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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 9, 1996
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AVANT! CORPORATION
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(EXACT NAME OF REGISTRATION AS SPECIFIED IN CHARTER)
DELAWARE 0-25864 94-3133226
(STATE OR OTHER JURISDICTION (COMMISSION (IRS EMPLOYER
OF INCORPORATION FILE NUMBER) IDENTIFICATION NO.)
1208 EAST ARQUES, SUNNYVALE, CALIFORNIA 94086
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (408) 738-8881
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(Former Name or Former Address, If Changed Since Last Report)
Total pages:
Exhibit Index on Page 5.
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ITEM 5. OTHER EVENTS.
On October 9, 1996, Avant! Corporation, a Delaware corporation (the
"Registrant"), entered into an Agreement and Plan of Reorganization (the
"Agreement") with Frontline Design Automation, Inc., a California corporation
("Frontline"), and DSM Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Registrant ("Sub"). Pursuant to the Agreement,
Sub will merge under the laws of the States of California and Delaware with
and into Frontline, with Frontline remaining as a wholly-owned subsidiary of
Registrant (the "Merger"). Under the terms of the Agreement, Registrant will
issue an aggregate of approximately 2.22 million shares of Registrant's
common stock and options to purchase shares of Registrant's common stock in
exchange for all of Frontline's outstanding equity interests.
The Merger is conditioned upon Frontline shareholder approval, the
availability of pooling-of-interests accounting treatment, the issuance of a
permit by the Department of Corporations of the State of California and certain
other customary closing conditions.
The preceding description of the Agreement is qualified in its
entirety by reference to the copy of the Agreement included as Exhibit 2.1 of
the Current Report on Form 8-K and which is incorporated herein by reference.
Frontline has approximately thirty employees. For the nine months
ended September 30, 1996, Frontline had approximately $5 million in revenue
and was profitable. As of September 30, 1996, Frontline had approximately $3
million in assets.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Not applicable.
(b) PRO FORMA FINANCIAL INFORMATION.
Not applicable.
(c) EXHIBITS.
Exhibit No. Description
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2.1 Agreement and Plan of Reorganization as of October 9, 1996,
among Registrant, Sub and Frontline.
13.1 Annual Report on Form 10-K for the year ended December 31,
1995
99.1 Press release dated October 10, 1996, announcing the
definitive agreement to merge with Frontline.
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99.2 Press release dated October 17, 1996, announcing financial
results for the third quarter ended September 30, 1996.
99.3 1995 Proxy statement for the Annual Meeting of Stockholders
held on May 30, 1996.
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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.
Avant! Corporation
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(Registrant)
Date: October 23, 1996 By: /s/ John P. Huyett
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John P. Huyett, Vice President of
Financial & Administrative Services,
Chief Financial Officer, Treasurer and
Principal Accounting Officer
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AVANT! CORPORATION
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ----------- -----------
2.1 Agreement and Plan of Reorganization dated as of October 9, 1996
among Registrant, Sub and Frontline.
13.1 Annual Report on Form 10-K for the year ended December 31, 1995
99.1 Press release dated October 10, 1996, announcing the definitive
agreement to merge with Frontline.
99.2 Press release dated October 17, 1996, announcing financial
results for the third quarter ended September 30, 1996.
99.3 1995 Proxy statement for the Annual Meeting of Stockholders held
on May 30, 1996.
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AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF OCTOBER 9, 1996,
AMONG
AVANT! CORPORATION,
DSM ACQUISITION CORPORATION
AND
FRONTLINE DESIGN AUTOMATION, INC.
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TABLE OF CONTENTS
PAGE
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ARTICLE I THE MERGER......................................................1
1.1 Merger; Effective Time of the Merger.................................1
1.2 Closing..............................................................1
1.3 Effects of the Merger................................................1
1.4 Tax-Free Reorganization; Pooling of Interests........................2
1.5 Escrow...............................................................2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES;
SUPPLEMENTARY ACTION............................................2
2.1 Effect on Capital Stock..............................................2
2.2 Exchange of Certificates.............................................5
2.3 Supplementary Action.................................................6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF FRONTLINE.....................7
3.1 Organization, Standing and Power.....................................7
3.2 Capital Structure....................................................7
3.3 Subsidiaries.........................................................8
3.4 Authority............................................................8
3.5 Financial Statements.................................................9
3.6 Payables; Receivables...............................................10
3.7 Compliance with Laws................................................11
3.8 No Defaults.........................................................11
3.9 Litigation..........................................................11
3.10 Conduct in the Ordinary Course......................................11
3.11 Absence of Undisclosed Liabilities..................................13
3.12 Documents and Information Supplied..................................13
3.13 Certain Agreements..................................................14
3.14 Employee Plans......................................................14
3.15 Major Contracts.....................................................15
3.16 Taxes...............................................................16
3.17 Intellectual Property...............................................19
3.18 Employee Agreements.................................................20
3.19 Restrictions on Business Activities.................................20
3.20 Title to Properties; Absence of Liens and
Encumbrances: Condition of Equipment................................20
3.21 Governmental Authorizations and Licenses............................21
3.22 Environmental Matters...............................................22
3.23 Insurance...........................................................24
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3.24 Labor Matters.......................................................25
3.25 Customers; Backlog; Returns and Complaints..........................25
3.26 Personnel...........................................................25
3.27 Questionable Payments...............................................25
3.28 Related Party Transactions..........................................26
3.29 Customers and Suppliers.............................................26
3.30 Bank Accounts and Powers of Attorney................................26
3.31 Products............................................................26
3.32 Brokers or Finders; Professional Fees...............................27
3.33 Permit..............................................................27
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF AVANT! AND SUB...............27
4.1 Organization; Standing and Power....................................27
4.2 Authority...........................................................27
4.3 Valid Issuance of Shares of Avant! Common Stock.....................28
4.4 Avant! Financial Statements.........................................28
4.5 Litigation..........................................................29
4.6 Reports.............................................................29
4.7 Restrictions on Business Activities.................................29
4.8 Brokers or Finders; Professional Fees...............................29
4.9 Conduct in the Ordinary Course......................................29
4.10 Permit..............................................................30
ARTICLE V CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME;
ADDITIONAL AGREEMENTS..........................................30
5.1 Conduct of Business of FrontLine....................................30
5.2 Access to Information; Provision of Interim Financial Statements. . 33
5.3 FrontLine Shareholders' Consent.....................................34
5.4 Fairness Hearing and Permit.........................................34
5.5 Exclusivity; Acquisition Proposals..................................34
5.6 Breach of Representations, Warranties, Agreements and Covenants . . 35
5.7 Consents............................................................35
5.8 Best Efforts........................................................35
5.9 Legal Conditions to the Merger......................................36
5.10 Public Announcements................................................36
5.11 Affiliates Agreement and Continuity of Interest Certificate.........37
5.12 Expenses............................................................37
5.13 Information to be Supplied..........................................37
5.14 Registration of Avant! Common Stock Issuable With
Respect to Assumed FrontLine Options................................37
5.15 Reorganization......................................................38
5.16 Schedules...........................................................38
5.17 Certain Benefit Plans...............................................38
5.18 Listing of Shares...................................................38
5.19 Indemnification.....................................................38
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ARTICLE VI CONDITIONS PRECEDENT...........................................39
6.1 Conditions to Each Party's Obligation to Effect the Merger..........39
6.2 Conditions of Obligations of Avant! and Sub.........................39
6.3 Conditions of Obligation of FrontLine...............................41
ARTICLE VII INDEMNITY......................................................41
7.1 Survival of Representations, Warranties, Covenants
and Agreements......................................................41
7.2 Indemnification; Escrow Deposit of Avant! Common Stock..............42
7.3 Termination of Indemnity and Representations and Warranties.........43
7.4 Exclusivity of Remedies.............................................43
ARTICLE VIII TERMINATION....................................................43
8.1 Termination.........................................................43
8.2 Expenses and Termination Fees.......................................44
ARTICLE IX GENERAL PROVISIONS.............................................44
9.1 Amendment...........................................................44
9.2 Extension; Waiver...................................................44
9.3 Notices.............................................................45
9.4 Interpretation......................................................46
9.5 Counterparts........................................................46
9.6 Entire Agreement....................................................46
9.7 No Transfer.........................................................46
9.8 Severability........................................................46
9.9 Other Remedies......................................................46
9.10 Further Assurances..................................................46
9.11 Absence of Third-Party Beneficiary Rights...........................47
9.12 Governing Law.......................................................47
EXHIBITS
1.1 Agreement of Merger
1.3(a) Articles of Incorporation
1.3(b) Bylaws
1.5 Escrow Agreement
5.11(a) Affiliates Agreement
5.11(b) Continuity of Interest Certificate
SCHEDULES
2.1(d) Holders of FrontLine Options Exercisable for Common Stock
2.1(e) Holders of FrontLine Restricted Stock
3.3 List of Subsidiaries
3.6 Receivables
3.7 Exceptions to Compliance with Laws
3.8 List of Defaults
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3.9 Pending Litigation
3.10 Exceptions to Conduct in the Ordinary Course
3.11 Undisclosed Liabilities
3.13 Certain Agreements
3.14 FrontLine Compensation Plans
3.15 Major Contracts
3.17 FrontLine Intellectual Property Rights
3.18 Proprietary Information and Inventions Agreements
3.19 Restrictions on Business Activities
3.20 Real Property Leased; Physical Assets
3.21 Governmental Authorizations and Licenses
3.22 Environmental Matters
3.23 Insurance
3.25 Customers; Backlog; Returns and Complaints
3.26 Personnel
3.28 Related Party Transactions
3.29 Customers and Suppliers
3.30 Bank Accounts and Powers of Attorney
3.32 Brokers or Finders; Professional Fees
5.11 List of Affiliates
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is dated as of October 9,
1996, by and among Avant! Corporation, a Delaware corporation ("Avant!"), DSM
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Avant! ("Sub") and FrontLine Design Automation, Inc., a California corporation
("FrontLine").
INTENDING TO BE LEGALLY BOUND, and in consideration of the premises
and mutual covenants and agreements contained herein, Avant!, Sub and FrontLine
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 MERGER; EFFECTIVE TIME OF THE MERGER. Subject to the terms and
conditions of this Agreement and Plan of Reorganization (the "Agreement") and as
contemplated by the Agreement of Merger substantially in the form attached
hereto as Exhibit 1.1 (the "Agreement of Merger"), Sub will be merged with and
into FrontLine (the "Merger") in accordance with the applicable provisions of
the corporate laws of the State of Delaware ("Delaware Law") and the State of
California ("California Law"). The Agreement of Merger provides, among other
things, the mode of effecting the Merger and the manner and basis of converting
each issued and outstanding share of capital stock of FrontLine into shares of
Common Stock, par value $.0001 per share, of Avant! ("Avant! Common Stock").
The Agreement of Merger shall be executed by FrontLine, Avant! and Sub prior to
the Effective Date of the Merger (as defined in this Section 1.1).
Subject to the provisions of this Agreement, the Agreement of Merger
shall be filed in accordance with Delaware Law and California Law on the Closing
Date (as defined in Section 1.2). The Merger shall become effective upon such
filing of the Agreement of Merger (the date of such filing being hereinafter
referred to as the "Effective Date of the Merger" and the time of confirmation
of such filing being hereinafter referred to as the "Effective Time of the
Merger") in the State of California, which for purposes of Delaware Law shall
also be the Effective Time of the Merger in Delaware.
1.2 CLOSING. The closing of the Merger (the "Closing") will take
place as soon as practicable on the first business day after satisfaction or
waiver of the conditions precedent set forth in Article VI of this Agreement
(the "Closing Date"), at the offices of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 600 Hansen Way, Palo Alto, California, unless a
different date or place is agreed to in writing by Avant!, Sub and FrontLine.
1.3 EFFECTS OF THE MERGER. At the Effective Time of the Merger, (a)
the separate existence of Sub shall cease and Sub shall be merged with and into
FrontLine (Sub and FrontLine are sometimes referred to herein as the
"Constituent Corporations" and FrontLine after
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the Merger is sometimes referred to herein as the "Surviving Corporation"), (b)
the Articles of Incorporation of the Surviving Corporation shall be set forth in
EXHIBIT 1.3(a) hereto, (c) the Bylaws of the Surviving Corporation shall be set
forth in EXHIBIT 1.3(b) hereto, (d) the directors of the Surviving Corporation
shall be Gerald C. Hsu and John P. Huyett, (e) the officers of the Surviving
Corporation shall be Gerald C. Hsu, President and Chief Executive Officer and
John P. Huyett, Vice President, Chief Financial Officer and Secretary and (f)
the Merger shall, from and after the Effective Time of the Merger, have all the
effects provided by applicable law.
1.4 TAX-FREE REORGANIZATION; POOLING OF INTERESTS. The Merger is
intended to be a Reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and to be accounted for
as a pooling of interests.
1.5 ESCROW. Ten percent (10%) of the aggregate number of shares of
Avant! Common Stock issued in connection with the Merger (the "Escrow Shares")
shall be held in escrow as collateral for the indemnification obligations of
FrontLine pursuant to Article VII of this Agreement and the provisions of an
escrow agreement ("Escrow Agreement") substantially in the form attached hereto
as EXHIBIT 1.5. The Escrow Shares shall be withheld pro rata from the shares of
Avant! Common Stock to be received by the shareholders of FrontLine upon
exchange of their shares of FrontLine capital stock for Avant! Common Stock.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF
CERTIFICATES; SUPPLEMENTARY ACTION
2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of FrontLine:
(a) CAPITAL STOCK OF SUB. All issued and outstanding shares of
capital stock of Sub shall continue to be issued and outstanding and shall be
converted into 1,000 shares of Common Stock of the Surviving Corporation. Each
stock certificate of Sub evidencing ownership of any such shares shall continue
to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(b) CANCELLATION OF CAPITAL STOCK OF FRONTLINE.
(i) All shares of capital stock of FrontLine that are
owned directly or indirectly by FrontLine or by any entity controlled by
FrontLine shall be canceled and no stock of Avant! or other consideration shall
be delivered in exchange therefor. For this purpose, a controlled entity shall
mean a corporation or other entity whose voting securities are owned or are
otherwise controlled directly or indirectly by a parent corporation or other
intermediary entity in an amount sufficient to elect at least a majority of the
board of directors or other managers of such corporation or other entity.
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(ii) Each holder of a certificate representing any
shares of FrontLine capital stock after the Effective Time of the Merger shall
cease to have any rights with respect to such shares, except the right either to
receive the Merger Consideration Per Share (as defined below) upon surrender of
such certificate, or to exercise such holder's dissenters' rights, if
applicable, as provided in Section 2.1(g) hereof and pursuant to Delaware Law
and California Law.
(c) CONVERSION OF CAPITAL STOCK OF FRONTLINE. Subject to this
subsection 2.1(c), each issued and outstanding share of Common Stock of
FrontLine ("FrontLine Common Stock"), including shares issued or issuable upon
the exercise of any FrontLine Option (as defined in Section 2.1(d) below) prior
to the Effective Time of the Merger, that are issued and outstanding immediately
prior to the Effective Time of the Merger shall automatically be canceled and
extinguished and converted, without any action on the part of the holder
thereof, into the right to receive a fraction of a share of Avant! Common Stock
(the "Merger Consideration Per Share") equal to a fraction, the numerator of
which is 2,222,222 and the denominator of which is the total number of shares of
FrontLine Common Stock outstanding plus the total number of shares of FrontLine
Common Stock issuable upon exercise or conversion of outstanding options,
warrants and any other security convertible or exchangeable for FrontLine Common
Stock, in each case as of the Effective Time of the Merger. The ratio pursuant
to which each share of Common Stock of FrontLine will be exchanged for shares of
Avant! Common Stock, determined in accordance with the foregoing provisions, is
hereinafter referred to as the "Exchange Ratio."
(d) ASSUMPTION OF FRONTLINE OPTIONS.
(i) At the Effective Time of the Merger, each
unexpired and unexercised option to purchase shares of FrontLine Common Stock (a
"FrontLine Option") granted under the stock option plans and agreements of
FrontLine outstanding immediately prior to the Effective Time of the Merger
shall be assumed by Avant! (an "Assumed FrontLine Option"). SCHEDULE 2.1(d)
hereto sets forth a true and complete list as of the date hereof of all holders
of FrontLine Options exercisable to purchase shares of FrontLine Common Stock,
including the number of shares of FrontLine Common Stock subject to such
options, a breakdown as between vested and unvested options, the exercise price
per share and the term of such options and the residence address of each such
holder. Three (3) days prior to the Closing Date, FrontLine shall deliver to
Avant! an updated SCHEDULE 2.1(d) hereto current as of the Closing Date. Each
FrontLine Option so assumed by Avant! will continue to have, and be subject to,
substantially the same terms and conditions set forth in the documents governing
such FrontLine Option immediately prior to the Effective Time of the Merger,
except that (A) such Assumed FrontLine Option will be exercisable for that
number of whole shares of Avant! Common Stock equal to the product of the number
of shares of FrontLine Common Stock that were purchasable under such Assumed
FrontLine Option immediately prior to the Effective Time of the Merger
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Avant! Common Stock, and (B) the per share exercise price for the
shares of Avant! Common Stock issuable upon exercise of such Assumed FrontLine
Option will be equal to the quotient obtained by dividing the exercise price per
share of FrontLine Common Stock at which
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such FrontLine Option was exercisable immediately prior to the Effective Time
of the Merger by the Exchange Ratio, rounded up to the nearest whole cent. The
parties intend that the assumption or replacement of the FrontLine Options
hereunder will meet the requirements of Section 424(a) of the Code and this
Section 2.1(d) shall be interpreted consistent with such intention. Consistent
with the terms of the FrontLine Options and the documents governing such
FrontLine Options, except for existing contractual arrangements to the contrary,
the Merger will not terminate or accelerate any Assumed FrontLine Option or any
right of exercise, vesting or repurchase relating thereto with respect to shares
of Avant! Common Stock acquired upon exercise of such FrontLine Option. Holders
of FrontLine Options will not be entitled to acquire FrontLine capital stock
following the Merger.
(ii) Holders of vested FrontLine Options may elect to
exercise such options prior to the Effective Time of the Merger and receive the
Merger Consideration Per Share by providing notice of such exercise and payment
of the exercise price thereof to FrontLine at any time prior to the Effective
Time of the Merger. In the event that any holder of vested FrontLine Options
does not exercise such FrontLine options prior to the Effective Time of the
Merger, such FrontLine Options shall become Assumed FrontLine Options.
(iii) As soon as practicable after the Effective Time
of the Merger, Avant! shall issue to each holder of an Assumed FrontLine
Option a document evidencing the stock option assumption by Avant!. The
right to receive an Assumed FrontLine Option may not be assigned or
transferred. Any attempted assignment contrary to this Section 2.1(d) shall
be null and void.
(e) FRONTLINE CAPITAL STOCK SUBJECT TO REPURCHASE. All shares
of Avant! Common Stock that are received in the Merger in exchange for shares of
FrontLine Common Stock that, under applicable stock purchase, stock restriction
or similar agreements with FrontLine, are unvested or subject to a repurchase
option or other condition of forfeiture that by its terms does not terminate due
to the Merger ("FrontLine Restricted Stock") will also be unvested or subject to
the same repurchase option or other condition, as the case may be, and the
certificates evidencing such shares will be marked with appropriate legends.
SCHEDULE 2.1(e) hereto sets forth a true and complete list of all holders of
FrontLine Restricted Stock, including the number of shares of FrontLine
Restricted Stock held and a breakdown as between vested and unvested shares. On
the Closing Date, FrontLine shall deliver to Avant! an updated SCHEDULE 2.1(e)
hereto current as of the Closing Date.
(f) ADJUSTMENT OF EXCHANGE RATIO. If, between the date of this
Agreement and the Effective Time of the Merger, the outstanding shares of Avant!
Common Stock shall have been changed into a different number of shares or a
different class by reason of any reclassification, recapitalization, split-up,
stock dividend, stock combination, exchange of shares or readjustment, the
Exchange Ratio shall be correspondingly adjusted.
(g) DISSENTERS' RIGHTS. If, as of the Effective Time of the
Merger, holders of the issued and outstanding FrontLine Common Stock are
entitled to dissenters' rights under California Law and have properly exercised
and not lost such dissenters' rights
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("Dissenting Shares") in connection with the Merger, such shares of FrontLine
Common Stock shall not be converted into Avant! Common Stock but shall be
converted into the right to receive such consideration as may be determined to
be due with respect to such Dissenting Shares.
(h) FRACTIONAL SHARES. No fractional shares of Avant! Common
Stock shall be issued, but in lieu thereof each holder of shares of FrontLine
Common Stock who would otherwise be entitled to receive a fraction of a share of
Avant! Common Stock shall receive from Avant! an amount of cash equal to the
Average Nasdaq Per Share Price multiplied by the fraction of a share of Avant!
Common Stock to which such holder would otherwise be entitled. The fractional
share interests of each FrontLine shareholder shall be aggregated, so that no
FrontLine shareholder shall receive cash in an amount greater than the value of
one (1) full share of Avant! Common Stock. The "Average Nasdaq Per Share Price"
equals the average closing sales price of Avant! Common Stock as quoted on the
Nasdaq National Market for the five (5) consecutive trading days ending three
(3) business days prior to the Closing Date.
2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Closing Date, Avant! shall
appoint Harris Trust Company to act as exchange agent (the "Exchange Agent") in
the Merger.
(b) AVANT! TO PROVIDE COMMON STOCK. Promptly after the
Effective Time of the Merger (but in no event later than five (5) business days
thereafter), Avant! shall make available for exchange in accordance with this
Article II, through such reasonable procedures as Avant! may adopt, the shares
of Avant! Common Stock issuable pursuant to Section 2.1 in exchange for
outstanding shares of capital stock of FrontLine.
(c) EXCHANGE PROCEDURES. Within five (5) business days after
the Effective Time of the Merger, the Exchange Agent shall mail to each holder
of record of a certificate or certificates that immediately prior to the
Effective Time of the Merger represented outstanding shares of FrontLine Common
Stock (the "Certificates") whose shares are being converted into Avant! Common
Stock pursuant to Section 2.1 hereof (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Avant! may
reasonably specify including appointment of the Shareholders' Representative (as
defined in the Escrow Agreement) as attorney-in-fact for shareholders of
FrontLine with respect to certain matters) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for Avant! Common Stock.
Upon surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by Avant!, together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor the number of shares of Avant! Common Stock to
which the holder of FrontLine capital stock is entitled pursuant to Section 2.1
hereof. The Certificate so surrendered shall forthwith be canceled. In the event
of a transfer of ownership of FrontLine capital stock that is not registered on
the transfer records of FrontLine, the appropriate number of shares of Avant!
Common Stock may be delivered to a transferee if the Certificate representing
such FrontLine
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capital stock is presented to the Exchange Agent and accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at all times
after the Effective Time of the Merger to represent the right to receive upon
such surrender the number of shares of Avant! Common Stock as provided by this
Article II and the provisions of Delaware Law and California Law but shall have
no other right; provided, however, that customary and appropriate
certifications, indemnities and bonds allowing exchange against lost or
destroyed certificates shall be provided; and provided further that nothing in
this Section 2.2(c) shall require Avant! to exchange its Common Stock to any
holder of FrontLine capital stock who shall fail to surrender a certificate
representing such shares or the certification, indemnities and bonds relating to
a lost certificate. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to a holder of shares of FrontLine capital
stock for any Avant! Common Stock delivered to a public official pursuant to
applicable abandoned property, escheat and similar laws. Promptly following the
date that is six (6) months after the Effective Date of the Merger, the Exchange
Agent shall return to the Surviving Corporation all shares of Avant! Common
Stock in its possession relating to the transactions described in this
Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a Certificate may surrender such Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat and similar
laws) receive in exchange therefor the shares of Avant! Common Stock to which
such holder is entitled pursuant hereto.
(d) NO FURTHER OWNERSHIP RIGHTS IN CAPITAL STOCK OF FRONTLINE.
All Avant! Common Stock delivered upon the surrender for exchange of shares of
capital stock of FrontLine in accordance with the terms hereof shall be deemed
to have been delivered in full satisfaction of all rights pertaining to such
shares of capital stock of FrontLine. There shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of capital stock of FrontLine that were outstanding immediately prior to the
Effective Time of the Merger. If, after the Effective Time of the Merger,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article II.
2.3 SUPPLEMENTARY ACTION. at any time after the Effective Time of
the Merger, any further assignments or assurances in law or any other things are
necessary or desirable to vest or to perfect or confirm of record in the
Surviving Corporation the title to any property or rights of either FrontLine or
Sub or otherwise to carry out the provisions of this Agreement, the officers and
directors of the Surviving Corporation are hereby authorized and empowered, in
the name of and on behalf of FrontLine and Sub, to execute and deliver any and
all things necessary or proper to vest or to perfect or confirm title to such
property or rights in the Surviving Corporation, and otherwise to carry out the
purposes and provisions of this Agreement.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FRONTLINE
FrontLine represents and warrants to Avant! and Sub that the
representations and warranties set forth below shall be true and correct as of
the date hereof, except as disclosed in documents delivered by FrontLine to
Avant! prior to the execution of this Agreement (the "FrontLine Disclosure
Schedules") or as supplemented pursuant to Section 5.16. As used in this
Agreement, (a) "Business Condition" with respect to FrontLine shall refer to
FrontLine's financial condition, business as presently conducted (including
products currently under development), property, results of operations and
assets; and (b) a disclosure or result will be deemed "material and adverse"
only if, individually or when aggregated with other similar or related
disclosures or results, it gives rise to a substantial diminution in the value
of FrontLine.
3.1 ORGANIZATION, STANDING AND POWER. FrontLine is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite corporate power and authority to own,
operate and lease its properties and to carry on its business as now being
conducted. FrontLine is duly qualified as a foreign corporation and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material and adverse effect on FrontLine's Business Condition. FrontLine has
delivered or made available to Avant! complete and correct copies of its current
Articles of Incorporation ("Articles") and Bylaws, and has delivered minutes of
all directors' and shareholders' meetings, complete and accurate as of the date
hereof, and stock certificate books of FrontLine, that correctly set forth the
record ownership of all outstanding shares of capital stock of FrontLine and the
addresses of each of its security holders.
3.2 CAPITAL STRUCTURE.
(a) The authorized capital stock of FrontLine consists of
7,000,000 shares of Common Stock, no par value and 3,000,000 shares of Preferred
Stock, no par value, all of which have been designated Series A Preferred Stock.
As of the date of this Agreement, there were issued and outstanding 2,700,610
shares of FrontLine Common Stock and 2,536,088 shares of Series A Preferred
Stock. As of the date of this Agreement, there were an aggregate of
1,088,500 shares of Common Stock reserved for issuance upon the exercise of
outstanding FrontLine Options. There are no outstanding shares of FrontLine
capital stock or any other equity securities or rights to purchase equity
securities of FrontLine (collectively with FrontLine Common Stock, FrontLine
Preferred Stock and FrontLine Options, "FrontLine Capital Stock"), other than
shares of FrontLine Common Stock, FrontLine Preferred Stock and FrontLine
Options as described in the preceding sentence.
(b) All outstanding shares of FrontLine Common Stock and
FrontLine Preferred Stock are, and any shares of FrontLine Common Stock issued
upon exercise of any FrontLine Option will be, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights created by
statute, FrontLine's Articles or Bylaws or any agreement to which FrontLine is a
party or by which FrontLine may be bound. All outstanding FrontLine
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Capital Stock have been issued in compliance with applicable securities laws.
There are no options, warrants, calls, conversion rights, commitments or
agreements of any character to which FrontLine is a party or by which FrontLine
may be bound that do or may obligate FrontLine to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of FrontLine Capital
Stock or that do or may obligate FrontLine to grant, extend or enter into any
such option, warrant, call conversion right, commitment or agreement.
(c) None of the issued and outstanding shares of FrontLine
Capital Stock is subject to repurchase or redemption. All FrontLine Options have
been issued in accordance with FrontLine's stock option plans and all applicable
securities laws, including pursuant to valid permits or exemptions therefrom.
The FrontLine stock option plans and all amendments thereto have been approved
by all requisite FrontLine shareholder action. FrontLine does not have in effect
any stock appreciation rights plan and no stock appreciation rights are
currently outstanding. The consummation of the Merger shall not cause an
acceleration in the vesting of any of FrontLine's Capital Stock.
(d) Except for any restrictions imposed by applicable securities
laws, there is no right of first refusal, co-sale right, right of participation,
right of first offer, option or other restriction on transfer applicable to any
shares of FrontLine Capital Stock.
(e) FrontLine is not a party or subject to any agreement or
understanding, and there is no agreement or understanding between or among any
persons that affects or relates to the voting or giving of written consent with
respect to any outstanding security of FrontLine.
3.3 SUBSIDIARIES. FrontLine does not own or control, directly or
indirectly, any corporation, partnership, business, trust or other entity.
SCHEDULE 3.3 sets forth a true and complete list of all jurisdictions in which
FrontLine and its subsidiaries are qualified to do business or own or lease
property or have employees. All of the shares of capital stock of each such
subsidiary are owned free and clear of all liens by FrontLine.
3.4 AUTHORITY.
(a) FrontLine has all requisite corporate power and authority to
enter into this Agreement, the Agreement of Merger and the Escrow Agreement
(collectively, the "Related Agreements") and, subject to approval of this
Agreement and the Agreement of Merger by the shareholders of FrontLine, to
execute, deliver and perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Related Agreements, the performance by
FrontLine of its obligations hereunder and thereunder and the consummation of
the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of FrontLine, including
approval by its Board of Directors, other than approval of the FrontLine
shareholders. Each of this Agreement and the Related Agreements is a legal,
valid and binding obligation of FrontLine enforceable against FrontLine in
accordance with its respective terms, except as enforcement may be limited by
bankruptcy, insolvency, or other similar laws
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affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies is subject to the discretion of the court
before which any proceeding therefor may be brought.
(b) Subject to satisfaction of the conditions set forth in
Article VI hereto, the execution and delivery of this Agreement and the Related
Agreements do not and the performance and consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
conflict with, breach or violation of any statute, law, rule, regulation,
judgment, order, decree, or ordinance applicable to FrontLine or its properties
or assets, or conflict with, or result in any conflict with, breach or violation
of or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation, forfeiture or acceleration of any
obligation or the loss of a benefit under, or result in the creation of a lien
or encumbrance on any of the properties or assets of FrontLine pursuant to (i)
any provision of the current Articles or Bylaws of FrontLine, or (ii) any
agreement, contract, note, mortgage, indenture, lease, instrument, permit,
concession, franchise or license to which FrontLine is a party or by which
FrontLine or any of its property or assets may be bound or affected, other than
any such conflict, breach, violation or default which would not have a material
and adverse effect on the Business Condition of FrontLine or which would arise
from a general restriction on assignments or changes in control.
(c) No consent, approval, order or authorization of, or
registration, declaration of, or qualification or filing with, any court,
administrative agency, commission, regulatory authority or other governmental or
administrative body or instrumentality, whether domestic or foreign (a
"Governmental Entity"), is required by or with respect to FrontLine in
connection with the execution and delivery of this Agreement and the Related
Agreements by FrontLine or the consummation by FrontLine of the transactions
contemplated hereby or thereby, except for filing of the Agreement of Merger as
required under Delaware Law and California Law and appropriate documents with
the relevant authorities of other jurisdictions in which FrontLine is qualified
to do business.
3.5 FINANCIAL STATEMENTS.
(a) FINANCIAL STATEMENTS PREVIOUSLY DELIVERED. FrontLine has
delivered to Avant! a complete and accurate copy of its balance sheet at
December 31, 1993, 1994, and 1995, and June 30, 1996, and its statement of
operations, statement of cash flows and statement of shareholders' equity,
including notes thereto, for each of the three years ended December 31, 1993,
1994 and 1995, and the six months ended June 30, 1996, and will deliver such
financial statements as of and for the period ending September 30, 1996 on or
prior to October 25, 1996 (collectively, "the FrontLine Unaudited Financial
Statements"). The FrontLine Unaudited Financial Statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") applied on
a consistent basis throughout the periods indicated and with each other except
that such financial statements will not contain any footnotes required by GAAP.
The FrontLine Unaudited Financial Statements fairly present the financial
position and operating results of FrontLine as of the dates, and for the
periods, indicated therein.
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(b) FINANCIAL STATEMENTS TO BE DELIVERED. As soon as available,
but no later than the Closing Date, FrontLine shall deliver to Avant! a complete
and accurate copy of its balance sheet at December 31, 1993, 1994, and 1995, and
its statement of operations, statement of cash flows and statement of
shareholders' equity, including notes, for each of the three years ended
December 31, 1993, 1994 and 1995 (collectively, "the FrontLine Audited Financial
Statements", collectively with the FrontLine Unaudited Financial Statements, the
"FrontLine Financial Statements"). The FrontLine Audited Financial Statements
will have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
indicated and with each other and will have been audited and certified by
independent public accountants of nationally recognized standing. The FrontLine
Audited Financial Statements will fairly present the financial position and
operating results of FrontLine as of the dates and for the periods indicated
therein. The notes to the FrontLine Audited Financial Statements as at and for
each such period will set forth in reasonable detail FrontLine's accounting
policies, principles and methods.
3.6 PAYABLES; RECEIVABLES.
(a) All accounts payable and notes payable by FrontLine to third
parties as of September 30, 1996 arose in the ordinary course of business.
(b) All of the accounts receivable and notes receivable owing to
FrontLine as of September 30, 1996 are set forth in SCHEDULE 3.6 and constitute
valid and enforceable claims arising from bona fide transactions in the ordinary
course of business, and, to FrontLine's knowledge, there are no contingent or
asserted claims, refusals to pay, rights of return, or other rights of set-off
against any thereof. As of September 30, 1996, there was no account receivable
or note receivable that is pledged to any third party by FrontLine.
(c) As of September 30, 1996, there were no debts, liabilities
or claims against FrontLine that are not reflected in the FrontLine Unaudited
Financial Statements, as applicable, contingent or otherwise, that are or would
be of a nature required to be reflected in a balance sheet prepared in
accordance with GAAP and that, individually exceed $10,000, or in the aggregate,
exceed $25,000. As of September 30, 1996, FrontLine has no debts, liabilities,
or claims other than those specifically set forth in the FrontLine Unaudited
Financial Statements. FrontLine's revenue recognition policies with respect to
FrontLine Financial Statements have been made in accordance with GAAP. FrontLine
maintains a standard system of accounting in accordance with GAAP. All of
FrontLine's general ledgers, books and records have been made available to
Avant!. FrontLine does not have any of its records, systems, controls, data or
information recorded, stored, maintained, operated or otherwise wholly or partly
dependent upon or held by any means (including any electronic, mechanical or
photographic process, whether computerized or not) that (including all means of
access thereto and therefrom) are not under the exclusive ownership and direct
control of FrontLine. FrontLine's financial reserves in the FrontLine Unaudited
Financial Statements are adequate to cover claims already incurred. The
provision for taxes of FrontLine as set forth in the FrontLine Unaudited
Financial Statements is adequate and accurate for taxes due or accrued as of
such date.
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3.7 COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 3.7,
FrontLine is in compliance and has conducted its business and operations so as
to comply with all laws, ordinances, rules and regulations, judgments, decrees
or orders of any Governmental Entity, except to the extent that failure to
comply would not have a material and adverse effect on FrontLine's Business
Condition. There are no judgments or orders, injunctions, decrees, stipulations
or awards (whether rendered by a court or administrative agency or by
arbitration) against FrontLine or against any of its properties or businesses,
and none are pending or, to FrontLine's knowledge, threatened. FrontLine has
not during the past four (4) years received any governmental notice from any
Governmental Entity for any violation of applicable laws or regulations.
FrontLine has all valid and current permits, licenses, orders, authorizations,
registrations, approvals and other instruments (each of which is in full force
and effect) and FrontLine has made all filings and registrations and the like
necessary or required by law to conduct its business, except in each case where
its failure to do so would not have a material and adverse effect on FrontLine's
Business Condition.
3.8 NO DEFAULTS. Except as set forth in SCHEDULE 3.8, FrontLine is
not, and it has not received notice that it is or would be with the passage of
time, in violation of any provision of its current Articles or Bylaws or in
default or violation of any term, condition or provision of (a) any judgment,
decree, order, injunction or stipulation applicable to FrontLine, or (b) any
agreement, note, mortgage, indenture, law, statute, rule, regulation, contract,
lease, instrument, permit, concession, franchise or license to which FrontLine
is a party or by which FrontLine or its properties or assets may be bound, other
than any such conflict, breach, violation or default which would not have a
material and adverse effect on the Business Condition of FrontLine.
3.9 LITIGATION. Except as set forth in SCHEDULE 3.9, there is no
action, suit, proceeding, claim, arbitration or investigation pending or, to
FrontLine's knowledge, threatened against FrontLine or, to FrontLine's
knowledge, any of its officers or directors, nor is there any reasonable basis
therefor known to FrontLine. There is no action, suit, proceeding or
investigation by FrontLine currently pending or which it intends to initiate.
