As filed with the Securities and Exchange Commission on August 9, 2001
Registration No.: 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7372 56-154236
State(of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification Number)
Classification Code)
--------------
700 East Middlefield Road, Mountain View, California 94043
(650) 584-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Aart J. de Geus
Chairman of the Board and Chief Executive Officer
Synopsys, Inc.
700 East Middlefield Road, Mountain View, California 94043
(650) 584-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Rod J. Howard, Esq. Diane Holt Frankle, Esq.
Brobeck, Phleger & Harrison LLP P. James Schumacher, Esq.
Two Embarcadero Place Gray Cary Ware & Freidenrich LLP
2200 Geng Road 400 Hamilton Avenue
Palo Alto, California 94303 Palo Alto, California 94301
Telephone: (650) 424-0160 Telephone: (650) 833-2000
Facsimile: (650) 496-2885 Facsimile: (650) 833-2001
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this Registration Statement,
satisfaction of other conditions to closing of the merger described herein, and
consummation of the merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered (1) Per Share Price (1) Fee (1)
- -------------------------------------------------------------------------------
Common Stock, par value
$0.01 per share....... 1,748,692 N/A $94,070,868 $23,518
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) This registration statement relates to common stock, par value $0.01 per
share, of Synopsys, Inc. in the proposed merger of Oak Merger Corporation,
a wholly-owned subsidiary of Synopsys, with and into IKOS Systems, Inc.
The filing fee was calculated by multiplying the maximum aggregate number
of shares of IKOS common stock that were outstanding at August 8, 2001,
assuming the issuance and exercise of all IKOS options currently
authorized to be issued (12,534,426 shares), by $7.505, the average of the
high and low prices of IKOS common stock on the Nasdaq National Market on
August 8, 2001, and then multiplying the product by .00025. The actual
number of Synopsys shares registered will be based on (1) the number of
outstanding IKOS shares at the time of closing, (2) the actual price per
share to be paid in the merger and (3) the average Synopsys closing price
during the 10 full trading days ending 5 full trading days before the
closing. Synopsys shall file a pre-effective amendment to this
Registration Statement or an additional Registration Statement to increase
the number of shares of Synopsys Common Stock registered hereby if at the
time of closing of the merger, the number of shares of Synopsys common
stock issuable pursuant to the merger agreement exceeds the number of
shares of Synopsys common stock registered hereby. No inference should be
drawn from the use of the figures set forth above and nothing herein
should be construed as a prediction by Synopsys or IKOS of actual amounts,
prices or exchange ratio. The registration fee was calculated pursuant to
Rule 457(f) under the Securities Act.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to such
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
August , 2001
[IKOS LOGO]
Dear IKOS Systems, Inc. Stockholders:
On behalf of the board of directors of IKOS Systems, Inc., I am pleased to
forward the enclosed proxy statement/prospectus regarding the proposed merger
of IKOS Systems, Inc. with a subsidiary of Synopsys, Inc. We believe the merger
will strengthen the combined company's product offerings, competitive position,
management depth and research and development capabilities, while offering
significant value to our stockholders.
Under the terms of the proposed merger with Synopsys, each share of IKOS
common stock will be exchanged for Synopsys common stock with a value between
$6.00 and $20.00. The exact dollar amount of Synopsys common stock will depend
on when the merger is completed and will be determined by a formula based on
IKOS' financial performance during the 12-month period ending June 30, 2002,
and the number of IKOS shares and options outstanding when the merger is
completed. The Synopsys common stock issued will be valued at the average last
sale price per share of Synopsys common stock for the ten full trading-day
period ending on the fifth trading day prior to the closing date. Completion of
the merger is subject to a number of conditions, including achievement by IKOS
of certain minimum financial milestones for the 12-month period ending June 30,
2002, the absence of legal rulings preventing the merger, retention of certain
IKOS employees and the expiration (scheduled to occur in June 2002) or prior
waiver of Synopsys' agreement with Quickturn Design Systems, Inc. not to engage
in the integrated circuit emulation business. The transaction is described more
fully in this proxy statement/ prospectus.
Before we can merge, the holders of a majority of IKOS' outstanding common
stock must vote to adopt the merger agreement and to approve the merger. The
merger proposal will be voted on at a special meeting of IKOS' stockholders on
[ , 2001] at [10:00 a.m. local time] at the [ ], [ ], [ ], [ ] [ ].
Only those stockholders who hold shares of our common stock at the close of
business on [ ] [ ], 2001 will be entitled to vote at the special meeting.
The IKOS board of directors has carefully considered the terms and
conditions of the merger and has determined that the terms of the merger are
fair to, and that the merger is in the best interests of, IKOS stockholders. By
the unanimous vote of the directors present at the board meeting at which the
merger was considered and voted upon, the board of directors has approved the
merger agreement and the merger and recommends that you vote FOR the adoption
of the merger agreement and approval of the merger.
This proxy statement/prospectus provides you with detailed information
concerning Synopsys, IKOS and the merger. Please give all of the information in
the proxy statement/prospectus your careful attention. In particular, you
should carefully consider the discussion in the section entitled "Risk Factors"
beginning on page 16.
YOUR VOTE IS VERY IMPORTANT. To adopt the merger agreement and approve the
merger, you must vote FOR the proposal by following the instructions stated on
the enclosed proxy card. Since adoption of the merger agreement and approval of
the merger require the affirmative vote of the holders of a majority of the
outstanding IKOS shares entitled to vote at the special meeting, a failure to
vote will, in effect, count as a vote against adoption of the merger agreement
and approval of the merger.
Whether or not you plan to attend the special meeting, PLEASE COMPLETE,
SIGN, DATE AND PROMPTLY RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. If you attend the special meeting, you may vote in person if you
wish, even though you have previously returned your proxy.
On behalf of the IKOS board of directors, I thank you for your support and
urge you to vote FOR adoption of the merger agreement and approval of the
merger among IKOS, Synopsys and a subsidiary of Synopsys.
Sincerely,
Ramon Nunez
President and Chief Executive Officer
IKOS Systems, Inc.
79 Great Oaks Boulevard, San Jose, CA 95119/Tel (408) 284-0400 Fax (408) 284-
0401
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the Synopsys
common stock to be issued in the merger or determined whether this proxy
statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
This proxy statement/prospectus is dated August , 2001, and is first
being mailed to IKOS stockholders on or about August , 2001.
IKOS Systems, Inc.
79 Great Oaks Boulevard
San Jose, CA 95119
(408) 284-0400
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [ , 2001]
To the Stockholders of IKOS Systems, Inc.:
We will hold a special meeting of stockholders of IKOS Systems, Inc.,at
[10:00 a.m. local time], on [ , 2001] at the [ ], [Address], for the
following purposes:
1. To consider and vote on a proposal to adopt the agreement and plan of
merger and reorganization, dated July 2, 2001, as amended, by and among
Synopsys, Inc., Oak Merger Corporation, a wholly-owned subsidiary of Synopsys,
and IKOS pursuant to which, among other things, Oak Merger Corporation will
merge with and into IKOS, IKOS will become a wholly-owned subsidiary of
Synopsys and each outstanding share of IKOS common stock will be converted into
the right to receive the number of shares (or fraction of a share) of Synopsys
common stock prescribed by the agreement; and
2. To transact such other business as may properly come before the special
meeting.
We describe these items of business more fully in the proxy
statement/prospectus attached to this notice. Please give all of the
information in the proxy statement/prospectus your careful attention.
Only stockholders of record of IKOS common stock at the close of business on
[ ] [ ], 2001 are entitled to notice of, and will be entitled to vote at, the
special meeting or any adjournment or postponement thereof. At the close of
business on such record date, IKOS had outstanding and entitled to vote [ ]
shares of common stock.
The IKOS board of directors has carefully considered the terms and
conditions of the merger and has determined that the terms of the merger are
fair to, and that the merger is in the best interests of, IKOS stockholders. By
the unanimous vote of the directors present at the board meeting at which the
merger was considered and voted upon, the board of directors has approved the
merger agreement and the merger and recommends that you vote FOR the adoption
of the merger agreement and the approval of the merger.
YOUR VOTE IS VERY IMPORTANT. Since adoption of the merger agreement and
approval of the merger require the affirmative vote of the holders of a
majority of the outstanding IKOS shares entitled to vote at the special
meeting, a failure to vote will in effect, count as a vote against adoption of
the merger agreement and approval of the merger. To assure that your shares are
represented at the special meeting, you are urged to complete, date, sign and
promptly return your proxy card in the enclosed postage-paid envelope whether
or not you plan to attend the special meeting in person. If you sign, date and
mail your proxy card without indicating how you wish to vote, your proxy will
be voted in favor of adoption of the agreement and plan of merger and approval
of the merger. You may revoke your proxy in the manner described in the
accompanying proxy statement/prospectus at any time before it has been voted at
the special meeting. Any stockholder who attends the special meeting may revoke
his, her or its proxy and vote in person.
By Order of the Board of Directors
Ramon Nunez
President and Chief Executive
Officer
San Jose, California
August , 2001
[IKOS LOGO] [SYNOPSYS LOGO]
Proxy Statement Prospectus
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER................................... iii
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................................ 1
MARKET PRICE AND DIVIDEND INFORMATION.................................... 14
RISK FACTORS............................................................. 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................ 28
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. 29
THE SPECIAL MEETING...................................................... 37
Proxy Statement/Prospectus............................................. 37
Date, Time and Place of the Special Meeting............................ 37
Matters to be Considered at the Special Meeting........................ 37
Record Date and Shares Entitled to Vote................................ 37
Voting of Proxies...................................................... 37
Vote Required for Stockholder Approval................................. 38
Quorum; Abstentions and Broker Non-Votes............................... 38
Solicitation of Proxies................................................ 38
No Dissenters' Rights.................................................. 38
Board Recommendation................................................... 38
THE MERGER AND RELATED TRANSACTIONS...................................... 40
Background of the Merger............................................... 40
Reasons for the Merger................................................. 43
Recommendation of IKOS' Board of Directors............................. 47
Opinion of Needham & Company, Inc., Financial Advisor to IKOS.......... 47
Completion and Effectiveness of the Merger............................. 52
Structure of the Merger and Calculation of Purchase Price Per IKOS
Share................................................................. 52
Exchange of IKOS Stock Certificates for Synopsys Stock Certificates.... 55
Treatment of IKOS Stock Options and Stock Incentive Plans.............. 56
Treatment of Outstanding Purchase Rights under the IKOS 1996 Employee
Stock Purchase Plan................................................... 57
Other Provisions of the Merger Agreement............................... 57
Related Agreements..................................................... 70
Operations Following the Merger........................................ 70
Indemnification Matters................................................ 70
Interests of IKOS Directors, Officers and Affiliates in the Merger..... 71
Antitrust Approval..................................................... 73
Material United States Federal Income Tax Considerations............... 74
Accounting Treatment................................................... 76
No Dissenters' Rights.................................................. 76
Restrictions on Sale of Shares by Affiliates of IKOS................... 76
BUSINESS OF IKOS......................................................... 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF IKOS................................................... 83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF IKOS... 91
i
Page
----
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SYNOPSYS AND STOCKHOLDERS OF
IKOS.................................................................. 92
EXPERTS................................................................ 100
LEGAL MATTERS.......................................................... 100
STOCKHOLDER PROPOSALS.................................................. 100
WHERE YOU CAN FIND MORE INFORMATION.................................... 101
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................ 102
INDEX TO FINANCIAL STATEMENTS OF IKOS SYSTEMS, INC..................... F-1
APPENDICES:
Appendix A -- Agreement and Plan of Merger and Reorganization.......... A-1
Appendix A-1 -- First Amendment to the Agreement and Plan of Merger and
Reorganization........................................................ A-1(1)
Appendix B -- Form of Voting Agreement................................. B-1
Appendix C -- Opinion of Needham & Company, Inc........................ C-1
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are Synopsys and IKOS proposing the merger?
A: Synopsys and IKOS believe that the merger presents an opportunity to link
two complementary product lines--software-based integrated circuit
verification solutions and hardware-assisted acceleration and emulation
products. By integrating our product lines, the combined company will
offer customers a more comprehensive set of verification solutions,
providing opportunities to reach new customers and to expand relationships
with existing customers. By integrating our sales and support efforts,
customers will be able to reduce their transactional costs by interacting
with a single vendor. By combining our research and development efforts we
believe that the combined company will have greater expertise and a
stronger strategic position to develop new verification technologies. In
addition, IKOS believes that the merger will provide IKOS with additional
resources to grow more quickly than if IKOS remained independent, and will
provide IKOS stockholders the opportunity to hold equity in a larger
company better positioned to deliver increased stockholder value over the
long term.
Q: When will the merger be completed?
A: Completion of the merger is subject to obtaining the approval of IKOS
stockholders and satisfaction of other conditions. We hope to complete the
merger by the end of August 2002.
Q: Why is the closing date scheduled for August 2002?
A: The August 2002 closing date is intended to ensure that Synopsys fully
honors an agreement not to engage in the integrated circuit emulation
business for five years, made in June 1997 when Synopsys sold its
emulation technology to Quickturn Design Systems. This agreement is
discussed more fully on page 17. Since the merger cannot close until the
Quickturn non-competition agreement expires or is terminated, Synopsys and
IKOS agreed to base the purchase price per IKOS share on IKOS' financial
performance over the 12-month period ending on June 30, 2002. The August
closing date has been set to permit calculation and review of the
performance formulas that will determine the purchase price per IKOS
share. Either party has the right to terminate the merger agreement if the
merger is not completed by September 14, 2002, except this date may be
extended to October 14, 2002 if the calculations referred to above have
not been completed by September 14, 2002.
Q: What will I receive in the merger?
A: If the merger is completed, for each share of IKOS common stock you own,
you will receive Synopsys common stock valued at between $6 and $20. The
exact purchase price per IKOS share will be determined by a formula based
on IKOS' financial performance during the 12-month measurement period
ending June 30, 2002. If the merger closes before June 30, 2002, which
requires, among other things, termination or waiver of Synopsys' agreement
not to engage in the emulation business and the agreement of both parties,
you will receive Synopsys common stock valued at $15 for each share of
IKOS common stock you own. In addition, the purchase price per IKOS share
is subject to reduction if the number of outstanding IKOS shares and
options exceeds certain maximum levels.
The Synopsys common stock issued will be valued at the average last sale
price per share of Synopsys common stock for the ten full trading-day
period ending on the fifth full trading day prior to the closing date of
the transaction. Given the fact that the purchase price per IKOS share
will be based on IKOS' future financial performance, we cannot predict or
determine and you will not know the actual number of shares of Synopsys
common stock that you will receive in the merger until the completion of
the merger. Synopsys will not issue fractional shares of common stock. You
will receive cash based on the market price of Synopsys common stock
instead of any fractional share.
Synopsys is traded on the Nasdaq National Market under the trading symbol
"SNPS." On [ ] [ ], 2001, Synopsys common stock closed at [$ . ] per
share.
IKOS is traded on the Nasdaq National Market under the trading symbol of
"IKOS." On
iii
[ ][ ], 2001, IKOS Common Stock closed at [$ . ] per share.
Q: Will IKOS stockholders be able to sell the Synopsys stock they receive in
the merger?
A: Yes. All shares of Synopsys common stock received in the merger will be
freely transferable unless you are considered an "affiliate" of IKOS for
purposes of the Securities Act of 1933. Persons who are deemed affiliates
of IKOS will be required to comply with Rules 144 and 145 under the
Securities Act.
Q: Are there risks I should consider in deciding whether to vote for the
merger?
A: Yes. We have set out in the section entitled "Risk Factors" beginning on
page 16 of this proxy statement/prospectus a number of risk factors that
you should consider in connection with the merger.
Q: How will the merger affect IKOS stock options?
A: Options to purchase shares of IKOS common stock will be assumed by
Synopsys and become exercisable for shares of Synopsys common stock after
the merger. The number of shares of Synopsys common stock issuable upon
the exercise of any given IKOS option will be determined by multiplying
the exchange ratio by the number of shares of IKOS common stock underlying
the option, rounded down to the nearest whole number, and the per share
exercise price of any given option will be determined by dividing the
exercise price of the option by the exchange ratio, rounded up to the
nearest whole cent.
Q: How do I vote?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at the special meeting. If
your shares are held in "street name" by your broker, your broker will
vote your shares only if you provide instructions to him or her on how to
vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. Without instructions,
your shares will not be voted at the special meeting. Since adoption of
the merger agreement and approval of the merger require the affirmative
vote of a majority of the outstanding shares entitled to vote, if you do
not vote your shares it will have the same effect as voting against
adoption of the merger agreement and approval of the merger.
Q: Can I change my vote after I have mailed my proxy?
A: Yes. You may change your vote by delivering a signed notice of revocation
or a subsequently dated, signed proxy card to IKOS' corporate secretary
before the stockholder meeting, or by attending the stockholder meeting
and voting in person.
Q: Should I send in my stock certificates now?
A: No. After we complete the merger, Synopsys will send instructions to you
explaining how to exchange your shares of IKOS common stock for the
appropriate number of shares of Synopsys common stock.
Q: Do I have any dissenters' rights?
A: No. Under Delaware law, you are not entitled to dissenters' rights in
connection with the merger.
Q: What are the tax consequences of the merger to me?
A: We expect the merger will qualify as a "reorganization" for federal income
tax purposes. If the merger qualifies as a reorganization, you generally
will not recognize any gain or loss for federal income tax purposes upon
the exchange of your IKOS shares for shares of Synopsys common stock,
although you will recognize taxable income with respect to any cash
received in lieu of a fractional share of common stock. You should consult
your own tax advisor regarding the tax consequences of the merger to you.
For a more detailed description of the tax consequences of the merger, see
the section of this proxy statement/prospectus entitled "The Merger and
Related Transactions--Material United States Federal Income Tax
Considerations" beginning on page 74.
Q: Will there be any changes in my rights as a stockholder?
A: Yes. As a stockholder of IKOS, your rights are currently governed by IKOS'
certificate of incorporation and bylaws. After completion of the merger,
you will become a stockholder of
iv
Synopsys. As a Synopsys stockholder, your rights will be governed by
Synopsys' certificate of incorporation and bylaws. Both IKOS and Synopsys
are incorporated in Delaware. For a more detailed description of
differences in these rights, see the section of this proxy statement/
prospectus entitled "Comparison of Rights of Stockholders of Synopsys and
Stockholders of IKOS" beginning on page 92.
Q: Is Synopsys stockholder approval required?
A: The merger agreement does not require Synopsys to seek approval of its
stockholders for the issuance of Synopsys common stock in the merger and
Synopsys does not expect that such approval will be required. If, however,
as a result of a significant decrease in Synopsys' stock price from the
price as of the date of this proxy statement/prospectus (or a significant
decrease in Synopsys' stock price combined with a strong financial
performance by IKOS during the measurement period), Synopsys is required
to issue 20% or more of Synopsys' outstanding shares, Synopsys would be
required to obtain stockholder approval. In this case, Synopsys has no
obligation to seek such approval and the merger agreement does not require
either party to complete the merger. In that event, the merger may not
close.
Q: Whom can I call with questions?
A: If you have any questions about the merger, you may call [ ] with [ ],
IKOS' proxy solicitor, at [ ], or [ ] with Synopsys, at [ ].
v
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. This section includes page references in parentheses to
direct you to a more complete description of the topics presented in this
summary. You should carefully read this entire proxy statement/prospectus,
including the appendices, and the other documents we refer to for a more
complete understanding of the merger and related transactions. The agreement
and plan of merger and reorganization and the first amendment to the agreement
and plan of merger and reorganization are attached as Appendix A and Appendix
A-1, respectively, to this proxy statement/prospectus and additional documents
relating to the transaction are also attached hereto. The merger agreement is
summarized in this proxy statement/prospectus, but for a more complete
description of the rights of Synopsys and IKOS, you should read the merger
agreement in its entirety. You are also encouraged to read the additional
documents attached hereto in their entirety.
This proxy statement/prospectus includes or incorporates by reference
important business and financial information about Synopsys and IKOS. You may
obtain the information incorporated by reference into this proxy
statement/prospectus without charge by following the instructions in the
section entitled "Where You Can Find More Information" on page 101 of this
proxy statement/prospectus.
In this proxy statement/prospectus, information regarding Synopsys has been
supplied solely by Synopsys and information regarding IKOS has been supplied
solely by IKOS. Each party disclaims responsibility for independently verifying
the accuracy or completeness of the information provided by the other.
The Companies
SYNOPSYS, INC.
700 East Middlefield Road
Mountain View, CA 94043
www.synopsys.com
(650) 584-5000
Synopsys is a leading supplier of electronic design automation, or EDA,
software to the global electronics industry. Synopsys' products are used by
designers of integrated circuits, or ICs, including system-on-a-chip ICs, and
electronic products such as computers, cell phones, and Internet routers, that
use such ICs, to automate significant portions of their chip design process.
ICs are distinguished by the speed at which they run, their area, the amount of
power they consume and their cost of production. Synopsys' products offer its
customers the opportunity to design ICs that are optimized for speed, area,
power consumption and production cost, while reducing overall design time.
Synopsys also provides consulting services to assist customers with their IC
designs, as well as training and support services. Synopsys was incorporated in
Delaware in 1987.
IKOS SYSTEMS, INC.
79 Great Oaks Boulevard
San Jose, CA 95119
www.ikos.com
(408) 284-0400
IKOS develops, manufactures, markets, and supports systems for the
verification of complex electronic system designs. IKOS' mission is to help
customers verify the functional correctness of their high complexity electronic
system designs. IKOS differentiates its hardware verification solutions from
those of its competitors by offering simulation-like ease of use coupled with
the capacity to handle very large semiconductor designs. IKOS also provides
services to customers to assist in the integration and deployment of IKOS'
solutions. IKOS was incorporated in California in 1984 and reincorporated in
Delaware in May 1990.
Structure of the Merger and Calculation of Purchase Price Per IKOS Share (see
page 52)
IKOS and Synopsys have entered into a merger agreement that provides for the
merger of Oak Merger Corporation, a newly formed wholly-owned subsidiary of
Synopsys, with and into IKOS. IKOS will be the surviving corporation in the
merger and will become a wholly-owned subsidiary of Synopsys.
Upon completion of the merger, IKOS stockholders will receive Synopsys
common stock in exchange for their IKOS shares. If the merger closes, as
expected, after June 30, 2002, the dollar amount of Synopsys common stock you
will receive will depend upon the financial performance of IKOS during the 12-
month period ending June 30, 2002 (referred to in this proxy
statement/prospectus as the "measurement period"). For each share of IKOS
common stock that you own, you will be entitled to receive Synopsys common
stock with a value between $6 and $20.
As described in the summary below, you will not know the exact purchase
price per IKOS share or the number of shares of Synopsys common stock you will
receive until August 2002. The complete text of the merger agreement, which
describes the formulas by which the purchase price per IKOS share will be
calculated, is included in this proxy statement/prospectus as Appendix A. For a
more complete description of the formulas, we urge you to read Article II of
the merger agreement.
IKOS' financial performance will be measured according to the provisions of
the merger agreement. As provided in the merger agreement, after the close of
the measurement period, IKOS, subject to review by Synopsys and its advisors,
will determine IKOS' revenue, revenue plus change in backlog, and profit (loss)
before tax, or PBT, during the measurement period, in each case based on
definitions included in the merger agreement. The purchase price per IKOS share
will be calculated using all three of these measurements of IKOS' financial
performance during the measurement period.
For the purposes of the merger agreement, "revenue" is defined as IKOS'
revenue during the measurement period as reflected in audited financial
statements prepared in accordance with generally accepted accounting
principles. "Revenue plus change in backlog" is the sum of revenue for the
measurement period and the change (positive or negative) in backlog during the
measurement period. "Backlog" is defined as the dollar amount, as of June 30,
2001 or June 30, 2002, of all non-cancellable orders made in accordance with
IKOS' order acceptance policy for IKOS products and services with scheduled
shipment or performance dates within six months of either June 30, 2001 or June
30, 2002 but which have not been invoiced by IKOS, plus all deferred revenue as
reflected in IKOS' audited financial statements. Change in backlog is the
difference between backlog at the end of the measurement period and backlog at
the beginning of the measurement period and is limited for given amounts of
revenue. PBT is IKOS' profit or loss before taxes, but with certain significant
items excluded. IKOS' PBT as used to determine the purchase price per IKOS
share, therefore, may differ substantially from PBT as used in IKOS' publicly
filed financial statements.
2
The following graph summarizes the purchase price per IKOS share at
different levels of revenue, revenue plus change in backlog and PBT. As
indicated in the graph, the formulas contained in the merger agreement provide
for proportionate increases in the purchase price per IKOS share as revenue,
revenue plus change in backlog or PBT increase from one level to the next.
[GRAPH]
Purchase Price Per IKOS
Share ($ IKOS Share)
________________________________________________________
$20 $20
$18
________________________________________________________
$15 $15
$12
________________________________________________________
$10 $9
$6
$5 ________________________________________________________
(In millions)
Revenue $50 $60 $70 $80 $90 (EQUAL OR GREATER THAN) 100
Revenue Plus Change 50 60 70 80 90 (EQUAL OR GREATER THAN) 100
in Backlog
PBT (10) (5) 0 8 14 (EQUAL OR GREATER THAN) 18
The purchase price per IKOS share will be the lower of the purchase price
per IKOS share determined by revenue plus change in backlog or the purchase
price per IKOS share determined by PBT, with one exception. If the purchase
price per IKOS share determined by PBT is lower than the purchase price per
IKOS share determined by revenue plus change in backlog but the same or higher
than the purchase price per IKOS share determined by revenue without regard to
backlog, the purchase price per IKOS share will be determined by revenue plus
change in backlog. See the section entitled "The Merger and Related
Transactions--Structure of the Merger and Calculation of Purchase Price Per
IKOS Share" on page 52 for a more detailed explanation of this exception.
If Synopsys' agreement not to compete in the emulation business is
terminated, waived, or determined to be inapplicable, the merger could close
before the August 2002 target date, but only if Synopsys and IKOS both consent.
If the merger closes before June 30, 2002, you will receive Synopsys common
stock with a value of $15 for each share of IKOS stock you own, regardless of
IKOS' financial performance.
Regardless of when the merger closes, the purchase price per IKOS share will
be reduced if the number of outstanding IKOS shares and options at the time of
the closing of the merger exceeds an agreed-upon level. However, the purchase
price per IKOS share will not be less than $6.
The number of shares of Synopsys common stock you will receive in exchange
for each share of IKOS common stock will be equal to the purchase price per
IKOS share divided by the average last sale price per share of Synopsys common
stock for the ten full trading-day period ending on the fifth full trading day
prior to the closing date of the merger. This number is referred to as the
"exchange ratio." The total number of shares of Synopsys common stock you will
receive in the merger will equal the total number of IKOS shares you own
multiplied by the exchange ratio. The exchange ratio will be proportionately
adjusted for any stock split, stock dividend, reorganization or similar change
in IKOS common stock or Synopsys common stock. IKOS stockholders will receive
cash in lieu of any fractional shares to which they might otherwise be entitled
when their IKOS shares are converted into Synopsys shares.
3
Reasons for the Merger (see page 43)
The following is a partial summary of the Synopsys board's and IKOS board's
reasons for the merger. For a more complete description of the reasons of each
party, see page 43.
Synopsys
By the unanimous vote of the directors present, the board of directors of
Synopsys has determined that the merger is in the best interest of Synopsys and
its stockholders, and has identified several potential benefits, including:
. allowing Synopsys to offer its customers a more comprehensive and
integrated set of verification solutions by linking Synopsys'
simulation, test bench automation and formal verification software tools
to IKOS' hardware-assisted acceleration and emulation products;
. enabling Synopsys' customers to obtain their verification solutions for
their complex "system on a chip" designs from a single supplier,
creating new opportunities to sell the full range of Synopsys products
to customers who may only be using a limited number of Synopsys
verification products and potentially reducing customers' transactional
costs by interacting with a single vendor;
. expanding Synopsys' customer and relationship base;
. giving Synopsys additional expertise and a stronger strategic position
to develop new verification technologies, including IKOS' potentially
significant on-going research and development efforts; and
. providing new opportunities for revenue growth for Synopsys'
verification products.
IKOS
By the unanimous vote of the directors present, the board of directors of
IKOS has determined that the terms of the merger are fair to, and that the
merger is in the best interests of IKOS and its stockholders, and has
identified several potential benefits, including:
. the combined company's ability to offer its customers a more
comprehensive set of verification solutions, from Synopsys' simulation,
test bench automation and formal verification software tools to IKOS'
hardware-assisted acceleration and emulation products, providing
increased sales opportunities for the combined company;
. the fact that Synopsys' larger market capitalization, broader suite of
complementary products and services, larger installed base of customers
and worldwide brand recognition will provide IKOS with additional
resources and opportunities to grow and gain market share more rapidly
following the merger than IKOS would likely be able to as an independent
company following the merger;
. the expected synergies from the combined research and development, and
marketing and sales efforts of the two companies following the merger;
. the fact that the IKOS stockholders will have greater liquidity
available upon exchange of their shares of IKOS common stock for shares
of Synopsys common stock, which trade in significantly higher share
volumes;
. the fact that the range of merger consideration compensates IKOS
stockholders based on IKOS' financial performance during the measurement
period at what the IKOS board believed would be premiums to expected
trading prices resulting from such performance absent a business
combination; and
. the potential for merger consideration representing a significant
premium to the trading price of IKOS common stock on the date of the
merger agreement if IKOS' financial performance is at the high end of
the performance targets;
4
Vote Required for Stockholder Approval (see page 38)
For the merger to go forward, the holders of a majority of the outstanding
shares of IKOS common stock must adopt the merger agreement and approve the
merger. You are entitled to cast one vote per share of IKOS common stock you
owned as of [ ] [ ], 2001, the record date. The merger agreement
does not require Synopsys to seek approval of its stockholders for the issuance
of Synopsys common stock in the merger and Synopsys does not expect that such
approval will be required. If, however, as a result of a significant decrease
in Synopsys' stock price from the price as of the date of this proxy statement/
prospectus (or a significant decrease in Synopsys' stock price combined with a
strong financial performance by IKOS during the measurement period), Synopsys
is required to issue 20% or more of Synopsys' outstanding shares, Synopsys
would be required to obtain stockholder approval. In this case, Synopsys has no
obligation to seek such approval and the merger agreement does not require
either party to complete the merger. In that event, the merger may not close.
Recommendation of IKOS' Board of Directors (see page 47)
The IKOS board of directors has carefully considered the terms and
conditions of the merger and has determined that the terms of the merger are
fair to, and that the merger is in the best interests of, IKOS stockholders. By
the unanimous vote of the directors present at the board meeting at which the
merger was considered and voted upon, the board of directors has approved the
merger agreement and the merger and recommends that you vote FOR the adoption
of the merger agreement and approval of the merger.
Opinion of IKOS' Financial Advisor (see page 47)
Needham & Company, Inc., IKOS' financial advisor, delivered an opinion to
the IKOS board of directors that, as of the date of the opinion and based on
the procedures followed, factors considered and assumptions made by Needham &
Company, and subject to the limitations set forth in the opinion, the exchange
ratio is fair, from a financial point of view, to the stockholders of IKOS. The
complete opinion of Needham is attached as Appendix C to this proxy
statement/prospectus. We urge you to read it in its entirety.
Conditions to the Merger (see page 59)
Synopsys' and IKOS' respective obligations to complete the merger and the
other transactions contemplated by the merger agreement are subject to the
prior satisfaction or waiver of a number of conditions. If either Synopsys or
IKOS waives any conditions, the parties will consider the facts and
circumstances at that time and make a determination as to whether a
resolicitation of proxies from IKOS stockholders is required.
Termination of the Merger Agreement (see page 62)
IKOS and Synopsys may terminate the merger agreement at any time prior to
completion of the merger by mutual agreement or unilaterally if the merger has
not closed by September 14, 2002. However, this date may be extended to October
14, 2002 if the IKOS financial performance determinations have not been
completed by September 14, 2002. In addition, under specific circumstances,
which are described on page 62 of this proxy statement/prospectus in the
section entitled "The Merger and Related Transactions--Other Provisions of the
Merger Agreement--Termination of the Merger Agreement," either Synopsys or IKOS
may be entitled to unilaterally terminate the merger agreement. As described
herein, termination may result in payment of a termination fee by IKOS to
Synopsys.
5
Payment of Termination Fees and Expenses (see page 65)
IKOS is required to pay Synopsys termination fees of up to $5,500,000 in
case of certain terminations of the merger agreement described on page 65 of
this proxy statement/prospectus in the section entitled "The Merger and Related
Transactions--Other Provisions of the Merger Agreement--Payment of Termination
Fees and Expenses."
No-shop Provision (see page 66)
IKOS has agreed, among other restrictions described in this proxy
statement/prospectus on page 66 in the section entitled "The Merger and Related
Transactions--Other Provisions of the Merger Agreement--No-shop Provision,"
that it will not solicit, initiate, intentionally encourage or facilitate any
agreement with respect to a business combination or similar transaction with
another party while the merger is still pending, and to notify its employees of
these restrictions.
IKOS may, subject to limitations described in this proxy
statement/prospectus in the section entitled "The Merger and Related
Transactions--Other Provisions of the Merger Agreement--No-shop Provision,"
engage in negotiations or discussions with, disclose nonpublic information to,
or afford access to its books, records and properties with a third party if the
third party has made an unsolicited "superior proposal," as defined in the
merger agreement, and certain other conditions are met, and IKOS' board of
directors determines that its fiduciary duties require it to take such action.
Otherwise, IKOS is prohibited from taking any such actions.
Stockholders Holding Approximately 4% of IKOS' Common Stock Have Entered into
Voting Agreements Requiring Them to Vote in Favor of the Merger (see page 70)
All of the directors and executive officers of IKOS have signed or are
expected to sign voting agreements agreeing to vote in favor of the merger and
against any competing offer, with certain exceptions.
The shares of IKOS common stock subject to the voting agreements represent
approximately 4% of the outstanding IKOS common stock as of June 30, 2001.
Interests of IKOS' Directors, Officers and Affiliates in the Merger (see page
71)
When considering the recommendation of the IKOS board of directors with
respect to the adoption of the merger agreement and approval of the merger, you
should be aware that members of IKOS' management and board of directors will
receive benefits as a result of the merger and have interests in the merger
that are different from or in addition to yours. For instance, options held by
IKOS' non-employee directors will accelerate and vest in full as a result of
the merger. In addition, certain executive officers of IKOS have executed or
will execute employment and/or severance agreements providing for, among other
things, cash payments and accelerated vesting of their unvested option shares
in case of certain terminations of their employment by Synopsys. IKOS
stockholders should consider whether these interests may have influenced these
directors and officers to support or recommend the merger. As of June 30, 2001,
directors and executive officers of IKOS and affiliates (including the
stockholders who signed or are expected to sign voting agreements) held
approximately 4% of the outstanding shares of IKOS common stock entitled to
vote. To adopt the merger agreement and to approve the merger, the holders of a
majority of the outstanding shares of IKOS common stock must vote for adoption
and approval. A description of additional interests of directors and officers
that may be different from, or in addition to, yours can be found on page 71 of
this proxy statement/prospectus in the section entitled "The Merger and Related
Transactions--Interests of IKOS' Directors, Officers and Affiliates in the
Merger."
6
Material United States Federal Income Tax Considerations of the Merger (see
page 74)
The exchange of shares of IKOS common stock for Synopsys common stock in the
merger is intended to be tax-free to IKOS stockholders for federal income tax
purposes, except to the extent of cash received by IKOS stockholders in respect
of fractional shares. It is a condition to the merger that Synopsys and IKOS
receive legal opinions from their respective tax counsel to the effect that the
merger will constitute a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code; provided that if counsel to IKOS does not render
such an opinion, the condition will be satisfied if counsel to Synopsys renders
such an opinion to Synopsys. TAX MATTERS CAN BE COMPLICATED AND THE TAX
CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN
SITUATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO FULLY UNDERSTAND THE TAX
CONSEQUENCES OF THE MERGER TO YOU.
Accounting Treatment of the Merger (see page 76)
Under generally accepted accounting principles, Synopsys will account for
the merger using the purchase method of accounting. Under the purchase method
of accounting, the purchase price recorded by Synopsys will be equal to the
market value of its common stock issued in connection with the merger and the
fair value of its options to purchase Synopsys common stock that will be issued
in exchange for IKOS' outstanding common stock options, each determined at the
date of the merger, plus the amount of directly related acquisition costs.
Antitrust Approval Required to Complete the Merger (see page 73)
The merger is subject to antitrust laws. Synopsys and IKOS are required to
make filings with the United States Department of Justice and the Federal Trade
Commission. Synopsys and IKOS will also make any required filings with foreign
regulatory agencies, or governmental entities, if necessary and applicable.
Synopsys and IKOS are not permitted to complete the merger until all relevant
waiting periods have expired or terminated.
Restrictions on the Ability to Sell Synopsys Stock (see page 76)
All shares of Synopsys common stock received by you in connection with the
merger will be freely transferable unless you are considered an "affiliate" of
IKOS for purposes of the Securities Act of 1933, as amended, or the Securities
Act.
You Do Not Have Dissenters' Rights (see page 76)
Under Delaware law, you are not entitled to dissenters' rights in the
merger.
7
Summary Selected Historical Consolidated Financial Data
The following table presents Synopsys' historical financial results.
Synopsys' summary financial data for the fiscal years ended September 30,
1998, September 30, 1999 and October 31, 2000 and as of September 30, 1999 and
October 31, 2000 has been derived from its audited consolidated financial
statements and related notes thereto incorporated into this proxy
statement/prospectus by reference. Synopsys' summary financial data as of
September 30, 1998 and as of and for the fiscal years ended September 30, 1996
and 1997 has been derived from its audited consolidated financial statements
and related notes thereto which has not been included in or incorporated by
reference into this proxy statement/prospectus. Synopsys' historical financial
data as of and for the six months ended April 30, 2001 has been derived from,
and should be read in conjunction with, Synopsys' unaudited consolidated
financial statements and the notes thereto that are incorporated by reference
into this proxy statement/ prospectus. The unaudited results of operations data
for the six months ended April 30, 2001 are not necessarily indicative of the
results to be expected for any other interim period or for the fiscal year as a
whole. However, in the opinion of Synopsys' management, the interim financial
data presented reflects all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial condition at
such date and the results of operations for such period. The historical
financial information may not be indicative of Synopsys' future performance.
Fiscal Years Ended September Fiscal Year Six Months
30,(1)(2) Ended Ended
------------------------------------- October 31, April 30,
1996 1997 1998 1999 2000(2) 2001(2)
-------- -------- -------- ---------- ----------- -----------
(unaudited)
(in thousands, except per share data)
Synopsys, Inc.
Historical Consolidated
Statement of Operations
Data:
Revenue................ $525,599 $646,956 $717,940 $ 806,098 $ 783,778 $320,678
Income before income
taxes and
extraordinary
items(3).............. 40,228 132,793 116,861 251,411 145,938 32,286
Provision for income
taxes................. 23,426 51,043 55,819 90,049 48,160 10,332
Extraordinary items,
net of income tax
expense(4)............ -- -- 28,404 -- -- --
Net income............. 16,802 81,750 89,446 161,362 97,778 21,954
Net income per share:
Basic................ 0.28 1.30 1.34 2.30 1.43 .35
Diluted.............. 0.27 1.24 1.29 2.20 1.38 .33
Historical Consolidated
Balance Sheet Data:
Working capital........ $238,942 $336,675 $504,759 $ 627,207 $ 331,857 $215,021
Total assets........... 584,853 769,499 951,633 1,173,918 1,050,993 982,426
Long-term debt, less
current portion....... 15,974 9,191 13,138 11,642 564 454
Stockholders' equity... 350,547 502,445 664,941 865,596 682,829 548,169
- -------
(1) Amounts and per share data for periods presented have been retroactively
restated to reflect Synopsys' mergers with Viewlogic Systems, Inc.
effective December 4, 1997 and Everest Design Automation, Inc. effective
November 21, 1998. Both mergers were accounted for under the pooling-of-
interests method of accounting.
