitation or (b) as a result of an employee's initiative. Section 4.6 EMPLOYEE AGREEMENTS. As used in this Section 4.6, "EMPLOYEE AGREEMENT" means the Employee Proprietary Information and Inventions Agreement and corresponding agreements in foreign countries executed by each employee of Cadence or any of its Subsidiaries. (a) SURVIVAL OF EMPLOYEE AGREEMENT OBLIGATIONS AND CADENCE'S COMMON LAW RIGHTS. The Employee Agreements of all Cadence employees transferring to Tality or one of its Subsidiaries as of the Separation Date shall remain in full force and effect according to their terms; PROVIDED, HOWEVER, that none of the following acts committed by former Cadence employees within the scope of their employment with Tality or one of its Subsidiaries shall constitute a breach of such Employee Agreements: (i) the use or disclosure of Confidential Information (as that term is defined in the former Cadence employee's Employee Agreement) for or on behalf of Tality or one of its Subsidiaries, if such disclosure is consistent with the rights granted to Tality and its Subsidiaries and restrictions imposed on Tality and its Subsidiaries under this Agreement or any Ancillary Agreement; (ii) the disclosure and assignment to Tality or one of its Subsidiaries of rights in proprietary developments authored or conceived by the former Cadence employee after the Separation Date and resulting from the use of, or based upon intellectual property (whether patented or not) which is retained by Cadence, provided that in no event shall such disclosure and assignment be regarded as assigning or licensing the underlying intellectual property to Tality or one of its Subsidiaries; (iii) the rendering of any services, directly or indirectly, to Tality or one of its Subsidiaries to the extent such services are consistent with the assignment or license of rights granted to Tality and the restrictions imposed on Tality and its Subsidiaries under this Agreement, any Ancillary Agreement or any other agreement between the parties; and (iv) solicitation of the employees of one party by the other party prior to the Separation Date (so long as such solicitation does not violate Section 4.5). Further, Cadence retains any rights it has under statute or common law with respect to actions by its former employees to the extent such actions are inconsistent with the rights granted to Tality and restrictions imposed on Tality under this Agreement or any Ancillary Agreement. (b) ASSIGNMENT, COOPERATION FOR COMPLIANCE AND ENFORCEMENT. To the extent permissible under Applicable Law, the following shall apply: (i) Cadence retains all rights under the Employee Agreements of all former Cadence employees necessary to permit Cadence to protect the rights and interests of Cadence, but hereby transfers and assigns to Tality and its Subsidiaries its rights under the Employee Agreements of all former Cadence 21 employees to the extent required to permit Tality to enjoin, restrain, recover damages from or obtain specific performance of the Employee Agreements or obtain other remedies against any employee who breaches his/her Employee Agreement; PROVIDED, HOWEVER, that if such partial transfer and assignment is not permissible under Applicable Law, Cadence shall be deemed to have transferred and assigned all such rights. (ii) Each of Cadence and Tality agrees, at its own cost and expense, to cooperate with the other as follows: (A) Tality shall advise Cadence of: (1) any violation(s) of the Employee Agreement by former Cadence employees, and (2) any violation(s) of the Tality Employee Agreement which affect Cadence's rights; and (B) Cadence shall advise Tality of any violations of the Employee Agreement by current or former Cadence employees which affect Tality's rights; PROVIDED, HOWEVER, that the foregoing obligations shall only apply to violations which become known to an attorney within the legal department of the party obligated to provide notice thereof. (iii) Tality may enforce all rights transferred and assigned to it under this Agreement relating to the Employee Agreements. In addition, if Cadence has retained any rights under the Employee Agreements, Tality shall, if requested by Cadence, enforce the Employee Agreements of former Cadence employees to the extent necessary to reasonably protect the interests of any member of the Cadence Group; PROVIDED, HOWEVER, that Tality shall not commence any legal action relating thereto without first consulting with Cadence's General Counsel (or his/her designee). If Tality, in seeking to enforce any Employee Agreement, notifies Cadence that it requires, or desires, Cadence to join in such action, then Cadence shall do so. In addition, if Cadence commences or becomes a party to any action to enforce a Employee Agreement of a former Cadence employee, Cadence shall, whether or not it becomes a party to the action, cooperate with Tality by making available its files and employees who have information or knowledge relevant to the dispute, subject to appropriate measures to protect the confidentiality of any proprietary or confidential information that may be disclosed in the course of such cooperation or action and subject to any relevant privacy laws and regulations. Any such action shall be conducted at the expense of Tality and Cadence and Tality shall agree on a case by case basis on compensation, if any, of Cadence for the value of the time of Cadence employees as reasonably required in connection with the action. (iv) Cadence and Tality understand and acknowledge that matters relating to the making, performance, enforcement, assignment