The Company is not a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or Governmental Entity. FrontLine
has delivered to Avant! correct and complete copies of all correspondence
prepared by its counsel for FrontLine's independent public accountants in
connection with the last completed audit of the FrontLine Financial Statements,
any such correspondence since the date of the last such audit and any such
correspondence in connection with the audit proposed pursuant to Section 3.5(b)
herein.
3.10 CONDUCT IN THE ORDINARY COURSE. Except as set forth in SCHEDULE
3.10, since September 30, 1996, FrontLine has conducted its business in the
ordinary course and there has not occurred:
(a) Any change in the assets, liabilities, business condition or
operating results from that reflected in the FrontLine Financial Statements and
that is material and adverse to the Business Condition of FrontLine;
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(b) Any amendments or changes in the Articles or Bylaws of
FrontLine;
(c) Any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting the Business Condition of
FrontLine;
(d) Any issuance, redemption, repurchase or other acquisition of
FrontLine Capital Stock (other than issuances pursuant to exercise of FrontLine
Options or repurchases of Common Stock at cost in the ordinary course under the
terms of agreements relating to FrontLine Restricted Stock), or any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to FrontLine Capital Stock;
(e) Any increase in or modification of the compensation or
benefits payable or to become payable by FrontLine to any of its service
providers or changes pursuant to employment agreements currently in effect or
changes in position;
(f) Any increase in or modification of any bonus, pension,
insurance or other employee benefit plan, payment or arrangement (including,
without limitation, the granting of stock options, restricted stock awards or
stock appreciation rights) made to, for or with any of its service providers;
(g) Any (i) sale of the property or assets of FrontLine
individually in excess of $10,000 or in the aggregate in excess of $25,000 other
than inventory sales or nonexclusive end user license grants in the ordinary
course of business consistent with past practice or (ii) mortgage, pledge,
transfer of a security interest in, or lien created by FrontLine, with respect
to any of its properties or assets, except liens for taxes not yet due or
payable (other than liens arising under existing lease financing arrangements,
liens arising in the ordinary course of FrontLine's business that in the
aggregate are not material and liens for Taxes not yet due and payable);
(h) Any alteration in any term of any outstanding security of
FrontLine;
(i) Any (i) incurrence, assumption or guarantee by FrontLine of
any debt for borrowed money other than trade indebtedness incurred in the
ordinary course of business consistent with past practice; (ii) waiver or
compromise by FrontLine of a valuable right or of a debt owed to it; (iii)
satisfaction or discharge of any lien, claim, or encumbrance or payment of any
obligation by it, except that which is not material to its Business Condition;
(iv) issuance or sale of any securities convertible into or exchangeable for
debt securities of FrontLine; or (v) issuance or sale of options or other rights
to acquire from FrontLine, directly or indirectly, debt securities of FrontLine
or any securities convertible into or exchangeable for any such debt securities;
(j) Any creation or assumption by FrontLine of any mortgage,
pledge, security interest or lien or other encumbrance on any asset (other than
liens arising under existing
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lease financing arrangements, liens arising in the ordinary course of
FrontLine's business that in the aggregate are not material and liens for Taxes
not yet due and payable);
(k) Any making of any loan, advance or capital contribution to,
or investment in, any person other than advances made in the ordinary course of
business of FrontLine;
(l) Any entry into, amendment of, relinquishment, termination or
nonrenewal by FrontLine of any contract, lease, commitment or other right or
obligation other than in the ordinary course of business consistent with past
practice;
(m) Any transfer or grant of a right under the FrontLine
Intellectual Property Rights (as defined in Section 3.17) other than those
transferred or granted in the ordinary course of business consistent with past
practice;
(n) Any labor dispute, other than routine individual grievances,
or any activity or proceeding by a labor union or representative thereof to
organize any employees of FrontLine;
(o) Any resignation or termination of employment of any of its
key employees; and FrontLine does not know of the impending resignation or
termination of employment of any such employee; or
(p) Any agreement or arrangement made by FrontLine to take any
action that, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Section 3.10 untrue or incorrect as
of the date when made.
3.11 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth in
SCHEDULE 3.11, FrontLine has no liabilities or obligations (whether absolute,
accrued or contingent, and whether or not determined or determinable) of a
character that should be, and are, accrued, shown, disclosed, reserved or
indicated in the FrontLine Financial Statements (including the footnotes
thereto).
3.12 DOCUMENTS AND INFORMATION SUPPLIED. The copies of all
instruments, agreements, other documents and information delivered or
communicated by FrontLine, its shareholders and professional advisors to Avant!
and Sub or their counsel and accountants are and will be complete, accurate and
correct in all respects. No representations or warranties made by FrontLine in
this Agreement, nor any document, information, statement, financial statement,
communication, letter, certificate or exhibit prepared and furnished or to be
prepared and furnished by FrontLine or its representatives to Avant! or Sub
pursuant hereto or in connection with the transactions contemplated hereby
contain or will contain any untrue statement of a material fact, or omit or will
omit to state a material fact necessary to make the statements or facts
contained herein or therein not misleading. FrontLine's management is not aware
of any event, fact or condition that it reasonably expects will have a material
and adverse effect upon the Business Condition of FrontLine that has not been
set forth in this Agreement or the schedules hereto or otherwise disclosed by
FrontLine to Avant! and Sub in writing.
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3.13 CERTAIN AGREEMENTS. Except as set forth in SCHEDULE 3.13,
neither the execution and delivery of this Agreement or any of the Related
Agreements nor the consummation of the transactions contemplated hereby or
thereby will (a) result in any payment (including, without limitation,
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any service provider of FrontLine under any Plan (as defined in
Section 3.14 below) or otherwise, (b) materially increase any benefits otherwise
payable under any Plan, or (c) result in the acceleration of the time of payment
or vesting of any such benefits.
3.14 EMPLOYEE PLANS.
(a) FrontLine has not failed to comply in any respect with
Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor Standards
Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the
Safe Drinking Water and Toxic Enforcement Act of 1986, as amended, all
applicable federal, state, and local laws, rules, and regulations relating to
employment, and all applicable laws, rules, and regulations governing payment of
minimum wages and overtime rates, and the withholding and payment of
compensation of employees, where the failure to so comply could have a material
and adverse effect on FrontLine's Business Condition.
(b) FrontLine is not a party to, nor has made any contribution
to or otherwise incurred any obligation under, any "multiemployer plan" as
defined in Section 3(37) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
(c) All plans, programs, policies, commitments or other
arrangements (whether or not set forth in a written document) maintained by or
on behalf of FrontLine that provide deferred or incentive compensation, stock
options or other stock purchase rights, severance or termination pay, medical
dental, life, disability or accident benefits (whether or not insured),
collective bargaining agreements, or pension, profit sharing, savings or
retirement benefits to, or for the benefit of, any active, former or retired
service provider of FrontLine or their spouses or dependents are set forth in
SCHEDULE 3.14 (each a "Plan" and collectively, the "Plans").
(d) FrontLine has furnished to Avant! or their counsel complete
and accurate copies of each Plan. FrontLine has prepared in good faith and
timely filed all requisite governmental reports and has properly and timely
posted, or distributed all notices and reports to employees required to be
filed, posted, or distributed with respect to each Plan. Each Plan has at all
times been operated and administered in all material respects in accordance with
its terms and all applicable laws currently in effect, including ERISA and the
Code, and including but not limited to, amendments to Section 401(a) of the Code
enacted by the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of
1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and
Miscellaneous Revenue Act of 1988, and the Omnibus Budget Reconciliation Act of
1989.
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(e) FrontLine has not violated any of the health care
continuation coverage requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") applicable to its employees prior to the
Closing Date.
(f) There are no "reportable events" under Section 4043 of ERISA
with respect to any pension benefit plan within the meaning of Section 3(2) of
ERISA, subject to Title IV of ERISA, and FrontLine has not incurred any
liability under Title IV of ERISA in connection with the termination of any
pension benefit plan or the complete or partial withdrawal from any
multiemployer plan within the meaning of Section 3(37) of ERISA.
3.15 MAJOR CONTRACTS. Except as set forth in SCHEDULE 3.15, FrontLine
is not a party to or subject to:
(a) Any union contract or any employment or consulting contract
or arrangement other than stock option or stock purchase agreements or
proprietary information agreements, written or oral, with any director, officer
or affiliate;
(b) Any original equipment manufacturer agreement, distribution
agreement, volume or quantity purchase agreement or other similar agreement, or
joint venture contract or arrangement or any other agreement that has involved
or is expected to involve a sharing of profits with other persons or provides
for payments of more than $10,000 per annum;
(c) Any lease for real or personal property involving payments
of more than $10,000 per annum;
(d) Any instrument evidencing or related in any way to
indebtedness incurred in the acquisition of companies or other entities or
indebtedness for borrowed money by way of direct loan, sale of debt securities,
purchase money obligation, conditional sale, guarantee, leasehold obligations or
otherwise;
(e) Any material license agreement, either as licensor or
licensee;
(f) Any contract containing covenants purporting to limit the
freedom of FrontLine to compete in any line of business in any geographic area;
(g) Any agreement of indemnification, except indemnification
provided in the ordinary course of business for officers and directors pursuant
to applicable corporate law;
(h) Any agreement, contract or commitment relating to capital
expenditures involving payments of more than $25,000 per annum;
(i) Any agreement, contract or commitment relating to the
disposition or acquisition by FrontLine of any assets or any FrontLine
Intellectual Property Rights (as defined in Section 3.17 below), other than
nonexclusive end user license grants in the ordinary course of business;
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(j) Any agreement providing for minimum payment or resale
obligations, ongoing support or research and development obligations, or
warranty obligations on the part of FrontLine, except arrangements entered into
in the ordinary course of business;
(k) Any agreement for the provision of products or securities to
any Governmental Entity, except customer agreements entered into in the ordinary
course of business;
(l) Any agreement requiring a commitment of FrontLine resources
or personnel to market, distribute or license products or technology, whether on
a best-efforts basis or otherwise, except customer agreements entered into in
the ordinary course of business;
(m) Any other agreement, contract, letter of intent, memorandum
of understanding or commitment that is material to FrontLine;
(n) Material service contracts for products and contracts
relating to material amounts of deferred revenues; or
(o) Any sole or limited source supplier agreements (written or
oral).
(p) Except as set forth on SCHEDULE 3.15, each agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license and commitment to which FrontLine is a party or
by which it is bound as set forth in SCHEDULE 3.15 (or required to be set forth
in SCHEDULE 3.15) (i) is valid and binding on FrontLine, (ii) is in full force
and effect, (iii) has not been breached by FrontLine or any other party thereto
in a manner that is material and adverse to the Business Condition of FrontLine,
and (iv) contains no liquidated damages, indemnification obligation, penalty or
similar provision that, if triggered, would have a material and adverse effect
upon the Business Condition of FrontLine. To FrontLine's knowledge, no party to
any such contract, agreement or instrument intends to cancel, withdraw, modify
or amend such contract, agreement or arrangement. FrontLine is not aware of any
facts from which it should reasonably conclude that it will not be able to
perform in all material respects the obligations required to be performed by it
subsequent to the date hereof under each such agreement.
3.16 TAXES.
(a) All Tax returns, statements, reports, declarations and other
forms and documents (including without limitation estimated Tax returns and
reports and material information returns and reports) required to be filed with
any Tax authority with respect to any Taxable period ending on or before the
Closing, by or on behalf of FrontLine (collectively, "Tax Returns" and
individually a "Tax Return"), have been or will be completed and filed when due
(including any extensions of such due date), all such Tax Returns were or will
be complete and accurate as filed, and all amounts shown due on such Tax Returns
on or before the Effective Time of the Merger have been or will be paid on or
before such date. The FrontLine Financial Statements (i) fully accrue all
actual and contingent liabilities for Taxes with respect to all periods through
September 30, 1996 and FrontLine has not and will not incur any Tax liability in
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excess of the amount reflected on its September 30, 1996 balance sheet included
in the FrontLine Financial Statements with respect to such periods, other than
Taxes incurred in the ordinary course of its business following September 30,
1996, and (ii) properly accrues in accordance with GAAP all material liabilities
for Taxes payable after September 30, 1996 with respect to all transactions and
events occurring on or prior to such date. All information set forth in the
notes to the FrontLine Financial Statements relating to Tax matters is true,
complete and accurate in all material respects. No material Tax liability since
September 30, 1996 has been incurred by FrontLine other than in the ordinary
course of business and adequate provision has been made by FrontLine for all
Taxes since that date in accordance with GAAP on at least a quarterly basis.
FrontLine has withheld and paid to the applicable financial institution or Tax
authority all amounts required to be withheld. To the best knowledge of
FrontLine, no Tax Returns filed with respect to Taxable years of FrontLine
through the Taxable year ended December 31, 1995 in the case of the United
States, have been examined and closed. FrontLine (or any member of any
affiliated or combined group of which FrontLine has been a member) has not
granted any extension or waiver of the limitation period applicable to any Tax
Returns that is still in effect. There is no material claim, audit, action,
suit, proceeding, or (to the best knowledge of FrontLine) investigation now
pending or (to the best knowledge of FrontLine) threatened against or with
respect to FrontLine in respect of any Tax or assessment. No notice of
deficiency or similar document of any Tax authority has been received by
FrontLine, and there are no liabilities for Taxes (including liabilities for
interest, additions to Tax and penalties thereon and related expenses) with
respect to the issues that have been raised (and are currently pending) by any
Tax authority that could, if determined adversely to FrontLine, materially and
adversely affect the liability of FrontLine for Taxes. There are no liens for
Taxes (other than for current Taxes not yet due and payable) upon the assets of
FrontLine. FrontLine has never been a member of an affiliated group of
corporations, within the meaning of Section 1504 of the Code. FrontLine is in
full compliance with all the terms and conditions of any Tax exemptions or other
Tax-sharing agreement or order of a foreign government and the consummation of
the Merger will not have any adverse effect on the continued validity and
effectiveness of any such Tax exemption or other Tax-sharing agreement or order.
Neither FrontLine nor any person on behalf of FrontLine has entered into or will
enter into any agreement or consent pursuant to the collapsible corporation
provisions of Section 341(f) of the Code (or any corresponding provision of
state, local or foreign income tax law) or agreed to have Section 341(f)(2) of
the Code (or any corresponding provision of state, local or foreign income tax
law) apply to any disposition of any asset owned by FrontLine. None of the
assets of FrontLine is property that FrontLine is required to treat as being
owned by any other person pursuant to the so-called "safe harbor lease"
provisions of former Section 168(f)(8) of the Code. None of the assets of
FrontLine directly or indirectly secures any debt the interest on which is tax
exempt under Section 103(a) of the Code. None of the assets of FrontLine is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
FrontLine has not made and will not make a deemed dividend election under Treas.
Reg. Section 1.1502-32(f)(2) or a consent dividend election under Section 565 of
the Code. FrontLine has not participated in (and will not participate in) an
international boycott within the meaning of Section 999 of the Code. No
FrontLine shareholder is other than a United States person within the meaning of
the Code. FrontLine does not have and has not had a permanent establishment in
any foreign country, as defined in any applicable tax treaty or
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convention between the United States of America and such foreign country and
FrontLine has not engaged in a trade or business within any foreign country.
All material elections with respect to FrontLine's Taxes made during the fiscal
years ended, December 31, 1993, 1994 and 1995 are reflected on the FrontLine Tax
Returns for such periods, copies of which have been provided or made available
to Avant!. After the date of this Agreement, no material election with respect
to Taxes will be made without the prior written consent of Avant!, which consent
will not be unreasonably withheld or delayed. FrontLine is not party to any
joint venture, partnership, or other arrangement or contract which could be
treated as a partnership for federal income tax purposes. FrontLine is not
currently and never has been subject to the reporting requirements of Section
6038A of the Code. There is no agreement, contract or arrangement to which
FrontLine is a party that could, individually or collectively, result in the
payment of any amount that would not be deductible by reason of Sections 280G
(as determined without regard to Section 280G(b)(4), 162 (other than 162(a)) or
404 of the Code, other than any agreements entered into in connection with the
Merger. FrontLine is not a party to or bound by any Tax indemnity, Tax sharing
or Tax allocation agreement (whether written or unwritten or arising under
operation of federal law as a result of being a member of a group filing
consolidated Tax returns, under operation of certain state laws as a result of
being a member of a unitary group, or under comparable laws of other states or
foreign jurisdictions) which includes a party other than FrontLine nor does
FrontLine owe any amount under any such Agreement. FrontLine has previously
provided or made available to Avant! true and correct copies of all income,
franchise, and sales Tax Returns, and, as reasonably requested by Avant!, prior
to or following the date hereof, presently existing information statements and
reports. FrontLine is not, and has not been, a United States real property
holding corporation (as defined in Section 897(c)(2) of the Code) during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. FrontLine
has not been and will not be required to include any material adjustment in
Taxable income for any Tax period (or portion thereof) pursuant to Section 481
or 263A of the Code or any comparable provision under state or foreign Tax laws
as a result of transactions, events or accounting methods employed prior to the
Merger. For purposes of this Agreement, the following terms have the following
meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any
and all taxes including, without limitation, (i) any net income, alternative or
add-on minimum tax, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, value added, net worth, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period or as
the result of being a transferee or successor thereof and (iii) any liability
for the payment of any amounts of the type described in (i) or (ii) as a result
of any express or implied obligation to indemnify any other person. As used in
this Section 3.16, the term "FrontLine" means FrontLine and any entity included
in, or required under GAAP to be included in, any of the FrontLine Financial
Statements.
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3.17 INTELLECTUAL PROPERTY.
(a) FrontLine owns, or is licensed or otherwise entitled to
exercise, without restriction, all rights to all patents, trademarks, trade
names, service marks, copyrights, mask work rights, trade secret rights and
other intellectual property rights, and any applications or registrations
therefor, and all mask works, net lists, schematics, technology, source code,
know-how, computer software programs and all other tangible and intangible
information or material used, usable or proposed to be used in the business of
FrontLine as currently conducted or as proposed to be conducted without any
conflict or infringement of the rights of others (collectively, the "FrontLine
Intellectual Property Rights"). All of such FrontLine Intellectual Property
Rights are set forth in SCHEDULE 3.17.
(b) SCHEDULE 3.17 also lists (i) all patents and patent
applications and all registered copyrights, trade dress, trade names,
trademarks, service marks and other company, product or service identifiers and
mask work rights included in the FrontLine Intellectual Property Rights, and
specifies the jurisdictions in which each such FrontLine Intellectual Property
Right has been registered, including the respective registration numbers; and
(ii) other than end user licenses entered into in the ordinary course of
business, all licenses, sublicenses and other agreements as to which FrontLine
is a party and pursuant to which FrontLine or any other person is authorized to
use any FrontLine Intellectual Property Right. Copies of all licenses,
sublicenses, and other agreements identified pursuant to clause (ii) above have
been delivered by FrontLine to Avant!.
(c) FrontLine is not in violation in any material respect,
except with respect to such violations arising out of a general restriction on
assignments or changes in control, of any license, sublicense or agreement
described in SCHEDULE 3.17. As a result of the execution and delivery of this
Agreement or the performance of FrontLine's obligations hereunder, FrontLine
will not be in violation in any material respect of any license, sublicense or
agreement described in SCHEDULE 3.17, or lose or in any way impair any rights
pursuant thereto.
(d) FrontLine is the absolute owner or licensee of, with all
necessary right, title and interest in and to (free and clear of any liens,
encumbrances or security interests), the FrontLine Intellectual Property Rights
and has rights to the use, sale, license or disposal thereof and the material
covered thereby in connection with the services or products in respect of which
the FrontLine Intellectual Property Rights are being used or proposed to be
used. FrontLine has taken all actions and made all applications and filings
pursuant to applicable laws to perfect or protect its interests in such
FrontLine Intellectual Property Rights.
(e) No claims with respect to the FrontLine Intellectual
Property Rights have been asserted to FrontLine, or to FrontLine's knowledge,
are threatened by any person, and FrontLine knows of no claims (i) to the effect
that FrontLine infringes any copyright, patent, trade secret, or other
intellectual property right of any third party or violates any license or
agreement with any third party, (ii) contesting the right of FrontLine to use,
sell, license or dispose of any FrontLine Intellectual Property Rights, or (iii)
challenging the ownership, validity or effectiveness of any of the FrontLine
Intellectual Property Rights.
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(f) All patents and registered trademarks, service marks, and
other company, product or service identifiers and registered copyrights held by
FrontLine are valid and subsisting.
(g) There has not been and there is not now any unauthorized
use, infringement or misappropriation of any of the FrontLine Intellectual
Property Rights by any third party, including, without limitation, any service
provider of FrontLine; FrontLine has not been sued or charged as a defendant in
any claim, suit, action or proceeding that involves a claim of infringement of
any patents, trademarks, service marks, copyrights or other intellectual
property rights; and FrontLine does not have any infringement liability with
respect to any patent, trademark, service mark, copyright or other intellectual
property right of another.
(h) No FrontLine Intellectual Property Right is subject to any
outstanding order, judgment, decree, stipulation or agreement restricting in any
manner the licensing thereof by FrontLine. FrontLine has not entered into any
agreement to indemnify any other person against any charge of infringement of
any FrontLine Intellectual Property Right, except in the ordinary course of
business. FrontLine has not entered into any agreement granting any third party
the right to bring infringement actions with respect to, or otherwise to enforce
rights with respect to, any FrontLine Intellectual Property Right. FrontLine
has the exclusive right to file, prosecute and maintain all applications and
registrations with respect to the FrontLine Intellectual Property Rights.
3.18 EMPLOYEE AGREEMENTS. To FrontLine's knowledge, no service
provider of FrontLine is in violation of any term of any judgment, decree or
order, or any term of an employment contract (whether written or oral), patent
or trademark disclosure agreement or any other contract or agreement relating to
the relationship of any such service provider with FrontLine or any other party
(including prior employers), because of the nature of the business now conducted
by FrontLine. Each current and former service provider of FrontLine has
executed a proprietary information and inventions agreement (or similar
agreement) with FrontLine in the form then being used by FrontLine, all of which
forms have been attached to SCHEDULE 3.18.
3.19 RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth in
SCHEDULE 3.19, there is no agreement, judgment, injunction, order or decree
binding upon FrontLine or which has or could reasonably be expected to have the
effect of prohibiting or significantly impairing any business practice of
FrontLine, any acquisition of property by FrontLine, or the continuation of the
business of FrontLine as currently conducted.
3.20 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES: CONDITION
OF EQUIPMENT.
(a) FrontLine does not own any real property.
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(b) All of the existing FrontLine real property leases have been
previously delivered to Avant!. SCHEDULE 3.20 sets forth a complete and
accurate list of all real property leased by FrontLine.
(c) FrontLine owns or has valid leasehold interests in all of
its tangible properties and assets, real, personal and mixed, used in its
business, free and clear of any liens (other than liens for Taxes that are not
yet delinquent), charges, pledges, security interests or other encumbrances,
except as reflected in the FrontLine Financial Statements and except for such
imperfections of title and encumbrances, if any, that are not substantial in
character, amount or extent, and that do not and are not reasonably likely to
materially detract from the value, or interfere with the present use, of the
property subject thereto or affected thereby. FrontLine will deliver within
ten (10) days of the date hereof to Avant! correct and complete copies of each
lease identified in SCHEDULE 3.20 and such lease(s) are valid and enforceable by
FrontLine in accordance with their terms. FrontLine has received no notice
that, and no circumstance exists which, with the passage of time or the giving
of notice could constitute a default under, any such lease(s).
(d) Each item of machinery and equipment (the "Equipment") owned
or leased by FrontLine is listed in SCHEDULE 3.20, except such Equipment which
individually has a net book value of less than $5,000. The Equipment is (i)
adequate for the conduct of the business of FrontLine consistent with its past
practice, (ii) suitable for the uses to which it is currently employed, (in) in
good operating condition, (iv) regularly and properly maintained, and (v) not
obsolete, dangerous or in need of renewal or replacement, except for renewal or
replacement in the ordinary course of business.
(e) Since September 30, 1996, there has not occurred any
transfer of title other than in the ordinary course of business, any material
abandonment, or any material pilferage or any other material loss with respect
to, any of its property or Equipment.
(f) SCHEDULE 3.20 also contains a true and correct list of all
of the physical assets (including fixed assets) having a net book value in
excess of $5,000 owned or leased by FrontLine or on consignment. All
improvements on leased property used in the business of FrontLine and the
present use thereof are performed in all material respects in accordance with
all applicable laws. The net book value of any fixed assets used in FrontLine's
business has not been written up or down, other than pursuant to depreciation or
amortization expense in accordance with its historical practice.
3.21 GOVERNMENTAL AUTHORIZATIONS AND LICENSES. SCHEDULE 3.21 sets
forth all of FrontLine's licenses, authorizations, permits, concessions,
certificates and other franchises of any Governmental Entity required to operate
its business (collectively, the "Government Licenses"). FrontLine is in
compliance in all material respects with the terms, conditions, limitations,
restrictions, standards, prohibitions, requirements and obligations of such
Government Licenses. The Government Licenses are in full force and effect. There
is not now pending, nor, to FrontLine's knowledge, is there threatened, any
action, suit, investigation or proceeding against FrontLine before any
Governmental Entity with respect to the Government
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Licenses, nor is there any issued or outstanding notice, order or complaint with
respect to the violation by FrontLine of the terms of any Government License or
any rule or regulation applicable thereto.
3.22 ENVIRONMENTAL MATTERS.
(a) For purposes of this Section 3.22, the following terms shall
have the following meanings:
"Court Order" shall mean any judgment, order, award or decree of any
foreign, federal, provincial, state, local or other court or tribunal, or any
Governmental Entity, and any award in any arbitration proceeding.
"Disposal Site" shall mean landfill, disposal agent, waste hauler or
recycler of Hazardous Materials.
"Environmental Encumbrance" shall mean any lien, claim, charge,
security interest, mortgage, pledge, easement, conditional sale or other title
retention agreement, defect in title, covenant or other restrictions of any kind
in favor of any Governmental Entity for (i) any liability under any
Environmental Law or (ii) damages arising from, or costs incurred by such
Governmental Entity in response to, a Release or threatened Release of a
Hazardous Material into the environment.
"Environmental Laws" shall mean all Requirements of Laws that relate
to any Hazardous Material, any Hazardous Materials Activities or the use,
handling, transportation, production, spin, lead pumping, injection, deposit,
disposal discharge, Release, threatened Release, migration, emission, sale or
storage of, or the exposure of any person to, a Hazardous Material
"Governmental Permits" shall mean all licenses, franchises, permits,
privileges, immunities, approvals and other authorizations from a Governmental
Entity.
"Hazardous Material" shall mean any material or substance that is
prohibited or regulated by any Requirement of Law or that is designated by any
Governmental Entity to be radioactive, toxic, hazardous or otherwise a danger to
health, reproduction or the environment.
"Hazardous Materials Activities" shall mean the use, handling,
transportation, distribution, sale, Release or threatened Release of, or
Remedial Action concerning any Hazardous Material, performed in connection with
FrontLine's business or the Real Property.
"Real Property" shall mean real property now or at any time in the
past owned or leased by FrontLine or any predecessors.
"Release" shall mean release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration of a
Hazardous Material in, on, under or through the Real Property or the air, soil,
surface water, ground water or improvements thereof.
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"Remedial Action" shall mean any reporting, investigation,
characterization, feasibility study, health assessment, risk assessment,
remediation, treatment, recycling, removal, transport, monitoring, maintenance
or any other activity incident to the Release, threatened Release,
investigation, remediation or removal of a Hazardous Material existing on the
Real Property or in, on, under or through the air, soil, ground water, surface
water or improvements thereof. "Requirements of Laws" shall mean any laws,
statutes, regulations, rules, guidelines, codes, ordinances, judgments,
injunctions' decrees, orders, permits, approvals, treaties or protocols enacted,
adopted, issued or promulgated by any Governmental Entity (including, without
limitation, those pertaining to electrical building, zoning, environmental and
occupational safety and health requirements) or common law in effect on the date
hereof.
(b) Except as set forth in SCHEDULE 3.22,
(i) FrontLine complies in all material respects with
all applicable Environmental Laws;
(ii) FrontLine has obtained all material environmental
health and safety Governmental Permits necessary for its operation or required
by any Environmental Laws, all such Governmental Permits are in good standing,
and FrontLine is in compliance in all material respects with all terms and
conditions of such permits;
(iii) to FrontLine's knowledge, none of FrontLine nor
any of the Real Property or present or past FrontLine operations is subject to
any pending or ongoing investigation by notice or order from or agreement with
any person (including, without limitation, any prior owner or operator of the
Real Property) with respect to (A) any claim of Environmental Law, (B) any
Remedial Action or (C) any claim of losses and expenses arising from the Release
or threatened Release of a Hazardous Material;
(iv) FrontLine is not subject to any pending or
existing judicial or administrative proceeding, Court Order or settlement
alleging or addressing a violation of or liability under any Environmental Law;
(v) FrontLine has not filed, and FrontLine does not
intend to file any notice or report under any Environmental Law reporting a
violation of any Environmental Law;
(vi) to FrontLine's knowledge, there is not now, and
there has never been, on or under any Real Property; (A) any underground storage
tank or surface impoundment; or (B) any landfill or waste pile that either is or
was used to dispose or store any Hazardous Material or contains or contained of
Hazardous Material;
(vii) FrontLine has not received any notice of claim to
the effect that it is or may be liable to any person as a result of the Release
or threatened Release of a Hazardous Material into the environment or any
Hazardous Materials Activities from or on any Real Property;
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(viii) FrontLine is not aware of any Environmental
Encumbrance on any Real Property;
(ix) to FrontLine's knowledge, any asbestos-containing
material that is on or part of any Real Property is in good repair according to
the current standards and practices governing such material, and its presence or
condition does not violate any currently applicable Environmental Law;
(x) none of the products FrontLine manufactures,
distributes or sells or has manufactured, distributed or sold in the past,
contains substantial amounts of asbestos containing material;
(xi) to FrontLine's knowledge, no Hazardous Material is
present on Real Property, and no reasonable likelihood exists that any Hazardous
Material present on other property will come to be present on the Real Property;
(xii) Hazardous Materials Activities (A) have been
conducted in compliance with applicable Environmental Laws, and (B) have not
resulted in the exposure of any person to a Hazardous Material in a manner that
has or will cause an adverse health effect to such person;
(xiii) no Court Order, action, proceeding, liability or
claim exists or, to FrontLine's knowledge, is threatened, against any Disposal
Site or against FrontLine with respect to any transfer or release of Hazardous
Materials by FrontLine to a Disposal Site, and there is no valid basis for such
claim;
(xiv) FrontLine is not aware of any fact or circumstance
that is reasonably expected to involve FrontLine in any environmental litigation
or impose upon FrontLine any environmental liability that would have a material
and adverse effect on the Business Condition of FrontLine; and
(xv) FrontLine has no records pertaining to
environmental audits or environmental assessments of any Real Property.
3.23 INSURANCE. SCHEDULE 3.23 lists all insurance policies and
fidelity bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of FrontLine, and the amounts of coverage
under each such policy and bond of FrontLine. FrontLine has not been refused
any requested coverage and no claim made by FrontLine has been denied by the
underwriters of such policies or bonds. All premiums payable under all such
policies and bonds have been paid, and FrontLine is otherwise in full compliance
with the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). FrontLine is in compliance in all
material respects with each of such policies. FrontLine does not know of any
threatened termination of, the invalidation of any coverage of or premium
increase with respect to, any of such policies.
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3.24 LABOR MATTERS. FrontLine is in compliance in all material
respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment and
wages and hours and occupational safety and health and employment practices, and
FrontLine is not engaged in any unfair labor practice. FrontLine has not
received any notice from any Governmental Entity; and, to FrontLine's knowledge,
there has not been asserted before any Governmental Entity, any claim action or
proceeding to which FrontLine is a party or involving FrontLine, and there is
neither pending nor, to FrontLine's knowledge, threatened any investigation or
hearing concerning FrontLine arising out of or based upon any such laws,
regulations or practices. There are no strikes or labor disputes pending or
threatened by or any attempts at union organization of any FrontLine employees.
No employee or group of employees whose continued services are material to
FrontLine business as presently conducted and as intended to be conducted has
terminated employment and, to FrontLine's knowledge, there is none that intends
to do so.
3.25 CUSTOMERS; BACKLOG; RETURNS AND COMPLAINTS. The aggregate amount
of FrontLine's backlog (orders scheduled for shipment within twelve (12) months)
as of September 30, 1996 is set forth in SCHEDULE 3.25 and no material amount of
the purchase orders which constitute that backlog will be withdrawn or delayed.
SCHEDULE 3.25 sets forth a complete list of customers on the backlog and their
respective orders as of September 30, 1996. Except as set forth in SCHEDULE
3.25, FrontLine has received no customer complaints concerning its products
and/or services, and it has not had any of its products returned by a purchaser
thereof except for normal warranty returns consistent with past history, which
complaints and returns in the aggregate would have a material and adverse effect
upon the Business Condition of FrontLine.
3.26 PERSONNEL. Set forth on SCHEDULE 3.26 is a true and complete
list identifying all current directors, officers, regular and temporary
employees, independent contractors and consultants of FrontLine, including,
without limitation, all officers of FrontLine, setting forth the job title of,
and salary (including bonuses and commissions) payable to each such person. None
of such service providers whose annual base compensation exceeds $50,000 has
indicated to FrontLine a present intention to resign or retire. The employment
of each of FrontLine's employees is at-will employment. FrontLine does not have
any obligation (i) to provide any particular form or period of notice prior to
termination or (ii) to pay any of such employees any severance benefits in
connection with their termination of employment or service. In addition, no
severance pay will become due to any FrontLine employees or other service
providers in connection with the Merger, as a result of any FrontLine agreement,
plan or program. FrontLine has not entered into any consulting agreements with
any service provider who owes services to or are owed compensation by FrontLine
for services provided.
3.27 QUESTIONABLE PAYMENTS. Neither FrontLine nor any director,
officer or other employee, agent or representative of FrontLine has (a) made any
payments or provided services or other favors in the United States or in any
foreign country in order to obtain preferential treatment or consideration by
any Governmental Entity with respect to any aspect of the business of FrontLine;
or (b) made any political contributions that would not be lawful under the laws
of the United States or the foreign country in which such payments were made.
Neither FrontLine nor any director, officer or other employee, agent or
representative of FrontLine or any
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customer or supplier of any of them has been the subject of any inquiry or
investigation by any Governmental Entity in connection with payments or benefits
or other favors to or for the benefit of any governmental or armed services
official, agent, representative or employee with respect to any aspect of the
business of FrontLine or with respect to any political contribution.
3.28 RELATED PARTY TRANSACTIONS. Except as set forth in SCHEDULE
3.28, no employee, officer or director of FrontLine or member of his or her
immediate family is indebted to FrontLine, nor is FrontLine indebted (or
committed to make loans or extend or guarantee credit) to or subject to a
guarantee from any of them. None of such persons has any direct or indirect
ownership interest in any firm or corporation with which FrontLine is affiliated
or with which FrontLine has a business relationship, or any firm or corporation
that competes with FrontLine, except that the employees, officers or directors
of FrontLine and members of their immediate families may own stock in publicly
traded companies that may compete with FrontLine. No member of the immediate
family of any officer or director of FrontLine is directly interested in any
contract with FrontLine.
3.29 CUSTOMERS AND SUPPLIERS. SCHEDULE 3.29 sets forth a list of the
names of the ten (10) largest customers and the ten (10) largest suppliers of
FrontLine during the past twelve (12) months (determined on the basis of
revenues and expenses, respectively, during such period). FrontLine has not
been informed by any of such customers or suppliers that such customer or
supplier has terminated, or intends to reduce or terminate during the next
twelve (12) months, the amount of business conducted with FrontLine.
3.30 BANK ACCOUNTS AND POWERS OF ATTORNEY. Set forth in SCHEDULE 3.30
is an accurate and complete list showing (a) the name and address of each bank
in which FrontLine has an account or safe deposit box, the number of any such
account or any such box and the names of all persons authorized to draw thereon
or to have access thereto and (b) the names of all persons, if any, holding
powers of attorney from FrontLine and a summary statement of the terms thereof.
3.31 PRODUCTS. There are no known defects in the design or technology
embodied in any product which FrontLine markets or has marketed in the past that
impair or are likely to impair the intended use of the product or injure any
consumer of the product or third party, except that warranty claims may arise in
the normal course of business for products shipped prior to the Closing Date in
an aggregate amount of no more than the warranty reserves established on the
most recent balance sheet of FrontLine provided to Avant!. FrontLine has
delivered to Avant! copies of its warranty policies and all outstanding
warranties or guarantees relating to any of FrontLine's products other than
warranties or guarantees implied by law. FrontLine is not aware of any claim
asserting (a) any damage, loss or injury caused by any product, or (b) any
breach of any express or implied product warranty or any other similar claim
with respect to any product other than standard warranty obligations (to
replace, repair or refund) made by FrontLine in the ordinary course of business,
except for those claims that, if adversely determined against FrontLine, would
not have a material and adverse effect on FrontLine's Business Condition.
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3.32 BROKERS OR FINDERS; PROFESSIONAL FEES. Except as set forth in
SCHEDULE 3.32, no third party shall be entitled to receive any brokerage
commissions, finder's fees, fees for financial advisory services or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of FrontLine.
