In the last few days there have been speculations on the DAC floor about the financial health of Magma Design Automation. The rumors appear to originate from the financial action described below. In an eminently technical environment with localized knowledge of financial rules and operations this can be damaging. In keeping with my belief that it is helpful to report on financial issues I decided to address the subject in as timely a manner as I could.

Magma Design Automation Inc. announced that its audited financial statements for the fiscal year ended May 3, 2009, included in the company’s Annual Report on Form 10-K, filed on July 20, 2009, contained a “going concern qualification” from its independent registered accounting firm, Grant Thornton LLP.

Management’s plan to address this issue includes, among other things, an intent to exchange all of the company’s outstanding 2.0% Convertible Senior Notes due May 15, 2010 with 8.0% Convertible Senior Notes due 2014 for up to an aggregate principal amount of $44,945,000. The company has already started the exchange.

Exchanging convertible notes that are about to mature is a normal tool in corporate financing.
For each validly tendered and accepted $1,000 principal amount of existing notes, Magma is offering to exchange:

• $900 principal amount of its exchange notes, and
• Accrued and unpaid interest on the existing notes up to, but excluding, the closing date of the exchange offer.

In other words someone holding a note worth $1000 will receive a new note with the value equal to $900 plus interest earned until August 20, 2009. That new note will then accrue interest equal to 8%.

The exchange offer for the existing notes will expire at 5 p.m. EDT on Friday, August 21, 2009, unless earlier terminated or extended by Magma. Tendered existing notes may be withdrawn at any time before 5 p.m. EDT on the expiration date.

The exchange offer is conditioned on a minimum of $35,000,000 aggregate principal amount of existing notes being validly tendered and not withdrawn in the exchange offer. Of course as the date of maturity of these new notes approaches, Magma will have the option to use whatever financial tools are at its disposal to offer another exchange, allow the holders to convert them according to the terms contained in the offer, or even redeem the notes for cash.