Cadence Design Systems, Inc. Form 10-Q 6/30/2001

(Mark One)


	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 o

At August 4, 2001, there were 248,519,432 shares of the registrant’s common stock, $0.01 par value, outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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 December 30, 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 consolidated financial statements as of December 30, 2000 and for the three and six months ended July 1, 2000 have been reclassified to conform with the June 30, 2001 presentation.

In the three months ended June 30, 2001, Cadence acquired substantially all of the assets of two companies for an aggregate price of $10.5 million, net of acquisition costs, of which $4.4 million was cash and $6.1 million was shares of Cadence common stock, plus future contingent payments. The acquisitions were accounted for as a purchase. Upon consummation of the acquisitions, Cadence immediately charged to expense $1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately-held design tools firm headquartered in San Jose. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. Its noise-analysis solutions are targeted at both digital and mixed signal designers working on microprocessors, dynamic random access memory, mixed-signal System-on-a-Chip, and application-specific integrated circuits. Cadence acquired all of the outstanding stock of CadMOS and assumed all outstanding stock options and warrants. The purchase price was $92.7 million and the acquisition was accounted for as a purchase. The purchase price could increase up to an additional $12.6 million, representing up to 488,970 shares, if certain predetermined performance factors are achieved over the next three years. Of the $12.6 million, $1.7 million is contingent on continued employment of certain specified individuals. The $12.6 million is based on the share price of Cadence’s common stock at the time of the acquisition. In connection with the acquisition, Cadence acquired goodwill of $58.3 million, which is being amortized over 5 years, and technology and workforce intangibles of $12.9 million, which are being amortized over 3 to 5 years. The results of operations of CadMOS and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 million representing acquired in-process technology that had not yet reached technological feasibility and had no alternative future use. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Unusual Items.” 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. The in-process technology is expected to be commercially viable in 2002. Expenditures to complete the in-process technology are expected to total approximately $1.8 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 additional research and development after they have reached a state of technological and commercial feasibility.

Comparative pro forma financial information for all acquisitions has not been presented because the results of operations were not material to Cadence’s consolidated financial statements.

In the second quarter of 2001, Cadence announced a worldwide restructuring plan targeted at reducing workforce and consolidating facilities and assets.

Cadence recorded $32.7 million of restructuring charges classified as unusual operating expenses associated with the worldwide restructuring plan. Cadence’s restructuring plan and associated costs consisted of $11.3 million for reduction in personnel and $21.4 million to downsize and close excess facilities. The restructuring plan was initiated primarily due to the severe downturn in the economic environment in the electronics industry, particularly in the U.S. The restructuring was primarily aimed at reducing excess personnel and capacity costs. Management estimates that the restructuring resulted in annualized cost reductions of approximately $30.8 million in salary and benefit costs and $35.1 million in facility costs.

The restructuring plan will result in the reduction of approximately 325 employees. While employee reductions are across all business functions, operating units, and geographic regions, Cadence’s wireless communications-related areas will be affected more than other areas. In addition, the number of temporary and contract workers employed by Cadence is being reduced. Severance costs in the restructuring included severance benefits, notice pay, and out-placement services. Approximately $5.3 million of these costs resulted from the payments to certain participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to June 30, 2001. All severance benefits are expected to be paid out by the end of 2001.

Facilities consolidation charges of $21.4 million were incurred in connection with the downsizing and closing of 16 sites. Closure and downsizing costs included 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. To determine the lease loss, which is the loss after Cadence’s cost recovery efforts from subleasing a building, certain assumptions were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss is an estimate under Statement of Financial Accounting Standards No. 5 Accounting for Contingencies and represents the low end of the range, $10.8 million, which will be adjusted in the future upon certain triggering events (change in estimate of time to sublease, actual sublease rates, etc.). Cadence has estimated that the high end of the lease loss could be $50.4 million if facilities operating lease rental rates

continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. Asset-related costs that were expensed consisted of leasehold improvements for facilities that were abandoned and whose estimated fair market value is zero. As of June 30, 2001, two sites had been vacated and four sites had been downsized.

In relation to the wireless communications business downsizing and current decline in business conditions generally, Cadence restructured certain of its businesses and realigned resources to focus on profit contribution, high-growth markets, and core opportunities. As a result, Cadence recorded a charge of $25.8 million related to the impairment of goodwill and acquired intangibles associated with the acquisition of Diablo Research Company LLC, or Diablo. Key factors in this write-off were significant downsizing or reassignment of personnel directly related to these assets and reduction of future emphasis on this line of business. The charge was determined as the amount by which the carrying value of the goodwill and intangible assets associated with Diablo’s acquisition exceeded the fair value of those assets.

The following table summarizes Cadence’s restructuring activity for the six months ended June 30, 2001:

The majority of the restructuring reserve balance at December 30, 2000 was offset to the 2001 restructuring plan.

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.

In connection with its announced restructuring, Cadence recorded a $5.8 million provision expense against inventory, which is included in unusual items in the Condensed Consolidated Statements of Operations. Of the $5.8 million, $3.7 million related to two discontinued product lines as part of Cadence’s restructuring and $2.1 million related to excess inventory of emulation products. The $3.7 million related to inventory and other related costs for two product lines Cadence will no longer sell. As part of the restructuring, Cadence examined the business and determined that these products would not result in future revenue growth. The excess inventory charge of $2.1 million was due to a sudden and significant decrease in forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on our current 12-month demand forecast, we do not anticipate that the excess inventory subject to this provision will be used at a later date.

On September 29, 2000, Cadence entered into two syndicated senior unsecured credit facilities that allow Cadence to borrow up to $350 million, referred to as the 2000 Facilities. The 2000 Facilities replace a prior $355 million revolving credit facility, of which $177.5 million terminated on September 27, 2000, and $177.5 million was terminated immediately prior to closing of the 2000 Facilities. One of the new 2000 Facilities is a $100 million three-year revolving credit facility, referred to as the Three-Year Facility. The other new facility is a $250 million 364-day revolving credit facility convertible into a two-year term loan, referred to as the 364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The 364-Day Facility will terminate on September 28, 2001, at which time the 364-Day Facility may be converted to a two-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the termination date of the 364-Day Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility that a consenting bank holds. For both of the 2000 Facilities, 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 (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expense associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants. At June 30, 2001, there were no borrowings outstanding under the 2000 Facilities.

Comprehensive 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 stockholders’ equity. A summary of comprehensive loss follows:

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:

Options to purchase 52,568,767 shares of common stock were outstanding for the three and six months ended June 30, 2001, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. These options expire at various dates through 2011. Put warrants to purchase 5,123,800 shares of common stock were outstanding for the three and six months ended June 30, 2001, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. The put warrants outstanding during the three and six months ended June 30, 2001 expire on various dates through February 2002. Warrants to purchase 140,000 shares of common stock were outstanding for the three and six months ended June 30, 2001, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. The warrants outstanding expire in June 2003.

Options to purchase 19,374,536 shares of common stock were outstanding for the three months ended July 1, 2000, but were not included in the computation of diluted net income per share because their effect would be antidilutive. These options expire at various dates through 2011.

Options to purchase 50,685,907 shares of common stock were outstanding for the six months ended July 1, 2000, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. These options expire at various dates through 2010. Put warrants to purchase 6,330,775 shares of common stock were outstanding for the six months ended July 1, 2000, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. The put warrants outstanding during the six months ended July 1, 2000 expire on various dates through February 2002. Warrants to purchase 140,000 shares of common stock were outstanding for the six months ended July 1, 2000, but were not included in the computation of diluted net loss per share because their effect would be antidilutive. The warrants outstanding expire in June 2003.

Cadence has authorized a share repurchase program under which repurchased shares with a value of up to $500 million will be used for general corporate purposes including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. See “Subsequent Events.”

As of June 30, 2001, Cadence had authorized three seasoned systematic stock repurchase programs under which it repurchased common stock to satisfy estimated requirements for shares to be issued under its employee stock option and purchase plans.

As part of its authorized stock repurchase program, Cadence has sold put warrants through private placements. At June 30, 2001, there were 5.1 million put warrants outstanding that entitle the holder to sell one share of common stock to Cadence on a specified date and at a specified price ranging from $23.87 to $26.90 per share. Additionally, during this same period, Cadence purchased call options that entitle Cadence to buy one share of common stock at a specified price to satisfy anticipated stock repurchase requirements under Cadence’s systematic stock repurchase programs. At June 30, 2001, Cadence had 3.8 million call options outstanding at prices ranging from $24.12 to $27.15 per share. The put warrants and call options outstanding at June 30, 2001 expire on various dates through February 2002 and Cadence has the contractual ability to settle the options prior to their maturity. At June 30, 2001, the estimated fair value of the call options was approximately $3 million and the estimated fair value of the put warrants was approximately $35.6 million.

If exercised, Cadence has the right to settle the put warrants with common stock equal to the difference between the exercise price and the fair value of the common stock 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 that such holders may have accumulated in anticipation of the exercise of the put warrants or call options, which may adversely affect the price of Cadence’s common stock. At June 30, 2001, Cadence had the ability to settle these put warrants with common stock and, therefore, no amount was classified out of stockholders’ equity in the condensed consolidated balance sheets.

On July 17, 2000, Cadence announced its plan to separate its electronics design services group into a new company named Tality Corporation, or Tality. Tality’s separation from Cadence was substantially completed on October 4, 2000, and the electronic design services business now operates as a majority-owned subsidiary of Cadence. Tality filed a registration statement with the Securities and Exchange Commission for Tality’s initial public offering, or IPO. As a result of the separation in the third quarter of 2000, Cadence has recorded deferred stock compensation resulting from Tality option grants and restricted stock sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Unusual Items.” On October 9, 2000, Cadence announced the postponement of Tality’s IPO due to unfavorable market conditions. As a result of the postponement of the Tality IPO Cadence wrote off $2.8 million of IPO related expenses in the first quarter of 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Unusual Items.” On April 17, 2001, Cadence announced the withdrawal of the Tality IPO registration statement. The financial statements and financial information in this Quarterly Report on Form 10-Q do not give effect to the IPO. As a result of a reorganization of the Tality entities during June and July, 2001, Tality is currently an indirect wholly-owned subsidiary of Cadence.

In relation to the postponement of the Tality IPO, Cadence and Tality began to redeem the minority interest in Tality. As of June 30, 2001, Cadence had repurchased 0.6% minority interest, leaving a minority interest of 1.7%. These remaining shares outstanding were repurchased in the third quarter ending September 29, 2001. In conjunction with the transaction, Cadence repurchased 455,000 restricted Tality shares from certain Cadence executives and key employees by cancelling a portion of the related notes

payable to Cadence owed by such Cadence executives and key employees equal to the repurchase price for such shares. Tality repurchased 220,000 restricted shares from three of its directors. The purchase price was $6.10, the fair market value of Tality stock at the time of repurchase.

The supplemental cash-flow information for the six months ended June 30, 2001 and July 1, 2000 follows:

In 1998, Cadence adopted Statement of Financial Accounting Standards, or SFAS, No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Under SFAS No. 131, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker when deciding how to allocate resources and when assessing performance. Cadence’s chief operating decision making group is the Executive Staff, which includes Cadence’s President and Chief Executive Officer and Cadence’s other senior management. Cadence’s Executive Staff reviews the Cadence consolidated results within three segments: Product, Services, and Maintenance, and also reviews Tality’s results separately as a stand-alone entity.

The Product segment includes revenue and associated costs to design and license to customers a variety of electronic design automation products. The Services segment includes revenue and associated costs to offer methodology and design services either to assist companies in developing electronic designs or to assume responsibility for the design effort when customers wish to outsource this work. The Maintenance segment includes revenue and associated costs primarily for a technical support organization, and maintenance agreements are offered to customers either as part of our product license agreements or separately. Within the Cadence consolidated results, Tality revenue is included in the Services segment, and associated Tality costs are reflected in each of the three segments, consistent with the benefit derived by the respective segments from those services.

Segment income from operations is defined as gross margin under generally accepted accounting principles and excludes amortization of acquired intangibles, operating expenses (marketing and sales, research and development, and general and administrative), unusual items, other income, net, and income taxes. Profitability information about Cadence’s segments is available only to the extent of gross margin by segment, and operating expenses and other income and expense items are managed on a functional basis. There are no differences between the accounting policies used to measure profit and loss for segments and

Cadence’s management does not identify or allocate its assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed by Cadence’s Executive Staff to make decisions about resources to be allocated among the segments or to assess their performance. Depreciation and amortization of purchased software is allocated among the segments in order to determine each segment’s gross margin.

The following tables present information about reported segments for the three months ended June 30, 2001 and July 1, 2000:

The following tables present information about reported segments for the six months ended June 30, 2001 and July 1, 2000:

Internationally, excluding Japan, Cadence markets and supports its products and services primarily through its subsidiaries and various distributors. Cadence licenses its products in Japan through Innotech Corporation, in which Cadence is an approximately 15% stockholder. Cadence markets its methodology and design services in Japan through a wholly-owned subsidiary.

Revenues are attributed to geographic areas based on the country in which the customer is domiciled. In the three months ended June 30, 2001, there were two customers that accounted for more than 10% of total revenues. In the six months ended June 30, 2001, and the three and six months ended July 1, 2000, no one customer accounted for more than 10% of total revenues. Long-lived assets are attributed to geographic areas based on the country where the assets are located.

The following table presents a summary of revenues by geographic region for the three months ended June 30, 2001 and July 1, 2000:

The following table presents a summary of revenues and long-lived assets by geographic region for the six months ended June 30, 2001 and July 1, 2000:

On August 1, 2001, Cadence’s Board of Directors approved an authorization to repurchase up to $500 million of common stock. The repurchased shares will be used for general corporate purposes including the share issuance of employee stock option and purchase plans and acquisitions. Share repurchases under this authorization may be made in the open market or in privately negotiated transactions.

On July 25, 2001, Avant! Corporation was ordered to pay Cadence $195 million in criminal restitution after Avant! entered a plea of no contest and was found guilty by the Superior Court of the State of California of conspiracy to take and use Cadence’s trade secrets. Cadence received $100 million of this amount on July 26, 2001, and $40 million on August 1, 2001. Avant! has publicly stated that it cannot currently pay the remainder of the award, and that it is seeking additional sources of funding to pay the $55 million balance. Cadence is negotiating a security agreement with Avant! to secure the remaining payments.

On July 1, 2001, Cadence adopted two employee stock purchase plans to allow Tality employees to participate in Cadence’s employee benefit plan. The two plans are the 2001 Employee Stock Purchase Plan, which is a qualified employee stock purchase plan under the Internal Revenue Code, and the Non-Qualified Stock Purchase Plan, which is an employee stock purchase plan not qualified under the Internal Revenue Code and will be primarily used for Tality employees located outside the U.S. Other than the qualified nature of the 2001 Employee Stock Purchase Plan, the provisions of the two plans are the same. The qualified plan will be presented to Cadence stockholders for approval at Cadence’s next annual meeting.

The plans are administered by Cadence’s board of directors or by a committee appointed by the board. Tality employees, including officers and employee directors but excluding 5% or greater stockholders, are eligible to participate if they are regular employees who work 20 hours or more per week.

Each offering period will normally have four purchase periods, which will result in four purchase dates during each offering period. The purchase periods, other than the initial two periods under the plan, are generally the same as those under the current Cadence employee stock purchase plan.

The plans permit eligible Tality employees to purchase Cadence common stock through payroll deductions, which, except for the first purchase period, may not exceed 12% of an employee’s compensation. During each purchase period, payroll deductions will accumulate without interest. On the last business day of each purchase period, accumulated payroll deductions will be used to purchase Cadence common stock. Other terms of these plans are generally the same as the terms of the current Cadence employee stock purchase plan.

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.”

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 its customers throughout the world to help them optimize their product development processes. Cadence is a supplier of end-to-end products and services that are used 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.

In recent years, the worldwide electronics industry has experienced expansion driven primarily by the communications (networking and wireless) markets. More recently, however, both the U.S. economy in general and the electronics industry in particular began to experience a slowdown in late 2000, the severity of which has increased in 2001. The electronics industry slowdown, especially in the semiconductor industry, may reduce our revenue and harm Cadence’s results of operations.

In February 2001, Cadence acquired CadMOS Design Technology, Inc., a privately held design tools firm headquartered in San Jose. CadMOS provides solutions to the noise problems experienced in ultra-deep submicron processes. Its noise-analysis solutions are targeted at both digital and mixed signal designers working on microprocessors, dynamic random access memory, mixed-signal System-on-a-Chip, and application-specific integrated circuits. Cadence acquired all of the outstanding stock of CadMOS and assumed all outstanding stock options and warrants. The purchase price was $92.7 million and the acquisition was accounted for as a purchase. The purchase price could increase up to an additional $12.6 million, representing up to 488,970 shares, if certain predetermined performance factors are achieved over the next three years. Of the $12.6 million, $1.7 million is contingent on continued employment. The $12.6 million is based on the share price of Cadence’s common stock at the time of the acquisition. In connection with the acquisition, Cadence acquired goodwill of $58.3 million, which is being amortized over 5 years, and

technology and workforce intangibles of $12.9 million, which are being amortized over 3 to 5 years. The results of operations of CadMOS and the estimated fair value of the assets acquired and liabilities assumed are included in Cadence’s consolidated financial statements from the date of acquisition.

Product revenue increased $49.8 million and $125.5 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to an increase in license renewals with major customers as well as an increase in new sales of Cadence’s software products. The increase in sales volume of products in the three months ended June 30, 2001 was primarily due to the increased sales volume of integrated circuit implementation products, which include place and route, physical design, and physical verification products. The increase in sales volume in the six months ended June 30, 2001 was due to an overall increase in sales volume of Cadence’s software products. The increase in sales volume of products was primarily attributable to higher sales of integrated circuit implementation products, intellectual property creation products, and printed circuit board-related products. In the three and six months ended June 30, 2001, more than one third of software revenue came from Cadence’s ratable software license arrangements. In the three and six months ended July 1, 2000, more than 15% of software revenue came from Cadence’s ratable software license arrangements. The percentage of ratable revenue will

Services revenue decreased $6.4 million and $2.2 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to Tality’s decline in revenue. Tality’s revenue declined primarily due to fewer active engagements and decreased total client service hours billed. Tality’s revenue is expected to continue to be affected by the slowdown in the economy and electronics industry specifically, with flat sequential revenue expected through the rest of the year.

Maintenance revenue increased $5.5 million and $12.7 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to the growth of the installed customer base and the renewal of maintenance and support contracts.

International revenue increased $20 million and $49.7 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000. The increase in the three months ended June 30, 2001 was primarily due to increases in product revenue in all regions, services revenue in Japan and Asia, and maintenance revenue in Europe, partially offset by decreases in maintenance revenue in Japan and Asia and services revenue in Europe. The increase in the six months ended June 30, 2001 was primarily due to increases in product revenue in all regions, maintenance revenue in Europe and Asia, and services revenue in Europe, partially offset by decreases in services revenue in Japan, Asia, and Canada and maintenance revenue in Japan.

Differences in the rate of revenue growth over the periods presented and as compared geographically are primarily due to fluctuations in sales volume of integrated circuit implementation and intellectual property creation products and for Cadence’s design and methodology services offerings.

Foreign currency exchange rates negatively affected revenue by $5.2 million and $9.8 million during the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to the weakening of the Japanese yen in relation to the U.S. dollar.

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 increased $1.3 million for the three months ended June 30, 2001, when compared to the same period in 2000, primarily due to an increase in amortization of software development costs and third-party royalty costs, partially offset by a decrease in manufacturing expenses associated with emulation system products. Cost of product revenue increased $2.5 million for the six months ended June 30, 2001, when compared to the same period in 2000, primarily due to third-party royalty costs and purchased software amortization.

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 and six months ended June 30, 2001, when compared to the same period in 2000, primarily due to an increase in price and volume of license renewals with major customers.

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 decreased $3.4 million in the three months ended June 30, 2001, when compared to the same period in 2000, primarily due to Cadence’s reduction of services professionals and employee-related costs. Cost of services revenue increased $1.3 million in the six months ended June 30, 2001, when compared to the same period in 2000, primarily due to Cadence’s addition of services professionals and employee-related costs that occurred in the three months ended March 31, 2001, partially offset by the reduction in employee-related costs in the three months ended June 30, 2001.

Services gross margin slightly decreased for the three and six months ended June 30, 2001, when compared to the same periods in 2000, primarily due to increased headcount in Tality in anticipation of increased demand which did not materialize. 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 by the slowdown in the economy generally and in the electronics systems industry in particular.

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 remained flat and increased $3.4 million for the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000. The increase for the six months ended June 30, 2001 was primarily due to an increase in employee-related costs.

Marketing and sales expenses increased $1.1 million and $8.5 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to an increase in employee-related costs.

Research and development expenses, prior to the reduction for capitalization of software development costs, were $81.6 million, representing 23% of total revenue, in the three months ended June 30, 2001, and $71.7 million, representing 24% of total revenue, for the three months ended July 1, 2000. For the three and six months ended June 30, 2001, Cadence capitalized software development costs of $7.7 million and $15.3 million, respectively, representing 9% and 10% of total research and development expenditures, respectively. For the three and six months ended July 1, 2000, Cadence capitalized software development costs of $5.9 million and $14.7 million, respectively, representing 8% and 10% of total research and development expenditures, respectively. The increase in capitalized software development costs for the three and six month periods ended June 30, 2001, resulted primarily from increases in new product development projects in which costs are expensed until technological feasibility is established. In any given period, the amount of capitalized software development costs may vary depending on the exact nature of the development performed.

The increase in net research and development expenses of $8.1 million and $16.5 million for the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, was primarily due to employee-related costs and increased investment in research and development projects.

General and administrative expenses increased $3.7 million and $11.9 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to an increased use of outside consulting services and increases in bad debt expense, primarily in Tality.

Foreign currency exchange rates positively affected operating expenses by $3 million and $5.8 million for the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to the weakening of the Japanese yen and the British pound in relation to the U.S. dollar.

Amortization of acquired intangibles increased $6 million and $8.4 million in the three and six months ended June 30, 2001, respectively, when compared with the same periods in 2000, primarily due to the 2001 acquisition of CadMOS.