3.33 PERMIT. The information provided by FrontLine in connection with
the preparation of the Hearing Documents (as defined below) by Avant! or
Avant!'s legal counsel shall be true and correct and shall not state or omit to
state a material fact required to be stated therein.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF AVANT! AND SUB
Avant! and Sub represent and warrant to FrontLine that the
representations and warranties set forth below shall be true and correct as of
the date hereof. As used in this Agreement, (a) Business Condition with respect
to Avant! shall refer to Avant! and all of its subsidiaries taken as a whole and
shall mean the financial condition, business as presently conducted, results of
operations and assets of Avant! and all of its subsidiaries taken as a whole;
and (b) a disclosure or result will be deemed "material and adverse" only if,
individually or when aggregated with other disclosures or results, it gives rise
to a substantial diminution in the value of Avant! and its subsidiaries taken as
a whole.
4.1 ORGANIZATION; STANDING AND POWER. Each of Avant! and Sub is a
corporation duly organized, validly existing and in good standing under the laws
of its respective state or province of incorporation and has all requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as now being conducted. Avant! is duly qualified as a
foreign corporation and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on Avant!'s Business
Condition.
4.2 AUTHORITY.
(a) Avant! and Sub have all requisite corporate power and
authority to enter into this Agreement and the Related Agreements, to execute,
deliver and perform their respective obligations hereunder and thereunder, and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the Related Agreements, the performance by
Avant! and Sub of their respective obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of Avant!
and Sub, including approval by their respective Boards of Directors and
stockholders of Sub. Each of this Agreement and the Related Agreements is a
legal, valid and binding obligation of Avant! and Sub enforceable against Avant!
and Sub in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors'
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rights generally and except that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefor may
be brought.
(b) Subject to satisfaction of the conditions set forth in
Article VI hereto, the execution and delivery of this Agreement and the Related
Agreements do not and the performance and consummation of the transactions
contemplated hereby and thereby will not conflict with or result in any
violation of any statute, law, rule, regulation, judgment, order, decree, or
ordinance applicable to Avant! or Sub or their respective properties or assets,
or conflict with or result in any conflict with, breach or violation or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation, forfeiture or acceleration of any obligation
or the loss of a benefit under, or result in the creation of a lien or
encumbrance on any of the properties or assets of Avant! or Sub pursuant to (i)
any provision of their respective Certificates of Incorporation or Bylaws, or
(ii) any agreement, contract, note, mortgage, indenture, lease, instrument,
permit, concession, franchise or license to which Avant! or Sub is a party or by
which Avant! or Sub or any of their respective property or assets may be bound
or affected.
(c) No consent, approval, order or authorization of, or
registration, declaration, qualification, or filing of or with, any Governmental
Entity is required by or with respect to the Company or Sub in connection with
the execution and delivery of this Agreement or the Related Agreements or the
consummation by Avant! and Sub of the transactions contemplated hereby, except
for (i) the filing of documents with, and the obtaining of orders from, the
various securities or "blue sky" authorities, (ii) the making of such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
are required in connection with the transactions contemplated by this Agreement,
(iii) the filing of the Agreement of Merger with the appropriate documents with
the relevant governmental authorities, (iv) the filing of an application with
the California Department of Corporations for a permit under Section 25121 of
the California Corporate Securities Law of 1968, as amended, and the issuance of
such permit, covering the issuance of the Avant! Common Stock and (v) the
registration pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), of shares of Avant! Common Stock issuable pursuant to Section 2.1(d)
above with respect to the Assumed FrontLine Options.
4.3 VALID ISSUANCE OF SHARES OF AVANT! COMMON STOCK . The shares of
Avant! Common Stock, when issued, sold and delivered to the shareholders of
FrontLine in accordance with the terms hereof for the consideration described
herein, will be duly and validly issued, fully paid and non-assessable and will
be issued in compliance with all applicable securities laws.
4.4 AVANT! FINANCIAL STATEMENTS. The financial statements of Avant!
included in the Registration Statement on Form S-1, as amended, and the annual,
quarterly or other reports filed on or prior to the date hereof by Avant! with
the Securities and Exchange Commission (the "SEC") (the "Avant! Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with United States GAAP
consistently applied (except as may be indicated in the notes thereto or, in the
case of unaudited statements as
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permitted by published rules and regulations of the SEC) and fairly present the
consolidated financial position of Avant! and its consolidated subsidiaries at
the dates thereof and the consolidated results of their operations and changes
in financial position for the periods then ended (subject, in the case of
unaudited statements, to normal recurring audit adjustments). There has been no
change in Avant!'s accounting policies or estimates, except as described in the
notes to the Avant! Financial Statements. There has been no material and
adverse change in Avant!'s Business Condition subsequent to June 30, 1996.
4.5 LITIGATION. There is no action, suit, proceeding, arbitration or
investigation or claim pending, or to the knowledge of Avant!, threatened,
against Avant! that in any manner challenges or seeks to prevent, enjoin, alter
or delay any of the transactions contemplated hereby. Except as set forth in the
Avant! Reports (as defined below) or in SCHEDULE 4.5, Avant! is not aware of any
other pending or threatened action, suit, proceeding, investigation or claim, or
any reasonable basis therefor, that individually or in the aggregate would
reasonably be expected to have a material and adverse effect on Avant!'s
Business Condition.
4.6 REPORTS. Avant! has previously furnished or made available to
FrontLine complete and accurate copies, as amended or supplemented, of (i) its
Registration Statement on Form S-1, as amended, filed with the SEC, (ii) its
Registrations Statement on Form S-4, as amended, filed with the SEC, (iii) its
Quarterly Reports on Form 10-Q filed with the SEC since Avant! became obligated
to file such reports and (iv) all reports and filings made with the SEC since
Avant! became obligated to file such reports (such reports and other filings,
together with any amendments or supplements thereto, are collectively referred
to herein as the "Avant! Reports"). As of their respective dates, the Avant!
Reports did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Avant! Reports comply in all material respects with the
rules and regulations promulgated by the SEC. Avant! has made all filings
required under the rules and regulations promulgated by the SEC.
4.7 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement,
judgment, injunction, order or decree binding upon Avant! that has or could
reasonably have the effect of prohibiting or significantly impairing any
business practice of Avant!, any acquisition of property by Avant!, or the
continuation of the business of Avant! as currently conducted or as currently
proposed to be conducted.
4.8 BROKERS OR FINDERS; PROFESSIONAL FEES. No third party shall be
entitled to receive any brokerage commissions, finder's fees, or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of Avant! or Sub.
4.9 CONDUCT IN THE ORDINARY COURSE. Since September 30, 1996, there
has not occurred any amendments or changes in the Certificate of Incorporation
or Bylaws of Avant! or any agreement or arrangement made by Avant! to do the
same.
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4.10 PERMIT. The Hearing Documents, as defined in SECTION 5.4 of this
Agreement, as of the date they are filed, will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements, in light of the circumstances under
which they were made, not misleading. The Hearing Documents will comply in all
material respects with the rules and regulations pursuant to Section 25121 of
the California Corporate Securities Law of 1968, as amended; provided, however,
the representations and warranties set forth in this SECTION 4.10 do not apply
to statements or omissions in the Hearing Documents based upon information
furnished to Avant! or Avant!'s legal counsel by FrontLine or FrontLine's legal
counsel for use in such Hearing Documents.
ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE
TIME; ADDITIONAL AGREEMENTS
5.1 CONDUCT OF BUSINESS OF FRONTLINE. During the period from the
date hereof and continuing until the earlier of the termination of this
Agreement or the Effective Time of the Merger, FrontLine shall carry on its
business in the usual, regular and ordinary course in substantially the same
manner as conducted prior to the date of this Agreement and, to the extent
consistent with such business, use its best efforts to preserve intact its
present business organizations, keep available the services of its present
service providers and preserve its relationships with customers, suppliers,
distributors, licensers, licensees, and others with whom it has business
dealings, to the end that its goodwill and ongoing businesses shall not be
adversely affected prior to the Effective Time of the Merger. No action with
respect to the amendment of the BNR Agreement (as defined in the FrontLine
Disclosure Schedules) will be required by the foregoing sentence other than as
specifically directed by Avant!. FrontLine shall promptly notify Avant! of any
material event or occurrence not in the ordinary course of business of
FrontLine, and any event that could have a material and adverse effect on the
Business Condition of FrontLine. Except as expressly contemplated by this
Agreement, FrontLine, without the prior written consent of Avant! or Sub shall
not:
(a) Accelerate, amend or change the period of exercisability of
options, warrants, stock or purchase rights or authorize cash payments in
exchange therefor or perform any actions that could prohibit the pooling of
interests accounting treatment;
(b) Enter into any commitment or transaction not in the ordinary
course of business to be performed over a period longer than six (6) months in
duration, or, except as in accordance with its existing capital budget
previously disclosed to Avant!, to purchase fixed assets with an aggregate
purchase price exceeding $10,000;
(c) Grant any severance or termination pay to any service
provider, except in the ordinary course of business consistent with past
practice or mandatory payments made pursuant to standard written agreements
outstanding on the date hereof (with any such agreement or arrangement to be
disclosed in SCHEDULE 3.18);
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(d) Transfer to any person or entity any rights to the FrontLine
Intellectual Property Rights, except licenses of Intellectual Property Rights in
connection with the sale of FrontLine products in the ordinary course of
business consistent with past practice;
(e) Enter into or amend any agreements pursuant to which any
other party is granted marketing or other similar rights of any type or scope
with respect to any products of FrontLine;
(f) Except in the ordinary course of business, amend or
otherwise modify, or without prior notice to Avant!, violate in any material
respect, the terms of any contract listed in SCHEDULE 3.15;
Except with prior consultation with Avant!, commence a lawsuit
other than for the routine collection of bills;
(h) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any FrontLine
Capital Stock other than distributions in amounts sufficient to pay income taxes
due from the shareholders with respect to FrontLine income for 1995 and the
period beginning January 1, 1996, and ending the Closing Date as reasonably
determined by FrontLine's accountants, which amounts are set forth on SCHEDULE
5.1, or split, combine or reclassify any of its Common Stock or issue or
authorize the issuance of other securities in respect of, in lieu of, or in
substitution for shares of FrontLine Common Stock, or repurchase or otherwise
acquire, directly or indirectly, any shares of FrontLine Common Stock except as
set forth in the FrontLine Disclosure Schedules, pursuant to the exercise of
outstanding FrontLine Options or pursuant to repurchases of Common Stock at cost
from former service providers in accordance with the terms of agreements
providing for the repurchase of shares in connection with any termination of
service to FrontLine;
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of or authorization of, the purchase of any shares of FrontLine
Capital Stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than (i) the issuance of shares of FrontLine Common Stock upon the exercise of
FrontLine Options and (ii) the issuance to employees and contractors of
FrontLine of options exercisable for an aggregate of not more than 100,000
shares of FrontLine Common Stock, such options to have an exercise price equal
to the fair market value of FrontLine Common Stock on the date of grant of such
options, as determined in good faith by the Board of Directors of FrontLine in
consultation with Avant!;
(j) Cause or permit any amendments to FrontLine's Articles or
Bylaws, or take any action or make any filings with any federal or state
regulatory agency or department that would modify or alter FrontLine's
corporate, legal or regulatory status in any material respect;
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(k) Acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to the
Business Condition of FrontLine, except as in accordance with its existing
capital budget previously disclosed to Avant!, to purchase fixed assets with an
aggregate purchase price exceeding $10,000;
(l) Sell, lease, license or otherwise dispose of any of its
properties or assets except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(n) Adopt or amend any plan, or enter into any employment
contract, pay any special bonus or special remuneration to any service provider,
or increase the salaries or wage rates of its employees other than pursuant to
scheduled employee reviews under normal employee review cycles or pursuant to
FrontLine's existing bonus plans, as the case may be, or in connection with the
hiring of employees other than officers in the ordinary course of business, in
all cases consistent with past practice, or otherwise increase or modify the
compensation or benefits payable or to become payable by FrontLine to any of its
service providers, except in the ordinary course of business, consistent with
past practice, or for changes pursuant to employment agreements in effect as of
the date hereof or changes in position;
(o) Re-value in any material respect any of its assets,
including, without limitation, writing down the value of inventory or accounts
receivable;
(p) Pay, discharge or satisfy in an amount in excess of $10,000
in any one case any claim, liability or obligation (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with past practice of
liabilities reflected or reserved against in the FrontLine Financial Statements;
(q) Make any material tax election other than in the ordinary
course of business and consistent with past practice, change any material tax
election, adopt any tax accounting method other than in the ordinary course of
business and consistent with past practice, change any tax accounting method,
file any tax return (other than any estimated tax returns, immaterial
information returns, payroll tax returns or sales tax returns) or any amendment
to a tax return, enter into any closing agreement, settle any Tax claim or
assessment or consent to any Tax claim or assessment provided that Avant! shall
not unreasonably withhold or delay approval of any of the foregoing actions;
(r) Engage in any activities or transactions that are outside
the ordinary course of its business consistent with past practice, including the
forming, financing or contributing any property to any business entity;
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(s) Fail to pay or otherwise satisfy its monetary obligations as
they become due or consistent with past practice, except such as are being
contested in good faith;
(t) Waive or commit to waive any rights of substantial value;
(u) Cancel, amend or, other than in the ordinary course upon
expiration of a policy term, renew any insurance policy;
(v) Alter, or enter into any commitment to alter, in any
material respect its interest in any corporation, association, joint venture,
partnership or business entity in which FrontLine directly or indirectly holds
any interest on the date hereof;
(w) Pay its employees bonuses, other than in the ordinary course
of business, or any other extraordinary payments to its employees or
shareholders, including, without limitation, dividends or other distributions
with respect to its outstanding capital stock;
(x) Take, or agree (in writing or otherwise) to take, any of the
actions described in this Section 5.1 or any action that would make any of the
representations or warranties or covenants of FrontLine contained in this
Agreement untrue or incorrect.
5.2 ACCESS TO INFORMATION; PROVISION OF INTERIM FINANCIAL STATEMENTS.
(a) FrontLine shall afford Avant! and its accountants, counsel
and other representatives, reasonable access during normal business hours during
the period from the date of this Agreement until the earlier of the Effective
Time of the Merger or the termination of this Agreement to (i) all properties,
books, contracts, commitments and records, and (ii) all other information
concerning the business, properties and personnel as may reasonably be
requested, provided that any information provided pursuant hereto or any
investigation by each party hereto shall not affect such party's right to rely
on the representations, warranties, agreements and covenants made by the other
party herein. FrontLine shall cause FrontLine's accountants to cooperate with
Avant! in auditing the financial statements of FrontLine's business, including
but not limited to, executing any and all representation or other letters or
agreements reasonably required by Avant!'s accountants. FrontLine shall cause
FrontLine's accountants to consent in writing or agree to consent in writing on
a timely basis to the inclusion of FrontLine's financial statements in any
registration statement or in any report to be filed with the SEC.
(b) FrontLine shall provide Avant! with an unaudited monthly
balance sheet, income statement and statement of cash flows within fifteen (15)
days of each month-end prior to the Effective Time of the Merger as well as
copies of such other internal financial statements as may be requested by
Avant!.
(c) FrontLine shall provide Avant! with all information
necessary for the preparation of any documents or filings prepared by Avant! to
be filed with the SEC and any applicable securities or blue sky commissions.
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(d) Each party shall use its respective best efforts to not take
any actions that would hinder Avant! from being able to account for the Merger
on a pooling of interests basis.
5.3 FRONTLINE SHAREHOLDERS' CONSENT. Except as permitted by
Section 5.5(d), FrontLine shall solicit the consent of its shareholders as
promptly as practicable after the date hereof for the purpose of obtaining the
shareholder approval required in connection with the transactions contemplated
hereby, and shall use its best efforts to obtain such approval.
5.4 FAIRNESS HEARING AND PERMIT. Avant! and FrontLine shall prepare
an Application for Qualification of Securities by Permit under Section 25121 of
the California Corporate Securities Law of 1968, as amended, a related Notice of
Hearing and a proxy statement and other disclosure materials (the "Disclosure
Document") to be supplied to the shareholders of FrontLine in connection with
the transactions contemplated hereby (collectively, the "Hearing Documents").
Avant! and FrontLine will file the Hearing Documents as promptly as practicable
with the California Department of Corporations and request a hearing on the
fairness of the Merger pursuant to Section 25142 of such California Corporate
Securities Law. Avant! and FrontLine will thereafter endeavor in good faith to
obtain a finding of fairness and the issuance of a permit to such effect by the
California Department of Corporations as a result of such hearing, but they
shall in no event be required to alter the terms of the Merger in order to
obtain such finding and issuance.
5.5 EXCLUSIVITY; ACQUISITION PROPOSALS. Until the earlier of (i) the
Closing Date or (ii) the termination of this Agreement:
(a) FrontLine shall not knowingly, and shall not knowingly cause
or permit, directly or indirectly, through any officer, director, agent or
representative (including, without limitation, investment bankers, attorneys,
accountants and consultants), or otherwise:
(i) Solicit, initiate or further the submission of
proposals or offers from, or enter into any agreement with, any firm,
corporation, partnership, association, group (as defined in Section 13(d)(3) of
the Exchange Act) or other person or entity, individually or collectively
(including, without limitation, any managers or other employees of FrontLine or
any affiliates), other than Avant! and Sub (a "Third Party"), relating to any
acquisition or purchase of all or any substantial portion of the assets of, or
any equity interest in, FrontLine or any merger, consolidation or business
combination with FrontLine;
(ii) Participate in any discussions or negotiations
regarding, or furnish to any Third Party any confidential information with
respect to FrontLine in connection with any acquisition or purchase of all or
any substantial portion of the assets of, or any equity interest in, FrontLine
or any merger, consolidation or business combination with FrontLine; or
(iii) Otherwise knowingly cooperate in any way with, or
assist or participate in, facilitate or encourage, any effort or attempt by any
Third Party to undertake or
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seek to undertake any acquisition or purchase of all or any portion of the
assets of, or any equity interest in, FrontLine, or any merger, consolidation or
business combination with FrontLine.
(b) In the event FrontLine receives prior to termination of this
Agreement any offer or indication of interest from any Third Party relating to
any acquisition or purchase of all or any portion of the assets of, or any
equity interest in, FrontLine or any merger, consolidation or business
combination with FrontLine, FrontLine shall promptly notify Avant! and Sub in
writing, and shall in any such notice, set forth in reasonable detail the
identity of the Third Party, the terms and conditions of any proposal and any
other information requested of it by the Third Party or in connection therewith.
(c) FrontLine shall immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any Third Party
conducted prior to the date of this Agreement with respect to any of the
foregoing.
(d) Notwithstanding the foregoing, in the event that FrontLine
receives an unsolicited offer for the acquisition of FrontLine, the terms of
which are, in the judgment of such board of directors, superior to the terms of
the transaction contemplated hereby, FrontLine shall be entitled to the extent
advised by counsel that such steps are necessary to fulfill the fiduciary duty
of the board of directors to FrontLine's shareholders, to: (i) transmit the
terms of the offer to FrontLine's shareholders, and (ii) not recommend or
withdraw a recommendation of the transaction contemplated hereby.
5.6 BREACH OF REPRESENTATIONS, WARRANTIES, AGREEMENTS AND COVENANTS.
Each of Avant!, Sub, and FrontLine shall use its respective best efforts to not
take, or fail to take, any action that from the date hereof through the Closing
Date would cause or constitute a breach of any of its respective
representations, warranties, agreements and covenants set forth in this
Agreement. In the event of, and promptly after becoming aware of, the actual,
pending or threatened occurrence of any event that would cause or constitute
such a breach or inaccuracy, each party shall give detailed notice thereof to
the other parties and shall use its best efforts to prevent or promptly remedy
such breach or inaccuracy.
5.7 CONSENTS. Each of Avant! and FrontLine shall promptly apply for
or otherwise seek and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, and FrontLine
shall use its best efforts to obtain all necessary consents, waivers and
approvals under any of FrontLine's agreements, contracts, licenses or leases in
connection with the Merger, except such consents and approvals which are not
material to the Business Condition of FrontLine (the existence of which
FrontLine shall have notified Avant! of) or which Avant! and FrontLine agree
FrontLine shall not seek to obtain.
5.8 BEST EFFORTS. If applicable, each of Avant! and FrontLine shall
use best efforts to effectuate the transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement.
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5.9 LEGAL CONDITIONS TO THE MERGER.
(a) FrontLine shall take all reasonable actions necessary to
comply promptly with all legal requirements that may be imposed on FrontLine
with respect to the Merger and will promptly cooperate with and furnish
information to Avant! in connection with any such requirements imposed upon
Avant! or Sub in connection with the Merger. FrontLine shall take all
reasonable actions to obtain (and to cooperate with Avant! and Sub in obtaining)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity required to be obtained or made by FrontLine (or by Avant!
or Sub) in connection with the Merger or the taking of any action contemplated
thereby or by this Agreement, and to defend such lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby as FrontLine deems advisable in good faith, to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby as
FrontLine deems advisable in good faith, and to effect all necessary
registrations and filings and submissions of information as FrontLine deems
advisable in good faith required by any Governmental Entity, and to fulfill all
conditions to this Agreement.
(b) Each of Avant! and Sub shall take all reasonable actions
necessary to comply promptly with all legal requirements that may be imposed on
them with respect to the Merger and will promptly cooperate with and furnish
information to FrontLine in connection with any such requirement imposed upon
FrontLine or any subsidiary of FrontLine in connection with the Merger. Avant!
and Sub shall take all reasonable actions to obtain (and to cooperate with
FrontLine in obtaining) any consent, authorization order or approval of, or
exemption by, any Governmental Entity required to be obtained or made by Avant!
or Sub (or by FrontLine or any of its subsidiaries) in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement,
and to defend such lawsuits or other legal proceedings challenging this
Agreement or the consummation of the transactions contemplated hereby as Avant!
and Sub deem advisable in good faith, to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby as Avant! and Sub deem
advisable in good faith, and to effect all necessary registrations and filings
and submissions of information as Avant! and Sub deem advisable in good faith,
required by any Governmental Entity, and to fulfill all conditions to this
Agreement.
5.10 PUBLIC ANNOUNCEMENTS. Avant! and FrontLine will make joint
announcements to employees and the public after the execution of this Agreement.
Each party will consult in advance with the other concerning the timing and
content of any announcements, press releases or public statements concerning the
Merger and will not make any such announcement, release or statement to any
party who is not entitled to have knowledge of the Merger without the other's
prior written consent (which consent shall not be unreasonably withheld);
provided, however, that Avant! may make any public statement concerning the
Merger without FrontLine's consent, after it has used reasonable efforts to
obtain FrontLine's consent, and in the opinion of counsel for Avant!, such
statement or announcement is required or advisable to comply with applicable
law.
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5.11 AFFILIATES AGREEMENT AND CONTINUITY OF INTEREST CERTIFICATE. The
shareholders of FrontLine listed on SCHEDULE 5.11 are, in FrontLine's reasonable
judgment, the only "affiliates" of FrontLine within the meaning of Rule 145
(each such person, together with the persons identified below, an "Affiliate")
promulgated under the Securities Act ("Rule 145"). FrontLine shall use its best
efforts to deliver or cause to be delivered to Avant!, concurrently with the
execution of this Agreement from each of the Affiliates of FrontLine identified
in the foregoing list who are directors or officers of FrontLine, and
concurrently with or promptly following execution of this Agreement from each
other Affiliate, an Affiliates Agreement and Continuity of Interest Certificate
in the forms attached hereto as Exhibit 5.11(a) and 5.11(b), respectively. In
addition, each of the principal shareholders of FrontLine, pursuant to the
Affiliates Agreement and Continuity of Interest Certificate, acknowledge that
they (i) have no current plan or intent to engage in a sale, exchange, transfer,
pledge, disposition or any other transaction that results in a reduction in the
risk of ownership with respect to a mutually agreed-upon percentage of the
shares of Avant! Common Stock to be issued in the Merger to all FrontLine
shareholders, and that they know of no such plan or intent on the part of any
other FrontLine shareholder or group thereof and (ii) will not sell such stock
in violation of the pooling of interests accounting rules. Avant! and Sub shall
be entitled to place appropriate legends on the certificates evidencing any
Avant! Common Stock to be received by such Affiliates pursuant to the terms of
this Agreement and the Agreement of Merger, and to issue appropriate stop
transfer instructions to the transfer agent for Avant! Common Stock, consistent
with the terms of such Affiliates Agreement and Continuity of Interest
Certificate.
5.12 EXPENSES. All costs and expenses incurred in connection with
this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby, including fees of any finders or brokers or investment
bankers, attorneys and accountants retained by such party, shall be paid by the
party incurring such expense. All parties to this Agreement acknowledge and
agree that the legal fees of counsel to FrontLine in connection with the
transactions contemplated hereby are being performed as counsel to FrontLine and
FrontLine shall be responsible for payment of such fees.
5.13 INFORMATION TO BE SUPPLIED. All information supplied by
FrontLine, Avant! and Sub for inclusion in the FrontLine shareholder
solicitation materials, the Hearing Documents, and any other solicitation
materials relating to the Merger or relating to any offering of securities by
Avant! shall not contain any untrue statement of material fact and shall not
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
5.14 REGISTRATION OF AVANT! COMMON STOCK ISSUABLE WITH RESPECT TO
ASSUMED FRONTLINE OPTIONS. As soon as practicable after the Effective Time of
the Merger (but in any event within two (2) business days thereof), but in
accordance with the other provisions of this Agreement, Avant! shall cause the
shares of Avant! Common Stock issuable pursuant to Section 2.1(d) above with
respect to the Assumed FrontLine Options to be registered pursuant to the
Securities Act and such registration shall remain effective for so long as
Avant! has other effective registrations or is required to file reports with the
SEC under the Exchange Act.
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5.15 REORGANIZATION. Neither FrontLine prior to the Merger nor Avant!
following the Merger shall take any action (or cause FrontLine to take any
action) which would cause the Merger to fail to qualify as a reorganization
under Section 368(a) of the Code.
5.16 SCHEDULES. FrontLine shall deliver to Avant! on or before
October 25, 1996 revised FrontLine Disclosure Schedules, which shall be deemed
to be delivered as of the date hereof. Except as set forth in the sentence
immediately following, for purposes of determining the accuracy of the
respective representations and warranties contained in Articles III and IV, and
in order to determine the fulfillment of the conditions set forth in Section
6.2(a), and for the purpose of determining the availability of rights to
indemnification under Article II below or otherwise, such revised FrontLine
Disclosure Schedules, as the case may be, shall be deemed to include all
information contained in such revised FrontLine Disclosure Schedules.
Notwithstanding the foregoing, any information contained in the FrontLine
Disclosure Schedules, as supplemented as of October 25, 1996, shall not (i) give
rise to any rights to indemnification under Article VII below or (ii) be
asserted as a basis for failure to fulfill the conditions set forth in
Section 6.2(a) unless (x) such items result in liability in excess of $3,250,000
or (y) evidence of fraud is found on the part of FrontLine in connection with
the entering into of this Agreement.
5.17 CERTAIN BENEFIT PLANS. Subject to compliance with pooling of
interest accounting treatment of the Merger, Avant! shall take such reasonable
actions as are necessary to allow eligible employees of FrontLine to participate
in the benefit programs of Avant!, or alternative benefits programs
substantially comparable to those applicable to employees of Avant! on similar
terms, as soon as practicable after the Effective Time of the Merger including
the Avant! stock option and employee stock purchase plans. For purposes of
satisfying the terms and conditions of such programs, Avant! shall give full
credit for eligibility, vesting or benefit accrual for each participant's period
of service with FrontLine.
5.18 LISTING OF SHARES. Upon Closing, Avant! will amend its listing
application with the Nasdaq National Market to include the Avant! Common Stock
issued under this Agreement.
5.19 INDEMNIFICATION.
Avant! shall indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date of this Agreement or who becomes
prior to the Effective Time of the Merger, a director of FrontLine (the
"Indemnified Parties") against any loss, claim, damage, liability or expense (as
such expenses are incurred) insofar as such loss, claim, damage, liability or
expense arises out of any claim brought by FrontLine shareholders (including,
without limitation, derivative suits and suits against an Indemnified Party in
his capacity as a shareholder) relating to acts or omissions occurring on or
prior to the Effective Time of the Merger relating to the transactions
contemplated by this Agreement. The provisions of this Section 5.19 are
intended to be for the benefit of, and shall be enforceable by, each Indemnified
Party, his or her heirs and representatives.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing of the following conditions:
(a) APPROVALS. All authorizations, consents, orders or
approvals of, or declarations or filings with or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed, occurred or
been obtained.
(b) ISSUANCE OF PERMIT. The California Department of
Corporations shall have issued a permit under Section 25121 of the California
Corporate Securities Law of 1968, as amended, covering the issuance of the
Avant! Common Stock and the assumption of securities following a hearing as to
the fairness of the Merger conducted pursuant to Section 25142 of the California
Corporate Securities Law.
(c) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any Governmental Entity and remain in
effect, and no litigation shall be pending the ultimate resolution of which may
in Avant!'s opinion (i) result in the issuance of such an order or injunction,
or the imposition against FrontLine or Avant! of substantial damages if the
Merger is consummated, or (ii) render Avant!, Sub or FrontLine unable to
consummate the Merger. In the event any such order or injunction shall have been
issued, each party agrees to use its best efforts to have any such injunction
lifted.
(d) STATUTES. No action shall have been taken, and no statute,
rule, regulation or order shall have been enacted, promulgated or issued or
deemed applicable to the Merger by any Governmental Entity that would (i) make
the consummation of the Merger illegal or (ii) render Avant!, Sub or FrontLine
unable to consummate the Merger, except for any waiting period provisions.
6.2 CONDITIONS OF OBLIGATIONS OF AVANT! AND SUB. The obligations of
Avant! and Sub to effect the Merger are also subject to the satisfaction of the
following conditions, unless waived by Avant! and Sub:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of FrontLine set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement.
(b) PERFORMANCE OF OBLIGATIONS OF FRONTLINE. FrontLine shall
have performed in all material respects all obligations and covenants required
to be performed by it under this Agreement prior to the Closing Date, and Avant!
shall have received a certificate on
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behalf of FrontLine signed by the chief executive officer and the chief
financial officer of FrontLine to such effect.
(c) AFFILIATES AGREEMENT AND CONTINUITY OF INTEREST CERTIFICATE.
Avant! shall have received from each shareholder of FrontLine listed on SCHEDULE
5.11, a duly executed Affiliates Agreement and Continuity of Interest
Certificate, substantially in the forms attached hereto and approved by Avant!'s
and FrontLine's respective counsel.
(d) ESCROW AGREEMENT. The Escrow Agreement shall be executed by
all appropriate parties.
(e) OPINION OF FRONTLINE'S COUNSEL. Avant! shall have received
an opinion dated the Closing Date of counsel to FrontLine, in form and substance
reasonably satisfactory to Avant!.
(f) DISSENTING SHARES. Dissenting Shares shall consist of no
more than ten percent (10%) of the then outstanding shares of FrontLine's Common
Stock.
(g) POOLING OF INTERESTS TRANSACTION. Avant! shall have
received an opinion from KPMG Peat Marwick ("KPMG"), in form and substance
satisfactory to Avant!, that the Merger will qualify as a pooling of interests
transaction for financial reporting purposes. KPMG shall have received an
opinion from Ernst & Young, in form and substance satisfactory to KPMG that the
Merger will qualify as a pooling of interests.
(h) FRONTLINE FINANCIAL STATEMENTS. Avant! shall have received
a true and correct copy of the FrontLine Audited Financial Statements, prepared
in accordance with GAAP, at or prior to the date of the Closing.
(i) FIRPTA. FrontLine shall, prior to the Closing Date, provide
Avant! with a properly executed Foreign Investment and Real Property Tax Act of
1980 ("FIRPTA") Notification Letter, in form and substance satisfactory to
Avant!, which states that shares of capital stock of FrontLine do not constitute
"United States real property interests" under Section 897(c) of the Code, for
purposes of satisfying Avant!'s obligations under Treasury Regulation
Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such
Notification Letter, FrontLine shall have provided to Avant!, as agent for
FrontLine, a form of notice to the Internal Revenue Service in accordance with
the requirements of Treasury Regulation Section 1.897-2(h)(2) along with written
authorization for Avant! to deliver such notice form to the Internal Revenue
Service on behalf of FrontLine upon the Closing of the Merger.
(j) TAX-FREE REORGANIZATION. Avant! shall have received a
written opinion from its counsel to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code. In preparing such
tax opinion, counsel may rely on reasonable assumptions and may also rely on
(and to the extent reasonably required, the parties and Avant's shareholders
shall make) reasonable representations related thereto.
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6.3 CONDITIONS OF OBLIGATION OF FRONTLINE. The obligation of
FrontLine to effect the Merger is also subject to the satisfaction of the
following conditions unless waived by FrontLine:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Avant! and Sub set forth in this Agreement shall be true and
correct as of the date hereof.
(b) PERFORMANCE OF OBLIGATIONS OF AVANT! AND SUB. Avant! and
Sub shall have performed in all material respects all obligations and covenants
required to be performed by them under this Agreement and the Agreement of
Merger prior to the Closing Date.
(c) NO STOP ORDER. The SEC shall not have issued any stop order
preventing the sale of any Avant! Common Stock.
(d) OPINION OF AVANT!'S COUNSEL. FrontLine shall have received
an opinion dated the Closing Date of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel to Avant!, in form and substance reasonably
satisfactory to FrontLine.
(e) TAX-FREE REORGANIZATION. FrontLine! shall have received a
written opinion from its counsel to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code. In preparing such
tax opinion, counsel may rely on reasonable assumptions and may also rely on
(and to the extent reasonably required, the parties and FrontLine's shareholders
shall make) reasonable representations related thereto.
ARTICLE VII
INDEMNITY
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
(a) Notwithstanding any investigation conducted at any time with
regard thereto by or on behalf of any party to this Agreement, all
representations, warranties, covenants and agreements of the parties hereto
shall survive the execution, delivery, and performance of this Agreement in
accordance with Section 7.3 of this Agreement. No investigation made by or on
behalf of a party hereto with respect to another party shall be deemed to affect
the party's reliance on the representations, warranties, covenants and
agreements made by the other party contained in this Agreement and shall not be
a waiver of Avant!'s or Sub's rights to indemnity as herein provided for the
breach or inaccuracy of or failure to perform or comply with any of FrontLine's
representations, warranties, covenants or agreements under this Agreement or the
Escrow Agreement. All representations and warranties of each party set forth in
this Agreement shall be deemed to have been made again by such party at and as
of the Closing Date.
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(b) As used in this Article VII, any reference to a
representation, warranty, agreement or covenant contained in any section of this
Agreement shall include the schedule attached hereto.
(c) Nothing in this Agreement shall be construed as limiting in
any way the remedies that may be available to a party in the event of fraud
relating to the representations, warranties, agreements or covenants made by
any other party in this Agreement.
(d) The FrontLine Shareholders (as defined below) shall have
liabilities and obligations for Damages (as defined below) under this Agreement
only with respect to claims submitted or notice of claims provided during the
time period of survivability of the specific representation, warranty, covenant
or agreement as set forth in SECTION 7.3. Notwithstanding the expiration date of
the representations, warranties, covenants and agreements set forth herein, if
Avant! or FrontLine shall notify the Shareholders' Representative with respect
to the submission of a claim during the time period of survivability of such
representation, warranty, covenant or agreement, each FrontLine Shareholder's
liability or obligation for Damages shall continue in full force and effect
until settled with respect to those claims timely made.
(e) Subject to the limitations set forth in Section 7.4, Avant!
shall be entitled to use the Escrow Shares as collateral for the obligations of
the FrontLine Shareholders pursuant to this Article VII of this Agreement.
7.2 INDEMNIFICATION; ESCROW DEPOSIT OF AVANT! COMMON STOCK. Subject
to the limitations set forth in this Article VII, by approval of this Agreement
and the Merger at the special shareholders' meeting of FrontLine, the
shareholders of FrontLine (such shareholders are referred to in this Article VII
as the "FrontLine Shareholders") hereby agree to indemnify, reimburse, defend
and hold harmless Avant!, FrontLine and Sub and each of their respective
affiliates (other than the FrontLine Shareholders) against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments, and causes of
action, assessments, costs, and expenses, including, without limitation,
interest, penalties, attorneys' fees, any and all expenses incurred in
investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages"), asserted against,
resulting from, imposed upon, or incurred or suffered, directly or indirectly,
by Avant!, FrontLine or Sub and each of their respective affiliates (other than
the FrontLine Shareholders), directly or indirectly, as a result of or arising
from or in connection with any inaccuracy in or breach or nonfulfillment of or
noncompliance with any of the representations, warranties, covenants, or
agreements made by FrontLine in this Agreement (including any exhibit, letter,
schedule, certificate or document delivered pursuant hereto or other instrument
referred to herein) or the Escrow Agreement or any facts or circumstances
constituting such an inaccuracy, breach, nonfulfillment or noncompliance (all of
which shall also be referred to as "Indemnifiable Claims").
Avant! and Sub shall be entitled to make claims under this Article VII
only to the extent that Damages exceed $250,000 in the aggregate and only to the
extent of such excess.