(2) Synopsys has a fiscal year that ends on the Saturday nearest October 31.
Fiscal years 2000, 1999, 1997 and 1996 were 52-week years while fiscal
year 1998 was a 53-week year. Fiscal year 2001 will be a 53-week year. For
presentation purposes, the consolidated financial statements refer to the
calendar month end. Prior to fiscal year 2000, Synopsys' fiscal year ended
on the Saturday nearest to September 30. The period from October 1, 1999
through October 31, 1999 was a transition period. During the transition
period, revenue, loss before income taxes, benefit for income taxes and
net loss were $23.2 million, $25.5 million, $9.9 million, and $15.5
million, respectively, and basic and diluted loss per share was $0.22. The
net loss during the transition period is due to the fact that sales in the
first month following a quarter end are historically weak. As of October
31, 1999, working capital, total assets, long-term debt, less current
portion, and stockholders' equity were $621.9 million, $1.2 billion, $11.3
million and $872.6 million, respectively.
(3) Includes charges of $64.5 million, $5.5 million, $33.1 million, $21.2
million, and $1.7 million for the years ended September 30, 1996, 1997,
1998, 1999 and October 31, 2000, respectively, for in-process research and
development. Includes merger-related and other costs of $51.0 million and
$11.4 million for the years ended September 30, 1998 and 1997,
respectively.
(4) On October 2, 1998, Synopsys sold a segment of the Viewlogic business for
$51.9 million in cash. As a result of the transaction, Synopsys recorded
an extraordinary gain of $26.5 million, net of income tax expense, in the
fourth quarter of fiscal 1998.
8
The following table presents IKOS' historical financial results.
IKOS' summary financial data for the fiscal years ended October 3, 1998,
October 2, 1999 and September 30, 2000 and as of October 2, 1999 and September
30, 2000 has been derived from its audited consolidated financial statements
and related notes thereto that are included in this proxy statement/prospectus.
IKOS' summary financial data as of October 3, 1998 and as of and for the fiscal
years ended September 28, 1996 and September 27, 1997 have been derived from
its audited consolidated financial statements and related notes thereto that
are not included in this proxy statement/prospectus. IKOS' historical financial
data for the six months ended March 31, 2001 has been derived from, and should
be read in conjunction with, IKOS' unaudited consolidated financial statements
and the related notes thereto that are included in this proxy
statement/prospectus. The unaudited consolidated results of operations data for
the six months ended March 31, 2001 are not necessarily indicative of the
results to be expected for any other interim period or for the fiscal year as a
whole. However, in the opinion of IKOS' management, the interim financial data
presented reflects all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial condition at
such date and the results of operations for such period. The historical
financial information may not be indicative of IKOS' future performance.
Fiscal Years Ended
--------------------------------------------------------------- Six Months
September 28, September 27, October 3, October 2, September 30, Ended March
1996 1997 1998 1999 2000 31, 2001
------------- ------------- ---------- ---------- ------------- -----------
(unaudited)
(in thousands, except per share data)
IKOS Systems, Inc.
Historical Consolidated
Statement of Operations
Data:
Revenue............... $45,341 $56,096 $40,893 $56,333 $72,796 $38,419
Income (loss) before
income taxes......... 559 2,418 (22,326) 3,106 11,038 3,809
Provision (benefit)
for income taxes..... (1,892) 1,023 4,928 650 2,750 975
Net income (loss)..... 2,451 1,395 (27,254) 2,456 8,288 2,834
Net income (loss) per
share:
Basic............... 0.33 0.17 (3.24) 0.30 0.97 0.32
Diluted............. 0.30 0.16 (3.24) 0.27 0.84 0.28
Historical Consolidated
Balance Sheet Data:
Working capital....... $27,919 $31,608 $ 5,492 $ 8,278 $17,045 $19,592
Total assets.......... 53,471 56,550 33,344 31,790 52,005 53,116
Long-term debt, less
current portion...... 350 -- -- -- -- --
Stockholders' equity.. 38,144 41,990 12,613 15,031 24,864 28,412
9
Summary Selected Unaudited Pro Forma Condensed Combined Consolidated Financial
Data
The following summary selected unaudited pro forma condensed combined
consolidated financial data give effect to the proposed merger between Synopsys
and IKOS using the purchase method of accounting for the business combination.
This data should be read in conjunction with Synopsys' unaudited pro forma
condensed combined consolidated financial statements and related notes thereto
included elsewhere in this proxy statement/prospectus.
The pro forma condensed combined consolidated financial statements have been
presented assuming the minimum exchange ratio and the maximum exchange ratio as
of July 2, 2001. The minimum and maximum exchange ratios were calculated using
a denominator of $55.12 which is equal to Synopsys' average closing stock price
as reported on the Nasdaq National Market System for the ten full trading-day
period ending on June 25, 2001, and a numerator of $6 and $20, respectively.
(See footnote 1 below.) The actual number of shares of Synopsys common stock
and options to be issued will be based on a final exchange ratio as determined
at the completion of the merger.
There can be no assurance that Synopsys and IKOS will not incur charges in
excess of those included in the pro forma total consideration related to the
Merger or that management will be successful in its effort to integrate the
operations of the two companies.
The unaudited pro forma condensed combined consolidated statements of
operations of Synopsys give effect to the proposed merger as if it had been
consummated on November 1, 1999. The unaudited pro forma condensed combined
consolidated statement of operations data of Synopsys combines the audited
historical consolidated statement of operations of Synopsys for the year ended
October 31, 2000 with the audited historical consolidated statement of
operations of IKOS for the year ended September 30, 2000.
The unaudited pro forma condensed combined consolidated statement of
operations data of Synopsys for the six months ended April 30, 2001 combines
the unaudited historical consolidated statement of operations of Synopsys for
the six months ended April 30, 2001 with the unaudited historical consolidated
statement of operations of IKOS for the six months ended March 31, 2001.
The unaudited pro forma condensed combined consolidated balance sheet data
of Synopsys gives effect to the proposed merger as if it had occurred on April
30, 2001 and combines the unaudited historical consolidated balance sheet of
Synopsys as of April 30, 2001 and the unaudited historical consolidated balance
sheet of IKOS as of March 31, 2001.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the proposed merger had been consummated on November 1,
1999 or on April 30, 2001, respectively, nor is it necessarily indicative of
future operating results or financial position. The pro forma adjustments are
based upon information and assumptions available at the time of the filing of
this proxy statement/prospectus. The pro forma information should be read in
conjunction with the accompanying notes thereto, with Synopsys' historical
consolidated financial statements and related notes thereto, incorporated by
reference into this proxy statement/prospectus, and with IKOS' historical
consolidated financial statements and related notes thereto, included in this
proxy statement/prospectus.
10
For purposes of the following pro forma statements, July 2, 2001, the date
of the merger agreement, was used for determining the assumptions.
Assuming the Minimum Assuming the Maximum
Exchange Ratio(1) Exchange Ratio(1)
---------------------- ----------------------
Fiscal Year Six Months Fiscal Year Six Months
Ended Ended Ended Ended
October 31, April 30, October 31, April 30,
2000 2001 2000 2001
----------- ---------- ----------- ----------
(in thousands, except per share data)
Pro Forma Condensed Combined
Consolidated Statement of
Operations Data:
Revenue....................... $856,574 $ 359,097 $856,574 $ 359,097
Income before income taxes.... 157,070 36,171 153,565 35,387
Provision for income taxes.... 51,834 11,575 50,677 11,324
Net income.................... 105,236 24,596 102,888 24,063
Earnings per share:
Basic....................... $1.51 $0.39 $1.43 $0.36
Diluted..................... $1.46 $0.36 $1.37 $0.34
Pro Forma Condensed Combined
Consolidated Balance Sheet
Data:
Working capital............... $ 240,945 $ 240,945
Total assets.................. 1,053,241 1,187,074
Long-term debt, less current
portion...................... 454 454
Stockholders' equity.......... 600,612 734,445
- --------
(1) The minimum and maximum exchange ratios were calculated using a denominator
of $55.12 which is equal to Synopsys' average last sale price per share as
reported on the Nasdaq National Market for the ten full trading-day period
ending on June 25, 2001, and a numerator of $6.00 and $20.00, respectively.
The actual exchange ratio will be calculated using a denominator equal to
Synopsys' average last sale price per share for the ten full trading-day
period ending five full trading days before the closing date. The numerator
will be determined based on IKOS' financial performance during the 12-month
measurement period ending June 30, 2002. If the merger is completed prior
to June 30, 2002, the numerator will be $15.00. Regardless of when the
merger closes, the numerator is subject to adjustment if the number of
outstanding IKOS shares and options at the time of completion of the merger
exceeds an agreed-upon level.
11
Comparative Per Share Data
The following tables present certain historical per share data and combined
per share data on an unaudited pro forma basis after giving effect to the
merger using the purchase method of accounting and assuming 0.1089 shares (the
minimum exchange ratio) and 0.3628 shares (the maximum exchange ratio) of
Synopsys common stock are issued in exchange for each share of IKOS common
stock (see footnote 4 on page 13). This data should be read along with the
selected historical consolidated financial data of Synopsys and IKOS included
in this proxy statement/ prospectus, the historical consolidated financial
statements of Synopsys and the notes thereto that are incorporated by reference
into this proxy statement/prospectus and the historical consolidated financial
statements of IKOS and the notes thereto that are included in this proxy
statement/prospectus. The pro forma information is presented for illustrative
purposes only. You should not rely on the pro forma financial information as an
indication of the combined financial position or results of operations of
future periods or the results that actually would have been realized had the
entities been a single entity during the periods presented.
Fiscal Year Six Months
Ended October Ended
31, April 30,
2000 2001
------------- ----------
Synopsys Historical Data:
Net income per share:
Basic............................................ $1.43 $0.35
Diluted.......................................... 1.38 0.33
Book value per share at the end of the period(1)... 10.86 9.04
Fiscal Year Six Months
Ended Ended
September 30, March 31,
2000 2001
------------- ----------
IKOS Historical Data:
Net income per share:
Basic............................................ $0.97 $0.32
Diluted.......................................... 0.84 0.28
Book value per share at the end of the period(1)... 2.83 3.16
12
Unaudited Pro Forma Combined Per Share Data
Assuming Minimum Assuming Maximum
Exchange Ratio(4) Exchange Ratio(4)
---------------------- ----------------------
Fiscal Year Six Months Fiscal Year Six Months
Ended Ended Ended Ended
October 31, April 30, October 31, April 30,
2000 2001 2000 2001
----------- ---------- ----------- ----------
(in thousands, except per share data)
Synopsys and IKOS Pro Forma
Combined:
Pro forma combined net income
per share(2):
Basic........................ $1.51 $0.39 $1.43 $0.36
Diluted...................... 1.46 0.36 1.37 0.34
Pro forma combined net income
per equivalent IKOS share(3)
Basic........................ 0.16 0.04 0.52 0.13
Diluted...................... 0.16 0.04 0.50 0.12
Pro forma book value per
Synopsys share at April 30,
2001(1)....................... 9.75 11.49
Pro forma book value per
equivalent IKOS share at March
31, 2001(1)................... 1.06 4.17
- --------
(1) The historical book value per share information is computed by dividing
total stockholders' equity by the number of shares of Synopsys or IKOS
common stock outstanding at the end of each period. The pro forma combined
book value per share information is computed by dividing total pro forma
stockholders' equity by the pro forma number of shares of Synopsys common
stock outstanding at the end of each period assuming the merger had
occurred on that date. Pro forma book value per equivalent IKOS share is
computed by dividing total pro forma stockholders' equity by the pro forma
number of shares of Synopsys common stock outstanding at the end of each
period converted to an equivalent number of IKOS shares using the
applicable exchange ratio.
(2) The pro forma combined per share information is computed by dividing the
pro forma net income by the combination of Synopsys' weighted average
common and equivalent shares outstanding during each period and the number
of shares of Synopsys common stock and equivalents to be issued in
connection with the proposed merger, assuming Synopsys had merged with
IKOS, on November 1, 1999.
(3) The pro forma combined net income per equivalent IKOS share information is
calculated by multiplying Synopsys' combined pro forma per share amounts
described in footnote (2) by the minimum and maximum exchange ratios of
0.1089 and 0.3628, respectively.
(4) The minimum and maximum exchange ratios were calculated using a denominator
of $55.12 which is equal to Synopsys' average last sale stock price as
reported on the Nasdaq National Market for the ten full trading-day period
ending on June 25, 2001, and numerators of $6.00 and $20.00, respectively.
The actual exchange ratio will be calculated using a denominator equal to
Synopsys' average last sale stock price for the ten full trading-day period
ending five full trading days before the closing date. The numerator will
be determined based on IKOS' financial performance during the 12-month
measurement period ending June 30, 2002. If the merger is completed prior
to June 30, 2002, the numerator will be $15.00. Regardless of when the
merger closes, the numerator is subject to adjustment if the number of
outstanding IKOS shares and options at time of completion exceeds an
agreed-upon level.
13
MARKET PRICE AND DIVIDEND INFORMATION
Synopsys Market Price Data
Synopsys common stock is traded on the Nasdaq National Market under the
symbol "SNPS." The following table shows the range of high and low closing
sales prices reported on the Nasdaq National Market for Synopsys common stock
for the periods indicated.
High Low
------ ------
Synopsys' Fiscal 1999
First Quarter............................................... $54.25 $28.38
Second Quarter.............................................. 60.56 45.88
Third Quarter............................................... 57.25 42.13
Fourth Quarter.............................................. 64.44 53.38
Synopsys' Fiscal 2000
First Quarter............................................... $74.69 $43.34
Second Quarter.............................................. 50.81 37.56
Third Quarter............................................... 51.94 30.94
Fourth Quarter.............................................. 39.50 29.38
Synopsys' Fiscal 2001
First Quarter............................................... $56.50 $33.31
Second Quarter.............................................. 62.13 41.84
Third Quarter (through August 8, 2001)...................... 62.75 44.05
IKOS Market Price Data
IKOS common stock is traded on the Nasdaq National Market under the symbol
"IKOS." The following table shows the range of high and low sales prices
reported on the Nasdaq National Market for IKOS common stock for the periods
indicated.
High Low
------ -----
IKOS' Fiscal 1999
First Quarter................................................ $ 3.63 $1.41
Second Quarter............................................... 6.06 3.63
Third Quarter................................................ 9.88 5.00
Fourth Quarter............................................... 11.00 6.38
IKOS' Fiscal 2000
First Quarter................................................ $ 9.69 $7.00
Second Quarter............................................... 14.94 8.88
Third Quarter................................................ 12.38 8.63
Fourth Quarter............................................... 13.00 9.69
IKOS' Fiscal 2001
First Quarter................................................ $14.88 $7.13
Second Quarter............................................... 17.44 8.28
Third Quarter................................................ 11.38 6.43
Fourth Quarter (through August 8, 2001)...................... 8.10 6.90
Dividend Information
Neither Synopsys nor IKOS has ever paid any cash dividends on its stock, and
both anticipate that they will continue to retain any earnings for the
foreseeable future for use in the operation of their respective businesses.
14
Recent Closing Prices
As of June 29, 2001, the last trading day before announcement of the
proposed merger, the closing prices per share of Synopsys common stock and IKOS
common stock on the Nasdaq National Market were $48.39 and $7.36, respectively.
On [ , 2001], the latest practicable trading day before the printing of
this proxy statement/prospectus, the closing prices per share of Synopsys
common stock and IKOS common stock on the Nasdaq National Market were $[ ]
and $[ ], respectively.
Number of IKOS Stockholders
As of close of business on [ ] [ ], 2001, there were approximately [ ]
shares of IKOS common stock outstanding and entitled to vote at the special
meeting, held by approximately [ ] stockholders of record of IKOS.
15
RISK FACTORS
By voting in favor of the merger agreement and the merger, you will be
choosing to invest in Synopsys common stock. An investment in Synopsys common
stock involves a high degree of risk. In addition, the formulas for determining
the purchase price per IKOS share based on IKOS' financial performance and the
extended period until the targeted closing date entail risks not normally found
in merger transactions between public companies. In addition to the other
information contained in or incorporated by reference into this proxy
statement/prospectus, you should carefully consider the following risk factors
in deciding whether to vote in favor of adoption of the merger agreement and
approval of the merger.
Risks Related to the Merger
Under this section entitled "Risks Related to the Merger," use of the term
"combined company" refers to Synopsys and its subsidiaries, including IKOS,
after completion of the merger.
At the time of the IKOS special meeting, you will not be able to determine the
purchase price per share for your IKOS shares or how many shares of Synopsys
common stock you will receive in the merger.
If the merger is completed, for each share of IKOS common stock that you
own, you will be entitled to receive Synopsys common stock with a value between
$6 and $20 (adjusted to reflect the effect of any stock split, stock dividend,
reorganization or similar change in Synopsys or IKOS common stock). The exact
purchase price per IKOS share will be determined by a formula based on IKOS'
financial performance during the 12-month measurement period ending June 30,
2002. If the merger closes before June 30, 2002 (which is not expected), you
will receive Synopsys common stock with a value of $15 regardless of IKOS'
financial performance up to the date of closing. For purposes of calculating
the number of shares of Synopsys common stock you will receive for each share
of IKOS common stock you own, the Synopsys common stock issued will be valued
at the average last sale price per share of Synopsys common stock for the ten
full trading day period ending on the fifth full trading day prior to the
closing date of the merger. See the section entitled "The Merger and Related
Transactions--Structure of the Merger and Calculation of Purchase Price Per
IKOS Share."
Because IKOS' financial performance cannot be predicted, and because the
future market price of Synopsys common stock is likely to fluctuate and cannot
be predicted, the exact purchase price per IKOS share and the number of shares
of Synopsys common stock that you will receive will not be determined until the
closing of the transaction, which is expected to occur in August 2002. As a
result, if and when the merger is completed you may receive Synopsys stock for
each IKOS share with a value less than either the then current market price of
IKOS common stock or the market price of IKOS common stock at the time of the
special meeting. For example purposes only, if IKOS common stock is trading at
$7 per share at the time of the special meeting. Thereafter, if at the end of
the measurement period IKOS meets only the lowest required financial
performance target, you will receive Synopsys common stock valued at $6 per
share, which may at that time be lower than the then current market price of
IKOS common stock.
IKOS may not meet the minimum financial performance targets and may not be able
to satisfy other conditions, including an employee retention condition, which
must be met in order for Synopsys to be required to close the merger.
Under the merger agreement, Synopsys has the right not to close the merger
in the event that IKOS' revenues for the 12 months ending June 30, 2002 are
less than $50 million or its profit before tax, or PBT, for the same period is
a loss greater than $10 million. PBT, as defined in the merger agreement, is
different than as used in IKOS' publicly filed financial statements. In
addition, Synopsys is not required to complete the merger if certain other
conditions are not satisfied, including the retention of the Chief Operating
Officer of IKOS, or a replacement employee with equivalent skills in the
reasonable judgement of Synopsys, and specified percentages of four categories
of employees. The difficult current economic environment has resulted in
deferral of customer purchasing decisions for IKOS and other capital equipment
vendors. Accordingly, IKOS
16
is not able to predict its financial performance for the measurement period in
light of these economic conditions. While the merger agreement provides for a
bonus plan to assist in retaining employees, IKOS cannot assure you that its
key employees and the specified percentages of other categories of employees
will remain with IKOS until the merger is completed. See the section entitled
"The Merger and Related Transactions--Other Provisions of the Merger
Agreement--Conditions to the Merger."
Benefits of the merger may not be realized.
Synopsys and IKOS entered into the merger agreement with the expectation
that the merger will result in benefits to the combined company, including a
more integrated verification solution for its customers. However, the expected
benefits may not be fully realized. Achieving the benefits of the merger will
depend in part on the successful and timely integration of the products,
technology, operations and personnel of the two companies following the closing
of the merger. These integration efforts, particularly integrating Synopsys'
software verification products and IKOS' hardware-based products may be
difficult and time consuming, especially considering the highly technical and
complex nature of each company's products and the duration of the pre-closing
period. Failure to achieve a successful and timely integration of IKOS and
Synopsys and their respective products and businesses could result in the loss
of existing or potential customers of Synopsys and could have a material and
adverse effect on Synopsys' business, financial condition and results of
operations and on the price of Synopsys common stock. Integration efforts
between the two companies will also divert significant management attention and
resources. This diversion of attention could have an adverse effect on Synopsys
during such transition period.
The long period between execution of the merger agreement and the expected
closing date could harm IKOS' business and impair IKOS' ability to meet the
financial and employee retention conditions to the merger.
The merger is not anticipated to close until August 2002. During the pre-
closing period, IKOS and Synopsys will not be able to integrate their
operations, thus deferring the benefits from the combination of the two
companies until at least August 2002. This could have an adverse effect on
IKOS' business. For example, customers and suppliers may defer or cancel
pending purchases, delay purchasing decisions, or decline to make future
purchases from IKOS. In addition, the pre-closing period may adversely affect
IKOS' ability to attract, retain and motivate key technical, management and
sales personnel. If any of these events occur, they could adversely affect
IKOS' ability to meet the closing conditions contained in the merger agreement,
including conditions relating to IKOS' financial performance and the retention
of IKOS employees. If these closing conditions are not met, Synopsys will not
be required to complete the merger. See the section entitled "The Merger and
Related Transactions--Other Provisions of the Merger Agreement--Conditions to
the Merger."
There is a risk of litigation relating to the Quickturn non-competition
agreement.
On June 14, 1997, Synopsys sold its emulation technology to Quickturn Design
Systems, Inc. and entered into an agreement not to engage, directly or
indirectly, in the integrated circuit emulation business before June 14, 2002.
In 1999, Quickturn became a subsidiary of Cadence Design Systems, Inc., a
competitor of Synopsys. While Synopsys and IKOS believe that this transaction
fully complies with all aspects of the Quickturn non-competition agreement, we
cannot assure you that Quickturn and/or Cadence will not institute litigation
against Synopsys and/or IKOS under the non-competition agreement. If filed, a
lawsuit under the non-competition agreement could include claims that execution
of the merger agreement and/or the specific conduct by Synopsys or IKOS prior
to closing constitute participation by Synopsys in the integrated circuit
emulation business. While Synopsys and IKOS believe that such claims would be
entirely without merit, the assertion of such claims could result in costly and
time-consuming litigation and diversion of management attention. If successful,
such litigation could result in damages, an injunction against specific conduct
prior to consummation of the merger or some combination of those remedies and
could delay or prevent completion of the merger.
17
IKOS directors and officers have interests that may influence them to support
or approve the merger.
The directors and officers of IKOS participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or are in addition to, yours, including
the following:
. As of June 30, 2001, directors and executive officers of IKOS and
affiliates held approximately 4% of the outstanding shares of IKOS
common stock entitled to vote. All of the directors and executive
officers of IKOS have signed or are expected to sign voting agreements
agreeing to vote in favor of merger and against any competing offer,
with certain exceptions.
. As of June 30, 2001, directors and executive officers of IKOS held stock
options, both vested and unvested, to purchase an aggregate of 1,245,825
shares of IKOS common stock. If the merger is completed, approximately
12.7% of that total, consisting of the options to purchase approximately
158,480 shares held by non-employee directors of IKOS, will accelerate
and become fully vested and exercisable immediately pursuant to terms of
existing stock option agreements.
. Under the merger agreement, certain officers of IKOS have signed or are
expected to sign employment agreements or amendments to their existing
severance agreements with IKOS. As a result of these agreements and
amendments, in the event that these officers are terminated without
cause or resign from the combined company for good reason, they will be
entitled to certain benefits, including severance payments and
accelerated vesting of their stock options. Officers of IKOS will also
be eligible to participate in a bonus plan. See the sections entitled
"The Merger and Related Transactions--Other Provisions of the Merger
Agreement--Employment and Severance Agreements" and "The Merger and
Related Transactions--Other Provisions of the Merger Agreement--Bonus
Plan."
. The merger agreement provides that for a period of six years after the
completion of the merger, the surviving corporation will maintain, for
the benefit of the directors and officers of IKOS at the time of
completion of the merger with respect to their acts and omissions in
their capacities as directors and officers of IKOS occurring prior to
completion of the merger, directors' and officers' liability insurance
on terms comparable to those maintained by IKOS as of the date of the
merger agreement. See the section entitled "The Merger and Related
Transactions--Indemnification Matters--Directors and Officers and
Liability Insurance."
IKOS stockholders should consider whether the interests set forth above may
have influenced the directors and officers benefiting from these provisions to
support or recommend the merger.
Failure to complete the merger could adversely affect IKOS' stock price and
future business and operations.
If the merger is not completed for any reason, IKOS may be subject to a
number of material risks, including the following:
. IKOS' relationships with customers and suppliers may be adversely
affected;
. the perception of IKOS as a viable independent company may be damaged;
. the price of IKOS' common stock may decline to the extent that the
current market price reflects a market assumption that the merger will
be completed;
. IKOS may be required to pay Synopsys a termination fee of up to
$5,500,000 if the merger agreement is terminated under certain
circumstances;
. the possibility that Synopsys might become a competitor of IKOS;
. IKOS' costs related to the merger, such as legal, accounting and
financial advisor fees, must be paid even if the merger is not
completed; and
. IKOS would face risks of operating as a stand-alone company or finding
another merger partner or acquiror, with no assurance that IKOS would be
successful as a stand-alone company or find another merger partner or
acquiror or be able to complete an alternative merger or sale of the
company on terms as favorable to IKOS and its stockholders as this
merger.
18
Following the merger, Synopsys currently intends to structure sales of IKOS
products so that revenue on hardware sales is recognized ratably in the quarter
of the sale which may lower recognized revenue in the quarter.
Currently, IKOS recognizes revenue derived from its hardware product sales
during the quarter of shipment if: (1) the earning process is complete, (2)
there is an agreement between IKOS and the customer, (3) delivery has occurred,
(4) collection is probable, and (5) pricing is fixed or determinable. Following
the merger, Synopsys intends to structure sales of IKOS' hardware-assisted
emulation products so that the revenue is recognized ratably over a period of
time. In such a case, Synopsys' reported revenue attributable to the sale of
hardware assisted verification products could be significantly lower in the
quarter of the sale than it would be if Synopsys maintains IKOS' sale
structure. In that event, however, any revenue not recognized in the quarter of
shipment would be added to backlog or deferred revenue and recognized over
time.
We may be unable to obtain the required regulatory approvals for completing the
merger.
As a condition to the obligations of Synopsys and IKOS to complete the
merger, the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, or the HSR Act, must have expired or been terminated.
Although Synopsys is not currently engaged in any of the businesses engaged in
by IKOS, there can be no assurance that regulators will terminate or allow the
waiting period under the HSR Act to expire without seeking to prohibit the
merger or to condition the merger on restrictions that would negatively impact
the combined company. In addition, the merger may be subject to foreign
antitrust laws, some of which may require us to make filings with foreign
antitrust authorities. Regulators may require Synopsys, IKOS or the combined
company to agree to operating restrictions, before or after receipt of IKOS
stockholder approval. If Synopsys and IKOS decline to agree to such
restrictions, the merger might not be completed. If Synopsys or IKOS do agree
to such restrictions, neither party plans to seek stockholder approval of any
terms and conditions necessary to resolve any regulatory objections to the
merger. If any agreements regarding operating restrictions are required under
applicable law or by governmental authorities, under the terms of the merger
agreement neither Synopsys nor IKOS is obligated to agree to the divestiture of
any businesses, product lines or assets. In addition, even if regulatory
approvals are obtained, any federal, state or foreign governmental entity or
any private person may challenge the merger at any time before or after its
completion.
The merger may fail to qualify as a reorganization, resulting in your
recognition of taxable gain or loss in respect of your IKOS shares.
Synopsys and IKOS intend the merger to qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code. Although the
Internal Revenue Service, or IRS, has not provided a ruling on the matter, each
of Synopsys and IKOS will obtain a legal opinion from their respective tax
counsel that the merger will constitute a reorganization for federal income tax
purposes. These opinions do not bind the IRS or prevent the IRS from adopting a
contrary position. If the merger fails to qualify as a reorganization you
generally would recognize gain or loss on each share of IKOS common stock
surrendered in an amount equal to the difference between your adjusted tax
basis in that share and the sum of the amount of cash, if any, and the fair
market value of the Synopsys common stock received in exchange for that share
upon completion of the merger.
We expect to incur significant costs associated with the merger.
Synopsys estimates that it will incur direct transaction costs of
approximately $1,975,000 associated with the merger, which will be included as
a part of the total purchase cost for accounting purposes. In addition, IKOS
estimates that it will incur direct transaction costs of approximately
$2,000,000 in connection with the merger, which will be expensed by IKOS in the
quarter in which the costs are incurred. These amounts will be excluded from
the calculation of IKOS' PBT during the measurement period. We believe the
combined company may incur charges to operations, which are not currently
reasonably estimable and which could be material, in the quarter in which the
merger is completed or the following quarters, to reflect costs associated with
integrating the two companies. We cannot assure you that the combined company
will not incur additional material charges in subsequent quarters to reflect
additional costs associated with the merger.
19
Risks Related to Synopsys
Under this section entitled "Risks Related to Synopsys," use of the terms
"we," "us" and "our" refers to Synopsys, Inc. and its subsidiaries at the date
of this proxy statement/prospectus.
Synopsys' revenue and earnings may fluctuate.
Many factors affect our revenue and earnings, which makes it difficult to
achieve predictable revenue and earnings growth. Among these factors are
customer product and service demand, product license terms, and the timing of
revenue recognition on products and services sold. The following specific
factors could affect our revenue and earnings in a particular quarter or over
several quarterly or annual periods:
. Like all companies, our business is linked to the health of the U.S. and
international economies. Economic growth has slowed significantly, and
some commentators believe the U.S. economy will experience a recession.
Weakness in the U.S. and world economy could have an adverse effect on
our orders and revenue.
. Our products are complex, and before buying them customers spend a great
deal of time reviewing and testing them. Our customers' evaluation and
purchase cycles do not necessarily match our quarterly periods. In the
past, we have received a disproportionate volume of orders in the last
week of a quarter, although since the adoption of our technology
subscription license (TSL) model, which is a time-limited right to use
our software, orders have become more linear. In addition, a large
proportion of our business is attributable to our largest customers. As
a result, if any order, and especially a large order, is delayed beyond
the end of a fiscal period, our orders for that period could be below
our plan and our revenue could be below any targets we may have
published.
. Accounting rules determine when revenue is recognized on our products,
TSLs and service contracts, and therefore impact how much revenue we
will report in any given fiscal period. The authoritative literature
under which Synopsys recognizes revenue has been, and is expected to
continue to be, the subject of much interpretative guidance. In general,
after the adoption of TSLs in the fourth quarter of fiscal 2000, most
orders for our products and services yield revenue over multiple
quarters (extending beyond the current fiscal year) or upon completion
of performance rather than at the time the contract is executed. The
specific terms agreed to with a customer may have the effect of
requiring deferral or acceleration of revenue in whole or in part.
Therefore, for any given fiscal period it is possible for us to fall
short in our revenue and/or earnings plan even while orders and backlog
remain on plan or, conversely, to meet or exceed our revenue and/or
earnings plan because of backlog and deferred revenue, while orders are
under plan.
. In fiscal 2000, we modified the license and pricing structure for our
software products, adopting TSLs, for which revenue is recognized over
multiple quarters or upon completion of performance rather than at the
time the contract is executed. Our revenue targets for any given quarter
are based, in part, upon an assumption that we will achieve a license
mix of perpetual licenses and TSLs that includes 20% to 30% perpetual
licenses (on which revenue is generally recognized in the quarter
shipped). If we are unable to achieve a mix in this range our ability to
achieve short-term or long-term revenue growth targets may be impaired.
Synopsys' business depends on the semiconductor and electronics businesses.
Purchases of our products are largely dependent upon the commencement of new
design projects by semiconductor manufacturers and their customers, the number
of design engineers and the increasing complexity of designs. Though we do not
directly benefit from increases in the sheer number of chips produced, our
business has benefited from the rapid worldwide growth of the semiconductor
industry. Since the end of 2000, the semiconductor industry has experienced a
sharp decline in orders and revenue. Many semiconductor manufacturers and
vendors of products incorporating semiconductors have announced earnings
shortfalls and employee layoffs. The outlook for the electronics industry is
uncertain and it is impossible to predict how long the current slump will last.
20
In general, our customers have experienced budget cuts and layoffs, customer
spending is becoming more restricted and spending decisions, particularly
relating to consulting services, are more carefully scrutinized. Under certain
conditions, our business could be materially adversely affected by the
semiconductor slump. Demand for our products and services may also be affected
by mergers in the semiconductor and systems industries, which may reduce the
aggregate level of purchases of our products and services by the combined
companies. Slower growth in the semiconductor and electronics industries, a
reduced number of design starts, restricting of customers' operating budgets,
continued consolidation among our customers or a shift toward field-
programmable gate arrays (FPGAs) or other types of semiconductors that can be
designed with less-expensive EDA software, all could have a material adverse
effect on our business, financial condition and results of operations.
Synopsys' industry is highly competitive.
The EDA industry is highly competitive. We compete against other EDA
vendors, and with customers' internally developed design tools and internal
design capabilities, for a share of the overall EDA budgets of our potential
customers. In general, competition is based on product quality and features,
post-sale support, price and, as discussed below, the ability to offer a
complete design flow. Our competitors include companies that offer a broad
range of products and services, such as Cadence Design Systems, Inc., Mentor
Graphics Corporation and Avant! Corporation, as well as companies, including
numerous start-up companies, that offer products focused on a discrete phase of
the integrated circuit design process. In certain situations, Synopsys'
competitors have been offering aggressive discounts on certain of their
products, in particular simulation and synthesis products. As a result, average
prices for these products may fall. In order to compete successfully, we must
continue to enhance our products and bring to market new products that address
the needs of our customers, and to expand our consulting services business. The
failure to enhance existing products, develop and/or acquire new products or
expand our ability to offer consulting services could have a material adverse
effect on our business, financial condition and results of operations.
Technology advances and customer requirements continue to fuel a change in the
nature of competition among EDA vendors.
Increasingly, EDA companies compete on the basis of "design flows" involving
integrated logic and physical design products (referred to as "physical
synthesis" products) rather than on the basis of individual "point" tools
performing a discrete phase of the design process. The need to offer physical
synthesis products will become increasingly important as ICs grow more complex.
Our principal physical synthesis product was fully released in June 2000, and
has been well received by customers. We are working on completing our design
flow, but there is no guarantee that we will be able to offer a competitive
complete design flow to customers. The market for physical design tools is
dominated by Cadence and Avant!, both of which offer products linking logic and
physical design. If we are unsuccessful in developing a complete design flow on
a timely basis or in convincing customers to adopt our integrated logical and
physical design products and methodology, our competitive position could be
significantly weakened.
Synopsys' revenue growth depends on new and non-synthesis products.
Historically, much of our growth has been attributable to the strength of
our logic synthesis products. These products accounted for 32.8% of revenue in
the second fiscal quarter of 2001. We believe that orders and revenue for our
flagship logic synthesis product, Design Compiler, and the DC Family have
peaked. Over the long term, we expect the contribution from the DC Family to
decline as our customers transition from the DC Family to Physical Synthesis
products. In order to meet our revenue plan, revenue from our physical
synthesis products, our non-synthesis products and professional services must
grow faster than our overall revenue growth target. Among the products that we
expect to be the most important contributors to revenue growth are our Physical
Compiler physical synthesis, VCS Verilog simulation and DesignWare IP library
products. If revenue growth for these products fails to meet our goals, it is
unlikely that we will meet our overall revenue growth target.
21
In order to sustain revenue growth over the long term, we will have to
introduce new products that are accepted by a broad range of customers and to
significantly expand our consulting services business. Product success is
difficult to predict. The introduction of new products and growth of a market
for such products cannot be assured. In the past we, like all companies, have
introduced new products that have failed to meet our revenue expectations.
Expanding revenue from consulting services will require us to recruit, hire and
train a large number of skilled employees, and to implement management controls
on bidding and executing on consulting engagements. The consulting business is
significantly different from the software business, however, and increasing
consulting orders and revenue while maintaining an adequate level of profit can
be difficult. There can be no assurance that we will be successful in expanding
revenue from existing or new products at the desired rate or in expanding our
services business, and the failure to do so would have a material adverse
effect on our business, financial condition and results of operations.
Businesses that Synopsys has acquired or that Synopsys or the combined company
may acquire in the future may not perform as projected.
We have acquired or merged with a number of companies in recent years, and
as part of our efforts to increase revenue and expand our product and services
offerings we may acquire additional companies. In addition to direct costs,
acquisitions pose a number of risks, including potential dilution of earnings
per share, problems in integrating the acquired products and employees into our
business, the failure to realize expected synergies or cost savings, the
failure of acquired products to achieve projected sales, the drain on
management time for acquisition-related activities, adverse effects on customer
buying patterns and assumption of unknown liabilities. While we attempt to
review proposed acquisitions carefully and negotiate terms that are favorable
to us, there is no assurance that any acquisition will have a positive effect
on our performance.
Stagnation of international economies would adversely affect our performance.
During the second quarter of fiscal 2001, 38% of our revenue was derived
from outside North America, while during fiscal 2000, this figure was 43%.
International sales are vulnerable to regional or worldwide economic or
political conditions and to changes in foreign currency exchange rates. A
number of our largest European customers are in the telecommunications
equipment business, which has weakened considerably this year. The longer this
weakness persists the more likely our business with these customers will be
negatively affected. The Japanese economy has been stagnant for several years.
If the Japanese economy remains weak, revenue and orders from Japan, and
perhaps the rest of Asia, could be adversely affected. In addition, the yen-
dollar and euro-dollar exchange rates remain subject to unpredictable
fluctuations. Weakness of the yen could adversely affect revenue and orders
from Japan during future quarters. Asian countries other than Japan also have
experienced economic and currency problems in recent years, and in most cases
they have not fully recovered. If such conditions persist or worsen, orders and
revenues from the Asia Pacific region would be adversely affected.
Synopsys' success depends on recruiting and retaining key personnel.
Our success is dependent on technical and other contributions of key
employees. We participate in a dynamic industry, with significant start-up
activity, and our headquarters is in Silicon Valley, where skilled technical,
sales and management employees are in high demand. There are a limited number
of qualified EDA and IC design engineers, and the competition for such
individuals is intense. Experience at Synopsys is highly valued in the EDA
industry and the general electronics industry, and our employees are recruited
aggressively by our competitors and by start-up companies in many industries.
Recent changes in the semiconductor and internet-related industries have led to
improvements in the recruiting and retention environment; however, we have
experienced, and may continue to experience, significant employee turnover.
There can be no assurance that we can continue to recruit and retain the
technical and managerial personnel we need to run our business. Failure to do
so could have a material adverse effect on our business, financial condition
and results of operations.
22
Synopsys is dependent on its proprietary technology.
Our success is dependent, in part, upon our proprietary technology and other
intellectual property rights. We rely on agreements with customers, employees
and others, and intellectual property laws, to protect our proprietary
technology. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known or be independently developed by
competitors. Moreover, effective intellectual property protection may be
unavailable or limited in certain foreign countries. Failure to obtain or
maintain appropriate patent, copyright or trade secret protection, for any
reason, could have a material adverse effect on our business, financial
condition and results of operations. In addition, there can be no assurance
that infringement claims will not be asserted against us and any such claims
could require us to enter into royalty arrangements or result in costly and
time-consuming litigation or could subject us to damages or injunctions
restricting our sale of products or could require us to redesign products.
Our operating expenses do not fluctuate proportionately with fluctuations in
revenues.
Our operating expenses are based in part on our expectations of future
revenue, and expense levels are generally committed in advance of revenue.
Since only a small portion of our expenses varies with revenue, a shortfall in
revenue translates directly into a reduction in net income. For fiscal 2001,
our target for total expenses is $670-675 million. If we are unsuccessful in
generating anticipated revenue or maintaining expenses within this range,
however, our business, financial condition and results of operations could be
materially adversely affected.
