SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 26, 2002
SYNOPSYS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 000-19807 56-1546236
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043-4033
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 650-584-5000
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
This Amendment No. 1 of Current Report on Form 8-K/A amends Item 7 of the
Current Report on Form 8-K dated June 6, 2002 and filed June 6, 2002.
(a) Financial Statements of Business Acquired.
(i) Historical financial statements of Avant! Corporation (A) as of
December 31, 2001 and 2000 and for each of the three years ended
December 31, 2001, 2000 and 1999 and (B) as of March 31, 2002 and
for the three months then ended (unaudited). Copies of such
financial statements are attached hereto as Exhibit 99.1.
(ii) Historical financial statements of Forefront Venture Partners, L.P.
as of December 31, 2001 and 2000 and for each of the three years
ended December 31, 2001, 2000 and 1999. Copies of such financial
statements are attached hereto as Exhibit 99.2.
(b) Pro Forma Financial Information
(i) Unaudited pro forma condensed combined consolidated financial
statements of Synopsys, Inc. and Avant! Corporation as of April
30, 2002 and for the year ended October 31, 2001 and for the six
months ended April 30, 2002. A copy of such financial information
is attached hereto as Exhibit 99.3.
(c) Exhibits
NUMBER TITLE
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG, LLP
23.3 Consent of BDO Seidman, LLP
99.1 Historical financial statements of Avant! Corporation
(A) as of December 31, 2001 and 2000 and for each of
the three years ended December 31, 2001, 2000 and 1999
and (B) as of March 31, 2002 and for the three months
then ended (unaudited).
99.2 Historical financial statements of Forefront Venture
Partners, L.P. (A) as of December 31, 2001 and 2000
and for each of the three years ended December 31,
2001, 2000 and 1999.
99.3 Unaudited pro forma condensed combined financial
statements of Synopsys as of April 30, 2002 and for the
year ended October 31, 2001 and for the six months
ended April 30, 2002 (unaudited).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 30, 2002
SYNOPSYS, INC.
(Registrant)
By: /S/ ROBERT B. HENSKE
----------------------
Robert B. Henske
Senior Vice President,
Finance and Operations, and
Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHIBITS
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG, LLP
23.3 Consent of BDO Seidman, LLP
99.1 Historical financial statements of Avant! Corporation (A) as of
December 31, 2001 and 2000 and for each of the three years ended
December 31, 2001, 2000 and 1999 and (B) as of March 31, 2002 and for
the three months then ended (unaudited).
99.2 Historical financial statements of Forefront Venture Partners, L.P.
(A) as of December 31, 2001 and 2000 and for each of the three years
ended December 31, 2001, 2000 and 1999.
99.3 Unaudited pro forma condensed combined financial statements of Synopsys
as of April 30, 2002 and for the year ended October 31, 2001 and for
the six months ended April 30, 2002 (unaudited).
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-56170, 333-90643, 333-84279, 333-77597,
333-50947, 333-45056, 333-32130, 333-38810, 333-63216, 333-71056, 333-77000,
333-75638, 333-97319 and 333-97317) of Synopsys, Inc. of our report dated
February 6, 2002 relating to the financial statements of Avant! Corporation,
which appears in the Current Report on Form 8-K of Synopsys, Inc. dated July 30,
2002. We also hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 (Nos. 333-56170, 333-90643, 333-84279,
333-77597, 333-50947, 333-45056, 333-32130, 333-38810, 333-63216, 333-71056,
333-77000, 333-75638, 333-97319 and 333-97317) of Synopsys, Inc. of our report
dated January 18, 2002 relating to the financial statements of Forefront Venture
Partners, L.P., which appears in the Current Report of Form 8-K of Synopsys,
Inc. dated July 30, 2002.
/s/PricewaterhouseCoopers LLP
San Jose, California
July 26, 2002
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Avant! Corporation:
We hereby consent to the incorporation by reference in the registration
statements (Nos. 333-56170, 333-90643, 333-84279, 333-77597, 333-50947,
333-45056, 333-32130, 333-38810, 333-63216, 333-71056, 333-77000, 333-75638,
333-97319 and 333-97317) on Form S-8 of our reports dated February 12, 2001,
except as to Note 7, which is as of March 23, 2001 included in Amendment No. 1
to the Current Report on Form 8-K/A of Synopsys, Inc. relating to the
consolidated balance sheets of Avant! Corporation, Inc. and subsidiaries as of
December 31, 2000, and the related consolidated statements of earnings,
stockholder's equity and comprehensive income, and cash flows for each of the
years in the two-year period ended December 31, 2000, and the related financial
statement schedule which reports appear in the December 31, 2000 annual report
on Form 10-K of Avant! Corporation.
KPMG LLP
Mountain View, California
July 29, 2002
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Forefront Venture Partners, L.P.
Santa Clara, California
We hereby consent to the incorporation by reference in the previously filed open
Registration Statements on Form S-8 (Nos. 333-56170, 333-90643, 333-84279,
333-77597, 333-50947, 333-45056, 333-32130, 333-38810, 333-63216, 333-71056,
333-77000, 333-75638, 333-97319 and 333-97317) of Synopsys, Inc. of our report
dated February 9, 2001 except for Note 4, as to which the date is March 30,
2001, relating to the financial statements of Forefront Venture Partners, L.P.
appearing in Synopsys, Inc.'s Current Report on Form 8-K/A dated July 30, 2002.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Jose California
July 24, 2002
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS OF AVANT! CORPORATION
Page
Fiscal Year Ended December 31, 2001
Report of PricewaterhouseCoopers LLP, Independent Accountants................F-1
Report of KPMG LLP, Independent Auditors.....................................F-2
Consolidated Statements of Earnings......................................... F-3
Consolidated Balance Sheets..................................................F-4
Consolidated Statements of Stockholders' Equity .............................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements ..................................F-7
Three Months Ended March 31, 2002
Unaudited Condensed Consolidated Balance Sheets.............................F-37
Unaudited Condensed Consolidated Statements of Earnings.....................F-38
Unaudited Condensed Consolidated Statements of Cash Flows.................. F-39
Notes to Unaudited Condensed Consolidated Financial Statements..............F-40
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders
of Avant! Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 7 present fairly, in all material respects, the financial
position of Avant! Corporation and its subsidiaries at December 31, 2001, and
the results of their operations and their cash flows for the year ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
February 6, 2002
F-1
INDEPENDENT AUDITOR'S REPORT
The Board of Directors Avant! Corporation:
We have audited the accompanying consolidated balance sheet of Avant!
Corporation and subsidiaries as of December 31, 2000, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the two-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avant! Corporation
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Mountain View, California
February 12, 2001, except as to Note 7,
which is as of March 23, 2001
F-2
AVANTI! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
Revenue:
Revenue from unaffiliated customers:
Perpetual license $ 95,515 $ 127,439 $ 119,525
Time-based license 167,302 110,437 84,784
Service 101,326 90,138 80,346
-------- -------- -------
Total revenue from unaffiliated customers 364,143 328,014 284,655
Revenue from affiliates 34,527 30,086 18,965
------- -------- -------
Total revenue 398,670 358,100 303,620
Costs and expenses:
Costs of software 5,203 5,623 5,664
Costs of services 24,243 20,131 17,627
Selling and marketing 98,744 102,953 84,698
Research and development 86,768 84,237 71,430
General and administrative 47,566 39,556 37,653
Litigation settlements 268,085 47,500 --
Merger and in-process research and
development expenses -- (343) 5,902
------- -------- -------
Total operating expenses 530,609 299,657 222,974
-------- -------- -------
Earnings (loss) from operations (131,939) 58,443 80,646
Equity income (loss) from investments
and joint ventures, net (13,354) 22,262 6,122
Interest income and other, net 6,124 4,434 7,716
--------- -------- -------
Earnings (loss) before income taxes (139,169) 85,139 94,484
Income taxes 38,548 32,280 37,864
--------- -------- -------
Net earnings (loss) $ (177,717) $ 52,859 $ 56,620
========= ======== ========
Basic $ (4.72) $ 1.36 $ 1.49
Diluted $ (4.72) $ 1.32 $ 1.42
Weighted average shares outstanding:
Basic 37,637 38,880 38,084
Diluted 37,637 39,966 39,746
See accompanying notes to consolidated financial statements.
F-3
AVANTI! CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 121,814 $ 106,545
Short-term investments 23,740 143,871
Restricted investments 6,007 37,800
Accounts receivable, net of allowances of $10,258
and $16,133, respectively 47,410 76,572
Due from affiliates -- 812
Deferred income taxes 29,201 34,036
Prepaid expenses and other current assets 18,028 11,853
------- -------
Total current assets 246,200 411,489
Equipment, furniture and fixtures, net 23,645 26,821
Deferred income taxes 15,413 25,994
Goodwill and other intangibles, net 17,960 35,124
Investments and joint ventures 26,465 49,144
Other assets 44,719 13,318
------- -------
Total assets $ 374,402 $ 561,890
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,265 $ 9,982
Accrued compensation 20,104 27,909
Accrued income taxes 32,849 33,165
Other accrued liabilities 24,839 19,056
Accrued litigation 31,548 47,500
Deferred revenue 68,171 70,459
-------- -------
Total current liabilities 183,776 208,071
Other noncurrent liabilities 10,563 7,918
-------- -------
Total liabilities 194,339 215,989
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.0001 par value; 70,000,000 shares
authorized; 38,322,078 and 37,576,000 shares
issued and outstanding at December 31, 2001
and 2000, respectively 4 4
Additional paid-in capital 293,018 276,219
Stock-based compensation (2,865) (2,770)
Retained earnings (accumulated deficit) (39,287) 138,430
Accumulated other comprehensive income 2,049 327
Treasury stock, at cost; 4,457,000 and 4,100,000 common
shares at December 31, 2001 and 2000, respectively (72,856) (66,309)
-------- --------
Total stockholders' equity 180,063 345,901
-------- --------
Total liabilities and stockholders' equity $ 374,402 $ 561,890
======== ========
See accompanying notes to consolidated financial statements.
F-4
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS TOTAL COMPREHENSIVE
PAID-IN STOCK-BASED COMPREHENSIVE (ACCUMULATED TREASURY STOCKHOLDERS' INCOME
SHARES AMOUNT CAPITAL COMPENSATION INCOME/(LOSS) DEFICIT) STOCK EQUITY (LOSS)
--------------------------------------------------------------------------------------------------------------
Balances as of 37,474 $ 4 $218,204 $(1,306) $ (19) $ 28,951 $ -- $ 245,834
December 31, 1998
Comprehensive
income:
Net
earnings 56,620 56,620 $ 56,620
Unrealized
loss on
short-term
investments
net of tax
effects of $479 (1,659) (1,659) (1,659)
----------
Comprehensive
income $ 54,961
==========
=====
Stock issued 870 9,698 9,698
under stock
option plans,
including tax
benefits of
$3,687
===
Stock issued
under stock
purchase plan 163 1,685 1,685
Issuance of
common stock 367 876 876
Employee
stock-based
compensation 270 (270)
Amortization of
employee
stock-based
compensation 1,247 1,247
--------------------------------------------------------------------------------------------------
Balances as of 38,874 $ 4 $230,733 $ (329) $ (1,678) $ 85,571 $ -- $ 314,301
December 31, 1999
=====================
Comprehensive
income:
Net
earnings 52,859 52,859 $ 52,859
Unrealized
gain on
short-term
investments
net of tax
effects of $1,203 2,005 2,005 2,005
---------
Comprehensive
income $ 54,864
==========
Stock issued
under stock
option plans,
net, including
tax expense of $260 575 5,474 5,474
Stock issued
under stock
purchase plan 227 3,017 3,017
Repurchase of
common stock (4,100) (66,309) (66,309)
Private placement
of common stock 2,000 32,846 32,846
Stock options
assumed in
connection with
acquisition 831 831
Employee
stock-based
compensation 3,318 (3,318)
Amortization of
employee
stock-based
compensation 877 877
--------------------------------------------------------------------------------------------------
Balances as of 37,576 $ 4 $276,219 $(2,770) $ 327 $ 138,430 $ (66,309) $ 345,901
December 31, 2000
=====================
Comprehensive
loss:
Net loss (177,717) (177,717) $ 177,717)
Unrealized
gain on
short-term
investments
net of tax
effects of $389 1,722 1,722 1,722
----------
Comprehensive
loss $(175,995)
==========
===
Stock issued 679 11,137 11,137
under stock
option plans,
net, including
tax benefit of
$2,253
===
Stock issued
under stock
purchase plan 271 3,018 3,018
Stock issued
under stock bonus
plan 153 842 842
Repurchase of
common stock (357) (6,547) (6,547)
Employee
stock-based
compensation 1,159 (1,159)
Stock-based
compensation to
non-employees 643 643
Amortization of
stock-based
compensation 1,064 1,064
--------------------------------------------------------------------------------------------------
Balances as of
December 31, 2001 38,322 $ 4 $293,018 $(2,865) $ 2,049 $ (39,287) $ (72,856) $ 180,063
================================================================================================
See accompanying notes to consolidated financial statements
F-5
AVANTI! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
Cash flows from operating activities:
Net (loss) earnings $ (177,717) $ 52,859 $ 56,620
Adjustments to reconcile net (loss) earnings to net cash (used in) provided
by operating activities:
Depreciation and amortization 27,792 28,508 20,656
Acquired in-process research and development -- 940 --
Merger accruals -- (2,165) --
Impaired goodwill 767 -- --
Amortization of stock-based compensation 1,064 877 1,247
Compensation under stock plans 1,485 -- --
Loss on disposal of assets -- 275 517
Equity (income) loss from investments and joint ventures 13,354 (22,262) (6,122)
Deferred income taxes 14,218 (15,975) (5,068)
Tax benefit (expense) related to stock options 2,253 (260) 3,687
Deferred rent (542) 1,455 648
Provision for doubtful accounts 4,210 5,876 7,282
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable 30,237 (24,366) (22,047)
Due from affiliates 812 3,743 4,392
Prepaid expenses and other assets 1,225 (9,625) 1,748
Accounts payable (3,717) (2,220) 4,783
Accrued compensation (8,406) 8,612 9,188
Accrued income taxes (316) 7,250 157
Other accrued liabilities 5,165 6,084 3,981
Accrued litigation (15,952) 47,500 --
Deferred revenue (2,288) 23,538 13,302
------------ ------------ -----------
Net cash (used in) provided by operating activities (106,356) 110,644 94,971
------------ ------------ -----------
Cash flows from investing activities:
Purchases of short-term investments (233,467) (382,306) 591,857)
Maturities and sales of short-term investments 384,714 363,271 451,354
Investments and joint ventures (8,102) (1,251) --
Investment in ALi Bonds (30,000) -- --
Investment in SMIC (55,000) (7,500) --
Proceeds from sale of investment in SMIC 62,500 -- --
Distribution of capital from Forefront 2,500 -- --
Purchases of equipment, furniture, fixtures and other assets (6,100) (10,210) (7,249)
Purchases of acquired entities, net of cash acquired (600) (21,914) --
------------ ------------ -------------
Net cash provided by (used in) investing activities 116,445 (59,910) 147,752)
------------ ------------ -------------
Cash flows from financing activities:
Principal payments under capital lease obligations -- -- (602)
Payments on notes payable, net -- -- (1,905)
Repurchase of common stock (6,547) (66,309) --
Loans to employees, officers and directors, net (175) 757 700
Exercise of stock options 8,884 5,734 6,011
Issuance of common stock under employee stock purchase plan 3,018 3,017 1,685
Issuance of common stock, net -- 32,846 478
------------ ------------ -------------
Net cash provided by (used in) financing activities 5,180 (23,955) 6,367
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents 15,269 26,779 (46,414)
Cash and cash equivalents, beginning of year 106,545 79,766 126,180
------------ ------------ -------------
Cash and cash equivalents, end of year $ 121,814 $ 106,545 $ 79,766
------------ ------------ -------------
------------ ------------ -------------
Supplemental disclosures:
Cash paid during the year for:
Interest $ 2,127 $ 149 $ 335
Income taxes $ 16,843 $ 37,384 $ 35,003
Noncash investing activities:
Issuance of options to acquire Analogy $ -- $ 831 $ --
See accompanying notes to consolidated financial statements.
F-6
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Avant! Corporation ("the Company" or "Avant!") develops, markets, licenses and
supports electronic design automation ("EDA") software products that assist
design engineers in the physical layout, design, verification, simulation,
timing and analysis of advanced integrated circuits. Its primary customers are
semiconductor companies in the United States, Asia and Europe.
PRINCIPLES OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Maingate Electronics, KK
("Maingate") became a wholly-owned subsidiary of the Company in December 2001,
and is consolidated in the accompanying balance sheet as of December 31, 2001.
Previously, the Company accounted for its investment in Maingate under the
equity method. The consolidated financial statements have been restated to
reflect the effect of the merger in 1999 with Chrysalis Symbolic Design, Inc.
("Chrysalis"), and Xynetix Design Systems Inc. ("Xynetix") as pooling of
interests. The Maingate and Analogy, Inc. ("Analogy") acquisitions were
accounted for under the purchase method. Analogy was acquired in 2000.
Accordingly, the Company's consolidated financial statements do not include the
results of operations, financial position or cash flows prior to their
acquisitions.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements, have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, impairment of investments and other
long-lived assets, income taxes, and contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
REVENUE RECOGNITION
Revenue consists primarily of fees for perpetual and time-based licenses (TBL)
of our software products and post-contract customer support (PCS) arrangements.
The Company classifies revenues as perpetual license, TBL, service or revenue
from affiliates. Perpetual revenue consists of software license revenue from
products sold under perpetual license arrangements. TBL revenue consists of
software and PCS revenue from TBL arrangements. Service revenue consists
primarily of PCS sold under perpetual licenses arrangements. Revenue from
affiliates consists of products sold to affiliates under perpetual licenses, TBL
and PCS arrangements.
The Company recognizes revenue using the residual method pursuant to the
requirements of Statement of Position No. 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended by Statement of Position No. 98-9, "Software Revenue
Recognition with Respect to Certain Arrangements" ("SOP 98-9").
Under SOP 97-2, revenue attributable to an element in a customer arrangement is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is probable.
F-7
Under the residual method, as per SOP 98-9, revenue is recognized in a multiple
element arrangement for perpetual licenses when Company-specific objective
evidence of fair value exists for all of the undelivered elements in the
arrangement, but does not exist for one or more of the delivered elements in the
arrangement. Most of the Company's perpetual license arrangements include the
first year of PCS in the contract. The Company has determined that it has
sufficient evidence to support vendor specific objective evidence (VSOE) for the
PCS portion in perpetual license arrangements. Accordingly, at the outset of a
new perpetual license arrangement with a customer, the Company defers revenue
for the fair value of its undelivered elements (i.e., PCS) and recognizes
revenue for the remainder of the arrangement fee attributable to the elements
initially delivered in the arrangement (i.e., software product) when the basic
criteria in SOP 97-2 have been met.
Revenues from TBL arrangements are generally recognized ratably over the term of
the license, as the product and PCS portions of the TBL arrangements are bundled
and not sold separately. Certain of the Company's TBL arrangements include
extended payment terms. Revenues from these contracts are recognized upon
delivery of the products at the lesser of aggregate amounts due and payable or
the ratable portion of the entire fee.
PCS arrangements for perpetual licenses generally call for the Company to
provide technical support and software updates. Service revenue is recognized
ratably over the term of the PCS agreement, on a straight-line basis when all
revenue recognition requirements are met.
During the fourth quarter of 2000, the Company adopted Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). The adoption
of SAB 101 did not have a material effect on the Company's consolidated
financial position or results of operations.
The Company recognized revenue from its affiliate Maingate Electronics KK
(Maingate), in the quarter subsequent to the quarter in which Maingate collected
cash from the end users. The company recognizes revenue from its affiliate,
Davan Tech Co., Ltd, ("Davan Tech") when the Company receives cash from Davan
Tech.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. Such costs are included in
selling and marketing expense and totaled approximately $4.7 million, $3.2
million and $4.9 million during the years ended December 31, 2001, 2000, and
1999, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, the financial statements of those subsidiaries, which are
maintained in the local currency, are remeasured into U.S. dollars in accordance
with SFAS No. 52, "Foreign Currency Translation". Exchange gains or losses from
remeasurement of monetary assets and liabilities that are not denominated in
U.S. dollars were not material for any period presented and are included in the
statement of earnings.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining maturity of
three months or less at the date of acquisition to be cash equivalents. Cash
equivalents are stated at cost and consist of money market funds, certificates
of deposit and commercial paper. The carrying amount of cash and cash
equivalents approximates fair value.
SHORT-TERM INVESTMENTS
Short-term investments, which are classified as available-for-sale, consist of
demand deposit investments in short-term debt securities, U.S. Government Agency
debt securities, municipal/ corporate auction preferred stock and municipal
bonds, and are reported at fair value. The cost of securities sold is determined
using the specific identification method when computing realized gains and
losses. Fair value is determined using available market information.
F-8
FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company transacts business in various foreign currencies. Accordingly, the
Company is subject to exposure from adverse movements in foreign currency
exchange rates. There was no foreign currency hedging contracts outstanding as
of December 31, 2001. Net gains and losses related to hedging contracts and
foreign exchange transactions were minimal in 2001, 2000 and 1999.
The Company assesses the need to utilize financial instruments to hedge currency
exposures on an ongoing basis. The Company does not use derivative financial
instruments for speculative trading purposes, nor does the Company hedge its
foreign currency exposure in a manner that entirely offsets the effects of
changes in foreign exchange rates. The Company regularly reviews its hedging
program and may as part of this review determine at any time to change its
hedging program.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. Adoption of this
statement did not have a significant impact on the Company's results of
operations or financial position.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
If appropriate, a valuation allowance is recorded against deferred tax assets if
it is more likely than not that all or a portion of the deferred tax assets will
not be realized. While the Company has considered future taxable income and tax
planning strategies in assessing the need for a valuation allowance, in the
event it determines that it would not be able to realize all or a portion of the
deferred tax assets in the future, an adjustment to the deferred tax asset would
be charged to earnings in the period the determination was made.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost. Equipment, furniture and
fixtures are depreciated using the straight-line method over the estimated
useful lives of the assets, which range from three to five years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Expenditures for
repairs and maintenance are charged to expense as incurred. Upon disposal, costs
and related accumulated depreciation are removed from the accounts and the
resulting gains or losses are reflected in operations.
GOODWILL AND OTHER INTANGIBLES
Intangibles consist principally of goodwill representing the excess of the cost
of a purchased business over the fair value of the net tangible and intangible
assets acquired. Generally, goodwill and other intangibles are amortized using
the straight-line method over three to five years. As of December 31, 2001 and
2000, goodwill and related intangibles totaled $66.9 million and $67.7 million,
respectively, and accumulated amortization was $49.0 million and $32.6 million,
respectively. Amortization expense was $18.5 million, $18.3 million, and $10.4
million for the years ended December 31, 2001, 2000 and 1999, respectively. The
Company periodically evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the assigned goodwill or
render the goodwill not recoverable. If such circumstances arise, the Company
would use an estimate of the undiscounted value of expected future operating
cash flows to determine whether the goodwill is recoverable. If the goodwill is
not recoverable, the carrying amount of the goodwill will be reduced to the
discounted amount of expected future operating cash flows resulting in a charge
to earnings.
F-9
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of our identifiable tangible and
intangible assets under Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of". This statement requires identifiable tangible and
intangible assets to be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the assets. If an asset is considered to be impaired, the
carrying amount of that asset is reduced to the fair value, based on discounted
future cash flows, resulting in a charge to earnings.
VALUATION OF INVESTMENTS
The Company has an investment in a company, which is a developer and supplier of
integrated circuits for personal computers and personal computer peripheral and
multimedia devices as well as other investments. The Company records an
investment impairment charge when we believe an investment has experienced a
decline in value that is other than temporary. The Company reviews each
investment for indicators of impairment on a quarterly basis based, primarily on
achievement of business plan objectives and current market conditions, among
other factors. The primary business plan objectives the Company considers
include, among others, those related to financial performance such as
achievement of planned financial results, liquidity or completion of capital
raising activities, and those that are not primarily financial in nature such as
the introduction of technology. If it is determined that an impairment has
occurred with respect to an investment, in the absence of quantitative valuation
metrics, management estimates the impairment and/or the net realizable value of
the investment based upon available information such as public- and
private-company market comparable information and valuations completed for
similar companies or investments.
LITIGATION COSTS
The pending litigation and any future litigation against the Company and its
employees, regardless of the outcome, are expected to result in substantial
costs and expenses to the Company. The Company's legal expenses for all
litigation matters were $14.6 million, $5.8 million and $14.7 million for the
years ended December 31, 2001, 2000 and 1999, respectively. The Company records
a litigation loss when it determines the negative outcome of litigation matters
to be probable and reasonably estimable. At December 31, 2001 and 2000, Avant!
accrued $31.5 million and $47.5 million, respectively for litigation issues.
The Company currently expects continued substantial legal costs in the future as
a result of its current litigation issues. Thus, current litigation issues could
seriously harm our business, financial condition and results of operations.
NET EARNINGS AND EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing the net earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is computed by
dividing net earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding after giving effect to all dilutive
potential common shares that were outstanding during the period.
Potential common shares are not included in the computation of dilutive earnings
per share if they are antidilutive. The net loss per share as reported in 2001
was not adjusted, since potential common shares were antidilutive. Excluded from
the computation of diluted earnings per share for the years ended December 31,
2000 and 1999, are options to acquire 1,374,902 and 2,159,285 shares
respectively, of common stock with weighted-average exercise prices of $22.27
and $19.72, respectively, because their effects would be antidilutive.
F-10
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years presented (in thousands, except
per share data):
NET EARNINGS WEIGHTED AVERAGE EARNINGS (LOSS)
(LOSS) SHARES OUTSTANDING PER SHARE
2001
Basic $ (177,717) 37,637 $ (4.72)
Effect of dilution:
Stock options ---- ---- ----
---------- --------- ---------
Diluted $ (177,717) 37,637 $ (4.72)
========== ========= =========
2000
Basic $ 52,859 38,880 $ 1.36
Effect of dilution:
Stock options ---- 1,086 ----
---------- ---------- ---------
Diluted $ 52,859 39,966 $ 1.32
========== ========== =========
1999
Basic $ 56,620 38,084 $ 1.49
Effect of dilution:
Stock options ---- 1,662 ----
---------- ---------- ---------
Diluted $ 56,620 39,746 $ 1.42
========== ========== =========
STOCK OPTION AND STOCK PURCHASE PLANS
The Company accounts for its stock-based compensation plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense is recorded on the date of grant when the current
market price of the underlying stock exceeds the exercise price. Pursuant to
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", the Company discloses the pro forma effects of using
the fair value method of accounting for stock-based compensation arrangements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 44, "Accounting for Certain Transactions involving Stock
Compensation", which clarifies the application of APB 25 for certain issues.
There was no material impact on the Company's consolidated financial statements
as a result of adopting this interpretation.
STOCK-BASED COMPENSATION
The Company accounts for stock and stock options issued to non-employees in
accordance with the provisions of Emerging Issues Task Force Consensus on Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring or in Conjunction with Selling, Goods or Services."
Expense is recognized over the vesting period of the options or the periods the
related services are rendered, as appropriate.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142.
The Company adopted the provisions of SFAS 141 effective July 1, 2001. Under
SFAS 141, goodwill and intangible assets determined to have indefinite useful
lives acquired in a purchase business combination completed after June 30, 2001,
but before SFAS 142 is adopted will not be amortized, but will continue to be
F-11
evaluated for impairment in accordance with SFAS 121. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized and tested for impairment in accordance with current
accounting guidance until the date of adoption of SFAS 142.
Upon adoption of SFAS 142, the Company will evaluate existing intangible assets
and goodwill that were acquired in prior purchase business combinations, and
make any necessary reclassifications in order to conform with the new criteria
in SFAS 142 for recognition of intangible assets apart from goodwill. Upon
adoption of SFAS 142, the Company will be required to reassess the useful lives
and residual values of all intangible assets acquired, and make any necessary
amortization period adjustments. In addition, the Company will be required to
test intangible assets with indefinite useful lives and goodwill for impairment
in accordance with the provisions of SFAS 142 within the six-month period
following adoption. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle. Any subsequent impairment losses will be included in operating
activities.
The Company adopted SFAS 142 on January 1, 2002 (See Note 19). As of December
31, 2001, unamortized goodwill is $14.6 million, which will no longer be
amortized subsequent to the adoption of SFAS 142. Related goodwill amortization
expense for 2001, 2000 and 1999 was $11.8 million, $12.9 million and $8.6
million, respectively.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).
SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The Company is in the process of evaluating the effect
of SFAS 144 on its financial statements. The Company does not expect a
significant impact on its financial condition or results of operation because
the impairment assessment under SFAS 144 is largely unchanged from SFAS 121.