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7.3 TERMINATION OF INDEMNITY AND REPRESENTATIONS AND WARRANTIES. The
Indemnity obligations of the FrontLine Shareholders pursuant to this Article VII
for a breach or inaccuracy of or a failure to perform or comply with any or all
of FrontLine's representations, warranties, covenants and agreements, and the
representations and warranties of Avant!, FrontLine and the FrontLine
Shareholders shall terminate upon the earlier to occur of: (i) one (1) year
after the Effective Time of the Merger, or (ii) the date of the issuance of the
first audited financial statements that contain the combined actual results of
Avant!, Sub and FrontLine. For purposes of the indemnification set forth
herein, the fair market value of one share of Avant! Common Stock shall equal
the Average Nasdaq Per Share Price.
7.4 EXCLUSIVITY OF REMEDIES. Subject to the terms of this Agreement
(including, without limitation, Section 7.1(c)), the total liability of any
FrontLine Shareholder under or in connection with this Agreement shall be
limited to the Escrow Shares of such shareholder, and Avant! (and the other
persons indemnified hereunder) may look solely and exclusively to such Escrow
Shares for the satisfaction of any claims against the FrontLine Shareholders
under or in connection with this Agreement.
ARTICLE VIII
TERMINATION
8.1 TERMINATION.
(a) This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger by
the shareholders of FrontLine:
(i) by mutual agreement of the Boards of Directors of
Avant! and FrontLine;
(ii) by Avant!, if there has been a breach by FrontLine
of any representation, warranty, covenant or agreement set forth in this
Agreement;
(iii) by FrontLine, if there has been a breach by Avant!
or Sub of any representation, warranty, covenant or agreement set forth in this
Agreement;
(iv) by FrontLine or Avant!, if any permanent
injunction or other order of a court preventing the Merger shall have become
final and nonappealable or shall render unlikely within a reasonable period of
time the consummation of the Merger on the terms contemplated hereby; or
(v) by either Avant! or FrontLine, if at the FrontLine
shareholders meeting (including any adjournment or postponement thereof) the
requisite vote of
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shareholders of FrontLine required by California law and the Articles of
FrontLine shall not have been obtained.
(b) Where action is taken to terminate this Agreement pursuant
to this Section 8.1, it shall be sufficient authorization for such action to be
authorized by the Board of Directors of the party taking such action.
(c) In the event of termination of this Agreement as provided in
this Section 8.1 or a failure to meet all of the closing conditions prior to
December 31, 1996, this Agreement shall forthwith become null and void;
provided, however, that the agreements contained or referred to in Sections 5.5,
5.12 and 5.19 shall survive and be legally enforceable.
(d) If the Effective Date of the Merger shall not have occurred
on or before December 31, 1996, this Agreement may be terminated by Avant! or
FrontLine with prior written notice to the other party.
8.2 EXPENSES AND TERMINATION FEES.
(a) Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, the fees and expenses of its
advisers, accountants and legal counsel) shall be paid by the party incurring
such expense.
(b) In the event that this Agreement is terminated pursuant to
Section 8.1(a)(v) or FrontLine fails to consummate the transactions contemplated
hereby in breach of this Agreement, then FrontLine shall promptly pay to Avant!
the sum of $35,000,000.
(c) In the event that Avant! fails to consummate this
transaction (i) in breach of this Agreement or (ii) in reliance upon Section 6.2
(f) or 6.2 (g), then Avant! shall promptly pay to FrontLine the sum of
$35,000,000.
ARTICLE IX
GENERAL PROVISIONS
9.1 AMENDMENT. This Agreement may be amended by the parties hereto
at any time before or after approval of the Merger by the shareholders of
FrontLine; provided, however, that following approval of the Merger by the
shareholders of FrontLine, no amendment shall be made that by law requires the
further approval of such shareholders without obtaining such further approval.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
9.2 EXTENSION; WAIVER. At any time prior to the Effective Time of
the Merger, each of FrontLine and Avant!, to the extent legally allowed, (a) may
extend the time for the performance of any of the obligations or other acts of
the other, (b) may waive any inaccuracies
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in the representations and warranties made to it contained herein or in any
document delivered pursuant hereto, and (c) may waive compliance with any of the
agreements or conditions for the benefit of it contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
9.3 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given (a) on the same day if delivered
personally, (b) three (3) business days after being mailed by registered or
certified mail (return receipt requested), or (c) on the same day if sent by
facsimile, confirmation received, to the parties at the following addresses and
facsimile numbers (or at such other address or number for a party as shall be
specified by like notice):
If to Avant! or Sub, to:
Avant! Corporation
1208 East Arques Avenue
Sunnyvale, CA 94086
Attention: President
Telephone No.: (408) 738-8881
Facsimile No.: (408) 738-8508
with copy to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
600 Hansen Way, Second Floor
Palo Alto, California 94304
Attn: Steven M. Spurlock, Esq.
Telephone No.: (415) 843-0500
Facsimile No.: (415) 843-0314
If to FrontLine:
FrontLine Design Automation, Inc.
2860 Zanker Road, Suite 203
San Jose, California 95134
Attn: President
Telephone No.: (408) 456-0222
Facsimile No.: (408) 456-0265
with copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
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Palo Alto, California 94301
Attn: Richard Friedman, Esq.
Telephone No.: (415) 324-7000
Facsimile No.: (415) 324-0638
9.4 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such references shall be to a Section, Exhibit
or Schedule to this Agreement unless otherwise indicated. The words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation."
9.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
9.6 ENTIRE AGREEMENT. This Agreement and the documents and
instruments and other agreements among the parties delivered pursuant hereto
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and are not intended to confer upon any other person any rights or remedies
hereunder except as otherwise expressly provided herein.
9.7 NO TRANSFER. This Agreement and the rights and obligations set
forth herein may not be transferred or assigned by operation of law or otherwise
without the consent of each party hereto. This Agreement is binding upon and
will inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
9.8 SEVERABILITY. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
9.9 OTHER REMEDIES. Any and all remedies set forth in this Agreement
and in the Related Agreements expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by law
or equity on such party; and the exercise of any one remedy will not preclude
the exercise of any other.
9.10 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.
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9.11 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provision of this
Agreement is intended, or will be interpreted, to provide to or create for any
third-party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, employee, partner or any party hereto or any
other person or entity, and all provisions hereof will be personal solely
between the parties to this Agreement.
9.12 GOVERNING LAW. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
California (without giving effect to its choice of law principles).
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and Plan of Reorganization as of the date first above written.
AVANT! CORPORATION
By: /s/ Gerald C. Hsu
------------------------------------
Gerald C. Hsu
President and Chief Executive
Officer
FRONTLINE DESIGN AUTOMATION, INC.
By:
------------------------------------
DSM ACQUISITION CORPORATION
By: /s/ Gerald C. Hsu
------------------------------------
Gerald C. Hsu
President
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
and Plan of Reorganization as of the date first above written.
AVANT! CORPORATION
By:
------------------------------------
Gerald C. Hsu
President and Chief Executive
Officer
FRONTLINE DESIGN AUTOMATION, INC.
By: /s/ Badruddin Agarwala
------------------------------------
Badruddin Agarwala
President and Chief Executive
Officer
DSM ACQUISITION CORPORATION
By:
------------------------------------
Gerald C. Hsu
President
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-25864
AVANT! CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3133226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1208 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices, including Zip Code)
(408)-738-8881
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.0001 par value (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ x ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of March 26, 1996 was approximately $211,971,123 (based on the
last sale price of such stock as reported by the Nasdaq National Market System):
The number of shares of the registrant's Common Stock outstanding as of March
26, 1996 was 15,927,607.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed by the Company with the Securities
and Exchange Commission within 120 days after the end of the fiscal year are
incorporated by reference in Part III of this Form 10-K. Portions of the 1995
Annual Report to Shareholders for the year ended December 31, 1995 are
incorporated by reference into Parts I, II, III and IV.
<PAGE>
AVANT! CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1995
Table of Contents
PART I. Page
----
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II.
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 8. Consolidated Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 11
PART III.
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and
Management 12
Item 13. Certain Relationships and Related Transactions 12
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 12
Signature Page 14
<PAGE>
PART I.
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in Item 1
under the heading "Business ".
ITEM 1. BUSINESS
GENERAL
Avant! Corporation ("Avant!" or "the Company") resulted from the merger of
ArcSys, Inc. (ArcSys) and Integrated Silicon Systems, Inc. (ISS) on November 27,
1995. ArcSys Inc. was founded in 1991 and ISS was founded in 1986. Avant! is a
Delaware corporation that develops, markets and supports integrated circuit
design automation ("ICDA") software for the physical design, layout,
verification and analysis of high-density, high -performance integrated circuits
("ICs").
The Company's objective is to establish a significant market position as a
supplier of physical design software for the ICDA market. To achieve this
objective, Avant! has adopted its mission, which is to provide innovative
technology, products, and business models that enable customers to solve the
toughest problems in deep submicron integrated circuit design, improve their
productivity and achieve a high return on their investment. To effect its
mission Avant! has adopted the strategies of maintaining focus on technological
innovation and creating strategic relationships with customers.
PRODUCTS
Avant! products are based on the Company's proprietary architecture and
technology, which provide a breadth of automated IC physical design
capabilities. Avant!'s product architecture is designed to solve the problems
inherent in submicron (less than 1.0-micron feature size) and deep submicron
(less than 0.5-micron feature size) IC design and to offer improved time to
market, reduced development and manufacturing costs, and enhanced IC performance
when compared to previous generations of ICDA software.
Avant! products are designed to be compatible with the most commonly used ICDA
tools and to be easily integrated into the customer's existing design
environments and methodologies through industry standard interfaces. Avant!'s
products are written in C, run on Unix workstations such as those from Sun
Microsystems, Inc. and Hewlett-Packard Company, and support industry standards
such as Motif, X-Windows, GDSII Stream format, EDIF, SDF, SPICE, and Verilog.
The Company's ArcCell-Registered Trademark- family of cell-based place and route
products includes ArcCell BV, for standard-cell IC designs with up to three
layers of metal, and Arc-Cell-XO, for more complex standard-cell and mixed-block
IC designs with up to six layers of metal. ArcCell-BV and -XO reduce die size
and shorten the design cycle by combining the advantages of over-the-cell
channel routing and channel compaction with the flexibility of area-based maze
routing.
The Company's Arc-Gate product is an advanced N-layer metal place and route
system for gate-array ICs. ArcGate increases gate utilization and minimizes
design congestion by using proprietary congestion-driven placement and routing
algorithms. ArcGate includes many of the same features as ArcCell to improve
circuit performance. ArcGate supports embedded designs through its horizontal
integration with ArcCell.
The Company's VERICheck family of design verification software is the industry's
most advanced suite of IC physical verification products. The VERICheck family
of tools is divided into two groups: geometric and electrical verification
products and the newly introduced extraction products. VERICheck's first module
for design rule checking (DRC) was introduced in January 1992 and is the first
hierarchical system offered for complex submicron design. VERICheck now
includes a comprehensive suite of hierarchical
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products addressing geometric and electrical verification, layout versus
schematic comparisons and parasitic extraction for resistance and capacitance
(RC) analysis. VERICheck extraction products consist of a full-chip
hierarchical capacitance extractor and a critical net resistance and capacitance
extractor.
The LTL layout editor was the first product developed by Avant!, and had been
its cornerstone product before the introduction of VERICheck in 1992. The LTL
family of layout products executes under UNIX or MS-DOS operating systems and
runs on popular platforms including DEC, HP, IBM, and Sun workstations and on
386/486-based PCs.
During each of 1993, 1994 and 1995, the Company derived substantially all of its
total revenue from the licensing and support of ArcCell, its cell-based place
and route software product, and VeriCheck, its design verification software
product. Absent any extraordinary results from existing litigation, the Company
currently expects that ArcCell-related and VeriCheck-related revenue will
continue to account for a significant portion of the Company's revenue for the
foreseeable future. As a result, the Company's future operating results are
significantly dependent upon continued market acceptance of ArcCell and
VeriCheck. A decline in demand for ArcCell or VeriCheck as a result of
competition, technological change or other factors would have a material adverse
effect on the business, operating results and financial condition of the
Company. There can be no assurance that ArcCell or VeriCheck will achieve
continued market acceptance or that the Company will be successful in marketing
any new or enhanced products. During 1993, 1994 and 1995, the Company derived
9%, 15% and 17%, respectively, of its total revenue from the licensing and
support of its software products in Japan. The Company currently expects that
the percentage from the license and support of its software products in Japan
will continue to be a significant percentage of its total revenue. Any
significant decline in demand for the Company's products in Japan would have a
material adverse effect on the Company's business, operating results and
financial condition.
Continued market acceptance of the Company's software products, ArcCell and
VeriCheck in particular, is critical to the Company's operating results. The
Company believes that a number of factors will be necessary for its products to
achieve continued market acceptance. These factors include performance of the
Company's existing products, successful development of advanced features,
adaptability into the user's design environment, the Company's technical,
managerial, service and support expertise, and the customer's assessment of the
Company's financial resources. Failure to achieve continued market acceptance
of the Company's products would have a material adverse effect on the Company's
business, operating results and financial condition.
The ICDA industry is characterized by extremely rapid technological change,
frequent new product introductions and enhancements, evolving industry standards
and rapidly changing customer requirements. The development of more complex ICs
embodying new technologies will require increasingly sophisticated design tools.
The Company's future results of operations will depend in part upon its ability
to enhance its current products and to develop and introduce new products on a
timely and cost-effective basis that will keep pace with technological
developments and evolving industry standards and methodologies, as well as
address the increasingly sophisticated needs of the Company's customers. For
example, all of the Company's current products operate in, and planned future
products will operate in, the Unix operating system. In the event that another
operating system, such as Windows NT, were to achieve broad acceptance in the
ICDA industry, the Company would be required to port its products to such an
operating system, which would be costly, time consuming and could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company has in the past and may in the future
experience delays in new product development. The introduction of certain
products in the past have been delayed by as much as 12 months beyond their
original scheduled release dates. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements, or that
its new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner would have a material and adverse effect on the Company's business,
operating results and financial condition. In addition, the introduction or
even announcement of products by the Company or one or more
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of its competitors embodying new technologies or changes in industry standards
or customer requirements could render the Company's existing products obsolete
or unmarketable. There can be no assurance that the introduction or
announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer purchases of existing Company
products. Such deferment of purchases could have a material adverse effect on
the Company's business, operating results or financial condition.
CUSTOMERS
Avant! focuses its sales and marketing efforts on creating strategic
relationships with technology leaders in IC design and with early adopters of
the most advanced EDA tools. By creating strong relationships with industry
leaders, Avant! receives critical technical feedback that enables it to develop
and implement proprietary design technologies and methodologies. In addition,
strategic relationships with these companies can create influential references
for other prospective customers.
The market for the Company's physical layout, verification and analysis
products encompasses a wide range of industries, including semiconductor,
computer, consumer electronics, multimedia and telecommunications IC companies
worldwide. End-users of the Company's products range from small companies to
a number of the world's largest manufacturing organizations. Approximately
1,000 of the Company's physical layout and verification systems are currently
installed worldwide at approximately 200 companies as of December 31, 1995.
In 1995, Intel accounted for 12% of the Company's revenue. IBM accounted for 13%
and 12% of the Company's revenue in 1994 and 1993, respectively. Motorola
accounted for 29% of the Company's revenue in 1993. The Company does not
believe that seasonality is a significant factor in sales.
SALES AND MARKETING
The Company markets its products in North America and Europe primarily through
its direct sales and support force. Avant! employs highly skilled engineers and
technically proficient sales persons capable of serving the sophisticated needs
of its prospective customers' engineering and management staffs. Avant! has
domestic sales and support offices in or near Austin, Texas; Boston,
Massachusetts; Chicago, Illinois; Dallas, Texas; Los Angeles, California;
Research Triangle Park, North Carolina; and Sunnyvale, California; sales and
support offices in London, England, and Tokyo, Japan; and support offices in
Munich, Germany and Seoul, South Korea. In addition to its direct sales and
marketing efforts, Avant! participates in industry trade shows and organizes
seminars to promote the adoption of its products and methodologies.
In Asia, Avant! markets its products primarily through a limited number of
independent distributors and manufacturer's representatives ("Third Party
Sellers") that license and service Avant! products in this market. Avant! also
supports these distributors and representatives and their customers with
technical, sales and management personnel.
International revenue accounted for 11%, 32% and 33% of the Company's total
revenue in 1993, 1994 and the 1995, respectively. The Company expects that
international license and service revenue will continue to account for a
significant portion of its total revenue. The Company intends to continue to
expand its sales and marketing activities outside the United States, which will
require significant management attention and financial resources. The Company's
international revenue involves a number of risks, including the impact of
possible recessionary environments in economies outside the United States,
longer receivables collection periods and greater difficulty in accounts
receivable collection, unexpected changes in regulatory requirements, reduced
protection for intellectual property rights in some countries and tariffs and
other trade barriers. There can be no assurance that the Company will be able
to sustain or
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increase revenue derived from international licensing and service or that the
foregoing factors will not have a material adverse effect on the Company's
future international license and service revenue, and, consequently, on the
Company's business, operating results and financial condition. Failure to
sustain or increase such revenue would materially and adversely affect the
Company's business, operating results and financial condition. Although the
Company has attempted to reduce the risk of fluctuations in exchange rates
associated with international revenue by pricing its products and services in
United States dollars, the Company pays the expenses of its international
operations in local currencies and does not currently engage in hedging
transactions with respect to such obligations. Currency exchange fluctuations
in countries in which the Company licenses its products could have a material
adverse effect on the Company's business, operating results or financial
condition by resulting in prices that are not competitive with products priced
in local currencies. Furthermore, there can be no assurance that in the future
the Company will be able to continue to price its products and services
internationally in United States dollars. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company relies on distributors and manufacturer's representatives ("Third
Party Sellers") for licensing and support of its products in Japan, Korea,
Taiwan and Singapore. A substantial portion of the Company's international
license and service revenue results from a limited number of these Third Party
Sellers. During 1993, 1994 and 1995, revenue from these channels accounted for
an aggregate of approximately 11%, 26% and 29%, respectively, of the Company's
total revenue. Design Solutions, Inc. and Marubeni Hytech Corporation
distribute Avant! products on a non-exclusive basis in Japan. In Korea, C&G
Technology, Inc. and Jason Advanced Technology are non-exclusive manufacturer's
representatives. In Taiwan, E-Team Design Systems, Inc. serves as Avant!'s
exclusive manufacturer's representative. In Singapore, Future Techno Designs,
Pte. Ltd. serves as Avant!'s exclusive manufacturer's representative. In each
of 1993, 1994 and 1995, one or more of these Third Party Sellers, other than
Future Techno Designs, Pte. Ltd. accounted for more than 10% of Avant!'s total
revenue. Avant! is dependent upon continued support from, and the viability and
financial stability of, these Third Party Sellers. Note 9 to the consolidated
financial statements included in the 1995 Annual Report to Shareholders, which
is incorporated by reference herein, contains disclosure of export revenues by
geographic location for 1993, 1994 and 1995.
Since the Company's products are used by highly skilled professional engineers,
in order to be effective a Third Party Seller must possess sufficient technical,
marketing and sales resources and must devote these resources to a lengthy sales
cycle, customer training and product service and support. Only a limited number
of Third Party Sellers possess such resources. In addition, the Company's Third
Party Sellers generally offer products of several different companies,
including, in some cases, products that are competitive with the Company's
products. There can be no assurance that the Company's current Third Party
Sellers will choose to or be able to market or service and support the Company's
products effectively, that economic conditions or industry demand will not
adversely affect these or other Third Party Sellers, that any Third Party Seller
will continue to market and support the Company's products or that these Third
Party Sellers will not devote greater resources to marketing and supporting
products of other companies. The loss of, or a significant reduction in revenue
from, one of the Company's Third Party Sellers could have a material adverse
effect on the Company's business, operating results or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The license of the Company's software products generally involves a significant
commitment of capital by prospective customers, with the attendant delays
frequently associated with large capital expenditures and lengthy acceptance
procedures. For these and other reasons, the sales cycle associated with the
license of the Company's products is typically lengthy and subject to a number
of significant risks over which the Company has little or no control and, as a
result, the Company believes that its quarterly operating results are likely to
vary significantly in the future. Due to the nature of the Company's business,
the Company does not believe any of its backlog orders to be firm.
CUSTOMER SERVICE AND SUPPORT
Avant!'s product management group provides customers with technical support,
training and consulting services. Avant! believes that a high level of customer
service and support is critical to the adoption and successful utilization of
its physical design technology and products.
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To address technical issues, Avant! has established both field and corporate
technical application engineering groups that understand the design
methodologies of Avant!'s customers and generally have IC design backgrounds.
Most of Avant!'s customers currently have maintenance agreements that entitle
them to receive software updates, documentation updates and a formal problem
identification and resolution process through a support hotline. Questions or
suggestions may be submitted by facsimile or through the Internet network mail
system. Avant! also offers additional training and consulting services for a
fee. The Company provides on-site and in-house training on all products.
Avant! consultants are available to work closely with customer design
engineering teams for all phases of physical design from conception through
implementation. Avant! consultants provide customers with in-depth technical
expertise in the use of the Company's physical design methodology and products.
RESEARCH AND DEVELOPMENT
The ICDA industry is characterized by extremely rapid technological change,
frequent product introductions and enhancements, evolving industry standards and
rapidly changing customer requirements. The development of more complex ICs
embodying new technologies will require increasingly sophisticated design tools.
Avant! believes that its future competitive position and future results of
operations will depend in large part on its ability to quickly and cost-
effectively develop new products, maintain and enhance its current product line,
maintain technological competitiveness and meet an expanding range of customer
requirements. In addition to supporting and enhancing its existing layout,
verification and analysis products, Avant! maintains an advanced research group
that is responsible for exploring new directions and applications of Avant!'s
proprietary technologies, migrating new technologies into the existing product
lines and maintaining strong research relationships outside Avant! with industry
and academia.
During 1993, and 1994 and 1995, the Company's research mad development
expenditures were approximately $3,449,000, $4,980,000, and $7,795,000
respectively (including capitalized software development costs of $140,000,
$143,000, and $63,000 respectively, for the same periods). The amount of
capitalized software development costs amortized was $145,000, $199,000, and
$228,000 for 1993, 1994, and 1995, respectively.
The Company believes that it must continue to commit substantial resources to
enhance and extend its product lines in order to remain competitive in the IC
CAD market. The Company intends to continue to increase its internally-funded
product development and, if appropriate, to enter into development agreements
with customers and other third parties to develop specific new product
applications and features. The Company currently has no material third-party
funded development agreements.
COMPETITION AND RELATED LITIGATION
The ICDA software market, in which the Company competes, is intensely
competitive and subject to rapid change. The Company currently faces
competition from major ICDA vendors, including Cadence Design Systems, Inc.
("Cadence"), which currently holds a dominant share of the market for IC
physical design software, and Mentor Graphics Corporation. Each of these major
ICDA vendors has a longer operating history, significantly greater financial,
technical and marketing resources, greater name recognition and a larger
installed customer base than the Company. In addition, each of these
competitors will likely be able to respond more quickly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the development, promotion and sale of their products than the
Company. These companies also have established relationships with current and
potential customers of the Company and can devote substantial resources aimed at
preventing the Company from enhancing relationships with existing customers or
establishing relationships with potential customers. Further, other companies
may develop and bring new products to the market which could create significant
competition for the Company and its products. Competition from EDA companies
that currently offer only functional or logic design products and that choose to
enter the physical design market could present particularly formidable
competition due to their relationships with the Company's current and potential
customers, their ability to
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offer a complete integrated IC design solution which Avant! does not currently
offer and their knowledge of the EDA industry.
The Company also competes with the internal ICDA development groups of its
existing and potential customers, many of whom design and develop customized
design tools for their particular needs and therefore may be reluctant to
purchase products offered by independent vendors, such as the Company.
Furthermore, because there are relatively low barriers to entry in the software
industry, the Company expects additional competition from other established and
emerging companies. There can be no assurance that the Company's current or
potential competitors will not develop products comparable or superior to those
developed by the Company or adapt more quickly than the Company to new
technologies, evolving industry trends or changing customer requirements.
Increased competition could result in price reductions, reduced margins or loss
or market share, any of which could materially and adversely affect the
Company's business, operating results or financial condition. In addition, the
EDA industry has become increasingly concentrated in recent years as a result of
consolidations, acquisitions and strategic alliances. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Alliances among competitors could
present particularly formidable competition to the Company by combining their
resources. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not lave a material adverse effect on its
business, operating results and financial condition. If the Company is unable
to compete successfully against current and future competitors, the Company's
business, operating results and financial condition will be materially and
adversely affected.
The Company competes on the basis of certain factors, including first-to-market
product capabilities, product performance, price, support of industry standards,
ease of use and customer technical support and service. The Company believes
that it currently competes favorably overall with respect to these factors,
particularly first-to-market product capabilities, technical support and
customer service.
In addition, competitors and potential competitors may resort to litigation as a
means of competition. Cadence has recently instituted litigation against the
Company and certain of its officers and employees alleging trade secret
misappropriation and other claims. See Item 3., "Legal Proceedings". There can
be no assurance that competitors of the Company, in particular Cadence, will not
initiate additional litigation against the Company and its officers, directors,
employees or consultants. The pending litigation against the Company and any
future litigation against the Company or its employees, regardless of the
outcome, may result in substantial costs and expenses to the Company and
significant diversion of effort by the Company's technical and management
personnel. Any such litigation could have a material adverse effect on the
Company's business, operating results or financial condition.
PROPRIETARY RIGHTS
The Company relies on a combination of license agreements, patents, and
copyright, trademark and trade secret laws to establish and protect proprietary
rights to its technology. The Company holds two patents covering certain
aspects of its place and route technology. The Company generally provides
products to end-users under non-exclusive licenses, which typically have a
perpetual term unless terminated for breach. The license provides that the
software may be used solely for internal operations in designated computers
at specified sites. The Company's software is shipped with a software
security lock which limits software access to authorized users. The source
code of the Company's products is protected both as a trade secret and as an
unpublished copyrighted work, and is not made available to third parties.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization or to develop similar technology independently. In addition,
effective copyright and trade secret protection may be unavailable or limited
in certain foreign countries. The Company believes that, due to the rapid pace
of innovation within the IC CAD software industry, factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are more important to establishing and maintaining a technology leadership
position than are the various legal protections of its technology.
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The Company is heavily dependent upon its proprietary software technology. The
Company currently holds two patents and also relies on a combination of trade
secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights in its
products. Although the Company holds two patents, there can be no assurance
that the Company will develop additional proprietary products or technologies
that are patentable, that any issued patent will provide the Company with any
competitive advantages or will not be challenged by third parties or that the
patents of others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company. There can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, and such protections may not
preclude competitors from developing products with functionality or features
similar to the Company's products. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
The Company believes that its products and trademarks do not infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims, regardless of merit, against
the Company in the future or that such claims will not require the Company to
cease use of certain technology or enter into expensive royalty arrangements, if
licenses are available, or result in costly litigation, any of which could
materially and adversely affect the Company's business, operating results or
financial condition.
EMPLOYEES
As of December 31, 1995, the Company had 206 employees, including 98 in research
and development, 91 in sales, marketing and related customer support services,
and 17 in finance and administration. Of these employees, 200 were located in
the United States, four in Europe, one in Japan and one in South Korea. None
of the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement, nor has Avant! experienced any work stoppage.
Avant! considers its relations with its employees to be good.
The Company has recently experienced a period of rapid growth and expansion that
has placed and continues to place a significant strain upon its management
systems and resources. The Company has grown to 206 employees at December 31,
1995 and currently plans to continue to expand its staff. To accommodate this
recent growth, the Company will be required to implement a variety of new and
upgraded operational and financial systems, procedures and controls, including
the improvement of its accounting and other internal management systems, some of
which currently require substantial management effort. There can be no
assurance that the Company will be able to do so successfully. The increase in
the number of the Company's employees and the Company's market diversification
and product development activities have resulted in increased responsibility for
the Company's management. The Company anticipates that continued growth, if
any, will require it to recruit and hire a substantial number of new
engineering, managerial, finance, sales and marketing and support personnel;
however, there can be no assurance that the Company will be successful at hiring
or retaining these personnel. The Company's ability to compete effectively and
to manage future growth, if any, will require the Company to continue to
implement and improve operational, financial and management information systems
on a timely basis and to expand, train, motivate and manage its work force.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees, including additional
finance personnel, could have a material adverse effect on the Company's
business, operating results or financial condition.
The Company's future operating results depend in significant part upon the
continued service of its key technical and senior management personnel,
including, in particular, Gerald C. Hsu, the Company's President and Chief
Executive officer. None of the Company's employees is bound by an employment or
noncompetition agreement. The Company's business, operating results and
financial condition also depend on its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its
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key technical and managerial personnel or attract such personnel in the future.
Uncertainty during the existing litigation, may adversely affect the Company's
ability to attract and retain such personnel. In particular, there are only a
limited number of qualified ICDA engineers, and competition for such individuals
is especially intense. The Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel, and there can be no
assurance that the Company will not experience such difficulties in the future.
The Company, either directly or through personnel search firms, actively
recruits qualified research and development, financial and sales personnel. If
the Company is unable to hire and retain qualified personnel in the future, such
inability could have a material adverse effect on the Company's business,
operating results or financial condition.
ENVIRONMENTAL AFFAIRS
The Company's operations are subject to numerous federal, state and local laws
and regulations designed to protect the environment. There are no
administrative or judicial proceedings pending or threatened against the Company
alleging violations of such environmental laws and regulations. Compliance with
these laws and regulations has not had, and is not expected to have, a material
effect on the capital expenditures, earnings and competitive position of the
Company.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; FUTURE OPERATING RESULTS UNCERTAIN
The Company's quarterly operating results have in the past and may in the future
vary significantly depending on factors such as the resolution of outstanding
litigation, increased competition, the timing of revenue recognition under the
Company's time-based license agreements, the timing of new product announcements
and changes in pricing policies by the Company or its competitors, market
acceptance of new and enhanced versions of the Company's products, the size,
timing and structure of significant licenses, the cancellation of time-based
licenses or maintenance agreements, the mix of direct and indirect sales,
changes in operating expenses, changes in Company strategy, personnel changes,
foreign currency exchange rates and general economic factors. Due to the
foregoing factors, and particularly the variability of the size, timing and
structure of significant licenses, quarterly revenue and operating results are
difficult to forecast. In particular, the Company recently adopted a flexible
pricing strategy pursuant to which the Company offers both perpetual and time-
based software licenses depending on customer requirements and financial
constraints. Because each time-based license may have a different structure and
could be subject to cancellation, future revenue, if any, will be difficult to
forecast. In addition, as a result of pending litigation, the Company may at
some time in the immediate future be subject to an injunction that prohibits the
Company from licensing its ArcCell software product. There can be no assurance
that such an injunction will not be issued against the Company. If such an
injunction is issued against the Company, the Company's business, operating
results and financial condition will be materially adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels. If revenue levels are below expectations, operating
results are likely to be materially adversely affected. In particular, net
income, if any, may be disproportionately affected by a reduction in revenue
because only a small portion of the Company's expenses varies with revenue. Due
to the foregoing factors, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, any shortfall in the
Company's revenue or operating results from levels expected by public market
analysts and investors could have an immediate and significant adverse effect on
the market price for the Company's Common Stock. Additionally. the Company may
not learn of such shortfalls until late in a quarter, which could result in an
even more immediate and adverse effect on the trading price of the Company's
Common Stock. In such event, the market price of the Company's Common Stock
would likely be materially adversely affected.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action
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litigation has often occurred against a company, as evidenced by the Company's
current status as a defendant in two class action lawsuits following a sharp
decline in the price of the Company's Common Stock. See "--Litigation." There
can be no assurance that such litigation will not occur again in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results or financial
condition. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 2. PROPERTIES
The Company occupies approximately 45,000 square feet of space at its
headquarters in Sunnyvale, California with an annual base rent of approximately
$475,000. This lease expires on February 15, 1998. The Company also occupies
30,000 square feet in its facility near Research Triangle Park in Durham, North
Carolina with an annual base rent of approximately $480,000 for seven and one-
half years. The Company also leases 5 sales and support offices in the United
States, two in Europe, one in Japan and one in South Korea. The Company's
current aggregate annual rental expense for these facilities is approximately
$80,000. Avant! believes that its existing facilities are adequate for its
current needs and that suitable additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On December 6, 1995, Cadence Design Systems, Inc. (Cadence) filed an action
against the Company and certain of its officers and employees in the Northern
California United States District Court alleging copyright infringement, unfair
competition, misappropriation of trade secrets, conspiracy, breach of contract,
inducing breach of contract, and false advertising. The essence of the
complaint is that the Company appropriated and improperly copied source code
from Cadence, and that the Company has competed unfairly by making false
statements concerning Cadence and its products. The action also alleges that
the Company induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. The action seeks relief by
enjoining the Company from its allegedly improper conduct and for actual and
punitive damages.
On January 16, 1996, Avant! filed a counterclaim 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 Santa Clara County District Attorney's office is investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described above. On December 5, 1995, a search warrant was executed at the
Company's Sunnyvale, California, facility to determine whether there was
evidence of criminal conduct. No criminal charges have been filed against the
Company.
On each of December 15 and 19, 1995, class action filings were made against the
Company alleging certain securities law violations, including omission and/or
misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely the same as those outlined in the Cadence claim.
It is the Company's position that the plaintiffs' claims are without merit. The
Company believes it has sufficient defenses to all the plaintiffs' claims and
intends to defend itself vigorously. In the opinion of management, based on
information it presently possesses, the conclusion of these claims will not have
a material adverse effect on the Company's consolidated financial position.
Although the Company believes, based on information it presently possesses, that
the conclusion of these claims will not have a material adverse effect on the
Company's consolidated financial position, there can be no assurance that an
adverse judgment, if granted, in any claim may have a material adverse effect on
the Company's business, consolidated financial position, or consolidated results
of operations.
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On May 12, 1995, Charles E. Cump, the Company's former Vice President, Worldwide
Sales and Marketing filed a complaint against the Company and the Company's
Chief Executive Officer in Superior Court, Santa Clara County. The complaint
alleges breach of contract, violation of public policy and several tort claims
in connection with the Company's alleged failure to pay the former employee
certain commissions and with respect to the modification of the Company's
commission plan. In addition, Mr. Cump claims that certain stock options were
improperly taken from him. Mr. Cump is seeking compensatory damages according
to proof, punitive damages, costs of suit and such other relief as the court
deems proper. The Company has conducted an internal investigation and reviewed
the matter with counsel, and believes that it has meritorious defenses to these
claims, and intends to defend this suit vigorously. Although there can be no
assurance that Mr. Cump will not prevail in whole or in part with respect to his
claims, the Company does not believe that the resolution of this suit would have
a material adverse effect on its business, operating results and financial
condition.
The Company is subject to other claims that have arisen in the ordinary course
of business. In the opinion of management, all such matters are without merit
or involve amounts which would not have a material adverse effect on the
Company's consolidated financial position if unfavorably resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 27, 1995, a Special Meeting of Shareholders of the Registrant was
held at which the following matters were submitted to and voted on by the
shareholders. The results of the votes are set forth below:
1. Shareholders approved a proposal to issue shares of the Company's
common stock in connection with the merger of ISS Merger Corp., a
North Carolina corporation and a wholly owned subsidiary of the
Company with and into Integrated Silicon Systems, Inc., a North
Carolina corporation ("ISS"), pursuant to which, amount other things,
(i) ISS became a wholly owned subsidiary of the Company, (ii) each
outstanding share of ISS Common Stock was converted into the right to
receive 0.75 of a share of the Company's Common Stock, and (iii) all
outstanding options to purchase shares of ISS Common Stock were
assumed by the Company and became options to purchase shares of the
Company's Common Stock. 6,569,121 votes were for the proposal, 1,050
votes were against the proposal, 133,225 votes were abstentions and
25,650 votes were withheld.
2. Shareholders approved a proposal to amend the Company's Certificate of
Incorporation to effect a change in the name of the Company from
ArcSys, Inc. to Avant! Corporation. 6,567,546 votes were for the
amendment, 1,275 votes were against the amendment, 160,225 votes were
abstentions and no votes were withheld.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq National Market System under
the symbol AVNT since November 27, 1995. The Company's Common Stock traded on
the National Market System under the Nasdaq symbol ARCS from the Company's
initial public offering on June 7, 1995 until November 26, 1995. The Company
has not paid cash dividends in the past and none are expected to be paid in the
future. As of March 26, 1996, the Company had approximately 150 shareholders of
record, and approximately 2,500 beneficial shareholders.
The information required by Item 5 concerning the high and low sales prices for
the Company's Common Stock is incorporated by reference from page 13 of the
Company's 1995 Annual Report to Shareholders. Such quotations reflect inter-
dealer prices without mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by Item 6 is incorporated by reference from the inside
front cover of the Company's 1995 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 is incorporated by reference from pages 16
through 20 of the Company's 1995 Annual Report to Shareholders.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference from pages 21
through 32 of the Company's 1995 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Coopers & Lybrand L.L.P. were previously the principal accountants for Avant!