Synopsys has adopted anti-takeover provisions which may have the effect of
delaying or preventing changes of control or management.
We have adopted a number of provisions that could have anti-takeover
effects. Our board of directors has adopted a Preferred Shares Rights Plan,
commonly referred to as a "poison pill." In addition, our board of directors
has the authority, without further action by its stockholders, to issue
additional shares of Common Stock and to fix the rights and preferences of, and
to issue authorized but undesignated shares of Preferred Stock. These and other
provisions of Synopsys' Restated Certificate of Incorporation and Bylaws and
the Delaware General Corporation Law may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of
Synopsys, including transactions in which the stockholders of Synopsys might
otherwise receive a premium for their shares over then current market prices.
Synopsys is subject to changes in financial accounting standards.
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States (GAAP). GAAP are subject to
interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants (AICPA), the SEC and various bodies
appointed by these organizations to interpret existing rules and create new
accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and issues interpretations of these rules. Additional interpretations
issued by the task force may have an adverse effect on how we report revenue or
on the way we conduct our business in the future.
23
Risks Related to IKOS
The following are risks relating to IKOS as a separate entity, both during
the pre-closing period and in the event that the merger does not close.
IKOS' operating results have fluctuated widely in the past from period to
period, making it difficult to rely on past quarters as indicators of future
performance.
IKOS' quarterly operating results have fluctuated widely in the past and
IKOS expects them to continue to fluctuate in the future as a result of a
variety of factors, including the following:
. The timing of orders from customers, and the timing of shipments to
customers, for IKOS' products varies. Many of IKOS' customers order on
an as-needed basis and often delay issuance of firm purchase orders. As
a result, quarterly revenue and operating results will depend on the
volume and timing of orders that IKOS receives during the quarter, which
are difficult to predict.
. IKOS has a historical pattern of concentrated shipments in the last few
weeks of the quarter. This pattern is exacerbated by the fact that IKOS
recognizes product revenue when orders are delivered and the earnings
process is complete, rather than ratably over a term. This means that a
failure to deliver product in a quarter deprives such quarter of all of
the revenue attributable to such order. Therefore the timing of an
order, and whether it is shipped in one quarter or the next, can have a
significant effect on the revenue recognized for such quarter. In
addition, any concentration of sales at the end of the quarter may limit
IKOS' ability to plan or adjust operating expenses and production and
inventory levels. Consequently, if anticipated shipments in any quarter
do not occur, expenditure levels could be disproportionately high,
adversely affecting IKOS' operating results for that quarter.
. IKOS must develop, introduce and ship new products on a timely basis.
Any failure to meet expected customer ship dates results in deferred
sales (such that IKOS recognizes revenue in a quarter later than
expected) or the failure to make a sale to a particular customer
altogether.
. IKOS competes with other emulation vendors, potentially resulting in
lost or deferred sales.
. IKOS must obtain key components used in its products, including field
programmable gate arrays, (FPGAs), at acceptable prices.
. IKOS' success depends upon the health of the semiconductor industry and
its impact on capital expenditures by customers who design
semiconductors.
For all of the reasons above, IKOS' quarterly operating results have in the
past been and may in the future be different from the expectations of public
market analysts and investors. Because IKOS' quarterly operating results
fluctuate, IKOS believes that quarter-to-quarter comparisons of its operating
results are not necessarily meaningful and investors should not rely on them as
indicators of future performance.
A downturn in the semiconductor industry will have a negative impact on IKOS'
business.
IKOS depends on the semiconductor industry, which is historically volatile,
for sales of its emulation products. The semiconductor industry is
characterized by rapid technological change, short product life cycles,
fluctuations in manufacturing capacity and pricing and margin pressures. These
factors can adversely affect sales of IKOS' products. For example, IKOS
believes that the semiconductor industry is currently in a downturn, which has
tightened capital expenditure budgets of IKOS' customers and led to a deferral
of purchasing decisions and a decrease in sales to such customers. In addition,
since IKOS' products are used at the verification stage of new semiconductor
designs, any decrease in design starts by semiconductor customers would result
in lower demand for IKOS' products and could have an adverse effect on IKOS'
results of operations.
24
IKOS depends on a limited number of customers for a significant part of its
revenues, the loss of any of which could have a material adverse effect on
IKOS' business, results of operation and financial condition.
During fiscal 2000, 1999 and 1998, sales to IKOS' top ten customers
accounted for approximately 66%, 60% and 45%, respectively, of IKOS' net
revenues. IKOS expects that sales of its products to a limited number of
customers will continue to account for a high percentage of net revenues for
the foreseeable future. The loss of a major customer or any reduction in orders
by such customers, including reductions due to market or competitive conditions
in the electronics or EDA industries, would have an adverse effect on IKOS'
results of operations.
The failure to continue to grow emulation product revenues would have a
material adverse effect on IKOS' business, financial condition and results of
operations.
Over the past several years IKOS' sales of simulation products have
decreased and its sales of emulation products have increased. As a result, any
failure to continue to grow its emulation revenues would have a material
adverse effect on IKOS' business, financial condition and results of
operations. Increased emulation sales depend on a number of factors, including:
. continued increase in demand for complex integrated circuits;
. IKOS' ability to effectively integrate its emulation products with other
vendors' IC design tools;
. the competitiveness of IKOS' emulation products against emulation
products offered by IKOS' competitors, such as Cadence/Quickturn Design
Systems, Inc. and IKOS' ability to win new customers for its emulation
products; and
. the capital expenditure budgets of IKOS' customers, which are influenced
by the financial condition of such customers and the overall market for
semiconductor products.
Because the market for hardware-assisted verification products is evolving,
IKOS cannot be certain that the market for its emulation solutions will
continue to expand. Even if such market expands, IKOS cannot be certain that
its products will achieve and maintain the market acceptance required to
maintain revenue growth and profitability in the future.
IKOS' results of operations could be adversely impacted if IKOS does not
continue to develop new products and enhance existing ones.
Over the past several years, the market for emulation products has evolved
substantially, requiring that IKOS develop new, higher gate count emulation
products in a timely manner. While IKOS continues to develop new emulation
products based on IKOS' understanding of customer requirements, there can be no
assurance that IKOS' new products, which require a substantial amount of time
and resources to develop, will meet customer requirements. In addition, any
delays in releasing new products can impact customer acceptance and sales. For
instance, IKOS encountered several product related issues with the introduction
of its second-generation emulation product, which in turn resulted in delays in
releasing such product to its customers and severely impacted financial results
for the second half of fiscal 1998. Any failure to meet customer deadlines or
requirements could have a material adverse effect on IKOS' results of
operations. From time to time, IKOS may announce new products or technologies
that have the potential to replace IKOS' existing product offerings or cause
customers to defer purchases of existing IKOS products. For example, IKOS
believes that introduction of its Vstation 15M emulator product has adversely
affected sales of its Vstation 5M product. These deferrals of customer
purchasing decisions could adversely affect IKOS' results of operations for any
particular quarter. Finally, successfully releasing new emulation products will
require IKOS' successful implementation of new manufacturing processes,
effective sales, marketing and customer service efforts and identifying and
resolving product performance or quality issues at an early stage. If IKOS
encounters delays or difficulties in developing new products or enhancing
existing ones, its business, financial condition and results of operations
could be materially and adversely affected.
25
IKOS' dependence on foreign sales could adversely impact IKOS' business,
results of operations and financial condition.
IKOS' international sales, including export sales and foreign operation net
revenues, accounted for approximately 34%, 37% and 36% of IKOS' net revenues in
fiscal 2000, 1999 and 1998, respectively. While IKOS attempts to reduce the
risk of fluctuation in exchange rates associated with international revenues by
selling its products primarily denominated in U.S. dollars, conducting sales
overseas entails numerous risks including regional or worldwide economic or
political difficulties and changes in foreign currency exchange rates. For
example, IKOS pays the expenses of its international operations in local
currencies and has not engaged in hedging transactions with respect to such
obligations. Any significant deterioration in foreign economies could have a
material adverse effect on IKOS' sales in such countries. In addition,
conducting business in international markets requires compliance with
applicable laws and regulations, such as safety and telecommunication laws and
regulations of foreign jurisdictions and import duties and quotas, as well as
U.S. export control laws.
IKOS' failure to compete effectively would have a material adverse effect on
its business, financial condition and results of operations.
The EDA industry is constantly evolving and is characterized by extremely
rapid technological change in both hardware and software development, frequent
new product introductions, evolving industry standards and changing customer
requirements.
Many of these factors are outside of IKOS' control and there can be no
assurance that IKOS will be able to compete effectively in the future. IKOS
specifically targets its products at the emerging portion of the industry
relating to complex designs. IKOS currently competes with traditional software
verification methodologies, including product offerings sold by Quickturn
Design Systems, a unit of Cadence Design Systems, Synopsys and Mentor Graphics.
IKOS' main competition for the sale of emulation systems is Quickturn/Cadence
and Mentor Graphics. IKOS expects competition in the market for verification
tools to increase as other companies introduce new products and product
enhancements. The risk of competition is exacerbated because of the long
product lives and substantial expense of emulation products. In particular, if
IKOS fails to make a sale to a customer, such customer is unlikely to seek a
new emulation system for an extended period of time.
Many of IKOS' competitors have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger installed customer bases than IKOS. In addition, many of these
competitors and potential competitors have established relationships with
current and potential IKOS customers and offer a broader and more comprehensive
product line. Moreover, IKOS competes with a number of smaller companies,
including Axis Systems, which can quickly gain market share. Increased
competition could result in price reductions, reduced margins and loss of
market share, all of which could materially adversely affect IKOS' business,
financial condition and results of operations.
Any failure to obtain sufficient quantities of crucial components will
adversely impact IKOS' business, results of operations and financial condition.
IKOS uses certain key components in its products that are presently
available from sole or limited sources. For example, IKOS' purchases FPGA's and
other components of its verification systems from only two suppliers. IKOS
generally purchases these components, including semiconductor memories used in
IKOS' verification hardware, pursuant to purchase orders placed from time to
time in the ordinary course of business. IKOS has no supply arrangements with
any of its suppliers that require the suppliers to provide components in
guaranteed quantities or at set prices. Moreover, the manufacture of these
components can be extremely complex. IKOS' reliance on the suppliers of these
components exposes IKOS to production difficulties and quality variations these
suppliers may experience. The inability to develop alternative sources for
these sole or limited source components or to obtain sufficient quantities of
these components could result in delays or reductions in product shipments
which could adversely affect IKOS' operating results.
26
Any claim of intellectual property infringement against IKOS could have a
material adverse effect on its business.
From time to time IKOS has received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Although IKOS
does not believe that its products infringe the proprietary rights of any third
parties, third parties could assert, and have asserted, infringement or
invalidity claims (or claims for indemnification resulting from infringement
claims) against IKOS. Moreover, there are numerous patents in the EDA industry
and new patents are being issued at a rapid rate. As a result, IKOS is exposed
to increased risk of involvement in costly and time consuming patent
infringement litigation, either as plaintiff or defendant. Adverse
determinations in litigation could result in one or more of the following
materially adverse effects:
. IKOS could be forced to pay damages to a party claiming infringement;
. IKOS' could lose its proprietary rights;
. IKOS could become subject to significant liabilities;
. an adverse judgment could require IKOS to seek licenses from third
parties, and such licenses may not be available on terms acceptable to
IKOS, if at all;
. an adverse judgement could prevent IKOS from licensing its technology;
and
. IKOS could be forced to redesign challenged technology, which could be
time-consuming and costly.
Infringement of intellectual property claims, regardless of merit, could
consume valuable management time, result in costly litigation, or cause product
shipment delays, all of which could seriously harm IKOS' business, operating
results, and financial condition.
A judgment adverse to IKOS in its ongoing litigation with Axis Systems, Inc.
could harm IKOS' business.
On February 9, 2001, IKOS filed a patent infringement complaint against Axis
Systems, Inc. (Axis) in the United States District Court in the District of
Delaware that alleges infringement by Axis of four patents relating to IKOS'
Virtual Wires technology. IKOS is seeking both injunctive relief and monetary
damages. On March 22, 2001, Axis filed a patent infringement complaint against
IKOS in the United States District Court for the Northern District of
California alleging infringement by IKOS of Axis' patent titled a "Simulation/
Emulation System and Method," U.S. Patent No 6,009,256. Axis is seeking both
injunctive relief and monetary damages. IKOS believes Axis' claims are without
merit and intends to vigorously defend the action; however, such actions are
currently in the discovery phase only and IKOS cannot assure you that it will
prevail in either case. A failure to prevail in either case could result in
IKOS being required to redesign certain parts of its products or pay damages,
which could adversely affect future sales. In addition, such a failure to
prevail would allow Axis to continue to compete against IKOS.
Irrespective of the validity or the successful assertion of such claims,
IKOS could incur significant costs and diversion of management efforts with
respect to the defending the claims. Such efforts and costs could have a
material adverse effect on IKOS' business, financial condition or results of
operations. If any other claims or actions are asserted against IKOS, it may
seek to obtain a license under a third party's intellectual property rights.
IKOS cannot assure you, however, that under such circumstances, a license would
be available under reasonable terms or at all.
27
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the documents incorporated by reference
into this proxy statement/prospectus contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the exchange ratio, Synopsys' and IKOS' individual businesses and
financial condition and results of operations and the expected benefits of the
merger. Examples of forward-looking statements include statements regarding
Synopsys' or IKOS' future financial results, operating results, business
strategies, projected costs, competitive position, and plans and objectives of
management for future operations. Words like "may," "will," "should," "would,"
"predicts," "potential," "continue," "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and the negative of these terms or
other comparable terminology are intended to identify forward-looking
statements. Neither Synopsys nor IKOS is under any obligation (and each
expressly disclaims any such obligation) to update or alter its forward-looking
statements, whether as a result of new information, future events or otherwise.
These forward-looking statements are not guarantees of future performance and
are inherently subject to risks and uncertainties, including those discussed in
the Risk Factors, that could cause actual results and outcomes to differ
materially from the results contemplated by the forward-looking statements.
These and many other factors could affect the merger and the future financial
and operating results of Synopsys or IKOS. In evaluating the merger, you should
carefully consider the discussion of certain risks and uncertainties in the
section entitled "Risk Factors" and in the documents incorporated by reference
in this proxy statement/prospectus.
28
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined consolidated financial
statements give effect to the proposed merger between Synopsys, Inc. (Synopsys)
and IKOS Systems, Inc. (IKOS) using the purchase method of accounting for the
business combination.
Upon completion of the merger, holders of IKOS common stock will be entitled
to receive Synopsys common stock with a value between $6 and $20 in exchange
for each share of IKOS common stock owned at the time of completion of the
merger. The exact amount per share will depend upon the financial performance
of IKOS during the 12-month measurement period ending June 30, 2002 and will be
calculated based on formulas contained in the merger agreement. The formulas
contained in the merger agreement provide for proportionate increases in the
purchase price per IKOS share as revenue, revenue plus change in backlog or
profit (loss) before tax (PBT) increase from one level to the next. The
formulas are summarized below.
Under the merger agreement, the number of shares of Synopsys common stock
each holder of IKOS shares will receive in exchange for each share of IKOS
common stock, will be equal to the purchase price per IKOS share divided by the
average last sale price per share of Synopsys common stock for the ten full
trading- day period ending on the fifth full trading day prior to the closing
date of the transaction. This ratio is referred to as the "exchange ratio." The
exchange ratio will be proportionately adjusted for any stock split, stock
dividend, reorganization or similar change in IKOS common stock or Synopsys
common stock. IKOS stockholders will receive cash based on the market price of
Synopsys common stock in lieu of any fractional shares to which they might
otherwise be entitled.
The purchase price per IKOS share will be the lower of the purchase price
per IKOS share determined by revenue plus change in backlog or the purchase
price per IKOS share determined by PBT with one exception. If the purchase
price per IKOS share determined by PBT is lower than the purchase price per
IKOS share determined by revenue plus change in backlog but the same or higher
than the purchase price per IKOS share determined by revenue without regard to
backlog, the purchase price per IKOS share will be determined by revenue plus
change in backlog. If the merger closes before June 30, 2002, holders of IKOS
common stock on the closing date will receive Synopsys common stock with a
value of $15 for each share of IKOS common stock, regardless of IKOS' financial
performance up to the date of closing. Regardless of when the merger closes,
the purchase price per IKOS share is subject to reduction if the number of
outstanding IKOS shares and options immediately before the effective time of
the merger exceeds an agreed-upon level. However, the purchase price per IKOS
share will not be less than $6.
The actual number of shares of Synopsys common stock to be issued in the
proposed merger and the dollar value at the effective time of the merger cannot
be determined until the date on which the number of Synopsys shares to be
issued becomes fixed. The pro forma condensed combined consolidated financial
statements have been presented assuming the minimum exchange ratio and the
maximum exchange ratio. The minimum and maximum exchange ratios were calculated
using a denominator of $55.12, which is equal to Synopsys' average last sale
price per share as reported on the Nasdaq National Market for the ten full
trading- day period ending on June 25, 2001, and a numerator of $6 and $20,
respectively. The actual number of shares of Synopsys common stock and options
to be issued will be based on the exchange ratio as determined at the
completion of the merger.
There can be no assurance that Synopsys and IKOS will not incur charges in
excess of those included in the pro forma total consideration related to the
merger or that management will be successful in its effort to integrate the
operations of the two companies.
The unaudited pro forma condensed combined consolidated statements of
operations of Synopsys give effect to the proposed merger as if it had been
consummated on November 1, 1999. The unaudited pro forma condensed combined
consolidated statement of operations of Synopsys for the year ended October 31,
2000
29
combines the audited historical consolidated statement of operations of
Synopsys for the year ended October 31, 2000 with the audited historical
consolidated statement of operations of IKOS for the year ended September 30,
2000.
The unaudited pro forma condensed combined consolidated statement of
operations of Synopsys for the six months ended April 30, 2001 combines the
unaudited historical consolidated statement of operations of Synopsys for the
six months ended April 30, 2001 with the unaudited historical consolidated
statement of operations of IKOS for the six months ended March 31, 2001.
The unaudited pro forma condensed combined consolidated balance sheet of
Synopsys gives effect to the proposed merger as if it occurred on April 30,
2001 and combines the unaudited historical consolidated balance sheet of
Synopsys as of April 30, 2001 and the unaudited historical consolidated balance
sheet of IKOS as of March 31, 2001.
The accompanying unaudited pro forma condensed combined consolidated
financial statements are presented in accordance with Article 11 of the
Securities and Exchange Commission Regulation S-X. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
proposed merger had been consummated on November 1, 1999 or on April 30, 2001,
respectively, nor is it necessarily indicative of future operating results or
financial position. The pro forma adjustments are based upon information and
assumptions available at the time of the filing of this proxy
statement/prospectus. The pro forma information should be read in conjunction
with the accompanying notes thereto, with Synopsys' historical consolidated
financial statements and related notes thereto, incorporated by reference into
this proxy statement/prospectus, and with IKOS' historical consolidated
financial statements and related notes thereto, included in this proxy
statement/prospectus.
30
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
April 30, 2001
(in thousands)
Combined
-------------------------------------------------------
Assuming Minimum Assuming Maximum
Historical Exchange Ratio (3) Exchange Ratio (3)
------------------- -------------------------- ---------------------------
Synopsys, IKOS, Pro Forma Pro Forma Pro Forma Pro Forma
Inc. (1) Inc. (2) Adjustments Combined Adjustments Combined
--------- -------- ----------- ---------- ----------- ----------
ASSETS
Current assets:
Cash and cash
equivalents........... $ 145,590 $ 15,737 $ 161,327 $ 161,327
Short-term
investments........... 247,109 6,036 253,145 253,145
--------- -------- ------- ---------- -------- ----------
Total cash and short-
term investments...... 392,699 21,773 -- 414,472 -- 414,472
Accounts receivable,
net................... 132,291 12,614 144,905 144,905
Prepaid expenses,
deferred taxes and
other................. 95,301 9,540 104,841 104,841
--------- -------- ------- ---------- -------- ----------
Total current assets... 620,291 43,927 -- 664,218 -- 664,218
Property and equipment,
net.................... 166,419 7,313 173,732 173,732
Long-term investments... 102,580 -- 102,580 102,580
Goodwill and intangible
assets, net............ 43,677 799 17,699 A, C 62,175 151,532 A, C 196,008
Other assets............ 49,459 1,077 50,536 50,536
--------- -------- ------- ---------- -------- ----------
Total assets........... $ 982,426 $ 53,116 $17,699 $1,053,241 $151,532 $1,187,074
========= ======== ======= ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities... $ 104,701 $ 12,370 $ 1,975 A $ 119,046 $ 1,975 A $ 119,046
Current portion of
long-term debt........ 1,624 -- 1,624 1,624
Accrued income taxes... 41,623 856 42,479 42,479
Deferred revenue....... 257,322 11,109 (8,307) A 260,124 (8,307) A 260,124
--------- -------- ------- ---------- -------- ----------
Total current
liabilities........... 405,270 24,335 (6,332) 423,273 (6,332) 423,273
Long-term debt.......... 454 -- 454 454
Deferred compensation... 16,503 -- 16,503 16,503
Other liability......... 12,030 369 12,399 12,399
Stockholders' equity:
Preferred stock........ -- -- -- --
Common stock........... 607 90 (80) A, B 617 (57) A, B 640
Additional paid-in
capital............... 567,502 58,849 (6,285) A, B 620,066 133,350 A, B 759,701
Retained earnings...... 412,726 (29,213) 29,213 B 412,726 29,213 B 412,726
Treasury stock, at
cost.................. (456,132) -- (456,132) (456,132)
Deferred stock-based
compensation.......... -- -- (131) A (131) (5,956) A (5,956)
Accumulated other
comprehensive income.. 23,466 (1,314) 1,314 B 23,466 1,314 B 23,466
--------- -------- ------- ---------- -------- ----------
Total stockholders'
equity................ 548,169 28,412 24,031 600,612 157,864 734,445
--------- -------- ------- ---------- -------- ----------
Total liabilities and
stockholders' equity.. $ 982,426 $ 53,116 $17,699 $1,053,241 $151,532 $1,187,074
========= ======== ======= ========== ======== ==========
See accompanying notes.
(1) As of April 30, 2001.
(2) As of March 31, 2001.
(3) See Note A for a description of the minimum and maximum exchange notes.
31
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
(in thousands, except per share data)
Combined
----------------------------------------------
Assuming Minimum Assuming Maximum
Historical Exchange Ratio (3) Exchange Ratio (3)
------------------ --------------------- ----------------------
Synopsys, IKOS, Pro Forma Pro Forma Pro Forma Pro Forma
Inc. (1) Inc. (2) Adjustments Combined Adjustments Combined
--------- -------- ----------- --------- ----------- ---------
Revenue:
Product................ $442,453 $54,652 $497,105 $497,105
Service................ 341,325 18,144 359,469 359,469
-------- ------- ----- -------- ------- --------
Total revenue.......... 783,778 72,796 -- 856,574 -- 856,574
Cost of revenue:
Product................ 42,257 11,545 53,802 53,802
Service................ 82,217 4,486 86,703 86,703
-------- ------- ----- -------- ------- --------
Total cost of revenue.. 124,474 16,031 -- 140,505 -- 140,505
-------- ------- ----- -------- ------- --------
Gross margin............ 659,304 56,765 -- 716,069 -- 716,069
Operating expenses:
Research and
development........... 189,280 15,912 205,192 205,192
Sales and marketing.... 288,762 24,913 313,675 313,675
General and
administrative........ 59,248 5,311 64,559 64,559
Amortization of
intangible assets..... 15,129 209 (209) C 15,129 (209) C 15,129
Amortization of
deferred
compensation.......... -- -- 115 D 115 3,620 D 3,620
In-process research and
development........... 1,750 -- 1,750 1,750
-------- ------- ----- -------- ------- --------
Total operating
expenses.............. 554,169 46,345 (94) 600,420 3,411 603,925
-------- ------- ----- -------- ------- --------
Operating (loss)
income................. 105,135 10,420 94 115,649 (3,411) 112,144
Other income, net....... 40,803 618 41,421 41,421
-------- ------- ----- -------- ------- --------
Income before provision
for income taxes....... 145,938 11,038 94 157,070 (3,411) 153,565
Provision for income
taxes.................. 48,160 2,750 924 E 51,834 (233) E 50,677
-------- ------- ----- -------- ------- --------
Net income............. $ 97,778 $ 8,288 $(830) $105,236 $(3,178) $102,888
======== ======= ===== ======== ======= ========
Basic earnings per
share.................. $ 1.43 $ 0.97 $ 1.51 $ 1.43
Weighted average common
shares outstanding..... 68,510 8,563 69,499 F 71,807 F
Diluted earnings per
share.................. $ 1.38 $ 0.84 $ 1.46 $ 1.37
Weighted average common
shares and dilutive
stock options
outstanding............ 70,998 9,836 72,272 F 74,974 F
See accompanying notes.
(1) For the year ended October 31, 2000.
(2) For the year ended September 30, 2000.
(3) See Note A for a description of the minimum and maximum exchange ratios.
32
SYNOPSYS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2001
(in thousands, except per share data)
Combined
---------------------------------------------
Assuming Minimum Assuming Maximum
Historical Exchange Ratio (3) Exchange Ratio (3)
------------------- --------------------- ---------------------
Synopsys, IKOS, Pro Forma Pro Forma Pro Forma Pro Forma
Inc. (1) Inc. (2) Adjustments Combined Adjustments Combined
--------- -------- ----------- --------- ----------- ---------
Revenue:
Product................ $ 72,294 $28,182 $100,476 $100,476
Service................ 178,470 10,237 188,707 188,707
Ratable license........ 69,914 -- 69,914 69,914
-------- ------- ----- -------- ----- --------
Total revenue.......... 320,678 38,419 -- 359,097 -- 359,097
Cost of revenue:
Product................ 11,530 6,251 17,781 17,781
Service................ 39,269 2,280 41,549 41,549
Ratable license........ 12,213 -- 12,213 12,213
-------- ------- ----- -------- ----- --------
Total cost of revenue.. 63,012 8,531 -- 71,543 -- 71,543
-------- ------- ----- -------- ----- --------
Gross margin............ 257,666 29,888 -- 287,554 -- 287,554
Operating expenses:
Research and
development........... 93,857 9,060 102,917 102,917
Sales and marketing.... 138,781 14,500 153,281 153,281
General and
administrative........ 31,793 3,046 34,839 34,839
Amortization of
intangible assets..... 8,351 84 (84) C 8,351 (84) C 8,351
Amortization of
deferred
compensation.......... -- -- 8 D 8 792 D 792
In-process research and
development........... -- -- -- --
-------- ------- ----- -------- ----- --------
Total operating
expenses.............. 272,782 26,690 (76) 299,396 708 300,180
-------- ------- ----- -------- ----- --------
Operating (loss)
income................. (15,116) 3,198 76 (11,842) (708) (12,626)
Other income, net....... 47,402 611 48,013 48,013
-------- ------- ----- -------- ----- --------
Income before provision
for income taxes....... 32,286 3,809 76 36,171 (708) 35,387
Provision for income
taxes.................. 10,332 975 268 E 11,575 17 E 11,324
-------- ------- ----- -------- ----- --------
Net income............. $ 21,954 $ 2,834 $(192) $ 24,596 $(725) $ 24,063
======== ======= ===== ======== ===== ========
Basic earnings per
share.................. $ 0.35 $ 0.32 $ 0.39 $ 0.36
Weighted average common
shares outstanding..... 62,822 8,865 63,811 F 66,119 F
Diluted earnings per
share.................. $ 0.33 $ 0.28 $ 0.36 $ 0.34
Weighted average common
shares and dilutive
stock options
outstanding............ 66,836 10,151 68,110 F 70,812 F
See accompanying notes.
(1) For the six months ended April 30, 2001.
(2) For the six months ended March 31, 2001.
(3) See Note A for a description of the minimum and maximum exchange ratios.
33
NOTE TO UNAUDITED PRO FORMA CONDENSED
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Adjustments
The measurement date to determine the value of the proposed merger has not
occurred. For purposes of the following pro forma adjustments, July 2, 2001,
the date of the merger agreement, was used for determining the adjustments.
(A) Purchase Price Adjustments.
The purchase price adjustments reflect the issuance of shares of
Synopsys common stock to IKOS stockholders as noted in the table below. The
exchange ratio and resulting number of shares assumed to be issued was
determined using a denominator of $55.12 per share which is equal to
Synopsys' average last sale price per share as reported on the Nasdaq
National Market for the ten full trading-day period ending on June 25,
2001, and a numerator of $6 (minimum exchange ratio), or $20 (maximum
exchange ratio stock price). The ratio of shares of Synopsys common stock
to be exchanged for each share of IKOS common stock outstanding as of July
2, 2001 is noted in the table below. The number of shares of IKOS common
stock outstanding on July 2, 2001 is 9,087,303. The fair value of the
shares assumed to be issued is based on a per share value of $46.48, which
is equal to Synopsys' average last sale price per share as reported on the
Nasdaq National Market for the trading-day period a few days before and
after July 2, 2001.
For purposes of the pro forma financial information, the following table
presents the assumptions under the minimum exchange ratio and the maximum
exchange ratio.
Assuming Assuming
Minimum Maximum
Exchange Exchange
Ratio Ratio
-------- ----------
Ratio of shares of Synopsys common stock to be
exchanged for each share of IKOS common stock
outstanding as of July 2, 2001........................ 0.1089 0.3628
Shares of Synopsys common stock assumed to be issued in
the proposed acquisition of IKOS...................... 989,184 3,297,280
Total consideration (in thousands):
Fair value of Synopsys common stock assumed to be
issued(1)............................................. $ 45,977 $ 153,258
Estimated fair value of options to purchase Synopsys
common stock to be issued less the portion of the
intrinsic value of IKOS' unvested options applicable
to the remaining vesting period(2).................... 6,466 33,018
Estimated acquisition related costs.................... 1,975 1,975
-------- ----------
$ 54,418 $ 188,251
======== ==========
--------
(1) Based on the number of outstanding shares of IKOS common stock as of
July 2, 2001. The actual number of shares of Synopsys common stock and
options to be issued will be based on the final exchange ratio as
determined at the completion of the merger.
(2) Based on the outstanding options to purchase shares of IKOS common
stock as of July 2, 2001. For purposes of this calculation, IKOS'
outstanding options that will vest solely as a result of the
consummation of the proposed merger are deemed to be vested as of July
2, 2001.
The estimated acquisition related costs consist primarily of legal and
accounting fees, printing costs, and other related charges.
The following represents the preliminary allocation of the purchase
price of IKOS to the acquired assets and assumed liabilities of IKOS as of
the date of the pro forma balance sheet and is for illustrative purposes
only. This allocation is preliminary and based on IKOS' assets and
liabilities as of March 31, 2001. This presentation does not include an
allocation to in-process research and development. As
34
discussed below, such an allocation will occur following a valuation. The
actual purchase price allocation will be based on fair values of the
acquired assets and assumed liabilities as of the date of completion of the
proposed merger. Assuming the merger occurred on April 30, 2001, the
allocation would have been as follows:
Assuming Assuming
Minimum Maximum
Exchange Exchange
Ratio Ratio
-------- --------
(in thousands)
Net tangible assets....................................... $35,920 $ 35,920
Goodwill and other intangible assets...................... 18,498 152,331
------- --------
Purchase price............................................ $54,418 $188,251
======= ========
Goodwill represents the excess of the purchase price over the fair value
of tangible and identifiable intangible assets. The unaudited pro forma
condensed combined consolidated statements of operations do not reflect the
amortization of goodwill acquired in the proposed merger, consistent with
the guidance in the FASB Statement No. 142, Goodwill and Other Intangible
Assets.
For purposes of the preliminary purchase price allocation used in the
preparation of the pro forma financial statements, Synopsys has not
allocated any portion of the purchase price to acquired in-process research
and development, nor has Synopsys allocated any of the pro forma purchase
price to any identifiable intangible assets. Upon completion of the
proposed merger, a valuation of the acquired in-process research and
development will be performed and any resulting allocation to acquired in-
process technology will be reflected in the post-merger statement of
operations of the combined company. A charge to acquired in-process
research and development is not reflected in the pro forma statements of
operations as it is a nonrecurring charge directly attributable to the
merger. In addition, upon completion of the proposed merger, a portion of
the purchase price will be allocated to identifiable intangible assets, if
any.
The purchase price allocation includes a reduction in IKOS' deferred
revenue related to product and software maintenance revenue to reflect the
fair value of the related obligation as of March 31, 2001. Synopsys has not
given effect in the pro forma statements of operations to the impact of the
deferred revenue adjustments on revenue for the periods presented as the
adjustment is directly related to the merger and the affect will be
included in income on average within twelve months of the transaction. Such
adjustments to revenue will be reflected in the post-merger statements of
operations of the combined company. The adjustments, which will be based on
IKOS' deferred revenue balance at the date of the merger, will have the
effect of reducing the amount of revenue the combined company will
recognize in periods subsequent to the merger compared to the amount of
revenue IKOS would have recognized in the same period absent the merger.
IKOS' deferred revenue balance as of March 31, 2001 will be recognized as
revenue through March 2002.
Deferred stock-based compensation represents the unearned portion of the
intrinsic value of IKOS' common stock options assumed in the merger which
are not vested as of July 2, 2001. For purposes of this calculation, IKOS'
outstanding options that will vest solely as a result of the consummation
of the proposed merger are deemed to be vested as of July 2, 2001. The
deferred compensation is being amortized on an accelerated basis over the
remaining vesting period of one to three years consistent with the method
described in Financial Accounting Standards Board (FASB) Interpretation No.
28.
(B) The pro forma adjustment represents the elimination of IKOS' equity
accounts.
(C) The pro forma adjustment represents the elimination of IKOS' capitalized
goodwill and other intangible assets and related amortization expenses.
(D) The pro forma adjustment represents the amortization of deferred
compensation associated with unvested stock options assumed in the proposed
merger with IKOS. The deferred compensation is amortized over the options'
remaining vesting period as of July 2, 2001 of one to three years.
35
(E) The pro forma adjustment reflects an effective tax rate of 33% for the year
ended October 31, 2000 and 32% for the six months ended April 30, 2001.
(F) The following tables set forth the computation of basic and diluted
earnings per share:
Pro Forma Combined
Historical -------------------------------------
---------------- Assuming Assuming
IKOS,
Synopsys, Inc. Minimum Maximum
Inc. (1) (2) Exchange Ratio (6) Exchange Ratio (6)
--------- ------ ------------------ ------------------
(in thousands)
For the year ended
October 31, 2000
Numerator:
Net income............ $97,778 $8,288 $105,236 $102,888
======= ====== ======== ========
Denominator:
Weighted-average
common shares
outstanding.......... 68,510 8,563 69,499 71,807
Effect of dilutive
employee stock
options outstanding
(5).................. 2,488 1,273 2,773 3,167
------- ------ -------- --------
Diluted common
shares............... 70,998 9,836 72,272 74,974
======= ====== ======== ========
Basic earnings per
share.................. $ 1.43 $ 0.97 $ 1.51 $ 1.43
------- ------ -------- --------
Diluted earnings per
share.................. $ 1.38 $ 0.84 $ 1.46 $ 1.37
======= ====== ======== ========
Pro Forma Combined
Historical -------------------------------------
---------------- Assuming Assuming
IKOS,
Synopsys, Inc. Minimum Maximum
Inc. (3) (4) Exchange Ratio Exchange Ratio
--------- ------ ------------------ ------------------
(in thousands)
For the six months ended
April 30, 2001
Numerator:
Net income............ $21,954 $2,834 $ 24,596 $ 24,063
======= ====== ======== ========
Denominator:
Weighted-average
common shares
outstanding.......... 62,822 8,865 63,811 66,119
Effect of dilutive
employee stock
options outstanding
(5).................. 4,014 1,286 4,299 4,693
------- ------ -------- --------
Diluted common
shares............... 66,836 10,151 68,110 70,812
======= ====== ======== ========
Basic earnings per
share.................. $ 0.35 $ 0.32 $ 0.39 $ 0.36
======= ====== ======== ========
Diluted earnings per
share.................. $ 0.33 $ 0.28 $ 0.36 $ 0.34
======= ====== ======== ========
--------
(1) For the year ended October 31, 2000.
(2) For the year ended September 30, 2000.
(3) For the six months ended April 30, 2001.
(4) For the six months ended March 31, 2001.
(5) The effect of dilutive employee stock options outstanding includes the
effect of the weighted average IKOS options expected to be assumed in
the merger.
(6) See Note A for a description of the minimum and maximum exchange
ratios.
36
THE SPECIAL MEETING
Proxy Statement/Prospectus
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies from the holders of IKOS common stock by the IKOS board
of directors for use at a special meeting of IKOS stockholders to vote on
adoption of the merger agreement and approval of the merger as more fully
described below.
This proxy statement/prospectus is first being furnished to stockholders of
IKOS on or about [ , , 2001].
Date, Time and Place of the Special Meeting
The special meeting will be held on [ , 2001 at a.m., local time, at
].
Matters to be Considered at the Special Meeting
At the special meeting and any adjournment or postponement of the special
meeting, stockholders of IKOS will be asked to consider and vote upon the
following proposals:
1. to adopt the agreement and plan of merger and reorganization, dated
July 2, 2001, as amended, by and among Synopsys, Oak Merger Corporation, a
wholly-owned subsidiary of Synopsys, and IKOS pursuant to which, among
other things, Oak Merger Corporation will merge with and into IKOS, IKOS
will become a wholly-owned subsidiary of Synopsys and each outstanding
share of IKOS common stock will be converted into the right to receive the
number of shares (or fraction of a share) of Synopsys common stock
prescribed by the agreement; and
2. to transact such other business as may properly come before the
special meeting.
Record Date and Shares Entitled to Vote
IKOS' board of directors has fixed the close of business on [ ] [ ],
2001, as the record date for determination of IKOS stockholders entitled to
notice of, and to vote at, the special meeting. As of the close of business on
the record date, there were approximately [ ] shares of IKOS common stock
outstanding and entitled to vote, held by approximately [ ] stockholders of
record of IKOS. Each IKOS stockholder is entitled to one vote for each share of
IKOS common stock held as of the record date.
Voting of Proxies
You are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to IKOS.
If your shares are held in "street name" by your broker, your broker will vote
your shares only if you provide instructions on how to vote. Your broker will
provide you with directions regarding how to instruct your broker to vote your
shares. All properly executed proxies received by IKOS prior to the vote at the
special meeting, and that are not revoked, will be voted in accordance with the
instructions indicated on the proxies. If you sign your proxy but fail to
indicate how you wish your shares to be voted, your proxy will be voted to
adopt the merger agreement and approve the merger. IKOS' board of directors
does not presently intend to bring any other business before the special
meeting and, so far as is known to IKOS' board of directors, no other matters
are to be brought before the special meeting. As to any business that may
properly come before the special meeting, however, it is intended that proxies,
in the form enclosed, will be voted in respect thereof by the proxy holders in
such manner as they determine to be in the best interests of IKOS. You may
revoke your proxy at any time prior to its use by delivering to the Secretary
of IKOS a signed notice of revocation or a subsequently dated, signed proxy, or
by attending the special meeting and voting in person. Attendance at the
special meeting does not in itself constitute the revocation of a proxy.
Failure to vote, abstentions and broker non-votes will, in effect, count as a
vote against the merger agreement and the merger.