2 AGREEMENT AND PLAN OF MERGER
On December 3, 2001, the Company announced that it had entered into a merger
agreement with Synopsys, Inc. under which it will merge with and into Maple
Forest Acquisition L.L.C., a Delaware limited liability company and a direct
wholly owned subsidiary of Synopsys. Under the merger agreement, the Company's
stockholders will receive 0.371 shares of Synopsys common stock for each share
of Avant! common stock owned. In addition, the merger agreement provides that
upon completion of the merger, stock options to purchase the Company's common
stock granted to the Company's employees and directors under the Company's stock
option plans that are outstanding and not exercised immediately before
completing the merger will become options to purchase Synopsys common stock,
except for the options granted to non-employee directors and Gerald C. Hsu. The
replacement options issued in the merger will generally have the same terms and
conditions as were applicable under the Company's stock option plans, except
that the number of common shares subject to such stock options, and the exercise
price of such stock options, will each be adjusted according to the exchange
ratio in the merger agreement. The merger is subject to certain closing
conditions, including, among other things, the approval of Avant! stockholders
of the merger, approval of Synopsys stockholders of the issuance of Synopsys
common stock in connection with the merger, expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other
customary closing conditions.
F-12
3 FINANCIAL INSTRUMENTS
CASH EQUIVALENTS AND INVESTMENTS
All short-term and restricted investments have been classified as
available-for-sale securities. As of December 31, 2001, cash equivalents consist
primarily of money market funds. Cash equivalents and short-term investments
consist of the following as of December 31, (in thousands):
2001 2000
Cash equivalents $ 66,527 $ 86,195
Short-term debt securities 2,947 11,120
U.S. government agency debt securities 22,550 19,234
Municipal bonds 4,250 151,317
------- --------
Total financial instruments $ 96,274 $ 267,866
======= ========
Reported as:
Cash equivalents $ 66,527 $ 86,195
Short-term investments 23,740 143,871
Restricted investments 6,007 37,800
------- --------
$ 96,274 $ 267,866
======= ========
In connection with the legal proceedings disclosed in Note 18, the Company is
required to maintain short-term investments and has classified these as
restricted investments.
The cost of the securities held is based on the specific identification method.
The carrying value of cash and cash equivalents and short-term investments
approximate the fair value (based on quoted market prices) of such investments.
Accordingly, net unrealized gains, at December 31, 2001, were $67,000 and net
unrealized losses at December 31, 2000, were $0.7 million, respectively. As of
December 31, 2001, the underlying maturities of financial instruments were $72.7
million within one year, and $23.6 million from 2003 to 2007.
The following table summarizes sales of available-for-sale securities for the
years ended December 31, 2001, 2000, and 1999 (in thousands):
2001 2000 1999
Proceeds from sales $ 384,714 $ 363,271 $ 451,354
Gross realized gains $ 2,343 $ 375 $ 334
Gross realized losses $ 207 $ 791 $ 1,286
4 EQUIPMENT, FURNITURE AND FIXTURES
As of December 31 equipment, furniture and fixtures consisted of the following
(in thousands):
2001 2000
Furniture and fixtures $ 9,372 $ 9,854
Equipment 44,575 47,341
Leasehold improvements 10,540 12,172
--------- --------
64,487 69,367
Less accumulated depreciation and amortization (40,842) (42,546)
--------- --------
$ 23,645 $ 26,821
========= ========
Depreciation expense on equipment, furniture and fixtures was $9.3 million, $9.4
million and $10.4 million for the years ended December 31, 2001, 2000, and 1999,
respectively.
F-13
5 MERGERS AND ACQUISITIONS
At the end of 2001, the Company completed its purchase of Maingate based on a
formula agreed to by the Company and Synopsys, which was set forth in the
Synopsys merger agreement. The purchase price was approximately $11.7 million in
cash, subject to completion of the final closing balance sheet of Maingate. The
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their fair market values at the date of acquisition. The Maingate
assets and liabilities acquired did not have a significant impact on Avant!'s
assets and liabilities and no goodwill was recorded in this transaction. The
Company had previously entered into a joint venture with Maingate for the
purpose of consolidating distribution in Japan. Prior to the acquisition, the
Company had an 18.8% ownership interest in Maingate and the remaining Maingate
interests were owned by Gerald C. Hsu, the Company's Chairman, Noriko Ando, a
former executive officer, and the Eigen Fund, whose owners included Moriyuki
Chimura, a Company director. Prior to the acquisition, the Company accounted for
its investment using the equity method. The Company's share of equity earnings
are included in the accompanying consolidated statement of earnings as equity
income from investments and joint ventures.
In July 1998, the initially agreed upon capitalization of Maingate was
accomplished by several transfers of Maingate common stock: Avant! transferred
25.0% of Maingate common stock to The Eigen Fund and 40.0% of Maingate common
stock to Gerald Hsu for approximately $177,000 and $283,000, respectively, and
the Eigen Fund sold 2% of Maingate common stock to Noriko Ando for approximately
$17,000.
In the first quarter of 2001, Maingate repurchased 20% of its outstanding shares
from the Company that had the effect of reducing the Company's ownership
interest in Maingate to 18.8%, and increasing Mr. Hsu's, Ms. Ando's and the
Eigen Fund's ownership to 50.0%, 2.5% and 28.7%, respectively. Immediately prior
to the Company's acquisition of Maingate, Mr. Hsu, Ms. Ando and the Eigen Fund
owned 50%, 10%, and 21.2% of Maingate, respectively.
The Eigen Fund is a private equity fund whose owners have included Company
directors Moriyuki Chimura and Charles St. Clair and Paul Lo, the Company's
President. In June and July 2001, Mr. Chimura purchased the Eigen Fund interests
owned by each of Dr. Lo and another Eigen Fund member at the same price paid by
the sellers for these interests. In September 2001, the Eigen Fund transferred a
7.5% ownership interest in Maingate to Ms. Ando in exchange for a cash payment
of approximately $50,000, and in October 2001, the Eigen Fund purchased the
Eigen Fund interest owned by Mr. St. Clair at the same price paid by Mr. St.
Clair for this interest. As of the date of Avant!'s acquisition of Maingate, Mr.
Chimura owned 60% of the outstanding interests in the Eigen Fund, but had the
right to receive approximately 27% of the Eigen Fund's Maingate sales proceeds.
Mr. Hsu served as the manager of the Eigen Fund until his resignation shortly
before Avant!'s purchase of Maingate. Mr. Hsu at no time held any ownership
interest in the Eigen Fund or received any compensation for his services as
manager.
The unaudited pro forma consolidated results of operations of the Company and
Maingate for 2001 and 2000 are summarized below (in thousands):
2001 2000
Revenue $ 405,016 $ 379,598
Net income (loss) (173,778) 56,206
Basic earnings (loss) $ (4.62) $ 1.45
Diluted earnings (loss) (4.62) 1.41
On March 22, 2000, the Company completed its acquisition of Analogy for
approximately $32.1 million including $7.3 million of liabilities assumed and
$0.8 million related to the fair value of options assumed. Analogy is a leader
in mixed-signal and mixed-technology simulation, analysis and design. The
Company paid $24.0 million in cash to acquire all of the outstanding shares of
Analogy. As part of the acquisition, the Company expensed $0.9 million of
acquired in-process research and development expenses and paid $0.9 million in
severance. The in-process research and development amount was expensed, as the
underlying technology had not reached technological feasibility and, in
management's opinion, had no alternative future use.
F-14
The acquisition was recorded under the purchase method of accounting, and
accordingly, the results of operations of Analogy are included in the
consolidated financial statements from the date of acquisition. Pro forma
consolidated information is not presented, as it is not material. The purchase
price has been allocated to the assets acquired and liabilities assumed based
upon their fair market values at the date of acquisition, as summarized below
(in thousands):
Current assets (including cash and cash equivalents of $2,086) $ 8,057
Long term asset 2,473
In-process research and development 940
Developed technology and other intangibles 9,609
Goodwill 11,060
-------
$ 32,139
=======
The amounts allocated to technology were estimated using an income approach
applied to specifically identified technologies acquired. In-process technology
was expensed upon acquisition because technological feasibility had not been
established and no alternative future uses existed. Amounts allocated to
developed technology and other intangibles are amortized on a straight-line
basis over three years. Goodwill is being amortized on a straight-line basis
over five years. All merger expenses were paid as of June 30, 2000.
On August 20, 1999, Avant! acquired Chrysalis, which designs, develops and sells
software products that assist designers of complex and application-specific
integrated circuits in the validation and verification of electronic designs,
for approximately $42 million by issuing approximately 3,042,000 shares of
Avant! common stock in a merger exchange for all of the outstanding stock of
Chrysalis. The Company also assumed Chrysalis stock options representing the
right to purchase 446,370 shares of Avant! common stock at a weighted average
exercise price of $3.99 per share and assumed Chrysalis warrants representing
the right to purchase 116,213 shares of Avant! common stock at a weighted
average exercise price of $14.25 per share. As of December 31, 1999, all the
related warrants had been exercised or expired.
In connection with the acquisition, the Company incurred expenses of $4.4
million, including fees to professional advisors and others totaling $2.0
million, $1.2 million of personnel-related costs and $1.2 million of other
costs. Substantially all of the Company's expenses related to the Chrysalis
acquisition consisted of cash expenditures. As of December 31, 1999, the unpaid
merger related expenses were $3.2 million of which $1.6 million was related to
professional advisors costs and $1.6 million was related to personnel and other
costs. All merger expenses were paid as of December 31, 2000.
On August 6, 1999, Avant! acquired Xynetix, which develops electronic design
automation software for advanced integrated circuits packaging and complex
system design, for approximately $19 million by issuing approximately 1,441,000
shares of Avant! common stock in a merger exchange for all of the outstanding
stock of Xynetix. The Company also assumed outstanding Xynetix stock options
representing the right to purchase 126,492 shares of Avant! common stock at a
weighted average exercise price of $1.86 per share.
In connection with the acquisition, the Company incurred expenses of
approximately $1.5 million, including professional fees totaling $0.6 million,
facilities costs of $0.5 million and other costs of $0.4 million. Substantially
all of the Company's expenses related to the Xynetix acquisition consisted of
cash expenditures. As of December 31, 1999, the unpaid merger related expenses
were $1.0 million of which $0.4 million was related to professional fees and
$0.6 million was related to facilities and other costs. All merger expenses were
paid as of December 31, 2000.
During the quarter ended June 30, 2000, the Company completed its analysis of
the remaining liabilities that related to the August 1999 acquisitions of
Chrysalis and Xynetix and determined that $2.2 million of accrued merger related
expenses related to these acquisitions were no longer required. Accordingly,
these amounts were reversed in the second quarter of 2000.
F-15
Both acquisitions were accounted for using the pooling of interests accounting
method. Accordingly, the Company's consolidated financial statements have been
restated to include the financial position and results of operations for
Chrysalis and Xynetix for all periods presented prior to their acquisition.
Summarized below are revenue and net earnings for the separate entities, Avant!,
Chrysalis and Xynetix, and combined amounts presented in the accompanying
consolidated financial statements (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
1999
(UNAUDITED)
Revenue:
Avant! $ 207,911
Chrysalis 10,608
Xynetix 3,994
---------
$ 222,513
=========
Net earnings (losses):
Avant! $ 39,586
Chrysalis (632)
Xynetix (2,955)
----------
35,999
Adjustment for deferred taxes 602
----------
Net earnings $ 36,601
==========
6 OTHER ASSETS
The Company's other assets consisted of the following as of December 31 (in
thousands):
2001 2000
Investment in ALi Bonds $ 32,400 $ --
Other 12,319 13,318
-------- -------
Total other assets $ 44,719 $ 13,318
======== =======
The Company purchased zero coupon convertible bonds in the amount of $30 million
issued by Acer Laboratories, Inc. (Ali) in March 2001. The bonds mature on March
30, 2004 and are redeemable on that date for an amount equal to 107% of the
original principal amount. The bonds are accounted for as available-for-sale
securities in accordance with FASB No. 115 "Accounting for "Certain Investments
in Debt and Equity Securities", and recorded at fair value based on an
independent valuation. The Company intends to hold these bonds until maturity.
ALi is a Taiwanese developer and supplier of integrated circuits for personal
computers and personal computer peripheral and multimedia devices. ALi was
established in 1993 through a spin-off by Acer Incorporated, which remains the
major shareholder of ALi.
The bonds are convertible until February 29, 2004, into ordinary shares of ALi
at the Company's option, subject to certain periods during which, under
Taiwanese law, ALi's stock transfer records are required to be closed. The
conversion price is US$1.835 per share, subject to adjustment for certain events
set out in the bond agreement including: (1) the making of a free distribution
or bonus issue of shares; (2) the subdivisions, consolidations or
reclassifications of ALi's ordinary shares; and (3) the declaration of a
dividend of shares. The conversion price is also subject to downward adjustment
on March 30, 2002 and March 30, 2003, if the average closing price of the
ordinary shares is less than the applicable conversion price on such date. At
December 31, 2001, if the Company were to convert the bonds at the current
conversion price, it would receive approximately 10.4% of the outstanding shares
of ALi.
The Company will have the right to cause ALi to redeem the bonds on March 30,
2003, for the principal amount of the bonds. ALi has the right to redeem the
bonds, in whole or in part, for the principal amount if the closing price of ALi
common shares on the trading stock market, the Republic of China
Over-the-Counter Securities Exchange (the Exchange), in U.S. dollars, calculated
F-16
at the then prevailing exchange rate, is at least 140% of the conversion price
for 30 consecutive days. ALi may exercise its right to redeem the bonds by
giving notice at least 30 days, but not more than 60 days, prior to the date of
redemption. Notice may not be given prior to ten days following the end of the
30-consecutive-day period described above, and not before the first anniversary
of the date of the purchase of the bonds.
7 LITIGATION SETTLEMENTS
As discussed in Note 18, in 1998, the Santa Clara County District Attorney's
office filed a criminal indictment alleging felony level offenses related to
allegations of misappropriation of trade secrets set forth in the Avant!/
Cadence lawsuit. In 2001, Avant! entered pleas of no contest. In connection with
the plea agreement to settle the criminal action brought against the Company and
certain current and former employees, the Company paid fines and restitution. In
connection with the settlement, the Company agreed to indemnify certain current
and former Avant! employees who were defendants in this action for the fines
assessed against them and to indemnify them for taxes levied as a result of this
indemnification. The Company recognized $236.5 million of expense related to
these matters in the second quarter of 2001.
In February 2002, in a default prove-up hearing, a Santa Clara County Superior
Court fixed the combined award to Silvaco International and Silvaco Data Systems
("Silvaco") at $26.1 million on two of Silvaco's three remaining causes of
action filed in 1995 against Meta Software Inc., which Avant! acquired in late
1996, and Shawn Hailey, former President and Chief Executive Officer of Meta
Software, Inc. In accordance with Statement of Financial Accounting Standards
No. 5 (SFAS 5) "Accounting for Contingencies", the Company recognized a loss
related to this award in the fourth quarter of 2001.
In February 2002, Avant! resolved all claims between it and Dynasty Capital
Services LLC and Randolph L. Tom. Under the terms of the settlement agreement,
Avant! will pay a total of $5.4 million. In accordance with SFAS 5, the Company
recognized a loss as a result of this agreement in the fourth quarter of 2001.
In March 2001, the Company reached an agreement to settle the two class action
stockholder lawsuits that were pending against the Company. Under the terms of
the two settlements, Avant! paid $47.5 million in cash to the plaintiff's
classes, which dismissed all of their claims against the Company with prejudice.
The two lawsuits, brought by Paul and Helen Margetis and by Joanne Hoffman on
behalf of certain purchasers of Avant! common stock, were filed in the United
States District Court for the Northern District of California in 1995 and 1997,
respectively. In accordance with SFAS 5, the Company recognized a loss related
to this agreement in the fourth quarter of 2000.
The following table summarizes the litigation settlement activities for the
years ended December 31 (in thousands):
2001 2000
EXPENSE PAYMENTS EXPENSE PAYMENTS
Securities class action $ -- $ 47,500 $ 47,500 --
Santa Clara criminal action restitution 195,400 195,400 -- --
Santa Clara criminal action company fines 27,000 27,000 -- --
Santa Clara criminal action individual fines and tax 14,137 8,534 -- --
Silvaco 26,148 -- -- --
Dynasty Capital Services and Randolph Tom 5,400 -- -- --
-------- ---------- ------- ------
Total $ 268,085 $ 278,434 $ 47,500 --
======== ========== ======= ======
As of December 31, 2001 and 2000, the remaining accrual balances related to the
above matters were $37.2 million and $47.5 million, respectively. There were no
comparable expenses for the year ended December 31, 1999.
F-17
8 DEFERRED REVENUE
Deferred revenue includes amounts received from customers for which revenue has
not been recognized. The Company believes these amounts represent our
contractual obligations for future performance. The Company does not recognize
deferred revenue for the unbilled portion of PCS for perpetual licenses because
it believes that these contracts are a form of executory contract in which it
has delivery obligations for software updates and customer support only if the
customer pays fees when due and payable. Similarly, the Company does not
recognize deferred revenue for the unbilled portion of its TBLs because it
believes that these contracts are a form of executory contract in which it has a
delivery obligation for new products, software updates and customer support only
if the customer pays fees when due and payable. Due to the nature of the
Company's business, the Company does not consider any of its backlog orders to
be firm commitments from its customers.
The components of deferred revenues for the years ended December 31, are as
follows (in thousands):
2001 2000
Perpetual license $ 14,187 $ 9,677
Time-based license 34,118 34,070
Service 19,866 26,712
-------- --------
Total $ 68,171 $ 70,459
======== ========
9 STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAMS
On April 18, 2000, the Board of Directors approved a stock repurchase program to
purchase up to 6 million shares of its outstanding common stock in the open
market or in privately negotiated transactions. As of December 31, 2001 the
Company had repurchased 4.5 million shares of its common stock for an aggregate
amount of approximately $72.9 million.
STOCKHOLDER RIGHTS PLAN
The Company's Stockholder Rights Plan ("The Rights Plan") adopted September 4,
1998, is intended to protect stockholders from unfair or unfriendly takeover
practices. In accordance with this plan, the Board of Directors declared a
dividend distribution of one preferred stock purchase right on each outstanding
share of its common stock held as of October 2, 1998, and on each share of
common stock issued by the Company thereafter. Each right entitles the
registered holder to purchase from the Company a one one-thousandth share of
preferred stock at $100. The rights become exercisable in certain circumstances,
including upon an entity acquiring or announcing the intention to acquire
beneficial ownership of 15 percent or more of the Company's common stock without
the approval of the Board of Directors or upon the Company being acquired by any
person in a merger or business combination transaction. The rights are
redeemable by the Company prior to exercise at $0.01 per right and expire on
September 4, 2008.
On December 3, 2001, the Company's Board of Directors amended the Rights Plan to
exempt Synopsys and its affiliates from triggering the Rights Plan in connection
with the execution of the Synopsys merger agreement and to provide that the
Rights Plan will terminate immediately prior to the effective date of the
Synopsys merger.
STOCK BONUS PLAN
In September 2001, the Company adopted the 2001 Stock Bonus Plan (the "Bonus
Plan"). The purpose of the Bonus Plan is to provide a means by which selected
directors, employees and consultants to the Company, and its affiliates may be
given an opportunity to benefit from increases in value of the stock of the
Company through the granting of stock bonuses and rights to purchase restricted
stock. The Company, by means of the Bonus Plan, seeks to retain the services of
persons who are now directors, employees or consultants to the Company or an
affiliate and to provide incentives for such persons to exert maximum efforts
for the success of the Company and its affiliates.
Under the terms of the Bonus Plan, the Company may issue up to 5 million shares
of the Company's common stock. The number of shares may be increased based on
the terms of the Plan. During the third quarter of 2001, approximately 200,000
shares were granted as bonuses under the Bonus Plan, and the Company recognized
$1.2 million of expense.
F-18
STOCK OPTION/ ISSUANCE PLAN
In April 1995, the Company approved the 1995 Stock Option/ Stock Issuance Plan
("the 1995 Plan"). The 1995 Plan is a qualified plan and is the successor to the
1993 Stock Option/ Stock Issuance Plan and has terms similar to those of the
1993 Plan.
The 1995 Plan has three separate equity programs: the Discretionary Option Grant
Program, the Stock Issuance Program and the Automatic Option Grant Program.
Eligible participants in the Discretionary Option Grant and Stock Issuance
Programs are employees, non-employee members of the Board of Directors or the
Board of Directors of any subsidiary and consultants and other independent
advisors who provide services to the Company. The term of the options granted
under the Discretionary Option Grant Program is generally ten years with a
typical vesting requirement of 25% after one year of service and monthly
thereafter, fully vesting upon completion of the fourth year of service.
The 1995 Plan Automatic Option Grant Program provides for automatic nonstatutory
option grants to non-employee members of the Board of Directors. Eligible
directors receive an option to purchase 20,000 shares on the date of his
appointment to the Board of Directors. In addition, at each annual stockholders'
meeting, each individual who continues to serve as a non-employee member of the
Board of Directors after the meeting receives an option grant to purchase 5,000
shares of common stock provided such individual has served as a non-employee
director for at least six months prior to the date of the meeting. Options
granted under the Automatic Grant Program are immediately exercisable. However,
any shares purchased under an option granted under the Automatic Grant Program
are subject to a repurchase right by the Company upon termination of the
grantee's service to the Company. With respect to a non-employee director's
initial grant of an option to purchase 20,000 shares, the Company's repurchase
right lapses with respect to 25% of the shares on each of the four anniversaries
of the director's continued service to the Company after the option grant date.
As of December 31, 2001, 2000 and 1999, there were no shares of common stock
subject to repurchase.
In July 2000, the Company approved the 2000 Stock Option/ Stock Issuance Plan
("the 2000 Plan"). The 2000 Plan is a non-qualified plan and is the successor to
the 1995 Plan and has terms similar to those of the 1995 Plan.
The 2000 Plan has two separate equity programs: the Discretionary Option Grant
Program and the Stock Issuance Program. Eligible participants in the
Discretionary Option Grant and Stock Issuance Programs are employees,
non-employee members of the Board of Directors or the Board of Directors of any
subsidiary and consultants and other independent advisors who provide services
to the Company (or any subsidiary). The terms of the options granted under the
Discretionary Option Grant Program are generally the same as the terms
established in the 1995 Plan.
In connection with the mergers and acquisitions discussed in Note 5, various
option plans were assumed by the Company, thereby allowing participants to
purchase Avant! stock in amounts and at prices adjusted to reflect the relative
exchange ratios of the mergers.
For the years ended December 31 2001, 2000, and 1999, the Company recorded
compensation expense for options to employees and other expense for options to
non-employees of $1.7 million, $0.9 million, and $1.2 million. In addition, the
Company has $2.9 million of deferred compensation in stockholder's equity, which
will be amortized to compensation expense over the period during which the
options become exercisable, generally four years. Had the Company determined
F-19
compensation expense based on the fair value at the grant date for its stock
plans under SFAS No. 123, the Company's net earnings (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below for
the years ended December 31 (in thousands, except per share data):
2001 2000 1999
Net earnings (loss) as reported $ (177,717) $ 52,859 $ 56,620
Additional compensation cost resulting from:
Stock options (14,629) (12,781) (11,178)
Employee stock purchase plan (Note 11) (174) (597) (664)
------------ --------- ---------
Pro forma $ (192,520) $ 39,481 $ 44,778
============ ========= =========
Basic earnings (loss) per share:
As reported $ (4.72) $ 1.36 $ 1.49
Pro forma $ (5.12) $ 1.02 $ 1.18
Diluted earnings (loss) per share:
As reported $ (4.72) $ 1.32 $ 1.42
Pro forma $ (5.12) $ 0.99 $ 1.13
The fair value of each option and purchase right is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
2001 2000 1999
Stock Option Plan:
Expected life (years) 3.62 3.77 4.32
Risk-free interest rate 3.59% 6.22% 5.61%
Volatility 81% 87% 72%
Dividend yield 0% 0% 0%
Stock Purchase Plan:
Expected life (years) 0.5 0.5 0.5
Risk-free interest rate 1.83% 5.73% 4.86%
Volatility 81% 87% 72%
Dividend yield 0% 0% 0%
F-20
The following table summarizes options outstanding under the various stock
option plans at December 31, 2001, 2000 and 1999 and changes during the years
then ended (in thousands, except per share data):
OPTIONS OUTSTANDING
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
Balances, December 31, 1998 6,916 $ 12.44
Granted and assumed 882 14.84
Exercised (898) 6.73
Canceled (1,096) 10.53
---------
Balances, December 31, 1999 5,804 $ 14.06
Granted and assumed 2,199 14.05
Exercised (742) 7.58
Canceled (821) 15.55
---------
Balances, December 31, 2000 6,440 $ 14.99
Granted 4,377 14.93
Exercised (679) 12.41
Canceled (626) 15.81
---------
Balance, December 31, 2001 9,512 $ 14.95
=========
2001 2000 1999
Weighted average fair value of options granted $ 9.41 $ 8.98 $ 8.90
The following table summarizes information about stock options outstanding as of
December 31, 2001:
OPTIONS OUTSTANDING
WEIGHTED-
AVERAGE OPTIONS EXERCISABLE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED- NUMBER WEIGHTED-
EXERCISE PRICE OUTSTANDING LIFE AVERAGE EXERCISABLE AVERAGE
(IN THOUSANDS) (IN THOUSANDS)
Below $5.90 1,127 9.19 $ 5.44 95 $ .98
$ 6.68 - $12.75 1,289 7.80 10.81 792 11.46
12.94 - 13.94 1,526 6.00 13.70 1,390 13.71
14.19 - 15.00 976 8.73 14.75 255 14.41
15.08 - 17.84 1,492 6.74 15.72 1,081 15.69
18.17 - 19.44 2,468 8.87 18.49 508 18.79
21.60 - 41.50 634 5.95 28.06 516 29.27
-------- ------
0.01 - 41.50 9,512 7.76 14.95 4,637 15.85
======== ======
10 SHARE PLACEMENT
On July 17, 2000, the Company completed a private placement of two million
shares of common stock to Metchem Engineering S.A. The shares were priced at
$17.03 per share, reflecting a 5% discount from the average closing price of the
five trading days prior to the date of the sale and purchase agreement. Net
proceeds from the placement were $32.8 million.
11 EMPLOYEE BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company maintains a deferred compensation plan which permits certain
employees to defer their annual cash compensation. Distributions from the plan
are generally payable upon cessation of employment in equal annual installments
not to exceed 10 years or as a lump sum payment, at the option of the employee.
F-21
Undistributed amounts under the plan are subject to the claims of the Company's
creditors. As of December 31, 2001 and 2000, the invested amounts under the plan
totaled $4.2 million and $4.0 million, respectively, and are recorded as
long-term other assets on the Company's balance sheet. Included in other
noncurrent liabilities is $5.3 million and $4.7 million at December 31, 2001 and
2000, respectively for undistributed amounts due to employees.
401(K) PLAN
The Company has a 401(k) retirement savings plan covering substantially all
employees in the United States. The Company's matching contributions amounted to
$2.8 million, $3.3 million and $2.3 million for 2001, 2000 and 1999,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a Qualified Employee Stock Purchase Plan ("Stock Purchase
Plan"), which currently permits eligible employees to purchase common stock of
the Company. The Stock Purchase Plan is qualified under Section 423 of the
Internal Revenue Code of 1986, as amended. Under the Stock Purchase Plan, during
six-month offering periods, employees may purchase from the Company a designated
number of shares through payroll deductions at a price per share equal to 85% of
the lesser of the fair market value of the Company's common stock as of the date
of the grant or the date the right to purchase is exercised. Under the Stock
Purchase Plan, the Company sold 271,000, 227,000, and 163,000 shares to
employees in 2001, 2000 and 1999, respectively.
The fair value of employee purchase rights, for purposes of SFAS No. 123
disclosure was estimated using the Black-Scholes model. The weighted average
fair value of those purchase rights (including the 15% discount to the fair
value of the Company's common stock) granted in 2001, 2000 and 1999 were $3.90,
$6.77, and $4.26, respectively (see Note 9).