Corporation (formerly ArcSys, Inc.). On November 22, 1995, that firm's
appointment as principal accountants was terminated and KPMG Peat Marwick L.L.P.
were engaged as principal accountants. The decision to change accountants was
approved by the board of directors.
In connection with the audits of the two fiscal years ended December 31, 1994
and subsequent interim period through September 30, 1995, there were no
disagreements with Coopers & Lybrand L.L.P. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subsequent
matter of the disagreements.
The audit reports of Coopers & Lybrand L.L.P. on the consolidated financial
statements of Avant! Corporation (formerly ArcSys, Inc.) and subsidiaries as of
and for the years ended December 31, 1994 and 1993, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors is incorporated by reference
from the Company's Proxy Statement to be filed by the Company with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year.
Executive officers of the Company are appointed by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors. The
executive officers of the Company are as follows:
Name Age Position
---- --- --------
Gerald C. Hsu 49 President, Chief Executive Officer,
Chairman of the Board and Director
Y. Eric Cho 48 Senior Vice President of Corporate
Operations, Secretary and Director
John P. Huyett 42 Vice President of Finance and
Administrative Services, Chief
Financial Officer, Treasurer
11
<PAGE>
Gerald C. Hsu joined the Company in March 1994 as President and Chief Executive
Officer and has been a director of the company since such date. From July 1991
to March 1994, Mr. Hsu was employed by Cadence Design Systems, Inc. ("Cadence"),
an EDA company, where his last position was President and General Manager of the
IC Design Group. From June 1988 to July 1991, Mr. Hsu was employed by Sun
Microsystems, Inc., an engineering workstation company, where his last position
was Director of Strategic Business Development. Mr. Hsu holds an M.S. in Ocean
Engineering from the Massachusetts Institute of Technology, an M.S. in Mechanics
and Hydraulics from the University of Iowa and a B.S. in Applied Mathematics
from the National Chung-Hsing University, Taiwan.
Y. Eric Cho co-founded the Company in February 1991 and has been a director of
the Company since such date. Dr. Cho served as Vice President of Sales and
Marketing until October 1993. From October 1993 until the present, he has served
as the Vice President of Asian Operations. From September 1986 to February
1991, Dr. Cho was employed by Cadence where his last position was Director of IC
Marketing. Dr. Cho holds an M.B.A. from New York University, a Ph.D. in
Computer Science from the University of California, Berkeley and a B.S. in
Electrical Engineering from National Chiao-Tung University, Taiwan.
John P. Huyett has served as Vice President of Finance and Administrative
Services, Chief Financial Officer and Treasurer of the Company since the date
of the merger, November 27, 1995. Mr. Huyett served as Vice President of
Finance and Chief Financial Officer for ISS from the time he joined the Company
in July 1993, as Treasurer from October 1993, and as Secretary from October,
1994, through the date of the merger, November 27, 1995. Mr. Huyett was a
partner with KPMG Peat Marwick from 1986 until he joined ISS. Mr. Huyett holds
a B.S. in Business Administration from the University of North Carolina at
Chapel Hill, and is a Certified Public Accountant.
The information required by Item 10 as to the filings of Forms 3, 4, and 5 as
required by Section 16(a) of the Securities Exchange Act of 1994 is incorporated
by reference from the Company's Proxy to be filed by the Company with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days after the end of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days after the end of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's Proxy to be filed by the Company with the Securities and Exchange
Commission within 120 days after the end of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
The following financial statements are incorporated by reference from the 1995
Annual Report to Shareholders for the year ended December 31, 1995 or, as
indicated, are included elsewhere in this Form 10-K.
12
<PAGE>
Page number
(a) 1. FINANCIAL STATEMENTS in Annual Report
----------------
Independent Auditors' Report 21
Consolidated Balance Sheets as of December 31,
1995 and 1994 23
Consolidated Statements of Income for the
Years Ended December 31, 1995, 1994 and 1993 22
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993 24
Consolidated Statements of Cash Flows the Years
Ended December 31, 1995, 1994 and 1993 25
Notes to Consolidated Financial Statements 26
Page number
(a)2. FINANCIAL STATEMENT SCHEDULE in this Form 10-K
-----------------
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1993, 1994 and 1995 15
Independent Auditors' Report 16
All other financial statement schedules required under Regulation S-X are
omitted as the required information is not applicable.
(a)3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such Exhibits and are incorporated by
reference.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, under Items 2 and 5, dated
November 27, 1995. Pursuant to this report, the Company announced
that it had completed its merger with ISS. Stockholders of both
companies approved the merger at the companies' respective special
stockholder meetings convened on November 27, 1995. The business of
both the Company and ISS is now operated under the new name "Avant!
Corporation." Effective upon consummation of the merger, David C.
Arnold, a board member of ISS at the time of the merger was elected to
the Company's Board of Directors. Y. Eric Cho, Tench Coxe, Robert C.
Kagle and Gerald C. Hsu, members of the Board of Directors of the
Company at the time of the merger, will continue to serve on the Board
of Directors of the Company. Mr. Hsu will continue to serve as
President and Chief Executive Officer of the Company. In addition,
John P. Huyett, Chief Financial Officer of ISS at the time of the
merger, was appointed as Chief Financial Officer and Vice President of
Finance and Administrative Services of the Company.
The Company filed a report on Form 8-K, under item 4, dated November
29, 1995. Pursuant to this report, the Company announced effective
November 22, 1995, the termination of the appointment of Coopers &
Lybrand L.L.P. as the principal accountants for the Company, and the
appointment of KPMG Peat Marwick LLP as principal accountants for the
Company.
With the exception of the information incorporated by reference to the 1995
Annual Report to Stockholders in Items 5, 6, 7 and 8 of Part II, and Item 14 of
Part IV of this Form 10-K, the Company's 1995 Annual Report to Shareholders is
not to be deemed filed as a part of this Report.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Avant! Corporation
------------------
(Registrant)
March 28 , 1996 /s/ Gerald C. Hsu
------------------
Gerald C. Hsu
President,
Chief Executive Officer, and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
---------- --------- -----
/s/ Gerald C. Hsu President (principal executive March 28 , 1996
- ------------------ officer), Chief Executive Officer ----------------
Gerald C. Hsu and Chairman of the Board of
Directors
/s/ John P. Huyett Vice President of Finance and March 28 , 1996
- -------------------- Administration, Chief Financial ----------------
John P. Huyett Officer, Treasurer (principal
accounting officer and principal
financial officer)
/s/ Y. Eric Cho Senior Vice President March 28 , 1996
- -------------------- Corporate Operations, ----------------
Y. Eric Cho Secretary, and Director
/s/ Robert C. Kagle Director March 28 , 1996
- --------------------- ----------------
Robert C. Kagle
/s/ Tench Coxe Director March 28 , 1996
- --------------------- ----------------
Tench Coxe
14
<PAGE>
Schedule II
AVANT! CORPORATION
VALUATION AND QUALIFYING ACCOUNTS -
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Balance Additions Balance
At Beginning Charged At End
of Period to Expense Deductions of Period
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1993 $ 4 $ 101 $ 0 $ 105
Year ended December 31, 1994 105 67 47 125
Year ended December 31, 1995 125 285 101 309
</TABLE>
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Avant! Corporation:
Under date of January 19, 1995, we reported on the consolidated balance sheets
of Avant! Corporation as of December 31, 1995 and 1994 and the related
consolidated statements of income, Shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995, which are
included in the Company's 1995 annual report. These consolidated financial
statements and our report thereon are incorporated by reference in the Company's
annual report on Form 10-K for the year 1995. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
San Jose, California
January 18, 1996
16
<PAGE>
Exhibit 11.1 Calculations of Income Per Share.
AVANT! CORPORATION
STATEMENTS RE: COMPUTATIONS OF INCOME PER SHARE
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Common shares outstanding
(weighted average) 6,119 8,291 14,650
Common stock equivalents
(using the treasury stock method):
Stock Options and Awards
(weighted average) 213 269 982
Pursuant to Staff Accounting Bulletin No. 83 (A) 496 496 496
Preferred Stock 4,678 4,678 --
------- ------- -------
Total (B) 11,506 13,734 16,128
------- ------- -------
------- ------- -------
Income $ 1,342 $ 2,260 $ 5,065
------- ------- -------
------- ------- -------
Income per common share (C) $ 0.12 $ 0.16 $ 0.31
------- ------- -------
------- ------- -------
</TABLE>
(A) Treated as if outstanding for all periods presented. (B) Total of all
common stock and equivalents. (C) Equal to income divided by (B).
17
<PAGE>
Exhibit 21.1 Subsidiaries of Registrant
Name Jurisdiction of Incorporation
- ---- -----------------------------
Integrated Silicon Systems, Inc. North Carolina
ISS Software Inc. California
ISS Corporate Services, Inc. North Carolina
ISS Export FSC, Inc. U.S. Virgin Islands
ArcSys UK Limited England
Avant! Export FSC, Inc. Barbados
18
<PAGE>
Exhibit 23.1 Consent of KPMG Peat Marwick LLP
Independent Auditors' Consent
The Board of Directors
Avant! Corporation:
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-77196 and 33-77242) on Form S-8 of Avant! Corporation of our reports
dated January 18, 1996 relating to the consolidated balance sheets of Avant!
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of income, Shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1995, and the related financial
statement schedule, which reports appear or are incorporated by reference in the
December 31, 1995 annual report on Form 10-K of Avant! Corporation.
KPMG PEAT MARWICK LLP
San Jose, California
March 28, 1996
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Avant! Corporation
------------------
(Registrant)
March 28 , 1996 /s/ Gerald C. Hsu
------------------
Gerald C. Hsu
President,
Chief Executive Officer, and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Gerald C. Hsu President (principal executive March 28 , 1996
- ------------------ officer), Chief Executive Officer ----------------
Gerald C. Hsu and Chairman of the Board of
Directors
/s/ John P. Huyett Vice President of Finance and March 28 , 1996
- -------------------- Administration, Chief Financial ----------------
John P. Huyett Officer, Treasurer (principal
accounting officer and principal
financial officer)
/s/ Y. Eric Cho Senior Vice President March 28 , 1996
- -------------------- Corporate Operations, ----------------
Y. Eric Cho Secretary, and Director
/s/ Robert C. Kagle Director March 28 , 1996
- --------------------- ----------------
Robert C. Kagle
/s/ Tench Coxe Director March 28 , 1996
- --------------------- ----------------
Tench Coxe
20
<PAGE>
(c) Exhibit Listing
EXHIBIT
-------
NO. DESCRIPTION
--- -----------
3.1 Restated Certificate of Incorporation
3.2 Bylaws (1)
4.1 Amended and Restated Investors Rights Agreement between the Company
and the Investors specified therein dated September 24, 1993 (1)
4.2 Specimen Common Stock Certificate (1)
10.1 Series C Preferred Stock Purchase Agreement between the Company and
the Investors specified therein dated as of September 24, 1993 (1)
10.2 Distribution Agreement between the Company and Marubeni Hytech
Corporation dated as of September 30, 1994 (1)
10.3 Distribution Agreement between the Company and Design Solutions,
Inc. dated as of September 30, 1994 (1)
10.4 Real Property Lease between the Company and TRI/VEST Properties I
dated as January 5, 1993 (1)
10.5 License Agreement between the Company and Sun Microsystems, Inc.
dated as of February 28, 1995 (1)
10.6 Software Agreement between the Company and AT&T Corp. dated as of
December 15, 1994 (1)
10.7 In-Sync Cooperative Technical and Marketing Agreement between the
Company and Synopsys, Inc. dated March 1, 1995 (1)
10.8 1993 Stock Option/Stock Issuance Plan (1)
10.9 1995 Stock Option/Stock Issuance Plan (1)
10.10 Employee Stock Purchase Plan (1)
10.11 Form of Indemnification Agreement (1)
10.12 Indemnification Agreement entered into between the Company and
Gerald C Hsu dated May 24, 1994 (1)
11.1 Statement regarding Computation of Net Income Per Share
22.1 List of subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick L.L.P., Independent Auditors' Consent
____________
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1. filed April 12, 1995 (File No. 33-91128)
21
<PAGE>
Avant! is dedicated to our customers, our technology, and our people. Our
mission is to provide innovative technology, products, services and business
models that enable our customers to solve the toughest problems in deep
submicron integrated circuit (IC) design, improve their productivity, and
achieve a high return on their investment.
Nineteen Hundred and Ninety-Five was a monumental year for Avant!. We began the
year as two fast-growing IC design automation (ICDA) companies, ArcSys, Inc.
(then privately held) and Integrated Silicon Systems, Inc. (ISS) (Nasdaq: ISSS).
ArcSys completed its initial public offering in June (Nasdaq: ARCS), and in
August announced its merger with ISS. The merger was completed in November, and
we closed the year as Avant! Corporation, a company focused entirely on deep
submicron integrated circuit design automation.
A Record-Setting Year. We are pleased to report that Avant! is profitable and is
one of the fastest-growing companies in ICDA. We are proud to report record
levels of revenue, net income, and earnings per share for fiscal 1995. We
recognized revenue of $38 million, a 100% increase over revenue of $19 million
in 1994. Net income was $5 million (31 cents per share), a 124% increase in net
income and a 94% increase in earnings per share over 1994. Operating margin for
the year was 28%, excluding merger expenses.
In addition to record revenue, net income, and earnings per share, this year
turned out several notable achievements. We firmly established a business model
that enables our customers and Avant! to be successful in both the short and
long term. This business model is based on a mix of perpetual licenses, whereby
we sell a lifetime license with annual maintenance fees, and "time licenses,"
whereby we sell customers a license to use our products for a specified time
(typically three years). The multi-year time-license model provides us greater
stability and increased visibility into our future revenue stream. In addition,
this model enables customers to satisfy their design load requirements and
constant financial constraints, and keeps Avant! moving forward with new
technology developments.
A strong balance sheet and no debt give us a good measure of financial as we
enter the new fiscal year, and enable us to execute on our ambitious strategic
plans.
We also established a customer support model that enables our customers to
receive both applications and software support in exchange for a major portion
of software maintenance fees. We were able to close business with many major
semiconductor and systems companies because of our innovative business model,
and we are the only major ICDA company to provide this unique type of return on
the customer's support investment.
This year our cash position increased significantly, primarily due to the ArcSys
initial public offering and significant cash flow from operations. A strong
balance sheet and no debt give us a good measure of financial security as we
enter the new fiscal year, and enable us to execute on our ambitious strategic
plans. We increased our visibility into future quarters by increasing our
backlog and growing our time license revenue stream, which also give us one of
the best DSOs
<PAGE>
(days sales outstanding, often used as a measure of customer satisfaction and
financial stability) in the EDA industry.
Build to Last: Laying a Foundation for Success. Also in 1995 we began laying a
foundation for future success. Our primary goal is to "build to last"--develop
the organization, infrastructure, and processes that will help Avant! succeed as
a major player in the ICDA industry. And we think we're well on our way toward
meeting that goal. We are in the process of establishing a strong corporate
culture based on keeping our commitments, with three values at our core: our
customers, who are the key measure of our success; our technology, which is
essential to IC design; and, our people, who are the foundation of our software
products.
The merger was completed in November, and our company officially became Avant!
Corporation. The name of the company is taken from the Italian word "Avanti,"
meaning "Onward!," "Forward!" or "Let's go!," and is commonly used during
Italian soccer games to show competitive spirit. The related French word is
"avant," as in "avant garde," used to describe a group of people dedicated to
the invention and application of new techniques in a given field. We combined
these words and transformed the "i" into an exclamation point as a constant
reminder to ourselves, our customer base, and our shareholders of our
competitive spirit and our enthusiasm for meeting the needs of our customers for
deep submicron ICDA solutions. In addition, the flipped "i" reminds us that
innovation, invention, and ideas come from looking at things from a different
perspective.
Our primary goal is to "build to last"--develop the organization,
infrastructure, and processes that will help Avant! succeed as a major player in
the ICDA industry.
We established our corporate headquarters in Sunnyvale, California, in the heart
of Silicon Valley, and formed two engineering divisions - the RTP (Research
Triangle Park) Division and the Silicon Valley Division.
The Semiconductor Market Depends on Deep Submicron ICDA. Because of the
increased worldwide demand for smaller, faster, more complex electronic products
at lower cost and shorter time to market, our customers are migrating their IC
designs to deep submicron feature sizes (less than0.5 micron). With deep
submicron processing requirements, physical design has more of an impact on IC
performance than logical design. At such small feature sizes, instead of gate
(or transistor) delay, interconnect wire delay is a major factor in determining
a design's performance, and the density of interconnect routing is primarily
responsible for determining a design's die size. Avant!'s physical design tools
optimize both interconnect delay and routing density to achieve the best
performance and smallest die size.
In 1995, IC physical design automation was widely recognized and accepted as the
primary technology that is essential to the growth and development of the
electronics and semiconductor industries, due to the challenges of interconnect
delay, placement and routing, verification and modeling in complex deep
submicron IC designs. According to Collett International, an electronics
industry research firm, a 10% reduction in die size can lead to a 20% reduction
in manufacturing costs, which are usually in the hundred-million-dollar range.
<PAGE>
Delivering Technology With an Impact. Avant!'s product strategy is to develop
the IC physical design technology that has the greatest impact on our customers'
success. During the year, this technology was delivered to the market through
the ArcCell physical layout product line, the VeriCheck hierarchical
verification product line, and our associated signal integrity analysis tool
suite.
We transformed the "i" into an exclamation point as a constant reminder to
ourselves, our customer base, and our shareholders of our competitive spirit and
our enthusiasm for meeting the needs of our customers for deep submicron ICDA
solutions. In addition, the flipped "i" reminds us that innovation, invention,
and ideas come from looking at things from a different perspective.
ArcCell is used by the world's leading semiconductor, computer,
telecommunications, and consumer electronics companies for the placement and
routing of mainstream structured custom and standard cell ICs and application
specific integrated circuits (ASICs). In January 1996, we complemented ArcCell
by releasing ArcCell-XO, the industry's first high-performance, common
architecture six-layer metal IC layout product. ArcCell-XO is in demand by
designers of high-end structured custom ICs, including microprocessors and
complex application-specific standard products (ASSPs) such as multimedia and
video graphics chips.
VeriCheck, which has become an industry standard solution for physical
verification of complex ICs, was complemented during the year with the
introduction of RCE, an extractor for distributed RC networks; and HLPE, a full-
chip capacitance extractor. We also introduced Star-DC, our submicron delay
calculator that provides highly accurate calculations of both gate and
interconnect delay; and the second generation of Crunch, which compresses RC
data by up to two orders of magnitude and accelerates interconnect analysis by
similar proportions.
Our People Set the ICDA Pace. Avant! was founded by ICDA pioneers - people who
invented physical design automation technology at leading universities in the
early days of computer-aided design. These people have continued to set the pace
for ICDA technology developments in both industry and academia.
Avant!'s product strategy is to develop the IC physical design technology that
has the greatest impact on our customers' success. Through committed teamwork,
we deliver timely solutions to the market.
We're very proud of both the quality and productivity of our employees. More
than 80% of them have technical backgrounds. Half of all our employees are in
research and development; one third of these hold Ph.D.s. And two-thirds of the
R&D engineers in our Silicon Valley Division have Ph.D.s.
Our productivity has improved steadily for the past three years: for example,
revenue per employee has increased from $117,000 to $164,000 to $218,000 in
1993, 1994 and 1995,
<PAGE>
respectively. And in 1995, the majority of our sales team made 150% to 280% of
their sales quotas.
Through continuing discussions with customers, industry leaders, and leading
universities, especially the University of California at Berkeley and Carnegie
Mellon University, Avant! employees continually analyze technology trends and
anticipate IC design automation needs. Avant! is firmly committed to developing
the best ICDA technology and to providing the best support to our customers to
help their businesses be as successful as possible.
Customers are the Key to Our Success. Increasing IC performance, reducing IC
cost, and shortening the time to market are our customers' most critical
business success factors. It is with these success factors in mind that we
develop our deep submicron ICDA technology, deliver on our customer support
model, and bring our physical design products and methodology to market. In
addition, to help customers meet their objectives, we continue to partner with
companies whose core technologies are highly strategic and complementary to
physical layout and verification. Our partnership with the leading logic
synthesis supplier enables customers to link their physical and logical design
efforts. By this link, customers are able to achieve an increase in IC
performance and time-to-market objectives.
By partnering with companies whose core technologies are highly strategic and
complementary to physical design, we help our customers meet their IC
performance die size, and time-to market requirements.
Customers all over the world are using Avant! products to produce the world's
leading semiconductor, computer, consumer electronics and telecommunications
chips. By the end of 1995, our customer base included most of the top
electronics companies worldwide. Customers such as these depend on Avant! to
develop their complex, high-performance ICs and speed them to market.
On behalf of all Avant! employees, I thank you for your continued support.
The discussion in this Annual Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in
"Quarterly Results" and "Factors That May Impact Future Operations" as well as
those discussed in this section and elsewhere in this Annual Report, and the
risks discussed in the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the Securities and
Exchange Commission on June 6, 1995 (Reg. No. 33-91128), the Registration
Statement on Form S-4 as declared effective by the Securities and Exchange
Commission on October 23, 1995 (Reg. No. 33-96648), and other risks detailed
from time to time in the Company's Securities and Exchange Commission reports,
including the report on Form 10-K for the year ended December 31, 1995. [to
table of contents]
<PAGE>
OVERVIEW
Avant! Corporation (the Company) resulted from the merger of ArcSys, Inc.
(ArcSys) and Integrated Silicon Systems, Inc. (ISS) on November 27, 1995.
Results and discussion for all periods relate to the Company, unless otherwise
indicated. The merger has been accounted for as a pooling of interests, and
accordingly, the Company's consolidated financial statements have been restated
for all periods prior to the merger to include the results of operations,
financial position and cash flows of ISS.
The Company develops, markets, and supports software products that assist design
engineers in the physical layout, design, verification, and analysis of advanced
integrated circuits (ICs). The Company's strategy is to focus on productivity-
enhancing software for the integrated circuit design automation (ICDA) segment
of the electronic design automation (EDA) market.
ArcSys was founded in February 1991 and began shipping ArcCell, its cell-based
place and route software product, in 1993. ISS was founded in 1986 and began
shipping its initial physical layout software products in 1988. ISS introduced
Ver i Check, its hierarchical physical verification software, in the third
quarter of 1992. ISS introduced its signal integrity analysis software in 1994.
Substantially all of the Company's revenue for 1993, 1994 and 1995 was derived
from the licensing and support of ArcCell and Ver i Check. [to table of
contents]
Results of Operations
The following table sets forth the percentage of total revenue and the
percentage change for certain items in the Company's consolidated financial
statements (after giving effect to rounding) for the periods indicated:
[to table of contents]
Comparison of Years Ended December 31, 1993, 1994 and 1995
Revenue. Revenue consists primarily of fees for licenses of the Company's
software products, maintenance and customer support. Revenue from the sale of
software licenses is recognized after shipment of the products, delivery of
permanent authorization codes and fulfillment of acceptance terms, if any,
providing that no significant vendor and post-contract support obligations
remain and collection of the related receivable is probable. Any remaining
insignificant vendor or post-contract support obligations are accrued at the
time the revenue is recognized. In instances where there is a contingency
regarding the sale, revenue recognition is delayed until the contingency has
been resolved. When the Company receives advance payment for software products,
such payments are reported as deferred revenue until all conditions for revenue
recognition are met. The Company has entered into certain license agreements
under which software, support and other services are provided to a customer for
a bundled price for a specific period of time. Generally, revenue under such
agreements is
<PAGE>
recognized ratably over the contract period. Maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement, which is
typically 12 months. Revenue from customer training, support and other services
is recognized as the service is performed.
The Company's total revenue increased 118% from $8,708,000 in 1993 to
$18,958,000 in 1994, and increased 100% to $38,004,000 in 1995. The percentage
of the Company's total revenue attributable to software licenses decreased
slightly from 88% in 1993 to 87% in 1994, and to 85% in 1995. This decrease is
primarily due to the increased user base and resulting increase in maintenance
revenue. International sources accounted for 11%, 32% and 33% of software
revenue in 1993, 1994 and 1995, respectively. The Company relies on distributors
and manufacturer's representatives for licensing and support of its products in
Asia. Software revenue from these channels accounted for 11%, 26% and 29% of
sales in 1993, 1994 and 1995, respectively.
Software revenue increased 115% from $7,648,000 in 1993 to $16,431,000 in 1994,
and increased 96% to $32,286,000 in 1995. Increases in software revenue were due
primarily to increased license revenue from the Company's place and route and
physical verification software. Services revenue increased 138% from $1,060,000
in 1993 to $2,527,000 in 1994, and increased 126% to $5,718,000 in 1995,
reflecting the growing base of installed systems. Through December 31, 1995,
price increases have not been a material factor in the Company's revenue growth.
As discussed in the consolidated financial statements, the Company is involved
in litigation with Cadence Design Systems, Inc., and other related actions
(collectively "the Cadence litigation"). As a result of the Cadence litigation,
some customers may cancel or postpone orders of the Company's products. As of
December 31, 1995, there had not been a material financial impact on the
Company; however, significant order delays in the future may impact the
Company's business, financial condition and results of operations.
Deferred revenue increased 121% from $2,280,000 at December 31, 1994 to
$5,029,000 at December 31, 1995 due to an increase in the number of customer
agreements whereby software and services are provided for a specific period and
revenue is recognized ratably over the contract period.
Costs of Software. Costs of software consist primarily of expenses associated
with product documentation and production costs as well as amortization of
capitalized software costs. Costs of software increased from $236,000 in 1993 to
$340,000 in 1994 and increased to $430,000 in 1995. Costs of software as a
percentage of software revenue decreased principally due to increased sales.
Costs of software included amortization of capitalized software amounting to
$145,000, $199,000 and $228,000 in 1993, 1994 and 1995 respectively.
Costs of Services. Costs of services consist of costs of maintenance and
customer support, and direct costs associated with providing other services.
Maintenance includes activities undertaken after the product is available for
general release to customers to correct errors and make routine changes and
additions. Customer support includes any installation assistance, training
classes,
<PAGE>
telephone question and answer services, newsletters, on-site visits and software
or data modifications. Costs of services increased from $614,000 in 1993 to
$1,352,000 in 1994 and increased to $2,988,000 in 1995, representing 58%, 54%
and 52% of services revenue, respectively. The increases in costs of services
were due primarily to an increase in personnel and expenses necessary to support
the Company's growing base of installed software. The reduction in costs of
services as a percentage of services revenue reflects the improved utilization
of the Company's customer support resources in servicing its increasing customer
base.
Selling & Marketing Expenses. Selling and marketing expenses consist primarily
of costs, including sales commissions, of all personnel involved in the sales
process. This includes sales representatives, marketing associates and
application engineers. Selling and marketingexpenses also include costs of
advertising, public relations, conferences and trade shows. Selling and
marketing expenses increased from $3,302,000 in 1993 to $7,615,000 in 1994, and
to $12,945,000 in 1995. The increases reflect higher sales commissions
associated with increased sales volumes and increases in sales and marketing
personnel from 30 to 48 to 54 as of December 31, 1993, 1994 and 1995,
respectively. As a percentage of total revenue, selling and marketing expenses
increased from 38% in 1993 to 40% in 1994, and decreased to 34% in 1995. The
decrease in selling and marketing expenses as a percentage of total revenue from
1994 to 1995 resulted primarily from revenue growth and improved sales
productivity. The increase in selling and marketing expenses as a percentage of
total revenue in 1994 resulted from higher costs associated with increased
international sales compared to 1993. The Company expects to hire additional
sales and marketing personnel and to increase promotion and advertising
expenditures throughout 1996.
Research and Development Expenses. Research and development expenses include all
costs associated with the development of new products and the significant
enhancement of existing products. Research and development expenses increased
from $3,309,000 in 1993 to $4,837,000 in 1994, and to $7,732,000 in 1995.
Research and development expenses represented 38%, 26% and 20% of total revenue
in 1993, 1994 and 1995, respectively. The increases in research and development
resulted from increased personnel-related costs associated with the development
of new products and enhancements of existing products. The number of research
and development personnel increased from 42 to 67 to 98 as of December 31, 1993,
1994 and 1995, respectively. The Company anticipates that it will continue to
devote substantial resources to product research and development.
Software development costs are accounted for in accordance with the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
(SFAS) No. 86, under which the Company is required to capitalize software
development costs once technological feasibility has been established. The
Company amortizes such amounts over three years. The amount of software
development costs capitalized for 1993, 1994 and 1995 was $140,000, $143,000 and
$63,000, respectively, representing 4%, 3% and 1% of total research and
development costs in 1993, 1994 and 1995, respectively.
General and Administrative Expenses. General and administrative expenses
increased from $1,606,000 in 1993 to $2,070,000 in 1994, and to $3,406,000 in
1995, reflecting increases in
<PAGE>
personnel and related costs necessary to support the Company's growth. As a
percentage of total revenue, general and administrative expenses decreased from
18% in 1993 to 11% in 1994, and to 9% in 1995. The Company incurred unexpected
legal and other costs in the fourth quarter of 1995 relating to the Cadence
litigation. The Company expects these legal expenditures to continue in 1996.
Merger Expenses. In connection with the merger with ISS, the Company recorded
related costs of approximately $3,600,000. These costs consisted primarily of
the following: (i) approximately $2,858,000 for transaction fees for attorneys,
accountants, investment bankers, and other related charges; (ii) approximately
$233,000 for the elimination of duplicate facilities and equipment; (iii)
approximately $337,000 for severance, and (iv) approximately $162,000 for
incremental travel, communications, consulting and other costs associated with
internal activities.
Income (Loss) from Operations. The Company had a loss from operations of
$359,000 in 1993, and income from operations of $2,744,000 and $6,913,000 in
1994 and 1995, respectively. The change in operating results is attributable to
revenue growth net of increased expenses necessary to support the Company's
growth. Operating loss represented 4% of revenue in 1993. Operating income
represented 14% and 18% of revenue in 1994 and 1995, respectively.
Interest Income and Expense. Interest income was $200,000, $878,000 and
$2,449,000 in 1993, 1994 and 1995, respectively. Interest income increased in
1994 and 1995 due to larger cash balances resulting primarily from the proceeds
of the ISS public offering completed in February 1994, and the Company's public
offering completed in June 1995. Interest expense represents interest paid on
capital leases.
Income Taxes. The Company accounts for income taxes in accordance with the
FASB's SFAS No. 109. Prior to 1995, the Company had experienced net operating
losses and had established a valuation allowance against its deferred tax assets
relating to the resulting net operating loss carryforwards. As a result of the
merger with ISS, the consolidated financial statements have been restated and
the valuation allowance was eliminated during 1993. The provision for income
taxes as a percentage of pre-tax income was 628%, 35% and 46% for 1993, 1994 and
1995, respectively. The percentage in 1993 was different from theU.S. federal
statutory rate of approximately 34% due to the elimination of the valuation
allowance. The percentage in 1995 was higher than the U.S. federal statutory
rate of approximately 34% due to the effect of merger expenses that were not
deductible for income tax purposes. [to table of contents]
Quarterly Results
The Company's quarterly results have varied in the past and may be subject to
fluctuations resulting from a variety of factors, including purchasing patterns
of customers, the completion of product evaluations by customers, the timing of
product enhancements and product introductions by the Company and its
competitors, and the timing of significant orders. The customer evaluation
process for the Company's products is lengthy, and the timing and outcome of
such evaluations have affected the Company's historical quarterly performance
and may impact future
<PAGE>
quarterly results. A substantial portion of the Company's revenue in each
quarter results from orders received in the same quarter. The Company's expense
levels are based, in part, on its expectations as to future revenue. The Company
continues to expand and increase its operating expenses in order to generate and
support future revenue. If revenue levels are below expectations, operating
results are likely to be disproportionately affected because only a small
portion of the Company's expenses varies with its revenue. As a result, the
Company believes that period-to-period comparison of financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock. Additionally, the Company may not learn of such
shortfalls until late in a fiscal quarter, which could result in an even more
immediate and adverse effect on the trading price of the Company's common stock.
[to table of contents]
Liquidity and Capital Resources
Net cash provided by operations was $747,000 in 1993, $2,384,000 in 1994 and
$11,351,000 in 1995. The increase in cash provided by operations primarily
results from increases in net income, deferred taxes and deferred revenue. The
Company used $2,679,000, $22,856,00 and $27,083,000 of net cash in 1993, 1994
and 1995, respectively, for investing activities. Net cash used in investing
activities relates primarily to net purchases of short-term "available-for-sale"
securities. The securities, which are accounted for in accordance with the
FASB's SFAS No. 115, consist of short-term debt securities, U.S. Government
Agency debt securities, U. S. Treasury Bills, municipal/corporate auction
preferred stock, municipal bonds and demand deposit investments in limited-
maturity fixed-income mutual funds. Cash is also used to acquire equipment,
furniture and fixtures. Purchases of equipment, furniture and fixtures primarily
represent computer workstations and file servers for the Company's employees.
The Company expects that purchases of equipment will likely increase as the
Company's employee base grows.
The Company's stated payment terms generally are net 30 days. However, in the
Company's experience, many customers do not comply with stated payment terms due
to industry practice, slower payment by certain major companies and most foreign
customers, and general economic conditions. The Company periodically increases
its allowance for doubtful accounts to reflect increased sales levels and
collection experience. The Company believes that its allowance for doubtful
accounts is adequate.
As of December 31, 1995, the Company had $69,719,000 in cash and short-term
investments and $68,784,000 in working capital. As of December 31, 1995, the
Company had $10,187,000 in current liabilities, including $5,029,000 of deferred
revenue. As of December 31, 1995, there was no bank indebtedness outstanding and
the Company had no long-term commitments other than operating and capital lease
obligations.
<PAGE>
Based on its operating plan, the Company believes that it has available cash and
short-term investments sufficient to fund the Company's operations until at
least the end of 1996.
[to table of contents]
Factors That May Impact Future Operations
The Company's products compete with similar products from both larger and
smaller EDA vendors, and with dissimilar EDA products for a share of their
customers' EDA budgets. The EDA industry, and as a result the Company's
business, has benefited from the rapid worldwide growth of the semiconductor
industry. There can be no assurance that this rapid growth will continue. The
EDA industry as a whole may experience pricing and margin pressures from a
decrease in growth in the semiconductor industry, or other changes in the
overall computing environment. In addition,the EDA industry is experiencing
consolidation as the major EDA vendors are seeking to provide a complete range
of EDA products to customers. There can be no assurance that the Company will be
able to compete successfully against current and future competitors, or that
market conditions faced by the Company will not adversely affect its operating
results and financial condition.
The Company's future success depends upon its ability to improve current
products and develop new products that address the increasingly sophisticated
needs of its customers. There can be no assurance that the Company will continue
to be successful in developing technologically acceptable products on a timely
basis. The Company's ability to develop and improve products is dependent on key
individuals for their technical and other contributions. There can be no
assurance that the Company can continue to attract and retain these key
personnel. Loss of certain key personnel could result in loss of the Company's
market advantage and could adversely affect its business, operating results and
financial condition.
The Cadence litigation may result in canceled or postponed customer orders and
increased future expenditures. Since only a small portion of the Company's
expenses varies with revenue, canceled orders or significant expenses related to
the Cadence litigation may have an adverse effect on the Company's business,
operating results and financial condition.
The FASB recently adopted SFAS No. 123, Accounting for Stock-Based Compensation.
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans, including employee stock purchase plans
and stock option plans. Management plans to remain on Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, to measure
compensation expense. Therefore, adoption of SFAS No. 123 will not have a
material effect on the Company's consolidated results of operations.
[to table of contents]
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Avant! Corporation:
We have audited the accompanying consolidated balance sheets of Avant!
Corporation and subsidiaries (the Company) as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. 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 generally accepted auditing
standards. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
January 18, 1996
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(amounts in thousands, except per share data)
Assets 1995 1994
------ ---- ----
Current assets:
Cash and cash equivalents $ 22,750 $ 5,830
Short-term investments 46,969 23,561
Accounts receivable, net 5,906 4,388
Deferred income taxes 1,638 2,835
Other 1,708 963
------- ------
Total current assets 78,971 37,577
Equipment, furniture, and fixtures, net 5,091 2,355
Capitalized software, net 150 315
------- ------
Total assets $ 84,212 $ 40,247
------- ------
------- ------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------
Current liabilities:
Current portion of capital lease obligations $ 145 $ 273
Accounts payable 801 507
Accrued compensation 2,319 1,754
Accrued income taxes 362 150
Other accrued liabilities 1,531 643
Deferred revenue 5,029 2,280
------- ------
Total current liabilities 10,187 5,607
Capital lease obligations, less current portion 40 147
Deferred rent 110 -
Deferred income taxes 365 681
------- ------
Total liabilities 10,702 6,435
------- ------
Mandatorily redeemable convertible preferred stock:
Mandatorily redeemable convertible preferred
stock, and convertible preferred stock with put
option, $.0001 par value; 3,655 shares
authorized; no shares issued and outstanding in
1995; 3,570 shares issued and outstanding
(liquidation value of $8,536) in 1994 - 8,312
Shareholders' equity:
Series A convertible preferred stock, $.0001 par
value; 687
<PAGE>
shares authorized; no shares issued
and outstanding in 1995; 687 shares issued and
outstanding (liquidation value of $907) in 1994 - -
Common stock, $.0001 par value; 25,000 and 10,000
shares authorized, 15,910 and 8,698 shares issued
and outstanding in 1995 and 1994,respectively 16 9
Additional paid-in capital 68,162 25,080
Deferred stock compensation (517) (62)
Net unrealized gain (loss) on short-term
investments 89 (222)
Retained earnings 5,760 695
------- ------
Shareholders' equity 73,510 25,500
------- ------
Total liabilities, mandatorily
redeemable convertible preferred
stock, and shareholders' equity $ 84,212 $ 40,247
------- ------
------- ------
See accompanying notes to consolidated financial statements.