37
Vote Required for Stockholder Approval
The Certificate of Incorporation of IKOS and the Delaware General
Corporation Law require the affirmative vote of the holders of a majority of
the shares of IKOS common stock outstanding and entitled to vote at the special
meeting to adopt the merger agreement and approve the merger. Certain
stockholders of IKOS have entered into voting agreements obligating them to
vote in favor of the merger agreement and the merger. As of the date of this
proxy statement/prospectus, the stockholders who signed the voting agreement
owned 353,630 shares of IKOS common stock (constituting approximately 4% of the
shares of IKOS common stock outstanding as of June 30, 2001). As of the record
date and the date of this proxy statement/prospectus, Synopsys owns no shares
of IKOS common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is a majority of the shares of IKOS common stock issued and outstanding on the
record date. If a quorum is not present in person or represented by proxy, it
is expected that the special meeting will be adjourned or postponed to solicit
additional proxies. Because adoption of the merger agreement and the approval
of the merger requires the affirmative vote of a majority of the outstanding
shares of IKOS common stock entitled to vote, and not just a majority of the
shares actually voted, the failure of an IKOS stockholder either to return a
proxy or to vote in person at the meeting (if the holder has not returned a
proxy) or to give voting instructions to a broker (for shares held for IKOS
stockholders by brokers) will have the same effect as a vote against the merger
agreement and the merger. In addition, the actions proposed in this proxy
statement/prospectus are not matters that can be voted on by brokers holding
shares for beneficial owners without the owners' specific instructions.
Abstentions and broker non-votes each will be included in determining the
number of shares present and voting at the meeting for the purpose of
determining the presence of a quorum, but otherwise will have the same effect
as a vote against the merger agreement and the merger. If you do not give
instructions to your broker on how to vote your shares, your shares will not be
voted on the merger proposal. Accordingly, we therefore urge you to return the
enclosed proxy card or the instructions form you receive from your broker
marked to indicate your vote.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers and employees
of IKOS may solicit proxies from stockholders by telephone, facsimile or in
person. Also, may solicit proxies on behalf of IKOS at an approximate
cost of $[ ], plus reasonable expenses. Directors, officers and employees of
Synopsys may also be deemed participants in the solicitation of proxies from
IKOS stockholders. IKOS will bear its own expenses in connection with the
solicitation of proxies for its special meeting of stockholders, although
Synopsys will pay one-half of all printing and filing costs and expenses
incurred in connection with the registration statement and this proxy
statement/prospectus. Following the original mailing of the proxy statement,
proxies and other soliciting materials, IKOS will request brokers, custodians,
nominees and other record holders to forward copies of the proxy statement and
other soliciting materials to persons for whom they hold shares of IKOS common
stock and to request authority for the exercise of proxies. In these cases,
IKOS, upon the request of the record holders, will reimburse the record holders
for their reasonable expenses.
No Dissenters' Rights
Under Delaware law, you are not entitled to exercise dissenters' rights as a
result of the merger or to demand payment for your shares.
Board Recommendation
The IKOS board of directors has carefully considered the terms and
conditions of the merger and has determined that the terms of the merger are
fair to, and that the merger is in the best interests of, IKOS stockholders. By
the unanimous vote of the directors present at the board meeting at which the
merger was considered and voted upon, the board of directors has approved the
merger agreement and the merger and
38
recommends that you vote FOR the adoption of the merger agreement and the
approval of the merger. In considering this recommendation, IKOS stockholders
should be aware that certain IKOS directors and officers have interests in the
merger that are different from, or in addition to yours. See the section
entitled "The Merger and Related Transactions--Interests of IKOS Directors,
Officers and Affiliates in the Merger."
The matters to be considered at the special meeting are of great importance
to the stockholders of IKOS. Accordingly, you are urged to read and carefully
consider the information presented in this proxy statement/prospectus, and to
complete, date, sign and promptly return the enclosed proxy card (or, in the
case of IKOS shares held for you by a broker, to give voting instructions to
your broker) in the enclosed postage-paid envelope.
You should not send any stock certificates with your proxy card. A
transmittal form with instructions for the surrender of IKOS common stock
certificates will be mailed to you promptly after completion of the merger. For
more information regarding the procedures for exchanging IKOS stock
certificates for Synopsys stock certificates see the section entitled "The
Merger and Related Transactions--Exchange of IKOS Stock Certificates for
Synopsys Stock Certificates."
39
THE MERGER AND RELATED TRANSACTIONS
This section of the proxy statement/prospectus describes material aspects of
the proposed merger, including the material terms of the merger agreement.
While we believe that the description covers the material terms of the merger
and the related transactions, this summary may not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents we refer to, including the merger agreement,
for a more complete understanding of the merger.
Background of the Merger
Since 1997, IKOS has focused on developing and marketing its hardware-
assisted emulation products, a specific subset of the larger design
verification market. IKOS has encountered increasing customer demand for
comprehensive design verification solutions that integrate a range of
verification technologies. Moreover, despite strong financial performance
during 1999 and 2000, IKOS had not attained the market visibility and higher
price earnings multiple of larger EDA companies. The IKOS board recognized the
potential benefits that could accrue for IKOS stockholders if IKOS were to
partner with a large, high-profile company in the electronic design automation
industry that provides a broad suite of verification products. The IKOS board
believed that such a partnership or business combination would benefit IKOS
stockholders by enabling IKOS to provide existing and potential customers more
of a "one-stop" shop for integrated circuit design verification solutions. In
addition, the IKOS board believed that a combination with a larger company
would enable the IKOS stockholders to benefit from the increased visibility and
stronger financial resources of a larger company. From time to time over this
period, IKOS has received unsolicited inquiries from some of the larger
electronic design automation companies regarding its interest in a business
combination. Although IKOS engaged in preliminary discussions with these
industry participants in response to each of these inquiries, the discussions
in each case terminated prior to any formal acquisition or business combination
proposal.
Over the past several years, Synopsys has established a strong position in
various segments of the integrated circuit verification market. As part of its
acquisition of Viewlogic Systems, Inc. in 1997, Synopsys acquired VCS, which
has become a leading product in the software simulation segment of
verification. VCS has also been the anchor point of Synopsys' verification
solution, around which Synopsys has built other software verification
solutions. Synopsys has expanded its verification tool offering through both
acquisitions and internal development to include software tools such as the
Vera(R) automated test bench tool, the CoverMeter code coverage tool, the
VirSim graphical user interface, the PrimeTime(R) gate-level analysis tool and
the Formality(R) formal verification product. As part of its long-term
verification strategy, Synopsys believes that it will become increasingly
important to offer a more complete range of verification technologies, which
are tightly linked in an integrated offering. The merger offers the opportunity
for Synopsys to broaden its verification portfolio and to better serve its
customers' needs.
At various times between August 1999 and January 2000, representatives of
Synopsys and IKOS met to discuss a possible strategic transaction. The parties
mutually terminated such discussions in January 2000.
On April 17, 2001, IKOS received an unsolicited oral indication of interest
from an EDA company other than Synopsys regarding a potential business
combination transaction with IKOS. IKOS consulted with its financial advisor,
Needham & Company, Inc., with respect to this indication of interest.
On April 19, 2001, IKOS requested that Needham & Company inquire about the
level of interest from other potential strategic partners and/or candidates for
a business combination transaction regarding a strategic alliance or business
combination transaction with IKOS.
From April 19, 2001 through April 27, 2001, on behalf of IKOS, Needham &
Company contacted potential partners and merger candidates, including Synopsys
and the EDA company that had earlier indicated interest in a transaction and
requested that interested parties submit proposals for consideration.
40
On April 30, 2001, Synopsys and Needham & Company, on behalf of IKOS,
entered into a non-disclosure agreement in order to permit Synopsys to conduct
a due diligence investigation of IKOS' business and technology.
On May 2 and May 3, 2001, Aart de Geus, Chairman of the Board and Chief
Executive Officer of Synopsys, Chi-Foon Chan, President and Chief Operating
Officer of Synopsys, Brad Henske, Chief Financial Officer of Synopsys, John
Chilton, Senior Vice President, IP and Systems Group of Synopsys and Steve
Shevick, Vice President and General Counsel of Synopsys, met with Ramon Nunez,
President and Chief Executive Officer of IKOS, Robert Hum, Chief Operating
Officer of IKOS and Chris Ditzen, Vice President of Business Development of
IKOS to discuss IKOS' business, products, markets, sales channels, and
financial results.
On May 4, 2001, Needham & Company, on behalf of IKOS, received a proposal
for a business combination transaction with IKOS from an EDA company other than
Synopsys or the company who had previously indicated interest in such a
transaction.
On May 7, 2001, Needham & Company, on behalf of IKOS, received a proposal
from Synopsys to enter into a business combination transaction with IKOS.
Synopsys delivered to IKOS a non-binding term sheet with respect to the
proposed transaction on May 8, 2001. Representatives of IKOS management and
Needham & Company engaged in preliminary negotiations with Synopsys
representatives on the terms of the proposal.
At a meeting of the IKOS board held on May 9, 2001, IKOS' management and
Needham & Company representatives reviewed with the IKOS board the current
status of the proposals from Synopsys and such other EDA company for a business
combination. The IKOS board received advice from outside legal counsel
regarding the fiduciary duties of the board in considering acquisition
proposals. The IKOS board also received preliminary advice from outside legal
counsel on the Quickturn non-competition agreement. The IKOS board compared the
financial terms of the proposals, as well as the proposed termination fees and
other deal protection devices. The IKOS board considered the likelihood of
consummation of the respective transactions, taking into account regulatory
review and other factors, as well as risks related to the length of the pre-
closing period for the transaction proposed by Synopsys. The IKOS board
discussed with its financial advisor and management the possibility of
receiving offers from other third parties, and other alternatives available to
IKOS, including remaining independent. IKOS' management then made a
presentation on the expected synergies, benefits and risks of each proposal.
The IKOS board discussed with management the risks and benefits attendant to
IKOS continuing as an independent company. IKOS' management discussed the
difficult economic environment facing capital equipment suppliers like IKOS and
the resulting uncertainty for IKOS' financial performance in both the near and
longer term. The IKOS board discussed with its financial advisor and management
the ranges of proposed merger consideration and the conditions for minimum
revenue and profit before taxes in the Synopsys offer. The IKOS board concluded
based on these discussions that the Synopsys offer represented the most
attractive alternative available to IKOS assuming that a mutually agreeable
definitive merger agreement could be negotiated. Accordingly, the IKOS board
authorized management to negotiate revisions to the term sheet with Synopsys to
clarify that IKOS would have a right to terminate the merger agreement on
receipt of a superior offer, and subject to such revision, to enter into a 30
day no-shop agreement with Synopsys to permit negotiation of a definitive
merger agreement and completion of Synopsys' due diligence.
On May 10, 2001, Synopsys and IKOS delivered a revised non-binding term
sheet setting forth proposed terms for a possible strategic combination of IKOS
and Synopsys. Also on that date, Synopsys and IKOS entered into a letter
agreement in which IKOS agreed not to solicit or negotiate an alternative
acquisition proposal by a party other than Synopsys until June 9, 2001.
On May 11, 2001, senior executives of Synopsys met with senior executives of
IKOS at Synopsys' offices in Mountain View, California to conduct further due
diligence on IKOS' business and technology. Simultaneously, attorneys from
Brobeck, Phleger & Harrison LLP, outside legal counsel to Synopsys, and Gray
Cary Ware &
41
Freidenrich LLP, outside legal counsel to IKOS, met with Steve Shevick at the
same location to discuss the timing and key issues relating to further due
diligence and preparation of key agreements.
Between May 11, 2001 and July 2, 2001, executives and technical teams from
both Synopsys and IKOS, and attorneys from Synopsys, Brobeck and Gray Cary held
numerous meetings and conference calls to conduct due diligence. On May 25,
2001, the Synopsys board of directors held a meeting at which the status of the
merger discussions and due diligence was reviewed.
At a special meeting of the IKOS board of directors on May 25, 2001, Mr.
Nunez reported to the IKOS board that Needham & Company had received contacts
from investment bankers representing the other EDA company that had previously
made a transaction proposal, and that Needham & Company had advised the other
party's bankers that the no-shop agreement prevented any further dialogue.
Outside legal counsel made presentations regarding the board's fiduciary duties
and the Quickturn non-competition agreement.
On May 28, 2001, Brobeck delivered a draft merger agreement to Gray Cary.
Between May 28, 2001 and July 2, 2001, Synopsys and IKOS and their respective
outside legal counsel negotiated the terms of the merger agreement and related
agreements.
At a special meeting of IKOS board of directors on June 1, 2001, IKOS
management briefed the IKOS board on the progress of negotiations with
Synopsys. Outside legal counsel to IKOS reviewed with the board the material
terms of the draft merger agreement, including the proposed pricing structure,
conditions to closing, the proposed no-shop covenant, termination provisions
and the size and triggering events for proposed termination fees, pre-closing
covenants and other provisions of the merger agreement. The IKOS board
discussed the risks and benefits of the proposed merger and other alternatives,
including IKOS remaining independent. The IKOS board discussed the difficult
economic environment and its possible effect on IKOS' prospects in the near and
longer term. The IKOS board authorized IKOS management and legal counsel to
continue negotiations.
At a special meeting of the IKOS board of directors on June 5, 2001, Needham
& Company reviewed with the IKOS board its detailed financial analyses
regarding the proposed merger, and responded to questions from the IKOS
directors. IKOS' outside legal counsel reviewed the revised draft of the merger
agreement and key terms of related agreements with the IKOS board. The IKOS
board discussed and provided direction regarding the negotiating strategy of
key terms, including the proposed range of and triggering events for
termination fees, the no-shop covenant, the conditions to closing, pre-closing
operating covenants, the contingent consideration due on achievement of various
revenue and profit targets and the definitions of these terms.
At a special meeting of the IKOS board of directors on June 6, 2001,
management and outside legal counsel updated the IKOS board on the progress of
negotiations and advised that Synopsys had requested an extension of the no-
shop agreement to complete certain due diligence. IKOS management and outside
legal counsel reviewed with the IKOS board the key remaining issues in the
merger agreement and related agreements. The IKOS board of directors discussed
these open issues and the request by Synopsys to extend the no-shop agreement.
The IKOS board considered the risks and benefits of the proposed extension, as
well as other alternatives available to IKOS. The IKOS board authorized IKOS
management to extend the no-shop agreement through June 27, 2001 to allow
Synopsys to complete its due diligence review, assuming that certain remaining
key open business issues could be resolved prior to such extension. IKOS
management and outside counsel negotiated those open points to resolution on
June 7, 2001.
On June 9, 2001, Synopsys and IKOS entered into a letter agreement to extend
the no-shop period of the May 8, 2001 letter agreement for an additional three
weeks, to June 27, 2001.
On June 25, 2001, the Synopsys board held a special meeting to review the
merger agreement and due diligence issues. After discussion, the Synopsys board
approved the merger agreement and the merger, subject to satisfactory
completion of due diligence and resolution of outstanding business points and
legal issues.
42
At a special meeting of the IKOS board on June 25, 2001, Needham & Company
made an oral presentation updating its financial analyses regarding the
proposed merger. IKOS' management updated the IKOS board on the progress of
negotiations and Synopsys' due diligence review. IKOS management reviewed the
preliminary outlook on IKOS' third quarter results which were still being
finalized. Outside legal counsel summarized the status of the negotiations on
the merger agreement and related agreements. The IKOS board reviewed the
outstanding business issues and authorized continued negotiations.
On June 26, 2001, Dr. de Geus discussed with Mr. Nunez certain proposed
adjustments to the pricing structure and the financial performance conditions
for the merger.
At a special meeting of the IKOS board of directors on June 27, 2001, IKOS
management updated the IKOS board on the proposed adjustments to the pricing
structure and financial performance conditions. In addition, IKOS' management
and IKOS' outside legal counsel reviewed in detail a revised employee retention
condition with the IKOS board. The IKOS board of directors reviewed the risks
and benefits of the proposed merger and reviewed other alternatives to the
proposed merger with Synopsys, including continuing as an independent company,
and their relative benefits and risks. The IKOS board adjourned to receive
advice from Needham & Company.
A second special meeting of the IKOS board of directors was held in the
evening of June 27, 2001. Mr. Nunez updated the IKOS board regarding the
results of negotiations since the IKOS board meeting earlier that morning.
Needham & Company reviewed with the IKOS board the revised pricing structure
and orally updated Needham & Company's financial analyses regarding the
proposed merger. Needham & Company delivered to the IKOS board its oral opinion
(subsequently confirmed in writing) that the exchange ratio was fair to IKOS'
stockholders from a financial point of view. The IKOS board discussed the risks
and benefits of the proposed transaction, taking into account the revised
terms, and considered other alternatives and their relative risks and benefits.
After discussion, the IKOS board concluded that the proposed merger was the
most attractive alternative available to IKOS, and was fair to and in the best
interests of the IKOS stockholders, and approved the merger agreement, the
merger and the related agreements, subject to final resolution of the remaining
open business issues. The IKOS board also authorized the extension of the no-
shop agreement through July 2, 2001 to permit final negotiations to be
completed.
On June 27, 2001, Synopsys and IKOS entered into a letter agreement to
extend the June 9, 2001 letter agreement to July 2, 2001.
On July 2, 2001, Dr. de Geus and Mr. Nunez signed the definitive merger
agreement on behalf of their respective companies at Synopsys' headquarters.
The parties to the voting agreements executed the voting agreement and the
Chief Operating Officer executed his employment agreement with Synopsys,
effective upon the closing of the merger. Also on July 2, 2001, the parties
issued a joint press release announcing the signing of the merger agreement
Reasons for the Merger
Synopsys' Reasons for the Merger
Synopsys' board has determined by the unanimous vote of the directors
present that the merger is in the best interest of Synopsys and its
stockholders. Synopsys' board has identified several potential benefits of the
merger that it believes will contribute to the success of the combined company
by:
. allowing Synopsys to offer its customers a more comprehensive and
integrated set of verification solutions by linking Synopsys'
simulation, test bench automation and formal verification software tools
to IKOS' hardware-assisted acceleration and emulation products;
. enabling Synopsys' customers to obtain their verification solutions for
their complex "system-on-a-chip" designs from a single supplier,
creating opportunities to sell the full range of Synopsys
43
products to customers who may only be using a limited number of
Synopsys verification products and potentially reducing customers'
transactional costs by interacting with a single vendor;
. expanding Synopsys' customer and relationship base;
. giving Synopsys additional expertise and a stronger strategic position
to develop new verification technologies; and
. providing new opportunities for revenue growth for Synopsys'
verification products.
The Synopsys board identified and considered a number of positive factors in
approving the merger, including:
. the favorable speed, capacity, cost and upgradeability features of IKOS'
products;
. IKOS' market position within the hardware-assisted verification market;
. the complementary nature of the two companies' products;
. IKOS' highly skilled workforce;
. IKOS' attractive valuation;
. a flexible transaction structure under which IKOS is required to meet
minimum performance thresholds, and under which the price will vary
depending upon IKOS' financial performance during the pre-closing
period;
. IKOS' potentially significant on-going research and development efforts;
. IKOS' patent position; and
. the strategic alignment and cultural fit of the two companies.
The Synopsys board also identified and considered a number of potentially
negative factors in approving the merger including:
. the length of the pre-closing period necessitated by the Quickturn non-
competition agreement, which could lead to customer, supplier and
employee retention problems and during which Synopsys will not enjoy the
benefits of the merger;
. competition within the hardware-assisted verification market;
. the risk that IKOS may not meet the minimum financial conditions needed
to close;
. potential for litigation regarding Synopsys' non-competition agreement
with Quickturn; and
. the potential impact of current and potential patent litigation
involving IKOS' products.
The Synopsys board concluded that certain of these risks could be managed or
mitigated and others were unlikely to occur or to have a material impact on the
combined company or the merger, and that, on balance, the potential benefits of
the merger outweighed the risks of the merger. For these reasons, the Synopsys
board determined that Synopsys should proceed with the merger agreement and the
merger.
The foregoing discussion of the information and factors considered by the
Synopsys board of directors is not intended to be exhaustive but is believed to
include material factors considered by the Synopsys board of directors. In view
of the variety of factors considered in connection with its evaluation of the
merger, the Synopsys board of directors did not find it practicable to and did
not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination.
IKOS' Reasons for the Merger
By the unanimous vote of the directors present at the board meeting at which
the merger was considered and voted upon, the IKOS board has approved the
merger agreement and the merger and recommends that the holders of shares of
IKOS common stock vote FOR the adoption of the merger agreement and the
approval of the merger.
44
The IKOS board identified a number of benefits for IKOS' stockholders that
could result from the merger. These potential benefits include:
. the combined company's ability to offer its customers a more
comprehensive set of verification solutions, from Synopsys' simulation,
test bench automation and formal verification software tools to IKOS'
hardware-assisted acceleration and emulation products, providing
increased sales opportunities for the combined company;
. the fact that Synopsys' larger market capitalization, broader suite of
complementary products and services, larger installed base of customers
and worldwide brand recognition will provide IKOS with additional
resources and opportunities to grow and gain market share more rapidly
following the merger than IKOS would likely be able to as an independent
company;
. the expected synergies from the combined research and development,
marketing and sales efforts of the two companies following the merger;
and
. the fact that the IKOS stockholders will have greater liquidity
available upon exchange of their shares of IKOS common stock for shares
of Synopsys common stock, which trade in significantly higher volumes.
In the course of its deliberations, the IKOS board considered a number of
additional factors relevant to the merger, including:
. the fact that the range of merger consideration compensates IKOS
stockholders based on IKOS' financial performance during the measurement
period at what the IKOS board believed would be premiums to expected
trading prices resulting from such performance absent a business
combination;
. the potential for merger consideration representing a significant
premium to the trading price of IKOS common stock on the date of the
merger agreement if IKOS' financial performance is at the high end of
the performance targets;
. the current competitiveness of IKOS product offerings and IKOS'
attractiveness to potential merger partners such as Synopsys as a result
of such offerings;
. the alternatives available to IKOS, including engaging in another
business combination or continuing as an independent company, taking
into account in the latter case the greater resources of competitors
compared to IKOS and IKOS' status as a relatively small technology
company;
. the larger size, relative stability and greater investor visibility of
Synopsys compared with IKOS;
. the strategic alignment and cultural fit of the two companies;
. the current difficult economic environment, and its adverse effect on
the outlook for capital equipment suppliers such as IKOS;
. the possibility of lower financial performance by IKOS during the next
year in light of the difficult economic conditions, and the possible
impact of such lower performance on potential acquiror's interest in a
business combination with IKOS;
. the fact that the conditions for minimum revenue and profit before taxes
permitted a broad range of possible financial performance for IKOS over
the 12-month measurement period, providing greater deal certainty, while
taking into account the possibility that the merger consideration at the
lower performance targets would be lower than IKOS' then current trading
price;
. the fact that the results of inquiries made by IKOS and its financial
advisors to possible interested buyers regarding a business combination
or similar transaction with IKOS and evaluation of other possible
alternatives indicated that a business combination with Synopsys in the
IKOS board's view presented the most favorable transaction available to
IKOS at this time, taking into account strategic fit, pricing and risk
of non-consummation;
. the fact that the merger consideration is for fixed values of Synopsys
common stock at closing based on IKOS' financial performance, so that
IKOS stockholders will not have significant pre-closing market risk for
the value of Synopsys common stock to be delivered at closing;
45
. the fact that the merger agreement included provisions permitting IKOS
to respond in certain circumstances to unsolicited proposals for an
acquisition of IKOS, subject to compliance with the terms of the merger
agreement, including the payment of a termination fee; and
. the oral opinion of Needham & Company to the IKOS board on June 27,
2001, subsequently confirmed in writing, that the exchange ratio was
fair from a financial point of view, to IKOS' stockholders. (The full
text of Needham & Company's written opinion dated June 27, 2001, which
sets forth the assumptions made, matters considered and limitations on
the review undertaken by Needham & Company, is attached hereto as
Appendix C and is incorporated herein by reference.)
The IKOS board also identified and considered a number of risks and
uncertainties in its deliberations concerning the merger, including the
following:
. IKOS' possible inability to meet the minimum revenue and profit before
tax conditions to the merger in light of the continued slowdown in the
overall U.S. economy, which is resulting in deferrals of purchasing
decisions for customers of capital equipment suppliers such as IKOS, and
which failure to meet such conditions could result in the merger not
closing;
. the fact that IKOS stockholders may receive a lower value for their
shares in the merger than the trading price of IKOS common stock on the
date of the merger agreement if IKOS' financial performance during the
measurement period is at the lower end of the range of performance
targets, a risk that the IKOS board considered to be offset by the fact
that the merger consideration in such cases represented, in the board's
opinion, premiums to the ranges of trading prices the board believed
would likely result from such performance absent the merger with
Synopsys, and the opportunity for IKOS stockholders to receive a
substantial premium to the current trading price if IKOS' financial
performance during the measurement period is at the high end of the
range of performance targets;
. the fact that the closing of the merger cannot occur until the
expiration of the Quickturn non-competition agreement on June 14, 2002,
or its earlier waiver, and the risks related to the length of the pre-
closing period, including employee retention, the possible effects of a
deteriorating economic environment for capital equipment suppliers and
other unforeseen occurrences which could adversely affect IKOS or its
financial performance during the pre-closing period;
. the possibility that IKOS might have potentially received a higher value
for IKOS shares than provided under the merger agreement if IKOS had
negotiated a business combination transaction 12 to 15 months later, at
the time of the expected closing of the merger, offset in the IKOS
board's view by the possibility that neither Synopsys nor a third party
would be interested in an acquisition of IKOS on at least as favorable
terms at such later time, particularly in light of the current difficult
economic conditions facing capital equipment suppliers, such as IKOS;
. the risk of litigation over the Quickturn noncompetition agreement;
. the risk of non-consummation of the merger due to IKOS' possible
inability to satisfy conditions relating to employee retention,
mitigated in part, in the IKOS board's opinion, by the negotiation of
certain key severance, employment and non-competition agreements with
management prior to execution of the merger agreement; and
. the risk that the potential benefits sought in the merger may not be
fully realized, if at all.
The IKOS board of directors concluded that certain of these risks could be
managed or mitigated and others were unlikely to occur or to have a material
impact on the combined company or the merger, and that, on balance, the
potential benefits of the merger outweighed the risks of the merger. For these
reasons, the IKOS board determined that IKOS should proceed with the merger
agreement and the merger.
The foregoing discussion of the factors considered by the IKOS board is not
intended to be exhaustive but summarizes the material factors considered by the
IKOS board in making its recommendation. In view of the wide variety of factors
considered by the IKOS board, the IKOS board did not find it practical to and
did not quantify or assign any relative or specific weights to the preceding
factors or determine that any factor was of
46
particular importance, nor did it specifically characterize any factor as
positive or negative, except as described above. The IKOS board viewed its
decision and recommendation as being based on the totality of the information
presented. In addition, individual members of the IKOS board may have given
differing weights to differing factors and may have viewed certain factors more
positively or negatively than others. Throughout its deliberations, the IKOS
board consulted with IKOS management and its legal and financial advisors.
Recommendation of IKOS' Board of Directors
For the reasons discussed above and after careful consideration, by the
unanimous vote of the directors present at the board meeting at which the
merger was considered and voted upon, the IKOS board has approved the merger
agreement and the merger and recommends that IKOS stockholders vote FOR
adoption of the merger agreement and approval of the merger.
In considering the recommendation of the IKOS board of directors, you should
be aware that some of the directors and officers of IKOS have interests in the
merger that are different from, or are in addition to, the interests of IKOS
stockholders generally. See the section entitled "The Merger and Related
Transactions--Interests of IKOS Directors, Officers and Affiliates in the
Merger."
Opinion of Needham & Company, Inc., Financial Advisor to IKOS
Pursuant to an engagement letter dated June 28, 2000, IKOS retained Needham
& Company to furnish financial advisory and investment banking services and to
render an opinion as to the fairness, from a financial point of view, of the
exchange ratio to the holders of IKOS common stock. The exchange ratio was
determined through arm's length negotiations between IKOS and Synopsys and not
by Needham & Company.
On June 27, 2001, Needham & Company delivered to the IKOS board its oral
opinion, which it subsequently confirmed in writing, that, as of that date and
based upon and subject to the assumptions and other matters described in the
written opinion, the exchange ratio is fair to the holders of IKOS common
stock, other than Synopsys and its affiliates, from a financial point of view.
The Needham & Company opinion is addressed to the IKOS board, is directed only
to the financial terms of the merger agreement, and does not constitute a
recommendation to any IKOS stockholder as to how that stockholder should vote
at the IKOS special meeting.
The complete text of the Needham & Company opinion, which sets forth the
assumptions made, matters considered, limitations on and scope of the review
undertaken by Needham & Company, is attached to this document as Appendix C.
The summary of the Needham & Company opinion set forth in this document is
qualified in its entirety by reference to the Needham & Company opinion. You
should read the Needham & Company opinion carefully and in its entirety for a
description of the procedures followed, the factors considered, and the
assumptions made by Needham & Company.
In arriving at its opinion, Needham & Company, among other things:
. reviewed a draft of the merger agreement dated June 22, 2001, together
with correspondence dated June 27, 2001 from IKOS outlining the proposed
modifications to the financial terms of the draft merger agreement;
. reviewed certain publicly available information concerning IKOS and
Synopsys and certain other relevant financial and operating data of IKOS
furnished to Needham & Company by IKOS;
. held discussions with members of management of IKOS concerning the
current and future business prospects of IKOS and the estimated
financial results of IKOS for the quarter ending June 30, 2001;
. reviewed and discussed with the management of IKOS certain financial
forecasts and projections prepared by management;
. reviewed the historical stock prices and trading volumes of IKOS common
stock and Synopsys common stock;
47
. compared certain publicly available financial data of companies whose
securities are traded in the public markets and that Needham & Company
deemed generally relevant to similar data for IKOS;
. reviewed the financial terms of certain other business combinations that
Needham & Company deemed generally relevant; and
. performed and/or considered such other studies, analyses, inquiries and
investigations as Needham & Company deemed appropriate.
Needham & Company assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by or discussed with
it for purposes of rendering its opinion. Needham & Company assumed that the
financial forecasts relating to IKOS were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the IKOS
management, at the time of preparation, of the future operating and financial
performance of IKOS. Needham & Company did not assume any responsibility for or
make or obtain any independent evaluation, appraisal or physical inspection of
the assets or liabilities of IKOS. The Needham & Company opinion states that it
was based on economic, monetary and market conditions existing as of its date.
Needham & Company did not express any opinion as to the amount of contingent
consideration, if any, that will actually be paid in the merger. Needham &
Company expressed no opinion as to the prices at which Synopsys common stock or
IKOS common stock will actually trade at any time. In addition, Needham &
Company was not asked to consider, and the Needham & Company opinion does not
address:
. IKOS' underlying business decisions to engage in the merger;
. the relative merits of the merger as compared to any alternative
business strategies that might exist for IKOS;
. the effect of any other transaction in which IKOS might engage; or
. the consideration to be received by any individual stockholder.
No limitations were imposed by IKOS on Needham & Company with respect to
investigations made or procedures followed by Needham & Company in rendering
its opinion.
Based on this information, Needham & Company performed a variety of
financial analyses of the merger and the merger consideration. The following
paragraphs summarize the material financial analyses performed by Needham &
Company in arriving at its opinion.
Stock Price Premium Analysis
Needham & Company analyzed the stock price premiums to IKOS stockholders at
varying offer prices payable in the merger. The premiums were based upon the
closing price per share of the IKOS common stock on June 27, 2001 of $7.20.
Needham & Company also analyzed the various stock price premiums based on the
present values of the varying offer prices payable in the merger. The present
values were calculated using discount rates ranging from 12% to 16%. The
following table sets forth the percentage premiums to the June 27, 2001 closing
price based on the offer prices and discounted present values of the offer
prices shown.
Discounted Present Value
---------------------------------------------------------
12% 16%
Offer Percentage Discount Percentage Discount Percentage
Price Premium Rate Premium Rate Premium
----- ---------- -------- ---------- -------- ----------
$20.00 178% $17.84 148% $17.22 139%
$18.00 150% $16.06 123% $15.50 115%
$15.00 108% $13.38 86% $12.92 79%
$12.00 67% $10.70 49% $10.33 44%
$ 9.00 25% $ 8.03 12% $ 7.75 8%
$ 6.00 -17% $ 5.35 -26% $ 5.17 -28%
48
Option Valuation Analysis
Needham & Company analyzed the hypothetical value of the proposed offer at
varying offer prices payable in the merger, assuming that each holder of IKOS
common stock is giving Synopsys a call option at the proposed offer price and
receives from Synopsys a put option at the proposed offer price. The overall
offer value is derived by subtracting the value of the call option from the
June 27, 2001 closing price per share of IKOS common stock of $7.20 and adding
to that amount the value of the put option. The put and call options were
valued utilizing the Black-Scholes option valuation methodology. Needham &
Company analyzed the hypothetical offer values assuming offer prices of $6.00,
$12.00 and $18.00 and using a risk-free discount rate reflecting the interest
rate earned on short-term United States Treasury bills. Needham & Company also
performed a risk-altered analysis using a discount rate on the put option of
15%, to adjust for the risk that the put option is not exercisable until the
assumed June 30, 2002 expiration date of the hypothetical options. The table
below sets forth the results of this analysis.
Unaltered Risk-Altered
Black-Scholes Black-Scholes
------------------- -------------
IKOS stock price as of 06/27/01............... $7.20 $ 7.20 $ 7.20 $ 7.20
Option strike price (offer price)............. $6.00 $12.00 $18.00 $18.00
Call value.................................... $3.27 $ 1.79 $ 1.10 $ 1.10
Put value..................................... $1.86 $ 6.17 $11.27 $ 9.55
Overall Offer Value........................... $5.79 $11.58 $17.37 $15.65
Selected Company Analysis
Using publicly available information, Needham & Company compared selected
historical and projected financial and market data ratios for IKOS, in some
cases based on the varying offer prices payable in the merger, to the
corresponding data and ratios of the three largest publicly traded electronic
design automation, or EDA, companies, as well as five smaller publicly traded
EDA companies. These companies, referred to as the selected companies,
consisted of:
Three Largest EDA Companies Five Smaller EDA Companies
--------------------------- --------------------------
Cadence Design Systems, Inc. Innoveda, Inc.
Mentor Graphics Corporation Integrated Measurement Systems, Inc.
Synopsys, Inc. Simplex Solutions, Inc.
Synplicity, Inc.
Verisity Ltd.
The following table sets forth information for the selected companies and
IKOS concerning the following multiples:
. market value of common stock as a multiple of calendar year 2000
earnings per share, or price/earnings multiple;
. projected calendar year 2001 price/earnings multiple;
. total market capitalization as a multiple of calendar 2000 revenues;
. total market capitalization as a multiple of projected calendar 2001
revenues; and
. total market capitalization as a multiple of projected calendar 2002
revenues.
49
Needham & Company calculated multiples for the selected companies based on
the closing stock prices for those companies on June 27, 2001 and for IKOS
based on the closing price per share of IKOS common stock on June 27, 2001 of
$7.20.
2000 Est. 2001 Est. 2002
2000 Est. 2001 Market Market Market
Price/ Price/ Capitalization/ Capitalization/ Capitalization/
Earnings Earnings Revenues Revenues Revenues
-------- --------- --------------- --------------- ---------------
Three Largest EDA
Companies:
High................... 44.3x 63.5x 7.7x 4.8x 3.4x
Mean................... 33.9x 23.8x 3.3x 3.0x 2.1x
Median................. 40.0x 22.7x 3.8x 3.3x 2.1x
Low.................... 17.3x 13.8x 2.0x 1.7x 1.5x
Five Smaller EDA
Companies:
High................... 21.9x 73.2x 11.7x 7.3x 5.4x
Mean................... 16.7x 44.3x 6.7x 4.5x 3.3x
Median................. 16.7x 45.3x 7.7x 4.8x 3.4x
Low.................... 11.5x 13.4x 1.1x 0.8x 0.7x
IKOS.................... 7.4x 21.2x 0.9x 1.0x 0.7x
The following table sets forth for IKOS total market capitalization as a
multiple of the revenues for the twelve months ending June 30, 2002 implied by
the varying offer prices in the merger. The table also sets forth, for the
selected companies, the average of the projected 2001 and 2002 market
capitalization to revenue multiples, to approximate the multiples for the
twelve months ending June 30, 2002. In the following table, the $7.82, $10.42,
$13.03 and $15.63 offer prices represent the discounted present value of the
$9.00, $12.00, $15.00 and $18.00 per share offer prices, discounted at 15%
discount rates, to reflect the risk associated with closing the merger one year
from the date of analysis.
12 mos. Ending
June 30, 2002
Market Capitalization/
Offer Price Revenues
----------- ----------------------
IKOS $20.00 2.1x
$18.00 2.1x
$15.63 1.8x
$15.00 1.9x
$13.03 1.7x
$12.00 1.8x
$10.42 1.5x
$ 9.00 1.5x
$ 7.82 1.3x
$ 6.00 1.2x
Three Largest EDA
Companies:
High 4.1x
Mean 2.6x
Median 2.7x
Low 1.6x
Five Smaller EDA
Companies:
High 6.4x
Mean 3.9x
Median 4.1x
Low 0.7x
50
Selected Transaction Analysis
Needham & Company also analyzed publicly available financial information for
27 selected pending and completed mergers and acquisitions involving EDA
companies since January 1, 1998. In examining these transactions, referred to
as the selected transactions, Needham & Company analyzed:
. the premium of consideration offered to the acquired company's stock
price one day prior to the announcement of the transaction;
. the premium of consideration offered to the acquired company's stock
price four weeks prior to the announcement of the transaction;
. the aggregate transaction value as a multiple of sales for the last
twelve months, or LTM sales;
. the aggregate transaction value as a multiple of earnings before
interest and taxes for the last twelve months, or LTM EBIT;
. the aggregate transaction value as a multiple of earnings before
interest, taxes, depreciation and amortization for the last twelve
months, or LTM EBITDA;
. market value as a multiple of net income for the last twelve months; and
. market value as a multiple of historical book value.
In the following table, the $7.82, $10.42, $13.03 and $15.63 offer prices
represent the discounted present value of the $9.00, $12.00, $15.00 and $18.00
per share offer prices, discounted at 15% discount rates, to reflect the risk
associated with closing the merger one year from the date of analysis.
Selected Transactions IKOS/Synopsys
------------------------ -------------------------------------------------------------------
$6.00 $7.82 $9.00 $10.42 $12.00 $13.03 $15.00 $15.63 $18.00 $20.00
Offer Offer Offer Offer Offer Offer Offer Offer Offer Offer
High Low Mean Median Price Price Price Price Price Price Price Price Price Price
----- ----- ----- ------ ------ ----- ----- ------ ------ ------ ------ ------ ------ ------
One day stock price
premium.............. 68.7% 23.1% 47.2% 48.6% -16.7% 8.6% 25.0% 44.7% 66.7% 81.0% 108.3% 117.1% 150.0% 177.8%
Four week stock price
premium.............. 75.5% 36.4% 61.8% 67.7% -27.1% -5.0% 9.4% 26.6% 45.8% 58.3% 82.3% 89.9% 118.7% 143.0%
Aggregate transaction
value to LTM sales... 2.8x 0.4x 1.8x 1.9x 0.5x 0.7x 0.9x 1.1x 1.3x 1.4x 1.7x 1.8x 2.1x 2.3x
Aggregate transaction
value to LTM EBIT.... 54.9x 15.1x 35.3x 35.8x 3.9x 5.7x 6.9x 8.3x 9.9x 10.9x 12.8x 13.5x 15.8x 17.8x
Aggregate transaction
value to LTM EBITDA.. 27.5x 10.1x 20.3x 23.3x 3.8x 5.6x 6.8x 8.2x 9.7x 10.7x 12.6x 13.3x 15.6x 17.5x
Market value to book
value................ 4.5x 1.3x 2.9x 2.8x 2.2x 2.8x 3.3x 3.8x 4.3x 4.7x 5.4x 5.7x 6.5x 7.2x
Market value to net
income............... 43.2x 18.6x 32.0x 34.2x 7.4x 9.6x 11.0x 12.8x 14.7x 16.0x 18.4x 19.2x 22.1x 24.5x
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Transaction Analysis" as a comparison is identical to IKOS,
Synopsys or the merger. Accordingly, these analyses are not simply
mathematical; rather, they involve complex considerations and judgments
concerning differences in the financial and operating characteristics and other
factors that could affect the acquisition, public trading or other values of
the selected companies, selected transactions, or the business segment, company
or transaction to which they are being compared.
Other Analyses
In rendering its opinion, Needham & Company considered various other
analyses, including a history of trading prices and volumes for IKOS and
Synopsys.