12 INCOME TAXES
The components of the Company's earnings before income taxes for the years ended
December 31, are as follows (in thousands):
2001 2000 1999
United States $ (168,651) $ 76,476 $ 89,781
Foreign 29,482 8,663 4,703
----------- -------- -------
Total $ (139,169) $ 85,139 $ 94,484
=========== ======== ========
The components of income tax expense (benefit), as presented in the accompanying
consolidated statements of earnings, are comprised of federal taxes, state taxes
and certain foreign taxes. The components of income taxes as of December 31, are
as fosllows (in thousands):
2001 2000 1999
Provision for income taxes:
Current:
Federal $ 7,312 $ 34,817 $ 29,896
Foreign 11,854 5,237 2,591
State 1,713 7,941 6,757
------ ------ -----
Total 20,879 47,995 39,244
====== ======== =========
Deferred:
Federal 12,171 (12,948) (1,653)
State 3,245 (3,027) (3,415)
------ -------- ---------
Total 15,416 (15,975) (5,068)
Charge in lieu of taxes attributable
to employee stock plans 2,253 260 3,688
------- -------- ---------
Total provision for income taxes $ 38,548 $ 32,280 $ 37,864
======= ======== =========
F-22
The Company's effective tax rate differs from the federal statutory income tax
rate of 35.0% as follows (in thousands):
2001 2000 1999
Income tax expense at statutory rate $ (48,709) $ 29,799 $ 33,068
State tax expense, net 1,621 4,862 5,745
Settlement of lawsuits 80,117 -- --
Merger costs 2,773 2,894 3,698
Tax exempt income (898) (1,670) ( 996)
Tax credits (2,365) (3,851) (2,548)
Foreign sales corporation (380) (1,453) (1,514)
Foreign taxes 5,070 (183) 58
Non-cash stock compensation -- 534 227
Equity investment in foreign companies 465 (1,197) (272)
Other 854 2,545 398
-------- -------- --------
Actual Income Tax Expense $ 38,548 $ 32,280 $ 37,864
======== ======== ========
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, are as
follows (in thousands):
2001 2000
Deferred tax assets:
Accrued liabilities $ 16,812 $ 28,556
Allowance for doubtful accounts 3,556 5,966
Net operating loss carryforwards 4,277 5,090
Deferred revenue 8,562 9,821
Property and equipment, principally due to
depreciation 309 164
Purchased technology 16,230 19,287
Tax credit carryforwards 1,110 1,210
Other 381 --
--------- ---------
Total gross deferred tax assets 51,237 70,094
Deferred tax asset valuation allowance (57) (57)
--------- ---------
51,180 70,037
Deferred tax liabilities:
Unrealized gain on venture capital investments (5,368) (10,007)
Property and equipment, principally due to
depreciation (1,198) --
--------- ---------
Net deferred tax assets $ 44,614 $ 60,030
========= =========
The Company had net operating loss carryforwards of $13.8 million for U.S.
federal income tax purposes as of December 31, 2001, expiring through the year
2019. The Company acquired these net operating loss carryforwards as a result of
the mergers with Chrysalis and Xynetix. The Company also acquired state net
operating loss carryforwards for various states in various amounts as a result
of the mergers with Chrysalis and Xynetix.
As of December 31, 2001, the Company had foreign tax credit carryforwards of
$0.1 million. The Company also had research and development credit carryforwards
of approximately $1.0 million.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and research and development credits that can be carried
forward may be impaired or limited in certain circumstances.
Events which may cause changes in the Company's net operating loss and research
and development credit carryovers include, but are not limited to, a cumulative
stock ownership change of greater than 50%, as defined, over a three year
period. The use of, or benefit from, tax attributes of certain acquired
subsidiaries, as described above, may be subject to such limitations.
F-23
U.S. income taxes have not been provided for approximately $14.0 million of
undistributed earnings of various non-U.S. subsidiaries. The Company intends to
reinvest these earnings indefinitely in operations outside of the U.S.
13 CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of investments and trade accounts receivable.
The Company invests cash, cash equivalents and short-term investments in a
variety of financial instruments issued by high credit quality institutions.
Markets for these securities generally are highly liquid, and therefore bear
minimal risk. Management regularly monitors the composition and maturity of
these securities. The Company, by policy, limits the amount of credit exposure
to any one financial institution, or commercial or municipal issuer. The Company
has not experienced any material losses on these investments.
To reduce credit risk, the Company performs ongoing credit evaluations of its
customers' financial condition. The Company maintains reserves for potential
credit losses, but historically has not experienced any significant losses
related to individual customers or groups of customers in any geographic area.
The Company's allowance for doubtful accounts was $10.3 million and $16.1
million as of December 31, 2001 and 2000, respectively.
14 RELATED PARTY TRANSACTIONS
Included in prepaid expenses and other current assets, as of December 31, 2001
and 2000 was $1.1 million and $0.8 million, respectively, of notes receivable
due from officers, former officers and a director.
The Company entered into certain joint ventures in Japan and Korea for the
purpose of consolidating distribution in the two countries and entered into a
limited partnership that invests primarily in technology start up companies. See
Note 16.
In December 2001, the Company acquired the shares of Maingate owned by Gerald C.
Hsu, Noriko Ando, and The Eigen Fund. See Note 5.
15 SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within the Company for
making operating decisions and assessing financial performance.
The Company's chief operating decision-maker (CODM) is considered to be the
President. The CODM reviews financial information presented on a consolidated
basis accompanied by disaggregated information about revenues by geographic
region for purposes of making operating decisions and assessing financial
performance. The consolidated financial information reviewed by the CODM is
identical to the information presented in the accompanying consolidated
statement of earnings. Therefore, the Company operates in a single operating
segment: electronic design automation software and services.
F-24
Revenue and asset information regarding operations in the different geographic
regions is as follows (in thousands):
NORTH AMERICA EUROPE ASIA CONSOLIDATED
Revenues:
2001 $ 258,798 $ 59,259 $ 80,613 $ 398,670
2000 244,704 40,739 72,657 358,100
1999 217,224 31,262 55,134 303,620
Identifiable assets:
As of December 31, 2001 $ 250,184 $ 75,440 $ 48,778 $ 374,402
As of December 31, 2000 420,827 77,543 63,520 561,890
Long-lived assets:
As of December 31, 2001 $ 15,496 $ 1,420 $ 6,729 $ 23,645
As of December 31, 2000 20,898 1,546 4,377 26,821
In fiscal 2001 one customer accounted for approximately 11% of the Company's
revenues. The customer's revenues were primarily in North America. In fiscal
2000 and 1999, no single customer accounted for 10% or more of the Company's
revenues.
16 INVESTMENTS AND JOINT VENTURES
The Company's investments and joint ventures consisted of the following as of
December 31:
2001 2000
Investment in Forefront $ 19,010 $ 34,416
Investment in SMIC -- 7,500
Other 7,455 7,228
------- -------
Total investments and joint ventures $ 26,465 $ 49,144
======== ========
The Company invested an additional $55 million in the first quarter of 2001 in
Semiconductor Manufacturing International Corporation ("SMIC"), a development
stage company in the process of establishing a semiconductor fabrication
facility in China. The Company was scheduled to make further investments of
$12.5 million on December 15, 2001, and $25.0 million on June 15, 2002. In
October 2001, the Company sold its ownership investment back to SMIC. Pursuant
to the agreement terminating the Company's investment, the entire $62.5 million
paid by the Company was returned and the Company was relieved of any obligation
to invest additional funds in SMIC.
The Company has a joint venture with Davan Tech Co., Ltd, ("Davan Tech") of
Korea. The Company also had a joint venture with Maingate until December 2001,
when the Company purchased Maingate (See Note 5). The joint ventures were formed
for the purpose of consolidating distribution in their respective countries. At
December 31, 2001, the Company owned 100% and 19.4% of Maingate and Davan Tech,
respectively. Prior to December, 2001, the company owned 18.8% of Maingate. Both
joint ventures were accounted for by the equity method during 2001. The
Company's share of equity earnings is included in the accompanying consolidated
statement of earnings as equity income from investments and joint ventures. The
Chairman of the Company's Board of Directors owns 8.2% of Davan Tech and owned
50% of Maingate prior to its acquisition.
Prior to the acquisition of Maingate, the Company recognized revenue from sales
to Maingate in the quarter subsequent to the quarter in which Maingate collected
cash from the end users. The Company recognizes revenue from sales to Davan Tech
when the Company receives cash from Davan Tech. At December 31, 2001, the
Company did not have a balance due from affiliates. At December 31, 2000, due
from affiliates included trade receivables of $0.8 million from Davan Tech. The
terms on the due from affiliates balances are consistent with all other trade
receivables.
F-25
The following table presents the sources of related party revenues from Maingate
and Davan Tech (in thousands):
2001 2000 1999
Maingate Revenue $ 31,329 $ 25,537 $ 16,765
Davan Tech Revenue 3,198 4,549 2,200
-------- ------- -------
Total $ 34,527 $ 30,086 $ 18,965
========= ======== =======
During 1998, the Company invested $10 million into Forefront Venture Partners
L.P. ("Forefront"), a limited partnership that invests primarily in high
technology start-up companies. This investment represented 53.9% ownership of
the partnership. The partnership is controlled and managed by a General
Partnership. A member of this partnership is a board member of the Company. The
Company accounts for this investment by the equity method because the Company
does not control Forefront. During the year ended December 31, 2001 the Company
recorded $11.4 million equity loss related to Forefront. Equity income from
Forefront for the years ended December 31, 2000 and 1999 was $18.8 million and
$5.7 million, respectively. The equity income and loss resulted primarily from
unrealized fluctuations of the portfolio value of the underlying venture capital
investments. During 2001, the Company received cash distributions from Forefront
totaling $2.5 million. The Company believes that due to the nature of venture
capital investing, its investment in Forefront will be subject to significant
fluctuation, which may result in the Company recording significant income and
losses in the future.
Each quarter, the Company receives financial information from each of these
companies. The Company's management reviews this financial information and also
discusses with management of the respective companies the results of their
operations, the general business climate and expectations about future results.
In assessing the performance of these investments and determining whether or not
impairment has occurred, the Company considers whether events or changes in
circumstances have occurred that might indicate that the carrying amount of the
investment may not be recoverable. None of these reviews and discussions has led
the Company to believe that the carrying amounts of its investments have been
permanently impaired.
The Company's equity loss of $13.4 million in 2001 and income of $22.3 million
and $6.1 million in 2000 and 1999, respectively, primarily represented the
Company's share of equity interest in investments in Maingate, Davan Tech and
Forefront.
17 COMMITMENTS
The Company generally leases all its facilities under noncancelable operating
lease agreements, which expire over the next eleven years. Rental expense
incurred by the Company under operating lease agreements totaled $9.9, $10.8
million, and $7.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Future annual minimum lease payments under noncancelable operating leases for
the years ended December 31, are as follows (in thousands):
2002 $ 9,861
2003 9,577
2004 8,431
2005 6,960
2006 6,592
Thereafter 27,776
------
$ 69,197
=======
The Company subleases certain of its facilities under noncancelable operating
sublease agreements that expire over the next four years. The minimum operating
lease payments have not been reduced by the minimum sublease rentals of $3.8
million due under the noncancelable subleases. (See Note 18)
F-26
The Company has employment and/or severance agreements with several of its
executives and key employees, including Gerald C. Hsu, Paul Lo, and Moriyuki
Chimura. These agreements have provisions relating to a voluntary resignation or
involuntary termination of employment that occurs within six months after a
change of control event, which includes, under the terms of certain employment
agreements, if Gerald C. Hsu ceases to be the Chairman and Chief Executive
Officer of the Company. In the case of a termination of employment after such a
change of control, the employee will receive a cash termination payment based on
a multiple of the employee's base salary in effect at that time. In addition,
certain agreements provide for acceleration of all unvested stock options and an
additional payment in consideration of covenants not to compete. If all such
termination payments were payable as of December 31, 2001, the aggregate cash
payout under employment/ or severance agreements to the executives and employees
would be approximately $55 million. In addition, the Company has loaned Mr.
Chimura $300,000 pursuant to a promissory note, dated June 5, 1998. This note
bears interest at an annual rate of 3% and provides that the outstanding
principal and accrued interest under the note will be forgiven in the event Mr.
Hsu is no longer the President and Chief Executive Officer of the Company. As of
December 31, 2001, the note to Mr. Chimura has not been forgiven.
18 LEGAL PROCEEDINGS
AVANT!/ CADENCE LITIGATION
On December 6, 1995, Cadence filed an action against Avant! and certain of its
officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition, misappropriation
of trade secrets, conspiracy, breach of contract, inducing breach of contract
and false advertising. The complaint alleges that some of Avant!'s employees
formerly employed by Cadence misappropriated and improperly copied Cadence's
source code for important functions of Avant!'s place and route products, and
that Avant! competed unfairly against Cadence by making false statements about
Cadence and its products. The action also alleges that Avant! induced
individuals, who have been named as defendants, to breach their employment and
confidentiality agreements with Cadence. The same set of facts alleged in the
Avant!/ Cadence litigation was also alleged in the Santa Clara criminal action.
Avant!, Gerald C. Hsu, Chairman of Avant!, and five former Avant! employees pled
no contest to certain of the charges alleged in the Santa Clara criminal action.
As part of that plea, Avant! paid approximately $35.3 million in fines and
$195.4 million in restitution.
In the Avant!/ Cadence litigation, Cadence sought to enjoin the sale of Avant!'s
ArcCell and Aquarius place and route products. On December 19, 1997, the
District Court entered a preliminary injunction against continued sales or
licensing of any product or work copied or derived from DFII, specifically
including, but not limited to, the ArcCell products. The preliminary injunction
also bars Avant! from possessing or using any copies of any portion of the
source code or object code for ArcCell or any other product, to the extent it
had been copied or derived from DFII. Avant! had ceased licensing its ArcCell
products in mid-1996, and Avant! had no revenue from these products in the last
fiscal year or in the most recent interim period. On December 7, 1998, the
District Court also entered a preliminary injunction against Avant! prohibiting
Avant! from directly or indirectly marketing, selling, leasing, licensing,
copying or transferring the Aquarius, Aquarius XO and Aquarius BV products.
Pending the outcome of the trial of Cadence's action, the injunction further
prohibits Avant! from marketing, selling, leasing, licensing, copying or
transferring any translation code for any Aquarius product that infringes any
protected right of Cadence and prohibits Avant! from possessing or using any
copies of any portion of the source code or object code for the Aquarius
products, to the extent that it has been copied or derived from DFII. Avant!
ceased supporting the Aquarius products in February 1999, and Avant! had no
revenue from these products in the last fiscal year or in the most recent
interim period.
In the Avant!/ Cadence litigation, Cadence seeks compensatory damages and treble
or other exemplary damages from Avant! under theories of copyright infringement,
misappropriation of trade secrets, inducing breach of contract and false
advertising. Cadence has not fully quantified the amount of damages it seeks in
the Avant!/ Cadence litigation. In the Santa Clara criminal action, described in
the following section, Cadence claimed losses of $683.3 million. The court in
the Santa Clara criminal action ultimately awarded Cadence $195.4 million, which
included $143.5 million as Cadence's estimated lost gross profit from all Avant!
sales of ArcCell and Aquarius products after a 1994 written release between
Cadence and Avant!. Avant! subsequently paid the entire restitution amount in
full. Under California law, Avant! may be entitled to credit that amount against
any judgment Cadence obtains in the Avant!/ Cadence civil litigation. Avant!
believes any potential liability to Cadence is neither probable nor estimable.
F-27
On January 16, 1996, Avant! filed an answer to the complaint denying wrongdoing.
On the same day, Avant! filed a counterclaim against Cadence and its then-CEO,
Joseph Costello, alleging antitrust violations, racketeering, false advertising,
defamation, trade libel, unfair competition, unfair trade practices, negligent
and intentional interference with prospective economic advantage, and
intentional interference with contractual relations. The counterclaim alleges,
among other things, that Cadence's lawsuit is part of a scheme to harm Avant!
competitively, because of Avant!'s success in the marketplace. Avant! filed its
amended counterclaim on January 29, 1998. Pursuant to a stipulated court order,
Cadence and the other counterclaim defendants have not responded to the amended
counterclaim, and Avant!'s counterclaim is currently stayed.
In April 1999, Avant! and Cadence filed cross-motions for summary adjudication
as to whether a 1994 written release agreement between the two companies
extinguished all Cadence claims regarding Avant!'s continued use of intellectual
property claimed by Cadence in any Avant! place and route product in existence
when the release was signed by the parties. On September 8, 1999, the District
Court granted Avant!'s motion in part and ruled that Cadence's trade secret
claim regarding use of DFII source code was barred by the release. The District
Court also ruled that the release did not bar Cadence's copyright infringement
claims regarding Avant!'s alleged post-release use of DFII source code. Unless
reversed on appeal, Avant! believes that this ruling makes it likely that
Cadence will prevail on its copyright infringement claims regarding Avant!'s use
of DFII source code in the ArcCell products. While this ruling also increases
the likelihood that Cadence will prevail on the same claims as they might apply
to the Aquarius products, Avant! believes that it possesses additional
meritorious defenses with respect to Aquarius that are not available with
respect to ArcCell. On October 15, 1999, the District Court issued an amended
order certifying its September 8, 1999 order for interlocutory appeal to the
United States Circuit Court of Appeals for the Ninth Circuit. Cadence and Avant!
petitioned for leave to file an interlocutory appeal, and the Circuit Court
granted their petitions on December 20, 1999. On June 11, 2001, the Circuit
Court certified to the California Supreme Court the following question: Under
the California Uniform Trade Secrets Act, Cal. Civ. Code sec. 3426, when does a
claim for trade secret infringement arise: only once, when the initial
misappropriation occurs, or with each subsequent misuse of the trade secret? On
October 31, 2001, the California Supreme Court accepted the certified question.
Briefing before the California Supreme Court has not been completed, and no date
for oral argument has been set.
Proceedings in the District Court have been stayed pending the Circuit Court's
decision on appeal, which will follow the California Supreme Court's decision on
the question certified to it, and no trial date has been set. Depending upon the
timing of the decision of the California Supreme Court, the disposition of the
appeal by the Circuit Court, the discovery process, jury selection and the
judicial calendar, Avant! expects that, absent a lifting of the current stay,
any trial would likely commence no earlier than mid 2003, and could commence
substantially later.
Avant! believes it has defenses to all of Cadence's claims and intends to defend
itself vigorously. The defenses include, but are not limited to, Avant!'s belief
that the 1994 written release bars Cadence's claims based on the use of DFII
source code. Avant!'s defenses also include Avant!'s belief that Avant! products
did not use or incorporate any Cadence proprietary information or material
allegedly misappropriated after the 1994 written release. This defense will be
based on testimony of the authors of the source code challenged by Cadence,
corroborated by contemporaneous records of their source code development, and of
experts who have analyzed both Cadence's source code and the Avant! source code
challenged by Cadence. Should Cadence ultimately succeed in the prosecution of
its claims, however, Avant! could be required to pay substantial monetary
damages to Cadence. Some or all of these damages may be offset by the amounts
paid to Cadence as restitution arising out of the Santa Clara criminal action.
An adverse judgment could seriously harm Avant!'s business, financial position
and results of operations. Due to the uncertainty of the ultimate outcome of
this issue, no losses have been accrued in Avant!'s financial statements as of
December 31, 2001.
As noted above, preliminary injunctions entered in 1997 and 1998 enjoined Avant!
from marketing its early place and route products, ArcCell and Aquarius, based
on a judicial determination that they incorporated DFII source code. In Avant!'s
current place and route products the functions supported by Cadence's DFII
source code are performed by the MilkWay database, and the DFII code is not
incorporated in any current Avant! product. Avant! developed MilkyWay under the
supervision of an independent expert employing rigorous screening and
record-keeping procedures. Cadence has never alleged that MilkyWay uses DFII
source code in any way. Although Cadence has not made a claim in the Avant!/
Cadence litigation against any current Avant! product, including its Apollo and
Astro place and route products, and has not introduced any evidence that any
such product infringes Cadence's intellectual property rights, Cadence has
publicly implied that it intends to assert such claims. If and when such claims
are made, Avant! believes it would have defenses to any such claims and would
defend itself vigorously. Nonetheless, should Cadence be successful at proving
that any past or then-current Avant! product incorporated intellectual property
misappropriated from Cadence, Avant! could be permanently enjoined from further
use of such intellectual property, which might require modification to existing
products and/or suspension of the sale of such products until such Cadence
intellectual property was removed.
F-28
SANTA CLARA CRIMINAL ACTION
On December 16, 1998, after a grand jury investigation, the Santa Clara County
District Attorney's office filed a criminal indictment alleging felony level
offenses related to the allegations of misappropriation of trade secrets set
forth in Cadence's lawsuit. This criminal action was brought against, among
others, Avant! and the following current or former employees and/or directors of
Avant!: Gerald C. Hsu, then President, Chief Executive Officer and Chairman of
the Board of Directors; Y. Z. Liao, Stephen Wuu, Leigh Huang, Eric Cheng and
Mike Tsai. One former defendant was dismissed from the action, and the District
Attorney appealed the dismissal order.
The 1998 indictment charged the defendants listed above with conspiring to
commit trade secret theft, inducing the theft of a trade secret, conspiracy to
commit fraudulent practices in connection with the offer or sale of a security
and fraudulent practices in connection with the offer or sale of a security. On
April 28, 2000, the Santa Clara Superior Court dismissed all charges in the 1998
indictment against Avant! and all of the current and former executives charged
in the case. The District Attorney appealed the dismissal of the 1998 indictment
and indicated intent to seek another indictment. The District Attorney dismissed
the appeal in favor of the indictment described below.
On August 10, 2000, a Santa Clara County grand jury returned an indictment
against the same current or former employees and/or directors of Avant! as the
1998 indictment. This charged defendants with conspiracy to commit trade secret
theft, conspiracy to withhold and conceal stolen property, conspiracy to commit
securities fraud, theft of trade secrets, withholding or concealing stolen
property, making an unauthorized copy of an article containing a trade secret,
and committing a fraudulent practice in connection with the offer or sale of a
security. Trial proceedings began May 14, 2001.
On May 22, 2001, Avant! entered pleas of no contest to conspiracy to
misappropriate trade secrets, two counts of trade secret misappropriation, and a
violation of California corporate securities law. In connection with the plea
agreement, Avant! agreed to pay a fine of $27.0 million and to pay restitution
in an amount to be determined by the Court. On July 25, 2001, the court fixed
the total restitution amount to be paid to Cadence at $195.4 million, any unpaid
portion of which accrued interest at the statutory rate of 10% beginning July
25, 2001. The Company recognized the resulting expense of $222.4 million in the
second quarter of 2001.
During the third quarter of 2001, Avant! paid the $27.0 million fine and made
restitution payments to Cadence totaling $170.0 million. Avant! made a final
payment of $26.5 million to Cadence on October 3, 2001, to conclude payment of
the restitution owed to Cadence. The payments above included $1.1 million of
interest.
In addition to the plea by Avant!, the individual defendants resolved the
charges against them in the following manner:
-- Gerald Hsu pleaded no contest to conspiracy to misappropriate trade secrets,
failure to return stolen property, and a violation of California corporate
securities law and agreed to pay a $2.7 million fine. Mr. Hsu's fine was paid on
May 22, 2001. The securities charge is a misdemeanor, and the other charges were
reduced to misdemeanors at sentencing on July 25, 2001. On July 25, 2001, Mr.
Hsu resigned his positions as Avant!'s President and Chief Executive Officer.
Mr. Hsu continues as the Chairman of Board of Directors and as an employee of
Avant! in the newly created position of Chief Strategist, providing strategic
direction for Avant!.
-- Leigh Huang, Y.Z. Liao, and Eric Cho pleaded no contest to trade secret
conspiracy and a violation of California corporate securities law. Huang, Liao
and Cho agreed to pay fines of $0.1 million, $2.7 million, and $0.1 million,
respectively, of which $0.2 million was paid in September 2001 and the remaining
$2.7 million was paid in October 2001. Huang was sentenced to three years
probation. Liao and Cho were each sentenced to three years probation and one
year in county jail. Effective July 25, 2001, Liao resigned his position at
Avant!. Huang and Cho are former Avant! employees.
F-29
-- Stephen Wuu pleaded no contest to trade secret misappropriation and a
violation of California corporate securities law. Wuu agreed to pay a $2.7
million fine, which was paid by October 23, 2001. On July 25, 2001, Wuu was
sentenced to 2 years in prison and three years probation. Effective July 25,
2001, Wuu resigned his position at Avant!.
-- Eric Cheng pleaded no contest to trade secret misappropriation. Cheng agreed
to pay a $27,000 fine and was sentenced to three years probation and 364 days in
county jail. Effective July 25, 2001, Cheng resigned his position at Avant!.
-- All charges were dismissed against former Avant! executive Mike Tsai.
As part of the settlement, Avant! agreed to indemnify all of the current and
former Avant! employees named above, with the exception of Mr. Cheng, for the
fines assessed against them, and indemnify them for the taxes levied as a result
of this indemnification. Avant! recognized the resulting expense of $14.1
million in the second quarter of 2001.
Under the applicable law, Avant! was authorized to pay the defense expenses and
fines of its officers, directors and employees if the Avant! board found that
"the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful." The Avant! board having determined that
these criteria were met, Avant! paid, or agreed to pay, the following amounts in
litigation expenses and fines for the listed individuals in connection with the
Santa Clara criminal action:
LITIGATION AND
NAME FINES(1) RELATED EXPENSES(1)
Gerald C. Hsu $ 2,700,000 $ 518,019
Stephen Wuu $ 2,700,000 $ 1,813,009
Y.Z. Liao $ 2,700,000 $ 1,044,457
Eric Cho $ 100,000 $ 617,685
Leigh Huang $ 100,000 $ 866,765
Eric Cheng -- $ 1,410,100(2)
Michael Tsai -- $ 502,402
(1) Amounts do not include amounts to indemnify each of
the individuals for any actual tax liability
attributable to amounts received from, or paid on
their behalf by, Avant!.
(2) Amounts include litigation expenses related to both
the Santa Clara criminal action and the Avant!/Cadence
litigation.
Delaware General Corporation Law, Section 145 authorizes a corporation to
indemnify officers, directors, employees and agents who were or are parties to a
pending or completed criminal action if "the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful." A finding of good faith is not precluded by a conviction or plea of
no contest. Section 145(a) expressly states that "[t]he termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person's conduct was unlawful."
F-30
In determining whether to indemnify the individual defendants for their expenses
and fines incurred in the Santa Clara criminal action, the Avant! board of
directors was advised by Avant!'s corporate counsel, special counsel to the
board of directors and Avant!'s criminal defense counsel. The Avant! board of
directors was advised concerning the requirements and appropriate application of
Delaware General Corporation Law, Section 145, and the facts and circumstances
of the plea bargain negotiated with the District Attorney for both Avant! and
the individual defendants, including the charges to be dismissed, the
agreed-upon sentence limitations and the fact that the prosecutor conditioned
the plea agreement on acceptance by all the defendants. In connection with
determining whether the individual defendants acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
Avant!, and had no reasonable cause to believe that their conduct was unlawful,
the Avant! board was advised concerning:
o The elements necessary to establish culpability for the violations of
securities laws;
o The substance of the allegedly misleading statements;
o The circumstances and potential legal effect of the mutual, general release
signed with Cadence in 1994; and
o The limited role, if any, the individuals who had apparently used
Cadence source code had played in connection with Avant!'s initial
public offering and subsequent securities-related activities.
Based on this information and the advice of counsel, the Avant! board determined
as to defendants Cho, Huang, Hsu, Liao and Wuu that the requirements of Section
145 were satisfied with respect to the fines assessed against these individuals
for violating California securities laws and resolved to indemnify each of them
for the fines being assessed pursuant to their no contest pleas. The Avant!
board did not address the requirements of Section 145 with respect to any
offenses other than violating California securities laws because no fines were
assessed in connection with such other offenses. With regard to fines being
assessed against defendants Igusa and Cheng, the Avant! board determined that
indemnification for their fines was not appropriate pursuant to Section 145
because Mr. Igusa had never been an officer, director, employee or agent of
Avant! and because Mr. Cheng's fine was based on a plea of no contest to an
offense predicated on alleged conduct by Mr. Cheng undertaken before he became
an Avant! employee.
In connection with the attorneys' fees and expenses previously advanced by
Avant! on behalf of the individual defendants in the Santa Clara criminal
action, except defendant Igusa, Avant! obtained undertakings by each of the
individual defendants on whose behalf advances were made that Avant! believes
complied with Delaware General Corporation Law, Section 145. Each of the
undertakings provided that, in the event it was ultimately determined that the
defendant was not, under applicable law, entitled to indemnification by Avant!
for attorneys' fees and expenses, the defendant would repay Avant! the amount of
all such payments made by Avant! to the defendant's attorneys. Avant!'s board of
directors later determined that Delaware General Corporation Law, Section 145
would permit Avant! to indemnify each of the individual defendants, except
defendant Igusa, for attorneys' fees and litigation expenses incurred in
connection with defense of the criminal action. In addition to the factors
described above, the Avant! board also was advised concerning, and considered:
o That, in connection with the no contest pleas, the prosecutor had dismissed
certain charges made against the individual defendants,
o that each of the defendants had been charged with conduct undertaken
while a company officer, director, employee or agent,
o That each defendant had coordinated with Avant! in the defense of the
criminal action,
o That it had been in Avant!'s best interests to coordinate the defense of
the criminal action,
o That Avant!'s prior willingness to advance attorneys' fees and costs to
assist the individual defendants in their defense of the criminal action
had been a material inducement in obtaining that coordination by
eliminating a potential source of financial pressure unrelated to the
merits of the action, and
o That such payments therefore had been for the
direct benefit of Avant! in addition to being of benefit to the individual
defendants.
F-31
Because these attorneys' fees and expenses previously had been advanced by
Avant! on behalf of the aforementioned individual defendants, the board of
directors resolved that Avant! would not require repayment of these fees and
expenses by the individual defendants. As a separate and further basis for
indemnifying Messrs. Hsu, Wuu, Liao and Cheng for their attorneys' fees and
expenses, for substantial business reasons, Avant! negotiated settlements that
involved either revisions to, or termination of, those individuals' existing
employment agreements with Avant!, including Avant!'s agreement not to require
reimbursement for the fees and costs incurred in connection with the criminal
action and advanced by Avant! on their behalf. The Avant! board of directors
reviewed, was advised concerning, and approved settlement agreements with each
of these individuals.