Cadence records deferred stock compensation resulting from Tality option grants for Tality stock, Tality restricted stock sales, and Cadence’s acquisition of CadMOS. Deferred stock compensation from Tality option grants and restricted stock sales represents the difference between the exercise price of stock option grants to Tality employees and directors, and restricted stock sales to certain Cadence executives and key employees, and the deemed fair market value of Tality’s common stock at the time of those grants and sales. Deferred stock compensation from the CadMOS acquisition represents the difference between the exercise price of stock option grants to CadMOS employees and the fair market value of Cadence’s common stock at the time of acquisition. Cadence is amortizing the deferred stock compensation to expense over the period during which the stock options and restricted stock vest. Cadence recorded $7.2 million and $13.1 million in the three and six months ended June 30, 2001, respectively, of amortization of deferred stock compensation for which there were no similar costs in the first six months of 2000.

The following table presents information regarding unusual items for the three and six months ended June 30, 2001:

In the second quarter of 2001, Cadence announced a worldwide restructuring plan targeted at reducing workforce and consolidating facilities and assets.

electronics industry, particularly in the U.S. The restructuring was primarily aimed at reducing excess personnel and capacity costs. Management estimates that the restructuring resulted in annualized cost reductions of approximately $30.8 million in salary and benefit costs and $35.1 million in facility costs.

The restructuring plan will result in the reduction of approximately 325 employees. While employee reductions will be across all business functions, operating units, and geographic regions, Cadence’s wireless communications-related areas will be affected more than other areas. In addition, the number of temporary and contract workers employed by Cadence is being reduced. Severance costs in the restructuring included severance benefits, notice pay, and out placement services. Approximately $5.3 million of these costs resulted from the payments to certain participants in Cadence’s employee stock purchase plan prior to Tality’s separation from Cadence in October 2000. All terminations and termination benefits were communicated to the affected employees prior to June 30, 2001. All severance benefits are expected to be paid out by the end of 2001.

In the first quarter of 2001, Cadence recorded $1.5 million of restructuring expenses incurred in connection with its research and development process.

In connection with its announced restructuring, Cadence recorded a $5.8 million provision expense against inventory. Of the $5.8 million, $3.7 million related to two discontinued product lines as part of Cadence’s restructuring and $2.1 million related to excess inventory of emulation products. The $3.7 million related to inventory and other related costs for two product lines Cadence will no longer sell. As part of the restructuring, Cadence examined the business and determined that these products would not result in future revenue growth. The excess inventory charge of $2.1 million was due to a sudden and significant decrease in

forecasted revenue for emulation products and was calculated in accordance with Cadence’s policy, which is based on inventory in excess of 12-month demand. Inventory purchases and commitments are based on future sales forecasts. Cadence typically buys and builds inventory levels for certain key components to mitigate component supply constraints. Based on our current 12-month demand forecast, we do not anticipate that the excess inventory subject to this provision will be used at a later date.

Also in connection with its announced restructuring, certain additional costs will be incurred in order to fulfill Tality contracts. As a result, a loss provision of $1.1 million has been placed against these contracts.

In the three months ended June 30, 2001, Cadence recorded $1.3 million of Tality separation costs primarily related to legal and consulting fees.

In the first quarter of 2001, Cadence wrote off $2.8 million of Tality IPO related expense as a result of the postponement of the Tality IPO on October 9, 2000. These expenses consisted of legal and accounting services and registration statement printing and filing fees and were incurred primarily during 2000. In addition, Cadence recorded $0.7 million of Tality separation costs in the first quarter of 2001, related primarily to information systems separation.

Upon consummation of the CadMOS acquisition, Cadence immediately charged to expense $12.1 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. The in-process technology is expected to be commercially viable in 2002. Expenditures to complete the in-process technology are

expected to total approximately $1.8 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 additional research and development after they have reached a state of technological and commercial feasibility.

At the time of its acquisition by Cadence, CadMOS’s in-process research and development projects were related to the development of a static timing analysis tool, the development of advanced fixing capabilities in the noise analysis area, and in the mixed signal area, the development of a flow to integrate with Cadence tools and a tool to analyze large application-specific integrated circuit designs for substrate noise. The nature of the efforts to complete these projects related, in varying degrees, to the completion of all planning, designing, prototyping, verification, and testing activities necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements.

The net cash flows resulting from the projects underway at CadMOS used to value the purchased research and development were based on management’s estimates of revenue, cost of revenue, research and development costs, selling, general and administrative costs, and income taxes from such projects. The revenue projections were based on the potential market size that the projects address, Cadence’s ability to gain market acceptance in these segments, and the life cycle of this in-process technology.

Estimated total revenue from the acquired in-process technology is expected to peak in 2004 and decline rapidly thereafter as other new products are expected to enter the market. In addition, a portion of the anticipated revenue had been attributed to enhancements of the base technology under development, and has been excluded from net cash flow calculations. Existing technology was valued at $3.6 million. The net cash flows generated from the acquired in-process technology were expected to reflect earnings before interest, taxes, and depreciation of approximately 50% of the revenue generated from in-process technology. However, there can be no assurance that these assumptions will prove accurate, or that Cadence will realize the anticipated benefit of the acquisition.

The discount of the net cash flows to their present value was based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on the required rates of return from investments in various areas of the enterprise. The rate used to discount the net cash flows from purchased in-process technology was 28%. The discount rate is sometimes higher than the WACC due to the inherent uncertainties in the estimates, including the uncertainty surrounding the successful development of the acquired in-process technology, the useful life of such technology, the profitability levels of such technology, if any, and the uncertainty of technological advances, all of which were unknown at that time.

Other income decreased $0.9 million and $2.3 million in the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000, primarily due to decreases in foreign exchange gains and interest income, partially offset by an increase in minority interest income and a reduction in investment losses. The decrease in interest income was due to a lower average balance of invested cash and short-term investments and lower interest rates.

Cadence’s estimated effective tax rate for the three and six months ended June 30, 2001 was 26.5%, excluding the effect of amortization of acquired intangibles, amortization of deferred stock compensation, and unusual items. Proceeds from the Avant! judgement will be subject to U.S. federal and state taxes. Cadence will provide for taxes on the Avant! proceeds at a rate of 40%. The effective tax rate for the three and six months ended July 1, 2000 was 26.5%.

At June 30, 2001, Cadence’s principal sources of liquidity consisted of $141.1 million of cash and cash equivalents and short-term investments, compared to $137 million at December 30, 2000, and two syndicated senior unsecured credit facilities totaling $350 million. As of June 30, 2001, Cadence had no outstanding borrowings under these credit facilities.

Cash provided by operating activities decreased $6.6 million to $81.8 million for the six months ended June 30, 2001, when compared to the six months ended July 1, 2000. The decrease was primarily due to the payment of accounts payable and accrued liabilities.

At June 30, 2001, Cadence had net working capital of $59.7 million compared with $65.3 million at December 30, 2000. The working capital decrease was driven primarily by a decrease in receivables of $40.4 million and an increase in deferred revenue of $17.3 million, partially offset by a decrease in accounts payable and accrued liabilities of $29.8 million and an increase in prepaid expenses and other of $15.8 million.

In addition to its short-term investments, Cadence’s primary investing activities consisted of acquisitions, purchases of property, plant, and equipment, capitalization of software development costs, and venture capital partnership investments, which combined represented $97.4 million and $88.2 million of cash used for investing activities in the six months ended June 30, 2001 and July 1, 2000, respectively.

Cadence sells put warrants and purchases call options through private placements. See “Notes to Consolidated Financial Statements — Put Warrants and Call Options.” At June 30, 2001, Cadence had a maximum potential obligation related to put warrants to buy back 5.1 million shares of its common stock at an aggregate price of approximately $128.8 million. The put warrants will expire on various dates through February 2002, and Cadence has the contractual ability to settle the put warrants 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.

As part of its overall investment strategy, Cadence is a limited partner in a venture capital fund and is committed to invest up to $100 million. As of June 30, 2001, Cadence had contributed approximately $70.5 million to this partnership, which is reflected in other assets in the accompanying condensed consolidated balance sheets.

On September 29, 2000, Cadence entered into two syndicated senior unsecured credit facilities that allow Cadence to borrow up to $350 million, referred to as the 2000 Facilities. The 2000 Facilities replace a prior $355 million revolving credit facility consisting of a $177.5 million two-year revolving credit facility, which was terminated on September 27, 2000, and a $177.5 million 364-day revolving credit facility, which was terminated immediately prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is a $100 million three-year revolving credit facility, referred to as the Three-Year Facility. The other new facility is a $250 million 364-day revolving credit facility convertible into a two-year term loan, referred to as the 364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The 364-Day Facility will terminate on September 28, 2001, at which time the 364-Day Facility may be converted to a two-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the termination date of the 364-Day Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility that a consenting bank holds. For both of the 2000 Facilities, 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 (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.20%. Cadence may

not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants. At June 30, 2001, there were no borrowings outstanding under the 2000 Facilities.

Cadence anticipates that current cash and short-term investment balances, cash flows from operations, and its $350 million revolving credit facilities will be sufficient to meet its working capital and capital requirements on a short-and long-term basis.

In August 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets.” SFAS No. 143 addresses financial accounting and reporting for the retirement obligation of an asset. This statement states that companies should recognize the asset retirement cost, at their fair value, as part of the cost of the asset and classify the accrued amount as a liability in the condensed consolidated balance sheet. The asset retirement liability is then accreted to the ultimate payout as interest expense. The initial measurement of the liability would be subsequently updated for revised estimates of the discounted cash outflows. The Statement will be effective for fiscal years beginning after June 15, 2002. Cadence has not yet determined the effect SFAS No. 143 will have on its consolidated financial position, results of operations, or cash flows.

In June 2001, the FASB issued SFAS No. 141, “Business Combinations.” SFAS No. 141 addresses financial accounting and reporting for business combinations and it requires business combinations in the scope of this Statement to be accounted for using one method, the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this Statement will not have a material effect of Cadence’s consolidated financial position, results of operations, or cash flows.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Goodwill will be assessed for impairment each year using the fair-value-based test. This Statement becomes effective January 1, 2002. Cadence is currently assessing the impact of the discontinued amortization of goodwill and, while Cadence is not aware of any impairment charges, an analysis will have to be done upon adoption of this Statement to determine if an impairment charge is necessary. Cadence has not yet determined the effect SFAS No. 142 will have on its consolidated financial position, results of operations, or cash flows.

In September 2000, the Emerging Issues Task Force, or EITF, published their consensus on EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was taken up to address implementation of the EITF’s March 2000 final consensus of EITF Issue No. 00-7, “Application of EITF Issue No. 96-13 to Equity Derivative Instruments That Contain Certain Provisions That Require Net Cash Settlement If Certain Events Outside the Control of the Issuer Occur.” The final consensus in Issue No. 00-7 generally stated that equity derivative contracts that contain provisions that implicitly or explicitly require net cash settlement outside of the control of the company must be treated as assets and liabilities and carried at fair value with changes in fair value recognized in earnings rather than equity instruments carried at original cost and reported as part of permanent equity. This interpretation became effective June 30, 2001 and did not have a material effect on Cadence’s consolidated financial position, results of operations, or cash flows.

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 Cadence faces. Additional risks and uncertainties not currently known to Cadence or that Cadence currently deem immaterial also may impair Cadence’s business operations. If any of the following risks actually occur, Cadence’s business, operating results, and financial condition could be materially harmed. Unless specifically noted, references to Cadence in the discussion below are references to Cadence and its subsidiaries, including Tality Corporation and its subsidiaries.

Cadence is subject to the cyclical nature of the integrated circuit industry and the electronics systems


	*industry, and the current downturn or any future downturns may reduce our revenue*

Purchases of our products and services are highly dependent upon the commencement of new design projects by integrated circuit manufacturers and electronics systems companies. The integrated circuit industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. The integrated circuit and electronics systems industries have experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both these companies’ and their customers’ products and a decline in general economic conditions. These downturns have been characterized by diminished product demand, production over capacity, high inventory levels and accelerated erosion of average selling prices. During these downturns, the number of new design projects may decrease. A number of integrated circuit manufacturers and electronics systems companies have announced significant slowdowns of demand and production. Cadence expects continued weakness in the communications businesses of the electronics systems industry for the foreseeable future. The current slowdown and any future downturns may reduce our revenue and harm our results of operations.

Cadence has reorganized its design services group as a separate company, which may impact its financial results

Since 1995, Cadence has operated an electronics design services group. On July 17, 2000, Cadence announced its plan to separate its design services group into a separate company named Tality Corporation focused on 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. The separation was substantially completed on October 4, 2000. On October 9, 2000, Cadence announced that it had postponed Tality’s initial public offering due to unfavorable market conditions. On April 17, 2001, Tality withdrew the registration statement for its initial public offering. Cadence currently intends to consider undertaking an initial public offering for Tality when market conditions become favorable. As a result of a reorganization of the Tality entities during the end of the second quarter and beginning of the third quarter, Tality now operates as an indirect wholly-owned subsidiary of Cadence. Cadence’s expenses in the design services business increased in connection with Tality’s separation from Cadence and Tality’s reorganization, and its expenses may continue to increase. The rate of growth of Tality’s revenue over prior periods has declined in 2001, and may not increase in the near term, or at all, and its separation and reorganization may prove more expensive than Cadence anticipates. If Tality fails to increase its revenue to offset its expenses, Tality will continue to experience losses.

Cadence has agreed to grant certain rights and provide certain services to Tality on terms that are more


	*favorable to Tality than terms that would be offered to an unrelated party*

In connection with the separation of Tality, Cadence entered into a number of agreements governing its business relationships with Tality and Cadence’s provision of certain services to Tality, including provision of certain facilities, and accounting, finance, legal, human resources, and other administrative services, on

terms that are more favorable to Tality than terms that would be offered to an unrelated entity. As a result, Cadence is obligated to provide certain services to Tality for the periods defined in the various agreements, some of which have long or unspecified terms. Continued provision of such services after Tality’s separation and after a potential future initial public offering may impact our financial results.

Cadence has historically suffered losses in its electronics design and methodology services business and may


	*continue to do so in the future*

The market for electronics design and methodology services is relatively new and rapidly evolving. Cadence’s or Tality’s failure to succeed in these electronics design and methodology services businesses may seriously harm Cadence’s business, operating results, and financial condition.

The success of Cadence’s electronic design and methodology services businesses depend 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:


	•	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 attract and retain professional services personnel. 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.

	•	A substantial portion of these services contracts are fixed-price contracts. This means that the customer pays a fixed price that is agreed upon at the time of contract execution, regardless of how much time or how many resources Cadence must actually devote to successfully complete the contract. Although Cadence is moving towards more time based contracts, there can be no guarantee that this shift will occur. 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 electronics 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 smaller. This is commonly referred to in the semiconductor industry as the migration to deep submicron and it represents a major challenge for all levels of the semiconductor industry from chip 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 “system-on-a-chip”), 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

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 from 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.

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 United States.

Cadence cannot assure you that its reliance on licenses from or to third parties, or that patent, copyright, trademark, and trade secret protections, will be enough to be successful and profitable in the industries in which Cadence competes.

There are numerous patents in the electronics design automation, or 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. Any potential intellectual property litigation could force us to do one or more of the following:


	•	Pay damages to the party claiming infringement;

	•	Stop licensing, or providing services that use, the challenged intellectual property;


	•	Obtain a license from the owner of the infringed intellectual property to sell or technology, which license may use the relevant not be available on reasonable terms, or at all; or

	•	Redesign the challenged technology, which could be time-consuming and costly.

If we were forced to take any of these actions, our business and results of operations may be harmed.

Cadence depends on several suppliers for certain key components and board assemblies used in its hardware-based verification 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 Taiwan Semiconductor Manufacturing Corporation for the supply of key integrated circuits and on IBM for the hardware components for Cadence’s COBALT™ and MERCURYPLUS™ products. 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 and services by customers. Quarterly operating results are affected by the mix of products and services 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 through 2000, Cadence had realized gross margins on software product sales of approximately 90% but realized gross margins of approximately 67% on hardware product sales and approximately 33% on its performance of services. In the second quarter of 2001, realized gross margins increased to approximately 92% for software products, decreased to approximately 60% for hardware products, and increased to approximately 34% 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 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.

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. These projects often require significant commitments of time and capital. Cadence’s hardware sales may be delayed if customers delay commencement of projects. Cadence has experienced greater delays during 2001 than in the past and such increase in delays may continue. Lengthy hardware sales cycles subject Cadence to a number of significant risks over which Cadence has little or no control, including insufficient, excess or obsolescent inventory, variations in inventory valuation 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.

Cadence believes that quarter-to-quarter comparisons of the results of operations of its services business segments may not be meaningful. Therefore, stockholders should not view Cadence’s historical results of operations as reliable indicators of its future performance. In addition, many of our services engagements are terminable with little or no advance notice and without penalty. Since a significant portion of our costs is fixed, we may not be able to reduce our costs in a timely manner in connection with the unanticipated revenue loss when one or more projects is terminated.

The lengthy sales cycle of Cadence’s products and services makes the timing of its revenue difficult to predict


	*and may cause its operating results to fluctuate unexpectedly*

Cadence has a lengthy sales cycle that generally extends at least three to six months. The length of our sales cycle may cause our revenue and operating results to vary unexpectedly from quarter to quarter. The complexity and expense associated with our business generally requires a lengthy customer education and approval process. Consequently, we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenue and may prevent us from pursuing other opportunities.

In addition, sales of our products and services may be delayed if customers delay approval or commencement of projects because of:


	•	Customers’ budgetary constraints and internal acceptance review procedures;

	•	The timing of customers’ budget cycles; and

	•	The timing of customers’ competitive evaluation processes.

If customers experience delays in their approval or project commencement activities, we may not learn of, and therefore would not be able to communicate to the public, revenue or earnings shortfalls until late in a fiscal quarter.

Cadence has recently completed acquisitions, expects to acquire other companies or businesses, and may not


	*successfully integrate them*

Cadence has acquired other businesses before and is likely to 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;


	•	Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas;

	•	Unanticipated costs;

	•	Adverse effects on existing relationships with suppliers and customers; and

	•	Failure to understand and compete effectively in markets in which we have limited previous experience.

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 June 30, 2001 and July 1, 2000. Cadence’s revenue from international operations as a percentage of total revenue was approximately 42% and 44% for the six months ended June 30, 2001 and July 1, 2000, respectively. Cadence also transacts business in various foreign currencies. Fluctuations in the rate of exchange between the U.S. dollar and the currencies of countries other than the United States 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 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 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 that 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 EDA products industry, Cadence currently competes with three large companies, Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc., and numerous smaller 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 high cost of training new personnel, not fully utilizing these personnel, or losing trained personnel to competing employers could reduce our gross margins and harm our business and operating results. Competition for these personnel is intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where our principal offices are located, and the other locations where we maintain facilities. To attract and retain individuals with the requisite expertise, we may be required to grant large numbers of stock options or other stock-based incentive awards, which may be dilutive to existing stockholders. We may also be required to pay significant base salaries and cash bonuses, which could harm our operating results. If we do not succeed in hiring and retaining candidates with appropriate qualifications, we will not be able to grow our business and our operating results will suffer. 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 becomes subject to unfair hiring claims, Cadence could be prevented from hiring needed


	*personnel, incur liability for damages and incur substantial costs in defending itself*

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 itself or its employees against these claims, regardless of their merits. Defending Cadence from these claims could also divert the attention of Cadence’s management away from its operations.

Errors or defects in Cadence designs could expose it to liability and harm our reputation

Cadence’s customers 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 customers 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 customers and loss of, or delay in, revenue and loss of market share;

	•	Failure to attract new customers or achieve market acceptance;

	•	Diversion of development resources to resolving the problem;

	•	Increased service costs; and

	•	Liability for damages.

We rely on a continuous power supply to conduct our operations, and California’s current energy crisis could


	*disrupt our operations and increase our expenses*

California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California. We currently have backup generators or alternate sources of power

for critical operations in the event of a blackout. If, however, blackouts interrupt our power supply, or the power supply of our service providers, we may be temporarily unable to continue operations at our facilities. Any such interruption in our ability to continue operations at our facilities could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. Our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply.

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.

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 is in the process of upgrading its internal systems and believes that its financial institution vendors are capable of handling the euro conversion and Cadence 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 harm 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 harm 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.

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.

On September 29, 2000, Cadence entered into two syndicated senior unsecured credit facilities that allow Cadence to borrow up to $350 million, referred to as the 2000 Facilities. The 2000 Facilities replace a prior $355 million revolving credit facility consisting of a $177.5 million two-year revolving credit facility, which was terminated on September 27, 2000, and a $177.5 million 364-day revolving credit facility, which was terminated immediately prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is a $100 million three-year revolving credit facility, referred to as the Three-Year Facility. The other new facility is a $250 million 364-day revolving credit facility convertible into a two-year term loan, referred to as the 364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The 364-Day Facility will terminate on September 28, 2001, at which time the 364-Day Facility may be converted to a two-year term loan with a maturity date of September 29, 2003, or, at the request of Cadence and with the consent of members of the bank group that wish to do so, the termination date of the 364-Day Facility may be extended for one additional 364-day period with respect to the portion of the 364-Day Facility that a consenting bank holds. For both of the 2000 Facilities, 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 (i) the Federal Funds Rate plus 0.50% or (ii) the prime rate. As a result, Cadence’s interest expenses associated with this borrowing will vary with market rates. In addition, commitment fees are payable on the unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based on a pricing grid tied to a financial covenant and on the unused portion of the 364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow under the 364-Day Facility at any time that any portion of the Three-Year Facility remains unused. The 2000 Facilities contain certain financial and other covenants. At June 30, 2001, there were no borrowings outstanding under the 2000 Facilities.

The table below presents the carrying value and related weighted average interest rates for Cadence’s interest bearing instruments. 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 long-term investments. As of June 30, 2001, all of Cadence’s

In October 1998, 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. As of June 30, 2001, the notional amount payable was $4.3 million that will be amortized in quarterly installments of approximately $2.2 million through October 2001. The estimated fair value at June 30, 2001 was negligible.

Cadence’s operations include transactions in foreign currencies and, as such, Cadence benefits from a weaker dollar and is adversely affected 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.

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 June 30, 2001 about Cadence’s forward contracts. As of June 30, 2001, there were no put options outstanding. 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 September 13, 2001.

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 consolidated results of operations and financial position during the quarter ended June 30, 2001. The realized gain (loss) on the forward contracts as they matured was not material to the consolidated operations of Cadence.

