-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MlyLE4mwYC7X3P27IDKt+4wZoudIYItX5E9e3l0wwYjtJ0LHKywnrQSeq0XJYEQT lA5la14fuPYkEPZ4TjYxQg== 0000912057-96-030651.txt : 19970102 0000912057-96-030651.hdr.sgml : 19970102 ACCESSION NUMBER: 0000912057-96-030651 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961218 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19961231 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADENCE DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000813672 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770148231 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10606 FILM NUMBER: 96689185 BUSINESS ADDRESS: STREET 1: 555 RIVER OAKS PKWY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089431234 MAIL ADDRESS: STREET 1: 555 RIVER OAKS PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 FORMER COMPANY: FORMER CONFORMED NAME: ECAD INC /DE/ DATE OF NAME CHANGE: 19880609 8-K 1 FORM 8-K 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): December 18, 1996 CADENCE DESIGN SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 1-10606 77-0148231 (Commission File No.) (IRS Employer Identification No.) 2655 SEELY ROAD BUILDING 5 SAN JOSE, CALIFORNIA 95134 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (408) 943-1234 -------------------------------------------- ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. THE PRO FORMA FINANCIAL INFORMATION INCORPORATED BY REFERENCE INTO THIS CURRENT REPORT ON FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS RELATED TO CADENCE DESIGN SYSTEMS, INC., A DELAWARE CORPORATION (THE "REGISTRANT"), AND THE REGISTRANT'S ACQUISITION OF HIGH LEVEL DESIGN SYSTEMS, INC., A DELAWARE CORPORATION ("HLDS"), THAT MAY INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THESE UNCERTAINTIES INCLUDE RISKS RELATING TO THE INTEGRATION OF THE REGISTRANT AND HLDS. ACTUAL RESULTS AND DEVELOPMENTS THEREFORE MAY DIFFER MATERIALLY FROM THOSE DESCRIBED OR INCORPORATED BY REFERENCE IN THIS REPORT. FOR MORE INFORMATION ABOUT THE REGISTRANT AND RISKS ARISING WHEN INVESTING IN THE REGISTRANT, YOU ARE DIRECTED TO THE REGISTRANT'S MOST RECENT REPORTS ON FORM 10-K AND FORM 10-Q AND RECENT REGISTRATION STATEMENT ON FORM S-4 RELATED TO THE TRANSACTION DESCRIBED BELOW, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. On December 18, 1996, Harbor Acquisition Sub, Inc., a Delaware corporation ("Harbor Sub"), was merged with and into HLDS, pursuant to an Agreement and Plan of Merger and Reorganization dated as of October 3, 1996 (the "Agreement"), among the Registrant, Harbor Sub and HLDS. The terms of the Agreement were determined through arms' length negotiations between the Registrant and HLDS. The merger of Harbor Sub with and into HLDS (the "Merger") became effective at the time of the filing of a Certificate of Merger with the Delaware Secretary of State on December 18, 1996 (the "Effective Time"). At the Effective Time: (a) Harbor Sub ceased to exist; (b) HLDS, as the surviving corporation in the Merger, became a wholly owned subsidiary of the Registrant; and (c) each share of HLDS Common Stock, par value $.001 per share ("HLDS Common Stock"), and each share of HLDS Series A Preferred Stock, par value $.001 per share, outstanding immediately prior to the Effective Time (except for any such shares held by HLDS as treasury stock and any such shares held by the Registrant or any subsidiary of the Registrant or HLDS, which shares, if any, were canceled) was converted into the right to receive twenty-two hundredths (0.22) of a share of Common Stock, $0.01 par value per share, of the Registrant ("Cadence Common Stock") (such fraction of a share of Cadence Common Stock into which each outstanding share of HLDS capital stock was converted is referred to as the "Exchange Ratio"). In addition, pursuant to the Agreement, at the Effective Time, all rights with respect to HLDS Common Stock under HLDS stock options (the "HLDS Options") then outstanding, were converted into and became rights with respect to Cadence Common Stock, and the Registrant assumed each such HLDS Option in accordance with its terms. By virtue of the assumption by the Registrant of the HLDS Options, from and after the Effective Time: (i) each HLDS Option assumed by the Registrant may be exercised solely for Cadence Common Stock; (ii) the number of shares of Cadence Common Stock subject to each such HLDS Option is equal to the number of shares of HLDS Common Stock subject to such HLDS Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole share; and (iii) the per share exercise price under each such HLDS Option was adjusted by dividing the per share exercise price under such HLDS Option by the Exchange Ratio and rounding up to the nearest cent. 2. The Registrant will issue approximately 2,562,000 shares of Cadence Common Stock to former stockholders of HLDS in connection with the Merger. In addition, approximately 600,000 shares of Cadence Common Stock may be issued in connection with the exercise of assumed HLDS Options. The Merger is intended to be a tax-free reorganization under the Internal Revenue Code of 1986, as amended, and will be accounted for as a purchase. A copy of the press release announcing the consummation of the Merger is attached hereto as Exhibit 99.1. HLDS develops, markets and supports EDA software for the design of high-density, high performance integrated circuits (ICs). HLDS products are designed to solve the problems inherent in deep submicron (less than 0.35 micron) IC design and to offer improved time to market, enhanced IC performance and reduced development and manufacturing costs when compared to previous generations of EDA software. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of the Business Acquired (1) The audited consolidated balance sheet of HLDS as of December 31, 1995, the audited consolidated statements of operations, stockholder's equity and cash flows of HLDS for the year then ended, the notes related thereto, and the Report of Independent Public Accountants thereon, are set forth at pages F-1 through F-17 of the Proxy Statement/Prospectus dated November 14, 1996 included in the Registrant's Registration Statement on Form S-4 (No. 333-15771). Such financial statements, notes and Report set forth at such pages are incorporated herein by reference. (2) The unaudited consolidated balance sheet of HLDS as of September 30, 1996, the unaudited consolidated statements of operations and cash flows of HLDS for the nine-month period then ended, and the notes related thereto, are set forth at pages F-1 through F-17 of the Proxy Statement/Prospectus dated November 14, 1996 included in the Registrant's Registration Statement on Form S-4 (No. 333-15771). Such financial statements and notes set forth at such pages are incorporated herein by reference. (b) Pro Forma Financial Information (1) An unaudited pro forma condensed combined balance sheet as of September 28, 1996, and the notes related thereto, are set forth at pages 53 through 57 of the Proxy Statement/Prospectus dated November 14, 1996 included in the Registrant's Registration Statement on Form S-4 (No. 333-15771). Such balance sheet and notes set forth at such pages are incorporated herein by reference. 3. (2) Unaudited pro forma condensed combined statements of income for the year ended December 30, 1995 and for the nine months ended September 28, 1996, and the notes related thereto, are set forth at pages 53 through 57 of the Proxy Statement/Prospectus dated November 14, 1996 included in the Registrant's Registration Statement on Form S-4 (No. 333-15771). Such statements of income and notes set forth at such pages are incorporated herein by reference. (c) Exhibits Exhibit No. Description 2 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among Cadence Design Systems, Inc., a Delaware corporation, Harbor Acquisition Sub, Inc., a Delaware corporation, and High Level Design Systems, Inc., a Delaware corporation (incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 7, 1996) 23.1 Consent of Arthur Andersen LLP 99.1 Press Release of Cadence Design Systems, Inc. dated December 18 ,1996 99.2 Pages F-1 through F-17 of the Proxy Statement/Prospectus dated November 14, 1996, included in the Registrant's Registration Statement on Form S-4 (No. 333-15771) 99.3 Pages 53 through 57 of the Proxy Statement/Prospectus dated November 14, 1996 included in the Registrant's Registration Statement on Form S-4 (No. 333-15771) 4. 