and termination of employee agreements are typically governed by the laws and regulations of the national, federal, state or local governmental unit where an employee resides, or where an employee's services are rendered, and that such laws and regulations may supersede or limit the applicability or enforceability of this Section 4.6. In such circumstances, Cadence and Tality agree to take action with respect to the employee agreements that best accomplishes the parties' objectives as set forth in this Section 4.6 and that is consistent with applicable law. 22 Section 4.7 GOVERNMENT AND THIRD PARTY APPROVALS. If and to the extent that the valid, complete and perfected transfer, assignment or novation of any asset or liability pursuant to the Assignment Agreement would be a violation of Applicable Law or require any Third-Party Approval or Governmental Approval in connection with the Separation or the IPO, then, unless Cadence shall otherwise determine, the transfer or assignment to, or novation by, the Tality Group, as the case may be, of such assets or liabilities shall be automatically deemed deferred and any such purported transfer, assignment or novation shall be null and void until such time as all such Third-Party Approvals or Governmental Approvals have been obtained. Notwithstanding the foregoing, any asset allocated to Tality the transfer of which is so delayed shall still be considered an asset of Tality for purposes of determining whether any associated liability is a liability of Tality; PROVIDED, HOWEVER, that if such Third-Party Approvals or Governmental Approvals have not been obtained within six months after the Separation Date, the parties shall use all commercially reasonable efforts to achieve an alternative solution in accordance with the parties' intentions. Tality shall (and it shall cause its Subsidiaries to) reimburse Cadence for all additional costs and expenses incurred by Cadence or any other member of the Cadence Group in connection with the performance of its obligations under this Section 4.7. ARTICLE V MISCELLANEOUS Section 5.1 LIMITATION OF LIABILITY. IN NO EVENT SHALL ANY MEMBER OF THE CADENCE GROUP OR TALITY GROUP BE LIABLE TO ANY MEMBER OF THE TALITY GROUP OR CADENCE GROUP, RESPECTIVELY, FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT (OTHER THAN AS SET FORTH IN ARTICLE III) OR ANY ANCILLARY AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY'S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES AS SET FORTH IN THE INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Section 5.2 ENTIRE AGREEMENT. This Agreement, the Ancillary Agreements and the Exhibits and Schedules referenced or attached hereto and thereto, constitute the entire agreement between the parties with respect to the subject matter hereof and thereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof and thereof. Section 5.3 GOVERNING LAW. This Agreement shall be construed in accordance with and all Disputes hereunder shall be governed by the laws of the State of Delaware, excluding its conflict of law rules, and the United Nations Convention on Contracts for the International Sale of Goods. The Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have jurisdiction and venue over all Disputes between the parties that are permitted to be brought in a court of law pursuant to Section 4.4. Section 5.4 TERMINATION. This Agreement and all Ancillary Agreements may be terminated at any time prior to the IPO Closing Date by and in the sole discretion of Cadence 23 without the approval or consent of Tality. This Agreement may be terminated at any time after the IPO Closing Date by mutual consent of Cadence and Tality. In the event of termination pursuant to this Section 5.4, no party shall have any liability of any kind to the other party. Section 5.5 NOTICES. Notices, offers, requests or other communications required or permitted to be given by either party pursuant to the terms of this Agreement shall be given in writing to the respective parties to the following addresses: if to Cadence : Cadence Design Systems, Inc 2655 Seely Avenue Building 5 San Jose, California 95134 Attention: R.L. Smith McKeithen, General Counsel Fax: (408) 944-6855 if to Tality: Tality Corporation 2655 Seely Avenue Building 9 San Jose, California 95134 Attention: Robert Wiederhold, Chief Executive Officer Fax: (408) 894-2605 or to such other address as the party to whom notice is given may have previously furnished to the other in writing as provided herein. Any notice involving non-performance, termination, or renewal shall be sent by hand delivery, recognized overnight courier or, within the United States, may also be sent via certified U.S. mail, return receipt requested. All other notices may also be sent by fax, confirmed by first class mail. All notices shall be deemed to have been given and received on the earlier of actual receipt and three (3) days from the date of postmark. Section 5.6 COUNTERPARTS. This Agreement and each of the Ancillary Agreements, and the Exhibits and Schedules hereto and thereto, and the other documents referred to herein or therein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. Section 5.7 BINDING EFFECT; ASSIGNMENT. This Agreement and each Ancillary Agreement shall inure to the benefit of and be binding upon the parties hereto and thereto and their respective legal representatives and successors, and nothing in this Agreement or any Ancillary Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this Agreement. This Agreement and each Ancillary Agreement may be enforced separately by each member of the Cadence Group and each member of the Tality Group. Neither party may assign this Agreement or any rights or obligations hereunder, without the prior written consent of the other party (except in connection with a merger, consolidation or sale of all or substantially all of the party's assets), and any such attempted assignment shall be void and in violation hereof. 