Finally, in connection with the indemnification of the individuals identified
above for the fines assessed in connection with their no contest pleas, the
Avant! board of directors determined that indemnification properly should
encompass amounts sufficient to indemnify each of the individuals for any actual
tax liability attributable to amounts received by or paid on behalf of the
defendants and attributable to the indemnification of those individuals for the
fines assessed in connection with the criminal action. The Avant! board of
directors therefore resolved to reimburse each of the individual defendants,
except for defendants Igusa and Cheng, for additional taxes actually incurred
and paid as a result of having been indemnified by Avant! for the fines assessed
in connection with the no contest pleas. As a separate and further basis for
indemnifying Messrs. Hsu, Wuu and Liao for their actual additional tax liability
incurred in connection with Avant!'s indemnification of them for the fines
assessed in the criminal action, the settlements described above included
Avant!'s agreement to indemnify each of those three individuals for any actual
tax liability incurred and attributable to Avant!'s indemnification of them for
the fines assessed in connection with the no contest pleas and the attorneys'
fees and costs advanced by Avant! on their behalf.
SECURITIES CLASS ACTION CLAIMS
On December 15, 1995, Paul Margetis and Helen Margetis filed a securities fraud
class action complaint against Avant! in the United States District Court for
the Northern District of California. This lawsuit alleged securities laws
violations, including omissions and/or misrepresentations of material facts
related to the events and transactions which are the subject of the claims
contained in Cadence's civil lawsuit against the Avant!. In addition, on May 30,
1997, Joanne Hoffman filed a securities fraud class action in the United States
District Court for the Northern District of California on behalf of purchasers
of Avant!'s stock between March 29, 1996 and April 11, 1997, the date of the
filing of a criminal complaint against Avant! and six of its employees and/or
directors. The plaintiffs alleged that Avant! and its officers misled the market
as to the likelihood of the criminal indictment and as to the validity of the
Cadence allegations. The District Court subsequently certified these two
securities class actions, consolidated them for pretrial purposes, and stayed
most discovery and other proceedings pending resolution of the criminal
proceeding described above.
In March 2001, Avant! reached agreement with counsel for the plaintiff classes
in both securities actions for a voluntary resolution of the cases. Under that
agreement, Avant! paid a total of $47.5 million in exchange for dismissal of the
actions and a release of claims by members of the classes. The District Court
entered an order on June 22, 2001, that gave final approval to the settlement
and dismissed the litigation with prejudice. Avant! paid the full settlement
amount of $47.5 million in April 2001. Avant! recognized the settlement as an
expense in the fourth quarter of 2000.
SILVACO LITIGATION
In March 1993, Meta Software Inc. ("Meta"), which Avant! acquired in October
1996, filed a complaint in the Superior Court of California for Santa Clara
County against Silvaco Data Systems, Inc. seeking monetary damages and
injunctive relief. In August 1995, Silvaco International and Silvaco Data
Systems (collectively "Silvaco") filed a cross-complaint against Meta and Shawn
Hailey, then the President and Chief Executive Officer of Meta, alleging that
Meta owed Silvaco royalties and license fees pursuant to a product development
and marketing program and unpaid commissions related to Silvaco's sale of Meta's
products and services under such program. In November 1997, a judgment in the
aggregate amount of $31.4 million was entered against Avant!. Avant! filed
appeals on its own behalf and on behalf of Mr. Hailey. In order to appeal the
judgment, Avant! was required to post a bond, which was collateralized with a
$23.6 million letter of credit.
On June 21, 2001, the California Court of Appeal for the Sixth Appellate
District reversed the judgment. The Court of Appeal decision gave Silvaco the
option of amending its cross-complaint, in which case defaults that had been
previously entered against Meta and Hailey, and that were the principal bases
for the $31.4 million award, would be vacated, or holding a new default prove-up
hearing on Silvaco's causes of action for intentional interference with business
relationships and defamation and retrial as to the amount of award on Silvaco's
cause of action for unfair business practices. On July 27, 2001, Silvaco
petitioned the California Supreme Court for review of the Court of Appeal
decision reversing the trial court judgment. On September 19, 2001, the
California Supreme Court denied review of the Court of Appeal decision, and the
Court of Appeal remitted the case to the trial court on September 21, 2001. At
Silvaco's request, the Santa Clara County Superior court held a default prove-up
hearing on January 31, 2002, where the court fixed the combined award to Silvaco
at $26.1 million on its causes of action for defamation and intentional
interference with economic relations based on conduct occurring between November
1995 and June 1996. Judgment against Avant! will not be entered until its claims
against Silvaco and Silvaco's remaining claim against Avant! are resolved, and
the amount of the award in Silvaco's favor will be reduced by any current and
future awards in Avant!'s favor in the same action. On February 6, 2002, the
F-32
court entered judgment against Mr. Hailey for the amount of the award, but the
court ordered, with the parties' consent, that enforcement of that judgment be
stayed. Mr. Hailey has written indemnity agreements with Meta Software and with
Avant!, and Avant! is providing him with a defense. As part of the agreement to
stay enforcement of the judgment against Mr. Hailey in February 2002, Avant! set
aside funds in the amount of the award. Consequently, Avant! has accrued $26.1
million as a one-time charge as of December 31, 2001. Following the entry of
judgment against Mr. Hailey, Avant! filed on behalf of Mr. Hailey notice of
intention for move for new trial, which motion was denied on March 22, 2002.
Avant! will file on behalf of Mr. Hailey an appeal to challenge the basis and
amount of the judgment. Following the entry of any judgment against Avant!, it
will have an opportunity on its own behalf to file a motion for new trial and,
if appropriate, an appeal. Avant! intends to pursue all remedies available to it
in connection with the litigation with Silvaco, and Avant! believes it has
substantial issues that could cause the trial court to grant a new trial or that
could cause any judgment to be remanded to the trial court for further
proceedings. However, there can be no assurance that any such remedies will be
successful. Payment of the damage award, or damages that may be awarded in the
future, would have a material effect on Avant!'s financial condition and cash
flows.
SHAREHOLDER DERIVATIVE ACTIONS
Between July and October 2001, three derivative actions were filed against
Avant! and certain of its officers and directors: Scott v. Muraki, et al., No.
01-017548 (Cal. Superior Ct.); Louisiana School Employees' Retirement System v.
Muraki, et al., C.A. No. 19091 (Del. Chancery Ct.); and Peterson v. Hsu, et al.,
C.A. No. 19178 (Del. Chancery Ct.). The actions allege, in substance, that
certain present and former Avant! officers and directors caused damage to Avant!
by misappropriating trade secrets from competitors, making false representations
to investors and the public, and causing Avant! to award lucrative employment
contracts, bonuses, stock option grants, and valuable consulting contracts and
ownership interests in companies affiliated with Avant!. The plaintiffs in the
actions have agreed to several extensions of the defendants' deadline for
responding to their respective complaints. Accordingly, the defendants have not
moved to dismiss the actions or otherwise responded to plaintiffs' allegations.
None of the parties to the actions has initiated any discovery requests, and no
depositions have been taken. The defendants believe they have meritorious legal
and factual defenses to the actions but, because the cases are in their initial
stages, and because no court appearances have occurred, no motions have been
heard, and no discovery has been taken, the ultimate outcome of the cases is
uncertain. In addition, the individual officers and directors may have
indemnification rights against the company which may reduce or eliminate any
recovery by the company from the litigation. Due to the uncertainty of the
ultimate outcome of this issue, no losses have been accrued in Avant!'s
financial statements as of December 31, 2001.
SEQUENCE LITIGATION
On August 9, 2001, Sequence Design, Inc. (Sequence) filed an action against
Avant! Corporation No. CV-01-3064JL, in the United States District Court for the
Northern District of California. Sequence alleges that Avant!'s Star-RC and
Star-RCXT products infringe patent 5,901,063 owned by Sequence. The complaint
seeks monetary and injunctive relief. Avant! has answered the complaint and
counterclaimed for declaratory relief, for violations of the Sherman Antitrust
Act and for statutory unfair competition in violation of California Business and
Professions Code section 17200. The court held a case management conference on
December 13, 2001, and subsequently scheduled trial for June 2, 2003. Avant!
believes it has defenses to Sequence's claim and intends to defend itself
vigorously. Avant!'s defenses and counterclaims include, but are not limited to,
Avant!'s belief that the '063 patent is invalid over the prior art pursuant to
35 U.S.C. sections 102 and 103 and, independently, that Avant!'s Star-RC and
Star-RCXT products do not infringe Sequence's '063 patent. Should Sequence's
claim succeed, however, Avant! could be permanently enjoined from using and
marketing any products held to incorporate the inventions claimed in the patent
at issue, and it may be required to pay monetary damages to Sequence. Although
Sequence has not made a claim against any Avant! products other than Star-RC and
Star-RCXT, Sequence may assert such claims. If such claims are made, Avant!
believes it would have defenses to any such claims and would defend itself
vigorously. Nonetheless, should Sequence be successful at proving that any
Avant! product infringes the '063 patent, Avant! could be permanently enjoined
from further infringing that patent, which might require modification to
existing products and/or suspension of the sale of such products until they no
longer infringed the Sequence patent. Accordingly, an adverse judgment could
seriously harm Avant!'s business, financial position and results of operations.
Due to the uncertainty of the ultimate outcome of this issue, no losses have
been accrued in Avant!'s financial statements as of December 31, 2001.
F-33
SILICON VALLEY RESEARCH LITIGATION
On August 10, 2001, Silicon Valley Research, Inc. (SVR) filed an action against
Avant! Corporation in the United States District Court for the Northern District
of California. The complaint purports to state claims for statutory unfair
competition, receipt, sale and concealment of stolen property, interference with
prospective economic advantage, conspiracy, false advertising, violation of the
Lanham Act and violation of 18 U.S.C.A. ss. 1962 (R.I.C.O.). In the complaint,
SVR alleges that Avant!'s use of Cadence trade secrets damaged SVR by allowing
Avant! to develop and market products more quickly and cheaply than it could
have otherwise and that more closely tracked Cadence's approach and interface.
The complaint seeks an accounting, the imposition of a constructive trust, and
actual and exemplary damages. Avant! has moved to dismiss the claims for
statutory unfair competition, receipt, sale and concealment of stolen property,
negligent interference with prospective economic advantage, conspiracy, and
violation of 18 U.S.C.A. ss. 1962 (R.I.C.O.). Avant! has filed an answer in
response to the remaining claims. Co-defendant Stephen Wuu moved to dismiss all
claims. The court held a hearing on the motions to dismiss on December 14, 2001,
and it took both motions under submission. Avant! believes it has defenses to
SVR's claims and intends to defend itself vigorously. These defenses include,
but are not limited to, defenses based on the authority granted to Avant! by the
written release agreement signed between Cadence and Avant! in 1994, Avant!'s
denial of any post-release misappropriation of Cadence trade secrets, Avant!'s
belief that any use by Avant! of Cadence trade secrets did not confer any
competitive advantage on Avant! over SVR, and Avant!'s belief that SVR's loss of
market share resulted from factors other than any use by Avant! of Cadence trade
secrets. Should SVR's claims succeed, however, Avant! could be required to pay
monetary damages to SVR. Accordingly, an adverse judgment could seriously harm
Avant!'s business, financial position and results of operations. Due to the
uncertainty of the ultimate outcome of this issue no losses have been accrued in
Avant!'s financial statements as of December 31, 2001.
DYNASTY CAPITAL SERVICES ARBITRATION
On October 18, 2001, Dynasty Capital Services LLC submitted a Notice of
Submission of Dispute against Avant! to the American Arbitration Association,
and Randolph L. Tom subsequently submitted a Notice of Submission of Dispute
against Avant! to the American Arbitration Association. The dispute stems from
an advisory services agreement between Avant! and Dynasty Capital Services LLC
and a legal services agreement between Avant! and Mr. Tom. In February 2002,
Avant! resolved all claims between it and Dynasty Capital Services LLC and
Randolph L. Tom. Under the terms of the settlement agreement, Avant! will pay a
total of $5.4 million-- $2.7 million was paid at the time of the settlement and
an additional $2.7 million will be paid upon the closing of the proposed merger
with Synopsys Inc. If the Synopsys merger does not close and Avant! does not
merge with any other entity, or sell or transfer 40% or more of its assets, on
or before September 14, 2003, Avant!'s payment obligation is limited to the
initial $2.7 million payment. Consequently, Avant! accrued $5.4 million as a
one-time charge as of December 31, 2001.
COMDISCO
On October 24, 2000, Avant! entered into an assignment of a lease dated February
27, 1997 between it as tenant and Renco Investment Company as landlord for
premises known as Renco 48 at 46897 Bayside Parkway, Fremont, CA. The assignee
was Comdisco, Inc. Avant! retained no possessory interest but was not released
from any obligations under the lease. Renco is also the landlord under the
leases covering Avant!'s facilities at 46871 Bayside Parkway. Those leases
contain cross default provisions that apply to defaults under the Renco 48
lease.
In July 2001, Comdisco filed Chapter 11 bankruptcy. Shortly thereafter the
general contractor who was modifying the leased premises filed a mechanic's lien
against the Renco 48 property. After having been notified of the filing of the
lien, the landlord, Renco, demanded that pursuant to the requirements of the
lease Avant! release or bond around the lien. Avant! discharged the lien by
payment of $4.2 million. Avant! recognized this cost in the third quarter of
2001. Subsequently, on September 8, 2001, Comdisco rejected the Renco 48 lease
in the bankruptcy proceeding. Based upon the assignment of that lease, Avant!
has the obligation to pay rent and common area maintenance (CAM) charges.
F-34
Avant! has been negotiating with Renco to resolve the issues related to
Comdisco's rejection of the lease. However, on February 7, 2002 Renco filed suit
in the Alameda County Superior Court claiming damages against Avant! on account
of Comdisco's rejection of the lease. The complaint asks for rent damages in the
sum of approximately $37.2 million, which is the amount through the end of the
lease term that Comdisco would have been required to pay, and approximately $5.9
million build out damages. Renco has not declared any default of any of the
other Avant! leases based on the cross-default provisions in those leases.
Avant! is vigorously defending the rent damages and build out damages claim. In
addition, Avant! is asserting its claim against Comdisco regarding payment of
the mechanic's lien and rent in the Comdisco bankruptcy proceeding.
The pending litigation and any future litigation against Avant! and its
employees, regardless of the outcome, are expected to result in substantial
costs and expenses to Avant!. Avant!'s legal expenses for all litigation matters
were $14.6 million, $5.8 million and $14.7 million for the years ended December
31, 2001, 2000 and 1999, respectively. Avant! currently expects continued
substantial legal costs in the future as a result of its current litigation
issues. Thus, current litigation issues could seriously harm Avant!'s business,
financial condition and results of operations.
In addition, from time to time, Avant! is subject to legal proceedings and
claims in the ordinary course of business that, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
Aside from the matters described above, Avant! does not believe that it is a
party to any legal proceedings or claims that it believes would materially harm
its business, financial condition and results of operations.
19 EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS 142 effective January 1, 2002. The following table
presents the pro forma results of operations as a result of adopting SFAS 142
(in thousands except per share data):
For The Year Ended
------------------------------------
2001 2000 1999
------------- ---------- ----------
Reported net earnings (loss) $ (177,717) $ 52,859 $ 56,620
Goodwill amortization expense, net of tax 7,307 7,963 5,009
------------- ---------- ----------
Adjusted net earnings (loss) $ (170,410) $ 60,822 $ 61,629
============= ========== ==========
Basic earnings (loss) per share:
Reported earnings (loss) per share $ (4.72) $ 1.36 $ 1.49
Goodwill amortization 0.19 0.20 0.13
Adjusted earnings (loss) per share (4.53) $ 1.56 $ 1.62
Diluted earnings (loss) per share:
Reported earnings (loss) per share $ (4.72) $ 1.32 $ 1.42
Goodwill amortization 0.19 0.20 0.13
Adjusted earnings (loss) per share $ (4.53) $ 1.52 $ 1.55
F-35
The following tables present details of the Company's total purchased intangible
assets (in thousands):
Accumulated
December 31, 2001 Gross Amortization Net
--------------- ---------------- --------------
Technology $ 5,780 $ (4,099) $ 1,681
Library Subscribers 2,104 (1,228) 876
--------------- ---------------- --------------
Total $ 7,884 $ (5,327) $ 2,557
=============== ================ ==============
December 31, 2000
Technology $ 9,035 $ (3,668) $ 5,367
Library Subscribers 8,182 (5,519) 2,663
--------------- ---------------- --------------
Total $ 17,217 $ (9,187) $ 8,030
=============== ================ ==============
December 31, 1999
Technology $ 3,541 $ (1,578) $ 1,963
Library Subscribers 6,078 (3,473) 2,605
--------------- ---------------- --------------
Total $ 9,619 $ (5,051) $ 4,568
=============== ================ ==============
The estimated future amortization expense of purchased intangible assets as of
December 31, 2001, is as follows (in thousands):
Amount
----------------
Fiscal Year
2002 $ 1,924
2003 633
----------------
Total $ 2,557
================
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Q1 2001 Q2 2001 Q3 2001 Q4 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $ 93,663 $ 98,045 $ 100,812 $ 106,150
Costs of revenue 7,759 7,717 6,852 7,118
Earnings (loss) from operations 26,976 (205,384) 34,568 11,901
Net earnings (loss) 14,661 (217,250) 17,128 7,744
Earnings (loss) per share:
Basic $ 0.39 $ (5.79) $ 0.45 $ 0.20
Diluted 0.38 (5.79) 0.45 0.20
Q1 2000 Q2 2000 Q3 2000 Q4 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue $ 85,219 $ 89,751 $ 90,508 $ 92,622
Costs of revenue 6,450 6,818 6,111 6,375
Earnings (loss) from operations 23,494 29,450 26,503 (21,004)
Net earnings (loss) 18,905 20,711 20,149 (6,906)
Earnings (loss) per share:
Basic $ 0.49 $ 0.55 $ 0.51 $ (0.18)
Diluted 0.47 0.52 0.50 (0.18)
F-36
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, 2002 DECEMBER 31, 2001
ASSETS
Current assets:
Cash and cash equivalents $ 164,196 $ 121,814
Short-term investments 24,608 23,740
Restricted investments 32,151 6,007
Accounts receivable, net of allowances
of $8,128 and $10,258, respectively 43,601 47,410
Deferred income taxes 29,209 29,201
Prepaid expenses and other current assets 20,091 18,028
------- -------
Total current assets 313,856 246,200
Equipment, furniture and fixtures, net 22,494 23,645
Deferred income taxes 15,763 15,413
Goodwill, net 15,403 15,403
Intangible assets, net 2,629 2,557
Investment and joint ventures 28,545 28,753
Other assets 42,951 42,431
------- -------
Total assets $ 441,641 $ 374,402
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,167 $ 6,265
Accrued compensation 18,525 20,104
Accrued income taxes 61,033 32,849
Other accrued liabilities 16,013 24,839
Accrued litigation 28,848 31,548
Deferred revenue 82,379 68,171
------- -------
Total current liabilities 209,965 183,776
Other noncurrent liabilities 10,574 10,563
------- -------
Total liabilities 220,539 194,339
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.0001 par value; 70,000,000
shares authorized, 38,775,746 and 38,322,078
shares outstanding at March 31, 2002 and
December 31, 2001, respectively 4 4
Additional paid-in capital 299,827 293,018
Stock-based deferred compensation (1,779) (2,865)
Accumulated deficit (6,438) (39,287)
Accumulated other comprehensive income 2,344 2,049
Treasury stock, at cost; 4,457,000 common shares
at March 31, 2002 and December 31, 2001,
respectively (72,856) (72,856)
-------- --------
Total stockholders' equity 221,102 180,063
-------- --------
Total liabilities and stockholders' equity $ 441,641 $ 374,402
======== ========
See accompanying notes to condensed consolidated financial statements.
F-37
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
March 31, 2002 March 31, 2001
Revenue:
Revenue from unaffiliated customers:
Perpetual license $ 23,243 $ 29,960
Time-based license 55,957 36,887
Service 27,358 26,816
------ ---------
Total revenue from unaffiliated customers 106,558 93,663
Revenue from affiliates 1,546 --
--------- ---------
Total revenue 108,104 93,663
Costs and expenses:
Costs of software 1,067 1,587
Costs of services 5,357 6,172
Selling and marketing 23,328 27,426
Research and development 20,046 22,518
General and administrative 8,878 8,984
--------- ---------
Total operating expenses 58,676 66,687
--------- ---------
Earnings from operations 49,428 26,976
Equity loss from investments and joint
ventures, net (208) (6,781)
Interest income and other, net 3,340 3,262
-------- ---------
Earnings before income taxes 52,560 23,457
Income taxes 19,710 8,796
-------- ---------
Net earnings $ 32,850 $ 14,661
======== =========
Earnings per share:
Basic: $ 0.85 $ 0.39
Diluted: $ 0.83 $ 0.38
Weighted average shares outstanding:
Basic: 38,506 37,375
Diluted: 39,801 38,490
See accompanying notes to condensed consolidated financial statements.
F-38
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
Cash flows from operating activities:
Net earnings $ 32,850 $ 14,661
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 3,516 6,909
Amortization of stock-based compensation 241 281
Compensation under stock plans 726 --
Equity loss from investments and joint ventures 208 6,781
Gain on sale of equipment (2,484) --
Deferred income taxes (358) 159
Tax benefit related to stock options 329 1,465
Deferred rent (54) 113
Provision for doubtful accounts 537 (79)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable 3,272 17,528
Due from affiliates -- 606
Prepaid expenses and other assets (734) 72
Accounts payable (3,098) (802)
Accrued compensation (1,579) (6,143)
Accrued income taxes 28,184 2,443
Accrued litigation (2,700) --
Other accrued liabilities (8,762) (6,058)
Deferred revenue 14,208 18,002
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 64,302 55,938
-------- ---------
Cash flows from investing activities:
Purchases of short-term investments (28,985) (66,765)
Maturities and sales of short-term investments 2,268 145,467
Investments and joint ventures -- (6,200)
Investment in SMIC -- (55,000)
Investment in ALi bonds -- (30,000)
Proceeds from sale of asset 3,144 --
Distribution from venture capital investment 1,500 --
Purchases of equipment, furniture, fixtures and other assets (1,581) (640)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (23,654) (13,138)
-------- ---------
Cash flows from financing activities:
Repurchase of common stock -- (6,547)
Repayment of notes receivable from officers -- 35
Exercise of stock options 1,734 2,364
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,734 (4,148)
-------- ---------
Net increase in cash and cash equivalents
42,382 38,652
Cash and cash equivalents, beginning of period 121,814 106,545
--------- ---------
Cash and cash equivalents, end of period $ 164,196 $ 145,197
========= =========
Cash paid during the period for:
Interest $ 36 $ 896
Income taxes $ 1,047 $ 15,454
See accompanying notes to condensed consolidated financial statements.
F-39
AVANT! CORPORATION AND SUDSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the accounts
of Avant! Corporation and its subsidiaries ("Avant!" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments necessary for a fair presentation of
financial position and results of operations have been made. Operating results
for interim periods are not necessarily indicative of results that may be
expected for a full year. The information included in these financial statements
should be read in conjunction with the Company's annual report on Form 10-K for
the year ended December 31, 2001, filed with the Securities and Exchange
Commission (SEC).
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Certain
financial statement items have been reclassified to conform to the current
period's presentation.
2 AGREEMENT AND PLAN OF MERGER
On December 3, 2001, the Company announced that it had entered into a merger
agreement with Synopsys, Inc. under which it will merge with and into Maple
Forest Acquisition L.L.C., a Delaware limited liability company and a direct
wholly owned subsidiary of Synopsys. Under the merger agreement, the Company's
stockholders will receive 0.371 shares of Synopsys common stock for each share
of Avant! common stock owned. In addition, the merger agreement provides that
upon completion of the merger, stock options to purchase the Company's common
stock granted to the Company's employees and directors under the Company's stock
option plans that are outstanding and not exercised immediately before
completing the merger will become options to purchase Synopsys common stock,
except for the options granted to non-employee directors and Gerald C. Hsu. The
replacement options issued in the merger will generally have the same terms and
conditions as were applicable under the Company's stock option plans, except
that the number of common shares subject to such stock options, and the exercise
price of such stock options, will each be adjusted according to the exchange
ratio in the merger agreement. The merger is subject to certain closing
conditions, including, among other things, the approval of Avant! stockholders
of the merger, approval of Synopsys stockholders of the issuance of Synopsys
common stock in connection with the merger, expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and other
customary closing conditions. Synopsys and Avant! have each set June 4, 2002 as
the date of their respective meetings of shareholders to vote on the proposed
merger. Holders of record of Avant! common shares at the close of business on
April 22, 2002 are entitled to vote at the Avant! special meeting.
3 COMPREHENSIVE INCOME
The following table sets forth the calculation of comprehensive income as
required by Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". Comprehensive income has no impact on the
Company's net earnings, balance sheet, or stockholders' equity. The components
of comprehensive income, net of tax, were comprised of the following (in
thousands):
THREE MONTHS ENDED
MARCH 31,
2002 2001
Net earnings $ 32,850 $ 14,661
Unrealized gains (losses) on investments, net 295 (91)
--------- ----------
Total comprehensive income $ 33,145 $ 14,570
========= ==========
F-40
4 EARNINGS PER SHARE
Basic earnings per share are computed by dividing the net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing net
earnings available to common shareholders by the weighted average number of
common shares outstanding after giving effect to all dilutive common shares that
were outstanding during the period.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
2002 2001
Net earnings $ 32,850 $ 14,661
====== ========
Weighted average number of common shares outstanding 38,506 37,375
Common stock equivalents:
Stock options and awards 1,295 1,115
------ --------
Total weighted average number of common and
common equivalent shares outstanding 39,801 38,490
====== ========
Basic earnings per share $ 0.85 $ 0.39
Diluted earnings per share $ 0.83 $ 0.38
5 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142.
The Company adopted SFAS 142 on January 1, 2002. As of January 1, 2002,
unamortized goodwill is no longer amortized due to the adoption of SFAS 142.
Related goodwill amortization expense for the year ended 2001 was $11.8 million.
The Company completed its reassessment of the useful lives and residual values
of all intangibles assets acquired and there was no material impact. The Company
has not completed its testing of goodwill for impairment in accordance with the
provisions of SFAS 142. The Company expects to have completed the implementation
of SFAS 142 by June 30, 2002. The Company does not expect the implementation of
SFAS 142, including recognizing transitional impairment losses, to have a
material impact on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).
SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SFAS 144 did not have a significant impact on
the Company's financial condition or results of operation because the impairment
assessment under SFAS 144 is largely unchanged from SFAS 121.
F-41
The following table presents the pro forma results of operations as a result of
adopting SFAS 142 (in thousands except per share data):
THREE MONTHS ENDED
MARCH 31,
2002 2001
Reported net earnings $ 32,850 $ 14,661
Goodwill amortization expense, net of tax -- 1,766
-------- --------
Adjusted net earnings $ 32,850 $ 16,427
======== ========
Basic earnings per share:
Reported earnings per share $ 0.85 $ 0.39
Goodwill amortization -- 0.05
----- -----
Adjusted net earnings per share $ 0.85 $ 0.44
===== =====
Diluted earnings per share:
Reported earnings per share $ 0.83 $ 0.38
Goodwill amortization -- 0.05
----- -----
Adjusted earnings per share $ 0.83 $ 0.43
===== =====
The following tables present details of the Company's total purchased intangible
assets (in thousands):
Accumulated
Gross Amortization Net
March 31, 2002
Technology $ 6,536 $ (4,608) $ 1,928
Library subscribers 2,104 (1,403) 701
------ -------- ------
Total $ 8,640 (6,011) 2,629
====== ======== ======
December 31, 2001
Technology $ 5,780 $ (4,099) $ 1,681
Library subscribers 2,104 (1,228) 876
------ -------- ------
Total $ 7,884 (5,327) 2,557
====== ======== ======
The estimated future amortization expense of purchased intangible assets as of
March 31, 2002 is as follows (in thousands):
Amount
Fiscal Year
2002 (remaining nine months) $ 1,996
2003 633
-------
Total $ 2,629
=======
6 INVESTMENTS AND JOINT VENTURES
The Company's investments and joint ventures consisted of the following (in
thousands):
MARCH 31, 2002 DECEMBER 31, 2001
Investment in Forefront $ 18,863 $ 19,010
Other 9,682 9,743
------- -------
Total investments and joint ventures $ 28,545 $ 28,753
======== ========
During 1998, the Company invested $10 million into Forefront Venture Partners
L.P. ("Forefront"), a limited partnership that invests primarily in high
technology start-up companies. This investment represented a 53.9% ownership of
the partnership. The partnership is controlled and managed by a general
partnership. A member of this partnership is a board member of the Company. The
Company accounts for this investment by the equity method because the Company
does not control Forefront.