51
The summary set forth above does not purport to be a complete description of
the analyses performed by Needham & Company in connection with the rendering of
its opinion. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, Needham & Company believes
that its analyses must be considered as a whole and that considering any
portions of its analyses and any of the factors considered, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Needham & Company made
numerous assumptions with respect to industry performance, general business and
economic and other matters, many of which are beyond the control of IKOS and
Synopsys. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable. Additionally, analyses relating to
the values of business or assets do not purport to be appraisals or necessarily
reflect the prices at which businesses or assets may actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial
uncertainty. The Needham & Company opinion and Needham & Company's related
analyses were only one of many factors considered by IKOS' board of directors
in its evaluation of the proposed merger and should not be viewed as
determinative of the view of IKOS' board of directors or management with
respect to the exchange ratio or the proposed merger.
Under the terms of the Needham & Company engagement letter, IKOS has paid or
agreed to pay Needham & Company fees for rendering the Needham & Company
opinion that IKOS and Needham & Company believe are customary in transactions
of this nature. A substantial portion of Needham & Company's fees are
contingent on consummation of the merger. IKOS has also agreed to reimburse
Needham & Company for its reasonable out-of-pocket expenses and to indemnify it
against specified liabilities relating to or arising out of services performed
by Needham & Company as financial advisor to IKOS.
Needham & Company is a nationally recognized investment banking firm. As
part of its investment banking services, Needham & Company is frequently
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. Needham & Company was
retained by the IKOS board of directors to act as financial advisor to IKOS in
connection with the merger based on Needham & Company's experience as a
financial advisor in mergers and acquisitions as well as Needham & Company's
familiarity with the electronic design automation industry. Needham & Company
has had no other investment banking relationship with IKOS during the past two
years. Needham Emerging Growth Partners, an affiliate of Needham & Company,
currently owns 25,000 shares of IKOS common stock. In the normal course of
business, Needham & Company may actively trade the equity securities of IKOS or
Synopsys for its own account or for the account of its customers and,
therefore, may at any time hold a long or short position in those securities.
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions of the merger are
satisfied or waived, including approval of the merger agreement by the IKOS
stockholders. The merger will become effective upon the filing of the
certificate of merger with the Secretary of State for the State of Delaware.
Completion of the merger is targeted for August 2002. Because the merger is
subject to government approvals and other conditions to closing, we cannot
predict the exact timing.
Structure of the Merger and Calculation of Purchase Price Per IKOS Share
IKOS and Synopsys have entered into a merger agreement that provides for the
merger of Oak Merger Corporation, a newly formed wholly-owned subsidiary of
Synopsys, with and into IKOS. IKOS will be the surviving corporation in the
merger and will become a wholly-owned subsidiary of Synopsys.
52
Upon completion of the merger, IKOS stockholders will receive Synopsys
common stock in exchange for their IKOS shares. If the merger closes, as
expected, after June 30, 2002, the exact dollar amount of Synopsys common stock
will depend upon the financial performance of IKOS during the 12-month period
ending June 30, 2002 (referred to in this proxy/statement prospectus as the
"measurement period"). For each share of IKOS common stock that you own, you
will be entitled to receive Synopsys common stock with a value between $6 and
$20. You will not know how the exact purchase price per IKOS share or the
number of shares of Synopsys common stock you will receive until August 2002.
The complete text of the merger agreement, which describes the formulas by
which the purchase price per IKOS share will be calculated, is included in this
proxy statement/prospectus as Appendix A. For a more complete understanding of
the formulas, we urge you to read Article II of the merger agreement.
IKOS' financial performance will be measured according to the provisions of
the merger agreement. As provided in the merger agreement, after the close of
the measurement period, IKOS, subject to review by Synopsys and its advisors,
will determine IKOS' revenue, revenue plus change in backlog, and profit (loss)
before tax, or PBT, during the measurement period, in each case based on
definitions included in the merger agreement.
The purchase price per IKOS share will be calculated using all three of
these measurements of IKOS' financial performance during the measurement
period. Synopsys and its advisors may review these calculations, and Synopsys
and IKOS, if their calculations differ, may submit them to an accounting firm
for final determination. The following graph summarizes the purchase price per
IKOS share at different levels of revenue, revenue plus change in backlog and
PBT. As indicated in the graph, the formulas contained in the merger agreement
provide for proportionate increases in the purchase price per IKOS share as
revenue, revenue plus change in backlog or PBT increase from one level to the
next.
[GRAPH]
Purchase Price Per IKOS
Share ($ IKOS Share)
________________________________________________________
$20 $20
$18
________________________________________________________
$15 $15
$12
________________________________________________________
$10 $9
$6
$5 ________________________________________________________
(In millions)
Revenue $50 $60 $70 $80 $90 (EQUAL OR GREATER THAN) 100
Revenue Plus Change 50 60 70 80 90 (EQUAL OR GREATER THAN) 100
in Backlog
PBT (10) (5) 0 8 14 (EQUAL OR GREATER THAN) 18
The purchase price per IKOS share will be the lower of the purchase price
per IKOS share determined by revenue plus change in backlog or the purchase
price per IKOS share determined by PBT, with one exception. If the purchase
price per IKOS share determined by PBT is lower than the purchase price per
IKOS share determined by revenue plus change in backlog but the same or higher
than the purchase price per IKOS share determined by revenue without regard to
backlog, the purchase price per IKOS share will be determined by revenue plus
change in backlog. The following chart illustrates the method by which PBT or
revenue plus change in backlog is used to set the per share purchase price.
53
Determining the Purchase Price Per IKOS Share
Calculate Revenue,
Revenue Plus Change in Backlog and PBT
|
|
|
Use formulas to determine Price
per Share based on Revenue, Revenue Plus
Change in Backlog and PBT
|
|
|
Compare Price per Share
based on Revenue Plus Change in Backlog and PBT
|
|
---------------------------
| |
| |
If Price per Share based If Price per Share
on Revenue Plus Change in based on PBT is lower
Backlog is lower
| |
| |
Price Per Share Compare Price per
Set by Revenue Plus Share Set by
Change in Backlog Revenue and PBT
If Revenue Price | If PBT Price per
per Share is higher | Share is higher
|
----------------------------------
| |
| |
Price Set by PBT Price Set by Revenue
Plus Change in Backlog
For the purposes of the merger agreement, "revenue" is defined as IKOS'
revenue during the measurement period reflected in audited financial statements
prepared in accordance with generally accepted accounting principles. "Revenue
plus change in backlog" is the sum of revenue for the measurement period and
the change (positive or negative) in backlog during the measurement period.
"Backlog" is defined as the dollar amount, as of June 30, 2001 or June 30,
2002, of all non-cancellable orders made in accordance with IKOS' order
acceptance policy for IKOS products and services with scheduled shipment or
performance dates within six months of either June 30, 2001 or June 30, 2002
but which have not been invoiced by IKOS, plus all deferred revenue as
reflected in IKOS' audited financial statements. Change in backlog is the
difference between backlog at the end of the measurement period and backlog at
the beginning of the measurement period and is limited for given amounts of
revenue, as shown below:
Limit on
Revenue during the Measurement Period Change in Backlog
------------------------------------- -----------------
Less than $50 million...................................... $ 0
Between $50 million and $60 million........................ $ 1 million
Between $60 million and $70 million........................ $ 3 million
Between $70 million and $80 million........................ $ 5 million
Between $80 million and $90 million........................ $ 8 million
Over $90 million........................................... $10 million
54
PBT is IKOS' profit or loss before taxes, but with certain significant items
excluded, such as specified balance sheet reserves, tax or other refunds, gains
from the sale or lease of IKOS' facilities or other assets, legal fees and
expenses relating to ongoing litigation, and expenses related to this merger.
IKOS' PBT as used to determine the purchase price per IKOS share, therefore,
may differ substantially from PBT as used in IKOS' publicly available financial
statements.
The definitions of PBT and revenue plus change to backlog are complex and
have important exclusions and limitations. You should review these definitions
in the merger agreement for more information.
If the Quickturn non-competition agreement is terminated, waived, or
determined to be inapplicable, the merger could close before the August 2002
target date, but only if Synopsys and IKOS both consent. If the merger closes
before June 30, 2002, you will receive $15 worth of Synopsys common stock for
each share of IKOS stock you own regardless of IKOS' financial performance.
Regardless of when the merger closes, the purchase price per IKOS share will
be reduced if the number of outstanding IKOS shares and options at time of the
closing of the merger exceeds an agreed-upon amount. However, the purchase
price per IKOS share will not be less than $6.
The number of shares of Synopsys common stock you receive in exchange for
each share of IKOS common stock will be equal to the purchase price per IKOS
share divided by the average last sale price per share of Synopsys common stock
for the ten full trading-day period ending on the fifth full trading day prior
to the closing date of the transaction. This number is referred to as the
"exchange ratio." The total number of shares of Synopsys common stock you will
receive in the merger will equal the total number of IKOS shares you own
multiplied by the exchange ratio. The exchange ratio will be proportionately
adjusted for any stock split, stock dividend, reorganization or similar change
in IKOS common stock or Synopsys common stock.
Given the fact that the pricing structure is based on IKOS future financial
performance, the actual number of shares of Synopsys common stock that you will
receive in the merger cannot be predicted and will not be determined until the
completion of the merger, which is expected to occur in August 2002.
No fractional shares of Synopsys common stock will be issued in connection
with the merger. Instead of a fraction of a share of Synopsys common stock, you
will receive cash equal to the product of that fraction multiplied by the
average closing price for a share of Synopsys common stock as quoted on the
Nasdaq National Market for the last ten full trading days ending on the fifth
full trading day prior to the completion of the merger.
Exchange of IKOS Stock Certificates for Synopsys Stock Certificates
Once the merger is completed, Synopsys' transfer agent, Computershare
Investor Services, LLC, who will act as exchange agent, will mail to you a
letter of transmittal and instructions for use in surrendering your IKOS stock
certificates in exchange for Synopsys stock certificates. When you deliver your
IKOS stock certificates to the exchange agent along with a properly executed
letter of transmittal and any other required documents, your IKOS stock
certificates will be canceled and you will receive Synopsys stock certificates
(except in the case of IKOS stock held subject to vesting or repurchase rights
which will be held in book form) representing the number of full shares of
Synopsys common stock to which you are entitled under the merger agreement (and
cash in lieu of fractional shares).
YOU SHOULD NOT SUBMIT YOUR STOCK CERTIFICATES FOR
EXCHANGE UNTIL YOU HAVE RECEIVED THE LETTER OF TRANSMITTAL AND
INSTRUCTIONS REFERRED TO ABOVE.
You are not entitled to receive any dividends or other distributions on
Synopsys common stock with a record date after the merger is completed until
you have surrendered your IKOS stock certificates in exchange for Synopsys
stock certificates.
55
If there is any dividend or other distribution on Synopsys common stock with
a record date after the merger and a payment date prior to the date you
surrender your IKOS stock certificates in exchange for Synopsys stock
certificates, you will receive it with respect to the whole shares of Synopsys
common stock issued to you promptly after your IKOS stock certificates are
surrendered, without interest. If there is any dividend or other distribution
on Synopsys common stock with a record date after the merger and a payment date
after the date you surrender your IKOS stock certificates in exchange for
Synopsys stock certificates, you will receive it with respect to the whole
shares of Synopsys common stock issued to you promptly after the payment date
related to such dividend or other distribution.
Synopsys will only issue a Synopsys stock certificate, or a check in lieu of
a fractional share, in a name other than the name in which a surrendered IKOS
stock certificate is registered, if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.
Treatment of IKOS Stock Options and Stock Incentive Plans
Upon completion of the merger, each outstanding option to purchase shares of
IKOS common stock issued under IKOS' 1995 Stock Option Plan, 1995 Outside
Directors Stock Option Plan, 2000 Nonstatutory Stock Option Plan and Virtual
Machine Works 1994 Incentive Stock Option Plan and all non-plan options listed
in the merger agreement will be assumed by Synopsys regardless of whether the
options are vested or unvested. Each IKOS stock option, which will be assumed
by Synopsys, will continue to have the same terms, and be subject to the same
conditions, that were applicable to the option immediately prior to completion
of the merger, except that:
. each IKOS stock option will be exercisable for shares of Synopsys common
stock;
. the number of shares of Synopsys common stock issuable upon exercise of
any given IKOS option will be determined by multiplying the exchange
ratio by the number of shares of IKOS common stock underlying the
option, rounded down to the nearest whole number; and
. the per share exercise price of any given option will be determined by
dividing the exercise price of the option immediately prior to
completion of the merger by the exchange ratio, rounded up to the
nearest whole cent.
As of June 30, 2001, directors and executive officers of IKOS held stock
options, both vested and unvested, to purchase an aggregate of 1,245,825 shares
of IKOS common stock under the 1995 Stock Option Plan, 1995 Outside Directors
Stock Option Plan, 2000 Nonstatutory Stock Option Plan and Virtual Machine
Works 1994 Incentive Stock Option Plan. All of the unvested option shares held
by IKOS non-employee directors and granted under the 1995 Outside Directors
Stock Option Plan will accelerate and become fully vested and exercisable
immediately prior to the merger, pursuant to their existing stock option
agreements, without any action by IKOS or Synopsys. Under this plan, an
additional 6,000 options shall be granted to each non-employee director on the
date of the next IKOS annual meeting of stockholders if such non-employee
director continues in IKOS' service. These options will also accelerate in the
merger.
In addition, pursuant to existing severance agreements, in the event Gerald
Casilli, Christoph Ditzen, Nader Fathi, Thomas Gardner, Daniel Hafeman, Robert
Hum, Ramon Nunez, or Joseph Rockom is terminated without cause or resigns for
good reason within one year of the merger, then all of the terminated
individual's unvested option shares will become fully vested and exercisable on
such termination date.
See the sections entitled "The Merger and Related Transactions--Interests of
IKOS Directors, Officers and Affiliates in the Merger," "The Merger and Related
Transactions--Security Ownership of Certain Beneficial Owners and Management of
IKOS" and "The Merger and Related Transactions--Other Provisions of the Merger
Agreement--Employment and Severance Arrangements."
56
Synopsys has agreed to file a registration statement on Form S-8 following
the closing of the merger covering shares of Synopsys common stock issuable
upon the exercise of outstanding IKOS options granted to employees, officers
and directors of IKOS.
Treatment of Outstanding Purchase Rights under the IKOS 1996 Employee Stock
Purchase Plan
Each outstanding purchase right under the IKOS 1996 Employee Stock Purchase
Plan will be exercised immediately prior to the effective time of the merger,
and each participant in the IKOS 1996 Employee Stock Purchase Plan will be
issued shares of IKOS common stock at that time which will be converted into
shares of Synopsys common stock in the merger. The IKOS 1996 Employee Stock
Purchase Plan will terminate immediately following the exercise described above
and no purchase rights will be subsequently granted or exercised under the IKOS
1996 Employee Stock Purchase Plan and no IKOS 1996 Employee Stock Purchase Plan
payroll deductions from IKOS employees will be made thereafter. IKOS employees
who meet the eligibility requirements for participation in the Synopsys
Employee Stock Purchase Plan will be eligible to begin payroll deductions under
the Synopsys Employee Stock Purchase Plan as of the start date of the first
offering period thereunder beginning after the effective time of the merger.
Other Provisions of the Merger Agreement
Representations and Warranties
IKOS and Synopsys each made a number of representations and warranties in
the merger agreement regarding authority to enter into the merger agreement and
to consummate the merger and the other transactions contemplated by the merger
agreement and with regard to aspects of their respective business, financial
condition, structure and other facts pertinent to the merger.
The representations made by IKOS to Synopsys cover the following topics as
they relate to IKOS and its subsidiaries:
. IKOS' valid organization, good standing and qualification, power and
authority to conduct business;
. IKOS' capitalization;
. authorization of the merger and the transaction agreements by IKOS;
. the absence of legal or contractual conflicts resulting from the merger
agreement;
. governmental and regulatory consents, approvals, orders, authorizations,
registrations, declarations and filings required to enter into the
merger agreement or consummate the merger;
. IKOS' filings and reports with the SEC;
. IKOS' financial statements;
. changes in IKOS' business since March 31, 2001;
. absence of undisclosed liabilities;
. pending or threatened litigation involving IKOS;
. the absence of restrictions on IKOS' business activities;
. the possession of and compliance with governmental permits, licenses and
other authorizations;
. title to the properties owned or leased;
. intellectual property used, owned and licensed by IKOS and infringement
of intellectual property rights;
. compliance with environmental laws;
. matters relating to taxes;
. matters relating to employee benefit plans;
57
. transactions with interested parties;
. matters relating to employees and the effect of the merger on
obligations to employees, directors and officers;
. insurance coverage;
. compliance with applicable laws;
. information supplied by IKOS in this proxy statement/prospectus and the
related registration statement of Synopsys;
. the vote required of the IKOS stockholders to approve the merger;
. the execution of voting agreements to vote for adoption of the merger
agreement;
. the IKOS board of directors' approval of the merger;
. the inapplicability of state anti-takeover control share statutes to the
merger;
. brokers' and finders' fees incurred in connection with the merger;
. certain IKOS customers, supplier and order backlog matters; and
. the absence of legal or contractual violations or defaults by IKOS.
The representations made by Synopsys to IKOS cover the following topics as
they relate to Synopsys:
. valid organization, good standing, qualification, power and authority to
conduct the business of Synopsys and Oak Merger Corporation;
. capitalization of Synopsys and Oak Merger Corporation;
. authorization of the merger by Synopsys and Oak Merger Corporation;
. the absence of legal or contractual conflicts resulting from the merger
agreement;
. governmental and regulatory consents, approvals, orders, authorizations,
registrations, declarations and filings required to enter into the
merger agreement or consummate the merger;
. Synopsys' filings and reports with the SEC;
. Synopsys' financial statements;
. the absence of undisclosed liabilities;
. pending or threatened litigation involving Synopsys;
. information supplied by Synopsys and Oak Merger Corporation in this
proxy statement/prospectus and the related registration statement of
Synopsys;
. approval of the merger by the Synopsys and Oak Merger Corporation board
of directors;
. brokers' and finders' fees incurred in connection with the merger;
. tax matters; and
. ownership of IKOS common stock by Synopsys, Oak Merger Corporation and
their respective subsidiaries.
This is only a summary. For the full text and details of the
representations and warranties made by IKOS to Synopsys and by Synopsys to
IKOS, see Articles III and IV of the merger agreement entitled
"Representations and Warranties of Company" and "Representations and
Warranties of Parent and Merger Sub."
Synopsys' representations and warranties in the merger agreement are solely
for the benefit of IKOS and are not for the benefit, and create no legal
rights in favor, of IKOS stockholders or any other person. Likewise, IKOS'
representations and warranties in the merger agreement are solely for the
benefit of Synopsys and Oak Merger Corporation and are not for the benefit,
and create no legal rights in favor, of any other person.
58
In addition, the parties' representations and warranties speak only as of the
date of the merger agreement or the other dates specified in particular
representations and warranties, and except as set forth in the covenants,
agreements and closing conditions in the merger agreement, neither party is
under an obligation to update or repeat its representations and warranties.
Accordingly, stockholders and investors should not rely on the parties'
representations and warranties in the merger agreement.
IKOS' Conduct of Business Before Completion of the Merger
IKOS agreed that until the completion of the merger, the termination of the
merger agreement, or unless Synopsys consents in writing, IKOS and its
subsidiaries will pay their respective debts and taxes when due, pay or perform
other material obligations when due and will operate their respective
businesses in the ordinary course and consistent with their past practices, and
otherwise use their commercially reasonable efforts consistent with past
practices to preserve their businesses.
IKOS also agreed to promptly notify Synopsys of any material event which
could reasonably be expected to have a material adverse effect on IKOS or the
occurrence of events outside the usual course of business. IKOS also agreed to
customary restrictions for a transaction of this type, including entering into
new material contracts, making significant payments, transferring intellectual
property, disposing of significant assets, incurring substantial debt or
capital expenditures, changing its accounting policies and amending its
employee benefit plans, among other things.
This is only a summary. For the full text and details of the restrictions on
IKOS' conduct before completion of the merger, see article V of the merger
agreement entitled "Conduct Prior to the Effective Time" in Appendix A to the
proxy statement/prospectus.
IKOS' obligations, and the restrictions on IKOS' conduct, between the
signing of the merger agreement and the closing of the merger are for the sole
benefit of Synopsys, and may be waived by Synopsys without public disclosure,
and are not for the benefit, and create no legal rights in favor, of any other
person. Stockholders and investors should not rely on IKOS' covenants and
agreements in the merger agreement and should not assume or infer from those
covenants and agreements that IKOS has in fact taken any of the actions
required by those covenants and agreements or refrained from taking any of the
actions prohibited by those covenants and agreements.
Conditions to the Merger
Synopsys' and IKOS' respective obligations to complete the merger and the
other transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the merger:
. the merger agreement and the merger must be approved by the holders of a
majority of the outstanding shares of IKOS common stock;
. Synopsys' registration statement registering the Synopsys shares to be
issued in the merger must have been declared effective by the SEC and
must remain effective and the SEC must not have taken steps challenging
such effectiveness;
. no order or injunction shall have been threatened, pending or issued
which has or would have the effect of prohibiting completion of the
merger;
. no statute, rule, regulation, or order shall have been enacted, entered,
enforced or deemed applicable to the merger which has the effect of
making the merger illegal or otherwise prohibiting completion of the
merger;
. all applicable waiting periods under the HSR Act must have expired or
been terminated;
. Synopsys and IKOS each must have received the opinion of their
respective tax counsel to the effect that the merger will constitute a
"reorganization" within the meaning of Section 368(a) of the
59
Internal Revenue Code; however, if counsel to IKOS does not render this
opinion, this condition will be satisfied if counsel for Synopsys
renders such an opinion to Synopsys;
. Synopsys and IKOS must have received from their respective counsel such
tax opinions as may be required by the SEC in connection with the filing
of the registration statement registering the shares to be issued in the
merger; and
. the issuance of Synopsys common stock in connection with merger must not
require the approval of Synopsys' stockholders under any applicable
Nasdaq rules.
IKOS' obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction, or
waiver by IKOS, of each of the following additional conditions before
completion of the merger:
. Synopsys' representations and warranties must be true and correct in all
material respects (except for representations and warranties that are
qualified by a reference to materiality, which must be true and correct
in all respects) as of the closing of the merger, except for failures to
be true and correct which (without regard to material adverse effect
qualifications) could not reasonably be expected, either individually or
in the aggregate, to have a material adverse effect on Synopsys;
. Synopsys and Oak Merger Corporation must have complied in all material
respects with all covenants, agreements and obligations of the merger
agreement required to be performed and complied with by them prior to
the effective time of the merger; and
. the shares of Synopsys common stock issuable in the merger and upon
exercise of the options under the IKOS stock options assumed by Synopsys
must have been approved for listing on the Nasdaq National Market, or
must be exempt from such requirement.
Synopsys' and Oak Merger Corporation's obligations to complete the merger
and the other transactions contemplated by the merger agreement are subject to
the satisfaction, or waiver by Synopsys, of each of the following additional
conditions before completion of the merger:
. IKOS' representations and warranties must be true and correct in all
material respects (except for representations and warranties that are
qualified by a reference to materiality, which must be true and correct
in all respects) as of the closing of the merger, except in the case of
the representations and warranties relating to organization, standing
and power, capital structure, authority, conflicts, SEC documents,
financial statements, absence of certain changes, absence of undisclosed
liabilities, litigation, restrictions on business activities,
governmental authorization, title to property, intellectual property,
environmental matters, taxes, employee benefit plans, interested party
transactions, certain agreements affected by the merger, employee
matters, insurance, compliance with laws, the registration statement,
proxy statement and prospectus, customers and suppliers, backlog, and no
default, where the failure to be true and correct (without regard to any
materiality or material adverse effect qualifications) could not
reasonably be expected, either individually or in the aggregate, to have
a material adverse effect on IKOS, as confirmed in a certificate
executed on behalf of IKOS;
. IKOS must have complied in all material respects with all covenants,
agreements and obligations of the merger agreement required to be
performed and complied with by it prior to the effective time of the
merger, as confirmed in a certificate executed on behalf of IKOS;
. For the twelve month measurement period ending June 30, 2002, IKOS'
revenue must be greater than or equal to fifty million dollars
($50,000,000), and IKOS must have a loss before tax of no more than ten
million dollars ($10,000,000), each as determined pursuant to the
formulas and procedures contained in the merger agreement;
. IKOS must have obtained all necessary third-party consents under
material contracts;
. no injunctions, or restraining orders, or other orders shall have been
imposed, or shall be threatened or pending, which would limit or
restrict Synopsys' conduct or operation of IKOS' business following the
merger;
60
. the Quickturn non-competition agreement must have expired or been
terminated or waived, or other action must have been taken which has the
effect of rendering such provision inapplicable to the merger or
unenforceable;
. IKOS must have satisfied the following conditions relating to employee
retention:
. certain employees of IKOS must have executed amendments to their
existing severance agreements;
. the Chief Operating Officer of IKOS, or a replacement employee with
equivalent skills in the reasonable judgement of Synopsys, must be
employed by IKOS as of the closing date; and
. certain specified percentages of four categories of IKOS employees
must be employed by IKOS as of the closing date, constituting a
substantial majority of IKOS' total headcount as of July 2, 2001.
. IKOS must have entered into an OEM license agreement that meets certain
requirements contained in the merger agreement.
As used in the merger agreement a "material adverse effect" as it relates to
IKOS means any event, matter, change, condition, circumstance or effect that is
materially adverse to the business, condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, operations or
results of operations of IKOS (or, after the effective time of the merger, the
surviving corporation) and its subsidiaries, taking IKOS (or, after the
effective time of the merger, the surviving corporation) together with its
subsidiaries as a whole. However, none of the following, in and of themselves,
either alone or in combination, shall constitute a material adverse effect as
it relates to IKOS:
. a decrease in the trading price of IKOS common stock;
. any event, matter, change, condition, circumstance or effect which IKOS
successfully bears the burden of proving results from changes affecting
any of the industries or economies in which IKOS operates as a whole
(which changes do not materially and disproportionately affect IKOS);
. any adverse event, matter, change, condition, circumstance or effect
which IKOS successfully bears the burden of proving is directly and
primarily caused by the announcement or pendency of the merger;
. any adverse event, matter, change, condition, circumstance or effect
which IKOS successfully bears the burden of proving is directly and
primarily caused by the taking of any action expressly required by the
merger agreement;
. any adverse event, matter, change, condition, circumstance or effect
which IKOS successfully bears the burden of proving is directly and
primarily caused by any matter for which Synopsys has agreed to
indemnify IKOS pursuant to the section entitled "The Merger and Related
Transactions--Other Provisions of the Merger Agreement--Indemnification
Matters--Indemnification of IKOS for Certain Matters"; or
. a failure in and of itself of results of operations of IKOS and its
subsidiaries (on a consolidated basis) to meet internal projections or
forecasts or published revenue or earnings predictions for any fiscal
quarterly or annual period of IKOS after July 2, 2001 and prior to the
closing date of the merger, but not either the underlying causes of such
failure or the consequences of such failure.
As used in the merger agreement a "material adverse effect" as it relates to
Synopsys means any event, matter, change, condition, circumstance or effect
that is materially adverse to the business, condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, operations or
results of operations of Synopsys and its subsidiaries, taking Synopsys
together with its subsidiaries as a whole. However, that none of the following,
in and of themselves, either alone or in combination, shall constitute a
material adverse effect as it relates to Synopsys:
. a decrease in the trading price of Synopsys common stock;
. any event, matter, change, condition, circumstance or effect which
Synopsys successfully bears the burden of proving results from changes
affecting any of the industries or economies in which Synopsys operates
as a whole (which changes do not materially and disproportionately
affect Synopsys);
61
. any adverse event, matter, change, condition, circumstance or effect
which Synopsys successfully bears the burden of proving is directly and
primarily caused by the announcement or pendency of the merger;
. any adverse event, matter, change, condition, circumstance or effect
which Synopsys successfully bears the burden of proving is directly and
primarily caused by the taking of any action expressly required by the
merger agreement;
. any adverse event, matter, change, condition, circumstance or effect
which Synopsys successfully bears the burden of proving is directly and
primarily caused by any matter for which Synopsys has agreed to
indemnify IKOS pursuant to the section entitled "The Merger and Related
Transactions--Other Provisions of the Merger Agreement--Indemnification
Matters--Indemnification of IKOS for Certain Matters"; or
. a failure in and of itself of results of operations of Synopsys and its
subsidiaries (on a consolidated basis) to meet internal projections or
forecasts or published revenue or earnings predictions for any fiscal
quarterly or annual period of Synopsys after July 2, 2001 and prior to
the closing date, but not either the underlying causes of such failure
or the consequences of such failure.
Termination of the Merger Agreement
At any time prior to the completion of the merger, the merger agreement may
be terminated and the merger abandoned:
. by mutual consent of the boards of directors of Synopsys and IKOS;
. by either Synopsys or IKOS, by written notice to the other party, if:
. the closing has not occurred on or before September 14, 2002, or, at
the request of either party and subject to certain limitations set
forth in the merger agreement, October 14, 2002 if:
. any of the determinations relating to the calculation of the
contingent merger consideration having not been completed;
. the failure to complete the determinations relating to the
calculation of the contingent merger consideration or the failure
of the merger to occur on or before September 14, 2002 was not
principally caused by action or failure to act constituting a
breach, in any material respect, of the merger agreement by the
party seeking such extension; and
. all other conditions to obligation to the parties' obligations to
complete the merger have been satisfied or waived.
. any permanent injunction or other order of a court or other
competent authority preventing the consummation of the merger shall
have become final and nonappealable, provided that the terminating
party used commercially reasonable efforts to have such injunction
or other order lifted; or
. any required vote of the stockholders of IKOS shall not have been
obtained at a duly held meeting of stockholders or at any
adjournment thereof (provided that IKOS shall not have the right to
terminate the merger agreement where the failure to obtain such
stockholder approval shall have been caused by the action or failure
to act of IKOS and such action or failure constitutes a breach of
the merger agreement).
. by Synopsys, by written notice to IKOS, if:
. any of IKOS' representations and warranties in the merger agreement
would be inaccurate if made as of the time of such notice, or IKOS
shall have breached any of its covenants, agreements or obligations
in the merger agreement; and:
. the condition relating to the accuracy of IKOS' representations
and warranties and the performance or compliance by IKOS with its
covenants, agreements or obligations contained in the merger
agreement would not be satisfied if such inaccuracy or breach
were to remain uncured; and
62
. such inaccuracy or breach, if curable, is not cured within 30
business days after receipt by IKOS of written notice of such
inaccuracy or breach.
. a trigger event shall have occurred or a takeover proposal shall
have been made (each as further explained below) and, in either
case, shall not have been absolutely and unconditionally abandoned
or withdrawn, and the board of directors of IKOS, if so requested by
Synopsys, does not within 10 business days of such request:
. reconfirm its unanimous recommendation of the approval of the
merger agreement and the transactions contemplated thereby; and
. reject such takeover proposal or trigger event (in the case of a
takeover proposal or trigger event involving a tender or exchange
offer);
. the IKOS board of directors shall have failed to unanimously
recommend that IKOS stockholders vote to approve the merger and
adopt the merger agreement, or shall have withdrawn or modified that
recommendation in a manner adverse to Synopsys or shall have
resolved to do any of the foregoing;
. the IKOS board of directors shall have recommended, endorsed,
approved, accepted or agreed to a takeover proposal, or shall have
entered into any letter of intent or similar document or agreement
relating to another takeover proposal, or shall have resolved to do
any of the foregoing; or
. IKOS or any IKOS representative shall have breached IKOS' no-shop
obligations relating to other potential takeover proposals.
. by IKOS, by written notice to Synopsys, if:
. any of Synopsys' representations and warranties in the merger
agreement would be inaccurate if made as of the time of such notice,
or Synopsys shall have breached any of its covenants, agreements or
obligations in the merger agreement;
. the condition relating to the accuracy of Synopsys' and Oak Merger
Corporation's respective representations and warranties and the
performance or compliance by Synopsys and Oak Merger Corporation
with their respective covenants contained in the merger agreement
would not be satisfied if such inaccuracy or breach were to remain
uncured; and
. such inaccuracy or breach, if curable, is not cured within 30
business days after receipt by Synopsys of written notice of such
inaccuracy or breach.
. by IKOS, by written notice to Synopsys, if IKOS has received a takeover
proposal constituting a "superior proposal," and:
. the board of directors of IKOS has determined that it desires to
approve entering into a written agreement providing for such
superior proposal and has so notified Synopsys;
. 5 business days have elapsed after Synopsys' receipt of such written
notification, and during such 5 business day period IKOS has
reasonably cooperated with Synopsys with the intent of enabling
Synopsys to make an offer that is at least as favorable to the
stockholders of IKOS as such superior proposal;
. prior to 6:00 p.m. California time on the fifth business day of such
5 business day period Synopsys has not made an offer that is at
least as favorable to IKOS' stockholders as such superior proposal
(or waived the condition to closing relating IKOS' financial
performance);
. at the end of such 5 business day period the board of directors of
IKOS reasonably believes that such takeover proposal continues to be
a superior proposal; and
. IKOS, prior to such termination, pays to Synopsys in immediately
available funds the termination fee required to be paid pursuant to
the merger agreement.
63
If the merger agreement is terminated, it will be of no further effect and
none of the parties to the merger agreement will have any liability or
obligations in respect of the merger agreement, except for liabilities relating
to:
. breaches of confidentiality obligations;
. obligations to pay expenses and termination fees under the merger
agreement; and
. willful or intentional breaches of representations or warranties and
breaches of covenants or agreements set forth in the merger agreement.
For purposes of the merger agreement, a "trigger event" occurs if any
person, other than a stockholder party to an enforceable voting agreement,
acquires beneficial ownership of securities representing 15% or more of the
outstanding shares of any class of capital stock or voting power of IKOS, or
commences a tender or exchange offer, open market purchase program or other
publicly announced initiative following the successful consummation of which
such person or group would beneficially own securities representing 15% or more
of the outstanding shares of any class of capital stock or voting power of
IKOS.
For purposes of the merger agreement, a "takeover proposal" means any
agreement, offer or proposal, whether written or oral, for:
. a merger, reorganization, share exchange, consolidation, or other
business combination involving IKOS or any of its subsidiaries which
would result in the holders of IKOS' common stock immediately prior to
the consummation of such transaction holding less than 85% of the
outstanding shares of any class of capital stock or voting power of the
surviving, resulting or acquiring entity immediately following the
consummation of such transaction;
. a tender offer for securities of IKOS, which, if successful, would
result in the tender offeror, either alone or as part of a group,
holding beneficial ownership of 15% or more of the outstanding shares of
any class of capital stock or voting power of IKOS immediately following
the consummation of such tender offer; or
. the acquisition of 15% or more of the outstanding shares of any class of
capital stock or voting power of IKOS;
. the acquisition of 15% or more of the assets of IKOS and its
subsidiaries (either on the basis of book value or fair market value,
calculated in each case on a consolidated basis), other than, in each
case, the transactions contemplated by the merger agreement.
For purposes of payment of termination fees (described below), references to
15% above are increased to 40% and all references to 85% are reduced to 60%.
For purposes of the merger agreement a "superior proposal" means a takeover
proposal that the IKOS board determines in good faith meets the following
criteria after consulting with its outside financial advisor and after
considering all terms and conditions, including the likelihood and timing of
consummation. Whether a proposal is a "superior proposal" may vary depending on
when the IKOS board reviews the proposal:
. if the IKOS board makes its determination before IKOS stockholders have
adopted the merger agreement, the board must determine that the proposal
would result in a transaction more favorable to IKOS' stockholders from
a financial point of view than the merger;
. if the IKOS board makes its determination following adoption of the
merger agreement by IKOS stockholders and after March 31, 2002 and the
IKOS board determines in good faith that the conditions to completion of
the merger relating to IKOS' financial performance will not be
satisfied, the board must determine that the proposal would result in a
transaction with a value of $6 or less per share of IKOS common stock;
or
. if the IKOS board makes its determination following adoption of the
merger agreement by IKOS stockholders and the other determination
specified in the immediately preceding bullet point has not
64
been made, the board must determine that the proposal would result in a
transaction with a value greater than $24.70 per share of IKOS common
stock.
Neither Synopsys nor IKOS has the right to terminate the merger agreement
solely as a result of fluctuations in the market price of Synopsys or IKOS
common stock. The one exception to this occurs if a decrease in Synopsys'
common stock price delays the completion of the merger until after September
14, 2002, after which either party can generally terminate the merger
agreement. Under the Nasdaq rules, Synopsys would be required to obtain
stockholder approval prior to the closing if there is a substantial decrease in
Synopsys' stock price and strong financial performance by IKOS over the 12
month measurement period such that the shares of Synopsys common stock required
to be issued in the merger will exceed 20% of Synopsys' outstanding shares. A
significant decrease in Synopsys' common stock price could delay completion of
the merger because the merger agreement does not require either party to
complete the merger if the Synopsys stock price falls to the level at which the
Nasdaq rules require Synopsys to seek approval of its stockholders for the
issuance of Synopsys common stock in the merger.
Payment of Termination Fees and Expenses
Whether or not the merger is consummated, the merger agreement provides that
each party will bear its own costs and expenses incurred in connection with the
merger agreement and the merger, except that the following expenses shall be
shared equally by Synopsys and IKOS:
. expenses incurred in connection with printing this proxy
statement/prospectus;
. registration and filing fees incurred in connection with this proxy
statement/prospectus;
. the listing of Synopsys shares to be issued in the merger;
. fees, costs and expenses, associated with compliance with applicable
state blue sky securities laws in connection with the merger; and
. fees, costs and expenses incurred in connection with the HSR Act
filings.
In addition to any expenses otherwise payable, IKOS is required by the
merger agreement to pay Synopsys a termination fee of up to $5.5 million:
. If Synopsys terminates the merger agreement under any of the following
circumstances, in which case the termination fee is due and payable 2
business days after termination:
. a trigger event has occurred or takeover proposal has been made and,
in either case, has not been absolutely and unconditionally
abandoned or withdrawn, and the board of directors of IKOS, if
requested by Synopsys, does not within 10 business days of that
occurrence: (A) reconfirm its unanimous recommendation of the
approval of the merger agreement, the merger and the transactions
contemplated thereby, and (B) reject the takeover proposal or
trigger event (in the case of a takeover proposal or trigger event
involving a tender or exchange offer);
. the IKOS board of directors has failed to unanimously recommend that
IKOS' stockholders vote to approve the merger and adopt the merger
agreement, or shall have withdrawn or modified its recommendation in
a manner adverse to Synopsys, or shall have resolved to do any of
the foregoing;
. the IKOS board of directors has recommended, endorsed, accepted,
approved, or otherwise agreed to a takeover proposal, or shall have
resolved to do any of the foregoing; or
. there has been a breach of IKOS' no-shop obligations or
restrictions.
. If IKOS terminates the merger agreement under the following
circumstances, in which case the termination fee is due prior to
termination of the merger agreement:
. IKOS has received a takeover proposal constituting a superior
proposal;
. the board of directors of IKOS has determined that it desires to
approve entering into a written agreement providing for such
superior proposal and has so notified Synopsys in writing;
65
. 5 business days have elapsed after Synopsys' receipt of such written
notification, and during such 5 business day period IKOS has
reasonably cooperated with Synopsys with the intent of enabling
Synopsys to make an offer that is at least as favorable to the
stockholders of IKOS as such superior proposal;
. before 6:00 p.m. California time on the fifth business day of such 5
business day period Synopsys has not made an offer that is at least
as favorable to IKOS' stockholders as such superior proposal (or
waived the condition to closing relating to IKOS' financial
performance); and
. at the end of such 5 business day period the board of directors of
IKOS reasonably believes that such takeover proposal continues to be
a superior proposal.