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. CADENCE DESIGN SYSTEMS, INC. Dated: December 31, 1996 By: /s/ R.L. Smith McKeithen ------------------------------------- Vice President and General Counsel 5. EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 8-K of our report dated February 16, 1996 on the consolidated financial statements of High Level Design Systems, Inc. included in Cadence Design Systems, Inc.'s previously filed registration statement on Form S-4, File No. 333-15771. ARTHUR ANDERSEN LLP San Jose, California December 30, 1996 EX-99.1 3 EXHIBIT 99.1 EXHIBIT 99.1 FOR IMMEDIATE RELEASE - --------------------- CADENCE COMPLETES MERGER WITH HLDS COMBINATION TO PROVIDE INTEGRATED SOLUTION FOR .35 MICRON SAN JOSE, Calif. -- December 18, 1996 -- Cadence Design Systems, Inc. today announced that it has completed its merger with High Level Design Systems, Inc. (HLDS) in a move that creates the industry's first comprehensive approach to designing .35 micron chips. The merger immediately aligns the technology and market strengths of HLDS' advanced IC design planning technology and high-level floorplanning capabilities with Cadence's timing-driven design flow for today's complex deep submicron (DSM) gate array and cell-based IC designs. As consideration for the merger, Cadence will issue .22 shares of Cadence common stock for each share of HLDS stock, for a total issuance of approximately 2,562,000 shares of Cadence common stock in exchange for all of the outstanding shares of stock of HLDS. Cadence has also assumed HLDS employee stock options, which have become options to purchase approximately 600,000 shares of Cadence common stock. The merger will be accounted for as a purchase. Cadence Design Systems, Inc. provides comprehensive services and technology for the product development requirements of the world's leading electronics companies. Cadence is the largest supplier of software tools and professional services used to accelerate and manage the design of semiconductors, computer systems, networking and telecommunications equipment, consumer electronics, and a variety of other electronics-based products. With more than 3,000 employees and annual sales in excess of a half-billion dollars, Cadence has sales offices and research facilities around the world. The company is headquartered in San Jose, Calif. and traded on the New York Stock Exchange under the symbol CDN. More information about the company and its products and services may be obtained from the World Wide Web at http://www.cadence.com. The news release contains forward looking statements related to Cadence and the acquisition of HLDS that may involve substantial risks and uncertainties. These uncertainties include risks relating to the integration of Cadence and HLDS. Actual results and developments therefore may differ materially from those described in this release. For more information about Cadence and risks arising when investing in Cadence, you are directed to Cadence's most recent reports on Form 10-K and Form 10-Q and recent registration statement on Form S-4 related to the merger, as filed with the United States Securities and Exchange Commission. For more information, contact: Mike Sottak Cadence Design Systems, Inc. (408) 428-5036 sottak@cadence.com EX-99.2 4 EXHIBIT 99.2 EXHIBIT 99.2 INDEX TO HLDS FINANCIAL STATEMENTS Report of Independent Public Accountants............................................. F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 (Unaudited)........................................................................ F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1995 and 1996 (Unaudited)........................................................................ F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1996 (Unaudited)........................................................................ F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995 and the nine months ended September 30, 1995 and 1996 (Unaudited)........................................................................ F-6 Notes to Consolidated Financial Statements........................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To High Level Design Systems, Inc.: We have audited the accompanying consolidated balance sheets of High Level Design Systems, Inc. (a Delaware corporation) and Subsidiary as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the 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 consolidated 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 High Level Design Systems, Inc. and Subsidiary as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California February 16, 1996 F-2 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ----------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................................... $ 1,655 $ 2,133 $ 1,209 Restricted cash..................................................... 300 300 300 Short-term investments.............................................. 68 68 68 Accounts receivable, less allowance for doubtful accounts of $274, $217 and $70, respectively........................................ 1,163 2,320 2,568 Deferred income taxes............................................... 102 102 102 Prepaid expenses.................................................... 85 122 298 ------------- ------------- ------------- Total current assets............................................ 3,373 5,045 4,545 ------------- ------------- ------------- PROPERTY AND EQUIPMENT, at cost: Computer software and equipment..................................... 1,844 2,469 2,953 Furniture and fixtures.............................................. 129 129 164 Leasehold improvements.............................................. 62 62 100 ------------- ------------- ------------- 2,035 2,660 3,217 Less--Accumulated depreciation and amortization..................... (711) (1,480) (2,191) ------------- ------------- ------------- Net property and equipment...................................... 1,324 1,180 1,026 ------------- ------------- ------------- OTHER ASSETS 56 64 97 ------------- ------------- ------------- $ 4,753 $ 6,289 $ 5,668 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under line of credit..................................... $ 400 $ 400 $ 500 Current portion of long-term debt................................... 57 135 276 Accounts payable.................................................... 341 957 870 Accrued liabilities................................................. 538 642 781 Deferred revenues................................................... 164 814 805 ------------- ------------- ------------- Total current liabilities....................................... 1,500 2,948 3,232 ------------- ------------- ------------- LONG-TERM DEBT, net of current portion................................ 104 183 283 ------------- ------------- ------------- DEFERRED INCOME TAXES................................................. 17 17 17 ------------- ------------- ------------- COMMITMENTS (Notes 9 and 10) STOCKHOLDERS' EQUITY: Preferred stock: $.001 par value, 5,000,000 shares authorized, Series A-- 800,000 shares designated, aggregated liquidation preference of $1,500; 600,000 shares outstanding at December 31, 1994 and 1995 and September 30, 1996............................................ 1 1 1 Common stock: $.001 par value; 35,000,000 shares authorized; 10,582,346, 11,125,909, and 11,333,956 shares issued at December 31, 1994 and 1995, and September 30, 1996, respectively........... 11 11 11 Additional paid-in capital.......................................... 6,584 13,452 14,473 Notes receivable from sale of common stock.......................... (39) (457) (774) Treasury stock 300,000 common shares................................ -- (4,013) (4,013) Accumulated deficit................................................. (3,425) (5,853) (7,562) ------------- ------------- ------------- Total stockholders' equity...................................... 3,132 3,141 2,136 ------------- ------------- ------------- $ 4,753 $ 6,289 $ 5,668 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS FOR THE NINE MONTHS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------------------ --------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) REVENUES: Licenses............................................ $ 2,804 $ 3,119 $ 7,821 $ 6,048 $ 6,636 Services............................................ 292 441 2,306 1,426 2,793 ------------ ------------ ------------ ------------ ------------ Total revenues.................................... 3,096 3,560 10,127 7,474 9,429 ------------ ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Cost of services.................................... 106 144 678 419 846 Research and development............................ 1,030 2,910 3,648 2,680 3,963 Sales and marketing................................. 1,130 2,888 3,480 2,605 4,138 General and administrative.......................... 