Cadence repurchases shares of its common stock under its stock repurchase program. Repurchased shares will be used for general corporate purposes including the share issuance requirements of Cadence’s employee stock option and purchase plans and acquisitions. As part of these repurchase programs, Cadence has purchased and will purchase call options or has sold and will sell put warrants. The put warrants, if exercised and settled by physical delivery of shares, 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 has the option to elect “net share settlement”, rather than physical settlement, of put warrants that are exercised; that is, Cadence has the right to settle the exercised 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. These transactions may result in sales of a large 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.


	•	Depending on the exercise price of the put warrants and the market price of Cadence common stock at the time of exercise, “net share 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 as of June 30, 2001 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 2002 and Cadence has the contractual ability to settle the options prior to their maturity.

From time to time Cadence is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, 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 anti-competitive 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. On May 15, 2001, the Ninth Circuit heard oral arguments by both parties on their appeals from the District Court’s order. On June 11, 2001, the Ninth Circuit certified a question of California law to the California Supreme Court. The Ninth Circuit’s request has not yet been accepted or rejected by the California Supreme Court. The trial date has been vacated pending a decision on the appeal.

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 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 Court also granted summary judgment to Aptix denying Quickturn’s abuse of process counterclaim, and Quickturn filed an appeal brief on June 30, 2000. On September 8, 2000 the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement to Quickturn of the attorneys’ fees and costs it incurred in the litigation. Aptix has appealed the District’s Court’s judgment and, in the meantime, has agreed to post a $2 million bond to secure the judgment. The U.S. Court of Appeals for the Federal Circuit heard oral arguments on June 7, 2001 on Aptix and Meta’s appeal of the sanctions and claim construction and on Quickturn’s appeal of the denial of its abuse of process counterclaim. On June 8, 2001, the Federal Circuit affirmed the District Court’s dismissal of Quickturn’s abuse of process counterclaim. Aptix’s appeal is under submission.

On January 7, 1999, in the suit captioned Mentor Graphics Corporation, et. al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action No. 16843-NC (“Mentor v. Lobo”), 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 Mentor v. Lobo 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, Quickturn and the individual defendants have opposed Mentor’s request. A hearing on the matter was held on February 2, 2001. The court has taken the matter under submission.

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. On September 18, 2000 the District Court granted Cadence’s Motion to Dismiss Plaintiffs’ Claims with leave to amend. To date, no amended complaint has been filed. Should an amended complaint be filed, Cadence and the individual defendants intend to continue their vigorous defense of the allegations.

In early 1999, Cadence entered into negotiations with Intelect Communications, Inc., and Intelect’s wholly-owned subsidiary, DNA Enterprises, Inc., with respect to a potential purchase of substantially all the assets of DNA. The transaction was not consummated and, in July 1999, Intelect and DNA filed suit against Cadence in a Texas state court alleging breach of contract, fraud, negligent misrepresentation and breach of fiduciary duty, seeking unspecified compensatory and punitive damages. Cadence has answered, denying liability, and discovery has concluded. In February 2001, Cadence filed a motion for partial summary judgment. The Court has taken the motion under submission but has not yet issued a ruling. A trial date has been scheduled for October 1, 2001. Cadence believes that it has defenses to, and it disputes, the allegations made by Intelect and DNA, including the allegation that a purchase contract was entered into, and intends to defend the action vigorously.

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™ 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 MERCURYPLUS™ 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. Cadence’s Motion to Dismiss plaintiffs’ claims was denied. Discovery is continuing. The defendants believe the complaint is without merit and intend to continue their vigorous defense of the allegations.

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 WHA. 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 September 11, 2000, Mentor filed a complaint against Quickturn and Cadence in the U.S. District Court for the Northern District of California (Case No. C-00-03291) accusing Quickturn and Cadence of infringing U.S. Patent No. 5,574,388, purportedly owned by Mentor and seeking unspecified damages and injunctive relief. Quickturn and Cadence believe the complaint filed by Mentor is without substance and that the patent that is the subject of this suit in invalid and not infringed. Cadence and Quickturn are vigorously defending the claim. On November 3, 2000, Mentor filed a motion for preliminary injunction, asking the Court to prohibit the sale of Quickturn’s MERCURYPLUS emulation systems prior to trial of this action. The hearing on that motion was held on April 17, 2001. The Court took the matter under submission. The parties have agreed to consolidate this action with Civil Action Nos. C99-5464 and C 00-01030 WHA, described above, for purposes of discovery and pre-trial motions. A trial date of October 7, 2002 has been set for all three actions.

On November 2, 2000, Mentor and Meta filed a complaint for declaratory judgment against Quickturn and Cadence in the U.S. District Court for the District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor’s proposed design verification approach (in which chip designers would use U.S.-based computer terminals to operate SimExpress emulation systems located overseas) will not infringe Quickturn’s patents and will not violate the permanent injunction entered by the Oregon District Court on July 7, 1999 in Civil Action No. C-96-00342. On January 5, 2001, Quickturn and Cadence answered the complaint. In their answer, Quickturn and Cadence denied Mentor and Meta’s contention, and asserted that Mentor and Meta’s complaint lacks subject matter jurisdiction and is barred by res judicata and collateral estoppel. In January 2001, Quickturn and Cadence filed a Motion to Dismiss the action, based on lack of subject matter jurisdiction. On May 1, 2001, the Court provisionally granted Quickturn’s motion to dismiss.

On November 22, 2000, a former design services customer, Uniden Corporation, filed an action for fraud, negligent misrepresentation and breach of contract in the State Court of Texas against Cadence and other corporate defendants. Uniden seeks compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of approximately $1 million for design services rendered

to Uniden. Cadence since has filed a counterclaim to recover the approximate $1 million owed for services rendered. The parties agreed to dismiss voluntarily the actions pending in the State Court of Texas and to re-file in the State Court of California, County of Orange. Uniden refilled its Complaint on July 2, 2001 in Orange County, California. Cadence intends to file its answer and counterclaim on or before September 11, 2001.

On December 28, 2000, a former design services customer, Scanz Communications, filed an action for fraud, breach of contract, negligence, intentional interference with prospective advantage, negligent interference with prospective advantage, negligent misrepresentation and unfair business practices in the Los Angeles Superior Court of California against Cadence and Tality. Scanz seeks compensatory and punitive damages in an unspecified amount. The suit was filed after Cadence demanded payment of $4,657,556.17 for design services rendered to Scanz. Cadence demurred to Scanz’ complaint. Cadence’s demurrer was sustained on all causes of actions. Accordingly, Scanz’s complaint was dismissed on March 13, 2001, with leave to amend. Cadence and Tality filed a Complaint against Scanz in April 2001 for recovery of the $4,657,556.17 owed. Scanz filed its First Amended Complaint on April 2, 2001, to which Cadence demurred on May 7, 2001. Cadence filed a cross-complaint against Scanz on May 8, 2001. On June 25, 2001, Cadence’s demurrers to the first amended complaint were sustained in part. On July 10, 2001 Scanz filed a second amended complaint.

On June 2, 2001 Cadence filed a cross-complaint against Scanz alleging breach of contract and unjust enrichment, and seeking declaratory relief. On July 12, 2001, Scanz filed an answer to Cadence’s cross-complaint denying all allegations. Cadence intends to vigorously defend the claims alleged by Scanz.

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. However, were an unfavorable ruling to occur in any specific period, there exists the possibility of a material adverse impact on the result of operations.

During the quarter ended June 30, 2001, 272,297 shares of common stock were issued by Cadence in connection with one of Cadence’s acquisitions pursuant to an exemption under Regulation S under the Securities Act of 1933, as amended.

At the Annual Meeting of Stockholders held on May 16, 2001, 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.

2. A proposal to approve the Amended and Restated Senior Executive Bonus Plan was approved by a vote of 220,789,910 for, 4,743,608 opposed, and 287,719 withheld.

3. A proposal for the ratification of the selection of Arthur Andersen LLP as independent public accountants for the fiscal year ending December 29, 2001 was approved by a vote of 221,634,239 for, 4,136,224 opposed, and 50,774 withheld.

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.

DATE: August 13, 2001


	By:	/s/ H. Raymond Bingham



	H. Raymond Bingham
	President, Chief Executive Officer, and Director

DATE: August 13, 2001


	By:	/s/ William Porter



	William Porter
	Senior Vice President
	and Chief Financial Officer

49 EX-2.17 3 f74874ex2-17.txt EXHIBIT 2.17 1 EXHIBIT 2.17 GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT BY AND BETWEEN TALITY, LP AND NEW TALITY CORPORATION DATED AS OF JUNE 2, 2001 2 EXHIBIT 2.17 TABLE OF CONTENTS

