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