533 1,462 1,654 1,146 1,478 Compensation charge related to stock options........ -- -- 3,008 3,008 -- ------------ ------------ ------------ ------------ ------------ Total costs and expenses.......................... 2,799 7,404 12,468 9,858 10,425 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations..................... 297 (3,844) (2,341) (2,384) (996) ------------ ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Expensed offering costs............................. -- -- -- -- (627) Interest expense.................................... (13) (10) (68) (46) (70) Interest income..................................... 4 59 70 51 49 Other, net.......................................... (1) 40 17 (1) 50 ------------ ------------ ------------ ------------ ------------ Other income (expense), net....................... (10) 89 19 4 (598) ------------ ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes... 287 (3,755) (2,322) (2,380) (1,594) PROVISION FOR INCOME TAXES............................ 38 23 106 58 115 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS)..................................... $ 249 $ (3,778) $ (2,428) $ (2,438) $ (1,709) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) PER SHARE............................................... $ 0.03 $ (0.34) $ (0.22) $ (0.22) $ (0.16) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENTS SHARES.............................................. 7,834,473 11,168,579 10,982,762 11,037,233 10,879,598 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 b HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE RETAINED --------------- ------------------ PAID-IN FROM SALE OF TREASURY EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL COMMON STOCK STOCK (DEFICIT) ------- ------ ---------- ------ ---------- ------------ -------- -------- BALANCE, DECEMBER 31, 1992.............. -- $ -- 5,630,000 $ 6 $ 106 $ (70) $ -- $ 104 Issuance of common stock for notes at $0.02 per share..................... -- -- 715,000 1 13 (14) -- -- Sale of common stock at $0.40 and $0.65 per share, net of issuance costs............................... -- -- 1,850,000 2 936 -- -- -- Sale of common stock in initial public offering on Vancouver Stock Exchange at $0.97 per share, net of issuance costs............................... -- -- 1,200,000 1 789 -- -- -- Sale of common stock and attached warrants at $0.76 and $1.88 per unit, net of issuance costs......... -- -- 1,275,000 1 1,929 -- -- -- Exercise of warrants at $0.94 and $0.98 per share..................... -- -- 500,000 -- 481 -- -- -- Repurchase of common stock at $0.02 per share........................... -- -- (175,000) -- (4) 4 -- -- Payments received on notes receivable.......................... -- -- -- -- -- 5 -- -- Net income............................ -- -- -- -- -- -- -- 249 ------- ------ ---------- ------ ---------- ----- -------- -------- BALANCE, DECEMBER 31, 1993.............. -- -- 10,995,000 11 4,250 (75) -- 353 Sale of preferred stock at $2.50 per share, net of issuance costs........ 600,000 1 -- -- 1,476 -- -- -- Exercise of warrants at $1.80 per share............................... -- -- 487,346 1 875 -- -- -- Repurchase of common stock at $0.02 per share........................... -- -- (900,000) (1) (17) 18 -- -- Payments received on notes receivable.......................... -- -- -- -- -- 4 -- -- Forgiveness of notes receivable....... -- -- -- -- -- 14 -- -- Net loss.............................. -- -- -- -- -- -- -- (3,778) ------- ------ ---------- ------ ---------- ----- -------- -------- BALANCE, DECEMBER 31, 1994.............. 600,000 1 10,582,346 11 6,584 (39) -- (3,425) Issuance of common stock for notes at $0.85 per share..................... -- -- 500,000 -- 425 (425) -- -- Exercise of stock options at $1.00 to $2.19 per share..................... -- -- 43,563 -- 49 -- -- -- Payments received on notes receivable.......................... -- -- -- -- -- 7 -- -- Contribution of 300,000 shares of common stock at fair market value... -- -- -- -- 4,013 -- (4,013) -- Compensation charge related to stock options............................. -- -- -- -- 3,008 -- -- -- Capitalized offering costs............ -- -- -- -- (627) -- -- -- Net loss.............................. -- -- -- -- -- -- -- (2,428) ------- ------ ---------- ------ ---------- ----- -------- -------- BALANCE, DECEMBER 31, 1995.............. 600,000 1 11,125,909 11 13,452 (457) (4,013) (5,853) Exercise of stock options at $1.00 to $2.19 per share..................... -- -- 208,047 -- 394 (326) -- -- Payments received on notes receivable.......................... -- -- -- -- -- 9 -- -- Expensed offering costs............... -- -- -- -- 627 -- -- -- Net loss.............................. -- -- -- -- -- -- -- (1,709) ------- ------ ---------- ------ ---------- ----- -------- -------- BALANCE, SEPTEMBER 30, 1996 (unaudited)........................... 600,000 $ 1 11,333,956 $ 11 $14,473 $(774) $(4,013) $(7,562) ------- ------ ---------- ------ ---------- ----- -------- -------- ------- ------ ---------- ------ ---------- ----- -------- -------- TOTAL STOCKHOLDERS' EQUITY ------------- BALANCE, DECEMBER 31, 1992.............. $ 146 Issuance of common stock for notes at $0.02 per share..................... -- Sale of common stock at $0.40 and $0.65 per share, net of issuance costs............................... 938 Sale of common stock in initial public offering on Vancouver Stock Exchange at $0.97 per share, net of issuance costs............................... 790 Sale of common stock and attached warrants at $0.76 and $1.88 per unit, net of issuance costs......... 1,930 Exercise of warrants at $0.94 and $0.98 per share..................... 481 Repurchase of common stock at $0.02 per share........................... -- Payments received on notes receivable.......................... 5 Net income............................ 249 ------------- BALANCE, DECEMBER 31, 1993.............. 4,539 Sale of preferred stock at $2.50 per share, net of issuance costs........ 1,477 Exercise of warrants at $1.80 per share............................... 876 Repurchase of common stock at $0.02 per share........................... -- Payments received on notes receivable.......................... 4 Forgiveness of notes receivable....... 14 Net loss.............................. (3,778) ------------- BALANCE, DECEMBER 31, 1994.............. 3,132 Issuance of common stock for notes at $0.85 per share..................... -- Exercise of stock options at $1.00 to $2.19 per share..................... 49 Payments received on notes receivable.......................... 7 Contribution of 300,000 shares of common stock at fair market value... -- Compensation charge related to stock options............................. 3,008 Capitalized offering costs............ (627) Net loss.............................. (2,428) ------------- BALANCE, DECEMBER 31, 1995.............. 3,141 Exercise of stock options at $1.00 to $2.19 per share..................... 68 Payments received on notes receivable.......................... 9 Expensed offering costs............... 627 Net loss.............................. (1,709) ------------- BALANCE, SEPTEMBER 30, 1996 (unaudited)........................... $ 2,136 ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------ --------------------------- 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................... $ 249 $ (3,778) $ (2,428) $ (2,438) $ (1,709) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities-- Depreciation and amortization....... 134 546 769 560 711 Provision for allowance for doubtful accounts.......................... 12 264 188 39 -- Forgiveness of notes receivable from sale of common stock.............. -- 14 -- -- -- Revenue recognized on non-monetary exchange.......................... (180) -- -- -- -- Compensation charge related to stock options........................... -- -- 3,008 3,008 -- Expensed offering costs............. -- -- -- -- 627 Change in assets and liabilities-- Increase in restricted cash....... -- (300) -- -- -- Increase in accounts receivable... (1,052) (146) (1,345) (1,913) (248) Increase in deferred income taxes........................... (65) -- -- -- -- Decrease (increase) in prepaid expenses........................ (78) 17 (37) (60) (176) Decrease (increase) in other assets.......................... -- 5 (8) (39) (33) Increase (decrease) in accounts payable......................... 138 125 616 110 (87) Increase in accrued liabilities... 245 113 104 367 139 Increase (decrease) in deferred revenues........................ 