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands, except per share data)
1995 1994 1993
---- ---- ----
Revenue:
Software $ 32,286 $ 16,431 $ 7,648
Services 5,718 2,527 1,060
------- ------ ------
Total revenue 38,004 18,958 8,708
------- ------ ------
Costs and expenses:
Costs of software 430 340 236
Costs of services 2,988 1,352 614
Selling and marketing 12,945 7,615 3,302
Research and development 7,732 4,837 3,309
General and administrative 3,379 2,070 1,606
Merger expenses 3,590 - -
------- ------ ------
Total operating expenses 31,064 16,214 9,067
------- ------ -------
Income (loss) from
operations 6,940 2,744 (359)
------- ------ ------
Interest income 2,449 878 200
Interest expense (154) (146) (95)
------- ------ ------
Income (loss) before
income taxes 9,235 3,476 (254)
------- ------ ------
Provision for income taxes 4,170 1,216 (1,596)
------- ------ ------
Net income $ 5,065 $ 2,260 $ 1,342
------- ------ ------
------- ------ ------
Net income per common share $ 0.31 $ 0.16 $ 0.23
------- ------ ------
------- ------ ------
Weighted average number of common
and common equivalent shares
outstanding 16,128 13,734 5,805
------- ------ ------
------- ------ ------
<PAGE>
See accompanying notes to consolidated financial statements.
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994, 1993
(amounts in thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 5,065 $ 2,260 $ 1,342
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,187 636 337
Amortization of capitalized
software costs 228 199 145
Amortization of deferred
stock compensation 133 - -
Deferred income taxes 2,183 398 (2,404)
Deferred rent 110 (5) (19)
Changes in operating assets
and liabilities:
Accounts receivable, net (1,518) (2,260) (1,245)
Other current assets (745) (48) (92)
Accounts payable 294 232 141
Accrued compensation 565 1,057 576
Accrued income taxes 212 (221) 221
Other accrued liabilities 888 241 252
Advance payments by
shareholder for product - (453) (213)
Deferred revenue 2,749 348 1,706
------- ------- --------
Net cash provided by
operating activities 11,351 2,384 747
------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments (79,568) (92,615) (2,529)
Maturities and sales of
short-term investments 56,471 71,366 667
Purchases of equipment, furniture,
and fixtures (3,923) (1,483) (677)
Capitalized software development
costs (63) (143) (140)
Cash received in merger - 19 -
------- ------- --------
Net cash used in
investing activities (27,083) (22,856) (2,679)
------- ------- --------
Cash flows from financing activities:
Payment on note assumed in merger - (89) -
Principal payments under capital
lease obligations (235) (235) (134)
Proceeds from issuance of preferred
stock, net - - 4,482
Repurchase of common stock (3) (2) -
Exercise of stock options 4,643 201 -
Issuance of common stock under
employee stock purchase plan 534 66 -
Proceeds from issuance of
common stock, net 27,713 20,343 48
------- ------- --------
Net cash provided by
financing activities 32,652 20,284 4,396
------- ------- --------
Net increase (decrease) in cash
and cash equivalents 16,920 (188) 2,464
Cash and cash equivalents, beginning
of year 5,830 6,018 3,554
------- ------- --------
Cash and cash equivalents, end of year $ 22,750 $ 5,830 $ 6,018
------- ------- --------
------- ------- --------
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AVANT! CORPORATION
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands)
Net
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1992 1,710 $ 630 $ 4,973 $ 5 $ 3,075 $ -
Issuances of common stock - - 214 - 63 -
Repurchase and retirement of common stock - - (2) - (2) -
Unrealized loss on short-term investments - - - - - -
Net income for 1993 - - - - - -
-------- ------- ------- -------- ------- -------
Balances as of December 31, 1993 1,710 630 5,185 5 3,136 -
Conversion of preferred stock to common stock (1,023) (630) 1,023 1 629 -
- - -
Issuance of shares in public offering,
net of expenses - - 2,250 3 20,340 -
Issuances of common stock under stock option
plan, including related tax benefits - - 134 - 848 -
Issuances of common stock under employee stock
purchase plan - - 5 - 66 -
Issuance of shares and accumulated deficit of
merged company (PSI) - 113 - 1 -
Repurchase of common stock - - (12) - (2) -
Issuance of common stock options at below
market value - - - - 62 (62)
Unrealized loss on short-term investments - - - - - -
Net income for 1994 - - - - - -
-------- ------- ------- -------- ------- -----
Balances as of December 31, 1994 687 - 8,6989 9 25,080 (62)
(Continued)
Balances as of December 31, 1992 $ - $ (2,804) $ 906
Issuances of common stock - - 63
Repurchase and retirement of common stock - - (2)
Unrealized loss on short-term investments (8) - (8)
Net income for 1993 - - -
-------- ------- -------
Balances as of December 31, 1993 (8) (1,462) 2,301
Conversion of preferred stock to
common stock - - -
Issuance of shares in public offering,
net of expenses - - 20,343
Issuances of common stock under stock
option plan, including related tax benefits - - 848
Issuances of common stock under employee stock
purchase plan - - 66
Issuance of shares and accumulated deficit of
merged company (PSI) - (103) (102)
Repurchase of common stock - - (2)
Issuance of common stock options at below
market value - - -
Unrealized loss on short-term investments (214) - (214)
Net income for 1994 - 2,260 2,260
-------- ------- -------
Balances as of December 31, 199 (222) 695 25,500
(Continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVANT! CORPORATION
Consolidated Statements of Shareholders' Equity, (Continued)
Years ended December 31, 1995, 1994 and 1993
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994 687 $ - 8,698 $ 9 $ 25,080 $ (62)
Issuance of shares in public offering,
net of expenses - - 2,360 2 27,711 -
Conversion of mandatory redeemable convertible
preferred stock into common stock - - 3,570 4 8,308 -
Conversion of preferred stock into common stock (687) - 687 - - -
Exercise of stock options and warrants,
including related tax benefits - - 570 1 5,944 -
Repurchase of common stock - - (18) - (3) -
Issuance of common stock options at below
market value - - - - 588 (588)
Amortization of deferred stock compensation - - - - - 133
Issuance of common stock under employee
stock purchase plan - - 43 - 534 -
Unrealized gain on short-term investments - - - - - -
Net income for 1995 - - - - - -
-------- ------- ------- -------- -------- -------
Balances as of December 31, 1995 - $ - 15,910 $ 16 $ 68,162 $ (517)
-------- ------- ------- -------- -------- -------
-------- ------- ------- -------- -------- -------
See accompanying notes to consolidated financial statements.
****
Balances as of December 31, 1994 $ (222) $ 695 $ 25,500
Issuance of shares in public offering,
net of expenses - - 27,713
Conversion of mandatory redeemable convertible
preferred stock into common stock - - 8,312
Conversion of preferred stock into common stock - - -
Exercise of stock options and warrants,
including related tax benefits - - 5,945
Repurchase of common stock - - (3)
Issuance of common stock options at below
market value - - -
Amortization of deferred stock compensation - - 133
Issuance of common stock under employee
stock purchase plan - - 534
Unrealized gain on short-term investments 311 - 311
Net income for 1995 - 5,065 5,065
-------- -------- --------
Balances as of December 31, 1995 $ 89 $ 5,760 73,510
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Avant! Corporation (the Company or Avant!), formerly ArcSys, Inc.,
develops, markets and supports software products that assist design
engineers in the automated design, layout, physical verification, and
analysis of advanced integrated circuits. Its primary customers are
semiconductor manufacturers in the United States, Japan, Korea, Taiwan, and
Europe.
PRINCIPLES OF PRESENTATION AND PREPARATION
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
consolidated. The consolidated financial statements have been restated to
reflect the effect of the merger with Integrated Silicon Systems, Inc.
(ISS) discussed in Note 2.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer support.
LICENSE REVENUE
Revenue from the sale of software licenses is recognized upon shipment
of the products, delivery of permanent authorization codes, and
fulfillment of acceptance terms, if any, providing that no significant
vendor and post-contract support obligations remain and collection of
the related receivable is probable. Any remaining insignificant
vendor or post-contract support obligations are accrued at the time
the revenue is recognized. In instances where there is a contingency
regarding the sale, revenue recognition is delayed until the
contingency has been resolved. When the Company receives advance
payment for software products, such payments are reported as deferred
revenue until all conditions for revenue recognition are met. The
Company has entered into certain license agreements under which
software, support and other services are provided to a customer for a
bundled price for a specific period. Generally, revenue under such
agreements is recognized ratably over the contract period.
SERVICES REVENUE
<PAGE>
2
Maintenance revenue is deferred and recognized ratably over the term
of the maintenance agreement, which is typically twelve months.
Revenue from customer training, support, and other services is
recognized as the service is performed.
CASH AND CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents are stated at cost
and consist primarily of overnight eurodollar deposits, certificates of
deposit, and commercial paper. The carrying amount of cash and cash
equivalents approximates fair value.
SHORT-TERM INVESTMENTS
Short-term investments, which consist of demand deposit investments in
limited maturity fixed income mutual funds, short-term debt securities,
U.S. government agency debt securities, U.S. Treasury Bills,
municipal/corporate auction preferred stock and municipal bonds, are
reported at fair value, and are classified as available-for-sale
securities. 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. There were no realized
gains or losses on investments sold during 1995, 1994 or 1993. As of
December 31, 1995, the net unrealized gain on short-term investments
consisted of $136,000 of gross unrealized gains, and $47,000 of gross
unrealized losses. As of December 31, 1994, the gross unrealized loss on
short-term investments was $222,000.
EQUIPMENT, FURNITURE, AND FIXTURES
Equipment, furniture, and fixtures consist primarily of computer
workstations and file servers for employees and are stated at cost net of
accumulated depreciation of $2,246,000 and $1,412,000 as of December 31,
1995 and 1994, respectively. Depreciation is provided on the straight-line
method over the estimated useful lives of the related assets (generally
five years).
SOFTWARE DEVELOPMENT COSTS
Certain software development costs for new products and product
enhancements are capitalized upon the establishment of technological
feasibility, which is defined by the Company as the completion of a working
model of the software. Capitalization of computer software development
costs ceases, and amortization begins, when the product is available for
general release to customers. The ongoing assessment of the realizability
of these costs requires considerable judgment related to anticipated future
product revenues, estimated economic life, and changes in hardware and
software technology. The amount of software development costs capitalized
for the years 1995, 1994, and 1993 was $63,000, $143,000, and $140,000,
respectively. Accumulated amortization of software development costs was
$997,000 and $849,000 as of December 31, 1995 and 1994, respectively.
<PAGE>
3
Amortization of software development costs is provided on a product-by-
product basis. Annual amortization is the greater of the amount computed
using the ratio of current product revenue to the total of current and
anticipated future product revenue or the straight-line method over the
remaining estimated economic life of the product. All current products
have estimated economic lives of three years. Amortization of software
development costs for the years 1995, 1994, and 1993 was $228,000,
$199,000, and $145,000, respectively. Amortization of software development
costs is included in costs of software in the accompanying consolidated
statements of income.
INCOME TAXES
Income taxes are provided under the asset and liability method, whereby
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. 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.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Prior to 1994, the Company
had experienced net operating losses and had established a valuation
allowance against its deferred tax assets relating to the resulting net
operating loss carryforwards for tax purposes due to the uncertainty
surrounding the realization of such assets. As a result of the merger
discussed in Note 2, the Company's income tax provisions were restated and
the valuation allowance was eliminated during 1993.
NET INCOME PER COMMON SHARE
Net income per common share is computed using the weighted average number
of common and common equivalent shares outstanding during each period
presented using the treasury stock method.
Common stock equivalents consist of stock options and awards (using the
treasury stock method) and convertible preferred stock. Common stock
equivalents are excluded from the computation if their effect is
antidilutive, except that, common stock issued and stock options and awards
during the 12 months preceding the initial filing of the Registration
Statement for the Company's initial public offering have been included in
the calculation of common and common equivalent shares using the treasury
stock method as if they were outstanding for all periods presented.
<PAGE>
4
STATEMENT OF CASH FLOWS
Interest of $48,000, $42,000, and $36,000 was paid in 1995, 1994, and 1993,
respectively. Income taxes of $711,000, $600,000, and $619,000 were paid
during 1995, 1994, and 1993, respectively. Acquisition of equipment under
capital lease obligations was $-0-, $298,000, and $247,000 during 1995,
1994, and 1993, respectively. Deferred stock compensation of $588,000 and
$62,000 was recognized in 1995 and 1994, respectively, for stock options
issued below market value. In connection with the Company's initial public
offering in 1995, mandatorily redeemable convertible preferred stock was
converted to common stock in the amount of $8,312,000.
TRANSLATION OF FOREIGN CURRENCIES
The Company's foreign subsidiary considers the U.S. dollar its functional
currency. Resulting foreign exchange gains and losses, which have been
insignificant, are included in the results of operations.
STOCK-BASED COMPENSATION
The Company has various stock-based compensation plans as discussed in Note
4. The Company has accounted for the effect of its stock-based
compensation plans under Accounting Principles Bulletin No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. The Company has adopted FAS 123, and plans
to use the pro forma approach allowed under this standard. Disclosures
under FAS 123 will be required in the Company's 1996 consolidated financial
statements.
(2) MERGER
On November 27, 1995, the Company issued approximately 6.4 million shares
of its common stock for all of the outstanding common stock of ISS, and
assumed approximately 1.5 million stock options and subscriptions under
various ISS stock option and purchase plans. ISS declared a two for one
stock split distributed on August 24, 1995 to shareholders of record on
August 7, 1995. The merger has been accounted for as a pooling of
interests, and accordingly, the Company's consolidated financial statements
have been restated for all periods prior to the merger to include the
results of operations, financial position, and cash flows of ISS. Total
revenue and net income for the individual entities as previously reported
are as follows (in thousands):
Nine-month
period ended Year ended
September 30, December 31,
--------------------
1995 1994 1993
---- ---- ----
Total revenue
Avant! $ 12,087 $ 6,191 $ 1,696
ISS 14,414 12,767 7,012
--------- ------- -------
<PAGE>
As previously reported $ 26,501 $ 18,958 $ 8,708
--------- ------- -------
Nine-month
period ended Year ended
September 30, December 31,
-------------------
1995 1994 1993
Net income
Avant! $ 3,073 $ (1,206) $ (2,174)
ISS 3,890 3,128 1,370
--------- ------- -------
As previously reported 6,963 1,922 (804)
Adjustment for deferred
taxes (959) 338 2,146
--------- ------- -------
As restated $ 6,004 $ 2,260 $ 1,342
--------- ------- -------
--------- ------- -------
In connection with the merger with ISS, the Company recorded related costs
of approximately $3.6 million. These costs consisted primarily of the
following: (i) approximately $2,858,000 for transaction fees for attorneys,
accountants, investment bankers, and other related charges; (ii)
approximately $233,000 for the elimination of duplicate facilities and
equipment; (iii) approximately $162,000 for incremental travel,
communications, consulting, and other costs associated with internal
activities; and (iv) approximately $337,000 for severance, relocation, and
related costs. Of the $3.6 million of merger-related costs, approximately
$3.2 million related to cash expenditures while approximately $400,000
related to noncash charges. As of December 31, 1995, there was a balance
of $392,000 of expected future cash expenditures.
On May 5, 1994, ISS completed a merger with Performance Signal Integrity,
Inc. (PSI), a Pennsylvania corporation. The accumulated deficit and
operations of PSI were not material to ISS, and the merger was accounted
for as an immaterial pooling of interests. Therefore, ISS's previously
reported financial results were not restated.
(3) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
INITIAL PUBLIC OFFERING
In connection with the completion of the Company's initial public offering
in June 1995, all the outstanding mandatory redeemable convertible
preferred stock automatically converted into approximately 3,570,000 shares
of the Company's common stock. In addition, the outstanding warrants to
acquire Series B preferred stock were automatically converted into
approximately 27,000 shares of the Company's common stock.
<PAGE>
6
As of December 31, 1994, mandatorily redeemable convertible preferred stock
consisted of the following (in thousands):
Shares Issued and Liquidation
Series authorized outstanding value
------ ---------- ------------ ------------
A $ 313 $ 313 $ 693
B 1,942 1,910 3,343
C 1,400 1,347 4,500
------- ------- -----
$ 3,655 $ 3,570 $ 8,536
------- ------- -----
------- ------- -----
In connection with the completion of the Company's initial public offering
in June 1995, all the outstanding Series A preferred stock automatically
converted into approximately 687,000 shares of the Company's common stock.
4. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING AND CHANGES IN AUTHORIZED COMMON AND PREFERRED
STOCK
In April 1995, the Board of Directors was granted the authority to cause
the Company to issue up to 5,000,000 shares of preferred stock in one or
more series and to fix the rights, preferences, privileges, and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, and the number of
shares constituting any series or the designation of such series, without
any further vote or action by the shareholders. In addition, the Company
increased its authorized number of shares of common stock from 10,000,000
to 25,000,000 shares.
COMMON STOCK
The Company has issued to the Company's founders and employees 2,683,000
shares of its common stock, which are subject to repurchase upon
termination of employment. The number of shares of common stock subject to
the Company's right to repurchase declines 25% after the founder or
employee has been employed one year, and thereafter ratably over three
years on a monthly basis. As of December 31, 1995 and 1994, 279,000 and
232,000 shares, respectively, were subject to repurchase.
<PAGE>
7
1995 STOCK OPTION/ISSUANCE PLAN
The Company approved the 1995 Stock Option/Stock Issuance Plan (the 1995
Plan) in April 1995, under which all remaining outstanding stock options
and shares available for grant under the Company's 1993 Stock Option/Stock
Issuance Plan and 1,000,000 additional shares of the Company' common stock
have been authorized for issuance, for a total of 2,315,575 shares of the
Company's common stock. The 1995 Plan is intended to serve as a successor
to the 1993 Stock Option/Stock Issuance Plan (see below) and has terms
similar to those of the 1993 Stock Option/Stock Issuance Plan. Under the
1995 Plan, however, each individual serving as a nonemployee Board of
Directors' member on the date the Underwriting Agreement for the initial
public offering was executed received an option grant on such date for
20,000 shares of common stock, provided such individual had not otherwise
been in the prior employ of the Company. Each individual who first becomes
a nonemployee Board of Directors' member thereafter will receive a 20,000
share option grant on the date such individual joins the Board of Directors
provided such individual has not been in the prior employ of the Company.
In addition, at each annual shareholders' meeting, beginning with the 1996
Annual Shareholders' Meeting, each individual who is to continue to serve
as a nonemployee Board of Directors' member after the meeting will receive
an additional option grant to purchase 5,000 shares of common stock whether
or not such individual has been in the prior employ of the Company.
1993 STOCK OPTION/STOCK ISSUANCE PLAN
In September 1993, the Board of Directors approved the 1993 Stock
Option/Stock Issuance Plan (the Plan) under which 1,366,000 shares of the
Company's common stock were reserved and are available for issuance.
Options granted under the Plan may be either incentive stock options or
nonstatutory stock options, as designated by the Board of Directors. The
Plan provides that the exercise price of an incentive stock option and a
nonstatutory option will be no less than the fair market value and 85% of
the fair market value, respectively, of the Company' common stock at the
date of grant, as determined by the Board of Directors.
<PAGE>
8
The Board of Directors also has the authority to set exercise dates (no
longer than 10 years from the date of grant), payment terms and other
provisions for each grant. Generally options granted under the Plan become
exercisable as to 25% of the shares on the anniversary date of grant and
thereafter become exercisable ratably over 3 years. The Plan remains in
effect for 10 years. Activity under the Plan is as follows:
Options Number Exercise
available of price per
for grant shares share
--------- ------ -----
Options available for
grant under plan 576,000 - $ -
Options granted (320,000) 320,000 0.30
Options canceled 120,000 (120,000) 0.30
--------- ---------- ------------
Balances, December 31,
1993 376,000 200,000 0.30
Additional shares
reserved 460,000 - -
Options granted (936,000) 936,000 0.30
Options canceled 209,000 (209,000) 0.30
--------- ---------- ------------
Balances, December 31,
1994 109,000 927,000 0.30
Additional shares
reserved 300,000 - -
Options granted (405,000) 405,000 0.30 - 44.50
Options exercised - (174,000) 0.30
Options canceled 74,000 (74,000) 0.30 - 33.50
--------- ----------- ------------
Balances, December 31,
1995 78,000 1,084,000 $ 0.30 - 44.50
--------- ---------- -------------
--------- ---------- -------------
Exercisable as
December 31, 1995 255,000 $ 0.30
---------- -------------
---------- -------------
The Company has recorded for financial statement purposes a deferred charge
of $650,000, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for 355,000 shares subject
to common stock options granted in the fourth quarter of 1994 and the first
quarter of 1995. The deferred stock compensation will be amortized to
compensation expense over the period during which the options become
exercisable, generally four years.
<PAGE>
9
ISS OPTION PLANS
In connection with the ISS merger discussed in Note 2, various ISS option plans
were assumed by the Company. The following is a summary of activity in those
plans.
Options Number Exercise
available of price per
for grant shares share
--------- ------ -----
Balances as of December 31, 1992 158,063 144,563 $ 0.01-2.50
Granted (143,063) 143,063 0.2 -2.53
Exercised - (19,313) 1.00-1.47
Canceled 13,875 (13,875) 0.83-2.53
----------- ---------- ----------
Balances as of December 31, 1993 28,875 254,438 0.01-2.53
Additional shares reserved 1,500,000 - -
Granted (1,035,900) 1,035,900 9.33-19.00
Exercised - (125,075) 0.01-2.50
----------- ---------- ----------
Balances as of December 31, 1994 492,975 1,165,263 0.24-19.00
Additional shares reserved 1,500,000 - -
Granted (779,500) 779,500 16.67-28.17
Exercised - (369,969) 0.24-17.67
Canceled 124,200 (124,200) 1.47-28.17
----------- ---------- ----------
Balances as of December 31, 1995 1,337,675 1,450,594 $ 0.24-26.50
----------- ---------- ----------
----------- ---------- ----------
Exercisable as of
December 31, 1995 103,294 $ 0.24-19.00
---------- ----------
---------- ----------
As of December 31, 1995, there were 1,450,595 shares reserved for the future
exercise of ISS stock options. No additional options will be granted under the
ISS options plans.
The Company incurred compensation expense relating to nonqualified stock options
of $20,000 during 1994 and $151,000 during 1993.
<PAGE>
(5) LEASES
CAPITAL LEASES
The Company has leased certain equipment under capital lease arrangements
and has granted warrants to the lessor to purchase the Company's Series B
mandatorily redeemable convertible preferred stock (see Note 3). Future
minimum lease payments under these capital lease arrangements are as
follows (in thousands):
Year ending
December 31,
------------
1996 $ 145
1997 53
----
198
Less amount representing interest 13
----
185
Less current portion 145
----
$ 40
----
----
OPERATING LEASES
The Company leases its Sunnyvale, California, and Research Park Trangle,
North Carolina, facilities under operating lease agreements which expire
over the next 10 years. Portions of the Company's headquarters were
subleased to an unrelated third party under a lease that expired in June
1995. Rental expense incurred by the Company under operating lease
agreements totaled $702,000, $522,000, and $395,000 for the years 1995,
1994, and 1993, respectively.
Future annual minimum lease payments under operating leases as of
December 31, 1995 are as follows (in thousands):
1996 $ 1,078
1997 1,250
1998 839
1999 784
2000 713
Thereafter 4,000
---------
$ 8,664
---------
---------
<PAGE>
11
(6) INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
1995 1994 1993
---- ---- ----
Current:
Federal $ 551 $ 289 $ 586
Foreign 959 38 10
State 477 28 207
------ ------ ------
Total 1,987 355 803
------ ------ ------
Deferred:
Federal 974 100 (2,285)
Foreign - - -
State (93) 114 (114)
------ ------ ------
Total 881 214 (2,399)
------ ------ ------
Charge in lieu of taxes
attributable to employee
stock plans 1,302 647 -
Total provision for
income taxes
(benefit) $ 4,170 $ 1,216 $ (1,596)
------ ------ ------
------ ------ ------
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule (in thousands):
1995 1994 1993
Income tax expense
(benefit)
at statutory rate $ 3,140 $ 1,182 $ (86)
State income taxes,
net of federal benefit 594 145 93
Nondeductible merger costs 938 - -
Change in valuation
allowance - 89 (1,568)
Tax exempt interest income (306) (140) -
Tax credits (175) (78) (60)
Foreign sales corporation
benefit (96) - -
Other 75 18 25
------ ------ ------
Actual income tax $ 4,170 $ 1,216 $ (1,596)
------ ------ ------
------ ------ ------
<PAGE>
12
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1995
and 1994 are as follows (in thousands):
1995 1994
---- ----
Deferred tax assets:
Accrued liabilities $ 456 $ 123
Allowance for doubtful accounts 155 37
Tax credit carryforwards 361 494
Unrealized loss on short-term investments 89 89
Net operating losses - 2,153
Deferred revenue 796 -
Other - 28
------ -----
Total gross deferred tax assets 1,857 2,924
------ -----
Less valuation allowance (89) (89)
------ -----
Deferred tax assets, net of
valuation allowance 1,768 2,835
------ -----
Deferred tax liabilities:
Accrual to cash conversion 321 412
Depreciation and amortization 188 269
------ -----
Total gross deferred tax
liabilities 509 681
------ -----
Net deferred tax asset
(liability) $ 1,259 $ 2,154
------ -----
------ -----
As of December 31, 1995, the Company had $361,000 of foreign tax credits,
expiring in the year 2000, available to offset future federal income taxes.
(7) EMPLOYEE BENEFIT PLANS
401(K) PLAN
The Company has two 401(k) retirement savings plans covering substantially
all employees. The Company matches contributions in the ISS plan at the
discretion of the Board of Directors. Effective August 1, 1993, the Board
of Directors authorized matching contributions up to 2% of participants'
salaries, amounting to $115,000, $77,000, and $37,000 for 1995, 1994, and
1993, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a Qualified Employee Stock Purchase Plan, which permits
eligible employees to purchase newly issued common stock of the Company up
to an aggregate of 500,000 shares. Under this plan, 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
<PAGE>
13
of the Company's common stock as of the date of the grant or the date the
right to purchase is exercised.
(8) CONCENTRATIONS OF CREDIT RISK
The Company maintains excess cash balances in a variety of financial
instruments such as overnight eurodollar deposits, securities backed by the
U.S. government, municipal/corporate auction preferred stock, municipal
bonds, short-term debt securities, and demand deposit investments in
limited maturity fixed income mutual funds. The Company has not experienced
any material losses in any of the instruments it has used for excess cash
balances.
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
$309,000 and $125,000 as of December 31, 1995 and 1994, respectively.
(9) BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates primarily in one business segment, comprising the
electronic design automation industry.
The Company's export revenues are all denominated in U.S. dollars, and are
summarized as follows (in thousands):
1995 1994 1993
---- ---- ----
Western Europe $ 1,315 $ 890 $ -
Japan 5,585 2,473 676
Taiwan 997 799 183
Korea 2,813 1,049 -
-------- ------ ------
$ 10,710 $ 5,211 $ 859
-------- ------ ------
-------- ------ ------
In 1995, one key customer accounted for 12% of the Company's revenue.
Another key customer accounted for 13% of the Company's revenue in 1994 and
12% of the Company's revenue in 1993. A third key customer accounted for
29% of the Company's revenue in 1993.
(10) COMMITMENTS AND CONTINGENCIES
On December 6, 1995, Cadence Design Systems, Inc. (Cadence) filed an action
against the Company and certain of its officers in the Northern California
United States District Court alleging copyright infringement, unfair
competition, misappropriation of trade secrets, conspiracy, breach of
contract, inducing breach of contract, and false
<PAGE>
14
advertising. The essence of the complaint is that the Company appropriated and
improperly copied source code from Cadence, and that the Company has competed
unfairly by making false statements concerning Cadence and its products. The
action also alleges that the Company induced certain individual defendants to
breach their agreements of employment and confidentiality with Cadence. The
action seeks relief by enjoining the Company from its allegedly improper conduct
and for actual and punitive damages.
On January 16, 1996, Avant! filed a counterclaim 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 Santa Clara County District Attorney's office is investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described above. On December 5, 1995, a search warrant was executed at the
Company's Sunnyvale, California, facility to determine whether there was
evidence of criminal conduct. No criminal charges have been filed against the
Company.
On each of December 15, and 19, 1995, class action filings were made against the
Company alleging certain securities law violations, including omission and/or
misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely consistent with those outlined in the Cadence
claim.
It is the Company's position that the plaintiffs' claims are without merit. The
Company believes it has sufficient defenses to all the plaintiffs' claims and
intends to defend itself vigorously. In the opinion of management, based on
information it presently possesses, the conclusion of these claims will not have
a material adverse effect on the Company's consolidated financial position.
The Company is subject to other claims which have arisen in the ordinary course
of business. In the opinion of management, all such matters are without merit
or involve amounts which would not have a material adverse effect on the
Company's consolidated financial position if unfavorably resolved.
<PAGE>
COMPANIES (AVNT) PAGE 1
AVANT! MOVES INTO IC LOGIC DESIGN, AGREES TO MERGE WITH FRONTLINE
DESIGN AUTOMATION
OCTOBER 10, 1996, 4:06 PM EDT
SUNNYVALE, Calif.--(BUSINESS WIRE)--Oct. 10, 1996--Avant! Corporation (Nasdaq:
AVNT) today announced that they have reached a definitive agreement to merge
with FrontLine Design Automation, a three-year-old privately held software
company specializing in high-performance hardware description language (HDL)
simulation technology.
With this merger, Avant! intends to deliver on its commitment to provide a
complete integrated circuit design automation (ICDA) solution for deep submicron
IC design.
The transaction, which Avant! intends to account for as a pooling of interests,
was approved by both companies' boards of directors and is expected to close in
the fourth quarter of 1996. Under the terms of the merger agreement, Avant!
will issue an aggregate of approximately 2.2 million shares and options to
purchase shares of Avant! common stock in exchange for all of FrontLine's
outstanding equity interests. The closing of the merger is subject to
regulatory and FrontLine shareholder approval, the availability of pooling-of-
interests accounting treatment, and certain other customary closing conditions.
Avant! believes the transaction will be non-dilutive for Avant! shareholders.
"We founded FrontLine to address the HDL simulation speed and capacity
bottleneck that designers of high-complexity ICs found when they began working
with deep submicron technologies," said Badruddin Agarwala, FrontLine's
president. "Our strategy was to develop a unified simulation architecture and a
complete set of the fastest simulation engines in the industry, and we have been
very successful in executing that strategy."
Agarwala continued, "FrontLine is the clear technology leader in simulation. We
were the first to deliver direct RTL and gate-level cycle-based simulation
support, and now with our multi-threaded cycle-based simulation, we have
unmatched performance in the marketplace. To achieve maximum leverage for this
technology, we needed a much larger distribution channel. Combined with Avant!,
we have an established, powerful distribution channel that would otherwise have
taken much longer for FrontLine to build.
"HDL simulation is an important step in mainstream IC design," said Gerald C.
Hsu, Avant!'s chairman, president and CEO. "By merging with FrontLine, we will
have five of the six major technologies in the deep submicron methodology
flowall best-of-breed technologies."
The IC design methodology typically includes HDL simulation and logic synthesis
("front-end" tools), and layout, circuit simulation, analysis and verification
("back-end" tools). To meet performance, complexity, and time-to market
requirements, designers of deep submicron ICs are demanding better integration
between front- and back-end design tools. To help meet this demand, Avant! will
use FrontLine's leading Verilog HDL simulation technology to enhance its Planet
family of floorplanning tools.
Floorplanning, the link between front-end logic design and back-end physical
design, enables designers to quickly and accurately estimate IC performance and
size early in the design cycle, and to reduce the iterations between synthesis
and layout.
Avant! is known for its technology leadership in ICDA. With the introduction of
five new products internally developed by its R&D team this year, the Company
already provides a comprehensive solution for high-performance deep submicron
physical design. Avant!'s product suite includes hierarchical timing-driven
floorplanning and layout, physical timing optimization, circuit simulation and
physical analysis, parasitic extraction and delay analysis, and hierarchical
physical verification.
About FrontLine
FrontLine Design Automation develops and markets an innovative line of Verilog
simulation solutions to improve the productivity of hardware logic designers.
FrontLine has developed a unified HDL simulation architecture with true Verilog
compatibility that offers:
- --------------------------------------------------------------------------------
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<PAGE>
COMPANIES (AVNT) PAGE 2
Multiple levels of abstraction (behavioral, RTL, and gate) Multiple simulation
algorithms (event-driven and cycle-based) Multiple HDL compilation techniques
(interpreted and compiled)
FrontLine's products run on UNIX and Windows, and provide a multi-engine
architecture with high-performance cycle-based and event-driven simulation
support. The tools are used by designers of complex ICs and field-programmable
gate arrays (FPGAs) to verify the functionality of their chips and systems prior
to manufacturing. FrontLine is a privately held company with financial backing
provided by Dr. Prabhu Goel, a widely acknowledged proponent of top-down design
methodology and previously the founder of Gateway Design Automation. Major
FrontLine customers include C-Cube, Digital, Fujitsu, Hitachi, Oki, Seiko Epson
and Silicon Graphics. FrontLine employs about 30 people. Company headquarters
are located in San Jose, Calif., telephone 408/456-222. World Wide Web site:
http://www.frontline.com.
About Avant!
Avant! Corporation develops, markets, and supports ICDA software for deep
submicron ICs, microprocessors, microcontrollers, application-specific standard
products (ASSPs) and complex ASICs. Avant! recently merged with Anagram, Inc.,
a privately held company specializing in circuit simulation and timing and power
analysis software for deep submicron IC designs. Avant! has a definitive
agreement to merge with Meta-Software, Inc. Company headquarters are located in
Sunnyvale, California, telephone 408/738-8881. World Wide Web site:
http://www.avanticorp.com.
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ADDITIONAL SOURCES OF INFORMATION
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<PAGE>
COMPANIES (AVNT) PAGE 1
AVANT! REPORTS RECORD REVENUE AND INCOME FOR Q3 1996
OCTOBER 17, 1996, 4:21 PM EDT
SUNNYVALE, Calif.--(BUSINESS WIRE)--Oct. 17, 1996--Avant! Corporation
(NASDAQ:AVNT) today reported record revenue and earnings for the third quarter
of fiscal year 1996, which ended September 30.
This is the first combined operating report since the completion of the merger
between Avant! and Anagram, Inc. on September 27, 1996. The company reported
revenue of $17,279,000, a 49% increase over third quarter 1995 revenue of
$11,619,000. Including merger costs associated with Anagram, the company
reported net income of $3,361,000 ($0.17 per share on 20,152,000 shares).
Excluding merger costs, fully taxed net income was a record $3,959,000 ($0.20
per share), a 25% increase over third quarter 1995 net income of $3,175,000
($0.16 per share).
"Avant!'s strong financial performance this quarter marks the 11th consecutive
quarter of record growth," said Gerald C. Hsu, chairman, president and CEO of
Avant!. "This is a strong testimony from the marketplace that our corporate
values of customers, technology and people are working. It's also a very strong
vote of confidence that Avant! is delivering technology that can meet the
challenges of very deep submicron IC design."
Hsu added, "This quarter we continued our commitment to ICDA technology by
announcing and delivering new releases of six major products. We believe that
by continuously advancing our technology, Avant! will provide value and enhance
productivity of the IC design community. We will nurture and reinforce start-up
spirits inside our growing environment, and improve our service to customers."
During the third quarter, Avant! also expanded its business visions in the very
deep submicron technology arena by completing its merger with Anagram, Inc., as
well as announcing agreements to merge with Meta-Software, Inc. and FrontLine
Design Automation, Inc.
Meta-Software is the market leader in deep submicron circuit stimulation and
analysis. FrontLine Design Automation is a privately held company specializing
in high-performance hardware description language simulation technology.
Avant!'s entry into the IC simulation and analysis arena will reinforce its
position as the leader in ICDA.
Avant! Corporation develops, markets, and supports ICDA software for deep
submicron ICs, microprocessors, micro-controllers, application-specific standard
products (ASSPs) and complex ASICs. Avant! has definitive agreements to merge
with Meta-Software, Inc. and FrontLine Design Automation, Inc. Company
headquarters are located in Sunnyvale, telephone 408/738-8881. World Wide Web
site: http://www.avanticorp.com.