i 3 EXHIBIT 2.17 GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT THIS GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Agreement") is entered into and effective as of June 2, 2001 by and between Tality, LP, a Delaware limited partnership (the "Partnership"), and New Tality Corporation, a Delaware corporation ("New Tality"). Capitalized terms used herein and not defined elsewhere herein shall have the meanings ascribed to them in Article I. RECITALS WHEREAS, New Tality is a newly formed corporation, with no assets or liabilities as of the date hereof; and WHEREAS, the Board of Directors of New Tality and the partners of the Partnership have each determined that it would be appropriate and desirable for the Partnership to transfer (or cause to be transferred) to New Tality, and for New Tality to receive and assume certain assets and liabilities in exchange for 100% of the stock of New Tality, on the terms and subject to the conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1 "Action" means any demand, action, suit, counter suit, arbitration, inquiry, audit, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal. 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 "Assets" means assets, properties and rights (including goodwill), wherever located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person, including the following: (i) all accounting and other books, records and files whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other form; (ii) all apparatus, computers and other electronic data processing equipment, automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property; 1 4 (iii) all inventories, parts, raw materials, supplies, work-in-process and finished goods and products; (iv) all interests in real property of whatever nature, including easements, whether as owner, mortgagee or holder of a Security Interest, lessor, sublessor, lessee, sublessee or otherwise; (v) all bonds, notes, debentures or other securities issued by any Subsidiary or any other Person; all loans, advances or other extensions of credit or capital contributions to any Subsidiary or any other Person; and all other investments in securities of any Person; (vi) all license agreements, leases of personal property, open purchase orders for raw materials, supplies, parts or services, unfilled orders for the manufacture and sale of products and other contracts, agreements or commitments; (vii) all deposits, letters of credit and performance and surety bonds; (viii) all written technical information, data, specifications, research and development information, engineering drawings, operating and maintenance manuals, and materials and analyses prepared by consultants and other third parties; (ix) all Intellectual Property and licenses from third Persons granting the right to use any Intellectual Property; (x) all computer applications, programs and other software, including operating software, network software, firmware, middleware, design software, design tools, systems documentation and instructions; (xi) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, quality records and reports and other books, records, studies, surveys, reports, plans and documents; (xii) all prepaid expenses, trade accounts and other accounts and notes receivables; (xiii) all rights under contracts or agreements, all claims or rights against any Person arising from the ownership of any Asset, all rights in connection with any bids or offers and all claims, choses in action or similar rights, whether accrued or contingent; (xiv) all rights under Insurance Policies and all rights in the nature of insurance, indemnification or contribution; 2 5 (xv) all licenses, permits, approvals and authorizations which have been issued by any Governmental Authority; (xvi) cash or cash equivalents, bank accounts, lock boxes and other deposit arrangements; and (xvii) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements. Section 1.4 "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 1.5 "Excluded Assets" means: (i) All equity interests in Subsidiaries of Tality, LP not incorporated in the United States. (ii) All receivables and loans owed to Tality, LP by all Subsidiaries; and (ii) cash held by the Partnership up to an aggregate amount of $8,266,194. Section 1.6 "Excluded Liabilities" means: (i) Any liabilities, solely relating to, arising out of or resulting from the Excluded Assets; and [(ii) all Insured Partnership Liabilities.] Section 1.7 "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 1.8 "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, 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 1.9 "Insurance Policies" means insurance policies pursuant to which a Person makes a true risk transfer to an insurer. 3 6 Section 1.10 "Insurance Proceeds" means those monies: (i) received by an insured from an insurance carrier; or (ii) paid by an insurance carrier on behalf of the insured; from Insurance Policies. Section 1.11 "Insured Partnership Liabilities" means any Partnership Liability to the extent that it is covered under the terms of Cadence Design Systems, Inc.'s ("Cadence") Insurance Policies in effect prior to the date hereof for which Partnership or any of its Subsidiaries are a named insured under, or otherwise entitled to the benefits of, such Insurance Policies. Section 1.12 "Intellectual Property" means all domestic and foreign patents and patent applications, together with any continuations, continuations-in-part or divisional applications thereof, and all patents issuing thereon (including reissues, renewals and re-examinations of the foregoing); design patents, invention disclosures; mask works; copyrights, and copyright applications and registrations; Web addresses, trademarks, service marks, trade names, and trade dress, in each case together with any applications and registrations therefor and all appurtenant goodwill relating thereto; trade secrets, commercial and technical information, know-how, proprietary or confidential information, including engineering, production and other designs, notebooks, processes, drawings, specifications, formulae, and technology; computer and electronic data processing programs and software (object and source code), data bases and documentation thereof; inventions (whether patented or not); registered designs, certificates of invention and all other intellectual property under the laws of any country throughout the world. Section 1.13 "Liabilities" means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including whether arising out of any Contract or tort based on negligence or strict liability) and whether or not the same would be required by U.S. GAAP to be reflected in financial statements or disclosed in the notes thereto. Section 1.14 "Partnership Assets" means (without duplication) the following Assets (other than those Assets constituting Excluded Assets): (i) all Assets reflected on the Partnership Balance Sheet, subject to any dispositions of such Assets after the date of the Partnership Balance Sheet; (ii) all Assets that have been written off, expensed or fully depreciated that, had they not been written off, expensed or fully depreciated, would have been reflected on the Partnership Balance Sheet in accordance with the principles and accounting policies under which the Partnership Balance Sheet was prepared; (iii) all Assets acquired by the Partnership after the date of the Partnership Balance Sheet that would be reflected on the consolidated balance sheet date hereof if such consolidated balance sheet was prepared using the same 4 7 principles and accounting policies under which the Partnership Balance Sheet was prepared. (iv) all Assets that are used solely by the Partnership Business as of the date hereof but are not reflected on the Partnership Balance Sheet due to mistake or omission (as determined by Partnership in its sole and absolute discretion); (v) all Partnership Special Gains; (vi) all Partnership Contracts; and (vii) to the extent permitted by Applicable Law, all rights of the Partnership under any of Cadence's Insurance Policies or Partnerships' Insurance Policies. Section 1.15 "Partnership Balance Sheet" means the consolidated balance sheet (including the notes thereto) of the Partnership Business as of June 2, 2001. Section 1.16 "Partnership Business" means business of providing design engineering services, and intellectual property in connection therewith, to electronic equipment manufacturers and other customers in the United States. Section 1.17 "Partnership Contingent Liability" means any Liability, other than Liabilities for Taxes, of the Partnership that is reflected on, or, were it not for the reasons noted in clause (ii) below, would have been reflected on, the Partnership Balance Sheet, whenever arising, to any Person other the Partnership, if and to the extent that (i) such Liability arises out of the events, acts or omissions occurring before the date hereof and (ii) the existence or scope of the obligation the Partnership as of the date hereof with respect to such Liability was not acknowledged, fixed or determined in any material respect, due to a dispute or other uncertainty as of the date hereof or as a result of the failure of such Liability to have been discovered or asserted as of the date hereof (it being understood that the existence of a litigation or other reserve with respect to any Liability shall not be sufficient for such Liability to be considered acknowledged, fixed or determined); provided, however, that the only Liabilities relating to, arising out of or resulting from litigation matters pending on the date hereof that shall constitute Partnership Contingent Liabilities are Liabilities relating to, arising out of or resulting from the matters identified on Schedule 1.17. In the case of any Liability a portion of which arises out of events, acts or omissions occurring prior to the date hereof and a portion of which arises out of events, acts or omissions occurring on or after the date hereof, only that portion that arises out of events, acts or omissions occurring prior to the date hereof shall be considered a Partnership Contingent Liability. For purposes of the foregoing, a Liability shall be deemed to have arisen out of events, acts or omissions occurring prior to the date hereof if all the elements necessary for the assertion of a claim with respect to such Liability shall have occurred on or prior to the date hereof, such that the claim, were it asserted in an Action on or prior to the date hereof, would not be dismissed by a court on ripeness or similar grounds. For purposes of clarifying the foregoing, the parties agree that no Liability relating to, arising out of or resulting from any obligation of any Person to perform the executory portion of any contract or agreement existing as of the date 5 8 hereof, or to satisfy any obligation accrued under any Employee Benefits Plan as of the date hereof, shall be deemed to be a Partnership Contingent Liability. Section 1.18 "Partnership Contracts" means the following contracts and agreements to which Partnership is a party or by which it or any of its Assets is bound, whether or not in writing, except for any such contract or agreement that is contemplated to be retained by Partnership pursuant to this Agreement: (i) any contract or agreement reflected on the Partnership Balance Sheet, including without limitation, the Specified Separation Agreements; (ii) any contract or agreement entered into after October 4, 2000 and designated by the Partnership (subject to the consent of New Tality, which shall not be unreasonably withheld) as a Partnership Contract; (iii) any contract or agreement that is otherwise expressly contemplated pursuant to this Agreement to be assigned to the Partnership; and (iv) any contract or agreement set forth on Schedule 1.18(iv). Section 1.19 "Partnership Liabilities" means (without duplication) the following Liabilities (other than those Liabilities constituting Excluded Liabilities): (i) all Liabilities reflected on the Tality Balance Sheet, subject to any discharge of such Liabilities subsequent to the date of the Tality Balance Sheet; (ii) all Liabilities of the Partnership that arise after the date of the Tality Balance Sheet that would be reflected on the consolidated balance sheet of Tality as of the date hereof if such consolidated balance sheet was prepared using the same principles and accounting policies under which the Tality Balance Sheet was prepared; (iii) all Liabilities that are related solely to the Partnership Business on the date hereof but are not reflected on the Partnership Balance Sheet due to mistake or unintentional omission (as determined by the Partnership in its sole and absolute discretion); (iv) all Partnership Contingent Liabilities; (v) all Liabilities (other than Liabilities for Taxes), whether arising before, on or after the date hereof, solely relating to, arising out of or resulting from: (1) the operation of the Partnership Business, as conducted at any time prior to, on or after the date hereof (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person's authority)); 6 9 (2) the operation of any business conducted by any member of the Partnership at any time after the date hereof (including any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative (whether or not such act or failure to act is or was within such Person's authority)); or (3) any Partnership Assets; and (vi) all Liabilities that are expressly contemplated by this Agreement or Schedule 1.19(vii), as Liabilities to be assumed by New Tality. Section 1.20 "Partnership Special Gain" means any claim or other right of the Partnership that is reflected on, or, were it not for the reasons noted in clause (ii) below, would have been reflected on, the Partnership Balance Sheet, whenever arising, against any Person other than the Partnership, if and to the extent that (i) such claim or right arises out of the events, acts or omissions occurring before the date hereof (based on then existing law) and (ii) the existence or scope of the obligation of such other Person as of the date hereof was not acknowledged, fixed or determined in any material respect, due to a dispute or other uncertainty as of the date hereof or as a result of the failure of such claim or other right to have been discovered or asserted as of the date hereof. A claim or right meeting the foregoing definition shall be considered a Partnership Special Gain regardless of whether there was any Action pending, threatened or contemplated as of the date hereof with respect thereto. In the case of any claim or right a portion of which arises out of events, acts or omissions occurring prior to the date hereof and a portion of which arises out of events, acts or omissions occurring on or after the date hereof, only that portion that arises out of events, acts or omissions occurring prior to the date hereof shall be considered a Partnership Special Gain. For purposes of the foregoing, a claim or right shall be deemed to have accrued as of the date hereof if all the elements of the claim necessary for its assertion shall have occurred on or prior to the date hereof, such that the claim or right, were it asserted in an Action on or prior to the date hereof, would not be dismissed by a court on ripeness or similar grounds. Notwithstanding the foregoing, none of (i) any Insurance Proceeds, (ii) any Excluded Assets, (iii) any reversal of any litigation or other reserve, and (iv) any matters relating to Taxes shall be deemed to be a Partnership Special Gain. Section 1.21 "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 1.22 "Security Interest" means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. Section 1.23 "Specified Separation Agreements " means the following agreements dated as of October 4, 2000 by and among Cadence, Cadence Holdings, Inc., the Partnership, and Tality Corporation (except items (viii) and (xii), to which the parties were Cadence and the Partnership), as amended: 7 10 (i) Amended and Restated Master Separation Agreement (the "Separation Agreement"); (ii) General Assignment and Assumption Agreement; (iii) Real Estate Matters Agreement; (iv) Master Confidentiality Agreement; (v) Indemnity and Insurance Matters Agreement; (vi) Master Intellectual Property Agreement; (vii) Employee Matters Agreement; (viii) Loaned Employee Agreement; (ix) Master Corporate Services Agreement; (x) Joint Sales Agreement; (xi) Joint Technology Development and Support Agreement; and (xii) EDA Tools Agreement. Section 1.24 "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. Section 1.25 "Taxes" means any foreign or U.S. federal, state, local or municipal income, alternative or add-on minimum, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, value added or any other tax, custom, tariff, impost, levy, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount related thereto, imposed by any governmental authority or any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or other imposition of the foregoing. ARTICLE II CONTRIBUTION AND ASSUMPTION; NEW TALITY STOCK Section 2.1 Contribution of Assets and Assumption of Liabilities. 8 11 (a) Contribution of Assets. Partnership hereby assigns, transfers, conveys and delivers to New Tality, and New Tality hereby accepts from the Partnership, Partnership's respective right, title and interest in and to the Partnership Assets other than the Excluded Assets. (b) Assumption of Liabilities. New Tality hereby assumes and agrees faithfully to perform and fulfill, all the Partnership Liabilities, other than the Excluded Liabilities, in accordance with their respective terms. Thereafter, New Tality shall be responsible for all Partnership Liabilities, regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to, on or after the date hereof, regardless of where or against whom such Liabilities are asserted or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of law, fraud or misrepresentation by any member of the Partnership. Section 2.2 Methods of Transfer and Assumption. (a) General. It is the intent of the parties hereto that pursuant to Section 2.1 the transfer and assumption of all other Partnership Assets and Partnership Liabilities shall be made effective as of the date hereof. (b) Mistaken Allocations. In addition to those transfers and assumptions accurately identified and designated by the parties to take place but which the parties are not able to effect prior to the date hereof, there may exist (i) Assets that the parties discover were, contrary to this Agreement, by mistake or omission, transferred or not transferred, as the case may be, to New Tality or (ii) Liabilities that the parties discover were, contrary to this Agreement, by mistake or omission, assumed or not assumed, as the case may be, by New Tality. The parties hereto shall cooperate in good faith to effect the transfer or re-transfer of such Assets, and/or the assumption or re-assumption of such Liabilities, to or by the appropriate party with respect to the Assets to be transferred to or Liabilities to be assumed by New Tality. Prior to any such transfer, the Person receiving or possessing such Asset shall hold such Asset in trust for the other Person. Each party shall reimburse the other or make other financial adjustments (including cash reserves) or other adjustments to remedy any mistakes or omissions relating to any of the Assets transferred hereby or any of the Liabilities assumed hereby. (c) Documents Relating to Transfers of Assets and Assumption of Liabilities. In furtherance of the assignment, transfer and conveyance of the Partnership Assets and the assumption of Partnership Liabilities set forth in Sections 2.2(a) and (b), simultaneously with the execution and delivery hereof or as promptly as practicable thereafter, (i) Partnership shall execute and deliver, and shall cause their respective Subsidiaries to execute and deliver, such bills of sale, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of the Partnership's right, title and interest in and to the Partnership Assets to New Tality effected by this Agreement; and (ii) New Tality execute and deliver such assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Partnership Liabilities by New Tality effected by this Agreement. 9 12 Section 2.3 Novation of Assumed Partnership Liabilities. (a) Reasonable Commercial Efforts. Each of the parties shall use all commercially reasonable efforts to obtain, or to cause to be obtained, any consent, substitution, approval or amendment required to novate (including with respect to any federal government contract) or assign all rights and obligations under agreements, leases, licenses and other obligations or Liabilities of any nature whatsoever that constitute Partnership Liabilities or to obtain in writing the unconditional release of all parties to such arrangements so that, in any such case, New Tality shall be solely responsible for such Liabilities; provided, however, that neither of the parties shall be obligated to pay any consideration therefor to any third party from whom such consents, approvals, substitutions and amendments are requested. (b) Inability to Obtain Novation. If the parties are unable to obtain, or to cause to be obtained, any such required consent, approval, release, substitution or amendment, the Partnership shall continue to be bound by such agreements, leases, licenses and other obligations and, unless prohibited by law or the terms thereof (except to the extent expressly set forth in this Agreement), New Tality shall, pay, perform and discharge fully, or cause to be paid, transferred or discharged all the obligations or other Liabilities of the Partnership, thereunder from and after the date hereof. Partnership shall, without further consideration, pay and remit, or cause to be paid or remitted, to New Tality promptly all money, rights and other consideration received by it in respect of such performance (unless any such consideration is an Excluded Asset). If and when any such consent, approval, release, substitution or amendment shall be obtained or such agreement, lease, license or other rights or obligations shall otherwise become assignable or able to be novated, Partnership shall thereafter assign, or cause to be assigned, all its rights, obligations and other Liabilities thereunder to the New Tality without payment of further consideration and the New Tality shall, without the payment of any further consideration, assume such rights and obligations. Section 2.4 Issuance and Transfer of New Tality Stock. In consideration for the assignment and assumption of the Partnership Assets and Partnership Liabilities subject to the terms and conditions of this Agreement, New Tality shall issue and transfer all of its authorized capital stock to Tality, LP. ARTICLE III LITIGATION Section 3.1 Allocation. (a) Litigation to Be Transferred to New Tality. The responsibilities for management of the litigation identified on Schedule 3.1(a) (the "Litigation Schedule"), are hereby transferred in their entirety from the Partnership to New Tality. From and after the date hereof , New Tality shall manage the defense of such litigation. The Partnership must first obtain the prior consent of New Tality for any action taken subsequent to the date hereof in connection with the litigation identified in the Litigation Schedule, which consent cannot be unreasonably withheld or delayed. All other matters relating to such litigation, including any 10 13 indemnification for such claims, shall be governed by the provisions of the Indemnification and Insurance Matters Agreement. (b) Litigation to Be Defended by the Partnership at New Tality's Expense. Partnership shall defend, and shall cause its applicable Subsidiaries to defend, the litigation identified in the Litigation Schedule that is not delivered by the Partnership to New Tality on the date hereof. All other matters relating to such litigation, including indemnification for such claims, shall be governed by the provisions of the Indemnification and Insurance Matters Agreement. Section 3.2 Cooperation. The parties and their respective Subsidiaries shall cooperate with each other in the defense of any litigation covered under this Article III and afford to each other reasonable access upon reasonable advance notice to witnesses and Information (other than Information protected from disclosure by applicable privileges) that is reasonably required to defend this litigation. The foregoing agreement to cooperate includes an obligation to provide access to qualified assistance to provide information, witnesses and documents to respond to discovery requests in specific lawsuits. In such cases, cooperation shall be timely so that the party responding to discovery may meet all court-imposed deadlines. The party requesting information shall reimburse the party providing information consistent with the terms of Section 4.2 of the Separation Agreement. The obligations set forth in this paragraph are more clearly defined in Section 4.2 of the Separation Agreement. ARTICLE IV MISCELLANEOUS Section 4.1 Incorporation by Reference. Sections 4.4 and 4.7 and all of the provisions of Article V of the Separation Agreement (except for Sections 5.13 and 5.15 thereof) are incorporated into and made a part of this Agreement, as if fully set forth herein. Section 4.2 Conflicting Agreements. In the event of any irreconcilable conflict between this Agreement and the Separation Agreement, any other Ancillary Agreement (as defined in the Separation Agreement) or other agreement executed in connection herewith or therewith, the provisions of such other agreement shall prevail to the extent that they specifically address the subject matter of the conflict. 11 14 WHEREFORE, the parties have executed and delivered this Agreement effective as of the date first set forth above. NEW TALITY CORPORATION TALITY, LP By: /s/ Robert P. Wiederhold By: TALITY CORPORATION, Name: Robert P. Wiederhold AS GENERAL PARTNER Title: President and Chief Executive By: /s/ Duane W. Bell Officer Name: Duane W. Bell Title: Senior Vice President, Chief Financial Officer 12 EX-2.18 4 f74874ex2-18.txt EXHIBIT 2.18 1 EXHIBIT 2.18 MASTER AMENDMENT AND CONSENT THIS MASTER AMENDMENT AND CONSENT (this "Amendment") is entered into and effective as of June 2, 2001 by and among Tality, LP, a Delaware limited partnership (the "Partnership"), Tality Transition Corporation, a Delaware corporation ("Tality"), Tality Corporation, a Delaware corporation ("New Tality"), Cadence Design Systems, Inc. ("Cadence") and Cadence Holdings, Inc. ("Holdings"). Capitalized terms used herein and not defined elsewhere herein shall have the meanings ascribed to them in the Amended and Restated Master Separation Agreement. WHEREAS, New Tality is acquiring certain assets and liabilities from Partnership, including rights pursuant to agreements to which Partnership is a party as reflected in that certain Assignment and Assumption Agreement dated as of the date hereof (the "Transactions"); and WHEREAS, the parties hereto desire to amend certain agreements for the purpose of making New Tality a party to such agreements subject to the terms and conditions thereof, and to consent to the Transactions. NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows: Section 1 Separation/Intercompany Agreements. The parties hereby amend the following agreements dated as of October 4, 2000 by and among Cadence, Cadence Holdings, Inc., the Partnership, and Tality Corporation (except items (viii) and (xii), to which the parties were Cadence and the Partnership), as amended, such that New Tality shall be added as a party to such agreements, with the effect that New Tality shall have such rights and obligations as those pertaining to Tality, LP as such rights and obligations relate to the operation of the U.S. business and the ownership of the assets and liabilities of the Partnership related to such business: (i) Amended and Restated Master Separation Agreement (the "Separation Agreement"); (ii) General Assignment and Assumption Agreement; (iii) Real Estate Matters Agreement; (iv) Master Confidentiality Agreement; (v) Indemnity and Insurance Matters Agreement; (vi) Master Intellectual Property Agreement; (vii) Employee Matters Agreement; (viii) Loaned Employee Agreement; (ix) Master Corporate Services Agreement; 2 (x) Joint Sales Agreement; (xi) Joint Technology Development and Support Agreement; and (xii) EDA Tools Agreement. Section 2 Consent to Transactions, Cooperation. Cadence, Tality, and Holdings hereby consent to the Transactions as contemplated in the Assignment and Assumption Agreement. In furtherance of the Transactions, simultaneously with the execution and delivery hereof or as promptly as practicable thereafter as necessary, the parties, as applicable, shall deliver, and shall cause their respective subsidiaries to execute and deliver, such bills of sale, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment contemplated by the Transactions. Section 3 Incorporation by Reference. Sections 4.4 and 4.7 and all of the provisions of Article V of the Separation Agreement (except for Sections 5.13 and 5.15 thereof) are incorporated into and made a part of this Agreement, as if fully set forth herein. 3 WHEREFORE, the parties have executed and delivered this Amendment and Consent effective as of the date first set forth above. CADENCE DESIGN SYSTEMS, INC. CADENCE HOLDINGS, INC. By: R. L. Smith McKeithen By: R. L. Smith McKeithen Name: R. L. Smith McKeithen Name: R. L. Smith McKeithen Title: Senior Vice President and Title: Secretary General Counsel TALITY CORPORATION TALITY, LP By: /s/ Robert P. Wiederhold By: TALITY TRANSITION CORPORATION, Name: Robert P. Wiederhold AS GENERAL PARTNER Title: President and Chief Executive By: /s/ Duane W. Bell Officer Name: Duane W. Bell Title: Senior Vice President, Chief Financial Officer TALITY TRANSITION CORPORATION By: /s/Robert P. Wiederhold Name: Robert P. Wiederhold Title: President and Chief Executive Officer EX-10.50 5 f74874ex10-50.txt EXHIBIT 10.50 1 EXHIBIT 10.50 TALITY HOLDINGS, INC. 2000 EQUITY INCENTIVE PLAN AMENDED AND RESTATED AS OF JULY 26, 2001 1. PURPOSES. (a) AVAILABLE STOCK AWARDS. This Tality Holdings, Inc. 2000 Equity Incentive Plan (the "Plan") represents the amendment and restatement of the Tality Corporation 2000 Equity Incentive Plan (the "Former Plan") which, together with all options outstanding thereunder, is being assumed by Tality Holdings, Inc., a Delaware corporation (the "Company") in accordance with the provisions of Section 11 of the Former Plan, as a result of the restructuring of Tality Corporation and its affiliates ("Tality") pursuant to a series of transactions whereby the assets and liabilities of Tality have been assumed, directly or indirectly, by the Company. The purpose of the Plan is to provide a means by which eligible participants may be given an opportunity to benefit from increases in value of the Common Stock of the Company and through the granting of the following Stock Awards: (i) statutory stock options, (ii) non-statutory stock options, (iii) stock appreciation rights and (iv) restricted stock awards. (b) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. CERTAIN DEFINITIONS. (a) "ADMINISTRATOR" means the Committee, and if no Committee is appointed, the Board. (b) "AFFILIATE" means any entity approved by the Board in which the Company holds an ownership interest (by value or voting rights) of at least 50%, or any other entity approved by the Board which has an ownership interest (by value or voting rights) of at least 30% in the Company (a "Parent"), or any other entity approved by the Board in which a Parent has an ownership interest (by value or voting rights) of at least 50%; provided that with respect to any ISO, the term Affiliate shall mean any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (c) "BOARD" means the Board of Directors of the Company. (d) "CALIFORNIA COMMISSIONER" means the Commissioner of Corporations of the State of California. 1 2 (e) "CALIFORNIA REGULATED PLAN" means this Plan at any time that Awards and securities underlying Awards are California Regulated Securities and the Company relies upon the exemption provided by Section 25102(c) of the California Securities Law (or another exemption imposing comparable requirements) to exempt the issuance of securities under this Plan from qualification under the California Securities Law. (f) "CALIFORNIA REGULATED SECURITIES" means Awards and securities underlying Awards that are subject to the California Securities Law or the California Securities Rules. (g) "CALIFORNIA SECURITIES LAW" means the California Corporate Securities Law of 1968, as amended. (h) "CALIFORNIA SECURITIES RULES" means the Rules of the California Commissioner adopted under the California Securities Law. (i) "CODE" means the Internal Revenue Code of 1986, as amended. (j) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (k) "COMMON STOCK" means the Class A Common Stock of the Company. (l) "COMPANY" means Tality Holdings, Inc., a Delaware corporation and the successor in interest to Tality Corporation, a Delaware corporation. (m) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services. However, the term "Consultant" shall not include Directors or members of the Board of Directors of an Affiliate. (n) "CONTINUOUS SERVICE" shall mean the absence of any interruption or termination of service to the Company or an Affiliate, whether as an Employee, Director or Consultant. The Board or the Chief Executive Officer of the Company may determine, in that party's sole discretion, whether Continuous Service shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the Chief Executive Officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. (o) "COVERED PARTICIPANT" means a Participant who is (or, in the judgment of the Administrator, could reasonably be expected to become) a "covered employee" defined in Section 162(m)(3) of the Code. (p) "DIRECTOR" means a member of the Board of Directors of the Company. (q) "EMPLOYEE" means any officer or employee of the Company or an Affiliate. (r) "EMPLOYER" means the Company and any other Affiliate that has adopted the Plan 2 3 with the Company's permission. (s) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (t) "FAIR MARKET VALUE" means, as of any date, the average of the high and low prices of the Common Stock, as reported on the NASDAQ National Market on such date, or if such date is not a date on which the Common Stock is traded, the first preceding trading date. In the absence of such market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board; provided, however, that when appropriate, the Board in determining Fair Market Value of the Common Stock shall consider such factors as may be required by the California Securities Law and the California Securities Rules while this Plan is a California Regulated Plan, and may take into account such other factors as it may deem appropriate under the circumstances. (u) "INCENTIVE STOCK OPTION" OR "ISO" means a statutory stock option granted pursuant to the Plan that is intended to quality as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (v) "INITIAL PUBLIC OFFERING" means the effectiveness of a registration statement under the Securities Act covering any of the capital stock of the Company and the completion of a sale of such stock thereunder, if as a result of such sale (i) the issuer becomes a reporting company under Section 12(b) or 12(g) of the Exchange Act, and (ii) such stock is traded on the New York Stock Exchange or the American Stock Exchange, or is quoted on the Nasdaq Stock Market or is traded or quoted on any other national stock exchange or securities system. (w) "NON-QUALIFIED STOCK OPTION" OR "NQSO" means a stock option granted pursuant to the Plan not intended to qualify as an ISO. (x) "OFFICER" means any officer of the Company or an Affiliate. (y) "OPTION" means an ISO or NQSO. (z) "OPTION AGREEMENT" means a written agreement between an Employer and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (aa) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (bb) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. (cc) "PLAN" means this Tality Holdings, Inc. 2000 Equity Incentive Plan. (dd) "RESTRICTED STOCK AWARD" means a Stock Award as described in section 7(b) of the Plan. 3 4 (ee) "SECURITIES ACT" means the Securities Act of 1933, as amended. (ff) "SHARES" means shares of Common Stock. (gg) "STOCK APPRECIATION RIGHT" OR "SAR" means the right to receive an amount equal to the excess of the Fair Market Value of a Share of Common Stock (as determined on the date of exercise) over the exercise price of the related Stock Award. (hh) "STOCK AWARD" means any right granted under the Plan, including an Option, a SAR and a Restricted Stock Award. (ii) "STOCK AWARD AGREEMENT" means a written agreement between an Employer and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (jj) "TEN PERCENT OWNER" means a Participant who owns, directly or by reason of the applicable attribution rules of Code Section 424(d), more than 10% of the total combined voting power of all classes of capital stock of the Company or its parent or subsidiary corporations, if any, as defined in Code Sections 424(e) and (f). 3. ADMINISTRATION. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which Employees and/or Consultants shall be eligible to receive Stock Awards under the Plan; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a Stock Award shall become vested and/or free of any restrictions; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. The Board furthermore may delegate to one or more executive officers of the Company the authority to make Stock Awards to Participants who are not executive officers of the Company (as designated by the Company or otherwise covered as such under Rule 16b-3 of the Exchange Act ("Rule 16b-3")) ("Executive Officers") or Covered Participants. Awards made to the Executive Officers or Covered Participants shall be determined by the Board or the Committee. The Board shall also have the authority to establish subplans or other arrangements not inconsistent with the Plan which the Board deems necessary or advisable to comply with laws or requirements of foreign jurisdictions. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any 4 5 Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective; (iii) To amend the Plan or a Stock Award as provided in Section 14; and (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan. (c) DELEGATION TO COMMITTEE. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. For any Stock Award intended to qualify as "performance-based compensation "under Code Section 162(m) or as an exempt award under Rule 16b-3, the Committee shall consist of two or more "outside directors" as defined for purposes of applying Code Section 162(m), and two or more "non-employee directors" as defined in Rule 16b-3. (d) EFFECT OF ADMINISTRATOR'S DECISION. All determinations, interpretations and constructions made by the Administrator in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons. (e) INDEMNIFICATION OF COMMITTEE. In addition to such other rights of indemnification as they may have as directors or as members of the Committee or otherwise, the members of the Committee, and any executive officers to whom the Committee has delegated any of its rights and responsibilities, shall be indemnified by the Company against reasonable expenses incurred from their administration of the Plan, including, without limitation, related attorneys' fees actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, and against all reasonable amounts paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Employer. 4. SHARES SUBJECT TO THE PLAN. (a) SHARE RESERVE. Subject to the provisions of Section 13 relating to adjustments upon changes in Common Stock, and Sections 4(b) and 4(d) hereof, the number of shares of Common Stock with respect to which Stock Awards may be issued pursuant to the Plan shall not exceed in the aggregate 8,000,000 Shares. 5 6 (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the number of shares of Common Stock with respect to which the Stock Award was not exercised or settled shall revert to and again become available for issuance under the Plan. If the Company repurchases any unvested shares of Common Stock acquired pursuant to an Award, such repurchased shares of Common Stock shall revert to and again become available for issuance under the Plan. (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. (d) EVERGREEN. The number of Shares reserved under Section 4(a) shall be increased annually for four (4) years on each July 2, beginning on July 2, 2001 and ending on July 2, 2004, by 2,500,000 Shares per year. (e) ANNUAL LIMIT. No Participant under the Plan shall be issued Stock Awards, whether underlying Options or SARs, or as Restricted Stock Awards, for more than 5,000,000 Shares in any calendar year. (f) ISO LIMITS. Notwithstanding Sections 4(b) and 4(d), the maximum number of Shares that may be acquired by Participants hereunder pursuant to ISOs shall not exceed 10,000,000, subject to the provisions of Section 13 relating to adjustments upon changes in Common Stock. 5. ELIGIBILITY. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. The Board may grant Stock Awards only to Directors, Employees or Consultants as defined in Section 2 hereof. The Board may grant an additional Stock Award or Stock Awards to a Director, Employee or a Consultant who has been granted a Stock Award previously if he or she is otherwise eligible. However, only Employees of the Company or any parent corporation or subsidiary corporation (as those terms are defined in Code Section 424(e) and (f), respectively) shall be eligible to receive ISOs under the Plan. (b) CONSULTANTS. (i) A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (A) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (B) does not require registration under Rule 701 of the Securities Act, or any other applicable exemption, in order to comply with the requirements of the Securities Act (if applicable), and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. 6 7 (ii) Consultants shall not be eligible to receive ISOs under the Plan. (c) Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Stock Award (including approval of any Stock Award by the Board of Directors or Compensation Committee of the Company), and the Board may amend the Plan in any such respects, as may be required to satisfy the requirements of Rule 16b-3 under the Exchange Act, Code Section 162(m), or Code Section 422. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. Options may be granted by the Company or an Employer directly to a Participant, or may be granted to a Participant by an Affiliate by way of reassignment of options held by such Affiliate to purchase Shares of Common Stock of the Company. The provisions of separate Options need not be identical, but each Option shall state whether it is intended to be an ISO or NQSO, and shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. The Board shall determine the term of each Option, which shall not be greater than ten (10) years following the date granted, or five (5) years for an ISO granted to a Ten Percent Owner. No Stock Award shall be granted later than 10 years following the Effective Date (as defined in Section 16) of the Plan. (b) EXERCISE PRICE. The exercise price of each Option will be determined by the Board as of the date such Option is granted. The exercise price of each Option may be greater or lesser than 100% of the Fair Market Value of the Common Stock subject to the Option as of the date of grant, provided that the exercise price of Options that are California Regulated Securities granted while this Plan is a California Regulated Plan may not be less than 85% of the Fair Market Value of the Common Stock on the date the Option is granted. In all cases, the exercise price of ISO's granted to a Ten Percent Owner shall be no less than 110% of the Fair Market Value of the Common Stock as of the date of grant. Option may also be granted with an exercise price lower than 100% of the Fair Market Value of the Common Stock if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) NUMBER OF SHARES. Each Option shall state the number of Shares to which it pertains. (d) ISOs. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of Common Stock with respect to which ISOs are exercisable for the first time by any Optionholder in any calendar year (under all plans of the Employer and its parent or subsidiary corporations) exceeds $100,000, such Options shall be treated as NQSOs. In addition, no Options shall be deemed ISOs hereunder unless the Plan is approved by the stockholders of the Company within 12 months before or after the Effective Date. (e) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an 7 8 Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option or subsequently (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (f) TRANSFERABILITY. Unless otherwise provided in the Agreement, an Option shall not be transferable by the Optionholder other than by will or by the laws of descent and distribution or, except with respect to ISOs, a domestic relations order; provided, however, that the designation of a beneficiary of an Option by an Optionholder shall not be deemed a transfer prohibited by this Section. Notwithstanding the foregoing, to the extent specifically provided for in the applicable option agreement, transfers of NQSOs may be made with the prior approval of the Committee and on such terms and conditions as the Committee in its sole discretion shall approve, to the following permitted transferees: (a) in the case of a transfer without the payment of any consideration, any "family member" as such term is defined in Section 1(a)(5) of the General Instructions to Form S-8 under the Securities Act as in effect at the time of such transfer, (b) to any person or entity described in clause (ii) of Section 1(a)(5) of the General Instructions to Form S-8 under the Securities Act as in effect at the time of such transfer, and (iii) upon an Optionholder's death, Optionholder's executors, administrators, testamentary trustees, legatees and beneficiaries. Further, no right or interest of any Optionholder in an Option may be assigned in satisfaction of any lien, obligation, or liability of the Optionholder. Except as provided in this Section, an Option shall be exercisable, during the Optionholder's lifetime, only by such Optionholder (or by his or her legal representative) and no Option shall be assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise) or be subject to execution, attachment, or similar process. Any attempted transfer, assignment, pledge, hypothecation, or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon an Option, shall be null and void. (g) VESTING. The total number of Shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times 8 9 when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options granted to Officers and Directors may vary. To the extent necessary to comply with the California Securities Law, options granted to Optionholders other than Directors or Officers of the Company, that are California Regulated Securities granted while this Plan is a California Regulated Plan, will vest and become exercisable at a minimum of the rate of at least 20% per year over five years from the date of grant, subject to such other terms and conditions as are deemed reasonable by the Board. Such provisions may furthermore provide for accelerated vesting in the event the Participant takes one or more actions and/or meets various performance criteria within a stated period of time or by a date certain. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of Shares of Common Stock as to which an Option may be exercised. (h) TERMINATION OF CONTINUOUS SERVICE. (i) FOR CAUSE. Except as otherwise provided in an Option Agreement, if an Optionholder's Continuous Service if terminated for cause (as hereinafter defined), all outstanding and unexercised Options shall immediately be terminated as of the date such Optionholder is notified that his or her Continuous Service is terminated for cause. (ii) NOT FOR CAUSE. In the event an Optionholder's Continuous Service terminates (other than for cause, or upon the Optionholder's death or disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement, except that if the Options are California Regulated Securities while this Plan is a California Regulated Plan, the period of time in which to exercise the Options must be no less than thirty (30) days from the date of termination for reasons other than for Cause. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (iii) DEFINITION OF CAUSE. The Company or an Affiliate shall have "cause" to terminate the Continuous Service of an Optionholder upon any of the following: (A) a material breach by an Optionholder of this Agreement or any written confidentiality or trade secrets agreement entered into between Optionholder and the Company or any Affiliate; (B) any act of theft, misappropriation, embezzlement, intentional fraud or other violation of the law or similar conduct by the Optionholder involving the Company or any Affiliate; (C) a conviction or a plea of nolo contendere or the equivalent in respect of a felony involving an act of dishonesty, moral turpitude, deceit or fraud by Optionholder; (D) any damage of a material nature to the business or property of the Company or any Affiliate caused by the Optionholder's willful or grossly negligent conduct; (E) the willful failure by Optionholder to perform reasonable duties, responsibilities or instructions from the Company's Board of Directors or other officers or management of the Company or its Affiliates that the Optionholder reports to, after fifteen (15) 9 10 days written notice thereof; or (F) any act of dishonesty or misconduct by Optionholder in connection with his or her Continuous Service or otherwise. Notwithstanding the foregoing, any definition of "cause" in a written agreement between an Optionholder and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Optionholder. (i) EXTENSION OF TERMINATION DATE. Solely with respect to a NQSO, an Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. Except as otherwise set forth in an Option Agreement, in the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement for termination upon disability) or (ii) the expiration of the term of the Option as set forth in the Option Agreement, except that if the Option is a California Regulated Security granted while this Plan is a California Regulated Plan, the period of time in which to exercise the Option must be no less than six (6) months from the date of disability, but such term is still subject to the expiration of the Option. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) DEATH OF OPTIONHOLDER. Except as otherwise set forth in an Option Agreement, in the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder's death pursuant to subsection 6(f), but only within the period ending on the earlier of (1) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement for termination upon death) or (2) the expiration of the term of such Option as set forth in the Option Agreement, except that if the Option is a California Regulated Security granted while this Plan is a California Regulated Plan, the period of time in which to exercise the Option must be no less than six (6) months from the date of death, but such term is still subject to the expiration of the Option. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 10 11 (l) EARLY EXERCISE. The Option Agreement may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased shall be subject to a repurchase option in favor of the Company or to any other additional restrictions the Board determines to be appropriate. (m) RE-LOAD OPTIONS. (i) Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Unless otherwise specifically provided in the Option, the Optionholder shall not surrender shares of Common Stock acquired, directly or indirectly from the Company, unless such shares have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). (ii) Any such Re-Load Option shall (1) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (2) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (3) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. (iii) There shall be no Re-Load Options granted with respect to a Participant's exercise of a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. (a) GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and provisions of the Plan and applicable law, the Board, at any time and from time to time, may grant freestanding Stock Appreciation Rights, Stock Appreciation Rights in tandem with an Option, or Stock Appreciation Rights in addition to an Option. Stock Appreciation Rights granted in tandem with an Option or in addition to an Option may be granted at the time the Option is granted or at a later time. No Stock Appreciation Rights granted under the Plan may be exercisable after the expiration of ten years from the grant date. 11 12 (i) EXERCISE PRICE. The exercise price of each Stock Appreciation Right shall be determined on the grant date by the Board. The exercise price of each Stock Appreciation Right may be greater or lesser than 100% of the Fair Market Value of the Common Stock subject to the Option as of the date of grant, provided that the exercise price of Stock Appreciation Rights that are California Regulated Securities granted while this Plan is a California Regulated Plan may not be less than 85% of the Fair Market Value of the Common Stock on the date the Stock Appreciation Right is granted. In all cases, the exercise price shall be no less than 110% of the Fair Market Value of the Common Stock in the case of Stock Appreciation Rights granted to a Ten Percent Owner. Stock Appreciation Rights issued upon assumption of, or in substitution for, stock appreciation rights of a company with which the Company or an Affiliate participates in an acquisition, separation or similar corporate transaction may also be issued at an Exercise Price less than 100% of the Fair Market Value . (ii) EXERCISE. The Participant is entitled to receive an amount equal to the excess of the Fair Market Value over the Exercise Price thereof on the date of exercise of the Stock Appreciation Right. (iii) PAYMENT. Payment upon exercise of the Stock Appreciation Right shall be made in the form of cash, Shares (valued at Fair Market Value on the date of exercise), or a combination thereof, as determined in the sole and complete discretion of the Committee. However, if any payment in the form of Shares results in a fractional share, the payment for the fractional share shall be made in cash. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. (ii) CONSIDERATION. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) VESTING. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. 12 13 (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the Shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. If the Shares of repurchased Common Stock are California Regulated Securities issued while this Plan is a California Regulated Plan, the amount of the repurchase price will comply with the "reasonableness" requirement as defined by the California Securities Law and California Securities Rules. (v) TRANSFERABILITY. Rights to acquire Shares of Common Stock under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 8. LOCK-UP AGREEMENTS Each option agreement shall provide that, in connection with any public offering by the Company of its equity securities, any shares of Common Stock acquired or that may be acquired upon exercise or vesting of a stock option may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of securities of the Company, without the prior written consent of the Company or such underwriter, as the case may be, for a period of 180 days after the effective date of the registration statement for such public offering. Any attempted transfer in violation of this Section 8 shall be null and void. 9. RIGHT OF FIRST REFUSAL. (a) OFFER OF SALE; NOTICE OF PROPOSED SALE. If at any time an Optionholder desires to sell, transfer or otherwise dispose of any Shares or any interest in such Shares, the Optionholder shall deliver written notice of his or her desire to do so (the "Sale Notice") to the Company, which Sale Notice must be accompanied by a binding agreement (the "Binding Agreement"), which Binding Agreement shall be expressly subject to the Optionholder's compliance with the provisions of this Agreement, including this Section 9, with a bona fide purchaser reasonably capable of completing such purchase (the "Proposed Transferee"). The Sale Notice and Binding Agreement shall specify (i) the name and address of the Proposed Transferee(s), (ii) the number of Shares the Optionholder proposes to sell, transfer or otherwise dispose of (referred to herein as "Offered Shares"), (iii) the consideration per Offered Share to be delivered to the Optionholder for the proposed sale, transfer or disposition and (iv) all other material terms and conditions of the proposed transaction. (b) OPTION TO PURCHASE. (i) The Company shall have the option to purchase all or any portion of the Offered Shares for the consideration per share and on the terms and conditions set forth in the Sale Notice. The Company may only exercise such option by delivery of written notice to the Optionholder prior to the date ten (10) days after the date of delivery of the Sale Notice. 13 14 (ii) If the Company delivers written notice of its intent to purchase all or any portion of the Offered Shares, then the closing of the purchase of the Offered Shares by the Company shall take place at the offices of the Company no later than ten (10) days after the expiration of the applicable ten (10) day period. (c) Form of Consideration. To the extent that the consideration proposed to be paid by the Proposed Transferee for the Offered Shares consists of property other than cash or a promissory note (the "Non-Cash Consideration"), the consideration required to be paid by the Company exercising its options under this Section 9 may consist of cash equal to the value of the Non-Cash Consideration, as determined in good faith by the Company's Chief Executive Officer or Chief Financial Officer. Notwithstanding anything to the contrary set forth above, the ten (10) day period described in Section 9(b)(i) shall commence when the value of the Non-Cash Consideration is determined pursuant to this Section 9(c). (d) SALES TO PROPOSED TRANSFEREE. To the extent the Company fails (i) to deliver written notice or notices of intent to purchase any of the Offered Shares within the ten (10) day period specified in Section 9(b)(i) or (ii) to close the purchase of the Offered Shares within the applicable period specified in Section 9(b)(ii), then the Optionholder may sell, transfer or otherwise dispose of the remaining Offered Shares to the Proposed Transferee at any time within fifty (50) days after the date of the delivery of the Sale Notice on the terms set forth in the Sale Notice and Binding Agreement. Any Offered Shares not sold, transferred or otherwise disposed of within the applicable fifty (50) day period and any proposed transfer on terms more favorable to the Proposed Transferee than those described in the Sale Notice shall continue to be subject to all of the requirements of this Section 9 as if there had been no prior offer or Sale Notice. Notwithstanding the above, the Offered Shares shall not be sold, transferred or otherwise disposed of unless such purchaser or acquiror is bound or agrees in writing to be bound by the provisions of this Plan and the option agreement (and, if the purchaser or acquiror is an entity, such other terms reasonably imposed by the Company that are intended to circumvent avoidance of these provisions by means of an indirect transfer of the Shares), and any such sale, transfer or disposition where such purchaser or acquiror is not bound or does not so agree to be bound shall be void. (e) PERMITTED TRANSFERS. Notwithstanding anything to the contrary set forth herein, to the extent specifically so provided in the applicable stock option agreement, the provisions of this Section 9 shall not apply to any transfer or distribution by an Optionholder of Shares to: (a) a trust or similar entity directly or indirectly controlled by the Optionholder primarily for estate planning purposes, (b) the Optionholder's heirs, executors, administrators or beneficiaries upon the Optionholder's death, and (c) a spouse, sibling, parent or child, or to the spouse, sibling, parent or child of any such persons, or to a trust or similar entity of which such persons are the beneficiaries for estate planning purposes or domestic relations order issued by any court or other governmental or administrative body; provided, however, in the case of any such transfer that such transferee or distributee agrees in writing to comply with the provisions of this Agreement. 14 15 (f) EFFECT OF NOT FOLLOWING PROCEDURES. Any sale, transfer or other disposition of Shares not in accordance with the foregoing procedures of this Section 9 shall be null and void and of no force or effect. (g) TERMINATION. The provisions of this Section 9 shall terminate upon consummation of an initial public offering of the Company. 10. COVENANTS OF THE COMPANY. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of Shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell Shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of Common Stock pursuant to Stock Awards shall be used in any manner the Company deems appropriate. 12. MISCELLANEOUS. (a) PROVISION OF INFORMATION. The Board in its sole discretion may determine what, if any, financial and other information is to be provided to Optionholders and when such financial and other information is to be provided after giving consideration to applicable federal and state laws, rules and regulations, including, without limitation, applicable federal and state securities laws, rules and regulations, provided that during such times as this Plan is a California Regulated Plan, holders of California Regulated Securities will receive financial statements of the Company on an annual basis. (b) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest, and such acceleration may be contingent upon the happening of any event or the taking of any action as specified in the Board within its complete discretion. 15 16 (c) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any Shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (d) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, or (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) TAX OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any foreign, federal, state or local tax withholding obligation or other tax obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold Shares from the Shares otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award, provided, however, that no Shares are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering to the Company owned and unencumbered Shares. (g) ISSUANCES OF SECURITIES. Except as expressly provided herein or in the applicable 16 17 Stock Award Agreement, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to Stock Awards. Except as expressly provided herein or in the applicable Stock Award Agreement, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company. (h) FRACTIONAL SHARES. No fractional Share shall be issued under the Plan and the person exercising such right shall receive from the Employer cash in lieu of such fractional share equal to the Fair Market Value thereof. (i) NATURE OF PAYMENTS. All Stock Awards shall constitute a special incentive payment to the Participant and shall not be taken into account in computing the amount of salary or compensation of the Participant for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance, or other benefit plan of the Employer or under any agreement between the Employer and the Participant, unless such plan or agreement specifically provides otherwise. 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Section 4, and outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) CHANGE IN CONTROL. (i) A "Change in Control" shall be deemed to occur upon the consummation of any one of the following events: (a) a sale of all or substantially all of the assets of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation (other than a transaction the principal purpose of which is to change the state of the Company's incorporation or a transaction in which the voting securities of the Company are exchanged for beneficial ownership of at least a majority of the voting securities of the controlling acquiring corporation); (c) a merger or consolidation in which the Company is the surviving corporation and less than a majority of the voting securities of the Company that are outstanding immediately after the consummation of such transaction are beneficially owned, directly or indirectly, by the persons who owned such voting securities immediately prior to such transaction; (d) any transaction or series of related transactions after which any person (as such term is used in 17 18 Section 13(d)(3) of the Exchange Act), other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate, becomes the beneficial owner of voting securities of the Company representing a majority of the combined voting power of all of the voting securities of the Company; provided, however, that so long as Cadence Design Systems, Inc., a Delaware corporation, or its affiliates other than the Company (collectively, "Cadence"), own any voting securities of the Company and no other Change in Control has occurred, acquisition of any amount of voting securities of the Company by Cadence or its Affiliates shall not constitute a "Change in Control" hereunder; (e) during any period of two consecutive years, individuals who at the beginning of such period constitute the membership of the Company's Board of Directors ("Incumbent Directors") cease for any reason to have authority to cast at least a majority of the votes which all directors are entitled to cast, unless the election, or the nomination for election by the Company's stockholders, of a new Director was approved by a vote of at least two-thirds of the votes entitled to be cast by the Incumbent Directors, in which case such Director shall also be treated as an Incumbent Director in the future; or (f) the liquidation or dissolution of the Company. (ii) In the event of a Change in Control, then: (a) any surviving or acquiring corporation shall assume Stock Awards outstanding under the Plan or shall substitute similar Stock Awards (including an option to acquire the same consideration paid to stockholders in the transaction described in this subsection 13(b) for those outstanding under the Plan), or (b) in the event any surviving or acquiring corporation refuses to assume such Stock Awards or to substitute similar Stock Awards for those outstanding under the Plan, (i) with respect to Stock Awards held by persons whose Continuous Service has not terminated, the vesting both of such Stock Awards and of any shares of Common Stock acquired pursuant to a Stock Award as well as the time during which such Stock Awards may be exercised shall be accelerated prior to such event and the Stock Awards terminated if not exercised after such acceleration and at or prior to such event, and (ii) with respect to any other Stock Awards outstanding under the Plan, if there is a successor corporation, such Stock Awards shall be terminated if not exercised prior to such event. (c) Notwithstanding anything else contained herein to the contrary, in no event shall a Change in Control be deemed to occur solely by reason of (1) a distribution to the direct and/or indirect stockholders of any Affiliate, whether as dividend or otherwise, of all or any portion of the Shares held, directly or indirectly, by such Affiliate; (2) a sale of all or any portion of the Shares held, directly or indirectly, by any Affiliate in an underwritten public offering (including, without limitation, a sale of securities of the Company in an underwritten public offering); or (3) any Person (the "Subject Person") acquiring beneficial ownership of more than the permitted amount of the then outstanding voting securities as a result of the acquisition of Shares by the Company or Affiliate which, by reducing the number of Shares then outstanding, increases the percentage of Shares beneficially owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares by the Company or an Affiliate, and after such Share acquisition by the Company or an Affiliate, the Subject Person becomes the beneficial owner of any additional Shares which further increases the percentage of the then outstanding Shares beneficially owned by the Subject Person, then a Change in Control shall occur. 18 19 (d) Notwithstanding the foregoing, any adjustments made pursuant to subsection (a) above with respect to ISOs shall be made only after the Administrator determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424(h) of the Code). If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) AMENDMENT OF PLAN. The Plan may be amended by the Board, including, without limitation, to the extent necessary to ensure the qualification of any Award under Rule 16b-3 or Code Section 162(m), or any ISO under Code Section 422, and to the extent necessary to qualify the Shares issuable upon exercise of any outstanding Stock Awards granted, or Stock Awards to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment that requires shareholder approval under applicable law or in order to ensure favorable federal income tax treatment for any ISOs shall be subject to obtaining such approval. (b) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (c) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights of a Participant under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) PLAN TERM. The Plan shall terminate as of July 13, 2010, the date that is ten (10) years following the earlier of the date the Plan was adopted by the Company or approved by the shareholders of the Company. The Board may furthermore suspend or terminate the Plan at any time. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant. 16. EFFECTIVE DATE OF PLAN. The Former Plan became effective on July 13, 2000, the date on which it was approved by the Board. This amended and restated Plan is effective as of July 26, 2001. 17. GOVERNING LAW. 19 20 The Plan shall be governed by laws of the state of Delaware, without giving effect to the principles of the conflicts of laws thereof, provided that this will not be construed to apply the California Securities Law or the California Securities Rules to securities or holders thereof to which the California Securities Law or California Securities Rules would not otherwise apply. In the event any provision of the Plan shall be held invalid, illegal or unenforceable, in whole or in part, for any reason, such determination shall not affect the validity, legality or enforceability of any remaining provision, portion of provision or the Plan overall, which shall remain in full force and effect as if the Plan had been absent the invalid, illegal or unenforceable provision or portion thereof. 18. CERTAIN PARTICIPANTS. All Stock Award Agreements with Participants subject to Section 16(b) of the Exchange Act shall be deemed to include any such additional terms, conditions, limitations and provisions as Rule 16b-3 requires, unless the Administrator in its discretion determines that any such Stock Award should not be governed by Rule 16b-3. To the extent any provision of the Plan or any action by the Administrator fails to so comply with Rule 16b-3, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator. All performance-based Stock Awards to Covered Participants shall be deemed to include any such additional terms, conditions, limitations and provisions as are necessary to comply with the performance-based compensation exception of Section 162(m) of the Code unless the Administrator in its discretion determines that any such Award to a Covered Participant is not intended to qualify for the exception for performance-based compensation under Section 162(m). All Agreements awarding ISOs shall be deemed to include any such additional terms conditions, limitations, and provisions as Code Section 422 requires unless the Administrator in its discretion determines that any such Option is not intended or is no longer intended to qualify as an ISO. 19. LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE. Notwithstanding any other provision of this Plan, no Stock Awards or Shares of the Common Stock shall be required to be issued or granted under the Plan unless legal counsel to the Company shall be satisfied that such issuance or grant will be in compliance with all applicable federal and state securities laws and regulations and any other applicable laws or regulations. The Administrator may require, as a condition of any payment or share issuance, that certain agreements, undertakings, representations, certificates, and/or information, as the Administrator may deem necessary or advisable, be executed or provided to the Company to assure compliance with all such applicable laws or regulations. Any certificates for Shares of the Common Stock delivered under the Plan may be subject to such legends, stock-transfer orders and such other restrictions as the Administrator may deem advisable under the rules, regulations, or other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, the NASDAQ National Market System, and any applicable federal or state securities law. In addition, if, at any time specified herein (or in any Agreement or otherwise) for (a) the making of any Stock Award, or the making of any determination, (b) the issuance or other distribution of Common Stock, or (c) the payment of amounts to or through a Participant with respect to any Stock Award, any law, rule, regulation, 20 21 or other requirement of any governmental authority or agency shall require the Company or any Affiliate, or any Participant (or any estate, designated beneficiary, or other legal representative thereof) to take any action in connection with any such determination, any such Shares to be issued or distributed, any such payment, or the making of any such determination, as the case may be, shall be deferred until such required action is taken. 