67 89 650 321 (9) ------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities.......... (530) (3,051) 1,517 (45) (785) ------ ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment... (793) (688) (625) (369) (557) Purchase of held-to-maturity short-term investments.............. -- (68) -- -- -- ------ ------------ ------------ ------------ ------------ Net cash used in investing activities.................... (793) (756) (625) (369) (557) ------ ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable to related parties.......... 94 -- -- -- -- Repayment of notes payable to related parties............................. (152) -- -- -- -- Proceeds from borrowings under line of credit.............................. -- 400 -- -- 100 Repayments on debt.................... (19) (35) (131) (84) (183) Proceeds from issuance of preferred stock, net of issuance costs........ -- 1,477 -- -- -- Proceeds from sale of common stock and exercise of warrants, net of issuance costs...................... 4,135 876 49 38 68 Payments received on notes receivable from sale of common stock........... 5 4 7 7 9 Proceeds from equipment refinancing... -- -- 288 264 424 Capitalized offering costs............ -- -- (627) -- -- ------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities.......... 4,063 2,722 (414) 225 418 ------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 2,740 (1,085) 478 (189) (924) CASH AND CASH EQUIVALENTS, beginning of period................................ -- 2,740 1,655 1,655 2,133 ------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period................................ $ 2,740 $ 1,655 $ 2,133 $ 1,466 $ 1,209 ------ ------------ ------------ ------------ ------------ ------ ------------ ------------ ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for income taxes............ $ 48 $ 26 $ 130 $ 20 $ 2 ------ ------------ ------------ ------------ ------------ ------ ------------ ------------ ------------ ------------ Cash paid for interest expense........ $ 12 $ 9 $ 68 $ 46 $ 70 ------ ------------ ------------ ------------ ------------ ------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-6 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND OPERATIONS: High Level Design Systems, Inc. (the "Company") was incorporated in California in April 1991, commenced operations effective January 1992 and was reincorporated in Delaware in October 1995. The Company operates in a single industry segment and develops, markets, and supports electronic design automation ("EDA") software for the design of high-density, high performance integrated circuits. The principal markets for the Company's products are the United States, Asia and Europe. The Company's initial technology was based upon research and development originally performed by AfCAD Corporation ("AfCAD"), the Company's predecessor, which was primarily a consulting firm that created the Company's design planner technology. Effective January 1, 1992, AfCAD transferred substantially all of its EDA technology, contracts and rights to the Company. During 1992, the Company operated primarily as a consulting services business with sales of products through original equipment manufacturer relationships and its consulting efforts. In 1993, the Company embarked on a planned transition from a consulting services business to a products-based business. In 1993, the Company completed a public offering of its common stock on the Vancouver Stock Exchange (see Note 6). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary based in the United Kingdom. All intercompany balances and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. There are no significant differences between U.S. and Canadian generally accepted accounting principles which would have a material effect on the accompanying consolidated financial statements. UNAUDITED INTERIM FINANCIAL DATA The unaudited interim financial statements for the nine months ended September 30, 1995 and 1996 have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The Company believes the results of operations for the interim periods are not necessarily indicative of the results to be expected for any future period. EFFECT OF RECENT PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." The disclosure requirements of SFAS No. 123 are effective as of the beginning of the Company's 1996 fiscal year. The Company does not expect the new pronouncement to have an impact on its results of operations since the intrinsic value-based method prescribed by APB Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used for the valuation of stock-based compensation plans. F-7 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) USE OF ESTIMATES 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION The functional currency of the Company's subsidiary is the United States dollar. Accordingly, all translation gains and losses resulting from transactions denominated in currencies other than United States dollars are included in the consolidated statement of operations. To date, the resulting gains and losses have not been material. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of investments in bank certificates of deposit with initial maturities of three months or less and money market accounts. Short-term investments consist of a certificate of deposit, maturing in October 1996, which the Company has the ability and intention to hold to maturity. In January 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The Company's investments in debt securities are considered to be held to maturity and are stated at amortized cost, which approximated the fair value at December 31, 1994 and 1995 and September 30, 1996, respectively. Adoption of SFAS No. 115 did not have a material impact on the Company's financial position or results of operations. RESTRICTED CASH Restricted cash represents the minimum average daily balance, calculated monthly, required to be maintained on account with the Company's lender under its revolving line of credit agreement (see Note 3). PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which is three years for computer software and equipment and furniture and fixtures and over the shorter of the economic life or the life of the lease for leasehold improvements. SOFTWARE DEVELOPMENT COSTS Under the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," software development costs are capitalized upon the establishment of technological feasibility, which the Company defines as establishment of a working model and further F-8 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) defines as a beta version of the software. The period of time commencing when a product achieves beta status and ending when a product is offered for sale is typically very short. Accordingly, amounts which could have been capitalized under this statement were immaterial to the Company's results of operations and financial position. Therefore, the Company has expensed all software development costs and included those costs in research and development expenses in the accompanying statements of operations. REVENUE RECOGNITION The Company generates revenues from licensing the rights to use its software products to both end users and resellers. The Company also generates revenues from consulting and training services performed for customers as well as revenues from support and software update rights (maintenance). Revenues from software license agreements with end users and resellers are recognized upon shipment of the licensed software if there are no significant post-delivery obligations, payment is due within one year and collectibility is probable. Revenues for maintenance are recognized ratably over the term of the support period. If maintenance is included free in a license agreement, the maintenance services are unbundled from the license fee at the fair market value of the maintenance services based on the value established by independent sale of such maintenance to customers. Consulting revenues are primarily related to implementation services performed under separate service arrangements related to the installation of the Company's software products. Such services do not include customization or modification of the underlying software code. If included free in a license agreement, such services are unbundled at their fair market value based on the value established by the independent sale of such services to customers. Revenues from such consulting services as well as training services are recognized as the services are performed. Cost of licenses consists of product packaging, documentation, production costs and royalties to development partners. Such costs are not material and are included in selling and marketing expenses in the accompanying statements of operations. Deferred revenues relate to maintenance, consulting and training fees which have been paid by the customers prior to performance of those services. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are excluded from the computation if their effect is antidilutive. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of these investments to financial institutions evaluated as highly creditworthy. Concentrations of credit risk F-9 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) with respect to trade receivables exist because the Company's revenues are derived primarily from the sale of software licenses and services to a limited number of companies in the technology industry. The Company performs ongoing credit evaluation of its customers and generally does not require collateral. SIGNIFICANT CUSTOMERS AND EXPORT REVENUES Sales to significant customers as a percentage of total revenues for the years ended December 31, 1993, 1994 and 1995 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----- ----- ----- Customer A....................................................................... 10% 18% 37% Customer B....................................................................... 12% 14% 7% Customer C....................................................................... 23% 7% 7% Customer D....................................................................... 16% 1% --
Export sales, which consist of sales to customers in foreign countries, as a percentage of total revenues for the years ended December 31, 1993, 1994 and 1995 were as follows:
YEARS ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Asia (primarily Japan)....................................................... 23% 16% 9% Europe....................................................................... -- 2 1 --- --- --- 23% 18% 10% --- --- --- --- --- ---
3. LINE OF CREDIT AGREEMENT: The Company has a revolving line of credit agreement with a bank which provides for borrowings of up to $500,000 through May 1997. Borrowings are limited to 70% of eligible accounts receivable (as defined). Interest on the line of credit borrowings is payable monthly at the bank's reference interest rate plus .5 percent (9.5% percent at December 31, 1995). As of December 31, 1995, there were borrowings outstanding of $400,000 and available borrowings of $100,000 under this line of credit agreement. As of September 30, 1996, there were borrowings outstanding of $500,000. Borrowings under the line of credit agreement are secured by the Company's accounts receivable and other assets. The line of credit agreement requires the Company to maintain a minimum cash balance of $300,000. As of September 30, 1996 the line of credit agreement also requires the Company to maintain specified financial covenants, including tangible net worth of not less than $1.9 million, a ratio of total liabilities to tangible net worth of less than 1.7 to 1, working capital in excess of $1.3 million, and a current ratio in excess of 1.4 to 1. The Company was in compliance with the covenants as of December 31, 1995 and September 30, 1996. F-10 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 4. ACCRUED LIABILITIES: Accrued liabilities consisted of the following (in thousands):
DECEMBER 31, -------------------- 1994 1995 --------- --------- Sales tax............................................................................... $ 93 $ 84 Accrued employee compensation........................................................... 317 422 Other................................................................................... 128 136 --------- --------- Total................................................................................... $ 538 $ 642 --------- --------- --------- ---------
5. LONG-TERM DEBT: At December 31, 1994 and 1995, long-term debt of the Company consisted of the following (in thousands):
DECEMBER 31, -------------------- 1994 1995 --------- --------- Notes payable, secured by equipment, interest at 11% per year, principal and interest due in equal monthly installments of $6 through October 1997........................... $ 161 $ 110 Notes payable, secured by equipment, interest at 16%-17% per year, principal and interest due in equal monthly installments of $9 through February 1998 and thereafter equal monthly installments of $3 through August 1998................................... -- 208 --------- --------- 161 318 Less- Current portion................................................................... (57) (135) --------- --------- Long-term debt, net of current portion.................................................. $ 104 $ 183 --------- --------- --------- ---------
As of December 31, 1995, maturities of long-term debt are as follows (in thousands): 1996................................................................. $ 135 1997................................................................. 146 1998................................................................. 37 --------- $ 318 --------- ---------
6. COMMON STOCK AND STOCK OPTIONS: In 1993, the Company completed a public offering of 1,200,000 shares of common stock on the Vancouver Stock Exchange. Net proceeds to the Company after commissions and other issuance costs were approximately $.66 per share or $790,000. During 1992, 1993 and 1995, the Company sold 3,530,000, 715,000, and 500,000 shares of common stock at $.02, $.02 and $.85 per share, respectively, which was the fair market value at the date of sale, to employees in exchange for promissory notes under restricted stock purchase agreements. Each note bears interest at 8% compounded semi-annually and is due within 30 days of full vesting, or upon termination of F-11 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 6. COMMON STOCK AND STOCK OPTIONS: (CONTINUED) employment, whichever is earlier, and is secured by the underlying common stock. Unvested shares are subject to repurchase by the Company at the original purchase price, at the Company's option, upon termination of employment for any reason. The shares generally vest 25% one year after the date of sale and ratably thereafter over three years. As of December 31, 1995, $457,000 remained outstanding under these promissory notes receivable from the sale of common stock and approximately 742,292 shares were subject to repurchase by the Company related to these restricted stock purchase agreements. During 1993, the Board of Directors adopted the 1993 Stock Option Plan (the "Option Plan"). During 1994, the Company's Board of Directors approved an increase in the number of shares authorized for issuance under the Option Plan from 1,000,000 shares of its common stock to 2,750,000 shares. During 1995, the Board of Directors approved an increase in the number of shares authorized for issuance under the Option Plan to 4,000,000 shares. Under the Option Plan, incentive and nonstatutory stock options may be granted with an exercise price equal to the fair market value on the date of grant. Options granted under the Option Plan generally vest 25% one year after the date of grant and ratably thereafter over three years and expire ten years from the date of grant. As of December 31, 1995, options for 796,486 shares were exercisable. The weighted average exercise price of options outstanding at December 31, 1995 was $1.82 per share. Activity under the Option Plan is as follows:
PRICE AVAILABLE OUTSTANDING PER SHARE ------------ ------------ --------------- Initial authorized shares................................. 1,000,000 -- -- Granted................................................. (548,500) 548,500 $ 1.00 Exercised............................................... -- -- -- Canceled................................................ -- -- -- ------------ ------------ --------------- Balance at December 31, 1993.............................. 451,500 548,500 $ 1.00 Authorized.............................................. 1,750,000 -- -- Granted................................................. (1,486,000) 1,486,000 $ 1.95 - $ 2.12 Exercised............................................... -- -- -- Canceled................................................ 250,000 (250,000) $ 1.00 ------------ ------------ --------------- Balance at December 31, 1994.............................. 965,500 1,784,500 $ 1.00 - $ 2.12 Authorized.............................................. 1,250,000 -- -- Granted................................................. (969,000) 969,000 $ 1.70 - $14.63 Exercised............................................... -- (43,563) $ 1.00 - $ 2.19 Canceled................................................ 141,437 (141,437) $ 1.00 - $13.38 ------------ ------------ --------------- Balance, December 31, 1995................................ 1,387,937 2,568,500 $ 1.00 - $14.63 ------------ ------------ --------------- ------------ ------------ ---------------