Except for any historical information presented herein, matters presented int
his press release are forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from the
results presented herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed from time to time in the Company's public reports
filed with the Securities and Exchange Commission, including those discussed in
the Company's report on Form 10-K for the year ended December 31, 1995, and
including the risks discussed in the "Risk Factors" section included in the
Company's Registration Statement on Form S-4 (no. 333-11659) as declared
effective by the Securities and Exchange Commission on September 30, 1996.
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1996 1996 1995
Revenue:
Software $13,728 $9,801 $39,236 $24,703
Services 3,551 1,818 9,587 3,990
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<PAGE>
COMPANIES (AVNT) PAGE 2
Total revenue 17,279 11,619 48,823 28,693
Costs and expenses:
Costs of software 244 106 687 338
Costs of services 1,086 876 3,521 2,066
Selling and marketing 4,371 3,496 12,634 9,485
Research and development 3,373 2,201 9,228 5,578
General and administrative 2,978 904 7,917 2,416
Merger expenses 920 -- 920 --
Total operating expenses 12,972 7,583 34,907 19,883
Income from operations 4,307 4,036 13,916 8,810
Interest income 865 822 2,550 1,623
Interest expense (2) (27) (9) (54)
Income before income
taxes 5,170 4,831 16,457 10,379
Provision for income
taxes 1,809 1,656 5,870 3,506
Net income $3,361 $3,175 $10,587 $6,873
Net income per common share $0.17 $0.16 $0.53 $0.39
Weighted average number of
common and common
equivalent shares
outstanding 20,152 20,002 19,823 17,711
AVANT! CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1996 1995
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 9,440 $ 23,808
Short-term investments 68,005 46,969
Accounts receivable, net 9,102 7,262
Deferred income taxes 2,790 1,646
Prepaid income taxes 1,488 --
Other 6,700 1,713
Total current assets 97,525 81,398
Equipment, furniture and
fixtures, net 6,351 5,217
Capitalized software, net 80 150
Other 13 7
Total assets $103,969 $86,772
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital lease
obligations $78 $145
Accounts payable 852 832
Accrued compensation 2,730 2,319
Accrued income taxes -- 553
Other accrued liabilities 3,357 1,842
Deferred revenue 6,567 5,545
Total current liabilities 13,584 11,236
Capital lease obligations, less
current portion 3 40
Deferred rent 81 110
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<PAGE>
COMPANIES (AVNT) PAGE 3
Deferred income taxes -- 381
Total liabilities 13,668 11,767
Commitments and contingencies
Shareholders' equity:
Common stock, $.0001 par value;
50,000 and 25,000 shares
authorized; 18,428 and 17,747
shares issued and outstanding
at September 30, 1996 and
December 31, 1995, respectively 19 18
Additional paid-in capital 74,545 68,489
Deferred stock compensation (1,707) (517)
Net unrealized gain (loss) on
short-term investments (69) 89
Retained earnings 17,513 6,926
Net shareholders' equity 90,301 75,005
Total liabilities and shareholders'
equity $103,969 $ 86,772
- -COPYRIGHT- Business Wire. All rights reserved.
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<PAGE>
[LOGO]
AVANT! CORPORATION
1208 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
April 29, 1996
TO THE STOCKHOLDERS OF AVANT! CORPORATION
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Avant! Corporation (the "Company"), which will be held at the Company's
principal executive offices at 1208 East Arques Avenue, Sunnyvale, California
94086, on Thursday, May 30, 1996, at 4:00 p.m.
Details of the business to be conducted at the Annual Meeting are given in
the attached Proxy Statement and Notice of Annual Meeting of Stockholders.
It is important that your shares be represented and voted at the meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. Returning the proxy does NOT deprive you of your right to attend the
Annual Meeting. If you decide to attend the Annual Meeting and wish to change
your proxy vote, you may do so automatically by voting in person at the meeting.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company. We look
forward to seeing you at the Annual Meeting.
Sincerely,
/s/ Gerald C. Hsu
Gerald C. Hsu
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
[LOGO]
AVANT! CORPORATION
1208 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 30, 1996
The Annual Meeting of Stockholders ("Annual Meeting") of Avant! Corporation
(the "Company") will be held at the Company's principal executive offices at
1208 East Arques Avenue, Sunnyvale, California 94086, on Thursday, May 30, 1996,
at 4:00 p.m. for the following purposes:
1. To elect five directors of the Board of Directors to serve until the
next Annual Meeting or until their successors have been duly elected and
qualified;
2. To approve an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan to increase the number of shares of Common Stock reserved for
issuance thereunder by 750,000 shares;
3. To approve an amendment to the Company's Certificate of Incorporation
increasing the number of shares of the Company's Common Stock reserved for
issuance thereunder by 25,000,000 shares;
4. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent public accountants for the fiscal year ending December 31, 1996; and
5. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The foregoing items of business are more fully described in the attached
Proxy Statement.
Only stockholders of record at the close of business on April 16, 1996 are
entitled to notice of, and to vote at, the Annual Meeting and at any
adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the Company's headquarters located at 1208 East
Arques Avenue, Sunnyvale, California, during ordinary business hours for the
ten-day period prior to the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Y. Eric Cho
Y. Eric Cho
SECRETARY
Sunnyvale, California
April 29, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING.
IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE,
YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
<PAGE>
AVANT! CORPORATION
1208 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 30, 1996
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Avant! Corporation, a Delaware corporation
(the "Company"), for the Annual Meeting of Stockholders (the "Annual Meeting")
to be held at the Company's principal executive offices at 1208 East Arques
Avenue, Sunnyvale, California 94086, on Thursday, May 30, 1996, at 4:00 p.m.,
and at any adjournment or postponement of the Annual Meeting. These proxy
materials were first mailed to stockholders on or about April 29, 1996.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy
Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Company's Common Stock is the only type of security entitled to vote at
the Annual Meeting. On April 16, 1996, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were 16,030,590
shares of Common Stock outstanding. Each stockholder of record on April 16,
1996 is entitled to one vote for each share of Common Stock held by such
stockholder on April 16, 1996. Shares of Common Stock may not be voted
cumulatively. All votes will be tabulated by the inspector of election appointed
for the meeting, who will separately tabulate affirmative and negative votes,
abstentions, and broker non-votes.
QUORUM REQUIRED
The Company's bylaws provide that the holders of a majority of the
Company's Common Stock issued and outstanding and entitled to vote at the Annual
Meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at the Annual Meeting. Abstentions and broker
non-votes will be counted as present for the purpose of determining the presence
of a quorum.
VOTES REQUIRED
PROPOSAL 1. Directors are elected by a plurality of the affirmative
votes cast by those shares present in person or represented by proxy and
entitled to vote at the Annual Meeting. The five nominees for director
receiving the highest number of affirmative votes will be elected. Abstentions
and broker non-votes are not counted toward a nominee's total. Stockholders may
not cumulate votes in the election of directors.
PROPOSAL 2. Approval of the adoption of the amendment to the Company's
1995 Stock Option/Stock Issuance Plan requires the affirmative vote of a
majority of those shares present in person or represented by proxy, and entitled
to vote at the Annual Meeting. Abstentions will be treated as votes against the
proposal. Broker non-votes will be treated as not entitled to vote on this
matter and thus will have no effect on the outcome of the vote.
1.
<PAGE>
PROPOSAL 3. Approval of the adoption of the amendment to the Company's
Certificate of Incorporation requires the affirmative vote of a majority of the
outstanding shares of the Company's Common Stock. Abstentions and broker
non-votes will be treated as votes against the proposal.
PROPOSAL 4. Ratification of the appointment of KPMG Peat Marwick LLP as
the Company's independent public accountants for the year ending December 31,
1996 requires the affirmative vote of a majority of those shares present in
person, or represented by proxy, and cast either affirmatively or negatively at
the Annual Meeting. Abstentions and broker non-votes will not be counted as
having been voted on the proposal.
PROXIES
Whether or not you are able to attend the Company's Annual Meeting, you are
urged to complete and return the enclosed proxy, which is solicited by the
Company's Board of Directors and which will be voted as you direct on your proxy
when properly completed. In the event no directions are specified, such proxies
will be voted FOR the Nominees of the Board of Directors (as set forth in
Proposal No. 1), FOR Proposals No. 2, No. 3 and No. 4 and, in the discretion of
the proxy holders, as to other matters that may properly come before the Annual
Meeting. You may also revoke or change your proxy at any time before the Annual
Meeting. To do this, send a written notice of revocation or another signed
proxy with a later date to the Secretary of the Company at the Company's
principal executive offices before the beginning of the Annual Meeting. You may
also automatically revoke your proxy by attending the Annual Meeting and voting
in person. All shares represented by a valid proxy received prior to the Annual
Meeting will be voted.
SOLICITATION OF PROXIES
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this Proxy Statement, the proxy,
and any additional soliciting material furnished to stockholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, the Company may reimburse such persons for their costs of
forwarding the solicitation material to such beneficial owners. The original
solicitation of proxies by mail may be supplemented by solicitation by
telephone, telegram, or other means by directors, officers, employees, or agents
of the Company. No additional compensation will be paid to these individuals
for any such services. The Company also has retained Corporate Investor
Communications ("CIC") to assist in the solicitation of proxies. CIC will
receive a fee for such services of approximately $4,000 plus out-of-pocket
expenses, which will be paid by the Company. Except as described above, the
Company does not presently intend to solicit proxies other than by mail.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The directors who are being nominated for election to the Board of
Directors (the "Nominees"), their ages as of February 29, 1996, their positions
and offices held with the Company and certain biographical information are set
forth below. The proxy holders intend to vote all proxies received by them in
the accompanying form FOR the Nominees listed below unless otherwise instructed.
In the event any Nominee is unable or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for any nominee who may be
designated by the present Board of Directors to fill the vacancy. As of the
date of this Proxy Statement, the Board of Directors is not aware of any Nominee
who is unable or will decline to serve as a director. The five Nominees
receiving the highest number of affirmative votes of the shares entitled to vote
at the Annual Meeting will be elected directors of the Company to serve until
the next Annual Meeting or until their successors have been duly elected and
qualified.
2.
<PAGE>
NOMINEES AGE POSITIONS AND OFFICES HELD WITH THE COMPANY
- -------- --- -------------------------------------------
Gerald C. Hsu 49 President, Chief Executive Officer and Chairman of
the Board of Directors
Y. Eric Cho 48 Senior Vice President of Corporate Operations,
Secretary and Director
Tench Coxe (1) 37 Director
Robert C. Kagle (1) 40 Director
Tatsuya Enomoto 55 None
- ---------------
(1) Member of Audit and Compensation Committees
MR. HSU joined the Company in March 1994 as President, Chief Executive
Officer and a director, and has been Chairman of the Board of Directors since
November 1995. From July 1991 to March 1994, Mr. Hsu was employed by Cadence
Design Systems, Inc. ("Cadence"), an electronic design automation ("EDA")
company, where his last position was President and General Manager of the IC
Design Group. From June 1988 to July 1991, Mr. Hsu was employed by Sun
Microsystems, Inc., an engineering workstation company, where his last position
was Director of Strategic Business Development. Mr. Hsu holds an S.M. in Ocean
Engineering from the Massachusetts Institute of Technology, an M.S. in Mechanics
and Hydraulics from the University of Iowa and a B.S. in Applied Mathematics
from the National Chung-Hsing University.
DR. CHO co-founded the Company in February 1991 and has been a director of
the Company since such date. From January 1996 to the present, Dr. Cho has
served as the Senior Vice President of Corporate Operations. From October 1993
until January 1996, he served as the Vice President of Asian Operations. From
the inception of the Company until October 1993, Dr. Cho served as Vice
President of Sales and Marketing. From September 1986 to February 1991, Dr. Cho
was employed by Cadence where his last position was a Marketing Director of the
IC Division. Dr. Cho holds an M.B.A. from New York University, an M.S. and a
Ph.D. in Electrical Engineering and Computer Science from the University of
California, Berkeley and a B.S. in Electrical Engineering from the National
Chiao-Tung University, Taiwan.
MR. COXE has been a director of the Company since February 1992. Mr. Coxe
is a general partner of the general partner of Sutter Hill Ventures, a venture
capital investment firm, and has been associated with Sutter Hill Ventures since
1987. Mr. Coxe holds a B.A. in Economics from Dartmouth College and an M.B.A.
from the Harvard Business School.
MR. KAGLE has been a director of the Company since February 1992. Mr.
Kagle has been a general partner of Benchmark Capital, a venture capital
investment firm, since 1995, and has been a general partner of TVI Management,
the general partner of Technology Venture Investors ("TVI"), a venture capital
investment firm, since 1986. Mr. Kagle also is a director of Viasoft, Inc., a
software company. Mr. Kagle holds a B.S. in Electrical Engineering from the
General Motors Institute and an M.B.A. from the Stanford Graduate School of
Business.
DR. ENOMOTO has been the President of Mitsubishi Electric Semiconductor
Software Corporation, a semiconductor engineering company and a subsidiary of
Mitsubishi Electric Corporation ("MELCO"), since June 1993. From 1962 to June
1993, Dr. Enomoto was employed by MELCO where his last position was General
Manager of the ASIC Design Engineering Center. Dr. Enomoto holds a Ph.D. in
Engineering from the University of Tokyo.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During the year ended December 31, 1995, the Board of Directors held seven
meetings and acted by written consent on three occasions. For the year, each of
the current directors during the term of their tenure
3.
<PAGE>
attended or participated in at least 75% of the aggregate of (i) the total
number of meetings or actions by written consent of the Board of Directors and
(ii) the total number of meetings held by all Committees of the Board of
Directors on which each such director served. The Board of Directors has two
standing committees: the Audit Committee and the Compensation Committee.
During the year ended December 31, 1995, the Audit Committee of the Board
of Directors met two times. The Audit Committee reviews, acts on and reports to
the Board of Directors with respect to various auditing and accounting matters,
including the selection of the Company's auditors, the scope of the annual
audits, fees to be paid to the Company's auditors, the performance of the
Company's auditors and the accounting practices of the Company. The members of
the Audit Committee are Messrs. Coxe and Kagle.
During the year ended December 31, 1995, the Compensation Committee of the
Board of Directors met four times. The Compensation Committee reviews the
performance and sets the compensation of the Chief Executive Officer of the
Company, and approves the compensation of the executive officers of the Company
and reviews the compensation programs for other key employees, including salary
and cash bonus levels and option grants under the 1995 Stock Option/Stock
Issuance Plan, as set by the Chief Executive Officer. The members of the
Compensation Committee are Messrs. Coxe and Kagle.
On November 27, 1995, David C. Arnold was elected to the Board of Directors
of the Company in connection with the merger of ArcSys, Inc. and Integrated
Silicon Systems, Inc. ("ISS") (the "Merger"). Mr. Arnold resigned from the
Board of Directors in February 1996, due to personal reasons unrelated to the
Company.
DIRECTOR COMPENSATION
Except for grants of stock options, directors of the Company generally do
not receive compensation for services provided as a director. The Company also
does not pay compensation for committee participation or special assignments of
the Board of Directors.
Non-employee Board members are eligible for option grants pursuant to the
provisions of the Automatic Option Grant Program under the Company's 1995 Stock
Option/Stock Issuance Plan. On June 6, 1995, Messrs. Coxe and Kagle were each
granted an option to purchase 20,000 shares of Common Stock at an exercise price
of $13.00 per share under the Automatic Option Grant Program. Under the
Automatic Option Grant Program, each individual who first becomes a non-employee
Board member after the date of the Company's initial public offering will be
granted an option to purchase 20,000 shares on the date such individual joins
the Board, provided such individual has not been in the prior employ of the
Company. In addition, at each Annual Stockholders Meeting, beginning with the
1996 Annual Meeting, each individual who continues to serve and has served as a
non-employee Board member for at least six months prior to such Annual Meeting
will receive an additional option grant to purchase 5,000 shares of Common
Stock, whether or not such individual has been in the prior employ of the
Company. For further information concerning the terms of these automatic
grants, please see the summary of the Automatic Option Grant Program below under
the heading, "Proposal No. 2: Amendment of the 1995 Stock Option/Stock Issuance
Plan."
Non-employee Board members not serving on the Compensation Committee and
directors who are also employees of the Company are eligible to receive options
and be issued shares of Common Stock directly under the 1995 Stock Option/Stock
Issuance Plan and such employee-directors are also eligible to participate in
the Company's Employee Stock Purchase Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES LISTED HEREIN.
4.
<PAGE>
PROPOSAL NO. 2
AMENDMENT OF THE 1995 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1995 Stock Option/Stock Issuance Plan (the "Option Plan") was
adopted by the Board of Directors (the "Board") in April 1995 and approved by
the stockholders in May 1995. The stockholders are being asked to vote on a
proposal to approve an amendment to the Option Plan to increase the number of
shares of Common Stock available for issuance under the Option Plan by 750,000
shares to a total of 3,065,575 shares of Common Stock. The Board adopted the
amendment on April 15, 1996 subject to stockholder approval at the Annual
Meeting. The Company established the Option Plan as a successor to the 1993
Stock Option/Stock Issuance Plan ("Predecessor Plan") to provide a means whereby
employees, officers, directors, consultants, and independent advisers of the
Company or parent or subsidiary corporations may be given an opportunity to
purchase shares of Common Stock. The Board believes the amendment is necessary
in order to provide the Company with a sufficient reserve of Common Stock for
future option grants needed to attract, employ, and retain employees, directors,
and consultants of outstanding ability. This description is also being given to
satisfy the requirements of Rule 16b-3(b)(2) which provides an exception from
the short-swing profit liability rules of the federal securities laws for the
officers participating in the Option Plan.
The principal terms and provisions of the Option Plan as modified by the
recent amendment are summarized below. The summary, however, is not intended to
be a complete description of all the terms of the Option Plan. A copy of the
Option Plan will be furnished by the Company to any stockholder upon written
request to the Corporate Secretary at the executive offices in Sunnyvale,
California.
DESCRIPTION OF THE OPTION PLAN
STRUCTURE. The Option Plan is divided into three separate components:
(i) the Discretionary Option Grant Program under which employees, non-employee
directors and consultants may, at the discretion of the Committee, be granted
options to purchase shares of Common Stock at an exercise price not less than
eighty-five percent (85%) of their fair market value on the grant date, (ii)
the Stock Issuance Program under which such persons may, in the Committee's
discretion, be issued shares of Common Stock directly through the purchase of
such shares at a price not less than eighty-five percent (85%) of their fair
market value at the time of their issuance or as a bonus tied to the performance
of services, and (iii) the Automatic Option Grant Program under which option
grants will automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of Common Stock at an exercise price equal to
their fair market value on the grant date.
ADMINISTRATION. The Compensation Committee of the Board, which is
comprised of two (2) or more Board members ("Committee"), administers the Option
Plan. Committee members serve for such period of time as the Board may
determine. No Board member may serve on the Committee if he or she has received
an option grant or stock award under the Option Plan or under any other stock
plan of the Company or its parent or subsidiary corporations within the twelve
(12) month period preceding his or her appointment to the Committee (or, if
shorter, the period commencing on the date of effectiveness of the Company's
initial public offering and ending with the date of appointment to the
Committee), other than grants under the Automatic Option Grant Program. The
Option Plan may also be administered with respect to optionees who are not
executive officers subject to the short-swing profit rules of federal securities
laws by the Board or a secondary committee comprised of one or more Board
members.
The Committee (or Board or secondary committee to the extent acting as plan
administrator) has full authority (subject to the express provisions of the
Option Plan) to determine the eligible individuals who are to receive grants
under the Option Plan, the number of shares to be covered by each granted
option, the date or dates on which the option is to become exercisable, the
maximum term for which the option is to remain outstanding, whether the granted
option will be an incentive stock option ("Incentive Option") which satisfies
the requirements of section 422 of the Internal Revenue Code (the "Code") or a
non-statutory option not intended to meet such requirements and the remaining
provisions of the option grant.
5.
<PAGE>
ELIGIBILITY. Employees (including officers), consultants and independent
contractors who render services to the Company or its subsidiary corporations
(whether now existing or subsequently established) are eligible to receive
option grants under the Discretionary Option Grant Program. A non-employee
member of the Board of Directors of the Company or any parent or subsidiary
corporation is also eligible for option grants under the Discretionary Option
Grant Program, providing he or she is not a member of the Committee.
As of February 29, 1996, approximately 205 persons (including 10 officers
and two non-employee directors) were eligible to participate in the Option Plan.
SECURITIES SUBJECT TO OPTION PLAN. The maximum number of shares of Common
Stock which may be issued over the term of the Option Plan shall not exceed
3,065,575 shares. Such authorized share reserve is comprised of (i) the number
of shares which remained available for issuance, as of the Plan effective date,
under the Predecessor Plan as last approved by the Company's stockholders prior
to such date, including the shares subject to the outstanding options
incorporated into the Option Plan and any other shares which would have been
available for future option grants under the Predecessor Plan, plus an
additional increase of 1,000,000 shares plus (ii) an additional increase of
750,000 shares, which is the subject of this Proposal No. 2. The number of
shares of Common Stock available for issuance under the Option Plan shall
automatically increase on the first trading day of each calendar year during the
term of the Option Plan, beginning with the 1997 calendar year, by an amount
equal to one percent (1%) of the shares of Common Stock outstanding on December
31 of the immediately preceding calendar year. No Incentive Options may be
granted under the Option Plan on the basis of such annual increases.
No one person participating in the Option Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate over the term of the
Option Plan.
Should an option expire or terminate for any reason prior to exercise in
full, including options incorporated from the Predecessor Plan, the shares
subject to the portion of the option not so exercised will be available for
subsequent option grants under the Option Plan.
DISCRETIONARY OPTION GRANT PROGRAM
PRICE AND EXERCISABILITY. The option exercise price per share in the case
of an Incentive Option may not be less than one hundred percent (100%) of the
fair market value of the Common Stock on the grant date and, in the case of a
non-statutory option, eighty-five percent (85%) of the fair market value of the
Common Stock on the grant date. Options granted under the Discretionary Option
Grant Program become exercisable at such time or times and during such period as
the Committee may determine and set forth in the instrument evidencing the
option grant.
The exercise price may be paid in cash or in shares of Common Stock.
Options may also be exercised through a same-day sale program, pursuant to which
a designated brokerage firm is to effect the immediate sale of the shares
purchased under the option and pay over to the Company, out of the sale proceeds
on the settlement date, sufficient funds to cover the exercise price for the
purchased shares plus all applicable withholding taxes. The Committee may also
assist any optionee (including an officer or director) in the exercise of his or
her outstanding options by (a) authorizing a Company loan to the optionee, or
(b) permitting the optionee to pay the exercise price in installments over a
period of years. The terms and conditions of any such loan or installment
payment will be established by the Committee in its sole discretion.
No optionee is to have any stockholder rights with respect to the option
shares until the optionee has exercised the option, paid the exercise price and
become a holder of record of the shares. Options are not assignable or
transferable other than by will or the laws of descent and distribution, and
during the optionee's lifetime, the option may be exercised only by the
optionee.
TERMINATION OF SERVICE. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the designated
post-service exercise period. Under no circumstances, however, may any
6.
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option be exercised after the specified expiration date of the option term.
Each such option will normally, during such limited period, be exercisable only
to the extent of the number of shares of Common Stock in which the optionee is
vested at the time of cessation of service. The Committee has complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding options may be exercised and/or to
accelerate the exercisability of such options in whole or in part. Such
discretion may be exercised at any time while the options remain outstanding,
whether before or after the optionee's actual cessation of service.
The shares of Common Stock acquired upon the exercise of one or more
options may be subject to repurchase by the Company at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The Committee has complete discretion in establishing the
vesting schedule to be in effect for any such unvested shares and may cancel the
Company's outstanding repurchase rights with respect to those shares at any
time, thereby accelerating the vesting of the shares subject to the canceled
rights.
INCENTIVE OPTIONS. Incentive Options may only be granted to individuals
who are employees of the Company or its parent or subsidiary corporation.
During any calendar year, the aggregate fair market value (determined as of the
grant date(s)) of the Common Stock for which one or more options granted to any
employee under the Option Plan (or any other option plan of the Company or its
parent or subsidiary corporations) may for the first time become exercisable as
incentive stock options under section 422 of the Code shall not exceed one
hundred thousand dollars ($100,000).
LIMITED STOCK APPRECIATION RIGHTS. One or more officers of the Company
subject to the short-swing profit restrictions of the federal securities laws
may, at the discretion of the Committee, be granted limited stock appreciation
rights in connection with their option grants under the Option Plan. Any option
with such a limited stock appreciation right in effect for at least six (6)
months will automatically be canceled, to the extent exercisable for one or more
vested option shares, upon the successful completion of a hostile tender offer
for more than 50% of the Company's outstanding voting stock. In return, the
officer will be entitled to a cash distribution from the Company in an amount
per canceled option share equal to the excess of (i) the highest price per share
of Common Stock paid in the tender offer over (ii) the option exercise price.
TANDEM STOCK APPRECIATION RIGHTS. The Committee is authorized to issue
tandem stock appreciation rights in connection with option grants under the
Discretionary Option Grant Program. Tandem stock appreciation rights provide
the holders with the right to surrender their options for an appreciation
distribution from the Company equal in amount to the excess of (a) the fair
market value of the vested shares of Common Stock subject to the surrendered
option on the option surrender date over (b) the aggregate exercise price
payable for such shares. Such appreciation distribution may, at the discretion
of the Committee, be made in cash or in shares of Common Stock.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, non-employee Board members will
receive option grants at specified intervals over their period of Board service.
These special grants may be summarized as follows:
- Each individual who was a non-employee Board member on the date of the
initial public offering and each individual who becomes a non-employee Board
member after such date, whether through election by the stockholders or
appointment by the Board, will automatically be granted, at the time of the
offering or if later at the time of such initial election or appointment, a
non-statutory stock option to purchase 20,000 shares of Common Stock.
- On the date of each Annual Stockholders Meeting beginning with the
1996 Annual Meeting, each individual who continues to serve as a non-employee
Board member will receive an additional grant of a non-statutory stock option
under the Option Plan to purchase 5,000 shares of Common Stock, provided such
individual has been a member of the Board for at least six months.
7.
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Each option grant under the Automatic Option Grant Program will be subject
to the following terms and conditions:
1. The option price per share will be equal to the fair market value per
share of Common Stock on the automatic grant date and each option is to have a
maximum term of ten years from the grant date. The initial options granted in
connection with the Company's initial public offering had an exercise price of
$13.00, the initial public offering price.
2. Each automatic option grant will be immediately exercisable for all of
the option shares; the shares purchasable under the option shall be subject to
repurchase at the original exercise price in the event the optionee's Board
service should cease prior to full vesting. With respect to each initial grant,
the repurchase right shall lapse and the optionee vest in four (4) equal annual
installments from the grant date. Each annual grant shall vest upon the
optionee's completion of one (1) year of Board service from the option grant
date.
3. The option will remain exercisable for a 12-month period following the
optionee's termination of service as a Board member for any reason and may be
exercised following the Board member's death by the personal representatives of
the optionee's estate or the person to whom the grant is transferred by the
optionee's will or the laws of inheritance. In no event, however, may the
option be exercised after the expiration date of the option term. During the
applicable exercise period, the option may not be exercised for more than the
number of shares (if any) for which it is exercisable at the time of the
optionee's cessation of Board service.
4. The option shares will become fully vested in the event of a Corporate
Transaction (as defined below) or a Change in Control (as defined below). The
option shares will also become fully vested in the event of the optionee's
cessation of Board service by reason of death or permanent disability.
5. Upon the occurrence of a hostile tender offer, the optionee shall have
a thirty (30) day period in which to surrender to the Company each automatic
option which has been in effect for at least six (6) months and the optionee
will in return be entitled to a cash distribution from the Company in an amount
per canceled option share (whether or not the optionee is otherwise vested in
those shares) equal to the excess of (i) the highest reported price per share of
Common Stock paid in the tender offer over (ii) the option exercise price
payable per share.
6. Option grants under the Automatic Option Grant Program will be made in
strict compliance with the express provisions of that program. The remaining
terms and conditions of the option will in general conform to the terms
described below for option grants under the Discretionary Option Grant Program
and will be incorporated into the option agreement evidencing the automatic
grant.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share
not less than eighty-five percent (85%) of fair market value, payable in cash or
through a promissory note payable to the Company. Shares may also be issued
solely as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Committee will, however, have the discretionary
authority at any time to accelerate the vesting of any and all unvested shares
outstanding under the Option Plan.
In the event of a Corporate Transaction (as defined below), all of the
Company's outstanding repurchase rights under the Stock Issuance Program will
terminate automatically (and all the shares subject to such terminated rights
will fully vest), unless such repurchase rights are assigned to the successor
corporation. Any repurchase rights assigned will automatically terminate (and
shares subject to such rights will fully vest) if the optionee's service is
subsequently terminated by reason of an involuntary termination within eighteen
(18) months following the Corporate Transaction.
8.
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GENERAL PROVISIONS
ACCELERATION OF OPTIONS/TERMINATION OF REPURCHASE RIGHTS. Upon the
occurrence of either of the following transactions (a "Corporate Transaction"):
(i) the sale, transfer, or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company, or
(ii) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from the
persons holding those immediately prior to such transaction,
each outstanding option under the Option Plan will, immediately prior to the
effective date of the Corporate Transaction, become fully exercisable for all of
the shares at the time subject to such option. However, an outstanding option
shall not accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent) or to be replaced with a comparable option to purchase
shares of the capital stock of the successor corporation (or parent), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (iii) the
acceleration of such option is subject to other limitations imposed by the
Committee at the time of the option grant. Immediately following the
consummation of the Corporate Transaction, all outstanding options will
terminate and cease to be exercisable, except to the extent assumed by the
successor corporation.
Also upon a Corporate Transaction, the Company's outstanding repurchase
rights applicable to options granted under the Discretionary Option Grant
Program will terminate automatically unless assigned to the successor
corporation.
Any options which are assumed or replaced in the Corporate Transaction and
do not otherwise accelerate at that time shall automatically accelerate (and any
of the Company's outstanding repurchase rights which do not otherwise terminate
at the time of the Corporate Transaction shall automatically terminate and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full) in the event the optionee's service should subsequently terminate by
reason of an involuntary termination within eighteen (18) months following the
effective date of such Corporate Transaction. Any options so accelerated shall
remain exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the involuntary termination.
Upon the occurrence of the following transactions ("Change in Control"):
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) acquires beneficial ownership of more than
fifty percent (50%) of the Company's outstanding voting stock without the
Board's recommendation, or
(ii) there is a change in the composition of the Board over a period
of thirty-six (36) consecutive months or less such that a majority of the Board
members ceases by reason of a proxy contest, to be comprised of individuals who
(a) have been Board members continuously since the beginning of such period or
(b) have been elected or nominated for selection as Board members by a majority
of the Board in (a) who were still in office at the time such election or
nomination was approved by the Board,
the Committee has the discretion to accelerate outstanding options and terminate
the Company's outstanding repurchase rights. The Committee also has the
discretion to terminate the Company's outstanding repurchase rights upon the
subsequent termination of the optionee's service within a specified period
following the Change in Control.
9.
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The acceleration of options in the event of a Corporate Transaction or
Change in Control may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt, or other efforts
to gain control of the Company.
VALUATION. For purposes of establishing the option price and for all other
valuation purposes under the Option Plan, the fair market value of a share of
Common Stock on any relevant date will be the closing price per share of Common
Stock on that date, as such price is reported on the Nasdaq National Market.
The closing price of the Common Stock on February 29, 1996 was $21.75 per share.
CHANGES IN CAPITALIZATION. In the event any change is made to the Common
Stock issuable under the Option Plan by reason of any stock split, stock
dividend, combination of shares, exchange of shares, or other change affecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments will be made to (i) the maximum number
and/or class of securities issuable under the Option Plan, (ii) the maximum
number and/or class of securities for which any one person may be granted
options, separately exercisable stock appreciation rights and direct stock
issuances per calendar year, (iii) the maximum number and/or class of securities
for which the share reserve is to increase automatically each year, (iv) the
number and/or class of securities for which automatic option grants are to be
subsequently made per director under the Automatic Option Grant Program and (v)
the number and/or class of securities and the exercise price per share in effect
under each outstanding option (including any option incorporated from the
Predecessor Plan) in order to prevent the dilution or enlargement of benefits
thereunder.
Each outstanding option which is assumed in connection with a Corporate
Transaction will be appropriately adjusted to apply and pertain to the number
and class of securities which would otherwise have been issued, in consummation
of such Corporate Transaction, to the option holder had the option been
exercised immediately prior to the Corporate Transaction. Appropriate
adjustments will also be made to the option price payable per share and to the
class and number of securities available for future issuance under the Option
Plan on both an aggregate and a per-participant basis.
OPTION PLAN AMENDMENTS. The Board may amend or modify the Option Plan in
any and all respects whatsoever. However, the Board may not, without the
approval of the Company's stockholders, (i) materially increase the maximum
number of shares issuable under the Option Plan (except in connection with
certain changes in capitalization), (ii) materially modify the eligibility
requirements for option grants, or (iii) otherwise materially increase the
benefits accruing to participants under the Option Plan.
Unless sooner terminated by the Board, the Option Plan will in all events
terminate on March 31, 2005. Any options outstanding at the time of such
termination will remain in force in accordance with the provisions of the
instruments evidencing such grants.
As of February 29, 1996 options covering approximately 1,315,000 shares
were outstanding under the Option Plan, 815,000 shares remained available for
future option grant, and 206,000 shares have been issued under the Option Plan.
The expiration dates for all such options range from February 12, 2000 to
January 16, 2006. In addition, in connection with the Merger, the Company
assumed the outstanding options of ISS. Accordingly, under the ISS option plan
as of February 29, 1996, options covering approximately 1,439,000 shares were
outstanding.
NEW PLAN BENEFITS AND OPTION GRANT TABLE
Because the Option Plan is discretionary, benefits to be received by
individual optionees are not determinable. However, each of Messrs. Coxe and
Kagle will receive an option grant to purchase 5,000 shares, and if elected Dr.
Enomoto will receive an option grant to purchase 20,000 shares, under the
Automatic Option Grant Program on the date of the Annual Meeting with an
exercise price per share equal to the closing price per share of Common Stock on
the date of that Annual Meeting. The table below shows, as to each of the Named
Officers named in the Summary Compensation Table and the various indicated
groups, (i) the number of shares of Common Stock for which options have been
granted under the Option Plan (including options granted under the Predecessor
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Plan), for the one (1)-year period ending December 31, 1995 plus the period
through February 29, 1996 and (ii) the weighted average exercise price per
share. No direct stock issuances have been made under the Option Plan to date.
WEIGHTED
AVERAGE EXERCISE
NUMBER OF PRICE OF
NAME AND POSITION OPTION SHARES GRANTED OPTIONS
- ----------------- ------------- ----------------
Gerald C. Hsu. . . . . . . . . . . . . . . . . . 50,000 $.30
President, Chief Executive Officer and
Chairman of the Board of Directors
Y. Eric Cho. . . . . . . . . . . . . . . . . . . -- --
Senior Vice President of Corporate Operations,
Secretary and Director
John P. Huyett . . . . . . . . . . . . . . . . . 67,500 $16.67
Vice President of Financial & Administrative
Services, Chief Financial Officer and Treasurer
Bruce E. Eastman . . . . . . . . . . . . . . . . 50,000 $.30
Vice President of North American Operations
Edward R. Pupa . . . . . . . . . . . . . . . . . 67,500 $16.67
Vice President of Strategic Accounts
All current executive officers as a group. . . . 352,500 $10.08
(10 persons)
All current directors (other than executive . . 40,000 $13.00
officers) as a group (2 persons)
All employees, including current officers who 668,000 $10.72
are not executive officers, as a group
(195 persons)
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE OPTION PLAN
Options granted under the Option Plan may be either incentive stock options
that satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options that are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as follows:
INCENTIVE STOCK OPTIONS. No taxable income is recognized by the optionee
at the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. The optionee will, however, recognize
taxable income in the year in which the purchased shares are sold or otherwise
made the subject of disposition.
For Federal tax purposes, dispositions are divided into two categories:
(i) qualifying and (ii) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two (2)
years after the grant date of the option and more than one (1) year after the
exercise date. If the optionee fails to satisfy either of these two holding
periods prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of those
shares on the date the option was exercised over (ii) the exercise price paid
for the
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shares will be taxable as ordinary income. Any additional gain recognized upon
the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the excess of (i) the fair market
value of such shares on the date the option was exercised over (ii) the exercise
price paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
The Company anticipates that any compensation deemed paid by the Company upon
one or more disqualifying dispositions of incentive stock option shares by the
Company's executive officers will remain deductible by the Company and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to the excess
of the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to satisfy
the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the acquisition of
Common Stock under a non-statutory option if the purchased shares are subject to
repurchase by the Company. These special provisions may be summarized as
follows:
(i) If the shares acquired upon exercise of the non-statutory
option are subject to repurchase by the Company at the original exercise price
in the event of the optionee's termination of service prior to vesting in such
shares, the optionee will not recognize any taxable income at the time of
exercise but will have to report as ordinary income, as and when the Company's
repurchase right lapses, an amount equal to the excess of (a) the fair market
value of the shares on the date such repurchase right lapses with respect to
such shares over (b) the exercise price paid for the shares.