21 EX-10.51 6 f74874ex10-51.txt EXHIBIT 10.51 1 Exhibit 10.51 TALITY HOLDINGS, INC. 2000 DIRECTORS STOCK OPTION PLAN AS AMENDED AND RESTATED EFFECTIVE AS OF JULY 26, 2001 1. PURPOSE This Tality Holdings, Inc. 2000 Directors Stock Option Plan (the "Plan") represents the amendment and restatement of the Tality Corporation 2000 Directors Stock Option Plan (the "Former Plan") which, together with all options outstanding thereunder, is being assumed by Tality Holdings, Inc., a Delaware corporation (the "Company") in accordance with the provisions of Section 9 of the Former Plan, as a result of the restructuring of Tality Corporation and its affiliates ("Tality") pursuant to a series of transactions whereby the assets and liabilities of Tality have been assumed, directly or indirectly, by the Company. The purpose of the Plan is to advance the interests of the Company by enabling it to attract, retain and motivate qualified individuals to serve on the Company's Board of Directors and to align the financial interests of such individuals with those of the Company's stockholders by providing for or increasing their proprietary interest in the Company. The stock options granted pursuant to this Plan are not qualified under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. DEFINITIONS (a) "BOARD" means the Board of Directors of the Company. (b) "CALIFORNIA COMMISSIONER" means the Commissioner of Corporations of the State of California. (c) "CALIFORNIA REGULATED PLAN" means this Plan at any time that Awards and securities underlying Awards are California Regulated Securities and the Company relies upon the exemption provided by Section 25102(o) of the California Securities Law (or another exemption imposing comparable requirements) to exempt the issuance of securities under this Plan from qualification under the California Securities Law (d) "CALIFORNIA REGULATED SECURITIES" means Awards and securities underlying Awards that are subject to the California Securities Law or the California Securities Rules. (e) "CALIFORNIA SECURITIES LAW" means the California Corporate Securities Law of 1968, as amended. (f) "CALIFORNIA SECURITIES RULES" means the Rules of the California Commissioner adopted under the California Securities Law. -1- 2 Exhibit 10.51 (g) "COMMITTEE" means the Board and/or a committee of the Board acting pursuant to its authorization to administer this Plan under Section 9. (h) "COMMON STOCK" means the Company's Class A Common Stock, as presently constituted, subject to adjustment as provided in Section 11. (i) "FAIR MARKET VALUE" means, as of any date, the mean average of the high and low prices of the Common Stock for each of the last 20 trading days prior to the such date on the national securities exchange, national market system or other trading market on which the Common Stock has the highest average trading volume; or, in the absence of such market for the Common Stock, the Fair Market Value shall be determined in good faith by the Board; provided, however, that when appropriate, the Board in determining Fair Market Value of the Common Stock shall consider such factors as may be required by the California Securities Law and the California Securities Rules while this Plan is a California Regulated Plan, and may take into account such other factors as it may deem appropriate under the circumstances. (j) "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not at the time also an employee of the Company or any of its direct or indirect majority-owned subsidiaries (regardless of whether such subsidiary is organized as a corporation, partnership or other entity). For purposes of this Plan, the Chairman of the Board's status as an employee shall be determined by the Board. (k) "TEN PERCENT OWNER" means a Participant who owns, directly or by reason of the applicable attribution rules of Code Section 424(d), more than 10% of the total combined voting power of all classes of capital stock of the Company or its parent or subsidiary corporations, if any, as defined in Code Sections 424(e) and (f). 3. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 11, the maximum number of shares of Common Stock which may be issued pursuant to this Plan shall not exceed Six Hundred Seventy-Five Thousand (675,000) Shares issued under this Plan may be authorized and unissued shares of Common Stock or shares of Common Stock reacquired by the Company. All or any shares of Common Stock subject to a stock option which for any reason are not issued or are reacquired under the stock option may again be made subject to a stock option under the Plan. 4. PARTICIPANTS Any person who is a Non-Employee Director shall be eligible for the award of stock options hereunder. Non-Employee Directors who are granted stock options hereunder shall be referred to as "Participants." 5. NON-EMPLOYEE DIRECTOR AWARDS -2- 3 Exhibit 10.51 (a) Each person who becomes a Non-Employee Director during any calendar year shall, upon election to the Board, automatically be granted an option to purchase 50,000 shares of Common Stock. If such person is also elected as the Chairman of the Board, such person shall, upon election as Chairman of the Board, automatically be granted an additional option to purchase 50,000 shares of Common Stock. (b) Other than the calendar year in which such person becomes a Non-Employee Director, each Non-Employee Director, on July 1 of each calendar year, beginning July 1, 2001, shall automatically be granted an option to purchase 12,500 shares of Common Stock. In addition, if such Non-Employee Director is serving as Chairman of the Board, such Non-Employee Director shall automatically be granted an option to purchase an additional 12,500 shares of Common Stock. 6. TERMS AND CONDITIONS OF STOCK OPTIONS (a) General Terms and Conditions: Stock options awarded pursuant to the Plan need not be identical but each stock option shall be subject to the following general terms and conditions: (1) Terms and Restrictions Upon Shares: The Board may provide that the shares of Common Stock issued upon exercise of a stock option shall be subject to such further conditions, restrictions or agreements as the Board in its discretion may specify prior to the exercise of such stock option, including without limitation, deferrals on issuance, conditions on vesting or transferability, and forfeiture or repurchase provisions. The Committee may establish rules for the deferred delivery of Common Stock upon exercise of a stock option with the deferral evidenced by use of "Stock Units" equal in number to the number of shares of Common Stock whose delivery is so deferred. A "Stock Unit" is a bookkeeping entry representing an amount equivalent to the Fair Market Value of one share of Common Stock. Stock Units represent an unfunded and unsecured obligation of the Corporation except as otherwise provided by the Board. Settlement of Stock Units upon expiration of the deferral period shall be made in Common Stock or otherwise as determined by the Committee. The amount of Common Stock, or other settlement medium, to be so distributed may be increased by an interest factor or by dividend equivalents. Until a Stock Unit is settled, the number of shares of Common Stock represented by a Stock Unit shall be subject to adjustment pursuant to Section 11. (2) Transferability of Option: Unless otherwise specifically provided by the Committee and the applicable option agreement, each stock option shall be transferable only by will or the laws of descent and distribution. Notwithstanding the foregoing, a stock option that is a California Regulated Security granted at any time that this Plan is a California Regulated Plan may not be transferred other than by will or the laws of descent or distribution. -3- 4 Exhibit 10.51 (3) Vesting: Options granted pursuant to Section 5 shall vest over a four-year period, with 25% of the option vesting on the first through fourth anniversaries of the date of grant of such option. (4) Other Terms and Conditions: No holder of a stock option shall have any rights as a stockholder with respect to any shares of Common Stock subject to a stock option hereunder until said shares have been issued. Stock options may also contain such other provisions, which shall not be inconsistent with any of the foregoing terms, as the Board or the Committee shall deem appropriate. The Board may waive conditions to and/or accelerate exercisability of a stock option, either automatically upon the occurrence of specified events (including in connection with a change of control of the Company) or otherwise in its discretion. No stock option, however, nor anything contained in the Plan, shall confer upon any Participant any right to serve as a director of the Company. (b) Stock Option Price: The exercise price for each stock option shall be established by the Board or under a formula established by the Board. The exercise price of each stock option may be greater or lesser than 100% of the Fair Market Value of the Common Stock subject to the stock option as of the date of grant, provided that the exercise price of an option that is a California Regulated Security granted while this Plan is a California Regulated Plan may not be less than 85% of the Fair Market Value of the Common Stock on the date the option is granted. In all cases, the exercise price shall not be less than 110% of the Fair Market Value of the Common Stock as of the date of grant in the case of a stock option granted to a Ten Percent Owner. The exercise price shall be payable in cash, by payment under an arrangement with a broker where payment is made pursuant to an irrevocable direction to the broker to deliver all or part of the proceeds from the sale of the option shares to the Company, by the surrender of shares of Common Stock owned by the optionholder exercising the option and having a fair market value on the date of exercise equal to the exercise price but only if such will not result in an accounting charge to the Company, or by any combination of the foregoing. In addition, the exercise price shall be payable in such other form(s) of consideration as the Committee in its discretion shall specify, including without limitation by loan (as described in Section 10) or by techniques that may result in an accounting charge to the Company. For the purposes of determining the fair market value of shares of Common Stock surrendered to pay the exercise price of an option, "fair market value" shall mean the average of the high and low prices of the Common Stock on the last trading day preceding the date of delivery of such Common Stock to the Company on the national securities exchange, national market system or other trading market on which the Common Stock has the highest average trading volume. -4- 5 Exhibit 10.51 7. RIGHT OF FIRST REFUSAL. (a) Offer of Sale; Notice of Proposed Sale. If at any time a Participant desires to sell, transfer or otherwise dispose of any Shares or any interest in such Shares, the Participant shall deliver written notice of his or her desire to do so (the "Sale Notice") to the Company, which Sale Notice must be accompanied by a binding agreement (the "Binding Agreement"), which Binding Agreement shall be expressly subject to the Participant's compliance with the provisions of this Agreement, including this Section 7, with a bona fide purchaser reasonably capable of completing such purchase (the "Proposed Transferee"). The Sale Notice and Binding Agreement shall specify (i) the name and address of the Proposed Transferee(s), (ii) the number of Shares the Participant proposes to sell, transfer or otherwise dispose of (referred to herein as "Offered Shares"), (iii) the consideration per Offered Share to be delivered to the Participant for the proposed sale, transfer or disposition and (iv) all other material terms and conditions of the proposed transaction. (b) Option to Purchase. (i) The Company shall have the option to purchase all or any portion of the Offered Shares for the consideration per share and on the terms and conditions set forth in the Sale Notice. The Company may only exercise such option by delivery of written notice to the Participant prior to the date ten (10) days after the date of delivery of the Sale Notice. (ii) If the Company delivers written notice of its intent to purchase all or any portion of the Offered Shares, then the closing of the purchase of the Offered Shares by the Company shall take place at the offices of the Company no later than ten (10) days after the expiration of the applicable ten (10) day period. (c) Form of Consideration. To the extent that the consideration proposed to be paid by the Proposed Transferee for the Offered Shares consists of property other than cash or a promissory note (the "Non-Cash Consideration"), the consideration required to be paid by the Company exercising its options under this Section 7 may consist of cash equal to the value of the Non-Cash Consideration, as determined in good faith by the Company's Chief Executive Officer or Chief Financial Officer. Notwithstanding anything to the contrary set forth above, the ten (10) day period described in Section 7(b)(i) shall commence when the value of the Non-Cash Consideration is determined pursuant to this Section 7(c). -5- 6 Exhibit 10.51 (d) Sales to Proposed Transferee. To the extent the Company fails (i) to deliver written notice or notices of intent to purchase any of the Offered Shares within the ten (10) day period specified in Section 7(b)(i) or (ii) to close the purchase of the Offered Shares within the applicable period specified in Section 7(b)(ii), then the Participant may sell, transfer or otherwise dispose of the remaining Offered Shares to the Proposed Transferee at any time within fifty (50) days after the date of the delivery of the Sale Notice on the terms set forth in the Sale Notice and Binding Agreement. Any Offered Shares not sold, transferred or otherwise disposed of within the applicable fifty (50) day period and any proposed transfer on terms more favorable to the Proposed Transferee than those described in the Sale Notice shall continue to be subject to all of the requirements of this Section 7 as if there had been no prior offer or Sale Notice. Notwithstanding the above, the Offered Shares shall not be sold, transferred or otherwise disposed of unless such purchaser or acquiror is bound or agrees in writing to be bound by the provisions of this Plan and the option agreement (and, if the purchaser or acquiror is an entity, such other terms reasonably imposed by the Company that are intended to circumvent avoidance of these provisions by means of an indirect transfer of the Shares), and any such sale, transfer or disposition where such purchaser or acquiror is not bound or does not so agree to be bound shall be void. (e) Permitted Transfers. Notwithstanding anything to the contrary set forth herein, to the extent specifically so provided in the applicable stock option agreement, the provisions of this Section 7 shall not apply to any transfer or distribution by a Participant of Shares to: (a) a trust or similar entity directly or indirectly controlled by the Participant primarily for estate planning purposes, (b) the Participant's heirs, executors, administrators or beneficiaries upon the Participant's death, and (c) a spouse, sibling, parent or child, or to the spouse, sibling, parent or child of any such persons, or to a trust or similar entity of which such persons are the beneficiaries for estate planning purposes or domestic relations order issued by any court or other governmental or administrative body; provided, however, in the case of any such transfer that such transferee or distributee agrees in writing to comply with the provisions of this Agreement. (f) Effect of Not Following Procedures. Any sale, transfer or other disposition of Shares not in accordance with the foregoing procedures of this Section 7 shall be null and void and of no force or effect. (g) Termination. The provisions of this Section 7 shall terminate upon consummation of an initial public offering of the Company. 8. LOCK-UP AGREEMENTS Each option agreement shall provide that, in connection with any public offering by the Company of its equity securities, any shares of Common Stock acquired or that may be acquired upon exercise or vesting of a stock option may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of securities of the Company, without the prior written consent of the Company -6- 7 Exhibit 10.51 or such underwriter, as the case may be, for a period of 180 days after the effective date of the registration statement for such public offering. Any attempted transfer in violation of this Section 8 shall be null and void. 9. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Board, except that as provided herein the Plan may be administered by a Committee of the Board, as appointed from time to time by the Board. The Board shall fill vacancies on and from time to time may remove or add members to the Committee. The Committee shall act pursuant to a majority vote or unanimous written consent. Subject to the express provisions of this Plan, the Committee shall be authorized and empowered to do all things necessary or desirable in connection with the administration of this Plan, including, without limitation: (a) to prescribe, amend and rescind rules relating to this Plan and to define terms not otherwise defined herein; (b) to prescribe the form of documentation used to evidence any stock option awarded hereunder, including provision for such terms as it considers necessary or desirable, not inconsistent with the terms established by the Board; (c) to establish and verify the extent of satisfaction of any conditions to exercisability applicable to stock options; (d) to determine whether, and the extent to which, adjustments are required pursuant to Section 11 hereof; and (e) to interpret and construe this Plan, any rules and regulations under the Plan and the terms and conditions of any stock option awarded hereunder, and to make exceptions to any procedural provisions in good faith and for the benefit of the Company. Notwithstanding any provision of this Plan, the Board may at any time limit the authority of the Committee to administer this Plan. The Board shall have the authority to establish subplans or other arrangements not inconsistent with this Plan which the Board deems necessary or advisable to comply with laws or requirements of foreign jurisdictions. All decisions, determinations and interpretations by the Board or, except as to the Board, the Committee, regarding the Plan, any rules and regulations under the Plan and the terms and conditions of any stock option awarded hereunder, shall be final and binding on all Participants and holders of stock options. The Board and the Committee may consider such factors as it deems relevant, in its sole and absolute discretion, in making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select. 10. LOANS The Company may, if authorized by the Board, make loans for the purpose of enabling a Participant to exercise stock options and to pay the tax liability resulting from a stock option exercise under the Plan. The Board shall have full authority to determine the terms and -7- 8 Exhibit 10.51 conditions of such loans. Such loans may be secured by the shares of Common Stock received upon exercise of such stock option. 11. ADJUSTMENT OF AND CHANGES IN THE STOCK If the outstanding securities of the class then subject to this Plan are increased, decreased or exchanged for or converted into cash, property or a different number or kind of shares or securities, or if cash, property or shares or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, reclassification, dividend (other than a regular cash dividend) or other distribution, stock split, reverse stock split, spin-off or the like, or if substantially all of the property and assets of the Company are sold, then, unless the terms of such transaction shall provide otherwise, the maximum number and type of shares or other securities that may be issued under this Plan shall be appropriately adjusted. The Committee shall determine in its sole discretion the appropriate adjustment to be effected pursuant to the immediately preceding sentence. In addition, in connection with any such change in the class of securities then subject to this Plan, the Committee may make appropriate and proportionate adjustments in the number and type of shares or other securities or cash or other property that may be acquired pursuant to stock options theretofore awarded under this Plan and the exercise price of such stock options. No right to purchase or receive fractional shares shall result from any adjustment in stock options pursuant to this Section 11. In case of any such adjustment, the shares subject to the stock option shall be rounded up to the nearest whole share of Common Stock. 12. REGISTRATION, LISTING OR QUALIFICATION OF STOCK In the event that the Board or the Committee determines in its discretion that the registration, listing or qualification of the shares of Common Stock issuable under the Plan on any securities exchange or under any applicable law or governmental regulation is necessary as a condition to the issuance of such shares under the stock option, the stock option shall not be exercisable or exercised in whole or in part unless such registration, listing, qualification, consent or approval has been unconditionally obtained. 13. TAXES The Board or Committee may make such provisions or impose such conditions as it may deem appropriate for the withholding or payment by a Participant of any taxes which it determines are necessary or appropriate in connection with any issuance of shares under this Plan, and the rights of a holder of a stock option in any shares are subject to satisfaction of such conditions. The Company shall not be required to issue shares of Common Stock or to recognize the disposition of such shares until such obligations are satisfied. At the Participant's election, any such obligations may be satisfied by having the Company withhold a portion of the shares of Common Stock that otherwise would be issued to the holder of the stock option upon exercise of the stock option or by surrendering to the Company shares of Common Stock previously acquired. The Company and any affiliate of -8- 9 Exhibit 10.51 the Company shall not be liable to a Participant or any other persons as to any tax consequence expected, but not realized, by any Participant or other person due to the receipt of any stock options awarded hereunder. 14. EFFECTIVE DATE, AMENDMENT, AND TERMINATION OF THE PLAN The Former Plan became effective upon its approval on September 22, 2000 by a majority of the outstanding shares of the Company in accordance with applicable law. This amended and restated Plan is effective as of July 26, 2001. Unless earlier suspended or terminated by the Board, no stock options may be awarded after the tenth anniversary of the date the Plan is approved by the Company's stockholders. The Board may periodically amend the Plan as determined appropriate, without further action by the Company's stockholders except to the extent required by applicable law. Notwithstanding the foregoing, and subject to adjustment pursuant to Section 11, the Plan may not be amended to materially increase the number of shares of Common Stock authorized for issuance under the Plan, unless any such amendment is approved by the Company's stockholders. The Plan may be earlier terminated at such earlier time as the Board may determine. Termination and expiration of the Plan will not affect the rights and obligations arising under stock options theretofore awarded and then in effect. 15. MISCELLANEOUS (a) Provision of Information: The Board in its sole discretion may determine what, if any, financial and other information is to be provided to Participants and when such financial and other information is to be provided after giving consideration to applicable federal and state laws, rules and regulations, including, without limitation, applicable federal and state securities laws, rules and regulations, provided that during such times as this Plan is a California Regulated Plan, holders of California Regulated Securities will receive financial statements of the Company on an annual basis. (b) Governing Law: The Plan shall be governed by the laws of the state of Delaware, without giving effect to the principles of the conflicts of laws thereof, provided that this will not be construed to apply the California Securities Law or the California Securities Rules to securities or holders thereof to which the California Securities Law or California Securities Rules would not otherwise apply. In the event any provision of the Plan shall be held invalid, illegal or unenforceable, in whole or in part, for any reason, such determination shall not affect the validity, legality or enforceability of any remaining provision, portion of provision or the Plan overall, which shall remain in full force and effect as if the Plan had been absent the invalid, illegal or unenforceable provision or portion thereof. -9- EX-10.56 7 f74874ex10-56.txt EXHIBIT 10.56 1 EXHIBIT 10.56 June 28, 2001 Name Address Re: Agreement to Repurchase Tality Corporation Common Stock Dear Tality Stockholder: Pursuant to that certain Common Stock Purchase Agreement (the "Purchase Agreement"), dated on or about July 14, 2000, between yourself and Cadence Design Systems, Inc. ("Cadence"), you purchased [Shares_Purchased] shares of Class A common stock of Tality Corporation, to be held in the name of [Name] (the "Shares"). Cadence hereby offers to repurchase the Shares for consideration of $6.10 per share, which represents the fair market value of each of the Shares as determined by the Board of Directors of Tality and Cadence and constitutes a total consideration of $[Total_Purchase_Price] for all of the Shares (the "Repurchase Price"), which offer is effective only if accepted on or prior to July 30, 2001, unless the offer is extended. By indicating your acceptance of this repurchase offer and signing this letter agreement and returning it, along with a completed copy of the attached Substitute Form W-9, or, if you are not a resident of the United States, a Form W-8 (which will be provided upon request), to Cadence at Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134, Attn: Stock Administration, Fax: (408) 944-7835) no later than July 30, 2001, you hereby accept Cadence's offer to repurchase the Shares, on the terms and conditions herein. If you reject this repurchase offer, please indicate your rejection below and sign this letter agreement and return to Cadence. Once you have accepted this repurchase offer, you may not withdraw your acceptance. If your properly completed acceptance is received by Cadence and the repurchase is completed within one year of your acquisition of the Shares, any loss recognized by you on such sale will be treated as a short-term capital loss. However, if such sale is completed after one year of your acquisition of the Shares, any such loss will be treated as a long-term capital loss. We urge you to discuss the tax implications to you with your tax advisor. If you do not accept this offer, there will be no change to your existing Tality Shares. It is anticipated that the Tality entities will undergo some form of reorganization, but such reorganization, once completed, is not expect to change the terms of the Tality Shares. Tality Shares that are not repurchased will not be registered under the Securities Act of 1933, and therefore will not constitute liquid securities before any initial public offering of Tality Corporation. 2 In connection with your purchase of the Shares, you delivered to Cadence a secured promissory note (the "Promissory Note") for the purchase price of the Shares which bears interest at the rate of 6.51% per annum, compounded semi-annually. As payment of the Repurchase Price, Cadence will reduce the outstanding amount owed to Cadence by you pursuant to the Promissory Note by the amount of the Repurchase Price (less any applicable withholding taxes), resulting in the total amount owed under the Promissory Note to be $[Total_Balance]. This amount consists of the $[Principal] remaining principal amount and $[Interest] accrued interest as of the date of this letter. Additional interest will continue to accrue on any outstanding balance on and as of the date hereof and will continue to accrue as long as such balance remains outstanding. Cadence will also release its security interest in the Shares. Your acceptance of this agreement will amend your Promissory Note to reduce the amount currently owed under the Promissory Note and to make the Promissory Note unsecured. The interest rate of the Promissory Note will not change. You will not receive a new promissory note reflecting these changes. In consideration of Cadence's offer to repurchase the Shares, you hereby release, acquit and forever discharge Cadence, Tality, Tality Canada Corporation, Tality UK, Ltd. and their respective officers, directors, agents, servants, employees, attorneys, stockholders, successors, assigns and other affiliates (the "Releasees") of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys' fees, damages, indemnities and obligations of every kind and nature, in law, equity or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, directly or indirectly arising out of or in any way connected with the Purchase Agreement, the related Pledge Agreement, the transactions contemplated by such agreements, stock, stock options, or any other ownership interests in Tality Corporation, including but not limited to, all such claims and demands pursuant to any federal, state or local law, statute, or causes of action under securities law, contract law or tort law; or any related events, acts or conduct at any time prior to and including the date of execution of this letter agreement. In addition, by signing this letter agreement, you understand and agree that the release of claims described above includes claims which may be unknown to you at present, and that you have read and understand Section 1542 of the California Civil Code, which reads as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." You hereby waive and relinquish any and all rights under Section 1542 with respect to your release of any unknown or unsuspected claims you might have against the Releasees. Promptly after receipt of your properly executed copy of this letter agreement, the Pledge Agreement dated on or about July 19, 2000 executed by you in connection with the Purchase Agreement and your Promissory Note will be terminated and will be of no further force and effect. This letter agreement will be governed by and construed in accordance with the laws of the State of California without regard to conflict of laws principles thereof. 3 You acknowledge that this letter agreement has been prepared on behalf of Cadence by Gibson, Dunn & Crutcher LLP, counsel to Cadence, and that Gibson, Dunn & Crutcher LLP does not represent, and is not acting on behalf of you. You have been provided with an opportunity to consult with your own counsel and tax advisor with respect to this letter agreement. 3 4 Should you have any questions regarding this matter please contact Elizabeth Villalobos at Cadence, tel: (408) 944-7835 or via email at lizv@cadence.com. We appreciate your assistance in handling this matter in a timely fashion. Very truly yours, CADENCE DESIGN SYSTEMS, INC. By: William Porter Its: Senior Vice President and Chief Financial Officer [_] I ACCEPT the offer to repurchase Tality common stock and related waiver [_] I DO NOT accept the offer to repurchase Tality common stock X ___________________________________ Date: __________________, 2001 Signature Print Name: _________________________ X ___________________________________ Date: __________________, 2001 Spouse's Signature Print Name: _________________________ Home Telephone Number (with area code): ________________________________ 4 5 SUMMARY OF TERMS OF STOCK REPURCHASE OFFER ----------------------------------------------------- RESPONSE NEEDED BY 12:00 MIDNIGHT, CALIFORNIA TIME, ON JULY 30, 2001, UNLESS THE OFFER IS EXTENDED ----------------------------------------------------- You must check your election and sign and date the Offer Letter, have your spouse sign and date the Offer Letter and return it, along with a completed copy of the attached Substitute Form W-9, or if you are not a resident of the United States, a Form W-8 (which will be provided upon request), to Stock Administration, Cadence Design Systems, Inc., 2655 Seely Avenue, Building 5, San Jose, California 95134, Fax: (408) 944-7835, before 12:00 midnight, California Time, on July 30, 2001, unless the offer is extended. If you have any questions, please contact Elizabeth Villalobos at Cadence, tel: (408) 944-7835 or via email at lizv@cadence.com. ----------------------------------------------------- The following description summarizes some of the terms and conditions of the offer to Repurchase Tality Corporation Class A Common Stock ("Tality Stock"). Please read the Offer to Repurchase as well because the information in this summary is not complete. WHO CAN PARTICIPATE IN THE REPURCHASE? Any holder of Tality Stock who purchased such stock from Cadence may sell all of his or her Tality Stock. ARE THERE ANY CONDITIONS OF THE REPURCHASE? Any holder of Tality Stock must transfer his or her Tality Stock on an all-or-nothing basis. Any such holder must also agree to waive any claims against Cadence, Tality Corporation and their affiliates relating to the offer and his or her ownership of Tality Corporation equity. In addition, once a holder of Tality Stock accepts the offer, this acceptance cannot be revoked. WHAT IS THE REPURCHASE PRICE PER SHARE OF THE TALITY STOCK? Cadence will repurchase shares of Tality Stock at a repurchase price equal to $6.10, the fair market value of such Tality Stock. WHAT DOES THE COMPANY RECOMMEND THAT I DO? Although the Cadence board of directors or the compensation committee of the board has approved Cadence making this offer, neither we nor our board of directors (nor any committee of the board) makes any recommendation as to whether you should accept the Offer to Repurchase or refrain from making such election. You must make your own decision whether to elect to accept the Offer to Repurchase Tality Stock. Our board of directors recognizes that the decision to accept the offer is an individual one that should be based on a variety of factors and you should consult with your personal financial and tax advisors if you have questions about your financial or tax situation. 5 6 WHAT HAPPENS TO MY TALITY STOCK IF I ACCEPT THE OFFER? If you accept the offer, all of your Tality Stock will be cancelled and you will have no further right or interest in Tality Stock. WHAT IS THE U.S. TAX TREATMENT OF RECEIPT OF THE REPURCHASE PRICE FOR THE TALITY STOCK? If you accept the offer, you will recognize gain or loss equal to the difference between the amount of cash that you receive and your tax basis in the shares of Tality Stock that are tendered pursuant to the offer. For a more detailed discussion, see "The Material U.S. Federal Income Tax Consequences" contained in the Offer to Repurchase. We recommend that you consult with your own tax advisor to determine the specific tax consequences to you of accepting the offer. Under U.S. federal income tax law, a stockholder whose tendered shares of Tality Common Stock are accepted for payment pursuant to the Offer to Repurchase may be subject to backup withholding at a rate of 31%. To prevent backup withholding on any payment made to a stockholder pursuant to the Offer to Repurchase, the stockholder is required to notify Cadence of the stockholder's current taxpayer identification number ("TIN") by completing the enclosed Substitute Form W-9, certifying that the TIN provided on that form is correct (or that such stockholder is awaiting a TIN), and that (i) the stockholder has not been notified by the Internal Revenue Service that the stockholder is subject to backup withholding as a result of failure to report all interest or dividends or (ii) after being so notified, the Internal Revenue Service has notified the stockholder that the stockholder is no longer subject to backup withholding. If Cadence is not provided with the correct TIN, such stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service and payments that are made to such stockholder with respect to the shares of Tality Common Stock pursuant to the Offer to Repurchase may be subject to backup withholding. Each stockholder is required to give Cadence the TIN (e.g., Social Security number or employer identification number) of the record holder of the shares of Tality Common Stock. A stockholder who does not have a TIN may check the box in Part 3 of the Substitute Form W-9 if such stockholder has applied for a number or intends to apply for a TIN in the near future. If the box in Part 3 is checked, the stockholder must also complete the "Certificate of Awaiting Taxpayer Identification Number" below in order to avoid backup withholding. If the box is checked, payments made will be subject to backup withholding unless the stockholder has furnished Cadence with his or her TIN by the time payment is made. A stockholder who checks the box in Part 3 in lieu of furnishing such stockholder's TIN should furnish Cadence with such stockholder's TIN as soon as it is received. Certain stockholders (including, among others, all corporations and certain non-U.S. citizens) are not subject to these backup withholding requirements. To avoid possible erroneous backup withholding, a stockholder who is exempt from backup withholding should complete the Substitute Form W-9 by providing his or her correct TIN, signing and dating the form, and writing exempt on the face of the form. A stockholder who is not a U.S. citizen or who is a non-U.S. entity should also submit to Cadence a properly completed Form W-8, Certificate of Foreign Status (which will be provided upon request), signed under penalty of perjury, attesting to the stockholder's exempt status. Stockholders are urged to consult their own tax advisors to determine whether they are exempt from these backup withholding and reporting requirements. 6 7 If backup withholding applies, Cadence is required to withhold 31% of any payments to be made to the stockholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained by filing a tax return with the Internal Revenue Service. Cadence cannot refund amounts withheld by reason of backup withholding. WHAT HAPPENS IF I DON'T ACCEPT THE OFFER? If you do not accept the Offer to Repurchase, you will keep all of your current Tality Stock. It is anticipated that the Tality entities will undergo some form of reorganization, but upon completion of the reorganization, such reorganization is not expected to change the terms of the Tality Stock. Tality Stock that is not Repurchased will not be registered under the Securities Act of 1933, and therefore will not constitute liquid securities before any initial public offering of Tality Corporation. 7 8 - ------------------------------------------------------------------------------- CADENCE DESIGN SYSTEMS, INC. - -------------------------------------------------------------------------------

NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. 8 9 - ------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office, or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all reportable payments made to me will be withheld. Signature: Date: , 200[ ] ------------------------------------- ---------- --- - ------------------------------------------------------------------------------- 9 EX-10.57 8 f74874ex10-57.txt EXHIBIT 10.57 1 EXHIBIT 10.57 CADENCE DESIGN SYSTEMS, INC. 2001 EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY BOARD OF DIRECTORS JULY 13, 2001 TERMINATION DATE: NONE STATUS AS SECTION 423 PLAN DEPENDS ON SHAREHOLDER APPROVAL AT 2002 ANNUAL MEETING 1. PURPOSE. (a) The Plan was established effective as of July 13, 2001. (b) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase Shares of the Company. (c) The Company, by means of the Plan, seeks to secure and retain the services of new Employees for itself and/or its designated Affiliates and to provide incentives for such persons to exert maximum efforts for the success of the Company and/or such Affiliates. (d) The Company intends that the Rights to purchase Shares granted under the Plan be considered options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code, and will seek shareholder approval of the Plan, in accordance with Section 423(b)(2) of the Code. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the United States Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of the Board appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation. (f) "DIRECTOR" means a member of the Board. (g) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering Memorandum for eligibility to participate in the Offering. 2 (h) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company designated for participation in the Plan. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. (i) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights intended to be options issued under an "employee stock purchase plan," as that term is defined in Section 423(b) of the Code. (j) "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. (k) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on the New York Stock Exchange or any other established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then, except as otherwise provided in the Offering Memorandum, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or market (or, in the event that the security is traded on more than one such exchange or market, the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day occurring on or closest to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable, and on the date as determined more precisely in the Offering Memorandum. (l) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (m) "OFFERING" means the grant of Rights to purchase Shares under the Plan to Eligible Employees. (n) "OFFERING DATE" means a date selected by the Board for an Offering to commence. (o) "OFFERING MEMORANDUM" means a memorandum describing the terms of the then current or otherwise relevant Offering. 2 3 (p) "PARTICIPANT" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. (q) "PLAN" means this 2001 Employee Stock Purchase Plan. (r) "PURCHASE DATE" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (s) "RIGHT" means an option to purchase Shares granted pursuant to the Plan. (t) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (u) "SECURITIES ACT" means the United States Securities Act of 1933, as amended. (v) "SHARE" means a share of the common stock of the Company. 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase Shares shall be granted and the provisions of each Offering of such Rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iv) To amend the Plan as provided in Section 14. 3 4 (v) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Non-Employee Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in securities, the Shares that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate One Million Seven Hundred Fifty Thousand (1,750,000) Shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Right shall again become available for the Plan. (b) The Shares subject to the Plan may be unissued Shares or Shares that have been bought on the open market at prevailing market prices or otherwise. 5. GRANT OF RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Rights to purchase Shares under the Plan to Eligible Employees in an Offering on one or more Offering Dates selected by the Board. All Employees granted Rights under the Plan shall have the same rights and privileges, except that such rights may differ only to the extent permitted under Section 423 of the Code. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all Employees granted Rights to purchase Shares under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering Memorandum or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. 4 5 (b) If a Participant has more than one Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant will be deemed to apply to all of his or her Rights under the Plan, and (ii) an earlier-granted Right (or a Right with a lower exercise price, if two Rights have identical grant dates) will be exercised to the fullest possible extent before a later-granted Right (or a Right with a higher exercise price if two Rights have identical grant dates) will be exercised. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or to Employees of an Affiliate, as the Board may designate as provided in subsection 3(b). Except as provided in subsection 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. Rights shall be granted to all Eligible Employees of any corporation whose Employees are granted any Rights under this Plan by reason of their employment by such corporation, except that there may be excluded Employees (i) whose customary employment is fewer than 20 hours per week (or such lower amount as established in the Offering Memorandum), (ii) whose customary employment is for not more than five months during any calendar year (or such shorter period as established in the Offering Memorandum), (iii) who have completed less than two years of employment by the Company or Affiliate (or such shorter period as established in the Offering Memorandum), (iv) who are "highly compensated" within the meaning of Section 414(q) or the Code, and (v) who otherwise may be excluded without violating Section 423 of the Code or other applicable law. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering Memorandum which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. 5 6 (c) No Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subsection 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) An Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all Employee Stock Purchase Plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase Shares or shares of any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such Shares (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. The provisions of Section 423(b)(8) of the Code shall govern the application of this Section 6(d). 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of Shares purchasable either: (i) with a minimum and maximum percentage or percentages designated by the Board (which need not be uniform throughout the Offering, but any fluctuations in such percentages shall be applied equally to all Employees participating in the Offering) not exceeding twenty percent (20%) of such Employee's Earnings (as defined by the Board in each Offering Memorandum) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering, which amount shall, as specified in the Offering Memorandum for that Offering, be (1) withheld, in whole or in part, from such Employee's Earnings during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering Memorandum for that Offering, which date shall be no later than the end of the Offering and/or (2) contributed, in whole or in part, by such Employee during such period; or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such Employee's Earnings (as defined by the Board in each Offering Memorandum) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. 6 7 (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (c) In connection with each Offering made under the Plan, the Board may specify a maximum amount of Shares that may be purchased by any Participant as well as a maximum aggregate amount of Shares that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate amount of Shares which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of Shares upon exercise of Rights granted under the Offering would exceed any such maximum aggregate amount, the Board shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable and consistent with the requirements of Section 423 of the Code. (d) The purchase price of Shares acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering an enrollment form to the Company within the time specified in the Offering Memorandum, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering Memorandum and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any 7 8 time prior to the end of the Offering except as provided by the Board in the Offering Memorandum. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the Participant) under the Offering, without interest unless otherwise specified in the Offering Memorandum, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate in any other Offerings under the Plan but such Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company and its designated Affiliates for any reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering Memorandum. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering Memorandum. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in Section 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified in the relevant Offering Memorandum, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of Shares up to the maximum amount of Shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering Memorandum for that Offering. No fractional Shares shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering and permitted by law. (b) Unless otherwise specifically provided in the Offering Memorandum, the amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is equal to the amount required to purchase one or more whole Shares on the final Purchase Date of the Offering shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the 8 9 Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering Memorandum. (c) The amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is less than the amount required to purchase one whole Share on the final Purchase Date of the Offering shall be carried forward, without interest, into the next Offering. (d) No Rights granted under the Plan may be exercised to any extent unless the Shares to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Shares are not so registered or the Plan is not in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Shares are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Shares are not registered and the Plan is not in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all amounts contributed by the Participant during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering Memorandum. If the amounts contributed by the Participant have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the amounts contributed by the Participant have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering Memorandum. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the amount of Shares required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Rights unless and until such authority is obtained. 9 10 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Rights granted under the Plan shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. (a) A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, Shares subject to Rights granted under the Plan unless and until the Participant's Shares acquired upon exercise of Rights under the Plan are recorded in the books of the Company. (b) Neither the Plan nor the grant of any Right thereunder shall confer any right on any Employee to remain in the employ of the Company or any Affiliate or restrict the right of the Company or any Affiliate to terminate such Employee's employment. 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) Subject to any required action by the stockholders of the Company, the number of Shares covered by each Right under the Plan that has not yet been exercised and the number of Shares that have been authorized for issuance under the Plan but have not yet been placed under a Right (collectively, the "Reserves"), as well as the price per Share covered by each Right under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split or the payment of stock dividend (but only on the Common Stock) or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to a Right. (b) In the event of the proposed dissolution or liquidation of the Company, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that the Rights under the Plan shall terminate as of a date fixed by the Board and give each Participant the right to exercise his or her Right. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another corporation or a parent or subsidiary of such successor corporation when the Company is not the surviving corporation, or a reverse merger in which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, any and all Offerings shall terminate immediately prior to the consummation of such 10 11 proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, and in lieu of assumption or substitution of the Rights, provide that each Participant shall have the right to exercise his or her Right. If the Board makes a Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Participant that the Right shall be fully exercisable for a period of twenty (20) days from the date of such notice (or such other period of time as the Board shall determine), and the Right shall terminate upon the expiration of such period. (c) The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share covered by each outstanding Right, in the event that the Company effects one or more reorganizations, recapitalizations, rights offering, or other increases or reductions of outstanding Shares, and in the event of the Company being consolidated with or merged into any other corporation. 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in securities and except as to minor amendments to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Affiliate, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3 under the Exchange Act or any Nasdaq or other securities exchange listing requirements. Currently under the Code, stockholder approval within twelve (12) months before or after the adoption of the amendment is required where the amendment will: (i) Increase the amount of Shares that may be issued under the Plan; (ii) Modify the provisions as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code; or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Rights granted under it into compliance therewith. 11 12 (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan without the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the Shares available for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan (including any Offering Memorandum) or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or Rights granted under the Plan comply with the requirements of Section 423 of the Code. 17. TAX WITHHOLDING AND OTHER TAXES AND CONTRIBUTIONS The Company and any Affiliate whose Employees are Eligible Employees shall withhold from each Participant's earnings or other amounts payable to the Participant income tax, social 12 13 security taxes and other taxes required or, if the Company or such Affiliate so chose, permitted, to be withheld with respect to such amounts under applicable law. The Participant shall be liable for all such amounts. In the event the Company or an Affiliate does not withhold such taxes or a Participant's earnings are insufficient to satisfy such withholding, the Company or an Affiliate shall have the right to effect the sale of such Participant's Shares on behalf of the Participant and pay the proceeds to the Company or to the Affiliate, retain amounts that have been deducted from payroll and would otherwise be used to purchase Shares, withhold such taxes from amounts otherwise due to the Participant, or take any other action that they deem necessary to cause the Participant to fulfill such obligation. 18. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon adoption by the Board. 13 EX-10.58 9 f74874ex10-58.txt EXHIBIT 10.58 1 EXHIBIT 10.58 CADENCE DESIGN SYSTEMS, INC. NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN ADOPTED BY BOARD OF DIRECTORS JULY 13, 2001 STOCKHOLDER APPROVAL NOT REQUIRED TERMINATION DATE: NONE 1. PURPOSE. (a) The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Affiliates may be given an opportunity to purchase Shares of the Company. (b) The Company, by means of the Plan, seeks to secure and retain the services of new Employees for itself and/or its designated Affiliates and to provide incentives for such persons to exert maximum efforts for the success of the Company and/or such Affiliates. 2. DEFINITIONS. (a) "AFFILIATE" means any entity approved by the Board in which the Company holds a direct or indirect ownership interest (by value or voting rights) of at least 50%. (b) "BOARD" means the Board of Directors of the Company. (c) "COMMITTEE" means a committee of the Board appointed by the Board in accordance with subsection 3(c) of the Plan. (d) "COMPANY" means Cadence Design Systems, Inc., a Delaware corporation. (e) "DIRECTOR" means a member of the Board. (f) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set forth in the Offering Memorandum for eligibility to participate in the Offering. (g) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or an Affiliate of the Company. Neither service as a Director nor payment of a director's fee shall be sufficient to constitute "employment" by the Company or the Affiliate. (h) "EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as amended. (i) "FAIR MARKET VALUE" means the value of a security, as determined in good faith by the Board. If the security is listed on the New York Stock Exchange or any other established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, then, except as otherwise provided in the Offering Memorandum, the Fair Market Value of the security shall be the closing sales price (rounded up where necessary to the nearest whole cent) for such security (or the closing bid, if no sales were reported) as quoted on such exchange or 2 market (or, in the event that the security is traded on more than one such exchange or market, the exchange or market with the greatest volume of trading in the relevant security of the Company) on the trading day occurring on or closest to the relevant determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable, and on the date as determined more precisely in the Offering Memorandum. (j) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (k) "OFFERING" means the grant of Rights to purchase Shares under the Plan to Eligible Employees. (l) "OFFERING DATE" means a date selected by the Board for an Offering to commence. (m) "OFFERING MEMORANDUM" means a memorandum describing the terms of the then current or otherwise relevant Offering. (n) "PARTICIPANT" means an Eligible Employee who holds an outstanding Right granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Right granted under the Plan. (o) "PLAN" means this Non-Qualified Employee Stock Purchase Plan. (p) "PURCHASE DATE" means one or more dates established by the Board during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. (q) "RIGHT" means an option to purchase Shares granted pursuant to the Plan. (r) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3 as in effect with respect to the Company at the time discretion is being exercised regarding the Plan. (s) "SECURITIES ACT" means the United States Securities Act of 1933, as amended. (t) "SHARE" means a share of the common stock of the Company. 2 3 3. ADMINISTRATION. (a) The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Whether or not the Board has delegated administration, the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan. (b) The Board (or the Committee) shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine when and how Rights to purchase Shares shall be granted and the provisions of each Offering of such Rights (which need not be identical). (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan. (iii) To designate from time to time which Employees are Eligible Employees. (iv) To construe and interpret the Plan and Rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (v) To amend the Plan as provided in Section 14. (vi) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Affiliates. (c) The Board may delegate administration of the Plan to a Committee of the Board composed of two (2) or more members, all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Non-Employee Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in securities, the Shares that may be sold pursuant to Rights granted under the Plan shall not exceed in the aggregate Seven Hundred Fifty Thousand (750,000) Shares. If any Right granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Right shall again become available for the Plan. (b) The Shares subject to the Plan may be unissued Shares or Shares that have been bought on the open market at prevailing market prices or otherwise. 3 4 5. GRANT OF RIGHTS; OFFERING. (a) The Board may from time to time grant or provide for the grant of Rights to purchase Shares under the Plan to Eligible Employees in an Offering on one or more Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the Offering Memorandum or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive. (b) If a Participant has more than one Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant will be deemed to apply to all of his or her Rights under the Plan, and (ii) an earlier-granted Right (or a Right with a lower exercise price, if two Rights have identical grant dates) will be exercised to the fullest possible extent before a later-granted Right (or a Right with a higher exercise price if two Rights have identical grant dates) will be exercised. 6. ELIGIBILITY. (a) Rights may be granted only to Employees of the Company or, as the Board may designate as provided in subsection 3(b), to Employees one or more Affiliates. Except as provided in subsection 6(b), an Employee shall not be eligible to be granted Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Affiliate, as the case may be, for such continuous period preceding such grant as the Board may require. (b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering Memorandum which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Right under that Offering, which Right shall thereafter be deemed to be a part of that Offering. Such Right shall have the same characteristics as any Rights originally granted under that Offering, as described herein, except that, unless otherwise determined by the Board: (i) the date on which such Right is granted shall be the "Offering Date" of such Right for all purposes, including determination of the exercise price of such Right; (ii) the period of the Offering with respect to such Right shall begin on its Offering Date and end coincident with the end of such Offering; and (iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Right under that Offering. 4 5 (c) Unless otherwise specified in an Offering Memorandum, no Employee shall be eligible for the grant of any Rights under the Plan if, immediately after any such Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subsection 6(c), the rules of Section 424(d) of the United States Internal Revenue Code of 1986, as amended (the "Code"), shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding rights and options shall be treated as stock owned by such Employee. (d) Unless otherwise specified in an Offering Memorandum, an Eligible Employee may be granted Rights under the Plan only if such Rights, together with any other Rights granted under all employee stock purchase plans of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase Shares or shares of any Affiliate to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of the fair market value of such Shares (determined at the time such Rights are granted) for each calendar year in which such Rights are outstanding at any time. 7. RIGHTS; PURCHASE PRICE. (a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted the Right to purchase up to the number of Shares purchasable either: (i) with a minimum and maximum percentage or percentages designated by the Board (which need not be uniform throughout the Offering, but any fluctuations in such percentages shall be applied equally to all Employees participating in the Offering) not exceeding twenty percent (20%) of such Employee's Earnings (as defined by the Board in each Offering) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering, which amount shall, as specified in the Offering Memorandum for that Offering, be (1) withheld, in whole or in part, from such Employee's Earnings during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering Memorandum for that Offering, which date shall be no later than the end of the Offering and/or (2) contributed in whole or in part by such Employee during such Offering, or (ii) with a maximum dollar amount designated by the Board that, as the Board determines for a particular Offering, (1) shall be withheld, in whole or in part, from such Employee's Earnings (as defined by the Board in each Offering Memorandum) during the period which begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering and/or (2) shall be contributed, in whole or in part, by such Employee during such period. (b) The Board shall establish one or more Purchase Dates during an Offering on which Rights granted under the Plan shall be exercised and purchases of Shares carried out in accordance with such Offering. 5 6 (c) In connection with each Offering made under the Plan, the Board may specify a maximum amount of Shares that may be purchased by any Participant as well as a maximum aggregate amount of Shares that may be purchased by all Participants pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate amount of Shares which may be purchased by all Participants on any given Purchase Date under the Offering. If the aggregate purchase of Shares upon exercise of Rights granted under the Offering would exceed any such maximum aggregate amount, the Board shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable. (d) Unless otherwise determined by the Board, the purchase price of Shares acquired pursuant to Rights granted under the Plan shall be not less than the lesser of: (i) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Offering Date; or (ii) an amount equal to eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. 8. PARTICIPATION; WITHDRAWAL; TERMINATION. (a) An Eligible Employee may become a Participant in the Plan pursuant to an Offering by delivering an enrollment form to the Company within the time specified in the Offering Memorandum, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board of such Employee's Earnings during the Offering (as defined in each Offering). The payroll deductions made for each Participant shall be credited to a bookkeeping account for such Participant under the Plan and either may be deposited with the general funds of the Company or may be deposited in a separate account in the name of, and for the benefit of, such Participant with a financial institution designated by the Company. To the extent provided in the Offering, a Participant may reduce (including to zero) or increase such payroll deductions. To the extent provided in the Offering, a Participant may begin such payroll deductions after the beginning of the Offering. A Participant may make additional payments into his or her account only if specifically provided for in the Offering Memorandum and only if the Participant has not already had the maximum permitted amount withheld during the Offering. (b) At any time during an Offering, a Participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board in the Offering Memorandum. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the Participant) under the Offering, without interest unless otherwise specified in the Offering Memorandum, and such Participant's interest in that Offering shall be automatically terminated. A Participant's withdrawal from an Offering will have no effect upon such Participant's eligibility to participate 6 7 in any other Offerings under the Plan but such Participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan. (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating Employee's employment with the Company and its designated Affiliates for any reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated Employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire Shares for the terminated Employee) under the Offering, without interest unless otherwise specified in the Offering Memorandum. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering Memorandum. (d) Rights granted under the Plan shall not be transferable by a Participant otherwise than by will or the laws of descent and distribution, or by a beneficiary designation as provided in Section 15 and, otherwise during his or her lifetime, shall be exercisable only by the person to whom such Rights are granted. 9. EXERCISE. (a) On each Purchase Date specified in the relevant Offering Memorandum, each Participant's accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of Shares up to the maximum amount of Shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering Memorandum for that Offering. No fractional Shares shall be issued upon the exercise of Rights granted under the Plan unless specifically provided for in the Offering and permitted by law. (b) As no fractional Shares shall be issued upon the exercise of Rights, unless otherwise specifically provided in the Offering Memorandum, the amount, if any, of accumulated payroll deductions remaining in any Participant's account on the final Purchase Date of the Offering after the purchase of the whole Shares pursuant to subsection 9(a) shall be distributed in full to the Participant at the end of the Offering, without interest. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering. (c) The amount, if any, of accumulated payroll deductions remaining in any Participant's account after the purchase of Shares that is less than the amount required to purchase one whole Share on the final Purchase Date of the Offering shall be carried forward, without interest, into the next Offering. 7 8 (d) No Rights granted under the Plan may be exercised to any extent unless the Shares to be issued upon such exercise under the Plan (including Rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Shares are not so registered or the Plan is not in such compliance, no Rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Shares are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Shares are not registered and the Plan is not in such compliance, no Rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire Shares) shall be distributed to the Participants, without interest unless otherwise specified in the Offering Memorandum. If the accumulated payroll deductions have been deposited with the Company's general funds, then the distribution shall be made from the general funds of the Company, without interest. If the accumulated payroll deductions have been deposited in a separate account with a financial institution as provided in subsection 8(a), then the distribution shall be made from the separate account, without interest unless otherwise specified in the Offering Memorandum. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Rights granted under the Plan, the Company shall ensure that the amount of Shares required to satisfy such Rights are available. (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell Shares upon exercise of the Rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise of such Rights unless and until such authority is obtained. 11. USE OF PROCEEDS FROM SHARES. Proceeds from the sale of Shares pursuant to Rights granted under the Plan shall constitute general funds of the Company. 12. RIGHTS AS A STOCKHOLDER AND EMPLOYEE. (a) A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, Shares subject to Rights granted under the Plan unless and until the Participant's Shares acquired upon exercise of Rights under the Plan are recorded in the books of the Company. 8 9 (b) Neither the Plan nor the grant of any Right thereunder shall confer any right on any Employee to remain in the employ of the Company or any Affiliate or restrict the right of the Company or any Affiliate to terminate such Employee's employment. 13. ADJUSTMENTS UPON CHANGES IN SECURITIES. (a) Subject to any required action by the stockholders of the Company, the number of Shares covered by each Right under the Plan that has not yet been exercised and the number of Shares that have been authorized for issuance under the Plan but have not yet been placed under a Right (collectively, the "Reserves"), as well as the price per Share covered by each Right under the Plan that has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split or the payment of stock dividend (but only on the Common Stock) or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to a Right. (b) In the event of the proposed dissolution or liquidation of the Company, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that the Rights under the Plan shall terminate as of a date fixed by the Board and give each Participant the right to exercise his or her Right. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another corporation or a parent or subsidiary of such successor corporation when the Company is not the surviving corporation, or a reverse merger in which the Company is the surviving corporation but the Shares outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, any and all Offerings shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, and in lieu of assumption or substitution of the Rights, provide that each Participant shall have the right to exercise his or her Right. If the Board makes a Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Participant that the Right shall be fully exercisable for a period of twenty (20) days from the date of such notice (or such other period of time as the Board shall determine), and the Right shall terminate upon the expiration of such period. (c) The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share covered by each outstanding Right, in the event that the Company effects one or more reorganizations, recapitalizations, rights offering, or other increases or reductions of outstanding Shares, and in the event of the Company being consolidated with or merged into any other corporation. 9 10 14. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. (b) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to comply with applicable law. (c) Rights and obligations under any Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan without the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulations. 15. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant's account under the Plan in the event of such Participant's death subsequent to the end of an Offering but prior to delivery to the Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of such Participant's death during an Offering. (b) The Participant may change such designation of beneficiary at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board in its discretion may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the Shares available for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Rights may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Rights granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except as expressly provided in the Plan (including any Offering Memorandum) or with the consent of the person to whom such Rights were granted, or except as necessary to comply with any laws or governmental regulation. 17. TAX WITHHOLDING AND OTHER TAXES AND CONTRIBUTIONS (a) The Company and any Affiliate whose Employees are Eligible Employees shall withhold from each Participant's earnings or other amounts payable to the Participant income 10 11 tax, social security taxes and other taxes required or, if the Company or such Affiliate so chose, permitted, to be withheld with respect to such amounts under applicable law. The Participant shall be liable for all such amounts. In the event the Company or an Affiliate does not withhold such taxes or a Participant's earnings are insufficient to satisfy such withholding, the Company or an Affiliate shall have the right to effect the sale of such Participant's Shares on behalf of the Participant and pay the proceeds to the Company or to the Affiliate, retain amounts that have been deducted from payroll and would otherwise be used to purchase Shares, withhold such taxes from amounts otherwise due to the Participant, or take any other action that they deem necessary to cause the Participant to fulfill such obligation. (b) It is a condition of the grant of Rights to a Participant under the Plan that the Participant agrees to indemnify the Company and its Affiliates in respect of any secondary national insurance contributions payable by any of them on the exercise of the Option. Accordingly, no Right may be exercised under the Plan until the Participant has put the Company or the relevant Affiliate (as the case may be) in sufficient funds (which shall be determined by the Company or the relevant Affiliate (as appropriate)) to meet any obligation of the Company or the relevant Affiliate to account for income tax chargeable under the PAYE system or national insurance contributions (both primary and secondary, including, for the avoidance of doubt, amounts covered by the indemnity in this Section 17(b)). The Company or the relevant Affiliate (as appropriate) may, in lieu of the Participant providing cash funds to the relevant company, sell at the best price which it can reasonably obtain such number of Shares allotted to the Participant as will provide it with an amount necessary to discharge the Participant's obligation under this Section 17(b). (c) The Company or the relevant Affiliate (as appropriate) shall use reasonable endeavours (with the Participant's assistance if required) to agree with the United Kingdom Inland Revenue the amount of any such income tax or national insurance contributions in advance of any Shares being issued to Participant following the exercise of Rights. In the event that any funds made available are less than or greater than the amount needed to meet any obligation of the relevant company to account for income tax or other amounts that are chargeable under the PAYE system and national insurance contributions in relation to the exercise of the relevant Rights, an appropriate payment shall be made by the Participant to the relevant company, or vice versa, as appropriate. 18. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon adoption by the Board. NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN HISTORY Adopted July 13, 2001. 11 -----END PRIVACY-ENHANCED MESSAGE-----