The termination fee is $2.6 million if IKOS terminates the merger agreement
to pursue a superior proposal under the following circumstances, in which case
the termination fee is due prior to termination of the merger agreement:
. the IKOS board determines in good faith that the conditions to
completion of the merger relating to IKOS' financial performance will
not be satisfied, and that there is a superior proposal; and
. the determination is made following adoption of the merger agreement by
IKOS' stockholders and after March 31, 2002.
The termination fee is either $5 million or $5.5 million if either Synopsys
or IKOS terminates the merger agreement under any of the following
circumstances:
. the required vote of IKOS stockholders is not obtained at the IKOS
stockholders meeting; or
. the closing does not occur on or before September 14, 2002 (or October
14, 2002, if the drop-dead date has been extended by either party); and
. before termination there was a trigger event or a takeover proposal
with respect to IKOS,
. the takeover proposal or trigger event involved an acquisition of at
least 40% of a class of IKOS' stock or voting power or 40% or IKOS'
assets,
. at the time of termination the takeover proposal or trigger event
was not absolutely and unconditionally withdrawn or abandoned by the
competing bidder, and
. within 12-months after termination a takeover proposal or trigger
event involving IKOS is consummated or a letter of intent or
preliminary or definitive agreement with respect to a takeover
proposal or trigger event is signed by IKOS.
The termination fee is $5.5 million if the takeover proposal or trigger
event is consummated or the letter of intent, preliminary agreement or
definitive agreement is signed with the same party that was responsible for the
takeover proposal or trigger event that gave rise to termination; otherwise,
the termination fee is $5 million. Such termination fee is due upon the earlier
of consummation of the trigger event or takeover proposal or execution of a
definitive agreement or letter of intent with a third party.
The payment of any termination fees will not limit any additional remedies
available to Synopsys.
"No-shop" Provision
Until the merger is completed or the merger agreement is terminated, IKOS
has agreed not to directly or indirectly take any of the following actions:
. solicit, initiate, intentionally encourage or facilitate any takeover
proposal;
. engage in discussions or negotiations with, or disclose any nonpublic
information relating to IKOS or any of its subsidiaries to, or afford
access to the properties, books or records of, IKOS or any of its
subsidiaries to, any person that has advised IKOS that such person may
be considering making a
66
takeover proposal, or that the board of directors or officers of IKOS
has reason to believe is seeking to make, or that has made, a takeover
proposal; and
. endorse, approve or recommend any takeover proposal or enter into any
agreement (including any letter of intent, preliminary agreement or
similar arrangement) providing for any takeover proposal.
In addition, IKOS has agreed to notify its employees of such restrictions
and, to direct them to refrain from taking any such actions and that any
violation of such directions will be considered grounds for termination.
However, these restrictions do not prevent the board of directors of IKOS from
taking and disclosing to the IKOS stockholders a position with respect to a
tender offer or otherwise complying with their obligations pursuant to Rules
14d-9 and 14e-2 promulgated under the Securities Exchange Act of 1934.
The no-shop clause also contains a "fiduciary out." The "fiduciary out"
allows IKOS to engage in discussions and negotiations, disclose non-public
information, afford access to IKOS' properties, books and records, modify or
withdraw its recommendation of the merger, and approve an agreement for a
superior proposal if:
. a bona fide unsolicited written takeover proposal by a competing bidder
is received by the IKOS board;
. the IKOS board determines that the takeover proposal constitutes a
superior proposal;
. the IKOS board determines in good faith, after consultation with outside
legal counsel, that it is necessary in order for IKOS directors to
comply with their fiduciary duties to IKOS stockholders under applicable
law;
. IKOS has notified Synopsys of such determination by the IKOS board and
has provided Synopsys with true and complete copies of the takeover
proposal received from the competing bidder and the financial
assumptions and projections reviewed and relied upon by the IKOS board
(including assumptions and projections regarding the anticipated amount
of contingent consideration) in determining that a takeover proposal
constitutes a superior proposal, and in determining that the conditions
to completion of the merger relating to IKOS' financial performance will
not be satisfied;
. IKOS first provides Synopsys with all documents containing or referring
to non-public information of IKOS that are supplied to the competing
bidder;
. IKOS enters into a nondisclosure agreement with the competing bidder
containing terms at least as restrictive on the competing bidder as the
terms of IKOS' confidentiality agreement with Synopsys are on Synopsys;
and
. before modifying or withdrawing its recommendation, recommending a
superior proposal or approving an agreement for a superior proposal,
IKOS provides Synopsys at least 3 business days prior notice.
The fiduciary out only allows IKOS to approve entering into a superior
proposal agreement and does not allow IKOS to enter into a superior proposal
agreement before termination of the merger agreement.
In addition, IKOS is obligated to immediately notify Synopsys after receipt
of any takeover proposal, any inquiry looking toward a takeover proposal, or
any request for non-public information relating to IKOS or any of its
subsidiaries or for access to the properties, books or records of IKOS or any
of its subsidiaries by any person that has made (or that IKOS has reason to
believe is considering making), a takeover proposal. IKOS is also required to
keep Synopsys fully informed of the status and details of any such proposal,
inquiry, or request and shall provide Synopsys with a true and complete copy
of such proposal, inquiry, or request and any amendment thereto, if it is in
writing, or a written summary of the material terms thereof, if it is not in
writing.
IKOS also agreed that it would end any takeover proposals with anyone other
than Synopsys existing as of the date of the merger agreement.
67
Extension, Waiver and Amendment of the Merger Agreement
Subject to Section 251(d) of the Delaware General Corporation Law, the board
of directors of either party may amend the merger agreement at any time by
execution of a written amendment signed on behalf of each of the parties to the
merger agreement. In addition, at any time prior to the completion of the
merger, either party may, to the extent legally allowed:
. extend the other's time for the performance of any of the obligations or
other acts under the merger agreement;
. waive any inaccuracies in the other's representations and warranties; or
. waive compliance by the other with any of the agreements or conditions
contained in the merger agreement.
Further Assurances
Both IKOS and Synopsys are required to use their respective commercially
reasonable efforts to fulfill the conditions to closing of the merger, to
effectuate the transactions contemplated by the merger agreement and to provide
such documents and do such things as may be reasonably required by the other
party for such purposes and to consummate the merger.
Employment and Severance Arrangements
It is a condition to the merger that all executive officers of IKOS (with
the exception of the Chief Operating Officer, who has entered into a separate
employment agreement with Synopsys) enter into amendments to their existing
severance agreements, to be effective upon the closing of the merger. These
amendments place a non-compete prohibition on such persons which lasts until
the earlier of one year after the termination of employment and the second
anniversary of the closing of the merger. If these employees are terminated
without cause or they resign for good reason within the first two years after
the closing of the merger, they will be entitled to continuation of their base
salary (including the target bonus for which they would have been eligible had
they remained employed through the year of termination), vacation pay, and
insurance and health benefits until the earlier of one year after the
termination of employment and the second anniversary of the closing of the
merger. In addition they will receive accelerated vesting of all of their
former IKOS options. The amendment to the Chief Executive Officer's severance
agreement provides that his non-competition period may be extended by Synopsys
for an additional twelve months if Synopsys continues the salary and benefits
referred to above during the 12-month period.
It is also expected that certain other IKOS employees will enter into new
employment agreements with Synopsys, to be effective upon the closing of the
merger. These agreements set forth the employees' annual salary, option grants
and bonus compensation. The agreements place a non-compete prohibition on the
employees which lasts until the earlier of one year after their termination of
employment and the second anniversary of the closing of the merger. Pursuant to
the agreements, either Synopsys or the employee can terminate the employment
relationship for any reason at any time. However, if the employees are
terminated without cause or they resign for good reason within the first two
years after the closing of the merger they will be entitled to continuation of
their base salary (including the target bonus for which they would have been
eligible had they remained employed through the year of termination), vacation
pay, and insurance and health benefits until the earlier of one year after the
termination of employment and the second anniversary of the closing of the
merger.
The Chief Operating Officer of IKOS has executed an employment agreement
with Synopsys, effective upon the closing of the merger. This agreement sets
forth the executive's annual salary, option grants and bonus compensation and
places a non-compete prohibition on the executive which lasts until the later
of one year after termination of employment and the second anniversary of the
closing of the merger. Pursuant to the agreement, either Synopsys or the
employee can terminate the employment relationship for any reason at any time.
However, if the executive is terminated without cause or resigns for good
reason, he will be entitled to
68
continuation of their base salary (including the target bonus for which they
would have been eligible had they remained employed through the year of
termination), vacation pay, and insurance and health benefits until the later
of one year after the termination of employment and the second anniversary of
the closing of the merger. In addition, if the executive is terminated without
cause or voluntarily terminates for good reason, his former IKOS stock options
accelerate and become vested in full.
Benefit Plans and Programs
IKOS is required to take all action necessary to terminate, or cause to
terminate, before the effective time of the merger, any IKOS benefit plan that
is a 401(k) plan or other defined contribution retirement plan or employee
stock purchase plan. On or as soon as practicable following the effective time
of the merger, continuing employees of IKOS and its subsidiaries shall be
eligible to participate in those benefit plans and programs maintained for
similarly situated employees of Synopsys on the same terms applicable to
similarly situated employees of Synopsys and to the extent that such plans and
programs provide the benefits such IKOS employees had prior to the merger.
Each continuing employee will be given credit, for purposes of any service
requirements under Synopsys' plans for his or her period of service with IKOS
or any of its subsidiaries. Each continuing employee will, with respect to any
Synopsys plans or programs which have co-payment, deductible or other co-
insurance features, receive credit for any amounts such individual has paid to
date in the plan year of the merger under comparable plans or programs
maintained by IKOS or any of its subsidiaries prior to the merger.
Each continuing employee and eligible dependent who, upon completion of the
merger, was participating in an employee group health plan maintained by IKOS
or any of its subsidiaries will not be excluded from Synopsys' employee group
health plan or limited in coverage thereunder by reason of any waiting period
restriction or pre-existing condition limitation.
Bonus Plan
Certain management and non-management employees of IKOS determined by IKOS'
management will, upon completion of the merger, be eligible to participate in a
bonus plan of up to $7.5 million, which shall be paid on or near the date of
completion of the merger. The same metrics, revenue, revenue plus change in
backlog and PBT, calculated over the measurement period, will be used to
determine the total bonus amount in accordance with the graph set forth below.
The actual bonus amount will be the amount determined by revenue plus change in
backlog or the amount determined by PBT, whichever is lower, except that if the
amount determined by PBT is lower than the amount determined by revenue plus
change in backlog but the same or higher than the amount determined by revenue
without regard to backlog, the bonus pool amount will be determined by revenue
plus change in backlog. The total bonus amount will be $0 if revenue is not at
least $50 million and PBT is not greater than a loss of $10 million. As
indicated in the graph, the total bonus amount increases proportionately as
revenue, revenue plus change in backlog, or PBT increase from one level to the
next.
[GRAPH]
___________________________________
$10.0
$7.5 $7.5 $7.5
$5.5
___________________________________
$5.0
$3.2
$1.5
$0.0 ___________________________________
Revenue $50 $60 $70 $80 $90 $100
Revenue plus
change in backlog 50 60 70 80 90 100
Profit Before Tax -10 -5 0 8 14 18
(in millions)
69
The total bonus amount, if any, will be excluded from the calculation of
IKOS profit before tax over the measurement period. See the chart titled
"Determining the Purchase Price Per IKOS Share" in the section above titled
"The Merger and Related Transactions--Structure of the Merger and Calculation
of Purchase Price Per IKOS Share" for the method for determining which metric
should be used to calculate the total bonus amount. IKOS shall determine the
employees to participate in the bonus plan and the amount to be paid to each,
subject to certain minimum amounts to be paid to non-management employees.
However, the first $2 million of the bonus plan shall be allocated exclusively
for non-management employees.
In the event that the merger closes prior to June 30, 2002 at a per share
price of $15, the total bonus amount will equal $5.0 million.
Related Agreements
Voting Agreements
In connection with the merger, IKOS' directors and executive officers have
entered or are expected to enter into voting agreements with Synopsys which
require them to vote all of their shares of IKOS common stock in favor of
approval of the merger agreement and against any other merger or other business
combination proposals, with certain exceptions. The voting agreements terminate
on the earlier of the completion of the merger or the termination of the merger
agreement pursuant to its terms.
As of June 30, 2001, there were 353,630 shares of IKOS common stock subject
to the voting agreements, which represent approximately 4% of the outstanding
IKOS common stock.
Amendment to IKOS Stockholder Rights Agreement
In connection with the merger agreement, IKOS has executed an amendment to
its rights agreement, dated July 2, 2001, by and between IKOS and Bank Boston,
N.A. pursuant to which neither Synopsys nor Oak Merger Corporation shall be
deemed "acquiring persons" (as defined in the rights agreement) under the terms
of the rights agreement by virtue of the approval, execution, delivery or
performance of the merger agreement and pursuant to which the execution,
delivery and the performance of the merger agreement shall not result in a
"distribution date" (as defined in the rights agreement).
Operations Following the Merger
Upon completion of the merger, IKOS will become a wholly-owned subsidiary of
Synopsys and the members of Oak Merger Corporation's board will be the members
of the board of IKOS. The membership of the Synopsys board will remain
unchanged as a result of the merger. Following the merger, the officers of Oak
Merger Corporation will be the officers of IKOS. The stockholders of IKOS will
become stockholders of Synopsys, and their rights as stockholders will be
governed by Synopsys' certificate of incorporation and bylaws and the laws of
the State of Delaware.
Indemnification Matters
Directors and Officers and Liability Insurance
The merger agreement provides that for not less than 6 years after the
effective time of the merger, Synopsys will indemnify and hold harmless the
present and former officers, directors, employees and agents of IKOS in respect
of acts or omissions occurring on or prior to the effective time of the merger
to the extent provided for under IKOS' certificate of incorporation and bylaws
and each indemnification agreement with IKOS directors and officers to which
IKOS is a party, in each case in effect on July 2, 2001, as limited from time
to time by applicable law.
In addition, the merger agreement provides that for a period of 6 years
after the completion of the merger, Synopsys will provide officers' and
directors' liability insurance in respect of acts or omissions occurring on or
70
prior to the completion of the merger covering each person currently covered by
IKOS' officers' and directors' liability insurance policy on terms at least as
favorable as the coverage currently in effect on July 2, 2001. However,
Synopsys shall not be obligated to pay, or to cause the surviving corporation
to pay, premiums in excess of 150% of the amount per annum IKOS paid in its
last full fiscal year. Moreover, if Synopsys or the surviving corporation is
unable to obtain the insurance required by the merger agreement it shall obtain
as much comparable insurance as possible for an annual premium equal to such
maximum amount.
Indemnification of IKOS for Certain Matters
Synopsys has agreed to indemnify IKOS, its subsidiaries, officers, directors
and certain other persons from any losses (including reasonable attorneys'
fees) incurred by such persons or entities caused by a claim by Cadence Design
Systems, Inc. or its affiliates that any of the following activities violates
the Quickturn non-competition agreement:
. the discussions and agreements between Synopsys and IKOS leading up to
the signing of the letter of intent regarding the merger;
. the discussions regarding or the negotiation and signing of the merger
agreement;
. IKOS' performance of any of its obligations under the merger agreement;
. consummation of any of the transactions contemplated by the merger
agreement; and
. actions taken by IKOS at the direction of Synopsys.
Interests of IKOS' Directors, Officers and Affiliates in the Merger
In considering the recommendation of the IKOS board of directors with
respect to the adoption and approval of the merger agreement and approval of
the merger, IKOS stockholders should be aware that certain members of the
management of IKOS and the IKOS board of directors may have interests in the
merger that are different from, or in addition to, the interests of IKOS
stockholders generally. The IKOS board of directors was aware of these
interests and considered the following matters, among others, in approving the
merger agreement and the merger.
As of June 30, 2001, directors and executive officers of IKOS (and their
respective affiliates) collectively beneficially owned an aggregate of
approximately 361,745 shares of IKOS common stock, excluding unexercised
options to purchase IKOS common stock. Upon completion of the merger, it is
anticipated that the former directors and executive officers of IKOS (and their
respective affiliates) collectively will beneficially own less than one percent
of the then outstanding shares of Synopsys common stock, calculated on the
basis set forth in the section entitled "The Merger and Related Transactions--
Security Ownership of Certain Beneficial Owners and Management of IKOS."
71
As of June 30, 2001, directors and executive officers of IKOS held
outstanding stock options to purchase an aggregate of approximately 1,245,825
shares of IKOS common stock. Upon the completion of the merger, these options
will be assumed by Synopsys in accordance with the merger agreement. An
aggregate of approximately 158,480 of such outstanding stock options are held
by IKOS' non-employee directors under IKOS' 1995 Outside Director Stock Option
Plan. In addition, if the merger closes in August 2002, as expected, each
outside director shall receive an additional option to purchase 6,000 shares of
IKOS common stock. Under the director plan, all of the unvested option shares
held by non-employee directors will vest in full vest and become exercisable
immediately prior to the merger. Assuming that such individuals continue in
IKOS' service through August 31, 2002, Jackson Hu, James Oyler, Glenn Penisten
and William Stevens will hold the following number of unvested option shares on
such date:
Number of Unvested
Total Number of Option Shares on
Name Option Shares August 31, 2002
---- --------------- ------------------
Jackson Hu................................ 33,240 12,740
James Oyler............................... 46,000 18,000
Glenn Penisten............................ 46,000 18,000
William Stevens........................... 33,240 12,740
IKOS' executive officers held options to purchase an aggregate of 1,087,345
shares of IKOS common stock as of June 30, 2001. IKOS has previously entered
into severance agreements with all of its executive officers by which their
stock options, as assumed by Synopsys in the merger, will accelerate and become
fully vested in the event of certain terminations of employment following the
merger. It is a condition to Synopsys' obligation to close the merger that all
such officers (with the exception of the Chief Operating Officer, who has
entered into a separate employment agreement with Synopsys) enter into
amendments to the severance agreement in order to, among other things, add a
non-competition agreement between such officers and Synopsys. See the section
entitled "The Merger and Related Transactions--Other Provisions of the Merger
Agreement--Employment and Severance Arrangements." Under the agreements, as
proposed to be amended, in the event that such individuals are terminated
without cause or terminate their employment with Synopsys for good reason
within two years of the closing of the merger, their former IKOS options shall
become fully vested and accelerate in full. Assuming that each executive
officer continues in IKOS' service through August 31, 2002, each such
individual will hold the following unvested option shares on such date:
Number of Unvested
Total Number of Option Shares on
Name Option Shares August 31, 2002
- ---- --------------- ------------------
Gerald Casilli.............................. 154,700 30,875
Chairman of the Board
Ramon Nunez................................. 300,743 42,607
President & Chief Executive Officer
Joseph Rockom............................... 116,500 16,771
Chief Financial Officer and Secretary
Robert Hum.................................. 231,000 63,541
Chief Operating Officer
Daniel Hafeman.............................. 118,550 10,729
Chief Technical Officer
Nader Fathi................................. 95,852 13,896
VP Worldwide Sales, Operations & Emerging
Markets
Thomas Gardner.............................. 70,000 14,833
VP Worldwide Sales
Christoph Ditzen............................ 30,000 18,333
VP Business Development
72
During the pre-closing period, IKOS is entitled to grant additional stock
options to its executive officers, and all of such options would be converted
into options to acquire Synopsys common stock at the closing of the merger and
would be subject to the accelerated vesting discussed above.
The amendments to the severance agreements of IKOS executive officers, in
addition to the acceleration of options described above, also provide that they
may receive continuation of salary and benefits upon termination without cause
or resignation for good reason within a period of time. See the section
entitled "The Merger and Related Transactions--Other Provisions of the Merger
Agreement--Employment and Severance Arrangements" for additional details.
In addition, IKOS executive officers will be eligible to participate in a
bonus plan upon completion of the merger. For additional information regarding
the bonus plan, see the section entitled "The Merger and Related Transactions--
Other Provisions of the Merger Agreement--Bonus Plan."
Synopsys has agreed to fulfill and honor in all respects the indemnification
agreements IKOS and its subsidiaries have previously entered into with their
respective directors and officers and to fulfill and honor any indemnification
provisions of IKOS' and its subsidiaries' applicable charter documents. The
merger agreement provides that all rights to indemnification for present and
former directors and officers of IKOS will survive the merger and continue in
full force and effect for a period of not less than six years from the date of
the completion of the merger. Synopsys also has agreed to maintain insurance
for IKOS' directors and officers that is no less favorable than IKOS' current
directors' and officers' liability insurance for actions or omissions occurring
on or prior to the date of the completion of the merger for a period of not
less than six years after the completion of the merger, subject to limitations.
IKOS stockholders should consider whether these interests may have
influenced these directors and officers to support or recommend the merger.
The acceleration of the vesting of options upon or following the merger and
any other payments in the nature of compensation to certain employees of IKOS
that are contingent upon or made in connection with the merger may result in
"excess parachute payments" as defined in Section 280G of the Internal Revenue
Code. Excess parachute payments are not deductible in accordance with Section
280G. As a result, neither Synopsys
nor IKOS would be entitled to a tax deduction for any amounts determined to be
excess parachute payments. The amount of the lost deduction would depend, in
part, on the value of the shares at the time of the merger, the number of
option shares being accelerated, and the amount of any other payments in the
nature of compensation that are contingent upon or deemed to be made in
connection with the merger. In accordance with Section 4999 of the Internal
Revenue Code, any employee that receives an excess parachute payment must pay a
federal excise tax (in addition to all other income taxes imposed on the
payment) equal to 20% of the amount of the excess parachute payment. IKOS,
based on advice from an outside consultant, has conducted an analysis to
ascertain whether any payments or acceleration of options made to Gerald
Casilli, Nader Fathi, Thomas Gardner, Daniel Hafeman, Robert Hum, Ramon Nunez
and Joe Rockom, could result in excess parachute payments under Section 280G.
IKOS believes that as a result of its analysis, no excess parachute payments
would be made as a result of the merger solely on the basis of the acceleration
of existing stock options and the payment of severance amounts under existing
severence and employment agreements. However, if additional options are issued
during the pre-closing period, or if payments pursuant to the bonus plan are
made to the above officers, it is possible that excess parachute payments under
Section 280G could result.
Antitrust Approval
The merger is subject to the requirements of the HSR Act. The HSR Act
requires both parties to file written notification of the proposed merger to
the Antitrust Division of the Department of Justice and the Federal Trade
Commission, and to provide each of those agencies with certain information and
documentary materials for their review. The HSR Act also prohibits the parties
from closing the merger transaction until
73
certain waiting periods end or expire. The initial waiting period is 30 days
after both parties have made their written filings and provided the information
and documentary materials required.
Synopsys and IKOS expect to make their HSR Act filings on or after September
30, 2001. The requirements of the HSR Act will be satisfied if the merger is
completed within one year from the termination of the applicable 30-day waiting
period.
However, the Antitrust Division of the Department of Justice or the Federal
Trade Commission may issue, during the initial waiting period, a second request
to the parties, requiring them to submit additional information and documentary
materials. If such a second request were to be issued, it would extend the
waiting period until a date 30 days after Synopsys and IKOS substantially
complied with their obligations under the second request.
In addition, the Antitrust Division of the Department of Justice or the
Federal Trade Commission could challenge the merger on antitrust grounds either
before or after expiration of the waiting period. Accordingly, at any time
before or after the completion of the merger, either the Antitrust Division of
the Department of Justice or the Federal Trade Commission could take action
under the antitrust laws as it deems necessary or desirable in the public
interest, or other persons could take action under the antitrust laws,
including seeking to enjoin the merger. Additionally, at any time before or
after the completion of the merger, notwithstanding that the applicable waiting
period expired or ended, any state could take action under the antitrust laws
as it deems necessary or desirable in the public interest. There can be no
assurance that a challenge to the merger will not be made or that, if a
challenge is made, we will prevail. It is a condition to closing that all HSR
Act waiting periods have expired. In addition, both Synopsys and IKOS have a
right to terminate the merger agreement if, as a result of antitrust action or
otherwise, there is a final, non-appealable injunction prohibiting the merger.
In addition, Synopsys and IKOS may need to obtain approval for the merger in
foreign jurisdictions depending upon the extent that IKOS and/or Synopsys
conducts business in these jurisdictions and the statutory requirements of each
of these jurisdictions.
Material United States Federal Income Tax Considerations
Brobeck, Phleger & Harrison LLP and Gray Cary Ware & Freidenrich LLP are of
the opinion that the following discussion correctly describes the material
United States federal income tax considerations that are generally applicable
to holders of IKOS common stock who exchange IKOS common stock for Synopsys
common stock pursuant to the merger. This discussion does not purport to be a
complete analysis or listing of all potential tax considerations relevant to a
decision whether to vote in favor of the merger. This discussion is based on
currently existing provisions of the Internal Revenue Code, existing and
proposed Treasury regulations promulgated thereunder and current administrative
rulings and court decisions, all of which are subject to change. Any change,
which may or may not be retroactive, could alter the tax consequences to IKOS
stockholders as described herein.
IKOS stockholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular IKOS
stockholders in light of their particular circumstances, such as stockholders
who:
. are dealers in securities;
. are banks;
. are insurance companies;
. are tax exempt organizations;
. are subject to the alternative minimum tax provisions of the Internal
Revenue Code;
. hold their shares as part of a hedging, straddle, conversion or other
risk reduction transaction;
. are foreign persons;
74
. do not hold their IKOS common stock as a capital asset; or
. acquired their shares of IKOS common stock in connection with stock
option or stock purchase plans or in other compensatory transactions.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws, the tax consequences of
transactions effectuated prior or subsequent to, or concurrently with, the
merger (whether or not any such transactions are undertaken in connection with
the merger), including without limitation any transaction in which shares of
IKOS common stock are acquired or shares of Synopsys common stock are disposed
of, the tax consequences of the assumption by Synopsys of the outstanding IKOS
stock options or the tax consequences of the receipt of rights to acquire
Synopsys common stock. Accordingly, IKOS STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.
The merger is intended to constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. If the merger does qualify as a
reorganization, then, subject to the limitations and qualifications referred to
herein, the merger will result in the following federal income tax consequences
to the IKOS stockholders:
. No gain or loss will be recognized by holders of IKOS common stock
solely upon their receipt of Synopsys common stock in exchange for IKOS
common stock in the merger (except to the extent of cash received in
lieu of a fractional share of Synopsys common stock);
. The aggregate tax basis of the Synopsys common stock received by IKOS
stockholders in the merger (including any tax basis attributable to
fractional shares deemed to be disposed of) will be the same as the
aggregate tax basis of the IKOS common stock surrendered in exchange
therefor;
. The holding period of the Synopsys common stock received by each IKOS
stockholder in the merger will include the period for which the IKOS
common stock surrendered in exchange therefor was considered to be held,
provided that the IKOS common stock so surrendered is held as a capital
asset at the time of the merger; and
. Cash payments received by a holder of IKOS common stock in lieu of a
fractional share will be treated as if the fractional share of Synopsys
common stock had been issued in the merger and then redeemed by
Synopsys. An IKOS stockholder receiving cash payments will recognize
gain or loss, upon payment, measured by the difference, if any, between
the amount of cash received and that stockholder's basis in the
fractional share.
The parties are not requesting, and will not request, a ruling from the
Internal Revenue Service as to the tax consequences of the merger. The
consummation of the merger is conditioned on the receipt by Synopsys of an
opinion of Brobeck, Phleger & Harrison LLP, and the receipt by IKOS of an
opinion of Gray Cary Ware & Freidenrich LLP to the effect that the merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code; provided that if counsel to IKOS does not render such an
opinion, the condition will be satisfied if counsel to Synopsys renders such an
opinion to Synopsys. IKOS stockholders should be aware that the tax opinions
will not bind the Internal Revenue Service, and the Internal Revenue Service
is, therefore, not precluded from successfully asserting a contrary position.
The tax opinions will be subject to certain assumptions and qualifications,
including the truth and accuracy of certain representations made by Synopsys,
IKOS and Oak Merger Corporation.
A successful Internal Revenue Service challenge to the reorganization status
of the merger would result in IKOS stockholders recognizing taxable gain or
loss with respect to each share of common stock of IKOS surrendered equal to
the difference between the stockholder's basis in the share and the sum of the
amount of cash, if any, and the fair market value, as of the effective time of
the merger, of the Synopsys common stock received in exchange therefor. In this
event, a stockholder's aggregate basis in the Synopsys common stock so received
would equal its fair market value, and the stockholder's capital gains holding
period for such stock would begin the day after the merger.
75
Accounting Treatment
Under generally accepted accounting principles, Synopsys will account for
the merger using the purchase method of accounting. Under the purchase method
of accounting, the purchase price recorded by Synopsys will be equal to the
market value of its common stock issued in connection with the merger and the
fair value of its options to purchase Synopsys common stock that will be issued
in exchange for IKOS' outstanding common stock options (each determined at the
date of the merger), plus the amount of directly related acquisition costs.
Synopsys will allocate the purchase price to the individual assets acquired and
liabilities assumed, including any identifiable intangible assets such as
acquired technology, trademarks, tradenames and workforce, and to in-process
research and development, based on their respective fair values. Any amounts
allocated to in-process research and development will be expensed in the
quarter in which the merger closes. The excess of the purchase price over the
fair value of tangible and identifiable intangible assets plus the amount
allocated to acquired workforce will be recorded as goodwill and will not be
amortized consistent with the guidance in the Financial Accounting Standards
Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets. Other
intangible assets recorded will be amortized over their estimated useful life.
In addition, under the purchase method of accounting, IKOS' deferred revenue
related to product and software maintenance will be reduced to the fair value
of the related obligation as of the closing date of the merger. This treatment
will have the effect of reducing the amount of revenue Synopsys will recognize
in the periods subsequent to the merger compared to the amount of revenue IKOS
would have recognized in the same period absent the merger.
No Dissenters' Rights
You are not entitled to exercise dissenters' rights as a result of the
merger or to demand payment for your shares under Delaware law.
Restrictions on Sale of Shares by Affiliates of IKOS
The shares of Synopsys common stock to be issued in connection with the
merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Synopsys common
stock issued to any person who is deemed to be an affiliate of IKOS at the time
of the special stockholders meeting. Persons who may be deemed to be affiliates
include individuals or entities that control, are controlled by, or are under
common control of IKOS and may include some of IKOS' directors and officers, as
well as its principal stockholders. Affiliates may not sell their shares of
Synopsys common stock acquired in connection with the merger except pursuant
to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
. another applicable exemption under the Securities Act.
Synopsys' registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of
Synopsys common stock to be received by affiliates in the merger.
76
BUSINESS OF IKOS
General
IKOS develops, manufactures, markets, and supports systems for the
verification of complex electronic system designs. IKOS has two primary product
lines, hardware assisted simulation acceleration and emulation. IKOS' mission
is to help customers verify the functional correctness of their high complexity
electronic system designs. IKOS differentiates its hardware verification
solutions from those of its competitors by offering simulation-like ease of use
coupled with the capacity to handle very large semiconductor designs. IKOS also
provides services to customers to assist in the integration and deployment of
IKOS' solutions.
IKOS sells its products and services to a broad range of customers,
including telecommunications, multimedia, semiconductor, computer, and consumer
electronics companies. IKOS' customers include Broadcom, TI, Fujitsu, Toshiba,
Lucent Technologies, ATI, STMicroelectronics, Infineon, nVIDIA and SIS.
Headquartered in San Jose, California, IKOS has 4 development centers worldwide
located in: San Jose, California, Waltham, Massachusetts, Noida, India and
Minneapolis, Minnesota. In addition, IKOS supports direct sales operations in
North America, the United Kingdom, the Netherlands, France, Germany, and Japan.
IKOS has a distributor network covering the remainder of Europe and parts of
Asia. IKOS is publicly traded on the Nasdaq National Market under the symbol
IKOS. IKOS was incorporated in California in 1984 and reincorporated in
Delaware in May 1990.
Background
The electronic design automation, or EDA, industry provides design
automation tools and technology for the development and verification of
electronic designs. Computer-aided engineering, or CAE, and Integrated circuit
computer-aided design, or ICCAD, are the largest segments in the EDA market and
IKOS is focused on the verification sub-segment of the CAE market. The
fundamental drivers in this arena are the continuing trend toward decreasing
time to market windows, increased design complexity, the inability of design
engineering productivity to keep pace, and the resulting productivity gap. IKOS
believes that design complexity is increasing at a faster rate than design
engineering productivity. This creates an ever-widening productivity gap that
EDA tool vendors seek to address and which IKOS' products help to close.
Design verification is the assessment of the functionality and timing of a
design prior to fabrication. Design engineers are looking for ways to cut
verification time and therefore are moving toward a method of verifying a
design at a "functional" level in the earlier phases of the design cycle to
boost productivity, manage design complexity, and reduce cycle times.
The verification cycle is a critical part of the design process with
significant impact upon the design engineer's productivity. Increasing design
size and time to market pressures create more demand for thorough verification
of these high-complexity designs, exceeding the performance capability of
software simulators running on general purpose workstations. As design sizes
increase, the amount of testing required to thoroughly verify functionality
also grows. IKOS' customers estimate that up to 70% of their total design cycle
time is spent in the verification phases. IKOS is focused on selling products
and solutions that enable its customers to reduce this bottleneck by finding
and fixing functional errors sooner in the verification process and thus
significantly helping to prevent silicon respins (the requirement to
remanufacture chips as a result of missed functional errors). As a result of
these factors, IKOS believes that the requirement for hardware assisted design
verification will continue to grow.
In addition to the verification bottleneck described above, high complexity
system-on-chip, or SoC, designs are facing a new verification challenge of
system integration verification. The traditional approach to system integration
was for the designer to develop the hardware and software separately and
integrate the two at the end of the project when the actual hardware is
available to run the newly developed software. An example would be the
development of a 3D graphics chip used in personal computers. These chips
require software drivers to interface them to the personal computer's installed
monitor. There are substantial advantages
77
if the software driver can be tested using an emulation of the chip while it is
still being designed. The emulated chip allows both the software and hardware
developer to find bugs early in the design process and also allows the hardware
developer to make performance trade-offs before the chip is actually
manufactured.
With the advent of SoC designs, design teams are looking for ways to provide
system integration verification and to prove system level functionality early
in the design cycle, in order to accelerate overall time to market for the
manufactured chip.
IKOS' emulation products address the challenge of early system integration.
One of the key challenges with integration of hardware and software is
performance. Software simulation alone has proven to be too slow to allow for
sufficient verification in a reasonable time frame. IKOS' emulation platforms
offer up to 1 million cycles per second verification performance, which helps
delivers the level of performance necessary to verify system operation and run
system software for an integrated view of the system.
IKOS' products are comprised of patented simulation acceleration technology
and patented emulation verification technology. IKOS' emulation solutions are
differentiated from the competition through IKOS' patented VirtuaLogic compiler
technology. VirtuaLogic allows IKOS to deliver low cost, high capacity
emulation solutions that provide two to three orders of magnitude of higher
performance than hardware accelerated simulation. IKOS' VStation emulation
platform leverages the rapidly growing system-level verification requirements
created by the growth in silicon complexity.
The hardware accelerated simulation technology is used for sign-off level
verification and provides orders of magnitude more performance than software
simulation. IKOS' Nsim and ARES simulation platforms leverage the growing
bottleneck in RTL simulation created by the growth in silicon complexity.
In addition to its simulation and emulation products, IKOS provides
consulting services for on-site support and design verification expertise to
help customers achieve project goals. Verification services allow the customer
to outsource the work needed to integrate new verification products into their
design flow or deliver new verification capabilities to the design team. These
services allow the customer to invest and focus on what differentiates them
while benefiting from the custom integration of high performance verification
to their design flow.
Maintenance and Support
IKOS provides maintenance and support on a contractual basis. Hardware
maintenance is provided on an on-site or on a return and repair basis. IKOS
also provides application support via a toll-free telephone line. Customers
with software maintenance coverage also receive software upgrades, if any, from
IKOS. Foreign distributors generally provide customer training, service and
support for the products they sell. Maintenance revenues, as a percent of total
revenues, represented 25% in fiscal 2000, 27% in fiscal 1999 and 32% in fiscal
1998. Maintenance revenues, as a percent of total revenue, represented 27% for
the six months ended March 31, 2001.
Competition
IKOS' main emulation competitors are the Quickturn Design Systems unit of
Cadence Design Systems, Inc. and Mentor Graphics Corporation. Cadence/Quickturn
is the market leader. Mentor Graphics offers emulation solutions in Europe and
Asia but is currently enjoined from selling in the United States as a result of
on-going litigation initiated by Cadence/Quickturn. The Cadence/Quickturn and
Mentor Graphics legal proceedings await rulings from several courts. In 1998,
Cadence/Quickturn announced their next generation emulator "Mercury" and the
end of life of their current System Realizer product. In fiscal 2000
Cadence/Quickturn announced an upgrade to their Mercury product called "Mercury
Plus" and in 2001 Cadence/Quickturn announced a new product called Pallidium.
IKOS believes the Cadence/Quickturn products generally have less capacity and a
higher cost per gate then the comparable IKOS System.
78
Competitors in the chip-level and sign-off level verification market include
software simulation providers such as Synopsys, Mentor Graphics and Cadence.
Hardware accelerated simulation providers include Axis Systems. For sign-off
level verification, IKOS' strongest competition comes from static timing
analysis tools from providers such as Chrysalis, Synopsys and Cadence.
IKOS expects competition in the verification market to continue to expand
and change. Moreover, IKOS competes, and expects that it will continue to
compete, with established EDA companies. A number of these companies have
longer operating histories, significantly greater financial, technical and
marketing resources, greater name recognition and larger installed customer
bases than IKOS. In addition, many of these competitors and potential
competitors have established relationships with current and potential customers
of IKOS and offer a broader and more comprehensive product line. Increased
competition could result in price reductions, reduced margins and loss of
market share, all of which could materially adversely affect IKOS. In addition,
current competitors or other entities may develop other products that have
significant advantages over IKOS' products. There can be no assurance that IKOS
will be able to compete successfully against current and future competitors or
that competitive pressures faced by IKOS will not materially adversely affect
its operating results.
IKOS competes on the basis of certain factors, including product
performance, price, support of industry standards, technical support and
customer service, timely introduction of new products, ease of use and
reputation. IKOS believes that it currently competes favorably overall with
respect to these factors.
Customers, Marketing and Sales
IKOS sells its products to a broad range of companies including those in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. IKOS markets its products and services
primarily through its direct sales and service organization. IKOS employs a
technically-oriented sales force and application engineering team to serve the
needs of existing and prospective customers. IKOS' consulting services provide
customers with a comprehensive solution that is tailored specifically to the
needs of the design team. These services include education, application
services, interface software support, custom library development and other on-
site support through customized consulting partnerships to assist the customer
in accomplishing key verification milestones.
IKOS' direct sales strategy concentrates on those companies that it believes
are major users and designers of complex electronic designs. For the fiscal
year ended September 30, 2000, one customer, Broadcom Corporation, Inc.,
accounted for approximately 12% of net revenues. For fiscal years ended October
2, 1999 and October 3, 1998, one customer, Lucent Technologies, Inc., accounted
for approximately 14% and 13% of net revenues, respectively.
Direct Sales
IKOS currently maintains direct sales and support offices in the following
states: Arizona, California, Illinois, Massachusetts, New Jersey and Texas.
IKOS makes direct sales internationally in Canada, in Japan through its wholly-
owned subsidiary, IKOS K.K., in India through its wholly-owned subsidiary IKOS
India Pvt. Ltd., and in central Europe through its wholly-owned subsidiaries,
IKOS Systems GmbH in Germany, IKOS Systems, Ltd. in England and IKOS Systems,
S.A.R.L. in France. Direct sales, including maintenance fees, accounted for
approximately 95% of IKOS' net revenues in fiscal year 2000. Direct sales,
including maintenance fees, accounted for approximately 94% of IKOS' net
revenues in fiscal year 1999. Direct sales for fiscal 1998 as a percentage of
net revenues were more than 95% of IKOS' net revenues.