24 Section 5.8 SEVERABILITY. If any term or other provision of this Agreement or any Ancillary Agreement, or any of the Exhibits and Schedules attached hereto is determined by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. Section 5.9 FAILURE OR DELAY NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or any Ancillary Agreement, or the Exhibits or Schedules attached hereto or thereto are cumulative to, and not exclusive of, any rights or remedies otherwise available. Section 5.10 AMENDMENT. No modification or amendment shall be made to this Agreement or any Ancillary Agreement, or the Exhibits or Schedules attached hereto or thereto, except by an instrument in writing signed on behalf of each of the parties to such agreement. Section 5.11 AUTHORITY. Each of the parties hereto and each of the Ancillary Agreements represents to the other that (a) it has the corporate or other requisite power and authority to execute, deliver and perform this Agreement or such Ancillary Agreement, as the case may be; (b) the execution, delivery and performance of this Agreement and each of the Ancillary Agreements by it have been duly authorized by all necessary corporate or other actions; (c) it has duly and validly executed and delivered this Agreement and each of the Ancillary Agreements; and (d) this Agreement and each of the Ancillary Agreements is a legal, valid and binding obligation, enforceable against it in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equity principles. Section 5.12 INTERPRETATION. The headings contained in this Agreement and each of the Ancillary Agreements, in any Exhibit or Schedule hereto and in the table of contents to this Agreement and each of the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or such Ancillary Agreement. Any capitalized term used in any Exhibit or Schedule hereto or to any Ancillary Agreement but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement or such Ancillary Agreement, as the case may be. When a reference is made in this Agreement or any Ancillary Agreement to an Article or a Section, Exhibit or Schedule, such reference shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement or such Ancillary Agreement, as the case may be, unless otherwise indicated. All Exhibits and Schedules hereto and to each Ancillary Agreement are incorporated into and made a part of this Agreement and the applicable Ancillary Agreement, respectively. The terms "including" and "include" employed in this Agreement or any Ancillary Agreement (including any of the Exhibits and 25 Schedules incorporated into and made a part of this Agreement or any such Ancillary Agreement) mean "including, without limitation," and "includes, without limitation," respectively. Section 5.13 CONFLICTING AGREEMENTS. In the event of any irreconcilable conflict between this Agreement and any Ancillary Agreement or other agreement executed in connection herewith, the provisions of such Ancillary Agreement shall prevail to the extent that they specifically address the subject matter of the conflict. Section 5.14 PAYMENT OF EXPENSES. Except as otherwise provided in this Agreement or any of the Ancillary Agreements or any other agreement related to the IPO, all costs and expenses of the parties hereto in connection with the Separation and the IPO (including underwriting discounts and commissions) shall be allocated between Tality and Cadence as determined by Cadence in its sole and absolute discretion. 26 WHEREFORE, the parties have executed and delivered this Master Separation Agreement effective as of the date first set forth above. CADENCE DESIGN SYSTEMS, INC. TALITY CORPORATION By: /s/ William Porter By: /s/ Robert P. Wiederhold ---------------------------- ---------------------------------------- Name: William Porter Name: Robert P. Wiederhold Title: Senior Vice President, Title: President and Chief Executive Officer Chief Financial Officer CADENCE HOLDINGS, INC. By: /s/ William Porter ---------------------------- Name: William Porter Title: Treasurer 27 EX-10.01 3 ex-10_01.txt EX 10.01 Exhibit 10.01 INDEMNITY AGREEMENT This Indemnity Agreement, dated as of , 2000, is made by and between Cadence Design Systems, Inc., a Delaware corporation (the "Company"), and , a of the Company (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors or officers of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors and officers; B. The statutes and judicial decisions regarding the duties of directors and officers area often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors and officers with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take; C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so substantial (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of officers and directors; D. The Company believes that it is unfair for its directors and officers and the directors and officers of its subsidiaries to assume the risk of large judgments and other expenses that may be incurred in cases in which the director or officer received no personal profit and in cases where the director or officer was not culpable; E. The Company recognizes that the issues in controversy in litigation against a director