F-42
The summarized financial information for Forefront consisted of the following
(in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
Current assets $ 12,543 $ 12,163
Non current assets 27,756 28,530
Current liabilities 5 58
Total equity 40,294 40,635
Total income $ 621 $ (12,458)
Gross profit 607 (12,858)
Net earnings $ (341) $ (14,139)
The Company has a joint venture with Davan Tech Co., Ltd. ("Davan Tech") of
Korea. The Company also had a joint venture with Maingate Electronics K.K.
("Maingate") until December 2001, when the Company purchased Maingate. The joint
ventures were formed for the purpose of consolidating distribution in their
respective countries. At March 31, 2002, the Company owned 19.4% of Davan Tech.
Davan Tech is accounted for by the equity method. The Company's share of equity
earnings is included in the accompanying consolidated statement of earnings as
equity income from investments and joint ventures. The Chairman of the Company's
Board of Directors owns 8.2% of Davan Tech. The Company recognizes revenue from
sales to Davan Tech when the Company receives cash from Davan Tech. Related
party revenue from Davan Tech for the three months ended March 31, 2002 was $1.5
million. There was no related party revenue for the three months ended March 31,
2001.
7 OTHER ASSETS
Included in other assets are zero coupon convertible bonds in the amount of $30
million issued by Acer Laboratories Inc. ("ALi"). ALi (incorporated as a company
limited by shares in Taiwan) is a leading manufacturer of integrated circuits
for the personal computer and embedded PC market. The bonds mature in February
2004 and are redeemable at maturity for an amount equal to 107% of the original
principal amount. The bonds are accounted for as available-for-sale securities
in accordance with FASB No. 115 "Accounting for Certain Investments in Debt and
Equity Securities", and recorded at fair value based on an independent
valuation. The bonds had a fair value of $33 million at March 31, 2002. The
Company intends to hold these bonds until maturity.
8 DEFERRED REVENUE
Deferred revenue includes amounts received from customers for which revenue has
not been recognized. The Company believes these amounts represent our
contractual obligations for future performance. The Company does not recognize
deferred revenue for the unbilled portion of post-contract customer support
(PCS) for perpetual licenses because it believes that these contracts are a form
of executory contract in which it has delivery obligations for software updates
and customer support only if the customer pays fees when due and payable.
Similarly, the Company does not recognize deferred revenue for the unbilled
portion of its time based licenses (TBLs) because it believes that these
contracts are a form of executory contract in which it has a delivery obligation
for new products, software updates and customer support only if the customer
pays fees when due and payable. Due to the nature of the Company's business, the
Company does not consider any of its backlog orders to be firm commitments from
its customers.
The components of deferred revenues at March 31, 2002, and December 31, 2001,
are as follows (in thousands):
2002 2001
Perpetual license $ 13,616 $ 14,187
Time-based license 48,023 34,118
Service 20,740 19,866
-------- --------
Total $ 82,379 $ 68,171
======== ========
F-43
9 SEGMENT INFORMATION
The Company's chief operating decision-maker is considered to be the Company's
President. The President reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
geographic region for purposes of making operating decisions and assessing
financial performance. The consolidated financial information reviewed by the
President is identical to the information presented in the accompanying
consolidated statements of operations. The Company operates in a single
operating segment: electronic design automation software and services.
Revenue and asset information regarding operations in different geographic
regions are as follows (in thousands):
NORTH AMERICA EUROPE ASIA CONSOLIDATED
Revenues:
Three months ended March 31, 2002 $ 62,057 $ 20,404 $ 25,643 $ 108,104
Three months ended March 31, 2001 55,074 14,931 23,658 93,663
Identifiable assets
As of March 31, 2002 $ 280,203 $ 82,770 $ 78,668 $ 441,641
As of December 31, 2001 233,119 77,834 63,449 374,402
Long-lived assets:
As of March 31, 2002 $ 14,622 $ 1,433 $ 6,439 $ 22,494
As of December 31, 2001 15,496 1,420 6,729 23,645
During the three months ended March 31, 2002, revenues from one customer
amounted to approximately 12% of the Company's revenues. This customer's
revenues were primarily in North America. During the three months ended March
31, 2001, no single customer accounted for 10% or more of the Company's
revenues.
10 COMMITMENTS AND CONTINGENCIES
The Company has employment and/or severance agreements with several of its
executives and key employees, including Gerald C. Hsu, Paul Lo, and Moriyuki
Chimura. These agreements have provisions relating to a voluntary resignation or
involuntary termination of employment that occurs within six months after a
change of control event, which includes, under the terms of certain employment
agreements, if Gerald C. Hsu ceases to be the Chairman and Chief Executive
Officer of the Company. In the case of a termination of employment after such a
change of control, the employee will receive a cash termination payment based on
a multiple of the employee's base salary in effect at that time. In addition,
certain agreements provide for acceleration of all unvested stock options and an
additional payment in consideration of covenants not to compete. If all such
termination payments were payable as of March 31, 2002, the aggregate cash
payout under employment/or severance agreements to the executives and employees
would be approximately $55 million. In addition, the Company has loaned Mr.
Chimura $300,000 pursuant to a promissory note, dated June 5, 1998. This note
bears interest at an annual rate of 3% and provides that the outstanding
principal and accrued interest under the note will be forgiven in the event Mr.
Hsu is no longer the President and Chief Executive Officer of the Company. As of
March 31, 2002, the note to Mr. Chimura has not been forgiven.
11 LEGAL PROCEEDINGS
AVANT!/CADENCE LITIGATION
On December 6, 1995, Cadence filed an action against Avant! and certain of its
officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition, misappropriation
of trade secrets, conspiracy, breach of contract, inducing breach of contract
and false advertising. The complaint alleges that some of Avant!'s employees
formerly employed by Cadence misappropriated and improperly copied Cadence's
source code for important functions of Avant!'s place and route products, and
that Avant! competed unfairly against Cadence by making false statements about
Cadence and its products. The action also alleges that Avant! induced
individuals, who have been named as defendants, to breach their employment and
confidentiality agreements with Cadence. The same set of facts alleged in the
Avant!/Cadence litigation was also alleged in the Santa Clara criminal action.
F-44
As part of a plea agreement in that action, Avant! pleaded no contest to charges
of conspiracy to misappropriate trade secrets, two counts of trade secret
misappropriation, and a violation of California corporate securities law, and it
paid approximately $35.3 million in fines that were imposed on Avant! and the
individual defendants named below and $195.4 million in restitution. Gerald C.
Hsu, Chairman of Avant!, pleaded no contest to conspiracy to misappropriate
trade secrets, failure to return stolen property and a violation of California
corporate securities law. In addition, five former Avant! employees pleaded no
contest to certain related charges alleged in the Santa Clara criminal action,
including trade secret conspiracy, trade secret misappropriation and violations
of California corporate securities law. See "Santa Clara Criminal Action" below.
In the Avant!/Cadence litigation, Cadence sought to enjoin the sale of Avant!'s
ArcCell and Aquarius place and route products. On December 19, 1997, the
District Court entered a preliminary injunction against continued sales or
licensing of any product or work copied or derived from DFII, specifically
including, but not limited to, the ArcCell products. The preliminary injunction
also bars Avant! from possessing or using any copies of any portion of the
source code or object code for ArcCell or any other product, to the extent it
had been copied or derived from DFII. Avant! had ceased licensing its ArcCell
products in mid-1996, replacing them at that time with its Aquarius products. On
December 7, 1998, the District Court also entered a preliminary injunction
against Avant! prohibiting Avant! from directly or indirectly marketing,
selling, leasing, licensing, copying or transferring the Aquarius, Aquarius XO
and Aquarius BV products. Pending the outcome of the trial of Cadence's action,
the injunction further prohibits Avant! from marketing, selling, leasing,
licensing, copying or transferring any translation code for any Aquarius product
that infringes any protected right of Cadence and prohibits Avant! from
possessing or using any copies of any portion of the source code or object code
for the Aquarius products, to the extent that it has been copied or derived from
DFII. Avant! had released its Apollo/Milkyway place and route products in
January 1998, and it ceased supporting the Aquarius products in February 1999.
In the Avant!/Cadence litigation, Cadence seeks compensatory damages and treble
or other exemplary damages from Avant! under theories of copyright infringement,
misappropriation of trade secrets, inducing breach of contract and false
advertising. Cadence has not fully quantified the amount of damages it seeks in
the Avant!/Cadence litigation. The press has reported claims by Cadence
representatives that Cadence may seek damages in excess of $1 billion in the
Avant!/Cadence litigation, although neither Cadence, these representatives nor
the press has ever described the basis, or provided any substantiation, for such
claims, including whether such claimed damages include punitive damages. In the
Santa Clara criminal action, described in the following section, Cadence claimed
losses of $683.3 million. The court in the Santa Clara criminal action
ultimately awarded Cadence $195.4 million, which included $143.5 million as
Cadence's estimated lost gross profit from all Avant! sales of ArcCell and
Aquarius products after a 1994 written release between Cadence and Avant!.
Avant! subsequently paid the entire restitution amount in full. Under California
law, Avant! may be entitled to credit that amount against any judgment Cadence
obtains in the Avant!/Cadence civil litigation. Although Avant! believes any
potential liability to Cadence is neither probable nor estimable, the financial
advisors to Avant! and Synopsys assumed, only for purposes of assessing the
fairness of the proposed Synopsys merger from a financial point of view, that
the potential litigation exposure of the Avant!/Cadence litigation could be
approximately $250 million to $500 million.
On January 16, 1996, Avant! filed an answer to the complaint denying wrongdoing.
On the same day, Avant! filed a counterclaim against Cadence and its then-CEO,
Joseph Costello, alleging antitrust violations, racketeering, false advertising,
defamation, trade libel, unfair competition, unfair trade practices, negligent
and intentional interference with prospective economic advantage, and
intentional interference with contractual relations. The counterclaim alleges,
among other things, that Cadence's lawsuit is part of a scheme to harm Avant!
competitively, because of Avant!'s success in the marketplace. Avant! filed its
amended counterclaim on January 29, 1998. Pursuant to a stipulated court order,
Cadence and the other counterclaim defendants have not responded to the amended
counterclaim, and Avant!'s counterclaim is currently stayed.
In April 1999, Avant! and Cadence filed cross-motions for summary adjudication
as to whether a 1994 written release agreement between the two companies
extinguished all Cadence claims regarding Avant!'s continued use of intellectual
property claimed by Cadence in any Avant! place and route product in existence
when the release was signed by the parties. On September 8, 1999, the District
Court granted Avant!'s motion in part and ruled that Cadence's trade secret
claim regarding use of DFII source code was barred by the release. The District
Court also ruled that the release did not bar Cadence's copyright infringement
claims regarding Avant!'s alleged post-release use of DFII source code. Unless
reversed on appeal, Avant! believes that this ruling makes it likely that
Cadence will prevail on its copyright infringement claims regarding Avant!'s use
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of DFII source code in the ArcCell products. While this ruling also increases
the likelihood that Cadence will prevail on the same claims as they might apply
to the Aquarius products, Avant! believes that it possesses additional
meritorious defenses with respect to Aquarius that is not available with respect
to ArcCell. On October 15, 1999, the District Court issued an amended order
certifying its September 8, 1999 order for interlocutory appeal to the United
States Circuit Court of Appeals for the Ninth Circuit. Cadence and Avant!
petitioned for leave to file an interlocutory appeal, and the Circuit Court
granted their petitions on December 20, 1999. On June 11, 2001, the Circuit
Court certified to the California Supreme Court the following question: Under
the California Uniform Trade Secrets Act, Cal. Civ. Code sec.3426, when does a
claim for trade secret infringement arise: only once, when the initial
misappropriation occurs, or with each subsequent misuse of the trade secret? On
October 31, 2001, the California Supreme Court accepted the certified question.
Briefing before the California Supreme Court has not been completed, and no date
for oral argument has been set.
Proceedings in the District Court have been stayed pending the Circuit Court's
decision on appeal, which will follow the California Supreme Court's decision on
the question certified to it, and no trial date has been set. Depending upon the
timing of the decision of the California Supreme Court, the disposition of the
appeal by the Circuit Court, the discovery process, jury selection and the
judicial calendar, Avant! expects that, absent a lifting of the current stay,
any trial would likely commence no earlier than mid 2003, and could commence
substantially later.
Avant! believes it has defenses to all of Cadence's claims and intends to defend
itself vigorously. The defenses include, but are not limited to, Avant!'s belief
that the 1994 written release bars Cadence's claims based on the use of DFII
source code. Avant!'s defenses also include Avant!'s belief that Avant! products
did not use or incorporate any Cadence proprietary information or material
allegedly misappropriated after the 1994 written release. This defense will be
based on testimony of the authors of the source code challenged by Cadence,
corroborated by contemporaneous records of their source code development, and of
experts who have analyzed both Cadence's source code and the Avant! source code
challenged by Cadence. Should Cadence ultimately succeed in the prosecution of
its claims, however, Avant! could be required to pay substantial monetary
damages to Cadence. Some or all of these damages may be offset by the amounts
paid to Cadence as restitution arising out of the Santa Clara criminal action.
An adverse judgment could seriously harm Avant!'s business, financial position
and results of operations. Due to the uncertainty of the ultimate outcome of
this issue, no losses have been accrued in Avant!'s financial statements as of
March 31, 2002.
As noted above, preliminary injunctions entered in 1997 and 1998 enjoined Avant!
from marketing its early place and route products, ArcCell and Aquarius, based
on a judicial determination that they incorporated DFII source code. In Avant!'s
current place and route products the functions supported by Cadence's DFII
source code are performed by the MilkWay database, and the DFII code is not
incorporated in any current Avant! product. Avant! developed MilkyWay under the
supervision of an independent expert employing rigorous screening and
record-keeping procedures. Cadence has never alleged that MilkyWay uses DFII
source code in any way. Although Cadence has not made a claim in the
Avant!/Cadence litigation against any current Avant! product, including its
Apollo and Astro place and route products, and has not introduced any evidence
that any such product infringes Cadence's intellectual property rights, Cadence
has publicly implied that it intends to assert such claims. If and when such
claims are made, Avant! believes it would have defenses to any such claims and
would defend itself vigorously. Nonetheless, should Cadence be successful at
proving that any past or then-current Avant! product incorporated intellectual
property misappropriated from Cadence, Avant! could be permanently enjoined from
further use of such intellectual property, which might require modification to
existing products and/or suspension of the sale of such products until such
Cadence intellectual property was removed.
SANTA CLARA CRIMINAL ACTION
On December 16, 1998, after a grand jury investigation, the Santa Clara County
District Attorney's office filed a criminal indictment alleging felony level
offenses related to the allegations of misappropriation of trade secrets set
forth in Cadence's lawsuit. This criminal action was brought against, among
others, Avant! and the following current or former employees and/or directors of
Avant!: Gerald C. Hsu, then President, Chief Executive Officer and Chairman of
the Board of Directors; Y.Z. Liao, Stephen Wuu, Leigh Huang, Eric Cheng and Mike
Tsai. One former defendant was dismissed from the action, and the District
Attorney appealed the dismissal order.
F-46
The 1998 indictment charged the defendants listed above with conspiring to
commit trade secret theft, inducing the theft of a trade secret, conspiracy to
commit fraudulent practices in connection with the offer or sale of a security
and fraudulent practices in connection with the offer or sale of a security. On
April 28, 2000, the Santa Clara Superior Court dismissed all charges in the 1998
indictment against Avant! and all of the current and former executives charged
in the case. The District Attorney appealed the dismissal of the 1998 indictment
and indicated intent to seek another indictment. The District Attorney dismissed
the appeal in favor of the indictment described below.
On August 10, 2000, a Santa Clara County grand jury returned an indictment
against the same current or former employees and/or directors of Avant! as the
1998 indictment. This charged defendants with conspiracy to commit trade secret
theft, conspiracy to withhold and conceal stolen property, conspiracy to commit
securities fraud, theft of trade secrets, withholding or concealing stolen
property, making an unauthorized copy of an article containing a trade secret,
and committing a fraudulent practice in connection with the offer or sale of a
security. Trial proceedings began May 14, 2001.
On May 22, 2001, Avant! entered pleas of no contest to conspiracy to
misappropriate trade secrets, two counts of trade secret misappropriation, and a
violation of California corporate securities law. In connection with the plea
agreement, Avant! agreed to pay a fine of $27.0 million and to pay restitution
in an amount to be determined by the Court. On July 25, 2001, the court fixed
the total restitution amount to be paid to Cadence at $195.4 million, any unpaid
portion of which accrued interest at the statutory rate of 10% beginning July
25, 2001. We recognized the resulting expense of $222.4 million in the second
quarter of 2001.
During the third quarter of 2001, Avant! paid the $27.0 million fine and made
restitution payments to Cadence totaling $170.0 million. Avant! made a final
payment of $26.5 million to Cadence on October 3, 2001, to conclude payment of
the restitution owed to Cadence. The payments above included $1.1 million of
interest.
In addition to the plea by Avant!, the individual defendants resolved the
charges against them in the following manner:
-- Gerald Hsu pleaded no contest to conspiracy to misappropriate trade secrets,
failure to return stolen property, and a violation of California corporate
securities law and agreed to pay a $2.7 million fine. Mr. Hsu's fine was paid on
May 22, 2001. The securities charge is a misdemeanor, and the other charges were
reduced to misdemeanors at sentencing on July 25, 2001. On July 25, 2001, Mr.
Hsu resigned his positions as Avant!'s President and Chief Executive Officer.
Mr. Hsu continues as the Chairman of Board of Directors and as an employee of
Avant! in the newly created position of Chief Strategist, providing strategic
direction for Avant!.
-- Leigh Huang, Y.Z. Liao, and Eric Cho pleaded no contest to trade secret
conspiracy and a violation of California corporate securities law. Huang, Liao
and Cho agreed to pay fines of $0.1 million, $2.7 million, and $0.1 million,
respectively, of which $0.2 million was paid in September 2001 and the remaining
$2.7 million was paid in October 2001. Huang was sentenced to three years
probation. Liao and Cho were each sentenced to three years probation and one
year in county jail. Effective July 25, 2001, Liao resigned his position at
Avant!. Huang and Cho are former Avant! employees.
-- Stephen Wuu pleaded no contest to trade secret misappropriation and a
violation of California corporate securities law. Wuu agreed to pay a $2.7
million fine, which was paid by October 23, 2001. On July 25, 2001, Wuu was
sentenced to 2 years in prison and three years probation. Effective July 25,
2001, Wuu resigned his position at Avant!.
-- Eric Cheng pleaded no contest to trade secret misappropriation. Cheng agreed
to pay a $27,000 fine and was sentenced to three years probation and 364 days in
county jail. Effective July 25, 2001, Cheng resigned his position at Avant!.
-- All charges were dismissed against former Avant! executive Mike Tsai.
F-47
As part of the settlement, Avant! agreed to indemnify all of the current and
former Avant! employees named above, with the exception of Mr. Cheng, for the
fines assessed against them, and indemnify them for the taxes levied as a result
of this indemnification. Avant! recognized the resulting expense of $14.1
million in the second quarter of 2001.
Under the applicable law, Avant! was authorized to pay the defense expenses and
fines of its officers, directors and employees if the Avant! board found that
"the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful." The Avant! board having determined that
these criteria were met, Avant! paid, or agreed to pay, the following amounts in
litigation expenses and fines for the listed individuals in connection with the
Santa Clara criminal action:
NAME FINES(1) LITIGATION AND RELATED EXPENSES(1)
Gerald C. Hsu $ 2,700,000 $ 518,019
Stephen Wuu $ 2,700,000 $ 1,813,009
Y.Z. Liao $ 2,700,000 $ 1,044,457
Eric Cho $ 108,000 $ 617,685
Leigh Huang $ 108,000 $ 866,765
Eric Cheng -- $ 1,410,100(2)
Michael Tsai -- $ 502,402
(1) Amounts do not include amounts to indemnify each of the
individuals for any actual tax liability attributable
to amounts received from, or paid on their behalf by,
Avant!. As of April 15, 2002, Avant! has paid Mr. Hsu,
Mr. Wuu, Mr. Liao and Mr. Cho approximately $2,073,000,
$1,748,000, $1,923,000 and $60,000, respectively, for
the actual tax liability attributable to the fines paid
by Avant! in connection with the Santa Clara criminal
action.
(2) Amounts include litigation expenses related to both the
Santa Clara criminal action and the Avant!/ Cadence litigation.
Delaware General Corporation Law, Section 145 authorizes a corporation to
indemnify officers, directors, employees and agents who were or are parties to a
pending or completed criminal action if "the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful." A finding of good faith is not precluded by a conviction or plea of
no contest. Section 145(a) expressly states that "[t]he termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person's conduct was unlawful."
In determining whether to indemnify the individual defendants for their expenses
and fines incurred in the Santa Clara criminal action, the Avant! board of
directors was advised by Avant!'s corporate counsel, special counsel to the
board of directors and Avant!'s criminal defense counsel. The Avant! board of
directors was advised concerning the requirements and appropriate application of
Delaware General Corporation Law, Section 145, and the facts and circumstances
F-48
of the plea bargain negotiated with the District Attorney for both Avant! and
the individual defendants, including the charges to be dismissed, the
agreed-upon sentence limitations and the fact that the prosecutor conditioned
the plea agreement on acceptance by all the defendants. In connection with
determining whether the individual defendants acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
Avant!, and had no reasonable cause to believe that their conduct was unlawful,
the Avant! board was advised concerning:
o The elements necessary to establish culpability for the violations of
California Securities laws;
o The substance of the allegedly misleading statements;
o The circumstances and potential legal effect of the mutual,general
relase signed with Cadence in 1994; and
o The limited role, if any, the individuals who had apparently used Cadence
source code had played in connection with Avant!'s initial public offering
and subsequent securities-related activities.
Based on this information and the advice of counsel, the Avant! board determined
as to defendants Cho, Huang, Hsu, Liao and Wuu that such defendants were acting
within the scope of their employment and that the requirements of Section 145
were satisfied with respect to the fines assessed against these individuals for
violating California securities laws and resolved to indemnify each of them for
the fines being assessed pursuant to their no contest pleas. The Avant! board
did not address the requirements of Section 145 with respect to any offenses
other than violating California securities laws because no fines were assessed
in connection with such other offenses. With regard to fines being assessed
against defendants Igusa and Cheng, the Avant! board determined that
indemnification for their fines was not appropriate pursuant to Section 145
because Mr. Igusa had never been an officer, director, employee or agent of
Avant! and because Mr. Cheng's fine was based on a plea of no contest to an
offense predicated on alleged conduct by Mr. Cheng undertaken before he became
an Avant! employee.
In determining whether to indemnify the individual defendants for violating
California securities laws, the Avant! board based its analysis, in part, upon
the fact that the prosecutor insisted that the plea bargain offered to Avant!
and the individual defendants had to be accepted as a "package deal" and had to
include pleas of NOLO CONTENDERE to the charge of criminal securities fraud
based upon statements made in connection with Avant!'s initial public offering
in the summer of 1995 and subsequent filings, regardless of the prosecutor's
likelihood of success on the merits in establishing securities fraud against the
defendants at trial. The fines that were to be assessed against Avant! and the
individual defendants who the Avant! board later determined to indemnify were
based expressly upon the count of the indictment alleging criminal securities
fraud.
In addition, as a separate matter, after receiving information from the advice
of counsel, the Avant! board determined that accepting the plea bargain offered
by the prosecutor was in Avant!'s best interests under the circumstances, which
circumstances included the pendency of the Avant!/Cadence litigation.
Thereafter, after receiving information from and the advice of counsel, the
Avant! board also considered the facts relating to the culpability or lack of
culpability of those individual defendants who were agreeing to plead NOLO
CONTENDERE to the securities fraud charge, in connection with statements made in
Avant!'s initial public offering documents and subsequent filings, since those
documents were the basis for that count of the indictment.
The Avant! board determined that the only two defendants who would have been
aware that code from Cadence's DFII software appeared in Avant!'s ArcCell
product, Messrs. Liao and Wuu, had no involvement with the preparation of
Avant!'s initial public offering documents and later relevant filings. Mr. Hsu
and Ms. Huang had both joined Avant! relatively recently and, although they were
involved in preparing the initial public offering documents and subsequent
relevant filings, there was and is no reason to believe that either of them had
any knowledge concerning the possible presence of Cadence code in ArcCell.
Finally, Mr. Cho had no involvement with the initial public offering documents
and subsequent relevant filings and, to the best of Avant!'s knowledge and
belief, also did not know of the possible presence of Cadence code in ArcCell.
For these reasons, the Avant! board concluded that the individual defendants
were not culpable in connection with the count of the indictment under with
which they were being fined pursuant to the plea bargain, and for which
indemnification was requested, and therefore could be indemnified consistent
with applicable Delaware law notwithstanding their pleas of NOLO CONTENDERE .
F-49
In connection with the attorneys' fees and expenses previously advanced by
Avant! on behalf of the individual defendants in the Santa Clara criminal
action, except defendant Igusa, Avant! obtained undertakings by each of the
individual defendants on whose behalf advances were made that Avant! believes
complied with Delaware General Corporation Law, Section 145. Each of the
undertakings provided that, in the event it was ultimately determined that the
defendant was not, under applicable law, entitled to indemnification by Avant!
for attorneys' fees and expenses, the defendant would repay Avant! the amount of
all such payments made by Avant! to the defendant's attorneys. Avant!'s board of
directors later determined that Delaware General Corporation Law, Section 145
would permit Avant! to indemnify each of the individual defendants, except
defendant Igusa, for attorneys' fees and litigation expenses incurred in
connection with defense of the criminal action. In addition to the factors
described above, the Avant! board also was advised concerning, and considered:
o That, in connection with the no contest pleas, the prosecutor had dismissed
certain charges made against the individual defendants;
o That each of the defendants had been charged with conduct undertaken
while a company officer, director, employee or agent;
o That each defendant had coordinated with Avant! in the defense of the
criminal action;
o That it had been in Avant!'s best interests to coordinate the defense of the
criminal action;
o That Avant!'s prior willingness to advance attorneys'fees and costs to assist
the individual defendants in their defense of the criminal action had been a
material inducement in obtaining that coordination by eliminating a potential
source of financial press unrelated to the merits of the action; and
o That such payments therefore had been for the direct benefit of Avant! in
addition to being of benefit to the individual defendants.
Because these attorneys' fees and expenses previously had been advanced by
Avant! on behalf of the aforementioned individual defendants, the board of
directors resolved that Avant! would not require repayment of these fees and
expenses by the individual defendants. As a separate and further basis for
indemnifying Messrs. Hsu, Wuu, Liao and Cheng for their attorneys' fees and
expenses, for substantial business reasons discussed below, Avant! negotiated
settlements that involved either revisions to, or termination of, those
individuals' existing employment agreements with Avant!, including Avant!'s
agreement not to require reimbursement for the fees and costs incurred in
connection with the criminal action and advanced by Avant! on their behalf. The
Avant! board of directors reviewed, was advised concerning, and approved
settlement agreements with each of these individuals.
In connection with determining whether to enter into these settlement
agreements, Avant! determined that those of the defendants who were still
employed by Avant! but who were being convicted and sentenced for pleading NOLO
CONTENDERE to at least one felony, Messrs. Wuu, Liao and Cheng, should not
continue to be employed by Avant!. However, each of those individuals had
employment agreements with Avant! that contained indemnification provisions.
Counsel for the individual defendants informed Avant! that the individual
defendants intended to assert their contractual rights to such provisions.
After obtaining the advice of counsel, information from Avant! officers, and
considering the circumstances, including the circumstances surrounding the
individual defendant's agreements to plead NOLO CONTENDERE to counts of the
indictment insisted upon by the prosecutor, regardless of culpability, the
Avant! board concluded that achieving rapid resolution of these individual
defendants' employment status with Avant! and of their contractual rights was
preferable to incurring the cost and uncertainty of the litigation that would
ensue even if the defendants were immediately terminated. In addition, the
Avant! board considered the probable negative impact on employee morale at
Avant! if the individual defendants were not treated in a manner that appeared
fair to Avant!'s other employees, given that each of the individual defendants
had continued to work and contribute to Avant! for years while defending
themselves in the criminal and civil actions. The Avant! board also considered
that because the individual defendants held senior positions with Avant!, they
were aware of information concerning important, ongoing Avant! business and
technical matters. Therefore, the Avant! board concluded that it was important
to retain their cooperation so that this information remained available to
Avant!. Finally, the Avant! board believed that it was in Avant!'s best
interests that these individual defendants continue to coordinate their defense
with that of Avant! in the Avant!/Cadence litigation.
In the case of each of these individual defendants, Avant! believes that the
settlement agreements were less favorable to them than their existing employment
agreements. Moreover, regardless of the settlement agreements, the Avant! board
would not have requested repayment of the attorneys' fees and costs advanced to
the individual defendants for the criminal actions. Avant! considered it to be
of a considerable benefit to Avant! for the individual defendants to coordinate
their defense of the criminal and civil actions with that of Avant!.
F-50
Although Mr. Hsu was found guilty of only a misdemeanor, Mr. Hsu himself
determined that for a variety of reasons, including issues relating to his
personal health, he should step down as Avant!'s chief executive officer. After
consulting counsel and Avant!'s auditors, the board of directors concurred in
Mr. Hsu's decision. However, the board of directors also concluded that it was
important to Avant!, and particularly important with regard to maintaining
Avant!'s relationship with key customers in Asia, to retain Mr. Hsu's services
and availability for Avant!. Consequently, Avant! and Mr. Hsu agreed upon a
revision to Mr. Hsu's employment agreement, which among other things, provided
for Mr. Hsu to remain as chairman of the board of directors and as Avant!'s
chief strategic officer, while resigning as Avant!'s chief executive officer.