Distributors
IKOS believes that international markets are an important source of its
revenues and while the bulk of its sales is through direct channels, IKOS has
developed distributor or outside sales relationships in ten foreign
79
countries in Europe and Asia. In fiscal 1997, IKOS terminated its distributor
relationship in Japan and began selling directly in that market. In early
fiscal 2000, IKOS entered into a new distributor agreement for sales in Japan.
The distributor relationship was later terminated as management concluded this
arrangement was not in the best interest of IKOS. Revenues to distributors were
less than 5% of IKOS' net revenues for the fiscal year 2000 and 1998,
respectively. Distributor revenues for fiscal 1999 as a percentage of net
revenues were less than 10%.
International Sales
International sales, including export sales and foreign operation net
revenues, accounted for approximately 34%, 37% and 36% of IKOS' net revenues in
fiscal 2000, 1999 and 1998, respectively. International revenues increased in
absolute dollars by approximately 19%, however, decreased as a percentage of
net revenues. The increase in sales dollars are a direct result of increasing
demand in Europe and the Asia Pacific territories. International revenues
increased during fiscal 1999 due to increased demand for IKOS' product,
primarily in Europe and the South Asia territories. In fiscal 1998,
international revenues decreased as a result of decreases in Voyager sales and
limited availability of simulation product for shipment during fiscal 1998. For
the six month period ending March 31, 2001, international revenues decreased
approximately 4% when compared to the first six months of the prior year. The
decrease in revenues is due to lower than planned revenues in Japan for the six
month period. IKOS believes the shortfall is a result of its increased emphasis
on simulation and the difficulties involved in penetrating the Japan market
with the new emulation products.
With the exception of sales to customers through the Japan subsidiary, IKOS
has attempted to reduce the risk of fluctuations in exchange rates associated
with international revenues by selling its systems primarily denominated in
U.S. dollars. IKOS pays the expenses of its international operations in local
currencies and has not engaged in hedging transactions with respect to such
obligations. Sales through the Japan subsidiary are denominated in Japanese
Yen. For those sales made in Japanese Yen, IKOS may enter into foreign exchange
contracts to minimize foreign exchange risk relating to the Japanese
subsidiary's sales.
Conducting business in international markets requires compliance with
applicable laws and regulations, such as safety and telecommunication laws and
regulations of foreign jurisdictions and import duties and quotas. To date,
IKOS has not experienced any difficulty in obtaining export licenses from the
U.S. Department of Commerce for foreign sales; however, there can be no
assurance that IKOS will not experience difficulties in the future.
Manufacturing and Suppliers
IKOS performs final assembly and test of all its products in its San Jose,
California facility and utilizes third parties for all major subassembly
manufacturing, including printed circuit boards and custom ICs. IKOS has a
testing and qualification program to ensure that all subassemblies meet its
specifications before going into final assembly and test.
Certain key components used in IKOS' products are presently available from
sole or limited sources, including the FPGA's used in its emulation products
and the semiconductor memories used in its hardware simulators. IKOS generally
purchases these components pursuant to purchase orders placed from time to time
in the ordinary course of business and has no supply arrangements with any of
these source suppliers that require the suppliers to provide components in
guaranteed quantities or at set prices. IKOS endeavors to maintain an ample
supply of such components at all times through order generation based on
tracking of sales projections, production and inventories, and by ordering
critical components for delivery over an extended period. The inability to
develop alternative sources for these sole or limited source components or to
obtain sufficient quantities of these components could result in delays or
reductions in product shipments which could adversely affect IKOS' operating
results.
80
Product Development
IKOS' ongoing product development activities include the enhancement of
current products, such as the ability to simulate, emulate and verify the
design of higher gate count ICs and increased integration with other EDA tools.
Furthermore these product development activities include the development of new
product options and features, such as new library tools and the research and
development of new technologies for use in future products.
IKOS' research and product development organization included 129 engineers
at June 30, 2001. During fiscal 2000, 1999, and 1998, IKOS spent approximately
$15.9 million, $13.4 million and $14.4 million, respectively, on research and
development. During fiscal 1998, IKOS also spent approximately $9.0 million
acquiring technology from Interra, Inc. In addition to acquiring this
technology, IKOS also obtained the services of approximately 52 engineers in
establishing a research and development subsidiary in India. IKOS' research and
development costs, including costs of software development before technological
feasibility, are expensed as incurred. Research and development expenses for
the six month period ended March 31, 2001 represented 24% of revenues, while
research and development expenses for the six month period ended April 1, 2000
represented 22% of revenues. The increase for the six month period ended March
31, 2001, as a percentage of sales, is due to the overall increase in expenses
related to increased payroll and related costs due to increased headcount
against lower than expected revenues for the six month period. As IKOS
continues to research verification tool methodologies and introduce new
products, research and development costs are expected to increase in absolute
dollars over the remainder of the year.
Proprietary Rights
Due to the rapid pace of technological advancement, IKOS believes it is less
dependent on the protection of proprietary product information than on its
ability to develop and market new products. IKOS protects its proprietary
product information primarily through the use of employee nondisclosure
agreements and patents and by limiting access to confidential information. IKOS
presently has 14 issued United States patents that cover various aspects and
features of its products, including its overall system architecture and certain
features in the systems hardware for both simulation and emulation products.
These patents expire between November 22, 2005 and August 15, 2017. IKOS also
has licensed rights under certain issued patents relating to VirtualWires
technology from MIT. This license continues through December 2004, and
thereafter becomes nonexclusive. MIT may terminate this license if IKOS fails
to meet certain minimum net sales milestones or upon certain other material
breaches of the license agreement that remain uncured after 90 days' notice of
such breach. Although IKOS may file additional patent applications in the
future, it does not expect to rely extensively on patents to protect its
products.
IKOS also relies on certain software which it licenses from third parties,
including software which is integrated with internally developed software and
used in IKOS' systems to perform key functions.
From time to time IKOS has received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Although IKOS
does not believe that its products infringe the proprietary rights of any third
parties, there can be no assurance that infringement or invalidity claims or
claims for indemnification resulting from infringement claims will not be
asserted against IKOS or that any such assertions will not materially adversely
affect IKOS' business, financial condition or results of operations.
Irrespective of the validity or the successful assertion of such claims, IKOS
could incur significant costs and diversion of management efforts with respect
to the defense thereof which could have a material adverse effect on IKOS'
business, financial condition or results of operations. If any claims or
actions are asserted against IKOS, it may seek to obtain a license under a
third party's intellectual property rights. There can be no assurance, however,
that under such circumstances, a license would be available under reasonable
terms or at all.
IKOS' tradename, "IKOS" and its product series named "Voyager" and "Delta
Core" are registered trademarks of IKOS.
81
Employees
As of June 30, 2001, IKOS employed a total of 316 persons, consisting of 136
in marketing, sales and support, 10 in manufacturing, 129 in research,
development and engineering, and 41 in finance, administration and other
capacities. IKOS has never had a work stoppage. None of its employees is
represented by a labor organization, and IKOS considers its relations with its
employees to be good.
Properties
IKOS' principal executive offices, as well as its principal manufacturing,
marketing, research and development, and engineering facility, are located on
approximately 106,000 square feet of leased office building space in San Jose,
California. In addition, IKOS leases research and development and sales office
space domestically in Arizona, California, Illinois, Massachusetts, Minnesota,
New Jersey and Texas and internationally in England, France, Germany, the
Netherlands, Korea and Japan. IKOS believes that its existing facilities are
adequate for its current needs.
Legal Proceedings
On February 9, 2001, IKOS filed a patent infringement complaint against Axis
Systems, Inc., or Axis, in the United States District Court in the District of
Delaware. The complaint alleges infringement by Axis of four patents relating
to IKOS' Virtual Wires technology, which allows high resource utilization in
FPGA-based emulators. IKOS is seeking both injunctive relief and monetary
damages.
On March 22, 2001, Axis filed a patent infringement complaint against IKOS
in the United States District Court for the Northern District of California.
The complaint alleges infringement by IKOS of Axis' patent titled
"Simulation/Emulation System and Method," U.S. Patent No. 6,009,256. Axis
claims that this patent covers technology for a single system that provides
simulation, acceleration, and emulation of complex electronic integrated
circuit and system-on-chip designs. The complaint alleges that certain of IKOS'
emulation products infringe on the patent. Axis is seeking both injunctive
relief and monetary damages. IKOS believes the claim is without merit and
intends to vigorously defend the action; however, such actions are currently in
the discovery phase only and there can be no assurance that IKOS will prevail
in either case.
82
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IKOS
Cautionary Statement
The following discussion and analysis of IKOS' financial condition and
results of operations should be read in conjunction with "IKOS Summary Selected
Consolidated Financial Data" and IKOS' consolidated financial statements and
notes thereto appearing elsewhere in this document. This discussion and
analysis contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
without limitation contain the words, "believes," "anticipates," "estimates,"
"expects," "projections," and words of similar import. These forward-looking
statements involve risks and uncertainties, and the cautionary statements
discussed under the caption "IKOS Risk Factors," identify important factors
that could cause actual results to differ materially from those indicated in
the forward-looking statements.
Nature Of Operations
IKOS develops, manufactures, markets and supports electronic design
automation tools for the verification of integrated circuit designs. IKOS'
mission is to help customers realize their high complexity electronic systems
through innovative design verification solutions. IKOS' products are designed
to enable its customers to verify their designs more rapidly and accurately
than existing software-based simulation tools. In 1996, IKOS broadened its
spectrum of verification solutions to extend from the design concept stage to
the prototype stage by introducing its first emulation system. IKOS
commercially released its first emulation system in 1997 and has completely
redesigned its original emulation product to the current two million gate
emulation solution. During fiscal 1999, IKOS released its third generation
emulation product, which provides a five million-gate emulation solution. In
March 2001, IKOS released its fourth generation emulation product, which
provides for 15 million gates of emulation capacity.
IKOS sells its products to a broad range of customers in the communications,
multimedia/graphics, semiconductor, computer, aerospace and consumer
electronics industries. IKOS markets its products and services primarily
through its direct sales and service organization as IKOS has direct sales
operations throughout the United States and in the United Kingdom, France,
Germany and Japan. IKOS also has a distribution network covering the remainder
of Europe and in parts of Asia. In fiscal 1998, IKOS opened a research and
development operation in India.
Recent Trends
IKOS depends on the semiconductor industry, which is historically volatile,
for sales of its emulation products. IKOS believes that the semiconductor
industry is currently in a downturn, which has tightened the capital
expenditure budgets of its customers and has led to a deferral of purchasing
decisions and a decrease in sales to such customers. IKOS expects that these
economic factors may continue to restrict its customers' budgets and limit the
demand for IKOS products.
Results Of Operations
Six Months Ended March 31, 2001 and April 1, 2000
Net Revenues. Net revenues for the six-month period ending March 31, 2001
were $38,419,000, representing a 19% increase over the same period of the prior
year. For the six-month period ending March 31, 2001, revenues have increased
on the overall strength of emulation product revenues, which were up over 63%
when compared with the first six months of the prior year. Maintenance revenues
also contributed to the overall increase for the six-month period increasing
17% over this period. Simulation product revenues have decreased by
approximately 26%, which is expected. IKOS expects to continue its focus on the
emulation market in an effort to continue to grow emulation revenues. In
addition, IKOS continues to expect a decline in the simulation revenues.
83
International revenues for the six-month period ending March 31, 2001,
totaled $11,758,000, respectively or approximately 31% of total revenues. For
the six-month period ending March 31, 2001, international revenues decreased
approximately 4% when compared to the first six months of the prior year. The
decrease in revenues was due to lower than planned revenues in Japan for the
six-month period. IKOS believes the shortfall was a result of IKOS' increased
emphasis on emulation and the difficulties involved in penetrating the Japan
market with a new product.
Gross Profit Margins. Gross profit margins for the six-month period ended
March 31, 2001 were 78%. Gross profit margins for the six-month period ended
April 1, 2000 were 77%. Margins were reasonably flat and comparable with same
six months of the prior year.
Research and Development Expenses. Research and development expenses for the
six-month period ending March 31, 2001 were approximately $9,060,000,
representing 24% of revenues. Research and development expenses for the six-
month period ending April 1, 2000 were approximately $7,207,000, representing
22% of revenues. The increase for the six months ended March 31, 2001, as a
percentage of sales, was due to the overall increase in expenses against lower
than expected revenues for the six-month period. The increase for the six-month
period was primarily related to increased payroll and related costs due to
increased headcount and increased consulting fees.
Sales and Marketing Expenses. Sales and marketing expenses for the six-month
period ending March 31, 2001 were approximately $14,500,000, representing 38%
of revenues. Sales and marketing expenses for the six-month period ending April
1, 2000 were approximately $11,681,000, representing 36% of revenues. The
increase as a percentage of sales was due to the overall increase in expenses
against lower than expected revenues for the six-month period. The increase in
absolute dollars over the prior year six months was primarily related to
increased payroll and commissions, recruiting, travel and trade show expenses.
General and Administrative Expenses. General and administrative expenses for
the six-month period ending March 31, 2001 were approximately $3,046,000,
representing 8% of revenues. General and administrative expenses for the six-
month period ending April 1, 2000 were approximately $2,341,000, representing
7% of revenues. The slight increase for the six month ended March 31, 2001, as
a percentage of sales, was due to the overall increase in expenses against
lower than expected revenues for the six-month period. In terms of absolute
dollars, general and administrative expenses for the six-month period ending
March 31, 2001, were higher than the same six months of the prior year periods
as a result of increased salaries and related expenses.
Income Taxes. IKOS' effective tax rate on the consolidated pretax income was
approximately 25% for the six-month periods ending March 31, 2001 and April 1,
2000. IKOS' effective tax rate for both periods differs from the federal
statutory rate primarily due to benefits associated with its net operating loss
carry forward.
For the Years ending September 30, 2000, October 1, 1999 and October 3, 1998
Net Revenues. For the fiscal year ended September 30, 2000, net revenues
increased 29% from $56,333,000 in fiscal 1999 to $72,796,000 in fiscal 2000.
For the fiscal year ended October 2, 1999, net revenues increased 38% from
$40,893,000 in fiscal 1998 to $56,333,000 in fiscal 1999. The year to year
increases in net revenues was primarily the result of increased sales of IKOS'
emulation product. Emulation revenues increased over 66% from 1999 to 2000 and
233% from 1998 to 1999. The increase from 1998 to 1999 was primarily the result
of the less than expected sales of emulation units during 1998 due to a lengthy
beta program for IKOS' two million gate system reducing the availability of
units available for sale during 1998. The increase from 1999 to 2000 is the
direct result of increasing acceptance and demand for the emulation product.
During the year IKOS realized several significant competitive wins in the
market including a record $11 million order from one customer. IKOS'
development effort has resulted in the introduction of a new and more robust
emulation system every twelve to eighteen months since IKOS' initial emulation
product
84
introduction in 1997. This effort has led customers to realize the ability of
IKOS to deliver high quality emulation products to assist in verifying the
increasingly complex IC designs. While emulation has grown substantially over
the past three years, simulation has grown at a much slower rate. However, this
growth is higher than IKOS had anticipated and IKOS expects that simulation
revenues will decline over the next several years as a result of the evolution
of the verification market. Simulation revenues for fiscal 2000 grew by
approximately 5% over fiscal 1999. Simulation revenues for 1999 grew by 10%
over fiscal 1998. The increases were higher than expected, as IKOS had
introduced new products. However, IKOS believes the growth in the simulation
product line is limited.
Maintenance revenues increased 20% from $15,075,000 in fiscal 1999 to
$18,144,000 in fiscal 2000. The growth in revenues is due to the increasing
installed based of emulation system users who are on maintenance coupled with
the on-going renewals of the Voyager systems installed base. The shifting base
of simulation users and emulation users impacts the maintenance revenue rate of
growth. As the simulation business declines, the base of users will decline,
negatively impacting the rate of growth for maintenance, however, this impact
is offset by the increasing base of emulation users. Maintenance revenues for
fiscal 1999 increased 14% over the previous year to $15,075,000 from
$13,169,000. The growth is primarily attributable to the current Voyager
systems installed base and the increasing installed base of IKOS' emulation
systems. However, the increase is offset by customers of older Voyager systems
who are not renewing their maintenance on such systems at the same rate as in
the past. In addition, the growth rate is lower than prior years due to the
downturn in product revenues in fiscal 1998 that directly impacted the level of
products due for maintenance renewals in the fiscal 1999. Also, lower growth
rate is attributable to the overall transition of IKOS' installed based from
primarily Voyager system holders to emulation system holders.
International sales, which reflect export sales and sales by IKOS' Japan and
European operations, were $25,034,000, $21,076,000 and $14,532,000 for fiscal
years 2000, 1999 and 1998, respectively. These sales represent 34%, 37% and 36%
of net revenues, respectively. For fiscal 1999 and 2000, international revenues
increased by $6,544,000 and $3,958,000, respectively and just slightly as a
percentage of revenues in each year. The increases were primarily a result of
the growth in sales in IKOS' European region and Asia. European revenues grew
from $12,818,000 in fiscal 1999 to $14,151,000 in fiscal 2000 and from
$9,620,000 in fiscal 1998 to $12,818,000 in fiscal 1999. IKOS has seen higher
demand in the European marketplace over the past year resulting in the increase
in revenues. Revenues in Asia also increased significantly, increasing from
$8,258,000 in fiscal 1999 to $10,883,000 in fiscal 2000 and $4,912,000 in
fiscal 1998 to $8,258,000 in fiscal 1999. The increase was due to a resurgence
in the Asia marketplace after several years of lower revenues due to problems
in the Asian economy and the reorganization of IKOS' Japan operations. IKOS
will continue to focus its efforts on the international market. There can be no
assurances that international sales will increase to the extent anticipated or
that the growth that was obtained in fiscal 2000 can be repeated.
Gross Profit. Gross profit was $56,765,000, $42,555,000 and $26,159,000 or
78%, 76% and 64% of total net revenues for fiscal years 2000, 1999 and 1998,
respectively. Overall gross margins and more specifically, product margins for
fiscal 2000 and 1999 increased primarily as a result of higher revenues overall
and increased sales of higher margin products. In addition, fiscal 1999
comparative with fiscal 1998 was impacted by the write-off of inventory related
to obsolete verification products in 1998 reducing margins for that year. No
similar write-off occurred in fiscal 1999 or fiscal 2000. Maintenance margins
improved from fiscal 1999 to fiscal 2000 as a result of better controls over
maintenance spending due to a full year under the new technical support
organization that was reorganized in fiscal 1999. Fiscal 1999 margins were
negatively impacted by higher maintenance costs associated with the new product
introductions as well as the reorganization of IKOS' technical support team.
Research and Development Expenses. Research and development expenses were
$15,912,000, $13,443,000 and $14,381,000 in fiscal 2000, 1999 and 1998,
respectively. As a percentage of net revenues, research and development
expenses were 22%, 24% and 35% for fiscal 2000, 1999 and 1998, respectively. In
general, the increase in research and development expenses reflects our
continued development of our emulation technology. More specifically, research
and development expenses increased during fiscal 2000 as a
85
result of increased spending for consultants and temporary employees, salaries,
profit sharing, and hardware prototyping expenses. Spending increases related
to consultants and temporary help was directly related to IKOS' need to meet
its resource needs using outside sources. The increases in payroll related
expenses were a result of higher profits contributing to higher profit sharing
and increasing salaries for employee retention purposes. Lastly, as IKOS worked
to complete its next generation emulator, IKOS incurred additional spending for
prototype parts for the new system. For fiscal 1999, research and development
expenses decreased in absolute dollars and as a percentage of revenues
primarily due to non-recurring charges in fiscal 1998 associated with
prototypes for completed product projects, including its revamping of the
original emulation technology. There were fewer such costs in fiscal 1999 as
fewer prototype projects were completed during the year. Higher consulting fees
needed to complete the various projects also affected the fiscal 1998 spending.
In addition, the decrease in fiscal 1999 as a percentage of revenues is a
direct result of the lower revenues in fiscal 1998 when compared to spending in
fiscal 1998.
Sales and Marketing Expenses. Sales and marketing expenses were $24,913,000,
$21,822,000 and $18,609,000 in fiscal 2000, 1999 and 1998, or 34%, 39% and 46%
of net revenues, respectively. The increases in absolute dollars for fiscal
2000 and fiscal 1999 are due to salary and commission increases as a result of
higher sales levels. The increase is also a result of higher spending for
representative commissions, consultants, travel expenses and other marketing
expenditures for new product introductions, particularly in 1999. As a
percentage of revenues, sales and marketing expenses decreased from 1999 to
2000, primarily due to the lower revenue base in 1999 when compared to the
level of spending.
General and Administrative Expenses. General and administrative expenses
were $5,311,000, $4,267,000 and $4,247,000 for fiscal 2000, 1999 and 1998, or
7%, 8% and 10% of net revenues, respectively. General and administrative
expenses increased in absolute dollars over the prior year primarily due to
increased headcount, salary adjustments, profit sharing, professional services,
and allocated MIS expenses. The higher costs while lower as a percentage of
revenues from the prior year, reflect IKOS' efforts to improve internal
processes to increase on-going efficiencies. General and administrative
expenses remained flat in 1999 when compared with 1998, as higher spending in
payroll related costs were offset with lower consulting and professional fees.
Other Income. Net interest income in fiscal 2000 was $618,000, representing
a 25% increase from the $495,000 earned in 1999. The increase in interest
income is primarily attributable to increased cash, cash equivalents and short-
term investments over the course of the year. These balances increased as
result of higher sales bringing about higher cash levels generated from
operations. For fiscal 1999, interest income decreased from $1,031,000 in 1998
to $495,000 as a result of lower cash, cash equivalent and short-term
investment balances during fiscal 1999. Cash, cash equivalents and short-term
investments decreased from $15,682,000 in 1998 to $10,534,000 in fiscal 1999.
The decrease was primarily the result of an increase in accounts receivable,
purchases of equipment, repurchases of common stock and reductions in accounts
payable, accrued liabilities and deferred revenues.
Provision for Income Taxes. During fiscal 2000, IKOS recorded a tax
provision of $2,750,000, which primarily consisted of federal and state
alternative minimum taxes and foreign taxes. For fiscal 1999, IKOS recorded a
tax provision of $650,000, which primarily consisted of federal and state
alternative minimum taxes and foreign taxes. For fiscal 1998, IKOS recorded a
tax provision of $4,928,000. The provision primarily consisted of the write
down of IKOS' net deferred tax assets because these deferred tax assets were
not considered to be realizable on a more likely than not basis, as a result of
the losses incurred in fiscal 1998.
Other. IKOS has experienced minimal gains or losses on foreign currency
translation. With the exception of IKOS' Japan operations, substantially all of
its international sales to date have been billed and collected in U.S. dollars.
IKOS pays the expenses of its international operations in local currencies and
to date IKOS has not engaged in hedging transactions with respect to such
obligations. IKOS' sales in Japan are billed and collected in the Japanese
local currency. As such, IKOS periodically enters into foreign exchange
contracts to minimize foreign exchange risk relating to the Japanese
subsidiary's sales that are denominated in yen. A forward exchange contract
obligates IKOS to exchange predetermined amounts of a specified foreign
currency
86
at a specified exchange rate on a specified date or to make an equivalent US
dollar payment equal to the value of such exchange. Through March 31, 2001, the
impact of such arrangements has been immaterial to IKOS operations.
Liquidity and Capital Resources
Since inception, IKOS has financed its operations, including increases in
accounts receivable, inventory and capital equipment acquisitions, primarily
through private and public sales of equity securities and a loan secured by
capital equipment. IKOS' cash, cash equivalents and short-term investments were
$21,773,000 at March 31, 2001 up from $19,803,000 at September 30, 2000. The
increase was a result of $5,162,000 of cash provided by operating activities
offset by $834,000 of cash used in investing activities (excluding short-term
investment activities) and $623,000 of cash used in financing activities.
Operating Activities
IKOS' operating activities provided cash of $5,162,000 during the first six
months of fiscal 2001. The cash provided by operations was primarily due to net
income adjusted for depreciation, amortization and accrued rent and a decreases
in accounts receivables, combined with an increases in accounts payables and
deferred revenues. These increases in cash provided by operations were
partially offset by increases in inventories, prepaid expenses and other assets
combined with decreases in accrued payroll expenses, accrued commissions,
income taxes payable and other accrued liabilities.
Investing Activities
Net cash used in investing activities for the first six months of fiscal
2001 was $834,000. The use of cash was primarily related to the purchases of
short-term investments of $8,922,000 and the acquisition of capital equipment
of $2,569,000, partially offset by the maturities of short-term investment in
the amount of $10,657,000.
Financing Activities
Net cash used in financing activities for the six months of fiscal, 2001,
was $623,000 and was primarily related to the repayment of the outstanding line
of credit in the amount of $1,809,000 partially offset by the net sales of
stock under stock option and purchase plans during the six months.
IKOS' primary unused sources of funds at March 31, 2000 consisted of
$15,737,000 of cash and cash equivalents, in addition to $6,036,000 of short-
term investments. IKOS renegotiated its working capital line of credit and
currently maintains a $5,000,000 working capital line. Of this total IKOS has
approximately $3,500,000 available under IKOS' line as the remainder serves as
collateral under two letter of credit arrangements IKOS has outstanding
relating to its facilities. IKOS believes that its current cash, cash
equivalents, short-term investments and its available credit facility, together
with cash and cash equivalents generated from operations will be sufficient to
finance its operations for at least the next twelve months. Should IKOS require
other financing arrangements, there can be no assurance that such financing
will be available, if at all, on terms favorable or acceptable to IKOS.
87
IKOS Quarterly Results of Operations
The following tables set forth IKOS' unaudited consolidated statement of
operations data for each of the ten quarterly periods ended March 31, 2001, as
well as that data expressed as a percentage of IKOS' total revenues for the
quarters presented. You should read this information in conjunction with IKOS'
consolidated financial statements and related notes appearing elsewhere in this
prospectus/proxy statement. This unaudited consolidated information has been
prepared on a basis consistent with IKOS' audited consolidated financial
statements and, in the opinion of IKOS' management, reflects all normal
recurring adjustments that are considered necessary for a fair presentation of
IKOS' financial position and operating results for the quarters presented.
Three Months Ended
---------------------------------------------------------------------------------------
Jan. 2, April 3, July 3 Oct. 2, Jan. 1, April 1, July 1, Sept. 30, Dec. 30, March 31,
1999 1999 1999 1999 2000 2000 2000 2000 2000 2001
------- -------- ------- ------- ------- -------- ------- --------- -------- ---------
(in thousands except per share data)
Net revenues
Product................ $ 7,613 $ 9,958 $11,098 $12,589 $11,049 $12,403 $13,876 $17,324 $16,379 $11 ,803
Maintenance............ 3,731 3,724 3,914 3,706 4,356 4,396 4,567 4,825 4,630 5,607
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Total net revenues.... 11,344 13,682 15,012 16,295 15,405 16,799 18,443 22,149 21,009 17,410
Cost of revenues
Product................ 1,969 2,471 2,681 2,457 2,705 2,456 2,834 3,550 3,355 2,896
Maintenance............ 846 948 1,057 1,349 1,023 1,215 1,102 1,146 1,114 1,166
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Total cost of
revenues............. 2,815 3,419 3,738 3,806 3,728 3,671 3,936 4,696 4,469 4,062
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Gross Profit.......... 8,529 10,263 11,274 12,489 11,677 13,128 14,507 17,453 16,540 13,348
Operating Expenses:
Research and
development........... 3,015 3,433 3,411 3,584 3,254 3,953 4,198 4,507 4,508 4,552
Sales and marketing.... 4,604 5,536 5,719 5,963 5,921 5,760 6,161 7,071 7,278 7,222
General and
administration........ 903 1,011 1,103 1,250 1,053 1,288 1,231 1,739 1,584 1,462
Amortization of
intangibles........... 103 103 103 103 83 42 42 42 42 42
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses............... 8,625 10,083 10,336 10,900 10,311 11,043 11,632 13,359 13,412 13,278
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations............. (96) 180 938 1,589 1,366 2,085 2,875 4,094 3,128 70
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Interest and other
income................. 148 133 111 103 92 99 198 229 219 392
Income before provision
for income taxes....... 52 313 1,049 1,692 1,458 2,184 3,073 4,323 3,347 462
Provision for income
taxes.................. 0 55 265 330 365 540 770 1,075 860 115
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
Net income............. $ 52 $ 258 $ 784 $ 1,362 $ 1,093 $ 1,644 $ 2,303 $ 3,248 $ 2,487 $ 347
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
Basic income per
share (*).............. $ 0.01 $ 0.03 $ 0.09 $ 0.16 $ 0.13 $ 0.19 $ 0.27 $ 0.37 $ 0.28 $ 0.04
Weighted-average shares
used in computing per
share amounts.......... 8,302 8,336 8,288 8,369 8,417 8,531 8,611 8,694 8,805 8,924
Diluted income per
share (*).............. $ 0.01 $ 0.03 $ 0.08 $ 0.14 $ 0.11 $ 0.17 $ 0.23 $ 0.32 $ 0.25 $ 0.03
Weighted-average shares
used in computing per
share amounts.......... 8,644 9,046 9,406 9,533 9,519 9,926 9,897 10,000 10,024 10,278
(*) Quarterly per share amounts do not equal the annual per share total as a
result of rounding.
88
As a Percentage of Net Revenues
--------------------------------------------------------------------------------------------
Jan. 2, April 3, July 3, Oct. 2, Jan. 1, April 1, July 1, Sept. 30, Dec. 30, March 31,
1999 1999 1999 2000 2000 2000 2000 2000 2000 2000
------- -------- ------- ------- ------- -------- ------- --------- -------- ---------
Net revenues
Product................ 67.11 % 72.78% 73.93% 77.26% 71.72% 73.83% 75.24% 78.22% 77.96% 67.79%
Maintenance............ 32.89 27.22 26.07 22.74 28.28 26.17 24.76 21.78 22.04 32.21
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net revenues.... 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Cost of revenues
Product................ 17.36 18.06 17.86 15.08 17.56 14.62 15.37 16.03 15.97 16.63
Maintenance............ 7.46 6.93 7.04 8.28 6.64 7.23 5.98 5.17 5.30 6.70
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenues............. 24.81 24.99 24.90 23.36 24.20 21.85 21.34 21.20 21.27 23.33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Profit.......... 75.19 75.01 75.10 76.64 75.80 78.15 78.66 78.80 78.73 76.67
Operating Expenses:
Research and
development........... 26.58 25.09 22.72 21.99 21.12 23.53 22.76 20.35 21.46 26.15
Sales and marketing.... 40.59 40.46 38.10 36.59 38.44 34.29 33.41 31.92 34.64 41.48
General and
administration........ 7.96 7.39 7.35 7.67 6.84 7.67 6.67 7.85 7.54 8.40
Amortization of
intangibles........... 0.91 0.75 0.69 0.63 0.54 0.25 0.23 0.19 0.20 0.24
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............. 76.03 73.70 68.85 66.89 66.93 65.74 63.07 60.31 63.84 76.27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (0.85) 1.32 6.25 9.75 8.87 12.41 15.59 18.48 14.89 0.40
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Interest and other
income................. 1.30 0.97 0.74 0.63 0.60 0.59 1.07 1.03 1.04 2.25
Income before provision
for income taxes....... 0.46 2.29 6.99 10.38 9.46 13.00 16.66 19.52 15.93 2.63
Provision for income
taxes.................. 0 0.40 1.77 2.03 2.37 3.21 4.18 4.85 4.09 0.66
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income............ 0.46 % 1.89% 5.22% 8.36% 7.10% 9.79% 12.49% 14.66% 11.84% 1.99%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net Revenues. Product revenues generally increased in each of the quarters
during the period from January 2, 1999 through December 30, 2000, except for
the quarters ended January 1, 2000 and December 30, 2000 primarily due to
increased sales of emulation products, partially offset by declines in the
simulation product line. The minor declines in the quarters ended January 1,
2000 and December 30, 2000 were due to seasonal factors. The decline in the
quarter ending March 31, 2001 was due to the sharp curtailment of capital
equipment spending by customers due to the overall slowdown in the United
States economy. Maintenance revenues have generally increased with product
revenues over the same time period because maintenance is billed as a
percentage of revenue.
Gross Profit Margin. Because of the large amount of fixed costs in
manufacturing, gross profit margin improves as revenue increases. Consequently
gross profit margin increased from 75.2% of net revenues in the quarter ended
January 2, 1999 to 78.7% of net revenues in the quarter ended December 30, 2000
and then decreased to 76.7% of net revenues in the quarter ended March 31,
2001, consistent with revenue growth.
Operating Expenses. Operating expenses generally increased over the ten-
quarter period ended March 31, 2001 primarily due to headcount increasing from
256 employees to 313 and expenses associated with higher revenues.
Additionally, IKOS moved into a new facility in the quarter ending March 31,
2001, which added approximately $350,000 of expense per quarter.
Research and Development Expenses. Research and development expenses have
increased over the ten-quarter period ended March 31, 2001 due primarily to
headcount and salary increases. On a quarter-to-quarter basis, research
89
and development expenses varied primarily as a result of the timing of
prototype expenses related to the development of the next generation of
hardware products.
Sales and Marketing Expenses. Sales and marketing expenses have increased
over the ten-quarter period ended March 31, 2001 due primarily to increased
headcount, salaries and commission expenses.
General and Administrative Expenses. General and administrative expenses
have increased over the ten-quarter period ended March 31, 2001 due primarily
to increases in headcount, salaries and associated expenses.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." IKOS is required to implement SAB 101 no later than the quarter
ending September 29, 2001. IKOS is currently evaluating the impact of SAB 101
and is uncertain as to what impact, if any, SAB 101 will have on its revenues
and results of operations. The impact of SAB 101, if any, will be reported as a
change in accounting principle in accordance with FASB Statement No. 3. This
may result in a significant cumulative effect change in accounting adjustment
that would be reflected in IKOS' results of operations for the fiscal year
ended September 29, 2001.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires IKOS to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow, or foreign currency hedges, and
establishes accounting standards for reporting changes in the fair value of the
derivative instruments. Upon adoption, IKOS was required to adjust hedging
instruments to fair value in the balance sheet and recognize the offsetting
gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. IKOS adopted SFAS No. 133 as of October
1, 2000. The adoption of SFAS No. 133 did not have a material effect on IKOS'
results of operations or financial position.
Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2001, IKOS' investment portfolio consists of money market
funds, corporate-backed debt obligations and mortgaged-backed government
obligations generally due within one year. IKOS' primary objective with its
investment portfolio is to invest available cash while preserving principal and
meeting liquidity needs. In accordance with IKOS' investment policy, IKOS
places investments with high credit quality issuers and limits the amount of
credit exposure to any one issuer. These securities, which approximate
$14,765,000 and have an average interest rate of approximately 5.50%, are
subject to interest rate risks. However, based on the investment portfolio
contents and the ability of IKOS to hold these investments until maturity, IKOS
believes that if a significant change in interest rates were to occur, it would
not have a material effect on IKOS' financial condition, although there can be
no assurance of this.
In addition to its cash equivalents and short-term investments, IKOS enters
into derivative financial instruments such as forward exchange contracts to
hedge certain identifiable receivables denominated in Japanese yen. Any market
risks associated with these contracts and related underlying transactions are
deemed minimal.
90
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF IKOS
The following table contains information regarding beneficial ownership of
IKOS' common stock as of June 30, 2001 by all persons who, to the knowledge of
the Company, were:
. the beneficial owners of 5% or more of the outstanding shares of common
stock of IKOS;
. each director and director nominee of IKOS;
. the chief executive officer and the four other most highly compensated
executive officers of IKOS as of June 30, 2001 whose salary and bonus
for the fiscal year ended September 30, 2000 exceeded $100,000; and
. all current executive directors and officers of IKOS as a group.
Shares of IKOS common stock that are subject to options that are currently
exercisable or are exercisable within 60 days of June 30, 2001, are deemed
outstanding for purposes of computing the percentages of the person holding
such options, but are not deemed outstanding for purposes of computing the
percentages of any other persons. Percentage ownership is based on 9,087,905
shares of common stock outstanding as of June 30, 2001.
Shares Beneficially
Owned (2)
--------------------
Name of Beneficial Owner (1) Number Percentage
- ---------------------------- --------- ----------
Ramon A. Nunez (3)....................................... 254,996 2.74%
Gerald S. Casilli (4).................................... 252,758 2.77%
Robert Hum (5)........................................... 127,834 1.39%
Thomas Gardner (6)....................................... 37,333 *
William Stevens (7)...................................... 14,500 *
Glenn E. Penisten (8).................................... 30,115 *
Nader Fathi (9).......................................... 85,094 *
James R. Oyler (10)...................................... 24,500 *
Jackson Hu (11).......................................... 14,500 *
All directors and executive officers as a group (11
persons)................................................ 1,019,092 10.46%
- --------
* Less than one percent.
(1) Except as otherwise indicated, the address of each beneficial owner is
c/o IKOS, 79 Great Oaks Boulevard, San Jose, California 95119.
(2) This table is based on information supplied by officers, directors and
principal stockholders. Except as otherwise indicated in the footnotes to
the above table, the Company believes that the persons named in the table
have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(3) Includes 223,959 shares subject to options exercisable within 60 days of
June 30, 2001.
(4) Includes 39,875 shares subject to options exercisable within 60 days of
June 30, 2001.
(5) Includes 127,834 shares subject to options exercisable within 60 days of
June 30, 2001.
(6) Includes 12,333 shares subject to options exercisable within 60 days of
June 30, 2001.
(7) Includes 14,500 shares subject to options exercisable within 60 days of
June 30, 2001.
(8) Includes 22,000 shares subject to options exercisable within 60 days of
June 30, 2001.
(9) Includes 74,496 shares subject to options exercisable within 60 days of
June 30, 2001.
(10) Includes 22,000 shares subject to options exercisable within 60 days of
June 30, 2001.
(11) Includes 14,500 shares subject to options exercisable within 60 days of
June 30, 2001.
91
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SYNOPSYS
AND STOCKHOLDERS OF IKOS
The following is a description of the material differences between the
rights of holders of Synopsys common stock and IKOS common stock. While we
believe that the description covers the material differences between the two,
this summary may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents we refer
to for a more complete understanding of the differences between being a
stockholder of Synopsys and being a stockholder of IKOS. These documents are
filed as exhibits to the reports filed by Synopsys and IKOS with the Securities
and Exchange Commission.
IKOS' certificate of incorporation and bylaws, each as currently in effect,
govern your rights as a stockholder of IKOS. After completion of the merger,
you will become a stockholder of Synopsys. Synopsys' certificate of
incorporation and bylaws will govern your rights as a stockholder of Synopsys.
Both IKOS and Synopsys are incorporated under the laws of the State of
Delaware. Accordingly, the Delaware General Corporation Law will continue to
govern your rights as a stockholder after completion of the merger.
Common Stock
Each of Synopsys and IKOS have one class of common stock issued and
outstanding. Holders of Synopsys common stock and holders of IKOS common stock
are each entitled to one vote for each share held.
Preferred Stock
Both of the certificates of incorporation of Synopsys and IKOS provide that
our boards of directors are authorized to provide for the issuance of shares of
undesignated preferred stock in one or more series, and to fix the
designations, powers, preferences and rights of the shares of each series and
any qualifications, limitations or restrictions thereof. IKOS has authorized an
aggregate of 500,000 shares of Series G Preferred Stock for potential issuance
under its Stockholder Rights Plan. Synopsys has authorized an aggregate of
2,000,000 shares of Series A Participating Preferred Stock for potential
issuance under its Stockholder Rights Plan.
Board of Directors
Synopsys' certificate of incorporation provides that the number of
directors, which will constitute the whole Synopsys board shall be as specified
in Synopsys' bylaws. Synopsys' bylaws currently provide that the number of
directors shall not be fewer than five (5) nor more than nine (9), with the
actual number of directors to be determined by the board of directors.
Synopsys' board of directors currently consists of eight directors. Synopsys'
directors are elected for a term of one year or until their successors are
elected and qualified.
IKOS' board of directors currently consists of six directors. The number of
directors on IKOS' board may only be changed pursuant to a resolution adopted
by a majority of the total number of authorized directors. IKOS' directors are
elected for a term of one year and until their successors are elected or
qualified.