(ii) The optionee may, however, elect under Section 83(b) of the
Internal Revenue Code to include as ordinary income in the year of exercise of
the non-statutory option an amount equal to the excess of (a) the fair market
value of the purchased shares on the exercise date (determined as if the shares
were not subject to the Company's repurchase right) over (b) the exercise price
paid for such shares. If the Section 83(b) election is made, the optionee will
not recognize any additional income as and when the repurchase right lapses.
The Company will be entitled to a business expense deduction equal to
the amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for
the taxable year of the Company in which such ordinary income is recognized by
the optionee. The Company anticipates that the compensation deemed paid by the
Company upon the exercise of non-statutory options with exercise prices equal to
the fair market value of the option shares on the grant date will remain
deductible by the Company and will not have to be taken into account for
purposes of the $1 million limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company.
STOCK APPRECIATION RIGHTS. An optionee who is granted a stock
appreciation right will recognize ordinary income in the year of exercise equal
to the amount of the appreciation distribution. The Company will be entitled to
a business expense deduction equal to the appreciation distribution for the
taxable year of the Company in which the ordinary income is recognized by the
optionee.
STOCK ISSUANCES. The tax principles applicable to direct stock issuances
under the Option Plan will be substantially the same as those summarized above
for the exercise of non-statutory option grants.
ACCOUNTING TREATMENT
Under present accounting principles, neither the grant nor the
exercise of options issued with an exercise price equal to the fair market value
of the option shares on the grant date will result in any charge to the
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Company's earnings. However, the number of outstanding options may be a factor
in determining the Company's reported earnings per share.
Should one or more optionees be granted stock appreciation rights that
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to be
charged periodically against the Company's earnings. Accordingly, at the end of
each fiscal quarter, the amount (if any) by which the fair market value of the
shares of Common Stock subject to such outstanding stock appreciation rights has
increased from prior quarter-end will be accrued as compensation expense to the
extent such fair market value is in excess of the aggregate exercise price in
effect for such rights.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT OF THE 1995
STOCK OPTION/STOCK ISSUANCE PLAN.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 29, 1996 certain information
with respect to shares beneficially owned by (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the Company's
outstanding shares of Common Stock, (ii) each of the Company's directors, and
the executive officers named in the Summary Compensation Table and (iii) all
current directors and executive officers as a group. Beneficial ownership has
been determined in accordance with Rule 13d-3 under the Exchange Act. Under
this rule, certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power to
dispose of the shares). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire shares (for example, upon
exercise of an option or warrant) within sixty (60) days of the date as of which
the information is provided; in computing the percentage ownership of any
person, the amount of shares is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of such
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the person's
actual voting power at any particular date.
SHARES BENEFICIALLY OWNED(1)(2)
-------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENTAGE OF CLASS
- --------------------------------------- ---------------- -------------------
Amerindo Technology Growth Fund Inc. (3) 3,482,200 21.8%
c/o Amerindo Investment Advisors, Inc.
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Technology Venture Investors-4, L.P. (4) 1,449,102 9.1
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
Gerald C. Hsu (5) 550,000 3.3
Y. Eric Cho 465,000 2.9
John P. Huyett (6) 41,530 *
Edward R. Pupa (7) 45,000 *
Bruce E. Eastman (8) 50,750 *
Tench Coxe (9) 50,560 *
Robert C. Kagle (10) 1,477,602 9.3
All directors and executive officers
as a group (12 persons including
those listed above) (11) 3,817,655 22.8
- -----------------------
* Less than 1% of the outstanding shares of Common Stock.
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(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. To the Company's knowledge, the entities named in the table have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty
(60) days after February 29, 1996.
(3) Based on Schedule 13G filed with the Securities and Exchange Commission as
of December 2, 1995 and other information obtained by the Company, held
sole voting power and sole dispositive power as to all of such shares.
(4) Includes 159,968 shares held by entities affiliated with Technology Venture
Investors-4, L.P. ("TVI-4"). Mr. Kagle, a director of the Company, is a
general partner of TVI Management-4, L.P. ("TVI Management"), which is the
general partner of TVI-4. Mr. Kagle disclaims beneficial ownership of the
shares held by TVI-4 and its affiliated entities except to the extent of
his indirect pecuniary interest therein arising from his general
partnership interest in TVI Management.
(5) Includes options exercisable into 520,000 shares of Common Stock under the
Option Plan.
(6) Includes options exercisable into 40,500 shares of Common Stock under the
Option Plan.
(7) Includes options exercisable into 45,000 shares of Common Stock under the
Option Plan.
(8) Includes options exercisable into 50,000 shares of Common Stock under the
Option Plan.
(9) Includes options exercisable into 20,000 shares of Common Stock under the
Option Plan.
(10) Includes 1,449,102 shares held by TVI-4, as to which Mr. Kagle disclaims
beneficial ownership except as set forth above. See Note (4). Also
includes options exercisable into 20,000 shares of Common Stock under the
Option Plan.
(11) Includes options exercisable into 774,250 shares of Common Stock under the
Option Plan.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
None of the Company's executive officers have employment or severance
agreements with the Company, and their employment may be terminated at any time
at the discretion of the Board of Directors.
The Compensation Committee has the authority under the 1995 Stock
Option/Stock Issuance Plan to provide for the acceleration of vesting of the
shares of Common Stock subject to the outstanding options held by the Chief
Executive Officer and the Company's other executive officers under that Plan, in
the event their employment were to be terminated (whether involuntarily or
through a forced resignation) following a hostile take-over of the Company
effected through a successful tender offer for more than 50% of the Company's
outstanding Common Stock or through a change in the majority of the Board as a
result of one or more contested elections for Board membership.
CERTAIN TRANSACTIONS
On June 7, 1995, Mr. Kagle, a member of the Company's Board of Directors,
purchased 8,500 shares of Common Stock in the Company's initial public offering
of Common Stock at the initial public offering price of $13.00 per share.
On November 27, 1995, the Company acquired in a merger all the capital
stock of Integrated Silicon Systems, Inc. ("ISS"), a North Carolina corporation,
in exchange for approximately 6,371,678 shares of the
14.
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Common Stock of the Company. The purchase price and the other terms of the
acquisition of ISS were negotiated at arms length by the management of the
Company and the shareholders of ISS. As a result of this merger, the Company
changed its name to Avant! Corporation from ArcSys, Inc.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Company's Board of Directors (the
"Committee") has the exclusive authority to establish the level of base salary
payable to the Chief Executive Officer ("CEO") and to administer the Company's
1995 Stock Option/Stock Issuance Plan and Employee Stock Purchase Plan. In
addition, the Committee has the responsibility for approving the individual
bonus program to be in effect for the CEO. The CEO has the exclusive authority
to establish the level of base salary payable to all other employees of the
Company, including all executive officers, subject to the approval of the
Committee. In addition, the CEO has the responsibility for approving the bonus
programs to be in effect for all other executive officers and other key
employees each fiscal year, subject to the approval of the Committee.
For 1995, the process utilized by the CEO in determining executive officer
compensation levels took into account both qualitative and quantitative factors.
Among the factors considered by the CEO were informal surveys conducted by
Copmany personnel among local companies. However, the CEO made the final
compensation decisions concerning such officers.
GENERAL COMPENSATION POLICY. The CEO's fundamental policy is to offer the
Company's executive officers competitive compensation opportunities based upon
overall Company performance, their individual contribution to the financial
success of the Company and their personal performance. It is the CEO's
objective to have a substantial portion of each officer's compensation
contingent upon the Company's performance, as well as upon his or her own level
of performance. Accordingly, each executive officer's compensation package
consists of: (i) base salary, (ii) cash bonus awards and (iii) long-term
stock-based incentive awards.
In preparing the performance graph for this Proxy Statement, the Company
has selected the Nasdaq Stock Market U.S. Total Return Index and the Nasdaq
Computer & Data Processing Stocks Total Return Index for the Nasdaq Stock
Market. The companies included in the Company's informal survey are not
necessarily those included in the Indices, because they were determined not to
be competitive with the Company for executive talent or because compensation
information was not available to the Company.
BASE SALARY. The base salary for each executive officer is set on the
basis of personal performance and the salary level in effect for comparable
positions at companies that compete for executive talent on the basis of
informal surveys conducted by the Company.
ANNUAL CASH BONUSES. Each executive officer has an established bonus
target each fiscal year. The annual pool of bonuses for executive officers is
determined on the basis of the Company's achievement of the financial
performance targets established at the start of the fiscal year, a range for the
executive's contribution and a measure of customer satisfaction. For 1995, the
Company exceeded its performance targets. Actual bonuses paid reflect an
individual's accomplishment of both corporate and functional objectives, with
greater weight being given to achievement of corporate rather than functional
objectives.
LONG-TERM INCENTIVE COMPENSATION. During 1995, the Committee, in its
discretion, made option grants to Gerald C. Hsu, and the CEO made option grants,
with the approval of the Committee, to Bruce Eastman under the 1995 Stock
Option/Stock Issuance Plan. Generally, a significant grant is made in the year
that an officer commences employment and no grant is made in the second year.
Generally, the size of each grant is set at a level that the CEO deems
appropriate, subject to the approval of the Committee, to create a meaningful
opportunity for stock ownership based upon the individual's position with the
Company, the individual's potential for future responsibility and promotion, the
individual's performance in the recent period and the number of unvested options
held by the individual at the time of the new grant. The relative weight given
to each of these factors will vary from individual to individual at the CEO's
discretion.
15.
<PAGE>
Each grant allows the officer to acquire shares of the Company's Common
Stock at a fixed price per share (the market price on the grant date) over a
specified period of time. The option vests in periodic installments over a four
year period, contingent upon the executive officer's continued employment with
the Company and the vesting schedule is adjusted to reflect existing grants to
ensure a meaningful incentive in each year following the year of grant.
Accordingly, the option will provide a return to the executive officer only if
he remains in the Company's employ, and then only if the market price of the
Company's Common Stock appreciates over the option term.
CEO COMPENSATION. The annual base salary for Mr. Hsu, the Company's
President and CEO, was established by the Committee in January 1996. The
Committee's decision was made primarily on the basis of Mr. Hsu's personal
performance of his duties.
The remaining components of the CEO's 1995 incentive compensation were
entirely dependent upon the Company's financial performance and provided no
dollar guarantees. The bonus paid to the CEO for 1995 was based on the same
incentive plan for all other officers. Specifically, a target incentive was
established at the beginning of the year using an agreed-upon formula based on
Company revenue and profit before interest. Each year, the annual incentive
plan is reevaluated with a new achievement threshold and new targets for revenue
and profit before interest. The option grant made to the CEO during 1995 was
intended: (i) to reflect his prior service with the Company, (ii) to provide him
a comparable ownership percentage in the Company compared to the other founding
executives of the Company, (iii) to compensate him for leaving his prior
publicly-held employer and joining the Company when it was still a privately-
held company, and (iv) to place a significant portion of his total compensation
at risk, because the options will have no value unless there is appreciation in
the value of the Company's Common Stock over the option term.
TAX LIMITATION. As a result of federal tax legislation enacted in 1993, a
publicly-held company such as the Company will not be allowed a federal income
tax deduction for compensation paid to certain executive officers to the extent
that compensation exceeds $1 million per officer in any year. This limitation
will be in effect for all fiscal years of the Company beginning after the
Company's initial public offering. The stockholders approved the Company's 1995
Stock Option/Stock Issuance Plan, which includes a provision that limits the
maximum number of shares of Common Stock for which any one participant may be
granted stock options per calendar year. Accordingly, any compensation deemed
paid to an executive officer when he exercises an outstanding option under the
1995 Stock Option/Stock Issuance Plan with an exercise price equal to the fair
market value of the option shares on the grant date will qualify as
performance-based compensation that will not be subject to the $1 million
limitation. Since it is not expected that the cash compensation to be paid to
the Company's executive officers for the 1996 fiscal year will exceed the $1
million limit per officer, the Committee will defer any decision on whether to
limit the dollar amount of all other compensation payable to the Company's
executive officers to the $1 million cap.
Compensation Committee
Tench Coxe
Robert C. Kagle
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed
in April 1995, and the members of the Compensation Committee are Messrs. Coxe
and Kagle. Neither of these individuals was at any time during 1995, or at any
other time, an officer or employee of the Company. No executive officer of the
Company serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
16.
<PAGE>
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Company's Common Stock between June 7, 1995 (the date the Company's
Common Stock commenced public trading) and December 31, 1995 with the cumulative
total return of (i) the Nasdaq Stock Market Total Return Index (U.S. Companies)
(the "Nasdaq Stock Market-U.S. Index") and (ii) the Nasdaq Computer & Data
Processing Stocks Total Return Index for the Nasdaq Stock Market ("Nasdaq CDP
Index"), over the same period. This graph assumes the investment of $100.00 on
June 7, 1995 in the Company's Common Stock, the Nasdaq Stock Market-U.S. Index
and the Nasdaq CDP Index, and assumes the reinvestment of dividends, if any.
The comparisons shown in the graph below are based upon historical data and
the Company cautions that the stock price performance shown in the graph below
is not indicative of, nor intended to forecast, the potential future performance
of the Company's Common Stock. Information used in the graph was obtained from
the Nasdaq Stock Market, a source believed to be reliable, but the Company is
not responsible for any errors or omissions in such information.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG AVANT! CORPORATION,
THE NASDAQ STOCK MARKET-U.S. INDEX AND THE NASDAQ CDP INDEX
[GRAPH]
The Company effected its initial public offering on June 6, 1995 at a per
share price of $13.00. The closing price of Common Stock on June 7, 1995, its
first day of public trading, was $26.50 per share. The graph above commences
with the first trading day closing price of $26.50 per share.
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this Proxy
Statement or future filings made by the Company under those statutes, the
Compensation Committee Report and Stock Performance Graph are not deemed filed
with the Securities and Exchange Commission and shall not be deemed incorporated
by reference into any of those prior filings or into any future filings made by
the Company under those statutes.
17.
<PAGE>
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated executive officers who were serving as such at the end of 1995
(collectively, the "Named Officers"), each of whose aggregate compensation for
1995 exceeded $100,000 for services rendered in all capacities to the Company
and its subsidiaries for that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (1) OPTIONS (2) COMPENSATION(3)
- --------------------------- ---- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Gerald C. Hsu. . . . . . . . . . . . . . . 1995 150,000 250,000 50,000 --
President, Chief Executive Officer and . 1994 118,750 100,000 500,000 --
Chairman of the Board of Directors
Y. Eric Cho (4). . . . . . . . . . . . . . 1995 90,000 206,536 -- --
Senior Vice President of Corporate . . . 1994 96,000 121,960 -- --
Operations, Secretary and Director
John P. Huyett . . . . . . . . . . . . . . 1995 150,000 95,000 67,500 16,500 (5)
Vice President of Financial & . . . . . 1994 125,000 100,000 45,000 3,000
Administrative Services, Chief Financial
Officer and Treasurer
Bruce E. Eastman (4) . . . . . . . . . . . 1995 95,035 210,100 50,000 --
Vice President of North American. . . . . 1994 -- -- -- --
Operations
Edward R. Pupa (4) . . . . . . . . . . . . 1995 125,000 135,000 67,500 3,000
Vice President of Strategic Accounts . . 1994 100,000 75,000 37,500 3,000
</TABLE>
- ----------
(1) Amounts in this column include amounts earned in the stated year but not
paid or to be paid in the subsequent year. Also, includes amounts deferred
under the 401(k) plan.
(2) The Company did not grant any stock appreciation rights or make any
long-term incentive payments during the year covered by the table.
(3) Includes matching contributions by the Company to the 401(k) Plan on behalf
of certain Named Officers.
(4) Bonus amounts include commissions earned in the current year.
(5) Includes reimbursed moving expenses of $13,500.
18.
<PAGE>
The following table contains information concerning the stock option grants
made to each of the Named Officers in 1995. No stock appreciation rights were
granted to these individuals during such year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES PRICE EXPIRATION FOR OPTION TERM(3)
NAME GRANTED IN 1995 ($/SH)(2) DATE 0% 5%($) 10%($)
---- ------- ------- --------- ---- -- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald C. Hsu (1) 50,000 4.2% $.30 3/10/05 $91,500 $570,113 $907,810
Y. Eric Cho -- -- -- -- -- -- --
John P. Huyett 67,500 5.7 16.67 2/1/05 -- 1,832,873 2,918,544
Bruce E. Eastman (1) 50,000 4.2 .30 3/10/05 -- 570,113 907,810
Edward R. Pupa 67,500 5.7 16.67 2/1/05 -- 1,832,873 2,918,544
</TABLE>
- ----------
(1) The option is immediately exercisable, subject to deferral to satisfy tax
limitations on exercisability, but any shares purchased under the option
are subject to repurchase by the Company at the original exercise price
paid per share upon optionee's cessation of service prior to vesting. The
repurchase right lapses and the optionee vests as to 25% of the option
shares one year from the grant date and the balance ratably upon optionee's
completion of the next thirty-six (36) months of service thereafter.
(2) The exercise price for the option may be paid in cash, in shares of Common
Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability incurred
by the optionee in connection with such exercise. The plan administrator
has the discretionary authority to reprice the options through the
cancellation of those options and the grant of replacement options with an
exercise price based on the fair market value of the option shares on the
regrant date. The options have a maximum term of 10 years measured from
the option grant date, subject to earlier termination in the event of the
optionee's cessation of service with the Company. Under each of the
options, the option shares will vest upon an acquisition of the Company by
merger or asset sale, unless the Company's repurchase right with respect to
the unvested option shares is transferred to the acquiring entity.
(3) The potential realizable value of the options reported above was calculated
by assuming that the market price of the Common Stock of the Company
appreciates 5% and 10% from the date of grant of the options until the
expiration of the options. These assumed annual rates of appreciation were
used in compliance with the rules of the Securities and Exchange Commission
and are not intended to forecast future price appreciation of the Common
Stock of the Company. The Company chose not to report the present value of
the options, because the Company does not believe any formula will
determine with reasonable accuracy a present value of the options, because
of unknown or volatile factors. The actual value realized from the options
could be substantially higher or lower than the values reported above,
depending upon the future appreciation or depreciation of the Common Stock
during the option period and the timing of exercise of the options. Unless
the market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers.
19.
<PAGE>
The following table sets forth information concerning option exercises in
1995 and option holdings as of the end of 1995 with respect to each of the Named
Officers. No stock appreciation rights were outstanding at the end of that
year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
VALUE REALIZED SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES (MARKET PRICE AT UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON EXERCISE LESS AT FY-END (#) AT FY-END($)(1)(3)
NAME EXERCISE EXERCISE PRICE) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald C. Hsu (2) 30,000 $381,000 520,000 -- $9,854,000 --
Y. Eric Cho -- -- -- -- -- --
John P. Huyett 26,250 339,580 3,000 97,500 29,760 $471,750
Bruce E. Eastman (2) -- -- -- -- -- --
Edward R. Pupa 12,500 114,579 10,000 92,500 190,100 422,150
</TABLE>
(1) Upon exercise of the options, an option holder did not receive the amount
reported above under the column "Value Realized." The amounts reported
above under the column "Value Realized" merely reflect the amount by which
the fair market value of the Common Stock of the Company on the date the
option was exercised exceeded the exercise price of the option. The option
holder does not realize any cash until the shares of Common Stock issued
upon exercise of the options are sold.
(2) The options are immediately exercisable for all the option shares but any
shares purchased thereunder will be subject to repurchase by the Company at
the original exercise price paid per share upon the optionee's cessation of
service to the Company prior to vesting in such shares. As of December 31,
1996, the repurchase right had lapsed as to approximately 225,000 option
shares for Mr. Hsu.
(3) Based on the closing price of the Common Stock of the Company at December
31, 1995, as reported on the Nasdaq National Market, of $19.25 per share,
less the exercise price payable for such shares.
BONUS PLAN. In 1995, the Company instituted a bonus program pursuant to
which bonuses will be paid to executive officers based on individual and Company
performance targets. In addition, all non-executive employees will receive year-
end bonuses if the Company meets its performance targets.
20.
<PAGE>
DESCRIPTION OF THE EMPLOYEE STOCK PURCHASE PLAN
The following is a description of the Company's Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan was adopted by the Board of
Directors ("Board") in April 1995 and approved by the stockholders in May 1995.
The Purchase Plan, and the right of participants to make purchases thereunder,
is intended to meet the requirements of an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code (the "Code"). This
description is being given to satisfy the requirements of Rule 16b-3(b)(2) under
the federal securities laws in order to ensure the favorable treatment of Rule
16b-3 for the officers participating in the Purchase Plan. Rule 16b-3 exempts
acquisitions of Common Stock under the Purchase Plan from liability under the
federal securities law rules which prohibit short-swing trading by executive
officers.
The following summary of certain Purchase Plan provisions is qualified, in
its entirety, by reference to the Purchase Plan. Copies of the Purchase Plan
document may be obtained by a stockholder upon written request to the Corporate
Secretary at the executive offices in Sunnyvale, California.
PURPOSE. The purpose of the Purchase Plan is to provide employees of the
Company and designated parent or subsidiary corporations (collectively,
"Participating Companies") an opportunity to participate in the ownership of the
Company by purchasing Common Stock of the Company through payroll deductions.
The Company is the only Participating Company in the Purchase Plan.
The Purchase Plan is intended to benefit the Company as well as its
stockholders and employees. The Purchase Plan gives employees an opportunity to
purchase shares of Common Stock at a favorable price. The Company believes that
the stockholders will correspondingly benefit from the increased interest on the
part of participating employees in the profitability of the Company. Finally,
the Company will benefit from the periodic investments of equity capital
provided by participants in the Purchase Plan.
ADMINISTRATION. The Purchase Plan is administered by the Compensation
Committee of the Board (the "Committee"). All costs and expenses incurred in
plan administration will be paid by the Company without charge to participants.
All cash proceeds received by the Company from payroll deductions under the
Purchase Plan shall be credited to a non-interest bearing book account.
SHARES AND TERMS. The stock issuable under the Purchase Plan is the
Company's authorized but unissued or reacquired Common Stock. The maximum number
of shares of Common Stock that may be issued in the aggregate under the Purchase
Plan is 250,000, adjusted as described in the "Adjustment" section of this
description. Common Stock subject to a terminated purchase right shall be
available for purchase pursuant to purchase rights subsequently granted.
ADJUSTMENTS. If any change in the Common Stock occurs (through
recapitalization, stock dividend, stock split, combination of shares, exchange
of shares, or other change affecting the outstanding Common Stock as a class
without the Company's receipt of consideration), appropriate adjustments shall
be made by the Company to the class and maximum number of shares subject to the
Purchase Plan, to the class and maximum number of shares purchasable by each
participant on any one purchase date, and to the class and number of shares and
purchase price per share subject to outstanding purchase rights in order to
prevent the dilution or enlargement of benefits thereunder.
ELIGIBILITY. Generally, any individual who is customarily employed by a
Participating Company more than twenty (20) hours per week and for more than
five months per calendar year is eligible to participate in the Purchase Plan.
Approximately 205 employees (including 10 officers) were eligible to participate
in the Purchase Plan as of February 29, 1996.
OFFERING PERIODS. The Purchase Plan is implemented by offering periods
which generally have a duration of twenty-four months; each offering period is
comprised of a series of one or more successive purchase periods, which will
have a duration of six (6) months. The first offering period began on the date
of execution of the underwriting agreement in connection with the Company's
initial public offering and will end on May 30, 1997; the
21.
<PAGE>
next offering period will commence on June 2, 1997 and will end on the last
business day in May 1999, unless terminated earlier. The initial purchase
period under the initial offering period ended on November 30, 1995 and the
subsequent purchase periods will end on May 31, 1996, November 29, 1996, and May
30, 1997. The Committee in its discretion may vary the beginning date and
ending date of the offering periods prior to their commencement, provided no
offering period shall exceed twenty-four (24) months in length.
The participant will have a separate purchase right for each offering
period in which he or she participates. The purchase right will be granted on
the first day of the offering period and will be automatically exercised in
successive installments on the last day of each purchase period within the
offering period.
PURCHASE PRICE. The purchase price per share under the Purchase Plan is
85% of the lower of (i) the fair market value of a share of Common Stock on the
first day of the applicable offering period or, if later, the participant's
entry date into the offering period, or (ii) the fair market value of a share of
Common Stock on the purchase date. However, if the participant's entry date is
not the first day of the applicable offering period, the clause (i) amount will
not be less than the fair market value of a share of Common Stock on the start
date of such offering period. Generally, the fair market value of the Common
Stock on a given date is the closing price of the Common Stock, as reported on
the Nasdaq National Market. The market value of the Common Stock as reported on
the Nasdaq National Market as of February 29, 1996, was $21.75 per share.
LIMITATIONS. The plan imposes certain limitations upon a participant's
rights to acquire Common Stock, including the following:
1. No purchase right shall be granted to any person who immediately
thereafter would own, directly or indirectly, stock or hold outstanding options
or rights to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any of
its parent or subsidiary corporations.
2. In no event shall a participant be permitted to purchase more than 750
shares on any one purchase date.
3. The right to purchase Common Stock under the Purchase Plan (or any
other employee stock purchase plan that the Company or any of its subsidiaries
may establish) in an offering intended to qualify under Section 423 of the Code
may not accrue at a rate that exceeds $25,000 in fair market value of such
Common Stock (determined at the time such purchase right is granted) for any
calendar year in which such purchase right is outstanding.
The purchase right shall be exercisable only by the Participant during the
Participant's lifetime and shall not be assignable or transferable by the
Participant.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS. Payment for shares by
participants shall be by accumulation of after-tax payroll deductions during the
purchase period. The deductions may not exceed 15% of a participant's base
salary paid during a purchase period. Base salary for this purpose means the
regular base salary paid to a participant and includes elective contributions
that are not includable in income under Code Sections 125 or 401(k) but excludes
all bonuses, overtime, commissions, and other contributions made on the
participant's behalf by the Company under an employee benefit or welfare plan
(other than 125 or 401(k) contributions).
The participant will receive a purchase right for each offering period in
which he or she participates to purchase up to the number of shares of Common
Stock determined by dividing such participant's payroll deductions accumulated
prior to the purchase date by the applicable purchase price (subject to the
"Limitations" section). No fractional shares shall be purchased. Any payroll
deductions accumulated in a participant's account that are not sufficient to
purchase a full share will be retained in the participant's account for the
subsequent purchase period. No interest shall accrue on the payroll deductions
of a participant in the Purchase Plan.
22.
<PAGE>
TERMINATION AND CHANGE TO PAYROLL DEDUCTIONS. A purchase right shall
terminate at the end of the offering period or earlier if (i) the participant
terminates employment and then any payroll deductions which the participant may
have made with respect to a terminated purchase right will be refunded or (ii)
the participant elects to withdraw from the Purchase Plan. Any payroll
deductions which the participant may have made with respect to a terminated
purchase right under clause (ii) will be refunded unless the participant elects
to have the funds applied to the purchase of shares on the next purchase date.
Unless a participant has irrevocably elected otherwise, he or she may decrease
his or her deductions once during a purchase period.
AMENDMENT AND TERMINATION. The Purchase Plan shall continue in effect
until the earlier of (i) the last business day in May 2005, (ii) the date on
which all shares available for issuance under the Purchase Plan shall have been
issued or (iii) a Corporate Transaction, unless the Purchase Plan is earlier
terminated by the Board in its discretion.
The Board may at any time alter, amend, suspend or discontinue the Purchase
Plan, provided that, without the approval of the stockholders, no such action
may (i) alter the purchase price formula so as to reduce the purchase price
payable for shares under the Purchase Plan, (ii) materially increase the number
of shares issuable under the Purchase Plan or the maximum number of shares
purchasable per participant, or (iii) materially increase the benefits accruing
to participants under the Purchase Plan or materially modify the eligibility
requirements.
In addition, the Company has specifically reserved the right, exercisable
in the sole discretion of the Board, to terminate the Purchase Plan immediately
following any six-month purchase period. If such right is exercised by the
Board, then the Purchase Plan will terminate in its entirety and no further
purchase rights will be granted or exercised, and no further payroll deductions
shall thereafter be collected under the Purchase Plan.
CORPORATE TRANSACTION. In the event of (i) a merger or consolidation in
which securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from the persons holding those securities immediately prior
to such transaction or (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company (a "Corporate Transaction"), each purchase right
under the Purchase Plan will automatically be exercised immediately before
consummation of the Corporate Transaction as if such date were the last purchase
date of the offering period. The purchase price per share shall be equal to
eighty-five percent (85%) of the lower of (i) the fair market value per share of
Common Stock on the start date of the offering period (or on the participant's
entry date, if later) or (2) the fair market value per share of Common Stock
immediately prior to the effective date of such Corporate Transaction. However,
if the participant's entry date is not the first day of the applicable offering
period, the clause (i) amount will not be less than the fair market value of a
share of Common Stock on the start date of such offering period. Any payroll
deductions not applied to such purchase shall be promptly refunded to the
participant.
The grant of purchase rights under the Purchase Plan will in no way affect
the right of the Company to adjust, reclassify, reorganize, or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
PRORATION OF PURCHASE RIGHTS. If the total number of shares of Common
Stock for which purchase rights are to be granted on any date exceeds the number
of shares then remaining available under the Purchase Plan, the Committee shall
make a pro rata allocation of the shares remaining.
FEDERAL INCOME TAX CONSEQUENCES. The following is a general description of
certain federal income tax consequences of the Purchase Plan. This description
does not purport to be complete.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under a plan which so qualifies, no taxable
income will be reportable by a participant, and no deductions will be allowable
to the Company, by reason of the grant or exercise of the purchase rights issued
thereunder. A participant will, however, recognize taxable income in the year
in which the purchased shares are sold or otherwise made the subject of
disposition.
23.
<PAGE>
A sale or other disposition of the purchased shares will be a disqualifying
disposition if made before the later of two years after the start of the
offering period in which such shares were acquired or one year after the shares
are purchased. If the participant makes a disqualifying disposition of the
purchased shares, then the Company will be entitled to an income tax deduction,
for the taxable year in which such disposition occurs, equal to the amount by
which the fair market value of such shares on the date of purchase exceeded the
purchase price, and the participant will be required to satisfy the employment
and income tax withholding requirements applicable to such income. In no other
instance will the Company be allowed a deduction with respect to the
participant's disposition of the purchased shares.
Any additional gain or loss recognized upon the disposition of the shares
will be a capital gain, which will be long-term if the shares have been held for
more than one (1) year following the date of purchase under the Purchase Plan.
The foregoing is only a summary of the federal income taxation consequences
to the participant and the Company with respect to the shares purchased under
the Purchase Plan. In addition, the summary does not discuss the tax
consequences of a participant's death or the income tax laws of any city, state
or foreign country in which the participant may reside.
NEW PURCHASE PLAN BENEFITS. Since purchase rights are subject to
discretion, including an employee's decision not to participate in the Purchase
Plan, awards under the Purchase Plan for the current fiscal year are not
determinable. However, in the purchase period that ended on November 30, 1995,
Mr. Eastman purchased 750 shares of Common Stock at a purchase price of $11.05
per share, and Mr. Huyett purchased 653 shares of Common Stock at an average
purchase price of $15.31 per share; and all executive officers as a group
purchased 1,403 shares. In addition, Mr. Eastman has the right to purchase an
annual maximum of $25,000 worth of Common Stock at a price that will not exceed
approximately $11.05 per share, and Mr. Huyett has the right to purchase an
annual maximum of $25,000 worth of Common Stock at a price that will not exceed
approximately $34.00 per share, on each of the May 31, 1996, November 29, 1996
and May 30, 1997 purchase dates.
24.
<PAGE>
PROPOSAL NO. 3
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
On April 15, 1996, the Board authorized an amendment of the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock, par value $.0001 per share ("Common Stock"), from 25,000,000 to
50,000,000. The stockholders are being asked to approve this proposed
amendment. As of February 29, 1996, 15,947,828 shares of Common Stock were
issued and outstanding and 4,022,983 shares were reserved for issuance under the
Company's Option Plan and Purchase Plan, and the ISS Option Plan.
The Board believes that the proposed increase is desirable so that, as the
need may arise, the Company will have more flexibility to issue shares of Common
Stock without the expense and delay of a special stockholders' meeting, in
connection with possible future stock dividends or stock splits, equity
financings, future opportunities for expanding the business through investments
or acquisitions, management incentive and employee benefit plans and for other
general corporate purposes.
Authorized but unissued shares of the Company's Common Stock may be issued
at such times, for such purposes and for such consideration as the Board of
Directors may determine to be appropriate without further authority from the
Company's stockholders, except as otherwise required by applicable law or stock
exchange policies.
The increase in authorized Common Stock will not have any immediate effect
on the rights of existing stockholders. However, the Board will have the
authority to issue authorized Common Stock without requiring future stockholder
approval of such issuances, except as may be required by applicable law or
exchange regulations. To the extent that the additional authorized shares are
issued in the future, they will decrease the existing stockholders' percentage
equity ownership and, depending upon the price at which they are issued, could
be dilutive to the existing stockholders. The holders of Common Stock have no
preemptive rights.
The increase in the authorized number of shares of Common Stock and the
subsequent issuance of such shares could have the effect of delaying or
preventing a change in control of the Company without further action by the
stockholders. Shares of authorized and unissued Common Stock could (within the
limits imposed by applicable law) be issued in one or more transactions which
would make a change in control of the Company more difficult, and therefore less
likely. Any such issuance of additional stock could have the effect of diluting
the earnings per share and book value per share of outstanding shares of Common
Stock, and such additional shares could be used to dilute the stock ownership or
voting rights of a person seeking to obtain control of the Company. The Company
has previously adopted certain measures that may have the effect of helping to
resist an unsolicited takeover attempt.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION. ---
PROPOSAL NO. 4
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The Company is asking the stockholders to ratify the appointment of KPMG
Peat Marwick LLP as the Company's independent public accountants for the year
ending December 31, 1996. The affirmative vote of the holders of a majority of
shares present or represented by proxy and voting at the Annual Meeting will be
required to ratify the appointment of KPMG Peat Marwick LLP.
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In the event the stockholders fail to ratify the appointment, the Board of
Directors will reconsider its selection. Even if the appointment is ratified,
the Board of Directors, in its discretion, may direct the appointment of a
different independent accounting firm at any time during the year if the Board
of Directors feels that such a change would be in the Company's and its
stockholders' best interests.
In November 1995, the Company appointed KPMG Peat Marwick LLP to replace
Coopers & Lybrand L.L.P. as its principal accountants. There were no
disagreements with the former accountants during any prior period preceding
their replacement on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the former accountants' satisfaction, would have caused them to
make reference to the subject matter of the disagreement in connection with
their reports. Coopers & Lybrand L.L.P. issued an unqualified opinion on the
1993 and 1994 financial statements. The Company did not consult with KPMG Peat
Marwick LLP on any accounting or financial reporting matters in the two years
prior to their appointment. KPMG Peat Marwick LLP has audited the Company's
financial statements for the year ended December 31, 1995. The change in
accountants was approved by the Audit Committee of the Board of Directors.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Annual Meeting, will have the opportunity to make a statement if they desire to
do so, and will be available to respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF KPMG PEAT MARWICK LLP TO SERVE AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1996.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file reports
with respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports that the Company received from such persons for their 1995 transactions
in the Common Stock and their Common Stock holdings and (ii) the written
representations received from one or more of such persons that no annual Form 5
reports were required to be filed by them for the 1995 fiscal year, the Company
believes that all reporting requirements under Section 16(a) for such year were
met in a timely manner by its executive officers, Board members and greater than
10% stockholders.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE
COMPANY'S FORM 10-K REPORT FOR 1995, INCLUDING THE FINANCIAL STATEMENTS,
SCHEDULES AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO AVANT! CORPORATION,
1208 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086, ATTN: TONY TROUSETT,
INVESTOR RELATIONS.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Stockholder proposals that are intended to be presented at the 1997 Annual
Meeting that are eligible for inclusion in the Company's proxy statement and
related proxy materials for that meeting under the applicable rules of the
Securities and Exchange Commission must be received by the Company not later
than January 16, 1997 in
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order to be included. Such stockholder proposals should be addressed to Avant!
Corporation, 1208 East Arques Avenue, Sunnyvale, California 94086, Attn: Tony
Trousett, Investor Relations.
OTHER MATTERS
The Board knows of no other matters to be presented for stockholder action
at the Annual Meeting. However, if other matters do properly come before the
Annual Meeting or any adjournments or postponements thereof, the Board intends
that the persons named in the proxies will vote upon such matters in accordance
with their best judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/Y. Eric Cho
Y. Eric Cho
SECRETARY
Sunnyvale, California
April 29, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE ANNUAL MEETING.
IF YOU DECIDE TO ATTEND THE ANNUAL MEETING AND WISH TO CHANGE YOUR PROXY VOTE,
YOU MAY DO SO AUTOMATICALLY BY VOTING IN PERSON AT THE MEETING.
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. YOUR PROMPT RESPONSE WILL GREATLY
FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING.
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