Finally, in connection with the indemnification of the individuals identified
above for the fines assessed in connection with their no contest pleas, the
Avant! board of directors determined that indemnification properly should
encompass amounts sufficient to indemnify each of the individuals for any actual
tax liability attributable to amounts received by or paid on behalf of the
defendants and attributable to the indemnification of those individuals for the
fines assessed in connection with the criminal action. The Avant! board of
directors therefore resolved to reimburse each of the individual defendants,
except for defendants Igusa and Cheng, for additional taxes actually incurred
and paid as a result of having been indemnified by Avant! for the fines assessed
in connection with the no contest pleas. As a separate and further basis for
indemnifying Messrs. Hsu, Wuu and Liao for their actual additional tax liability
incurred in connection with Avant!'s indemnification of them for the fines
assessed in the criminal action, the settlements described above included
Avant!'s agreement to indemnify each of those three individuals for any actual
tax liability incurred and attributable to Avant!'s indemnification of them for
the fines assessed in connection with the no contest pleas and the attorneys'
fees and costs advanced by Avant! on their behalf.
SECURITIES CLASS ACTION CLAIMS
On December 15, 1995, Paul Margetis and Helen Margetis filed a securities fraud
class action complaint against Avant! in the United States District Court for
the Northern District of California. This lawsuit alleged securities laws
violations, including omissions and/or misrepresentations of material facts
related to the events and transactions which are the subject of the claims
contained in Cadence's civil lawsuit against the Avant!. In addition, on May 30,
1997, Joanne Hoffman filed a securities fraud class action in the United States
District Court for the Northern District of California on behalf of purchasers
of Avant!'s stock between March 29, 1996 and April 11, 1997, the date of the
filing of a criminal complaint against Avant! and six of its employees and/or
directors. The plaintiffs alleged that Avant! and its officers misled the market
as to the likelihood of the criminal indictment and as to the validity of the
Cadence allegations. The District Court subsequently certified these two
securities class actions, consolidated them for pretrial purposes, and stayed
most discovery and other proceedings pending resolution of the criminal
proceeding described above.
In March 2001, Avant! reached agreement with counsel for the plaintiff classes
in both securities actions for a voluntary resolution of the cases. Under that
agreement, Avant! paid a total of $47.5 million in exchange for dismissal of the
actions and a release of claims by members of the classes. The District Court
entered an order on June 22, 2001, that gave final approval to the settlement
and dismissed the litigation with prejudice. Avant! paid the full settlement
amount of $47.5 million in April 2001. Avant! recognized the settlement as an
expense in the fourth quarter of 2000.
SILVACO LITIGATION
In March 1993, Meta Software Inc. ("Meta"), which Avant! acquired in October
1996, filed a complaint in the Superior Court of California for Santa Clara
County against Silvaco Data Systems, Inc. seeking monetary damages and
injunctive relief. In August 1995, Silvaco International and Silvaco Data
Systems (collectively "Silvaco") filed a cross-complaint against Meta and Shawn
Hailey, then the President and Chief Executive Officer of Meta, alleging that
Meta owed Silvaco royalties and license fees pursuant to a product development
and marketing program and unpaid commissions related to Silvaco's sale of Meta's
products and services under such program. In November 1997, a judgment in the
aggregate amount of $31.4 million was entered against Avant!. Avant! filed
appeals on its own behalf and on behalf of Mr. Hailey. In order to appeal the
judgment, Avant! was required to post a bond, which was collateralized with a
$23.6 million letter of credit.
On June 21, 2001, the California Court of Appeal for the Sixth Appellate
District reversed the judgment. The Court of Appeal decision gave Silvaco the
option of amending its cross-complaint, in which case defaults that had been
previously entered against Meta and Hailey, and that were the principal bases
for the $31.4 million award, would be vacated, or holding a new default prove-up
hearing on Silvaco's causes of action for intentional interference with business
relationships and defamation and retrial as to the amount of award on Silvaco's
cause of action for unfair business practices. On July 27, 2001, Silvaco
petitioned the California Supreme Court for review of the Court of Appeal
decision reversing the trial court judgment. On September 19, 2001, the
California Supreme Court denied review of the Court of Appeal decision, and the
Court of Appeal remitted the case to the trial court on September 21, 2001. At
F-51
Silvaco's request, the Santa Clara County Superior court held a default prove-up
hearing on January 31, 2002, where the court fixed the combined award to Silvaco
at $26.1 million on its causes of action for defamation and intentional
interference with economic relations based on conduct occurring between November
1995 and June 1996. Judgment against Avant! will not be entered until its claims
against Silvaco and Silvaco's remaining claim against Avant! are resolved, and
the amount of the award in Silvaco's favor will be reduced by any current and
future awards in Avant!'s favor in the same action. On February 6, 2002, the
court entered judgment against Mr. Hailey for the amount of the award, but the
court ordered, with the parties' consent, that enforcement of that judgment be
stayed. Mr. Hailey has written indemnity agreements with Meta Software and with
Avant!, and Avant! is providing him with a defense. As part of the agreement to
stay enforcement of the judgment against Mr. Hailey in February 2002, Avant! set
aside funds in the amount of the award. Consequently, Avant! has accrued $26.1
million as a one-time charge as of December 31, 2001. Following the entry of
judgment against Mr. Hailey, Avant! filed on behalf of Mr. Hailey notice of
intention for move for new trial, which motion was denied on March 22, 2002.
Avant! will file on behalf of Mr. Hailey an appeal to challenge the basis and
amount of the judgment. Following the entry of any judgment against Avant!, it
will have an opportunity on its own behalf to file a motion for new trial and,
if appropriate, an appeal. Avant! intends to pursue all remedies available to it
in connection with the litigation with Silvaco, and Avant! believes it has
substantial issues that could cause the trial court to grant a new trial or that
could cause any judgment to be remanded to the trial court for further
proceedings. However, there can be no assurance that any such remedies will be
successful. Payment of the damage award, or damages that may be awarded in the
future, would have a material effect on Avant!'s financial condition and cash
flows.
SHAREHOLDER DERIVATIVE ACTIONS
Between July and October 2001, three derivative actions were filed against
Avant! and certain of its officers and directors: Scott v. Muraki, et al., No.
01-017548 (Cal. Superior Ct.); Louisiana School Employees' Retirement System v.
Muraki, et al., C.A. No. 19091 (Del. Chancery Ct.); and Peterson v. Hsu, et al.,
C.A. No. 19178 (Del. Chancery Ct.). The actions allege, in substance, that
certain present and former Avant! officers and directors caused damage to Avant!
by misappropriating trade secrets from competitors, making false representations
to investors and the public, and causing Avant! to award lucrative employment
contracts, bonuses, stock option grants, and valuable consulting contracts and
ownership interests in companies affiliated with Avant!. The plaintiffs in the
actions have agreed to several extensions of the defendants' deadline for
responding to their respective complaints. Accordingly, the defendants have not
moved to dismiss the actions or otherwise responded to plaintiffs' allegations.
None of the parties to the actions has initiated any discovery requests, and no
depositions have been taken. The defendants believe they have meritorious legal
and factual defenses to the actions but, because the cases are in their initial
stages, and because no court appearances have occurred, no motions have been
heard, and no discovery has been taken, the ultimate outcome of the cases is
uncertain. In addition, the individual officers and directors may have
indemnification rights against the company, which may reduce or eliminate any
recovery by the company from the litigation. Due to the uncertainty of the
ultimate outcome of this issue, no losses have been accrued in Avant!'s
financial statements as of March 31, 2002.
SEQUENCE LITIGATION
On August 9, 2001, Sequence Design, Inc. (Sequence) filed an action against
Avant! Corporation No. CV-01-3064JL, in the United States District Court for the
Northern District of California. Sequence alleges that Avant!'s Star-RC and
Star-RCXT products infringe patent 5,901,063 owned by Sequence. The complaint
seeks monetary and injunctive relief. Avant! has answered the complaint and
counterclaimed for declaratory relief, for violations of the Sherman Antitrust
Act and for statutory unfair competition in violation of California Business and
Professions Code section 17200. The court held a case management conference on
December 13, 2001, and subsequently scheduled trial for June 2, 2003. Avant!
believes it has defenses to Sequence's claim and intends to defend itself
vigorously. Avant!'s defenses and counterclaims include, but are not limited to,
Avant!'s belief that the `063 patent is invalid over the prior art pursuant to
35 U.S.C. sections 102 and 103 and, independently, that Avant!'s Star-RC and
Star-RCXT products do not infringe Sequence's `063 patent. Should Sequence's
claim succeed, however, Avant! could be permanently enjoined from using and
marketing any products held to incorporate the inventions claimed in the patent
at issue, and it may be required to pay monetary damages to Sequence. Although
F-52
Sequence has not made a claim against any Avant! products other than Star-RC and
Star-RCXT, Sequence may assert such claims. If such claims are made, Avant!
believes it would have defenses to any such claims and would defend itself
vigorously. Nonetheless, should Sequence be successful at proving that any
Avant! product infringes the `063 patent, Avant! could be permanently enjoined
from further infringing that patent, which might require modification to
existing products and/or suspension of the sale of such products until they no
longer infringed the Sequence patent. Accordingly, an adverse judgment could
seriously harm Avant!'s business, financial position and results of operations.
Due to the uncertainty of the ultimate outcome of this issue, no losses have
been accrued in Avant!'s financial statements as of March 31, 2002.
SILICON VALLEY RESEARCH LITIGATION
On August 10, 2001, Silicon Valley Research, Inc. (SVR) filed an action against
Avant! Corporation in the United States District Court for the Northern District
of California. The complaint purports to state claims for statutory unfair
competition, receipt, sale and concealment of stolen property, interference with
prospective economic advantage, conspiracy, false advertising, violation of the
Lanham Act and violation of 18 U.S.C.A. ss. 1962 (R.I.C.O.). In the complaint,
SVR alleges that Avant!'s use of Cadence trade secrets damaged SVR by allowing
Avant! to develop and market products more quickly and cheaply than it could
have otherwise and that more closely tracked Cadence's approach and interface.
The complaint seeks an accounting, the imposition of a constructive trust, and
actual and exemplary damages. Avant! has moved to dismiss the claims for
statutory unfair competition, receipt, sale and concealment of stolen property,
negligent interference with prospective economic advantage, conspiracy, and
violation of 18 U.S.C.A. ss. 1962 (R.I.C.O.). Avant! has filed an answer in
response to the remaining claims. Co-defendant Stephen Wuu moved to dismiss all
claims. The court held a hearing on the motions to dismiss on December 14, 2001,
and it took both motions under submission. Avant! believes it has defenses to
SVR's claims and intends to defend itself vigorously. These defenses include,
but are not limited to, defenses based on the authority granted to Avant! by the
written release agreement signed between Cadence and Avant! in 1994, Avant!'s
denial of any post-release misappropriation of Cadence trade secrets, Avant!'s
belief that any use by Avant! of Cadence trade secrets did not confer any
competitive advantage on Avant! over SVR, and Avant!'s belief that SVR's loss of
market share resulted from factors other than any use by Avant! of Cadence trade
secrets. Should SVR's claims succeed, however, Avant! could be required to pay
monetary damages to SVR. Accordingly, an adverse judgment could seriously harm
Avant!'s business, financial position and results of operations. Due to the
uncertainty of the ultimate outcome of this issue no losses have been accrued in
Avant!'s financial statements as of March 31, 2002.
DYNASTY CAPITAL SERVICES ARBITRATION
On October 18, 2001, Dynasty Capital Services LLC submitted a Notice of
Submission of Dispute against Avant! to the American Arbitration Association,
and Randolph L. Tom subsequently submitted a Notice of Submission of Dispute
against Avant! to the American Arbitration Association. The dispute stems from
an advisory services agreement between Avant! and Dynasty Capital Services LLC
and a legal services agreement between Avant! and Mr. Tom. In February 2002,
Avant! resolved all claims between it and Dynasty Capital Services LLC and
Randolph L. Tom. Under the terms of the settlement agreement, Avant! will pay a
total of $5.4 million-- $2.7 million was paid at the time of the settlement and
an additional $2.7 million will be paid upon the closing of the proposed merger
with Synopsys Inc. If the Synopsys merger does not close and Avant! does not
merge with any other entity, or sell or transfer 40% or more of its assets, on
or before September 14, 2003, Avant!'s payment obligation is limited to the
initial $2.7 million payment. Consequently, Avant! accrued $5.4 million as a
one-time charge as of December 31, 2001.
COMDISCO
On September 14, 2000, Avant! entered into an assignment of a lease dated
February 24, 1997 between it as tenant and Renco Investment Company as landlord
for premises known as Renco 48 at 46897 Bayside Parkway, Fremont, CA. The
assignee was Comdisco, Inc. Avant! retained no possessory interest but was not
released from any obligations under the lease. Renco is also the landlord under
the leases covering Avant!'s facilities at 46871 Bayside Parkway. Those leases
contain cross default provisions that apply to defaults under the Renco 48
lease.
In July 2001, Comdisco filed Chapter 11 bankruptcy. Shortly thereafter the
general contractor who was modifying the leased premises filed a mechanic's lien
against the Renco 48 property. After having been notified of the filing of the
lien, the landlord, Renco, demanded that pursuant to the requirements of the
lease Avant! release or bond around the lien. Avant! discharged the lien by
payment of $4.2 million. Avant! recognized this cost in the third quarter of
2001. Subsequently, on September 8, 2001, Comdisco rejected the Renco 48 lease
in the bankruptcy proceeding. Based upon the assignment of that lease, Avant!
has the obligation to pay rent and common area maintenance (CAM) charges.
F-53
Avant! has been negotiating with Renco to resolve the issues related to
Comdisco's rejection of the lease. However, on February 7, 2002 Renco filed suit
in the Alameda County Superior Court claiming damages against Avant! on account
of Comdisco's rejection of the lease. The complaint asks for rent damages in the
sum of approximately $37.2 million, which is the amount through the end of the
lease term that Comdisco would have been required to pay, and approximately $5.9
million build out damages. Renco has not declared any default of any of the
other Avant! leases based on the cross-default provisions in those leases. On
April 4, 2002, Avant! filed its answer to Renco's complaint, generally denying
each of Renco's claims. Avant! is vigorously defending the rent damages and
build out damages claim. In addition, Avant! is asserting its claim against
Comdisco regarding payment of the mechanic's lien and rent in the Comdisco
bankruptcy proceeding.
The pending litigation and any future litigation against Avant! and its
employees, regardless of the outcome, are expected to result in substantial
costs and expenses to Avant!. Avant! currently expects continued substantial
legal costs in the future as a result of its current litigation issues. Thus,
current litigation issues could seriously harm Avant!'s business, financial
condition and results of operations.
In addition, from time to time, Avant! is subject to legal proceedings and
claims in the ordinary course of business that, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
Aside from the matters described above, Avant! does not believe that it is a
party to any legal proceedings or claims that it believes would materially harm
its business, financial condition and results of operations.
F-54
EXHIBIT 99.2
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
S-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Forefront Venture Partners L.P.
(a Delaware limited partnership)
In our opinion, the accompanying statement of net assets, including the schedule
of portfolio investments, and the related statements of operations, of changes
in partners' capital and of cash flows present fairly, in all material respects,
the financial position of Forefront Venture Partners L.P., a Delaware limited
partnership (the "Partnership"), at December 31, 2001, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included verification, by
physical examination or correspondence with the custodian, of investments owned
as of December 31, 2001. We believe that our audit provides a reasonable basis
for our opinion. The financial statements of the Partnership as of December 31,
2000 and the results of its operations and its cash flows for the years ended
December 31, 2000 and 1999 were audited by other independent accountants whose
report dated February 9, 2001 expressed an unqualified opinion on those
statements.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 18, 2002
S-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Forefront Venture Partners, L.P.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Forefront Venture Partners, L.P. (a Limited
Partnership) as of December 31, 2000, and the related statements of operations,
and changes in partners' capital for the years ended December 31, 2000 and 1999.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 2000, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Forefront Venture Partners,
L.P. (a Limited Partnership) as of December 31, 2000, and the results of its
operations and its changes in partners' capital for the years ended December 31,
2000 and 1999 in conformity with accounting principles generally accepted in the
United States of America.
As disclosed in the schedule of investments, the financial statements as of
December 31, 2000 include securities valued at $68,488,608 (91% of net assets),
whose values the General Partner has estimated in the absence of readily
ascertainable fair values. We have reviewed the procedures used by the General
Partner in arriving at its estimate of the fair value of such securities and
have inspected the underlying documentation, and, in the circumstances, we
believe the procedures are reasonable and the documentation appropriate.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material
to the financial statements.
As discussed more fully in Note 4, the Partnership's investment concentrations
expose the Partnership to a relatively greater degree of risk of loss than would
be the case with greater investment diversification. Additionally, subsequent to
December 31, 2000, the single largest investment in the portfolio has suffered
substantial unrealized losses.
/s/ BDO Seidman, LLP
San Jose, California February 9, 2001, except for Note 4, as to which the date
is March 30, 2001
S-3
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF NET ASSETS
--------------------------------------------------------------------------------
DECEMBER 31,
2001 2000
--------------- ----------
ASSETS
Investments in securities, at fair value
(cost: $14,948,133 in 2001
and $17,902,953 in 2000) $ 40,142,520 $ 68,488,608
Cash and cash equivalents 497,788 6,674,266
Other assets 53,397 17,688
-------------- --------------
Total assets 40,693,705 75,180,562
-------------- --------------
LIABILITIES
Accounts payable and accrued liabilities 58,374 16,000
-------------- --------------
Net assets $ 40,635,331 $ 75,164,562
============== ==============
NET ASSETS REPRESENTED BY PARTNERS' CAPITAL
Contributed capital $ 18,570,707 $ 18,570,707
Distributions to partners (8,000,297) --
Cumulative net operating loss (1,382,462) (1,071,711)
Total realized gain on investments 6,252,996 7,079,911
Net unrealized appreciation on investments 25,194,387 50,585,655
-------------- --------------
Total partners' capital $ 40,635,331 $ 75,164,562
============== ==============
The accompanying notes are an integral part of these financial statements.
S-4
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2001
------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
---------------------- ----------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- -------- ---------- ---------------------- ------------
COMMUNICATION AND
NETWORKING:
% of net assets 10.8% 35.6%
AltiGen Communications,
Inc.: United
States
Common stock 99,820 $ 833,330 $ 89,479
ANDA Networks, Inc.: United
States
Series B 500,500 $166,666 $5,526,821
Series C 166,667 333,334 1,896,004
Series D 10,933 150,000 150,000
-------- ----------
650,000 7,572,825
-------- ----------
Clarinet Systems, Inc.: United
States
Series B 500,000 500,000 800,000
CopperCom, Inc.: United
States
Series B 137,500 550,000 928,400
LeadTONE Wireless, Inc.: United
States
Common stock 6,628 1 1
Promissory note
-------- ----------
1 1
-------- ----------
Ligh Tech Fiberoptics, United
Inc.: States
Series A 999,999 999,999 3,199,997
Oplink Communications, United
Inc.: States
Common 2,574,464 1,246,674 4,295,751
RapidStream, Inc.: United
States
(formerly Network
Engine,
Inc.):
Series A 549,999 183,333 1,929,323
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2001 (cont'd)
--------------------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- ----------- ---------- ----------- ---------------
COMMUNICATION AND
NETWORKING:
% of net assets 0.0% 46.4%
AltiGen Communications,
Inc.: United
States
Common stock $ 833,330 $ 89,479 $ (743,851)
ANDA Networks, Inc.: United
States
Series B 166,666 5,526,821 5,360,155
Series C 333,334 1,896,004 1,562,670
Series D 150,000 150,000 --
--------- ---------- ----------
650,000 7,572,825 6,922,825
--------- ---------- ----------
Clarinet Systems, Inc.: United
States
Series B 500,000 800,000 300,000
CopperCom, Inc.: United
States
Series B 550,000 928,400 378,400
LeadTONE Wireless, Inc.: United
States
Common stock 1 1 --
Promissory note $4,850 $4,850 4,850 4,850 --
------ ------ --------- ---------- ----------
4,850 4,850 4,851 4,851 --
------ ------ --------- ---------- ----------
Ligh Tech Fiberoptics, United
Inc.: States
Series A 999,999 3,199,997 2,199,998
Oplink Communications, United
Inc.: States
Common 1,246,674 4,295,751 3,049,077
RapidStream, Inc.: United
States
(formerly Network
Engine, Inc.):
Series A 183,333 1,929,323 1,745,990
The accompanying notes are an integral part of these financial statements.
S-5
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- -----------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- -------- ---------- ----------- -------- -----------
SEMICONDUCTOR INDUSTRY:
% of net assets 0.0% 13.9%
Advanced Thermal
Technologies,
Inc.: Taiwan
Common stock 4,349,998 1,373,652 1,457,142
Chipstrate Technology Inc.: Taiwan
Common stock 1,582,500 486,246 490,500
Cypress Semiconductor
Corporation: United
States
Sales proceeds held in 306,801 306,801
escrow
Global Testing Corporation.: Taiwan
Common stock 3,093,554 865,126 2,283,078
Grand Plastic Technologies
Co.,
Ltd.: Taiwan
Common stock 166,667 58,140 87,619
Sonics, Inc.: United
States
Series A 333,334 333,334 333,334
Series B 146,334 219,501 146,334
Series C 333,333 333,333 333,333
Warrants-- series B 3,750
Warrants-- common stock 349,999
------- -------
886,168 813,001
------- -------
Ucomm Universal Communication
Technologies, Inc.: Taiwan
Common stock 400,000 124,043 114,286
Preferred stock 334,482 97,041 95,574
------- -------
221,084 209,860
------- -------
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001 (cont'd)
-----------------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
-------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
--------- --------- ---------- -------- ----------- --------------
SEMICONDUCTOR INDUSTRY:
% of net assets 0.0% 13.9%
Advanced Thermal
Technologies,
Inc.: Taiwan
Common stock 1,373,652 1,457,142 83,490
Chipstrate Technology Inc.: Taiwan
Common stock 486,246 490,500 4,254
Cypress Semiconductor
Corporation: United
States
Sales proceeds held in 306,801 306,801 --
escrow
Global Testing Corporation.: Taiwan
Common stock 865,126 2,283,078 1,417,952
Grand Plastic Technologies
Co.,
Ltd.: Taiwan
Common stock 58,140 87,619 29,479
Sonics, Inc.: United
States
Series A 333,334 333,334 --
Series B 219,501 146,334 (73,167)
Series C 333,333 333,333 --
Warrants-- series B -- -- -- -- --
Warrants-- common stock -- -- -- -- --
-- -- ------- ------- --------
-- -- 886,168 813,001 (73,167)
-- -- ------- ------- --------
Ucomm Universal Communication
Technologies, Inc.: Taiwan
Common stock 124,043 114,286 (9,757)
Preferred stock 97,041 95,574 (1,467)
------- ------- --------
221,084 209,860 (11,224)
------- ------- --------
The accompanying notes are an integral part of these financial statements.
S-6
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001
-----------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ------------------ ---------- ---------- ----------
ELECTRONICS AND COMPUTER
HARDWARE
% of net assets 1.1% 2.9%
Rainbow Display, Inc.: United
States
Common stock 50,001 38,334 38,334
Series B 166,667 333,334 466,667
------- -------
371,668 505,001
------- -------
AOpen, Inc.: Taiwan
Common stock 112,532 114,437 274,031
Ritek Corporation: Taiwan
Common stock 172,984 467,395 162,002
Waffer Technology Taiwan
Corporation:
Common stock 401,757 510,269 681,182
FABLESS IC DESIGN HOUSE
% of net assets 15.9% 12.6%
Capella Microsystems, Inc.: United
States
Common stock 62,500 15,625 15,625
Series B3 125,000 125,000 150,000
------- -------
140,625 165,625
------- -------
EmpowerTel Networks, Inc.: United
States
Common stock 52,884 57,291 57,291
Series A 606,060 181,818 2,130,906
Series B 211,538 222,114 775,498
------- ---------
461,223 2,963,695
------- ---------
HiNT Corporation: United
States
Series A 125,000 125,000 125,000
Warrants-- common stocks 1,875
------ -------
125,000 125,000
------- -------
LightSpeed Semiconductor
Corporation: United
States
Series D 39,452 110,071 13,374
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001 (cont'd)
--------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
--------- ---------- ---------- ---------- ---------- -------------
ELECTRONICS AND COMPUTER
HARDWARE
% of net assets 4.0%
Rainbow Display, Inc.: United
States
Common stock 38,334 38,334 --
Series B 333,334 466,667 133,333
------- ------- --------
371,668 505,001 133,333
------- ------- --------
AOpen, Inc.: Taiwan
Common stock 114,437 274,031 159,594
Ritek Corporation: Taiwan
Common stock 467,395 162,002 (305,393)
Waffer Technology Taiwan
Corporation:
Common stock 510,269 681,182 170,913
FABLESS IC DESIGN HOUSE
% of net assets 28.5%
Capella Microsystems, Inc.: United
States
Common stock 15,625 15,625 --
Series B3 125,000 150,000 25,000
------- ------- --------
140,625 165,625 25,000
------- ------- --------
EmpowerTel Networks, Inc.: United
States
Common stock 57,291 57,291 --
Series A 181,818 2,130,906 1,949,088
Series B 222,114 775,498 553,384
------- ------- --------
461,223 2,963,695 2,502,472
------- --------- ---------
HiNT Corporation: United
States
Series A 125,000 125,000 --
Warrants-- common stocks -- -- -- -- --
-- -- ------ ------- --------
-- -- 125,000 125,000 --
-- -- ------- ------- --------
LightSpeed Semiconductor
Corporation: United
States
Series D 110,071 13,374 (96,697)
The accompanying notes are an integral part of these financial statements.
S-7
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001
---------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ----------------- ----------- --------- -----------
Marvell Technology Group Ltd.: United
States
Common 184,616 199,998 5,978,235
PicoTurbo, Inc.: United
States
Series A 16,667 -- 16,667
Series B 333,333 416,666 416,666
------- -------
416,666 433,333
------- -------
Richtek Technology, Inc.: Taiwan
Common stock 500,869 442,434 910,032
Silicon Image, Inc.: United
States
Common stock 89,069 155,871 318,885
Silicon Laboratories, Inc.: United
States
Common stock 5,086 156,075 164,768
Tropian Inc. (formerly
Premier United
States
R.F., Inc.):
Series A 384,615 166,666 453,794
Series C 33,351 166,755 69,810
------- ------
333,421 523,604
------- -------
SOFTWARE AND
INFORMATION
% of net assets 0.0% 6.0%
Celestry Design Technologies Inc. United
States
(formerly Ultima
Interconnect
Technology, Inc.):
Series D 217,391 499,999 499,999
Chain Sea Information
Integration Co. Ltd.: Taiwan
Common stock 102,400 123,596 110,683
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001 (cont'd)
--------------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
--------- ---------- ----------- ---------- --------------------------
Marvell Technology Group Ltd.: United
States
Common 199,998 5,978,235 5,778,237
PicoTurbo, Inc.: United
States
Series A -- 16,667 16,667
Series B 416,666 416,666 --
------- ------- --------
416,666 433,333 16,667
------- ------- --------
Richtek Technology, Inc.: Taiwan
Common stock 442,434 910,032 467,598
Silicon Image, Inc.: United
States
Common stock 155,871 318,885 163,014
Silicon Laboratories, Inc.: United
States
Common stock 156,075 164,768 8,693
Tropian Inc. (formerly
Premier United
States
R.F., Inc.):
Series A 166,666 453,794 287,128
Series C 166,755 69,810 (96,945)
------- ------- --------
333,421 523,604 190,183
------- ------- --------
SOFTWARE AND
INFORMATION
% of net assets 6.0%
Celestry Design Technologies Inc. United
States
(formerly Ultima
Interconnect
Technology, Inc.):
Series D 499,999 499,999 --
Chain Sea Information
Integration Co. Ltd.: Taiwan
Common stock 123,596 110,683 (12,913)
The accompanying notes are an integral part of these financial statements.