At December 31, 1993, 1,000,000 warrants to purchase common stock were outstanding. Each warrant entitled the holder to purchase one share of common stock for approximately $1.80 per share. Of the total warrants, 487,346 were exercised during 1994, and the remaining warrants expired unexercised in June 1994. F-12 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 6. COMMON STOCK AND STOCK OPTIONS: (CONTINUED) 1995 SPECIAL NONSTATUTORY STOCK OPTION PLAN The Company's 1995 Special Nonstatutory Stock Option Plan (the "Special NSO Plan") was adopted by the Company's Board of Directors in September 1995. A total of 300,000 shares of common stock has been reserved for issuance under the Special NSO Plan. In September 1995, 300,000 shares of common stock were granted under the Special NSO Plan at an exercise price of $3.35 per share and there were no shares available for future grant. Because option grants under the Special NSO Plan are fully vested and are substantially discounted from the fair market value of the common stock as of the date of grant, the Company incurred a non-recurring, non-cash compensation charge of $3,008,000 during the quarter ended September 30, 1995, which represents the difference between the fair market value of the stock on the date of grant and the exercise price. The Special NSO Plan was authorized by the Board of Directors in connection with a concurrent contribution to the Company by the Company's President of 300,000 shares of common stock owned by him. The contributed shares of common stock were valued at fair market value on the date of contribution and are reflected as treasury stock in the accompanying balance sheet as of December 31, 1995. The Special NSO Plan and the option grants authorized under the plan are intended by the Company and the Company's President to enable the Company to attract and retain key employees and consultants. As of December 31, 1995, no options had been exercised under the Special NSO Plan and 300,000 options remained outstanding. 1995 EMPLOYEE QUALIFIED STOCK PURCHASE PLAN The Company's 1995 Employee Qualified Stock Purchase Plan (the "Purchase Plan") was adopted by the Company's Board of Directors in September 1995. A total of 150,000 shares of common stock are reserved for issuance under the Purchase Plan. The Purchase Plan will enable eligible employees to purchase common stock at 85% of the lower of the fair market value of the Company's common stock on the first day or the last day of each purchase period. The Purchase Plan will terminate in September 2005 and will only become effective if the Company completes an initial public offering in the United States. 1995 DIRECTOR OPTION PLAN The Company's 1995 Director Option Plan (the "Director Plan") was adopted by the Company's Board of Directors in September 1995. A total of 150,000 shares of common stock are reserved for issuance under the Director Plan. The Director Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. Under the Director Plan, an option for 15,000 shares of common stock are granted on the later of the effective date of the Director Plan or the date on which the optionee first becomes a nonemployee director of the Company and an additional option to purchase 5,000 shares of common stock each year beginning on November 1, 1996. Options granted under the Director Plan have a term of ten years. The exercise price per share of all options granted under the Director Plan are equal to the fair market value of a share of the Company's common stock on the date of grant of the option. The Director Plan will terminate in September 2005 and will only become effective if the Company completes an initial public offering in the United States. F-13 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 6. COMMON STOCK AND STOCK OPTIONS: (CONTINUED) At December 31, 1995, the Company has reserved shares of common stock for future issuance as follows: Conversion of Series A preferred stock.................... 600,000 1993 Stock Option Plan.................................... 3,956,437 1995 Special Nonstatutory Stock Option Plan............... 300,000 1995 Employee Qualified Stock Purchase Plan............... 150,000 1995 Director Option Plan................................. 150,000 ------------ Total shares reserved..................................... 5,156,437 ------------ ------------
STOCK RIGHTS AGREEMENTS In October 1994 the Company entered into an agreement with a third party which gave the third party the right to purchase up to $1,000,000 of shares of the Company's common stock at 150% of the average trading price in the preceding ten days. This right expired unexercised on December 31, 1995. In September 1995 the Company entered into an agreement with a different third party which allows the third party the right to acquire up to 40,000 shares of the Company's common stock at a price of $12 per share. The right may be exercised at any time after 12 months following the effective date of any initial public offering the Company may complete in the United States. The right expires two years following such effective date. 7. PREFERRED STOCK: At December 31, 1995, the Company has authorized 5,000,000 shares of preferred stock, of which 800,000 shares have been designated as Series A preferred stock. Significant rights, restrictions and preferences of the Series A preferred stock are as follows: - The holders of shares of Series A preferred stock are entitled to receive dividends payable in preference and priority to payment of any dividend on the common stock, at the rate of $.25 per share per annum, when and if declared by the Board of Directors. Dividends on the Series A preferred stock shall not be cumulative. No dividends have been declared to date as of December 31, 1995. - The Company has the right, at any time after December 31, 1997, to redeem all of the Series A preferred stock at the price of $2.50 per share, together with any declared but unpaid dividends. Redemption of less than all of the then outstanding shares of the Series A preferred stock shall be pro rata among the holders of the Series A preferred stock. - In the event of any liquidation, dissolution or winding up of the Company, the holders of each share of Series A preferred stock shall receive, before any payment is made with respect to the common stock, $2.50 per share, plus all declared but unpaid dividends. After paying the amounts due the holders of the Series A preferred stock, any remaining assets available for distribution to stockholders shall be distributed ratably among the holders of common stock and the holders of preferred stock on an as-converted basis. F-14 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 7. PREFERRED STOCK: (CONTINUED) - Each share of Series A preferred stock is convertible at the option of the holder into one share of common stock (subject to adjustments for events of dilution). The Series A preferred stock will automatically be converted into common stock upon the closing of a public offering of common stock in the United States which meets certain criteria. - Each share of Series A preferred stock has voting rights equal to the number of shares of common stock into which it converts. 8. INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109 "Accounting for Income Taxes," which requires an asset and liability approach for financial accounting and reporting of income taxes. The provision for income taxes for the years ended December 31, 1993, 1994 and 1995 is as follows (in thousands):
DECEMBER 31, ------------------------------- 1993 1994 1995 --------- --------- --------- Current provision-- Federal............................................................. $ 30 $-- $ 10 State............................................................... 2 1 1 Foreign............................................................. 70 22 95 --------- --------- --------- 102 23 106 --------- --------- --------- Deferred benefit-- Federal............................................................. (62) -- -- State............................................................... (2) -- -- --------- --------- --------- (64) -- -- --------- --------- --------- Total provision for income taxes...................................... $ 38 $ 23 $ 106 --------- --------- --------- --------- --------- ---------
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. The F-15 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 8. INCOME TAXES: (CONTINUED) tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows at December 31, 1994 and 1995 (in thousands):