or officer of a corporation such as the Company or a subsidiary of the Company are often related to the knowledge, motives and intent of such director or officer, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director or officer can reasonably recall such matters; and may extend beyond the normal time for retirement for such director or officer with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director or officer from serving in that position; Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced 1 individuals to serve as officers and directors of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its officers and directors and the officers and directors of its subsidiaries in connection with claims against such persons in connection with their service, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's shareholders; F. The Company desires and has requested the Indemnitee to serve or continue to serve as a director or officer of the Company and/or the subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or the subsidiaries of the Company; and G. The Indemnitee is willing to serve, or to continue to serve, the Company and/or the subsidiaries of the Company that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. (a) COVERED PERSON. For purposes of this Agreement, a "covered person" shall include the Indemnitee and any heir, executor, administrator or other legal representative of the Indemnitee following his or her death or incapacity. (b) EXPENSES. For purposes of this Agreement, "expenses" includes all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, Section 145 or otherwise. (c) PROCEEDING. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, investigative or any other type whatsoever, and including any of the foregoing commenced by or on behalf of the Company, derivatively or otherwise. (d) SUBSIDIARY. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, and one or more other subsidiaries, or by one or more other subsidiaries. 2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue to serve the Company and/or its subsidiaries in his present capacity, so long as he is duly appointed or elected or until such time as he tenders his resignation in writing, provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 2 3. MAINTENANCE OF LIABILITY INSURANCE. (a) The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an officer or director of the Company or any of its subsidiaries, and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of such service, the Company, subject to Section 3(b), shall use reasonable efforts to obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. MANDATORY INDEMNIFICATION. (a) RIGHT TO INDEMNIFICATION. In the event a covered person was or is made a parity or is threatened to be made a party to or is involved in any proceeding, by reason of the fact that the Indemnitee is or was a director, officer or employee of the Company (including any subsidiary or affiliate thereof or any constituent corporation or any of the foregoing absorbed in any merger) or is or was serving at the request of the Company (including such subsidiary, affiliate or constituent corporation) as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other entity, including service with respect to employee benefit plans, such person shall be indemnified and held harmless by the Company to the fullest extent permitted by applicable law, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise and other taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue after the Indemnitee has ceased to serve in such capacity and shall inure to the benefit of his heirs, executors and administrators; provided, however, that except for a proceeding pursuant to Section 7, the Company shall indemnify any such person in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. (b) EXCEPTION FOR AMOUNTS COVERED BY INSURANCE. Notwithstanding the foregoing, the Company shall not be obligated to indemnify a covered person for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to such person by D&O Insurance. (c) PARTIAL INDEMNIFICATION. If a covered person is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by him in the 3 investigation, defense, settlement or appeal of a proceeding but not entitled, however, to indemnification for all of the total amount thereof, the Company shall nevertheless indemnify such person for such total amount except as to the portion thereof to which the Indemnitee is not entitled. 5. MANDATORY ADVANCEMENT OF EXPENSES. The Company shall pay all expenses incurred by a covered person, or in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporations Law then so requires, the payment of such expenses incurred in advance of the final disposition of such proceeding shall be made only upon delivery to the Company of an undertaking, by or on behalf of such covered person, to repay all amounts so advanced if it should be determined ultimately that such person is not entitled to the payment of such expenses by the Company. 