S-8
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001
-------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
----------------------- ------------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ------------------ ------------ ---------- ------------
Dome Digital Holding
Corporation: United
States
Series A 500,000 250,000 250,000
EnReach Technology, Inc.: United
States
Series C 25,000 125,000 125,000
GeoVision, Inc.: Taiwan
Common stock 256,757 86,275 87,850
Incentia Design Systems, United
Inc.: States
Series B 35,715 62,501 62,501
Kinzan, Inc.: United
States
Common stock 17,339
Series A 277,778 69,083 69,083
Common stocks held in 250,000 938,888
escrow
(from the acquisition of
Portal Wave, Inc.) 4,335 17,613 17,613
---------- ----------
336,696 1,025,584
---------- ----------
Oridus, Inc. (formerly
Creosys,
Inc.): United
States
Series B 187,500 187,500 187,500
Sharemedia, Inc. (formerly
Fax2Net, Inc.): United
States
Common stock 537,340 13,815 13,815
Series A 276,355 92,194 92,194
Warrants-- common stocks 23,037
---------- ----------
106,009 106,009
---------- ----------
Total portfolio $3,173,780 $11,283,151 $11,769,503 $28,854,519
---------- ----------- ----------- -----------
investments
% of net assets 27.8% 71.0%
----------- -----------
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2001 (cont'd)
--------------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- ------------------------ APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
--------- ---------- ----------- ---------- ------------ --------------
Dome Digital Holding
Corporation: United
States
Series A 250,000 250,000 --
EnReach Technology, Inc.: United
States
Series C 125,000 125,000 --
GeoVision, Inc.: Taiwan
Common stock 86,275 87,850 1,575
Incentia Design Systems, United
Inc.: States
Series B 62,501 62,501 --
Kinzan, Inc.: United
States
Common stock
Series A 69,083 69,083 --
Common stocks held in 250,000 938,888 688,888
escrow
(from the acquisition of
Portal Wave, Inc.) 17,613 17,613 --
---------- ---------- ----------
336,696 1,025,584 688,888
---------- ---------- ----------
Oridus, Inc. (formerly
Creosys,
Inc.): United
States
Series B 187,500 187,500 --
Sharemedia, Inc. (formerly
Fax2Net, Inc.): United
States
Common stock 13,815 13,815 --
Series A 92,194 92,194 --
Warrants-- common stocks -- -- -- -- --
------ ------ ---------- ---------- ----------
-- -- 106,009 106,009 --
------ ------ ---------- ---------- ----------
Total portfolio $4,850 $4,850 $14,948,133 $40,142,520 $25,194,387
------ ------ ----------- ----------- -----------
investments
% of net assets 0.0% 98.8%
------ -----------
The accompanying notes are an integral part of these financial statements.
S-9
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
----------------------- -------------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- -------- ---------- ------------ ---------- --------------
COMMUNICATION AND
NETWORKING:
% of net assets 50.2% 14.0%
AltiGen Communications, United
Inc.: States
Common stock 99,820 $ 833,330 $ 85,346
ANDA Networks, Inc.: United
States
Series B 500,500 $166,667 $2,780,077
Series C 166,667 333,334 981,335
Series D 10,993 150,001 90,001
-------- ----------
650,002 3,851,413
-------- ----------
Clarinet Systems, Inc.: United
States
Series B 500,000 500,000 500,000
CopperCom, Inc.: United
States
Series B 550,000 550,000 2,035,000
Empower Tel Network, Inc.: United
States
Series A 606,060 181,818 1,083,635
Series B 211,538 222,114 409,961
Warrants-- common stocks 52,884
-------- ----------
403,932 1,493,596
-------- ----------
Ligh Tech Fiberoptics, United
Inc.: States
Series A 999,999 999,999 1,999,998
Oplink Communications, United
Inc.: States
Common 2,574,464 1,246,674 37,651,536
RapidStream, Inc.
(formerly
Network Engine, Inc.): United
States
Series A 549,999 183,333 667,552
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS
DECEMBER 31, 2000 (cont'd)
------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
-------------------- ----------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- --------- ----------- ---------- ------------ -------------
COMMUNICATION AND
NETWORKING:
% of net assets 64.2%
AltiGen Communications, United
Inc.: States
Common stock $ 833,330 $ 85,346 $ (747,984)
ANDA Networks, Inc.: United
States
Series B 166,667 2,780,077 2,613,410
Series C 333,334 981,335 648,001
Series D 150,001 90,001 (60,000)
--------- ---------- ----------
650,002 3,851,413 3,201,411
--------- ---------- ----------
Clarinet Systems, Inc.: United
States
Series B 500,000 500,000 --
CopperCom, Inc.: United
States
Series B 550,000 2,035,000 1,485,000
Empower Tel Network, Inc.: United
States
Series A 181,818 1,083,635 901,817
Series B 222,114 409,961 187,847
Warrants-- common stocks -- -- --
--------- ---------- ----------
403,932 1,493,596 1,089,664
--------- ---------- ----------
Ligh Tech Fiberoptics, United
Inc.: States
Series A 999,999 1,999,998 999,999
Oplink Communications, United
Inc.: States
Common 1,246,674 37,651,536 36,404,862
RapidStream, Inc.
(formerly
Network Engine, Inc.): United
States
Series A 183,333 667,552 484,219
The accompanying notes are an integral part of these financial statements.
S-10
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
--------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- -------- ---------- ------------ --------- -----------
Solopoint, Inc.: United
States
Common 256,158 277,778 --
Warrants-- common stocks 123,889
Promissory notes
------ -------
277,778 --
------- -------
SEMICONDUCTOR INDUSTRY:
% of net assets 0.0% 9.8%
Advanced Thermal
Technologies, Inc.: Taiwan
Common stock 2,999,999 908,536 906,126
Chipstrate Technology Taiwan
Inc.:
Common stock 1,582,500 486,247 517,593
Global Testing Taiwan
Corporation.:
Common stock 2,632,812 838,760 2,075,011
Grand Plastic Technologies
Co., Ltd.: Taiwan
Common stock 166,667 58,140 92,119
Lara Networks, Inc.
(formerly
Lara Technology, Inc.): United
States
Preferred A 408,799 204,400 2,657,193
Warrants-- common stocks 26,443
------ -------
204,400 2,657,193
------- ---------
Sage, Inc.: United
States
Common 22,000 79,406 272,498
Sonics, Inc.: United
States
Series A 333,334 333,334 466,668
Series B 146,334 219,501 219,501
Warrants-- series A 150,000
Warrants-- series B 3,750
------ -------
552,835 686,169
------- -------
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000 (cont'd)
----------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
-------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- --------- ----------- ---------- ---------- --------------
Solopoint, Inc.: United
States
Common 277,778 -- (277,778)
Warrants-- common stocks -- -- -- -- --
Promissory notes 27,780 -- 27,780 -- (27,780)
------ -- ------ ------- --------
27,780 -- 305,558 -- (305,558)
------ -- ------- ------- --------
SEMICONDUCTOR INDUSTRY:
% of net assets 0.0% 9.8%
Advanced Thermal
Technologies, Inc.: Taiwan
Common stock 908,536 906,126 (2,410)
Chipstrate Technology Taiwan
Inc.:
Common stock 486,247 517,593 31,346
Global Testing Taiwan
Corporation.:
Common stock 838,760 2,075,011 1,236,251
Grand Plastic Technologies
Co., Ltd.: Taiwan
Common stock 58,140 92,119 33,979
Lara Networks, Inc.
(formerly
Lara Technology, Inc.): United
States
Preferred A 204,400 2,657,193 2,452,793
Warrants-- common stocks -- -- --
------- ------- ---------
204,400 2,657,193 2,452,793
------- --------- ---------
Sage, Inc.: United
States
Common 79,406 272,498 193,092
Sonics, Inc.: United
States
Series A 333,334 466,668 133,334
Series B 219,501 219,501 --
Warrants-- series A -- -- --
Warrants-- series B -- -- --
------- ------- --------
552,835 686,169 133,334
------- ------- --------
The accompanying notes are an integral part of these financial statements.
S-11
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ------- --------- ----------- --------- -----------
Ucomm Universal Communication
Technologies, Inc.: Taiwan
Common stock 400,000 124,043 169,692
ELECTRONICS AND COMPUTER
HARDWARE
% of net assets 0.8% 1.2%
Rainbow Display, Inc.: United
States
Common stock 50,001 38,334 38,334
Series B 166,667 333,334 333,334
------- -------
371,668 371,668
------- -------
AOpen, Inc.: Taiwan
Common stock 404,301 500,925 435,591
Ritek Corporation: Taiwan
Common stock 133,065 465,116 181,753
Waffer Industrial
Corporation: Taiwan
Common stock 297,598 505,964 561,109
FABLESS IC DESIGN HOUSE
% of net assets 5.4% 3.5%
Capella Microsystems, Inc.: United
States
Preferred B-3 125,000 125,000 125,000
Warrants-- common stocks 62,500
------- -------
125,000 125,000
------- -------
HiNT Corporation: United
States
Series A 125,000 125,000 125,000
Warrants-- common stocks 1,875
------- -------
125,000 125,000
------- -------
LightSpeed Semiconductor
Corporation: United
States
Series D 39,452 110,071 110,071
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000 (cont'd)
-----------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION
---------- ----------- ---------- -------- ---------- -------------
Ucomm Universal Communication
Technologies, Inc.: Taiwan
Common stock 124,043 169,692 45,649
ELECTRONICS AND COMPUTER
HARDWARE
% of net assets 2.0%
Rainbow Display, Inc.: United
States
Common stock 38,334 38,334 --
Series B 333,334 333,334 --
------- ------- ------
371,668 371,668 --
------- ------- ------
AOpen, Inc.: Taiwan
Common stock 500,925 435,591 (65,334)
Ritek Corporation: Taiwan
Common stock 465,116 181,753 (283,363)
Waffer Industrial
Corporation: Taiwan
Common stock 505,964 561,109 55,145
FABLESS IC DESIGN HOUSE
% of net assets 8.9%
Capella Microsystems, Inc.: United
States
Preferred B-3 125,000 125,000 --
Warrants-- common stocks -- -- -- -- --
-- -- ------ ------ ------
-- -- 125,000 125,000 --
-- -- ------- ------- ------
HiNT Corporation: United
States
Series A 125,000 125,000 --
Warrants-- common stocks -- -- -- -- --
-- -- ------ ------ ------
-- -- 125,000 125,000 --
-- -- ------- ------- ------
LightSpeed Semiconductor
Corporation: United
States
Series D 110,071 110,071 --
The accompanying notes are an integral part of these financial statements.
S-12
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ------- --------- ----------- --------- -----------
Marvell Technology Group Ltd.: United
States
Common 184,616 199,998 3,323,088
PicoTurbo, Inc.: United
States
Series A 16,667 -- --
Series B 333,333 416,666 416,666
------- -------
416,666 416,666
------- -------
Richtek Technology, Inc.: Taiwan
Common stock 263,333 104,411 100,439
Silicon Image, Inc.: United
States
Common stock 123,608 216,314 645,234
Silicon Laboratories: United
States
Common stock 5,086 156,075 59,392
Tropian Inc. (formerly
Premier R.F., Inc.): United
States
Series A 384,615 166,667 1,571,793
Series C 33,351 166,755 166,755
------- ---------
333,422 1,738,548
------- ---------
SOFTWARE AND
INFORMATION
% of net assets 0.0% 5.8%
Box Vision.com: Taiwan
Common 187,500 61,215 57,519
Chain Sea Information
Integration Co. Ltd: Taiwan
Common stock 100,000 123,457 116,451
Creosys, Inc.: United
States
Series B 187,500 187,500 187,500
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000 (cont'd)
----------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- -------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- ------- ------------ -------- ----------- --------------
Marvell Technology Group Ltd.: United
States
Common 199,998 3,323,088 3,123,090
PicoTurbo, Inc.: United
States
Series A -- -- --
Series B 416,666 416,666 --
------- ------- --------
416,666 416,666 --
------- ------- --------
Richtek Technology, Inc.: Taiwan
Common stock 104,411 100,439 (3,972)
Silicon Image, Inc.: United
States
Common stock 216,314 645,234 428,920
Silicon Laboratories: United
States
Common stock 156,075 59,392 (96,683)
Tropian Inc. (formerly
Premier R.F., Inc.): United
States
Series A 166,667 1,571,793 1,405,126
Series C 166,755 166,755 --
--------- --------- ---------
333,422 1,738,548 1,405,126
--------- --------- ---------
SOFTWARE AND
INFORMATION
% of net assets 0.4% 6.2%
Box Vision.com: Taiwan
Common 61,215 57,519 (3,696)
Chain Sea Information
Integration Co. Ltd: Taiwan
Common stock 123,457 116,451 (7,006)
Creosys, Inc.: United
States
Series B 187,500 187,500 --
The accompanying notes are an integral part of these financial statements.
S-13
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
--------------------- ---------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- ------- ---------- ---------- --------- ------------
Dome Digital Holding
Corporation: United
States
Series A 500,000 250,000 250,000
EnReach Technology, Inc.: United
States
Series C 25,000 125,000 125,000
Warrants-- series C 2,500
------- ------
125,000 125,000
------- -------
GeoVision, Inc.: Taiwan
Common stock 221,667 84,267 70,380
Homeworkhelp.com: United
States
Series B 666,667 333,333 333,333
Series C 458,888 229,444 229,444
Common 100,000 5,000 5,000
Warrants-- common stocks 68,833
Promissory notes
------- -------
567,777 567,777
------- -------
Incentia Design Systems,
Inc.: United
States
Series B 35,715 62,501 62,501
Kinzan.com.: United
States
Series A 277,778 250,000 494,445
Portal Wave, Inc.: United
States
Series C 375,000 375,000 375,000
Pocket.com (formerly Pocket
Science, Inc.): United
States
Series C 244,200 666,666 --
Series C-1 61,051 166,669 --
Series D 104,192 284,444 --
Warrants-- common stocks 41,666
Promissory notes
------- ------
1,117,779 --
--------- ------
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000 (cont'd)
----------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- --------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- -------- ------------ -------- ------------ -------------
Dome Digital Holding
Corporation: United
States
Series A 250,000 250,000 --
EnReach Technology, Inc.: United
States
Series C 125,000 125,000 --
Warrants-- series C -- -- -- -- --
------ ------ ------- ------ --------
-- -- 125,000 125,000 --
------ ------ ------- ------- --------
GeoVision, Inc.: Taiwan
Common stock 84,267 70,380 (13,887)
Homeworkhelp.com: United
States
Series B 333,333 333,333 --
Series C 229,444 229,444 --
Common 5,000 5,000 --
Warrants-- common stocks -- -- -- -- --
Promissory notes 187,500 187,500 187,500 187,500 --
------- ------- ------- ------- --------
187,500 187,500 755,277 755,277 --
------- ------- ------- ------- --------
Incentia Design Systems,
Inc.: United
States
Series B 62,501 62,501 --
Kinzan.com.: United
States
Series A 250,000 494,445 244,445
Portal Wave, Inc.: United
States
Series C 375,000 375,000 --
Pocket.com (formerly Pocket
Science, Inc.): United
States
Series C 666,666 -- (666,666)
Series C-1 166,669 -- (166,669)
Series D 284,444 -- (284,444)
Warrants-- common stocks -- -- -- -- --
Promissory notes 31,250 -- 31,250 -- (31,250)
------ ------ ------- ------ --------
31,250 -- 1,149,029 -- (1,149,029)
------ ------ --------- ------ ----------
The accompanying notes are an integral part of these financial statements.
S-14
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
------------------------------------------------------------------------------------------------
PRIVATELY HELD
PUBLICLY TRADED PREFERRED/COMMON
COMMON STOCK STOCK
----------------------- ------------------------
LOCATION SHARES COST FAIR VALUE COST FAIR VALUE
---------- -------- --------- ------------ ---------- ------------
Share Media, Inc.: United
States
Series B 782,242 666,666 1,382,918
Series C 50,080 100,000 100,000
Warrants-- series B 195,560
Warrants-- common stocks 5,008
Promissory notes
---------- ----------
766,666 1,482,918
---------- ----------
Ultima Interconnect
Technology, Inc.: United
States
Series D 217,391 499,999 499,999
UniCONN Technologies, United
Inc.: States
Series C 52,125 65,156 65,156
Common 5,000 50 50
---------- ----------
65,206 65,206
---------- ----------
Uniteq Application
Systems,
Inc.: United
States
Series C 333,333 333,333 --
Common 666,666 166,667 --
Warrants-- common stocks 333,333
---------- ----------
500,000 --
--------- ---------- ---------- ----------
Total portfolio
investments $3,618,432$42,381,940 $13,945,980 $25,827,157
====================== =========== ===========
% of net assets 56.4% 34.3%
=========== ===========
The accompanying notes are an integral part of these financial statements.
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
SCHEDULE OF PORTFOLIO INVESTMENTS (CONTINUED)
DECEMBER 31, 2000 (cont'd)
-----------------------------------------------------------------------------------------------------
OTHER TOTAL UNREALIZED
--------------------- ----------------------- APPRECIATION
LOCATION COST FAIR VALUE COST FAIR VALUE (DEPRECIATION)
---------- --------- ----------- --------- ------------ --------------
Share Media, Inc.: United
States
Series B 666,666 1,382,918 716,252
Series C 100,000 100,000
Warrants-- series B -- -- -- -- --
Warrants-- common stocks -- -- -- -- --
Promissory notes 92,011 92,011 92,011 92,011 --
-------- ------- ---------- ---------- ----------
92,011 92,011 858,677 1,574,929 716,252
-------- ------- ---------- ---------- ----------
Ultima Interconnect
Technology, Inc.: United
States
Series D 499,999 499,999 --
UniCONN Technologies, United
Inc.: States
Series C 65,156 65,156 --
Common 50 50 --
---------- ---------- ----------
65,206 65,206 --
---------- ---------- ----------
Uniteq Application
Systems,
Inc.: United
States
Series C 333,333 -- (333,333)
Common 166,667 -- (166,667)
Warrants-- common stocks -- -- -- -- --
-------- ------- ---------- ---------- ----------
-- -- 500,000 -- (500,000)
-------- ------- ---------- ---------- ----------
Total portfolio
investments $338,541 $279,511 $17,902,953$68,488,608 $50,585,655
======== ========= ====================== ============
% of net assets 0.4% 91.1%
========= ===========
The accompanying notes are an integral part of these financial statements.
S-15
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------------- --------------- --------------
Interest income from idle funds $ 144,988 $ 95,464 $ 55,246
Interest income from notes receivable 7,391 8,073 --
Other income earned from investments 66,538 30,721 --
--------------- -------------- --------------
218,917 134,258 55,246
--------------- -------------- --------------
Expenses:
Management fee 464,268 464,268 464,268
Legal and accounting 56,374 24,048 24,307
Other 9,026 1,891 1,285
--------------- -------------- --------------
Total expenses 529,668 490,207 489,860
--------------- -------------- --------------
Net operating loss (310,751) (355,949) (434,614)
--------------- -------------- --------------
Net realized loss on investments:
Proceeds from sale of investments 3,897,982 10,892,165 437,067
Cost of investments written-off (3,946,511) -- (1,602,331)
Cost of investments sold (778,386) (2,230,323) (416,667)
--------------- -------------- --------------
Net realized gain (loss) on investments (826,915) 8,661,842 (1,581,931)
--------------- -------------- --------------
Unrealized appreciation on investments:
Beginning of the year 50,585,655 14,927,345 79,180
End of the year 25,194,387 50,585,655 14,927,345
--------------- -------------- --------------
Net change in unrealized appreciation on
investments (25,391,268) 35,658,310 14,848,165
--------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations $ (26,528,934) $ 43,964,203 $ 12,831,620
================ ============== ==============
The accompanying notes are an integral part of these financial statements.
S-16
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------------------------------------
GENERAL LIMITED
PARTNER PARTNERS TOTAL
Balances, January 1, 1999 $ 110,520 $ 18,258,219 $ 18,368,739
Net operating loss (101,338) (333,276) (434,614)
Net realized loss on investments (329,042) (1,252,889) (1,581,931)
Net change in unrealized appreciation on investments 3,088,418 11,759,747 14,848,165
-------------- --------------- ---------------
Balances, December 31, 1999 2,768,558 28,431,801 31,200,359
Net operating loss (100,621) (255,328) (355,949)
Net realized gain on investments 1,801,663 6,860,179 8,661,842
Net change in unrealized appreciation on investments 7,416,928 28,241,382 35,658,310
-------------- --------------- ---------------
Balances, December 31, 2000 11,886,528 63,278,034 75,164,562
Distributions (646,297) (7,354,000) (8,000,297)
Net operating loss (94,807) (215,944) (310,751)
Net realized loss on investments (171,998) (654,917) (826,915)
Net change in unrealized appreciation on investments (5,281,384) (20,109,884) (25,391,268)
-------------- --------------- ---------------
Balances, December 31, 2001 $ 5,692,042 $ 34,943,289 $ 40,635,331
============== =============== ===============
The accompanying notes are an integral part of these financial statements.
S-17
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting
from operations $ (26,528,934) $ 43,964,203 $ 12,831,620
Adjustments to reconcile net increase (decrease) in
net assets resulting from operations to net cash
used in operating activities:
Net change in unrealized appreciation on investments 25,391,268 (35,658,310) (14,848,165)
Net realized loss (gain) on investments 826,915 (8,661,842) 1,581,931
Change in assets and liabilities:
Increase in other assets (35,709) (17,501) (187)
Increase (decrease) in accounts payable and
accrued liabilities 42,374 783 (4,675)
--------------- --------------- ---------------
Net cash used in operating activities (304,086) (372,667) (439,476)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments and issuance of notes
receivable (1,770,077) (4,082,696) (3,359,341)
Proceeds from sale of investments 3,897,982 10,892,165 437,067
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 2,127,905 6,809,469 (2,922,274)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (8,000,297) -- --
--------------- --------------- ---------------
Net cash used in financing activities (8,000,297) -- --
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (6,176,478) 6,436,802 (3,361,750)
Cash and cash equivalents, beginning of year 6,674,266 237,464 3,599,214
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 497,788 $ 6,674,266 $ 237,464
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE:
Promissory note converted into privately held stock $ 179,411 $ 303,406 $ --
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
S-18
FOREFRONT VENTURE PARTNERS L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION
Forefront VENTURE Partners L.P., a Delaware limited partnership (the
"Partnership"), was formed on February 25, 1998 among Forefront Associates
L.L.C. as the General Partner and a number of limited partners for the
purpose of making venture capital investments in technology companies
through the acquisition, holding and distribution or other disposition of
portfolio securities. The Partnership will continue until December 31,
2008, unless terminated sooner or extended in accordance with the
Partnership agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America REQUIRES the
General Partner to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income, unrealized gains, and expenses during the reporting
period. Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
Investments are recorded at fair value which is determined by the General
Partner as follows:
a.If there is no active public market, fair value is determined by the
General Partner, taking into account the financial condition, operating
results, or the value of additional equity offerings of the issuers, and
other factors pertinent to the valuation of the investments. Because of
the inherent uncertainty of valuations, those estimated valuations may
differ significantly from the values that would have been had a ready
market for the securities existed, and the difference could be material.
The Partnership may also have risk associated with its concentration of
investments in certain geographical regions and in certain industries.
b.If actively traded on one or more national securities exchanges, the
fair value is determined at 90% of the average closing price on December
31, 2001 and the preceding four days, unless there are legal or economic
restrictions in trading, in which case the price may be discounted
appropriately.
c.Notes receivables are valued at principal plus accrued interest, except
that discounts will be taken when the company is considered to be
experiencing operating difficulties.
GAINS OR LOSSES ON INVESTMENTS
Realized gains or LOSSES on investment securities represent the difference
between the original cost of the securities on an identified cost basis and
the related market price on the sale or distribution date. They include the
original cost of investment securities written-off, if any. When investment
securities are sold or distributed to the partners, gains or losses are
classified as realized. The difference between the original cost and the
estimated fair value of investment securities owned at the end of the year
represents unrealized gains or losses.
The Partnership does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuation arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Net unrealized gains or losses on investments are included in partners'
capital.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. These
instruments are stated at cost, which approximates fair value. The
Partnership's cash and cash equivalents are held at financial institutions
in the United States and Taiwan.
S-19
INCOME TAXES
Income taxes on Partnership income are the responsibility of the individual
partners; accordingly, no provision for income taxes is included in the
accompanying financial statements.
ORGANIZATION AND SYNDICATION COSTS
Organization costs are costs incurred in the formation of the Partnership.
These costs are charged to expense when incurred. Syndication costs consist
of costs incurred in connection with the syndication of limited partnership
interests. These costs are reflected as a reduction of partners' capital.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified
to conform with the current year presentation.
3. ALLOCATION OF PROFITS AND LOSSES
The Partnership agreement provides for the allocation of net profit or loss
as follows:
a.The Partnership's idle funds income is allocated to all partners in
proportion to their respective capital commitments if the cumulative
capital contributions of the partners have not been fully returned; and
to all partners in proportion to their respective capital account
balances if the cumulative capital contributions have been fully
returned.
b.Except as provided in c. through e. below, all remaining unallocated
profit and loss items are allocated 20% to the general partner and 80%
to all partners in proportion to their respective capital commitments.
c.To the extent that an item of loss allocable to a limited partner
creates a negative balance in the limited partner's capital account, the
item shall not be allocated to such limited partner. It will instead be
allocated first, to all the partners as a group, to the extent possible
in proportion to their respective capital commitments, until the capital
account balance of each limited partner has been reduced to (but not
less than) zero; and thereafter to the general partner. The next
available item of profit will be allocated among the partners to offset
in reverse order such special allocation of excess losses.
d.To the extent that an item of loss allocable to the general partner, as
provided in b. above, causes the aggregate losses allocated to the
general partner to exceed the aggregate profits allocated to the general
partner, the item shall be allocated as follows: first, to the partners
as a group, to the extent possible in proportion to their respective
capital commitments, until the capital account balance of each limited
partner has been reduced to (but not less than) zero; and thereafter, to
the general partner. To the extent there have been special allocations
of loss from the general partner which have not been offset, the next
available item of profit allocable to the general partner shall first be
allocated to the partners to whom such items of loss had been previously
allocated so as to first offset in reverse order such special allocation
of loss.
e.Notwithstanding the above provisions, the general partner shall be
allocated at least 1% of each item of Partnership income, expense, gain
or loss.
4. DISTRIBUTIONS OF PARTNERSHIP ASSETS
The Agreement provides for mandatory distribution of cash equal to 35% of
the net taxable income and gain allocated to each partner as shown on the
Partnership's Federal income tax return. However, no distribution is
required if the total net taxable income and gain of the Partnership for
such fiscal year is less than or equal to $250,000. The Agreement also
provides for discretionary distributions. In 2001, the partnership made
$5,214,691 of mandatory cash distributions and $2,785,606 of discretionary
cash distributions.
S-20
5. INVESTMENTS
Investments by geographical region as follows:
PERCENTAGE
COST FAIR VALUE OF NET ASSETS
DECEMBER 31, 2001
United States................. $ 10,199,485 $ 33,388,549 82.2%
Taiwan........................ 4,748,648 6,753,971 16.6%
-------------- -------------- -----
$ 14,948,133 $ 40,142,520 98.8%
============== ============== =====
PERCENTAGE
COST FAIR VALUE OF NET ASSETS
DECEMBER 31, 2000
United States................. $ 13,641,872 $ 63,204,825 84.1%
Taiwan........................ 4,261,081 5,283,783 7.0%
-------------- -------------- -----
$ 17,902,953 $ 68,488,608 91.1%
============== ============== =====
6. MANAGEMENT FEE
The Agreement requires payment of a management fee to the general partner.
The management fee, payable quarterly, in advance, is 0.625% of the
aggregate capital commitments of the partners. Management fee paid in each
of the three years in the period ended December 31, 2001 was $464,268.
7. FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,
2001 2000 1999
---------- ---------- -------
Net operating loss........................ 0.48% 0.57% 1.63%
======= ======= =======
Operating expenses........................ 0.70% 0.89% 3.37%
Incentive allocation...................... (11.74)% 18.85% 12.00%
------- ------- -------
Total expenses and incentive allocation... (11.04)% 19.74% 15.37%
======= ======= =======
Total return before incentive allocation.. (43.89)% 152.69% 69.58%
Less incentive allocation................. 9.05% (30.47)% (13.46)%
------- ------- -------
Total return after incentive allocation... (34.84)% 122.22% 56.12%
====== ====== ======
The ratios of net investment loss to average net assets, of operating
expenses to average net assets and total return are calculated for the
limited partners as a class. Total return, which reflects the quarter to
quarter change in net assets, was calculated using returns which have been
geometrically linked and utilize the average quarterly capital
transactions. The total expenses and incentive allocation and the total
return after incentive allocation adjust the operating expense and total
return before incentive allocation calculations for the General Partner's
carried interest.
S-21
EXHIBIT 99.3
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
On June 6, 2002 (the "closing date"), Synopsys, Inc. (Synopsys or the Company)
completed a merger with Avant! Corporation (Avant!), a company which develops,
markets, licenses and supports electronic design automation software products
that assist design engineers in the physical layout, design, verification,
simulation, timing and analysis of advanced integrated circuits. Under the terms
of the merger agreement between the Company and Avant!, Avant! merged with and
into a wholly-owned subsidiary of Synopsys.
REASONS FOR THE ACQUISITION. The Synopsys Board of Directors unanimously
approved the merger agreement at its December 1, 2001 meeting. In approving the
merger agreement and making these determinations and recommendations, the Board
of Directors consulted with legal and financial advisors as well as with
management and considered a number of factors. These factors include the fact
that the merger is expected to enable Synopsys and Avant! to offer their
semiconductor customers a complete end-to-end solution for system-on-chip design
that includes Synopsys' logic synthesis and design verification tools with
Avant!'s advanced place and route, physical verification and design integrity
products, thus increasing customers' design efficiencies. By increasing customer
design efficiencies, Synopsys expects to be able to better compete for customers
designing the next generation of semiconductors. Further, by gaining access to
Avant!'s physical design and verification products, as well as its broad
customer base and relationships, Synopsys will gain new opportunities to market
its existing products. The foregoing discussion of the information and factors
considered by the Synopsys Board of Directors is not intended to be exhaustive
but includes the material factors considered by the Synopsys Board of Directors.