DECEMBER 31, -------------------- 1994 1995 --------- --------- Foreign tax credit carryforwards......................................... $ 95 $ 188 Research and development credit carryforwards............................ 207 333 Net operating loss carryforwards......................................... 954 703 AMT credit carryforward.................................................. -- 9 Net operating loss carryback............................................. 77 77 Items not currently deductible for tax purposes.......................... 204 1,326 Depreciation............................................................. 136 103 Research and development costs capitalized for state purposes............ -- 74 --------- --------- 1,673 2,813 Valuation allowance...................................................... (1,588) (2,728) --------- --------- Net deferred income tax assets........................................... $ 85 $ 85 --------- --------- --------- ---------
At December 31, 1995, the Company had net operating loss carryforwards of approximately $2,000,000 and $430,000, respectively, available to offset future federal and state taxable income. These loss carryforwards expire through the year 2009. The availability and timing of the amount of prior losses to be used to offset taxable income in future years will be limited due to various provisions, including any change in ownership of the Company resulting from significant stock transactions. The Company has provided a valuation allowance for a substantial portion of its net deferred tax assets as the Company believes sufficient uncertainty exists regarding the realization of these items due to its limited operating history and the variability of its operating results. 9. COMMITMENTS: On January 1, 1994, the Company entered into a non-cancelable operating lease for office space which expires in October 1997. In addition, the Company leases certain equipment under operating leases expiring in 1997. Total rent expense was approximately $122,000, $431,000 and $864,000 for the years ended December 31, 1993, 1994 and 1995, respectively. At December 31, 1995, future minimum rental payments under the non-cancelable operating leases are as follows (in thousands): 1996......................................................... $ 496 1997......................................................... 369 --------- $ 865 --------- ---------
10. RELATED PARTY TRANSACTION: In December 1995, the Company entered into a security agreement and promissory note with J. George Janac, the Company's President and Chief Executive Officer, whereby the Company loaned to F-16 HIGH LEVEL DESIGN SYSTEMS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED) 10. RELATED PARTY TRANSACTION: (CONTINUED) him the sum of $200,000. The loan accrues interest at the rate of 10% per annum compounded annually and all principal and interest are due and payable on the first anniversary date of the loan. The approximate loan amount including principal and interest as of September 30, 1996 was $215,395. The note is secured by 57,143 shares of the Company's common stock that are held by J. George Janac. 11. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED): On October 3, 1996, the Company entered into an Agreement and Plan of Merger and Reorganization ("Reorganization Agreement") with Cadence Design Systems, Inc. ("Cadence") whereby each share of the Company's common and preferred stock would be exchanged for 0.22 of a share of Cadence common stock. All outstanding stock options of the Company will be assumed or substituted at the 0.22 exchange ratio by Cadence. The Reorganization Agreement is subject to certain conditions including approval by the Company's stockholders. Prior to the signing of the Reorganization Agreement, the Company entered into an arrangement with a financial advisor for services prior to and in connection with the acquisition. This arrangement requires the payment of a fee that is dependent on the final consideration value received per share by the Company as a result of the consummation of the acquisition by Cadence. The Company has estimated that the fee payable on completion of the transaction with Cadence will be approximately $2,100,000. The Company will record an expense for this fee when consummation of the transaction is considered probable. If the acquisition is not consummated, the Company will be required to pay a fee of between $50,000 and $100,000. Cadence has agreed to allow the Company to reprice all outstanding options with a per share exercise price exceeding $7.315 by reducing the exercise price to an amount equal to $7.315. F-17 EX-99.3 5 EXHIBIT 99.3 EXHIBIT 99.3 UNAUDITED PRO FORMA FINANCIAL INFORMATION CADENCE AND HLDS UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial statements give effect to the proposed Merger and should be read in conjunction with the historical financial statements and accompanying notes for Cadence and HLDS, incorporated by reference or included elsewhere herein. The Merger is subject to approval by HLDS' stockholders and other conditions. The unaudited pro forma condensed combined statement of income for the fiscal year ended December 30, 1995 gives effect to the proposed Merger, which will be accounted for as a purchase of HLDS by Cadence, as if the acquisition was completed at the beginning of the period. The unaudited pro forma condensed combined statement of income for the nine-month period ended September 28, 1996 gives effect to the proposed Merger as if the acquisition was completed at the beginning of the nine-month period. The unaudited pro forma condensed combined balance sheet has been prepared as if the acquisition was consummated as of September 28, 1996. Such statements of income do not include the effect of the approximately $91.7 million nonrecurring charge for in-process research and development. It is anticipated that such amount will be charged to the operations of Cadence in the first fiscal quarter in which the Closing occurs. The purchase price allocation reflected in the accompanying pro forma condensed combined financial statements has been prepared on an estimated basis. The effects resulting from any adjustments in the final allocation of the purchase price are not expected to be material and are therefore not expected to have a material effect on Cadence's financial statements. This method of combining historical financial statements for the preparation of the pro forma condensed combined financial statements is for presentation only. Actual statements of income of the companies will be combined from the Closing Date with no retroactive restatements. The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. 53 CADENCE AND HLDS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA CADENCE HLDS ADJUSTMENTS BALANCES -------- ------- ----------- --------- REVENUE: Product................................................... $292,198 $ 7,821 $300,019 Service................................................... 65,860 915 66,775 Maintenance............................................... 190,360 1,391 191,751 -------- ------- --------- TOTAL REVENUE........................................... 548,418 10,127 558,545 -------- ------- --------- COSTS AND EXPENSES: Cost of product........................................... 44,793 -- $ 2,630(1) 47,423 Cost of service........................................... 54,988 678 55,666 Cost of maintenance....................................... 16,749 -- 16,749 Marketing and sales....................................... 185,025 3,480 188,505 Research and development.................................. 88,566 3,648 92,214 General and administrative................................ 40,437 1,654 42,091 Compensation charge related to stock options.............. -- 3,008 3,008 -------- ------- --------- TOTAL COSTS AND EXPENSES................................ 430,558 12,468 445,656 -------- ------- --------- Income (loss) from operations............................... 117,860 (2,341) 112,889 Other income, net........................................... 17,237 19 17,256 -------- ------- --------- Income (loss) before provision for income taxes............. 135,097 (2,322) 130,145 Provision (benefit) for income taxes........................ 37,827 106 (756)(2) 37,177 -------- ------- --------- NET INCOME (LOSS)....................................... $ 97,270 $(2,428) $ 92,968 -------- ------- --------- -------- ------- --------- NET INCOME (LOSS) PER SHARE............................. $ 1.05 $ (0.22) $ 0.97 -------- ------- --------- -------- ------- --------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING........................................... 92,948 10,983 2,719(3) 95,667 -------- ------- --------- -------- ------- ---------