6. NOTICE AND OTHER INDEMNIFICATION PROCEDURES. (a) Promptly after receipt by a covered person of notice of the commencement of or the threat of commencement of any proceeding, such person shall, if such person believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the covered person, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to advance the expenses for any proceeding against the covered person, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the covered person (such approval not to be unreasonably withheld), upon the delivery to the covered person of written notice of its election so to do. After delivery of such notice, approval of such counsel by the covered person and the retention of such counsel by the Company, the Company will not be liable to the covered person under this Agreement for any fees of counsel subsequently incurred by the covered person with respect to the same proceeding, provided that (i) the covered person shall have the right to employ separate counsel in any such proceeding at the covered person's expense; and (ii) if (A) the employment of counsel by the covered person has been previously authorized by the Company, (B) the covered person shall have reasonably concluded that there may be a conflict of interest between the Company the covered person in the conduct of any such defense of (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of the covered person's counsel shall be at the expense of the Company. 7. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Company within sixty days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the covered person may at 4 any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover and advancement of expenses pursuant to the terms of an undertaking, the covered person shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by a covered person to enforce a right to indemnification hereunder (but not in a suit brought by a covered person to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Company to recover an advancement of expenses pursuant to the terms of an undertaking the Company shall be entitled to recover such expenses upon a final adjudication that, indemnification is not permitted by applicable law. Neither the failure of the Company (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the covered person is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that indemnification is not proper, shall create a presumption that the covered person is not entitled to indemnification or, in the case of such a suit brought by a covered person, be a defense to such suit. In any suit brought by a covered person to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the covered person is not entitled to be indemnified, or to such advancement of expenses, shall be on the Company. 8. LIMITATION OF ACTIONS AND RELEASE OF CLAIMS. No proceeding shall be brought and no cause of action shall be asserted by or on behalf of the Company or any subsidiary against the Indemnitee, his spouse, heirs, estate, executors or administrators after the expiration of one year from the act or omission of the Indemnitee upon which such proceeding is based; however, in a case where the Indemnitee fraudulently conceals the facts underlying such cause of action, no proceeding shall be brought and no cause of action shall be asserted after the expiration of one year from the earlier of (i) the date the Company or any subsidiary of the Company discovers such facts, or (ii) the date the Company of any subsidiary of the Company could have discovered such facts by the exercise of reasonable diligence. Any claim or cause of action of the Company or any subsidiary of the Company, including claims predicated upon the negligent act or omission of the Indemnitee, shall be extinguished and deemed released unless asserted by filing of a legal action within such period. This Section 8 shall not apply to any cause of action which has accrued on the date hereof and of which the Indemnitee is aware on the date hereof, but as to which the Company has no actual knowledge apart from the Indemnitee's knowledge. 9. NON-EXCLUSIVITY. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee or any covered person may have under any provision of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's shareholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an officer, director or employee of the Company, and the Indemnitee's right hereunder shall continue after the Indemnitee has ceased to so act and shall inure to the benefit of any heir, executor, administrator or other legal representative of the Indemnitee. Notwithstanding the foregoing, the prior indemnification agreement, executed by the Indemnitee on __________, is superceded by this Agreement. 5 10. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent now or hereafter permitted by law. 11. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to Section 10 hereof. 12. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 13. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall bind, and shall inure to the benefit of, the successors and assigns of the parties hereto. 14. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i)if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. GOVERNING LAW. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely with Delaware. 16. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement. 6 The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. CADENCE DESIGN SYSTEMS, INC. By --------------------------------- Its ------------------------------- Address: --------------------------- INDEMNITEE By --------------------------------- Address: ------------------------------- ------------------------------- 7 EX-27.01 4 ex-27_01.txt EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CADENCE DESIGN SYSTEMS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-30-2000 JAN-02-2000 JUL-01-2000 113,165 6,278 231,839 46,392 15,219 484,275 629,498 291,743 1,395,733 452,903 0 0 0 573,974 333,483 1,395,733 0 556,175 0 211,214 355,826 883 1,105 (8,412) (2,229) (6,183) 0 0 0 (6,183) (0.03) (0.03)
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