The following unaudited pro forma condensed combined consolidated financial
statements give effect to the merger between Synopsys and Avant! using the
purchase method of accounting for the business combination.
Holders of Avant! common stock received 0.371 of a share of Synopsys common
stock (including the associated preferred stock rights) in exchange for each
share of Avant! common stock (the exchange ratio) owned as of the closing date.
Avant! stockholders received cash based on the market price of Synopsys common
stock in lieu of any fractional shares to which they might otherwise have been
entitled.
There can be no assurance that Synopsys and Avant! will not incur charges in
excess of those included in the pro forma total consideration related to the
merger or that management will be successful in its effort to integrate the
operations of the companies.
The unaudited pro forma condensed combined consolidated balance sheet of
Synopsys gives effect to the merger as if it occurred on April 30, 2002 and
combines the unaudited historical consolidated balance sheet of Synopsys as of
April 30, 2002 with the unaudited historical consolidated balance sheet of
Avant! as of March 31, 2002.
The unaudited pro forma condensed combined consolidated statement of operations
of Synopsys gives effect to the proposed merger as if the merger had been
consummated on November 1, 2000. The unaudited pro forma condensed combined
consolidated statement of operations of Synopsys for the year ended October 31,
2001 combines the audited historical consolidated statement of operations of
Synopsys for the year ended October 31, 2001 with the audited historical
consolidated statement of operations of Avant! for the year ended December 31,
2001.
The unaudited pro forma condensed combined consolidated statement of operations
of Synopsys for the six months ended April 30, 2002 combines the unaudited
historical consolidated statement of operations of Synopsys for the six months
ended April 30, 2002 with the unaudited historical consolidated statement of
operations of Avant! for the six months ended March 31, 2002.
1
Included in the unaudited pro forma condensed combined consolidated statements
of operations for the six months ended April 30, 2002 are gross profit, selling
and marketing expenses and operating income for Avant! of $99.0 million, $22.6
million and $11.9 million, respectively, for the three-months ended December 31,
2001 which are also included in the unaudited pro forma condensed combined
consolidated statements of operations for the year ended December 31, 2001.
Avant!'s fourth quarter is typically the largest revenue quarter during a year.
Therefore, the results presented are not necessarily indicative of Avant!'s
first quarter for the year ended December 31, 2002 or for any other interim
period.
The accompanying unaudited pro forma condensed combined consolidated financial
statements are presented in accordance with Article 11 of Regulation S-X. The
pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the proposed merger had been consummated on November 1, 2000 or
on April 30, 2002, respectively, nor is it necessarily indicative of future
operating results or financial position. The pro forma adjustments are based
upon information and assumptions available at the time of the filing of this
Form 8-K/A. The pro forma financial statements should be read in conjunction
with the accompanying notes thereto.
2
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
APRIL 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
-----------------
-------------------------------
SYNOPSYS, INC. AVANT! PRO FORMA PRO FORMA
(1) CORP. (2) ADJUSTMENTS COMBINED
------------------------------- ----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 483,570 $ 164,196 $ (184,972) D $ 367,794
(95,000) D
Short-term investments 48,170 24,608 (55,028) D 17,750
Restricted investments - 32,151 32,151
------------------------------- ----------------- ----------------
Total cash and short-term investments 531,740 220,955 (335,000) 417,695
Accounts receivable, net 151,953 50,409 (5,136) F 194,257
(2,969) A
Assets held for sale, net of tax 28,708 G 28,708
Prepaid expenses, deferred taxes and other 183,405 49,300 18,269 A 192,882
(50,411) A
(3,704) E
(109) D
(3,868) E
------------------------------- ----------------- ----------------
Total current assets 867,098 320,664 (354,220) 833,542
Property and equipment, net 194,225 22,494 (11,400) A 203,349
(1,970) D
Long-term investments 54,634 15,763 (2,194) A 67,203
(1,000) A
Long-term restricted asset - - 240,000 D 240,000
Intangible assets, net 26,974 18,032 (17,541) C 782,110
389,645 A
365,000 A
Other assets 53,358 71,496 (394) E 153,093
41,734 J
(13,101) A
------------------------------- --------------- ----------------
Total assets $ 1,196,289 $ 448,449 $ 634,559 $ 2,279,297
=============================== =============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 108,741 $ 37,705 $ 97,562 A $ 231,339
(1,829) A
(3,496) E
(5,648) E
850 E
(2,546) A
Current portion of long-term debt 515 - - 515
Accrued litigation - 28,848 - 28,848
Accrued income taxes 55,756 61,033 (38,000) D 120,523
41,734 J
Deferred revenue 327,319 89,187 (81,235) A 335,203
(68) D
------------------------------- --------------- ----------------
Total current liabilities 492,331 216,773 7,324 716,428
Deferred taxes and other liabilities 23,392 10,574 133,807 A 165,393
(2,380) E
Long-term deferred revenue 69,545 - - 69,545
Stockholders' equity:
Preferred stock - - - -
Common stock 616 4 (4) B 761
145 A
Additional paid-in capital 588,595 299,827 (299,827) B 1,454,973
866,378 A
Retained earnings (accumulated deficit) 451,318 (6,438) 6,438 B 309,807
(57,000) D
(2,011) D
(82,500) A
Treasury stock, at cost (434,937) (72,856) 72,856 B (434,937)
Deferred compensation and other liabilities (1,779) 1,779 B (8,102)
(8,102) A
Accumulated other comprehensive income 5,429 2,344 (2,344) B 5,429
----------------------------------------------- ----------------
Total stockholders' equity 611,021 221,102 495,808 1,327,931
----------------------------------------------- ----------------
Total liabilities and stockholders' equity $ 1,196,289 $ 448,449 $ 634,559 $ 2,279,297
=============================================== ================
(1) As of April 30, 2002.
(2) As of March 31, 2002.
See accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
3
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
--------------------------------
SYNOPSYS, AVANT! PRO FORMA PRO FORMA
INC. (1) CORP. (2) ADJUSTMENTS COMBINED
----------------------------------------------------------------------
Revenue:
Product $ $ - $
163,924 241,330 405,254
Service 341,833 157,340 - 499,173
Ratable license 174,593 - - 174,593
----------------------------------------------- ----------------
Total revenue 680,350 398,670 - 1,079,020
Cost of revenue:
Product 20,479 5,203 - 25,682
Service 79,747 24,243 - 103,990
Ratable license 29,896 - 29,896
----------------------------------------------- ----------------
Total cost of revenue 130,122 29,446 - 159,568
----------------------------------------------- ----------------
Gross margin 550,228 369,224 - 919,452
Operating expenses:
Research and development 189,831 86,768 (427) H 276,172
Sales and marketing 273,954 98,744 - 372,698
General and administrative 69,682 47,566 (15,640) C 101,608
Litigation settlement and other related costs - 268,085 - 268,085
Amortization of intangible assets 17,012 - 103,824 A 120,836
Amortization of deferred compensation expense - - 3,060 I 3,060
----------------------------------------------- ----------------
Total operating expenses 550,479 501,163 90,817 1,142,459
----------------------------------------------- ----------------
Operating (loss) income (251) (131,939) (90,817) (223,007)
Other income (loss), net 83,784 (7,230) - 76,554
----------------------------------------------- ----------------
Income before provision for income taxes 83,533 (139,169) (90,817) (146,453)
Provision for income taxes 26,731 38,548 (36,193) K 29,086
----------------------------------------------- ----------------
Net income $ $ $ $
56,802 (177,717) (54,624) (175,539)
=============================================== ================
Basic earnings per share $ $ L $
0.94 (4.72) (2.34)
Weighted average common shares outstanding 60,601 37,637 L 75,131
Diluted earnings per share $ $ L $
0.88 (4.72) (2.34)
Weighted average common shares
and dilutive stock options outstanding 64,659 37,637 L 75,131
(1) For the year ended October 31, 2001.
(2) For the year ended December 31, 2001.
See accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
4
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
----------------------------------
SYNOPSYS, AVANT! (2) PRO FORMA PRO FORMA
INC. (1) ADJUSTMENTS COMBINED
-------------------------------------------------- ----------------
Product $ 91,848 $ 145,528 $ - $ 237,376
Service 134,858 68,726 - 203,584
Ratable license 134,477 - - 134,477
----------------------------------------------- ----------------
Total revenue 361,183 214,254 - 575,437
Cost of revenue:
Product 7,287 2,153 - 9,440
Service 38,075 11,389 - 49,464
Ratable license 24,220 - - 24,220
----------------------------------------------- ----------------
Total cost of revenue 69,582 13,542 - 83,124
----------------------------------------------- ----------------
Gross margin 291,601 200,712 - 492,313
Operating expenses:
Research and development 95,355 41,762 (252) H 136,865
Sales and marketing 123,000 45,894 168,894
General and administrative 36,245 20,179 (4,272) C 52,152
Litigation settlement and other related costs - 31,548 - 31,548
Amortization of intangible assets 8,400 - 51,914 A 60,314
Amortization of deferred compensation expense - - 1,317 I 1,317
----------------------------------------------- ----------------
Total operating expenses 263,000 139,383 48,707 451,090
----------------------------------------------- ----------------
Operating (loss) income 28,601 61,329 (48,707) 41,223
Other income, net 22,294 6,861 29,155
----------------------------------------------- ----------------
Income before provision for income taxes 50,895 68,190 (48,707) 70,378
Provision for income taxes 15,463 27,596 (19,229) K 23,830
----------------------------------------------- ----------------
Net income $ 35,432 $ 40,594 $ (29,478) $ 46,548
======================================================================
Basic earnings per share $ $ L $
0.58 1.06 0.62
Weighted average common shares outstanding 60,670 38,252 L 75,200
Diluted earnings per share $ 0.55 $ 1.04 L
$
0.58
Weighted average common shares
and dilutive stock options outstanding 64,956 39,162 L 80,024
(1) For the six months ended April 30, 2002.
(2) For the six months ended March 31, 2002.
See accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on preliminary estimates which may change as
additional information is obtained. In addition, the pro forma adjustments were
derived from the June 5, 2002 closing balance sheet of Avant!; however, for
purposes of the unaudited pro forma combined consolidated financial statements,
such adjustments have been applied to the March 31, 2002 Avant! balance sheet.
(A) Purchase Price Adjustments
The purchase price adjustments reflect the issuance of 14,530,288 shares of
Synopsys common stock to Avant! stockholders using the exchange ratio of
0.371 based on the outstanding shares of Avant! common stock as of the
closing date. The fair value of the Synopsys shares issued and the stock
options assumed in the merger is based on a per share value of $54.74,
which is equal to Synopsys' average last sale price per share as reported
on the Nasdaq National Market for the trading-day period two days before
and after December 3, 2001, the date of the merger agreement. The intrinsic
value of the options assumed in the merger was based on the value of
Synopsys' common stock on the closing date.
For purposes of the pro forma financial information, the following table
presents the assumptions used.
Total consideration (in thousands):
Fair value of Synopsys common stock issued $795,388
Estimated acquisition related costs 36,142
Estimated facilities closure costs 62,638
Employee severance costs 49,193
Estimated fair value of options to purchase Synopsys
common stock to be issued, less $8.1 million representing
the portion of the intrinsic value of Avant!'s unvested
options applicable to the remaining vesting period 63,033
---------------
$1,006,394
===============
The estimated acquisition-related costs of $36.1 million consist primarily
of banking, legal and accounting fees, printing costs, and other directly
related charges including contract termination costs of $6.7 million. The
Company is currently reviewing all outstanding Avant! contracts to
determine the total impact which may result in additional accruals for
contract termination costs in accordance with Emerging Issues Task Force
(EITF) Issue No. 95-3. Such accruals would increase the purchase
consideration and the allocation of the purchase consideration to goodwill.
Estimated facilities closure costs includes $54.2 million related to
Avant!'s corporate headquarters. The lessor has brought a claim against the
Company for the future amounts payable under the lease agreements. The
amount accrued at the closing date is equal to such future amounts payable
under the related lease agreements, without taking into consideration in
the accrual any defenses we may have to the claim. Resolution of this
contingency at an amount different from that accrued will result in an
increase or decrease in the purchase consideration and the amount allocated
to goodwill. The remaining estimated facilities closure costs totaling $8.4
million represents the present value of the future obligations under
certain of Avant!'s lease agreements which the Company has or intends to
terminate under an approved facility exit plan plus additional costs
expected to be incurred directly related to vacating such facilities.
Employee severance costs include (i) $39.6 million in cash paid to Avant!'s
Chairman of the Board, consisting of severance plus a cash payment equal to
the intrinsic value of his in-the-money stock options at the closing date,
(ii) $3.3 million in cash severance payments paid to redundant employees
(primarily sales and corporate infrastructure personnel) terminated on or
subsequent to the consummation of the merger under an approved plan of
termination and (iii) $6.3 million in termination payments to certain
executives in accordance with their respective pre-merger employment
agreements. The total number of Avant! employees expected to be terminated
as a result of the merger is approximately 240.
6
As of the closing date, $50.4 million of costs described in the three
preceding paragraphs have been paid and $97.6 million of these costs have
not yet been paid.
The following represents the preliminary allocation of the purchase price
to the acquired assets and assumed liabilities of Avant! and is for
illustrative purposes only. This allocation is preliminary and based on
Avant!'s assets and liabilities as of March 31, 2002.
(IN THOUSANDS)
Net tangible assets $169,249
Goodwill 389,645
Other acquired intangible assets:
Core/Developed technology 184,000
Contract rights intangible 51,700
Customer installed base/relationship 102,500
Trademarks and tradenames 17,700
Covenants not to compete 9,100
In-process research and development 82,500
----------------
Total purchase price $ 1,006,394
================
Net tangible assets consist of $203.6 million recorded on the Avant!
historical financial statements as of March 31, 2002, adjusted principally
for the reduction in deferred revenue of $81.2 million, an increase in
deferred tax liabilities of $133.8 million, an increase in unbilled
receivables of $18.3 million, , an increase in assets held for sale of
$28.7 million (net of tax effect of $19.0 million), an increase in the
allowance for doubtful accounts of $5.1 million, and a decrease in fixed
and other assets of $23.7 million to record them at fair value.
Goodwill represents the excess of the purchase price over the fair value of
tangible and identifiable intangible assets acquired. The unaudited pro
forma condensed combined consolidated statements of operations do not
reflect the amortization of goodwill acquired in the merger consistent with
the guidance in the Financial Accounting Standards Board (FASB) Statement
No. 142, Goodwill and Other Intangible Assets.
Other acquired intangible assets total $365.0 million. Amortization of
other intangible assets has been provided over the following estimated
useful lives: core/developed technology -- three years; contract rights
intangible -- the life of the related contracts (three years); customer
installed base/relationship -- six years; trademarks and tradenames --
three years; and covenants not to compete -- the life of the related
agreement (two to four years). This will result in annual amortization of
approximately $61.3 million for core technology, $17.1 million for customer
installed base/relationship, $5.9 million for trademarks and tradename,
$17.2 million for contract rights intangible and $2.3 million for covenants
not to compete.
The purchase price allocation includes a reduction in Avant!'s reported
deferred revenue as of the closing date. Under the purchase method of
accounting, Avant!'s deferred revenue related to arrangements in which
payment had been received or was legally due and payable, including license
fees and post-contract customer support (PCS) for perpetual license
arrangements and time-based license arrangements was reduced to the fair
value of the related obligation as of the closing date. In addition,
Avant!'s deferred revenue related to the libraries business was reduced to
zero (see Note G). The aggregate reduction to Avant!'s reported deferred
revenue was approximately $81.2 million. Finally, Avant! had executed
signed perpetual license agreements, and delivered the licensed technology,
under contracts specifying future customer payments. There were no
receivables or deferred revenues recorded on Avant!'s historical financial
statements for these contracts as Avant! did not consider the fees fixed
and determinable at the outset of the arrangement and the related payments
were not yet due under extended payment terms. Unbilled receivables was
increased by $18.3 million, equal to the present value of future payments
related to these perpetual licenses.
7
Avant! had also executed signed license agreements, and delivered the
initial configuration of licensed technologies under ratable license
arrangements and had executed signed contracts to provide PCS over a one to
three year period, for which Avant! did not consider the fees to be fixed
and determinable at the outset of the arrangement. There were no
receivables or deferred revenues recorded on Avant!'s historical financial
statements at the closing date as the related payments were not yet due
under extended payment terms and deliveries occur over the term of the
arrangements. These ratable licenses and PCS arrangements require future
performance by both parties and, as such, represent executory contracts.
The fair value of these executory contracts of $51.7 million was included
in intangible assets on the pro forma balance sheet. The contract rights
intangible asset associated with these arrangements will be amortized to
cost of sales over the related contract lives.
Synopsys has not given effect in the pro forma statement of operations to
the deferred revenue adjustment on revenue or the effect of the
amortization of the contract rights intangible asset on cost of sales as
the adjustments are directly related to the merger and the effect is
non-recurring. Such adjustments will be reflected in the post-merger
statements of operations of the combined company.
The deferred revenue adjustment will have the effect of reducing the amount
of revenue the combined company will recognize in periods subsequent to the
merger compared to the amount of revenue Avant! would have recognized in
the same period absent the merger.
Revenue presented in the pro forma financial statements consists of fees
for perpetual and time-based licenses of software products, post-contract
customer support (PCS), customer training and consulting. Product revenue
consists primarily of perpetual and non-ratable time-based license fees.
Service revenue consists of PCS under perpetual and non-ratable time-based
licenses and consulting services.
Under a perpetual license a customer pays a one-time license fee for the
right to use the software. The vast majority of customers buying perpetual
licenses also purchase annual software support services (PCS) for perpetual
licenses, under which they receive minor enhancements to the products
developed during the year, bug fixes and technical assistance. Revenue from
perpetual licenses is recognized upon delivery using the residual method in
accordance with SOP 98-9 and revenue from PCS is recognized ratably over
the PCS term.
A ratable license (TSL), operates like a rental of software that includes
PCS. A customer pays a fee for license and PCS over a fixed period of time,
and at the end of the time period the license expires unless the customer
pays for renewal. Ratable licenses are usually offered with a range of
terms; the average length of which is expected to be approximately 3.0 to
3.5 years. Revenue from TSLs is recognized over the term of the ratable
license period, as the license and PCS portions of a TSL are bundled and
not sold separately.
Prior to the merger, Avant! sold approximately 45% to 60% of its products
under perpetual license arrangements. After the merger, Synopsys management
intends to modify the mix such that orders for ratable licenses will
account for approximately 73% to 78% of total product orders and orders for
perpetual licenses will account for approximately 22% to 27% of total
product orders for the combined company. This will have the effect of
reducing Avant!'s revenue in the short term compared to the revenue it
would have expected to record in the same period under its license mix
absent the merger. Under a ratable license, relatively little revenue is
recognized during the quarter the product is delivered as opposed to a
perpetual license arrangement where all of the license revenue is
recognized in the quarter the product was delivered. Therefore, an order
for a ratable license or TSL will result in significantly lower
current-period revenue than an equal-sized order under a perpetual license
arrangement.
The $8.1 million of deferred stock-based compensation represents the
unearned portion, as of the closing date, of the intrinsic value of
Avant!'s common stock options assumed in the merger. The deferred
compensation is being amortized on a straight-line basis over the remaining
vesting period of one to three years.
The pro forma adjustment of $1.8 million to accounts payable and accrued
liabilities represents the elimination of Avant!s excess capacity accrual
as amounts related to idle facilities for the combined company are included
in the estimated facilities closure costs of $62.6 million as described
above.
8
The pro forma adjustment to property and equipment, net represents the
elimantion of fixed assets, including leasehold improvements, which will
not be utilized by the combined company totaling $11.4 million.
The pro forma adjustment of $2.2 million to long term investments
represents an investment in a private company with which Avant! had a
distributor agreement. Synopsys has cancelled this distributor agreement
which was the only significant source of revenue for the investee company,
effective as of the closing date.
The pro forma adjustment to other assets of $13.1 million represents (i)
the elimination of intellectual property owned by Avant! totaling $4.1
million that will not be utilized by the combined company and (ii) a $9.0
million write-down of an investment in zero-coupon convertible bonds issued
by a company listed on the Taiwan exchange. Synopsys has been unable to
secure a buyer for the bonds, the conversion value of the bonds is well
below par, and the investee company does not appear to have the resources
to honor the March 2003 redemption of the bonds. The investment has been
written down to management's best estimate of it's net realizable value.
Avant!'s other assets balance includes an investment in a venture-capital
fund valued at $17.2 million. Management intends to dispose of this
investment; however, the Company has been unable to obtain certain
financial records and information required to effectively market the
investment. The pro forma financial statements do not include any
adjustment of the fair value of this investment due to this contingency.
Any adjustment to the fair-value of these investments which is ultimately
made will increase or decrease the purchase consideration and the
allocation of the purchase consideration to goodwill.
The balance of Avant!'s other assets also includes an investment in a
private company valued at $2.0 million with which it had a distributor
agreement. In connection with the merger, Synopsys entered a new limited
distributor agreement with the investee company under which Synopsys paid a
fee of $6.5 million and the investee company repurchased approximately
one-half of the Avant! equity investment for $1.0 million. The costs
associated with the cancellation of the distributor agreement are included
in accounts payable and accrued liabilities on the pro forma balance sheet.
In connection with the merger, Synopsys terminated a distributor agreement
under which Synopsys paid a fee of $0.5 million and the outstanding
accounts receivable and accounts payable totaling $3.0 million and $2.5
million, respectively, between the two companies were mutually forgiven.
At the closing date, the Avant!/Cadence litigation has been accounted for
as a pre-merger contingency because a litigation judgment or settlement
amount, if any is not probable or estimable. If a litigation loss becomes
probable and estimable after the date of the merger, such loss will be
included in net income.
(B) The pro forma adjustment represents the elimination of Avant!'s
stockholders' equity accounts.
(C) The pro forma adjustment represents the elimination of Avant!'s capitalized
goodwill and other intangible assets aggregating $17.5 million and related
amortization expense of $15.6 million and $4.3 million for the year ended
October 31, 2001 and the six months ended April 30, 2002, respectively.
(D) As a result of the merger, Synopsys anticipates that the combined company
will incur certain costs directly related to the merger that will be
recognized in the third fiscal quarter of 2002. These costs are reflected
in the pro forma financial information as a reduction of retained earnings
at the balance sheet date and are described below.
o In connection with the merger, Synopsys entered into a policy with a
subsidiary of American International Group, Inc., a AAA rated
insurance company, whereby insurance has been provided for certain
compensatory, exemplary and punitive damages, penalties and fines and
attorneys' fees arising out of the pending litigation between Avant!
and Cadence Design Corporation, Inc. (the "Avant!/Cadence litigation"
or the "covered loss"). The policy does not provide coverage for
litigation other than the Avant!/Cadence litigation.
In return for a premium of $335 million, the insurer is obligated to
pay covered loss up to a limit of liability equaling (a) $500 million
plus (b) interest accruing at the fixed rate of 2%, compounded
semi-annually, on $250 million (the "interest component"), as reduced
by previous losses. The policy will expire following a final judgment
or settlement of the Avant!/Cadence litigation or any earlier date
upon Synopsys' election. Upon such expiration, Synopsys will be
entitled to a payment equal to $240 million plus the interest
component less any covered loss paid under the policy (which, for this
purpose, shall include legal fees only to the extent that the
aggregate amount of such fees exceeds $10 million.)
The contingently refundable portion of the insurance premium ($240
million) is included in the pro forma balance sheet at April 30, 2002
as a long-term restricted asset. Interest earned on that amount will be
included in other income, net in the post-acquisition statement of
operations. The balance of the premium paid to the insurer ($95
million) will be expensed in the third quarter of fiscal 2002.
o Synopsys will write-off the net book value of software licenses
totaling $2.0 million originally purchased from Avant!.
o A pro forma adjustment totaling $0.1 million has been recorded to
elimnate the prepaid asset for maintenance agreements Synopsys
originally purchased from Avant!
o Synopsys will write-off the remaining deferred revenue balances
totaling $0.1 million related to licenses originally sold to Avant!.
9
(E) As a result of the merger, certain assets held by Avant! and liabilities
outstanding will no longer be utilized or payable by the combined company.
These costs are reflected in the pro forma financial information as a
reduction of the related asset or liability and are described below.
o Upon consummation of the merger, Avant!'s sales force was converted to
Synopsys' commission plan. As a result, the outstanding prepaid
commissions receivable at the closing date totaling $3.7 million have
been forgiven. In addition, a pro forma adjustment of $0.8 million has
been recorded representing the estimated liability the Company will
incur in closing out Avant!'s commission plan.
o A pro forma adjustment of $2.4 million has been recorded to eliminate
Avant!'s deferred rent balance for facilities which will no longer be
utilized by the combined company as of the closing date.
o An adjustment of $3.5 million has been recorded to eliminate
an Avant! liability related to the Avant!/Cadence litigation.
o In connection with the merger, the company settled certain existing
Avant! litigation for an amount approximately $5.6 million less than
the liability recorded by Avant!.
o A pro forma adjustment totaling $3.9 million has been recorded to
eliminate prepaid assets related to certain maintenance and insurance
contracts as these contracts have been cancelled as a result of the
merger.
o An adjustment totaling $0.4 million has been recorded to eliminate the
prepaid asset related to the facility lease agreements which have been
cancelled as a result of the merger.
(F) A pro forma adjustment of $5.1 million has been recorded representing an
increase to the allowance for doubtful accounts such that Avant!'s
allowance for doubtful accounts conforms to Synopsys' policy for recording
a reserve for uncollectible accounts receivable.
(G) In January 2001, Synopsys sold the assets of its silicon libraries business
to Artisan Components, Inc. ("Artisan") and entered into an agreement not
to engage, directly or indirectly, in the libraries business before January
3, 2003. As a result of the merger, the combined company is required to
make a reasonable effort to sell Avant!'s libraries business as defined in
the Artisan non-compete agreement. Therefore, a pro forma adjustment of
$28.7 million, net of tax of $19.0 million, has been recorded to allocate a
portion of the purchase price to the net assets held for sale as these
assets constitute a line of business as defined by APB 30. Amounts were
assigned to the net assets held for sale based on the estimated future net
cash flows from the libraries business in accordance with EITF 87-11,
Allocation of Purchase Price To Assets To Be Sold.
(H) The pro forma adjustment represents the elimination of depreciation expense
for Synopsys software owned by Avant! of $0.4 million and $0.2 million for
the year ended October 31, 2001 and the six months ended April 30, 2002,
respectively.
(I) The pro forma adjustment represents the amortization of deferred
compensation associated with unvested stock options assumed in the merger.
The deferred compensation is amortized over the options' remaining vesting
period as of the closing date of one to three years.
(J) The pro forma adjustment represents a reclass of certain amounts to conform
to Synopsys' accounting policy and presentation.
(K) The pro forma adjustment reflects an effective tax rate of 40% on the other
non-tax pro forma adjustments. For the twelve months ended October 31, 2001
there was a negative combined effective tax rate due to certain losses
arising in Avant!.
10
(L) The following table sets forth the computation of basic and diluted earnings
per share:
FOR THE YEAR ENDED
OCTOBER 31, 2001
----------------------------------------------------
HISTORICAL
----------------------------------
SYNOPSYS, INC. AVANT! CORP (2) PRO FORMA
(1) COMBINED
----------------- ---------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss) $56,802 $(177,717) $(175,539)
================= ================ =================
Denominator:
Weighted-average common shares outstanding 60,601 37,637 75,131
Effect of dilutive employee stock options 4,058 -- --
outstanding ----------------- ---------------- -----------------
Diluted common shares 64,659 37,637 75,131
================= ================ =================
Basic earnings (loss) per share $ 0.94 $ (4.72) $ (2.34)
================= ================ =================
Diluted earnings (loss) per share $ 0.88 $ (4.72) $ (2.34)
================= ================ =================
FOR THE SIX MONTHS ENDED
APRIL 30, 2002
----------------------------------------------------
HISTORICAL
----------------------------------
SYNOPSYS, INC. AVANT! CORP (4) PRO FORMA
(3) COMBINED
----------------- ---------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income $35,432 $40,594 $46,548
================= ================ =================
Denominator:
Weighted-average common shares outstanding 60,670 38,252 75,200
Effect of dilutive employee stock options 4,286 910 4,824
outstanding ----------------- ---------------- -----------------
Diluted common shares 64,956 39,162 80,024
================= ================ =================
Basic earnings per share $ 0.58 $ 1.06 $ 0.62
================= ================ =================
Diluted earnings per share $ 0.55 $ 1.04 $ 0.58
================= ================ =================
(1) For the year ended October 31, 2001.
(2) For the year ended December 31, 2001.
(3) For the six months ended April 30, 2002.
(4) For the six months ended March 31, 2002.
11