- ------------------------------ (1) Reflects twelve months of amortization of capitalized purchased intangibles based upon an estimated three-year life. (2) Adjusts the income tax provision due to HLDS' losses based upon a 28% effective tax rate. (3) Reflects the issuance of approximately 2,559,470 shares of Cadence Common Stock in exchange for all of the outstanding shares of HLDS Capital Stock and includes HLDS' common equivalent shares. 54 CADENCE AND HLDS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 28, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA CADENCE HLDS ADJUSTMENTS BALANCES -------- ------- ----------- --------- REVENUE: Product................................................... $291,214 $ 6,636 $297,850 Service................................................... 80,405 1,135 81,540 Maintenance............................................... 157,578 1,658 159,236 -------- ------- --------- TOTAL REVENUE........................................... 529,197 9,429 538,626 -------- ------- --------- COSTS AND EXPENSES: Cost of product........................................... 35,539 -- $ 1,973(1) 37,512 Cost of service........................................... 57,420 846 58,266 Cost of maintenance....................................... 17,707 -- 17,707 Marketing and sales....................................... 160,952 4,138 165,090 Research and development.................................. 85,147 3,963 89,110 General and administrative................................ 40,444 1,478 41,922 -------- ------- --------- TOTAL COSTS AND EXPENSES................................ 397,209 10,425 409,607 -------- ------- --------- Income (loss) from operations............................... 131,988 (996) 129,019 Other income (expense), net................................. (2,355) (598) (2,953) -------- ------- --------- Income (loss) before provision for income taxes............. 129,633 (1,594) 126,066 Provision (benefit) for income taxes........................ 42,779 115 (641)(2) 42,253 -------- ------- --------- NET INCOME (LOSS)....................................... $ 86,854 $(1,709) $ 83,813 -------- ------- --------- -------- ------- --------- NET INCOME (LOSS) PER SHARE............................. $ 0.95 $ (0.16) $ 0.89 -------- ------- --------- -------- ------- --------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING........................................... 91,095 10,880 2,719(3) 93,814 -------- ------- --------- -------- ------- ---------
- ------------------------------ (1) Reflects nine months of amortization of capitalized purchased intangibles based upon an estimated three-year life. (2) Adjusts the income tax provision due to HLDS' losses based upon a 33% effective tax rate. (3) Reflects the issuance of approximately 2,559,470 shares of Cadence Common Stock in exchange for all of the outstanding shares of HLDS Capital Stock and includes HLDS' common equivalent shares. 55 CADENCE AND HLDS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 28, 1996 (IN THOUSANDS)
PRO FORMA CADENCE HLDS ADJUSTMENTS BALANCES --------- ------- ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash investments............................... $ 83,211 $ 1,509 $ 84,720 Short-term investments.................................. 2,023 68 2,091 Accounts receivable, net................................ 99,030 2,568 101,598 Inventories............................................. 7,830 -- 7,830 Prepaid expenses and other.............................. 25,761 400 26,161 --------- ------- ----------- TOTAL CURRENT ASSETS.............................. 217,855 4,545 222,400 PROPERTY, PLANT AND EQUIPMENT, NET........................ 149,685 1,026 150,711 SOFTWARE DEVELOPMENT COSTS, NET........................... 24,019 -- 24,019 PURCHASED SOFTWARE AND INTANGIBLES, NET................... 9,415 -- $ 7,890(1,2,3) 17,305 OTHER ASSETS.............................................. 18,041 97 18,138 --------- ------- ----------- TOTAL ASSETS...................................... $ 419,015 $ 5,668 $ 432,573 --------- ------- ----------- --------- ------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under line of credit......................... $ -- $ 500 $ 500 Current portion of long-term debt....................... 3,422 276 3,698 Accounts payable and accrued liabilities................ 94,974 1,651 3,000(3) 99,625 Income taxes payable.................................... 6,960 -- 6,960 Deferred revenue........................................ 101,072 805 101,877 --------- ------- ----------- TOTAL CURRENT LIABILITIES......................... 206,428 3,232 212,660 --------- ------- ----------- LONG-TERM LIABILITIES: Long-term debt.......................................... 19,878 283 20,161 Deferred income taxes................................... 2,590 17 2,607 Minority interest liability............................. 15,246 -- 15,246 Other long-term liabilities............................. 14,466 -- 14,466 --------- ------- ----------- TOTAL LONG-TERM LIABILITIES....................... 52,180 300 52,480 --------- ------- ----------- STOCKHOLDERS' EQUITY: Preferred stock......................................... -- 1 (1)(1) -- Common stock and capital in excess of par value......... 351,035 14,484 85,016(1) 450,535 Notes receivable from sale of stock..................... -- (774) (774) Treasury stock at cost.................................. (399,263) (4,013) 4,013(1) (399,263) Retained earnings (deficit)............................. 209,412 (7,562) (84,138)(1,2) 117,712 Accumulated translation adjustment...................... (777) -- (777) --------- ------- ----------- TOTAL STOCKHOLDERS' EQUITY........................ 160,407 2,136 167,433 --------- ------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 419,015 $ 5,668 $ 432,573 --------- ------- ----------- --------- ------- -----------
- ------------------------------ (1) Reflects the issuance of approximately 2,559,470 shares of Cadence Common Stock in exchange for all outstanding shares of HLDS Capital Stock, the assumption of all outstanding HLDS options and the elimination of the HLDS Preferred Stock, common stock and capital in excess of par value, treasury stock at cost and retained earnings (deficit). (2) Reflects the writeoff of in-process product research and development as it had not reached technological feasibility, resulting in a decrease in retained earnings (deficit) and purchased software and intangibles of $91.7 million. (3) Records transaction expenses of HLDS, resulting in an increase to purchased software and intangibles and accounts payable and accrued liabilities of $3.0 million. 56 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF CADENCE AND HLDS NOTE 1. PURCHASE PRICE The purchase price for the Merger of HLDS is computed as follows (in thousands): Cadence Common Stock to be issued.................................. $ 89,500 Employee stock options............................................. 8,000 Direct transaction costs........................................... 2,000 --------- TOTAL.......................................................... $ 99,500 --------- ---------
In connection with the Merger, Cadence will issue 2,559,470 shares of Cadence Common Stock valued at the representative value of the Cadence Common Stock at the time the proposed transaction was announced, in exchange for all of the outstanding shares of HLDS Capital Stock. The value of the options was determined using the Black Scholes valuation method. NOTE 2. IN-PROCESS PRODUCT DEVELOPMENT In connection with the Merger, which will be accounted for as a purchase, Cadence will allocate the purchase price based upon the estimated fair value of the assets acquired and the liabilities assumed. Intangible assets acquired aggregated $99.6 million. Cadence received an appraisal of the intangible assets which indicates that approximately $91.7 million of the acquired intangible assets consists of in-process product development. Because there can be no assurance that Cadence will be able to successfully complete the development and integration of the HLDS products or that the acquired technology has any alternative future use, the acquired in-process product development will be charged to expense by Cadence in the quarter in which the Merger is consummated. The remaining intangible assets of $7.9 million were assigned to acquired software and goodwill and will be amortized on a straight-line basis over their estimated useful lives of three years. Management believes that the unamortized balance is recoverable through future operating results. 57 -----END PRIVACY-ENHANCED MESSAGE-----