INDEX
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1.Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 2.17
EXHIBIT 2.18
EXHIBIT 10.50
EXHIBIT 10.51
EXHIBIT 10.56
EXHIBIT 10.57
EXHIBIT 10.58


			Page

PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets:




		June 30, 2001 and December 30, 2000		3
		Condensed Consolidated Statements of Operations:




		Three and Six Months Ended June 30, 2001 and July 1, 2000		4
		Condensed Consolidated Statements of Cash Flows:




		Six Months Ended June 30, 2001 and July 1, 2000		5




		Notes to Condensed Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and




		Results of Operations		19




	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39





PART II.		OTHER INFORMATION




	Item 1.	Legal Proceedings		43




	Item 2.	Changes in Securities and Use of Proceeds		46




	Item 3.	Defaults Upon Senior Securities		46




	Item 4.	Submission of Matters to a Vote of Security Holders		47




	Item 5.	Other Information		47




	Item 6.	Exhibits and Reports on Form 8-K		47




Signatures				48


			June 30,			December 30,
			2001			2000

			(Unaudited)




Current Assets:




	Cash and cash equivalents		$	130,037		$	85,220




	Short-term investments			11,026			51,749




	Receivables, net			249,077			289,468




	Inventories, net			22,138			20,149




	Prepaid expenses and other			126,133			110,262





		Total current assets		538,411			556,848




Property, plant, and equipment, net				381,859			368,879




Software development costs, net				11,338			10,738




Acquired intangibles, net				355,508			326,518




Installment contract receivables				33,650			38,420




Other assets				159,306			175,918

			$	1,480,072		$	1,477,321





LIABILITIES AND STOCKHOLDERS’ EQUITY




Current Liabilities:




	Notes payable and current portion of capital leases		$	1,807		$	2,212




	Accounts payable and accrued liabilities			243,826			273,594




	Deferred revenue			233,068			215,768





		Total current liabilities		478,701			491,574





Long-term Liabilities:




	Capital leases			2,207			3,298




	Minority interest			6,878			11,612




	Other long-term liabilities			60,044			61,372





		Total long-term liabilities		69,129			76,282





Stockholders’ Equity:




	Common stock and capital in excess of par value			798,745			847,099




	Treasury stock at cost			(164,151	)		(256,260	)




	Deferred compensation			(53,506	)		(60,978	)




	Retained earnings			369,157			394,224




	Accumulated other comprehensive loss			(18,003	)		(14,620	)





		Total stockholders’ equity		932,242			909,465

			$	1,480,072		$	1,477,321



				Three Months Ended					Six Months Ended

				June 30,			July 1,		June 30,			July 1,
				2001			2000		2001			2000

Revenue:




	Product			$	190,166		$	140,383	$	371,423		$	245,915




	Services				73,798			80,177		153,818			155,992




	Maintenance				83,611			78,122		166,991			154,268





		Total revenue			347,575			298,682		692,232			556,175





Costs and Expenses:




	Cost of product				21,820			20,501		43,483			40,979




	Cost of services				48,765			52,182		102,481			101,183




	Cost of maintenance				15,918			15,329		32,876			29,518




	Marketing and sales				96,163			95,031		189,650			181,198




	Research and development				73,902			65,772		144,882			128,345




	General and administrative				27,454			23,751		58,209			46,283




	Amortization of acquired intangibles				25,928			19,868		47,920			39,534




	Amortization of deferred stock compensation⁽¹⁾				7,175			- - - -		13,115			- - - -




	Restructuring, asset impairment, and unusual items				67,704			- - - -		84,788			- - - -





		Total costs and expenses			384,829			292,434		717,404			567,040





			Income (loss) from operations		(37,254	)		6,248		(25,172	)		(10,865	)




Other income, net					536			1,407		158			2,453





			Income (loss) before provision (benefit) for income taxes		(36,718	)		7,655		(25,014	)		(8,412	)




Provision (benefit) for income taxes					(7,829	)		2,029		53			(2,229	)





			Net income (loss)	$	(28,889	)	$	5,626	$	(25,067	)	$	(6,183	)





Basic net income (loss) per share				$	(0.12	)	$	0.02	$	(0.10	)	$	(0.03	)





Diluted net income (loss) per share				$	(0.12	)	$	0.02	$	(0.10	)	$	(0.03	)





Weighted average common shares outstanding					248,020			244,404		244,609			244,516





Weighted average common and potential common shares outstanding — assuming dilution					248,020			258,583		244,609			244,516






Cost of services	$	1,441	$	- - - -	$	3,047	$	- - - -




Marketing and sales		1,550		- - - -		2,785		- - - -




Research and development		1,658		- - - -		2,078		- - - -




General and administrative		2,526		- - - -		5,205		- - - -

	$	7,175	$	- - - -	$	13,115	$	- - - -






Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0148231 (I.R.S. Employer Identification No.)






2655 Seely Avenue, Building 5, San Jose, California (Address of Principal Executive Offices)		95134 (Zip Code)


⁽¹⁾	Amortization of deferred stock compensation would be classified as follows:



		For the Six Months Ended June 30, 2001

		Severance
		And			Excess
		Benefits			Facilities			Assets			Total


		(In thousands)




Balance, December 30, 2000.		$	2,319		$	4,938		$	280		$	7,537




	2001 restructuring charges		11,290			10,264			11,100			32,654




	Non-cash charges		16			(2,787	)		(8,910	)		(11,681	)




	Cash charges		(10,841	)		(2,511	)		(427	)		(13,779	)




	Reclassifications		- - - -			525			- - - -			525





Balance, June 30, 2001.		$	2,784		$	10,429		$	2,043		$	15,256



		For the Six Months Ended

		June 30, 2001		July 1, 2000


		(In thousands)




Cash Paid During the Period For:




	Interest	$	967	$	942





	Income taxes (including foreign withholding tax)	$	8,357	$	9,905





Non-Cash Investing and Financing Activities:




	Capital lease obligations incurred for equipment	$	153	$	689





	Common stock and options issued for acquisitions	$	100,452	$	- - - -





	Transfer of inventory to fixed assets	$	- - - -	$	5,462





	Equity investment by transfer of equipment or software	$	- - - -	$	8,140





	Repurchase of restricted Tality stock and cancellation of a portion of related notes payable	$	2,775	$	- - - -



		For the Three Months Ended June 30, 2001

		Product		Services		Maintenance		Other			Total			Tality


		(In thousands)




Revenue		$	190,166	$	73,798	$	83,611	$	- - - -		$	347,575		$	45,266




Cost of revenue			21,820		48,765		15,918		- - - -			86,503			32,103




Amortization of acquired intangibles			- - - -		- - - -		- - - -		25,928			25,928			- - - -




Inventory write- down and other			- - - -		- - - -		- - - -		6,944			6,944			1,148





	Gross margin		168,346		25,033		67,693		(32,872	)		228,200			12,015




Marketing and sales			- - - -		- - - -		- - - -		(96,163	)		(96,163	)		(7,337	)




Research and development			- - - -		- - - -		- - - -		(73,902	)		(73,902	)		(6,206	)




General and administrative			- - - -		- - - -		- - - -		(27,454	)		(27,454	)		(8,994	)




Amortization of acquired intangibles			- - - -		- - - -		- - - -		- - - -			- - - -			(4,001	)




Amortization of deferred stock compensation			- - - -		- - - -		- - - -		(7,175	)		(7,175	)		(3,205	)




Unusual items			- - - -		- - - -		- - - -		(60,760	)		(60,760	)		(42,857	)




Other income (expense), net			- - - -		- - - -		- - - -		536			536			(20	)





Income (loss) before provision (benefit) for income taxes		$	168,346	$	25,033	$	67,693	$	(297,790	)	$	(36,718	)	$	(60,605	)



		For the Three Months Ended July 1, 2000

		Product		Services		Maintenance		Other			Total			Tality

						(In thousands)




Revenue		$	140,383	$	80,177	$	78,122	$	- - - -		$	298,682		$	47,257




Cost of revenue			20,501		52,182		15,329		- - - -			88,012			36,740




Amortization of acquired intangibles			- - - -		- - - -		- - - -		19,868			19,868			- - - -





	Gross margin		119,882		27,995		62,793		(19,868	)		190,802			10,517




Marketing and sales			- - - -		- - - -		- - - -		(95,031	)		(95,031	)		(8,726	)




Research and development			- - - -		- - - -		- - - -		(65,772	)		(65,772	)		(3,025	)




General and administrative			- - - -		- - - -		- - - -		(23,751	)		(23,751	)		(7,804	)




Amortization of acquired intangibles			- - - -		- - - -		- - - -		- - - -			- - - -			(4,185	)




Unusual items			- - - -		- - - -		- - - -		- - - -			- - - -			(741	)




Other income, net			- - - -		- - - -		- - - -		1,407			1,407			470





Income (loss) before provision (benefit) for income taxes		$	119,882	$	27,995	$	62,793	$	(203,015	)	$	7,655		$	(13,494	)



				For the Three Months Ended

				June 30,		July 1,
				2001		2000

North America:




	United States			$	189,423	$	160,542




	Other				11,739		9,115





		Total North America		$	201,162	$	169,657





Europe:




	United Kingdom			$	35,568	$	22,065




	Germany				11,852		22,270




	Other				38,156		27,243





		Total Europe		$	85,576	$	71,578





Japan and Asia:




	Japan			$	43,466	$	44,077




	Asia				17,371		13,370





		Total Japan and Asia			60,837		57,447





			Total	$	347,575	$	298,682



		Three Months Ended							Six Months Ended

		June 30,		July 1,					June 30,		July 1,
		2001		2000		% Change			2001		2000		% Change


		(In millions, except percentages)
*Revenue by Geography*




Domestic		$	189.4	$	160.5		18	%	$	398.9	$	312.6		28	%




International			158.2		138.2		14	%		293.3		243.6		20	%





	Total revenue	$	347.6	$	298.7		16	%	$	692.2	$	556.2		24	%


	*Intellectual property infringement by or against Cadence could seriously harm its business*



			For the Six Months Ended				For the Six Months Ended
			June 30, 2001				July 1, 2000

					Long-Lived				Long-Lived
			Revenues		Assets		Revenues		Assets

North America:




	United States		$	398,949	$	330,792	$	312,571	$	283,934




	Other			18,756		2,890		14,091		3,336





		Total North America	$	417,705	$	333,682	$	326,662	$	287,270





Europe:




	United Kingdom		$	30,994	$	26,918	$	43,991	$	32,912






Product	55%	47%	54%	44%




Services	21%	27%	22%	28%




Maintenance	24%	26%	24%	28%


	*Cadence obtains key components for its hardware products from a limited number of suppliers*


			Carrying		Average
			Value		Interest Rate

			(In millions)




Interest Bearing Instruments:




	Cash — variable rate		$	54.0		3.80%




	Cash — fixed rate			16.4		3.05%




	Short-term investments — fixed rate			11.0		3.94%




	Cash equivalents — variable rate			1.0		3.38%





		Total interest bearing instruments	$	82.4		3.67%


					Weighted
					Average
		Notional			Contract
		Amount			Rate

		(In millions)




Forward Contracts:




	Euro	$	37.8			0.86




	Japanese yen		24.7			121.54




	Swedish krona		11.7			10.59




	British pound sterling		8.3			1.37




	Canadian dollars		3.9			1.53




	Hong Kong dollars		1.4			7.80




	Singapore dollars		1.3			1.81

		$	89.1





	Estimated fair value	$	(0.4	)


		2001		2002		Estimated
		Maturity		Maturity		Fair Value

(Shares and contract amounts in millions)




Put Warrants:




	Shares		3.4		1.7




	Weighted average strike price	$	25.15	$	25.13




	Contract amount	$	86.4	$	42.4	$	35.6




Call Options:




	Shares		2.5		1.3




	Weighted average strike price	$	25.42	$	25.38




	Contract amount	$	63.5	$	31.7	$	3.0


Nominee	In Favor		Withheld

H. Raymond Bingham		183,380,447		42,440,790




Susan L. Bostrom		225,261,500		559,737




Dr. Leonard Y.W. Liu		225,238,755		582,482




Donald L. Lucas		225,214,844		606,393




Dr. Alberto Sangiovanni-Vincentelli		187,255,565		38,565,672




George M. Scalise		225,246,927		574,310




Dr. John B. Shoven		225,259,217		562,020




Roger S. Siboni		225,258,878		562,359


Exhibit
Number			Exhibit Title

	2.1	7	Assignment and Assumption Agreement, dated as of June 2, 2001, by and between Tality Corporation and Tality, LP.
	2.1	8	Master Amendment and Consent, effective as of June 2, 2001 by and among the Registrant, Tality Corporation, Tality Transition Corporation, Tality, LP, and Cadence Holdings, Inc.
	10.5	0	Tality Holdings, Inc. 2000 Equity Incentive Plan.
	10.5	1	Tality Holdings, Inc. Directors Stock Option Plan.
	10.5	6	Form of Letter Agreement between the Registrant and certain holders of Tality Corporation Class A Common Stock and regarding the repurchase of Tality stock.
	10.5	7	The Registrant’s 2001 Employee Stock Purchase Plan.
	10.5	8	The Registrant’s Non-Qualified Employee Stock Purchase Plan.