Removal of Directors
Any director of Synopsys, or the entire board, may be removed with or
without cause by the holders of a majority of Synopsys shares entitled to vote
at an election of directors. "Cause" is not defined in Synopsys' certificate of
incorporation or bylaws.
Any IKOS directors, or the entire board, may be removed from office with or
without cause but only by the affirmative vote of the holders of at least a
majority of the voting power of all of the then-outstanding shares of IKOS
capital stock entitled to vote generally in the election of directors, voting
together as a single class. "Cause" is not defined in IKOS' certificate of
incorporation or bylaws.
92
Filling Vacancies on the Board of Directors
Vacancies and newly created directorships in Synopsys' board may be filled
only by vote of at least two-thirds of the directors then in office, though
less than a quorum, or by a sole remaining director, except that in the event
a director is removed by the stockholders for cause, the stockholders shall be
entitled to fill the vacancy created as a result of such removal. If there are
no directors in office, then an election of directors may be held in the
manner provided by Delaware law.
Newly created directorships in IKOS' board resulting from any increase in
the authorized number of directors or any vacancies resulting from death,
resignation, retirement, disqualification or other cause may be filled either
by a majority vote of the directors in office, though less than a quorum, or
by the affirmative vote of the holders of at least a majority of all of the
outstanding shares of IKOS capital stock entitled to vote generally in the
election of directors, voting together as a single class.
Stockholder Action By Written Consent
Each of Synopsys' and IKOS' stockholders may take action at annual or
special meetings of stockholders. They may not take action by written consent.
Ability to Call Special Meetings
Special meetings of the Synopsys stockholders may be called by the chairman
of the board, president or chief executive officer and shall be called by the
chairman of the board or president or secretary at the request in writing of a
majority of the board.
Special meetings of the IKOS stockholders may be called by either a
majority of the total number of authorized directors, or by the holders of not
less than ten percent (10%) of all the shares entitled to cast votes at the
meeting.
Advance Notice Provisions For Stockholder Nominations and Proposals
The Synopsys bylaws allow stockholders to propose business to be brought
before an annual meeting of stockholders. In addition, the Synopsys bylaws
allow stockholders who are entitled to vote in the election of directors to
nominate candidates for election to Synopsys' board at a meeting of
stockholders. However, proposals and nominations may only be made by a
stockholder who has given proper, timely notice in writing to the Secretary of
Synopsys before the stockholder meeting.
Under Synopsys' bylaws, to be timely, notice of stockholder nominations or
proposals to be made at an annual meeting of stockholders must be received by
the Secretary of Synopsys not less than 120 calendar days in advance of the
date specified in the Synopsys proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders. If
Synopsys did not have an annual meeting the previous year or if the date of
the annual meeting for the current year has been changed by more than 30 days
from the date contemplated at the time of the previous year's proxy statement,
notice will also be timely if received by Synopsys a reasonable time before
the solicitation is made.
A stockholder's notice to Synopsys regarding the proposal of business must
set forth each of the following:
. a brief description of desired business to be brought before the annual
meeting and the reasons for conducting such business at the annual
meeting;
. any material interest of the stockholder in such business being
proposed.
. any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934 in
his capacity as a proponent to a stockholder proposal; and
. the name and address, as they appear on the corporation's books, of the
stockholder proposing such business and the class and number of shares
of the corporation which are beneficially owned by the stockholder.
93
A stockholder's notice to Synopsys regarding nomination of a director must
set forth each of the following:
. the name, age, business address, and residence address of each nominee
proposed in the notice;
. the principal occupation or employment of the nominee;
. the class and number of shares of Synopsys stock owned by the nominee;
. a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nominations are to be made
by the stockholder;
. any other information relating to such nominee that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, including that nominee's written consent to being
named in the proxy statement as a nominee and to serving as a director
if elected; and
. the name and address, as they appear on the corporation's books, of the
stockholder nominating a director and the class and number of shares of
the corporation which are beneficially owned by the stockholder.
Stockholder nominations and proposals will not be brought before any
Synopsys stockholder meeting unless the nomination or proposal was brought
before the meeting in accordance with Synopsys' stockholder advance notice
procedure.
The IKOS bylaws allow stockholders to propose business to be brought before
an annual meeting of stockholders or a special meeting of stockholders,
provided that, in the case of the latter, the notice of a special meeting of
stockholders provides for the business to be brought before the meeting. In
addition, the IKOS bylaws allow stockholders who are entitled to vote in the
election of directors to nominate candidates for election to IKOS' board at a
meeting of stockholders. However, proposals and nominations may only be made
by a stockholder who has given proper, timely notice in writing to the
Secretary of IKOS before the stockholder meeting.
Under IKOS' bylaws, to be timely, notice of stockholder proposals or
nominations to be made at an annual stockholder meeting must be received by
the Secretary of IKOS not less than 120 days in advance of the date that IKOS'
proxy statement was released to stockholders in connection with the previous
year's annual meeting. If IKOS did not have an annual meeting the previous
year or if the date of the annual meeting for the current year has been
changed by more than 30 calendar days from the date contemplated at the time
of the previous year's proxy statement, notice will also be timely if received
by IKOS no later than the close of business on the tenth day following the day
on which such notice of the date of the annual stockholder meeting was mailed
or such public disclosure was made. Under IKOS' bylaws, to be timely, notice
of stockholder proposals or nominations to be made at a special meeting of
stockholders must be received by the Secretary of IKOS no later than the close
of business on the tenth day following the day on which such notice of the
date of the special meeting of stockholders was mailed or such public
disclosure was made.
A stockholder's notice to IKOS regarding the proposal of business must set
forth each of the following:
. a brief description of the business desired to be brought before the
annual or special meeting of stockholders and the reasons for conducting
such business at the annual or special meeting of stockholders;
. the stockholder's name and address, as they appear on IKOS' books, of
the stockholder proposing such business and the class and number of
shares of IKOS stock beneficially owned by the stockholder; and
. any material interest of the stockholder in such business being
proposed.
94
A stockholder's notice to IKOS regarding nomination of a director must set
forth each of the following:
. the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated;
. a representation that the stockholder is a holder of record of stock of
IKOS entitled to vote for the election of directors on the date of such
notice and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
. a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations
are to be made by the stockholder;
. such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated,
by the board of directors; and
. the consent of each nominee to serve as a director of IKOS if elected.
Stockholder proposals and nominations will not be brought before any IKOS
stockholder meeting unless the proposal or nomination was brought before the
meeting in accordance with IKOS' stockholder notice procedure.
Amendment of Certificate of Incorporation
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote for the amendment, unless a higher vote is
required by the corporation's certificate of incorporation.
Synopsys' certificate of incorporation does not contain any provisions
requiring a vote greater than that required by Delaware law to amend its
certificate of incorporation.
In contrast, IKOS' certificate of incorporation requires the affirmative
vote of holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all of the then outstanding shares of IKOS capital stock
entitled to vote generally in the election of directors, voting together as a
single class, to amend or repeal provisions of the certificate of
incorporation regarding the (1) management of the business, (2) the adoption,
amendment or repeal of IKOS' bylaws, (3) the indemnification of the board of
directors, (4) the board's evaluation of tender or exchange offers, and offers
to effect any merger, consolidation, or sale of all or substantially all of
the assets of IKOS and (5) the requirement for the affirmative vote of sixty-
six and two-thirds (66 2/3%) percent of the voting power of outstanding shares
to amend or repeal the above provisions.
Amendment of Bylaws
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal bylaws, even though the board
may also be delegated such power.
Synopsys' board of directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of Synopsys' bylaws. In addition,
Synopsys' stockholders may also adopt, amend or repeal Synopsys' bylaws by the
affirmative vote of the holders of at least a majority of the voting power of
all of the then outstanding shares of Synopsys capital stock entitled to vote
generally in the election of directors, voting together as a single class.
95
IKOS' board of directors is expressly authorized to adopt, amend or repeal
IKOS' bylaws by majority vote of the total number of authorized directors
whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the board. IKOS' stockholders may also amend or repeal IKOS'
bylaws by the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the voting power of all of the then outstanding
shares of IKOS capital stock entitled to vote generally in the election of
directors, voting together as a single class.
State Anti-Takeover Statutes
Synopsys and IKOS are both subject to Section 203 of the Delaware General
Corporation Law, which under certain circumstances may make it more difficult
for a person who would be an "Interested Stockholder," as defined in Section
203, in our respective companies, to effect various business combinations with
either of us for a three-year period. Under Delaware law, a corporation's
certificate of incorporation or bylaws may exclude a corporation from the
restrictions imposed by Section 203. Our respective certificates of
incorporation and bylaws do not exclude us from the restrictions imposed under
Section 203.
Limitation of Liability of Directors
The Delaware General Corporation Law permits a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation or its
stockholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. Our respective certificates of incorporation include
such a provision to the maximum extent permitted by law. In addition, under the
terms of the merger agreement, Synopsys has agreed to fulfill and honor in all
respects the indemnification provisions in IKOS' certificate of incorporation
and bylaws with respect to the directors, officers, employees and agents of
IKOS prior to the merger for a period of six years following the completion of
the merger.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate that
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his duty of care.
Indemnification of Directors and Officers
The Delaware General Corporation Law permits a corporation to indemnify
directors and officers for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
Both Synopsys' and IKOS' bylaws provide that any person who was or is a
party or is threatened to be a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative, because
that person is or was a director or officer, or is or was serving at the
request of Synopsys or IKOS, as the case may be, as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, will be indemnified against expenses, including
attorney's fees, judgments, fines and amounts paid in settlement and held
harmless by Synopsys or IKOS, as the case may be, to the fullest extent
permitted by the Delaware General Corporation Law. The indemnification rights
conferred by Synopsys and IKOS are not exclusive of any other right to which
persons seeking indemnification may be entitled under any statute, Synopsys' or
IKOS' certificate of incorporation or bylaws, any agreement, vote of
stockholders or disinterested directors or otherwise. In addition, Synopsys and
IKOS are authorized to purchase and maintain insurance on behalf of their
directors and officers.
Additionally, Synopsys and IKOS shall pay expenses incurred by their
respective directors or officers in defending a civil or criminal action, suit
or proceeding because that person is a director or officer, in advance of the
final disposition of that action, suit or proceeding. However, such payment
will be made only if Synopsys
96
or IKOS, as the case may be, receives an undertaking by or on behalf of that
director or officer to repay all amounts advanced if it is ultimately
determined that he or she is not entitled to be indemnified by Synopsys or
IKOS, as authorized by the respective bylaws of Synopsys and IKOS.
Stockholder Rights Plans
Under Delaware law, every corporation may create and issue rights entitling
the holders of such rights to purchase from the corporation shares of its
capital stock of any class or classes, subject to any provisions in its
certificate of incorporation. The price and terms of such shares must be stated
in the certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
Synopsys
Synopsys has adopted a stockholder rights agreement. As with most
stockholder rights agreements, the terms of Synopsys' rights agreement are
complex and not easily summarized, particularly as they relate to the
acquisition of Synopsys' common stocks and to exercisability. This summary may
not contain all of the information that is important to you. Accordingly, you
should carefully read Synopsys' rights agreement, which has been filed with the
SEC.
Synopsys' rights agreement provides that each share of Synopsys' common
stock outstanding will have the right to purchase one one-thousandth of a
preferred share of Synopsys attached to it. The purchase price per one one-
thousandth of a preferred share of Synopsys under the agreement is $175,
subject to adjustment. Each share of Synopsys common stock issued in the merger
will have one right attached.
Initially, the rights under Synopsys' rights agreement are attached to
outstanding certificates representing Synopsys common stock and no separate
certificates representing the rights will be distributed. The rights will
separate from Synopsys common stock and be represented by separate certificates
10 days after someone acquires or commences a tender offer for 15% or more of
the outstanding Synopsys common stock.
After the rights separate from Synopsys' common stock, certificates
representing the rights will be mailed to record holders of the common stock.
Once distributed, the rights certificates alone will represent the rights.
All shares of Synopsys common stock issued prior to the date the rights
separate from the common stock will be issued with the rights attached. The
rights are not exercisable until the date the rights separate from the common
stock. The rights will expire on October 24, 2007, unless earlier redeemed or
exchanged by Synopsys.
If an acquiror obtains or has the right to obtain 15% or more of Synopsys
common stock, then each right will entitle the holder to purchase a number of
shares of Synopsys common stock having a then current market value equal to two
times the exercise price.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the purchase
price if an acquiror obtains 15% or more of Synopsys common stock and any of
the following occurs:
. Synopsys merges into another entity;
. an acquiring entity merges into Synopsys; or
. Synopsys sells more than 50% of its assets or earning power.
Under Synopsys' rights agreement, any rights that are or were owned by an
acquiror of more than 15% of Synopsys' respective outstanding common stock will
be null and void.
Synopsys' rights agreement contains exchange provisions which provide that
after an acquiror obtains 15% or more of Synopsys capital stock, but less than
50% of Synopsys' outstanding common stock, Synopsys' board of directors may, at
its option, exchange all or part of the then outstanding and exercisable rights
for
97
common shares. In such an event, the exchange ratio is one common share per
right, adjusted to reflect any stock split, stock dividend or similar
transaction.
The Synopsys board of directors may, at its option, redeem all of the
outstanding rights under the Synopsys rights agreement prior to the earlier of
(1) 10 days after the time that an acquiror obtains 15% or more of Synopsys'
outstanding common stock, or (2) the final expiration date of the rights
agreement. The redemption price under Synopsys' rights agreement is $.01 per
right. The right to exercise the rights will terminate upon the action of
Synopsys' board ordering the redemption of the rights and the only right of the
holders of the rights will be to receive the redemption price.
Holders of rights will have no rights as stockholders of Synopsys, including
the right to vote or receive dividends, simply by virtue of holding the rights.
Synopsys' rights agreement provides that the provisions of the rights
agreement may be amended by the board of directors prior to the date 10 days
after any person acquires 15% of Synopsys' common stock without the approval of
the holders of the rights. However, after the date any person acquires 15% of
Synopsys' common stock, the rights agreement may be amended without the consent
of the holders of the rights in order to cure any ambiguities or to make
changes which do not adversely affect the interests of the holders of the
rights (other than the acquiring person).
Synopsys' rights agreement contains rights that have anti-takeover effects.
The rights may cause substantial dilution to a person or group that attempts to
acquire Synopsys without conditioning the offer on a substantial number of
rights being acquired. Accordingly, the existence of the rights may deter
acquirors from making takeover proposals or tender offers. However, the rights
are not intended to prevent a takeover, but rather are designed to enhance the
ability of Synopsys' board to negotiate with an acquiror on behalf of all the
stockholders.
In addition, the rights should not interfere with a proxy contest.
IKOS
IKOS has also adopted into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of IKOS' rights agreement are complex
and not easily summarized, particularly as they relate to the acquisition of
IKOS' common stocks and to exercisability. This summary may not contain all of
the information that is important to you. Accordingly, you should carefully
read IKOS' rights agreement, which has been filed with the SEC.
IKOS' rights agreement provides that each share of IKOS' common stock
outstanding will have the right to purchase one one-hundredth of a preferred
share of IKOS attached to it. The purchase price per one one-hundredth of a
preferred share of IKOS under the agreement is $30, subject to adjustment.
Initially, the rights under IKOS' rights agreement are attached to
outstanding certificates representing IKOS common stock and no separate
certificates representing the rights will be distributed. The rights will
separate from IKOS common stock and be represented by separate certificates
approximately 10 days after someone acquires or commences a tender offer for
15% or more of the outstanding IKOS common stock.
After the rights separate from IKOS' common stock, certificates representing
the rights will be mailed to record holders of the common stock. Once
distributed, the rights certificates alone will represent the rights.
All shares of IKOS common stock issued prior to the date the rights separate
from the common stock will be issued with the rights attached. The rights are
not exercisable until the date the rights separate from the common stock. The
rights will expire on January 22, 2009, unless earlier redeemed or exchanged by
IKOS.
98
If an acquiror obtains or has the right to obtain 15% or more of IKOS common
stock, then each right will entitle the holder to purchase a number of shares
of IKOS common stock having a then current market value equal to the exercise
price divided by one-half the current market price of a share of IKOS common
stock.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value equal to the exercise
price divided by one-half the current market price of a share of acquiror
common stock if an acquiror obtains 15% or more of IKOS common stock and any of
the following occurs:
. IKOS common stock is exchanged or converted in an acquisition or merger
of IKOS;
. IKOS merges into another entity; or
. IKOS sells more than 50% of its assets or earning power.
Under IKOS' rights agreement, any rights that are or were owned by an
acquiror of more than 15% of IKOS' respective outstanding common stock will be
null and void.
IKOS' rights agreement contains exchange provisions which provide that after
an acquiror obtains 15% or more of IKOS capital stock, but less than 50% of
IKOS' outstanding common stock, IKOS' board of directors may, at its option,
exchange all or part of the then outstanding and exercisable rights for common
shares. In such an event, the exchange ratio is one common share per right,
adjusted to reflect any stock split, stock dividend or similar transaction.
The IKOS board of directors may, at its option, redeem all of the
outstanding rights under the IKOS rights agreement prior to the earlier of (1)
10 days after the time that an acquiror obtains 15% or more of IKOS'
outstanding common stock, or (2) the final expiration date of the rights
agreement. The redemption price under IKOS' rights agreement is $.001 per
right. The right to exercise the rights will terminate upon the action of IKOS'
board ordering the redemption of the rights and the only right of the holders
of the rights will be to receive the redemption price.
Holders of rights will have no rights as stockholders of IKOS, including the
right to vote or receive dividends, simply by virtue of holding the rights.
IKOS' rights agreement provides that the provisions of the rights agreement
may be amended by the board of directors prior to the date 10 days after any
person acquires 15% of IKOS' common stock without the approval of the holders
of the rights. However, after the date any person acquires 15% of IKOS' common
stock, the rights agreement may be amended without the consent of the holders
of the rights in order to cure any ambiguity, to correct or supplement any
provisions, to shorten or lengthen any time period under the rights agreement
or to make changes which do not adversely affect the interests of the holders
of the rights (other than the acquiring person).
In connection with the merger agreement, IKOS has executed an amendment to
its rights agreement, dated July 2, 2001 pursuant to which neither Synopsys nor
Oak Merger Corporation shall be deemed "acquiring persons" (as defined in the
rights agreement) under the terms of the rights agreement by virtue of the
approval, execution, delivery or performance of the merger agreement and
pursuant to which the execution, delivery and the performance of the merger
agreement shall not result in a "distribution date" (as defined in the rights
agreement).
IKOS' rights agreement contains rights that have anti-takeover effects. The
rights may cause substantial dilution to a person or group that attempts to
acquire IKOS without conditioning the offer on a substantial number of rights
being acquired. Accordingly, the existence of the rights may deter acquirors
from making takeover proposals or tender offers. However, the rights are not
intended to prevent a takeover, but rather are designed to enhance the ability
of IKOS' board to negotiate with an acquiror on behalf of all the stockholders.
In addition, the rights should not interfere with a proxy contest.
99
EXPERTS
The consolidated financial statements and schedule of Synopsys, Inc. and
subsidiaries as of October 31, 2000 and 1999 and September 30, 1999, and for
the year ended October 31, 2000, the one-month period ended October 31, 1999,
and each of the years in the two-year period ended September 30, 1999, included
in its annual report on Form 10-K, have been incorporated by reference herein,
and in the registration statement in reliance upon the reports of KPMG LLP,
independent auditors, incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements and schedule of IKOS Systems, Inc. at
September 30, 2000 and October 2, 1999, and for each of the three years in the
period ended September 30, 2000, included in the proxy statement of IKOS
Systems, Inc. which is referred to and made a part of this prospectus and
registration statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Synopsys common stock offered by this proxy
statement/prospectus and the federal income tax consequences in connection with
the merger will be passed upon for Synopsys by Brobeck, Phleger & Harrison LLP,
Palo Alto, California. Certain legal matters with respect to federal income tax
consequences in connection with the merger will be passed upon for IKOS by Gray
Cary Ware & Freidenrich LLP, Palo Alto, California.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, IKOS stockholders may present
proper proposals for inclusion in IKOS' proxy statement and for consideration
at the next annual meeting of IKOS stockholders by submitting their proposals
to IKOS in a timely manner.
IKOS has already held its 2001 annual meeting of stockholders. It is
anticipated that the merger will be completed in August, 2002, which is after
the anticipated date of the annual meeting of IKOS stockholders in January,
2002. However, it is possible that the merger will be completed before the
anticipated date of the annual meeting of IKOS stockholders if both Synopsys
and IKOS consent. IKOS will hold an annual meeting in the year 2002 only if the
merger has not been completed. If the 2002 annual meeting is held, proposals of
IKOS stockholders that are intended to be presented by stockholders at IKOS'
2002 annual meeting of stockholders must be received by IKOS at its corporate
offices not less than 120 calendar days in advance of the one year anniversary
of the date the IKOS' proxy statement was released to IKOS stockholders in
connection with the previous year's annual meeting of stockholders; except that
(i) if no annual meeting was held in the previous year, (ii) if the date of the
annual meeting has been changed by more than thirty calendar days from the date
contemplated at the time of the previous year's proxy statement, or (iii) in
the event of a special meeting, then notice must be received not later than the
close of business on the tenth day following the day on which notice of the
date of the meeting was mailed or public disclosure of the meeting date was
made.
Proposals of IKOS stockholders intended to be presented at the next annual
meeting of IKOS stockholders (i) must be received by the IKOS at its offices at
79 Great Oaks Avenue, San Jose, California 95119 no later than August 27, 2001
and (ii) must satisfy the conditions of Rule 14a-8 of the Securities Exchange
Act of 1934 relating to stockholder proposals to be included in IKOS' proxy
statement for that meeting.
100
WHERE YOU CAN FIND MORE INFORMATION
IKOS and Synopsys file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public from commercial
document retrieval services and at the Internet website maintained by the SEC
at http://www.sec.gov.
Synopsys filed a registration statement on Form S-4 to register with the SEC
Synopsys common stock to be issued to IKOS stockholders in the merger. This
proxy statement/prospectus is a part of that registration statement and
constitutes the prospectus of Synopsys as well as being a proxy statement of
IKOS for the IKOS special meeting.
Synopsys has supplied all the information contained in this proxy
statement/prospectus relating to Synopsys and IKOS has supplied all such
information relating to IKOS. As allowed by SEC rules, this proxy
statement/prospectus does not contain all of the information relating to
Synopsys and IKOS, which you can find in the registration statement or the
exhibits to the registration statement or which is filed with the SEC.
Some of the important business and financial information relating to
Synopsys that you may want to consider in deciding how to vote is not included
in this proxy statement/prospectus, but rather is "incorporated by reference"
from documents that have been previously filed by Synopsys with the SEC. The
information incorporated by reference is deemed to be a part of this proxy
statement/prospectus, except for any information superseded by information
contained directly in this proxy statement/prospectus.
If you are an IKOS stockholder, you can obtain any of the documents
incorporated by reference through Synopsys or the SEC. Documents incorporated
by reference are available from Synopsys without charge, excluding all
exhibits. You may obtain documents incorporated by reference in this proxy
statement/prospectus free of charge by requesting them orally or in writing to
the following addresses or by telephone:
Synopsys, Inc.
Investor Relations
700 East Middlefield Road
Mountain View, CA 94043
(650) 584-4257
To ensure timely delivery, you must make this request no later than five
business days before the special meeting or [ , 2001].
You should rely only on the information contained in or incorporated by
reference in this proxy statement/prospectus to vote on the merger. We have not
authorized anyone to provide you with information that is different from what
is contained in this proxy statement/prospectus. You should not assume that the
information contained in the proxy statement/prospectus is accurate as of any
date other than the date hereof, and neither the mailing of this proxy
statement/prospectus to IKOS stockholders nor the issuance of Synopsys common
stock in the merger shall create any implication to the contrary.
101
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Synopsys files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document Synopsys
files at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the Public Reference Room. Synopsys' SEC
filings are also available to the public from Synopsys' web site at
http://www.synopsys.com or at the SEC's website at http://www.sec.gov.
The SEC allows Synopsys to "incorporate by reference" the information
Synopsys files with the SEC, which means that Synopsys can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this proxy
statement/prospectus, and later information filed with the SEC will update and
supersede this information. Synopsys incorporates by reference the documents
listed below and any future filings made with the SEC under Section 13(a),
13(c), 14, or 15(d) of the Securities and Exchange Act of 1934, as amended
until this merger is completed:
1. Synopsys' Annual Report on Form 10-K for the fiscal year ended
October 31, 2000, filed January 26, 2001 (as amended by the Form 10-K/A
filed on February 13, 2001 and February 23, 2001), including certain
information in Synopsys' Definitive Proxy Statement proposal in connection
with Synopsys' 2001 Annual Meeting of Stockholders;
2. Synopsys' Quarterly Reports on Form 10-Q for the fiscal quarters
ended January 31, 2001 and April 30, 2001 filed March 20, 2001 and June 15,
2001, respectively;
3. Synopsys' Current Reports on Form 8-K filed on December 8, 2000 and
December 22, 2000;
4. The description of Synopsys' common stock contained in Synopsys'
Registration Statement on Form 8-A on January 24, 1992, including any
amendment or report filed for the purpose of updating such description; and
5. The description of Synopsys' Series A Participating Preferred Stock
contained in Synopsys' Registration Statement of Form 8-A filed under
Section 12 of the Exchange Act with the SEC on October 31, 1997, including
any amendment or report filed for the purpose of updating such description.
You may request a copy of Synopsys' filings, free of charge, by writing or
telephoning Synopsys at the following address:
Synopsys, Inc.
Investor Relations
700 East Middlefield Road
Mountain View, CA 94043
(650) 584-4257
You must request this information no later than five business days before
the date of the special meeting or [ , 2001] to ensure timely delivery.
102
INDEX TO FINANCIAL STATEMENTS OF IKOS SYSTEMS, INC.
The following financial documents of IKOS Systems, Inc. are filed as part of
this prospectus/proxy statement:
(1) Annual Financial Statements:
Page
----
Report of Ernst & Young LLP, Independent Auditors...................... F-2
Consolidated Balance Sheets, September 30, 2000 and October 2, 1999.... F-3
Consolidated Statements of Operations for the fiscal years ended
September 30, 2000, October 2, 1999 and October 3, 1998............... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended September 30, 2000, October 2, 1999 and October 3, 1998......... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2000, October 2, 1999 and October 3, 1998............... F-6
Notes to Consolidated Financial Statements............................. F-7
(2) Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts.......................... F-20
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto
which are included herein.
(3) Quarterly Financial Statements:
Condensed Consolidated Balance Sheets, March 31, 2001 and September 30,
2000.................................................................. F-21
Condensed Consolidated Statements of Income for the three months and
the six months ended March 31, 2001 and April 1, 2000................. F-22
Condensed Consolidated Statements of Cash Flows for the six months
ended March 31, 2001 and April 1, 2000................................ F-23
Notes to Condensed Consolidated Financial Statements................... F-24
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
IKOS Systems, Inc.
We have audited the accompanying consolidated balance sheets of IKOS
Systems, Inc., as of September 30, 2000 and October 2, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended September 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IKOS Systems,
Inc., at September 30, 2000 and October 2, 1999, and the consolidated results
of its operations and its cash flows for each of the three fiscal years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
San Jose, California
October 23, 2000
F-2
IKOS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amounts)
September 30, October 2,
2000 1999
------------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 12,032 $ 7,664
Short-term investments.............................. 7,771 2,870
Accounts receivable (net of allowances for doubtful
accounts of $645 and $801, respectively)........... 19,716 10,549
Inventories......................................... 3,997 3,455
Prepaid expenses and other assets................... 578 435
-------- --------
Total current assets.............................. 44,094 24,973
Equipment and leasehold improvements:
Office and evaluation equipment..................... 6,782 5,663
Machinery and equipment............................. 11,487 10,513
Leasehold improvements.............................. 2,640 718
-------- --------
20,909 16,894
Less allowances for depreciation and
amortization..................................... (14,534) (11,832)
-------- --------
6,375 5,062
Intangible assets (net of amortization of $924 and
$716, respectively)................................ 883 1,146
Other assets........................................ 653 609
-------- --------
$ 52,005 $ 31,790
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable....................................... $ 1,809 $ --
Accounts payable.................................... 5,446 3,763
Accrued payroll and related expenses................ 3,549 2,709
Accrued commissions................................. 2,094 1,052
Income taxes payable................................ 3,252 1,019
Other accrued liabilities........................... 2,511 2,815
Deferred revenues................................... 8,388 5,337
-------- --------
Total current liabilities......................... 27,049 16,695
Accrued rent.......................................... 92 64
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized, none issued and outstanding............ -- --
Common stock, $.01 par value; 50,000 shares
authorized, 8,797 and 8,797 shares issued and 8,778
and 8,401 outstanding, respectively................ 88 88
Additional paid-in capital.......................... 57,791 58,312
Treasury stock, at cost, 19 shares in 2000 and 396
in 1999............................................ (126) (2,536)
Accumulated adjustments to comprehensive income..... (842) (498)
Accumulated deficit................................. (32,047) (40,335)
-------- --------
Total stockholders' equity........................ 24,864 15,031
-------- --------
$ 52,005 $ 31,790
======== ========
See notes to consolidated financial statements.
F-3
IKOS SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
Fiscal Years Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Net revenues:
Product................................. $54,652 $41,258 $ 27,724
Maintenance............................. 18,144 15,075 13,169
------- ------- --------
Total net revenues.................... 72,796 56,333 40,893
Cost of revenues:
Product................................. 11,545 9,578 12,952
Maintenance............................. 4,486 4,200 1,782
------- ------- --------
Total cost of revenues................ 16,031 13,778 14,734
------- ------- --------
Gross profit.......................... 56,765 42,555 26,159
Operating expenses:
Research and development................ 15,912 13,443 14,381
Sales and marketing..................... 24,913 21,822 18,609
General and administration.............. 5,311 4,267 4,247
Acquired in process research and
development and special charges........ -- -- 7,600
Amortization of intangibles............. 209 412 4,679
------- ------- --------
Total operating expenses.............. 46,345 39,944 49,516
------- ------- --------
Income (loss) from operations............. 10,420 2,611 (23,357)
Other income:
Interest income......................... 618 495 1,031
------- ------- --------
Income (loss) before provision for income
taxes.................................... 11,038 3,106 (22,326)
Provision for income taxes................ 2,750 650 4,928
------- ------- --------
Net income (loss)..................... $ 8,288 $ 2,456 $(27,254)
======= ======= ========
Earnings (loss) per share:
Basic net income (loss)................... $ 0.97 $ 0.30 $ (3.24)
======= ======= ========
Common and common equivalent shares used
in computing basic per share amounts..... 8,563 8,306 8,418
------- ------- --------
Diluted net income (loss)................. $ 0.84 $ 0.27 $ (3.24)
======= ======= ========
Common and common equivalent shares used
in computing basic per share amounts..... 9,836 9,140 8,418
======= ======= ========
See notes to consolidated financial statements.
F-4
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Adjustments
Common Stock Treasury Stock Additional to Total
Comprehensive ------------- -------------- Paid-in Comprehensive Accumulated Stockholders'
Income Shares Amount Shares Amount Capital Income Deficit Equity
------------- ------ ------ ------ ------- ---------- ------------- ----------- -------------
Balance at September 27,
1997................... 8,611 $85 (32) $ (341) $58,014 $(231) $(15,537) $ 41,990
Net issuance of stock
under employee benefit
plans.................. 186 2 (17) (130) 761 -- -- 633
Acquisition of treasury
stock.................. -- -- (387) (2,673) -- -- -- (2,673)
Net loss................ $(27,254) -- -- -- -- -- -- (27,254) (27,254)
Net accumulated
translation losses..... (83) -- -- -- -- -- (83) -- (83)
-------- ----- --- ---- ------- ------- ----- -------- --------
Total comprehensive
income................. $(27,337)
========
Balance at October 3,
1998................... 8,797 87 (436) (3,144) 58,775 (314) (42,791) 12,613
Net issuance of stock
under employee benefit
plans.................. -- 1 170 1,015 (463) -- -- 553
Acquisition of treasury
stock.................. -- -- (130) (407) -- -- -- (407)
Net income.............. $ 2,456 -- -- -- -- -- -- 2,456 2,456
Net accumulated
translation losses..... (184) -- -- -- -- -- (184) -- (184)
-------- ----- --- ---- ------- ------- ----- -------- --------
Total comprehensive
income................. $ 2,272
========
Balance at October 2,
1999................... 8,797 88 (396) (2,536) 58,312 (498) (40,335) 15,031
Net issuance of stock
under employee benefit
plans.................. -- -- 377 2,410 (521) -- -- 1,889
Net income.............. $ 8,288 -- -- -- -- -- -- 8,288 8,288
Net accumulated
translation losses..... (344) -- -- -- -- -- (344) -- (344)
-------- ----- --- ---- ------- ------- ----- -------- --------
Total comprehensive
income................. $ 7,944
========
Balance at September 30,
2000................... 8,797 $88 (19) $ (126) $57,791 $(842) $(32,047) $ 24,864
===== === ==== ======= ======= ===== ======== ========
See notes to consolidated financial statements.
F-5
IKOS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents in thousands
(In thousands)
Fiscal Years Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Operating activities:
Net income (loss)........................ $ 8,288 $ 2,456 $(27,254)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 3,688 2,903 7,189
Accumulated translation adjustments.... (344) (184) (83)
Special charges........................ -- -- 7,600
Deferred income taxes.................. -- -- 4,577
Accrued rent........................... 28 (92) (56)
Changes in operating assets and
liabilities:
Accounts receivable.................... (9,167) (4,516) 6,195
Inventories............................ (542) 361 988
Prepaid expenses and other current
assets................................ (143) 101 123
Other assets........................... (44) (213) 176
Accounts payable....................... 1,683 (1,026) 1,716
Accrued payroll and related expenses... 840 855 (583)
Accrued commissions.................... 1,042 251 59
Income taxes payable................... 2,233 (166) 113
Other accrued liabilities.............. (250) (1,535) 249
Deferred revenues...................... 3,051 (2,259) 2,473
------- ------- --------
Net cash provided by (used in)
operating activities................ 10,363 (3,064) 3,482
Investing activities:
Purchases of equipment and leasehold
improvements............................ (4,792) (2,230) (3,235)
Purchase of Deerbrook Systems, Inc. ..... -- -- (500)
Purchase of Interra, Inc. technology..... -- -- (6,490)
Purchase of short-term investments....... (8,744) (4,465) (14,047)
Maturities of short-term investments..... 3,843 9,112 21,859
------- ------- --------
Net provided by (cash used)
investment activities............... (9,693) 2,417 (2,413)
Financing activities:
Proceeds from short-term borrowings...... 1,809 --
Payments on long-term borrowings......... -- -- (350)
Net sale of common stock................. 1,889 553 633
Acquisition of treasury stock............ -- (407) (2,673)
------- ------- --------
Net cash provided by (used in)
financing activities................ 3,698 146 (2,390)
------- ------- --------
Increase (decrease) in cash and cash
equivalents............................... 4,368 (501) (1,321)
Cash and cash equivalents at beginning of
year...................................... 7,664 8,165 9,486
------- ------- --------
Cash and cash equivalents at end of year... $12,032 $ 7,664 $ 8,165
======= ======= ========
Supplemental disclosures of cash flow
information:
Net cash paid for income taxes....... $ 322 $ 817 $ 337
Supplemental disclosure of noncash
financing activities:
Issuance of commons stock under employee
benefit plans in exchange for common
stock..................................... -- -- $ 130
See notes to consolidated financial statements.
F-6
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of operations. The Company develops, manufactures, markets and
supports verification systems for integrated circuit designs. The Company's
strategy is to serve the needs of a growing universe of IC designers for fast,
accurate verification of complex IC designs through its family of simulation
and emulation systems. The Company performs final assembly and test of all of
its products in its Cupertino, California facility and utilizes third parties
for all major subassembly manufacturing. Certain key components used in the
Company's products are presently available from sole or limited sources. The
Company is dependent upon these suppliers to provide these components on a
timely basis. The Company sells its products to a broad range of customers in
the communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries.
Basis of presentation. The accompanying consolidated financial statements
include the Company and its wholly owned subsidiaries after elimination of all
significant inter-company accounts and transactions.
Fiscal year. The Company is on a 52-53 week fiscal year. Accordingly,
September 30, 2000, October 2, 1999 and October 3, 1998 are the fiscal year-
ends for 2000, 1999 and 1998, respectively. Fiscal 2000 and 1999 were 52 week
fiscal years. Fiscal year 1998 was a 53 week fiscal year.
Cash Equivalents and Short-Term Investments. All liquid investments with
original maturities of three months or less when purchased are considered to be
cash equivalents and are stated at cost, which approximates their fair market
value. At September 30, 2000, cash equivalents consisted of money market funds,
certificates of deposits and U.S. corporate overnight securities. Short-term
investments are stated at cost, which approximates fair market value, and
consist primarily of U.S. corporate-backed securities and mortgage-backed
government obligations all due within one year. The Company is exposed to
credit risks in the event of default by the financial institutions or issuers
of investments to the extent of amounts recorded on the balance sheet.
Under Statements of Financial Accounting Standards No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that the Company has both positive intent and ability to hold to
maturity are carried at amortized cost. Debt securities that the Company does
not have the positive intent and ability to hold to maturity and all marketable
equity securities are classified as available-for-sale or trading and carried
at fair value. Unrealized holding gains and losses on securities classified as
available-for-sale are reported as part of equity while unrealized holding
gains and losses on securities classified as trading are reported in earnings.
At September 30, 2000, all securities are designated as held to maturity.
The fair values for marketable debt securities are based on quoted market
prices. The fair value of marketable securities is substantially equal to their
carrying values as of September 30, 2000 and October 2, 1999.
F-7
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of held-to-maturity securities at September 30,
2000 and October 2, 1999 (in thousands):
September 30, October 2,
2000 1999
------------- ----------
U.S. Treasury Securities........................... $ 2,060 $ --
U.S. Corporate Securities.......................... 6,804 --
Mortgage-Backed Securities......................... 4,026 2,870
------- ------
$12,890 $2,870
======= ======
Amounts included in short-term investments......... $ 7,771 $2,870
======= ======
Amounts included in cash and cash equivalents...... $ 5,119 $ --
======= ======
Inventories. Inventories are stated at the lower of cost (first-in, first-
out method) or market (estimated net realizable value). Inventories consist of
the following (in thousands):
September 30, October 2,
2000 1999
------------- ----------
Raw materials....................................... $ 951 $ 818
Work-in-process..................................... 1,386 1,435
Finished goods...................................... 1,660 1,202
------ ------
$3,997 $3,455
====== ======
Equipment and Leasehold Improvements. Equipment and leasehold improvements
are stated at cost and are depreciated or amortized using the straight-line
method over the estimated useful life (generally two to five years) of the
related asset, or in the case of leasehold improvements, the term of the lease,
if shorter.
Goodwill, Software Development Costs and Other Long-Lived Assets. The
Company periodically reviews and evaluates its recorded goodwill and other
long-lived assets for impairment. During the fourth quarter of 1998, the
Company evaluated and concluded that based on the strategic changes and the
current form of the emulation technology, the original technology acquired from
Virtual Machine Works, Inc. (VMW) would no longer be used, and thus, the
unamortized intangibles associated with the original transaction were written
off. The Company recorded a charge to operations of approximately $3,200,000.
There were no write-downs of intangible assets in fiscal 1999 or 2000.
The Company capitalizes software development costs upon achievement of
technological feasibility, subject to net realizable value considerations in
accordance with Statement of Financial Accounting Standards No. 86. The Company
has defined technological feasibility as completion of a working model. Such
capitalized costs are amortized upon product release on a straight-line basis
over the estimated useful life of two years or the ratio of current revenue to
the total of current and anticipated future revenues, whichever is greater. For
each of the three fiscal years ended September 30, 2000 capitalizable costs
were insignificant and thus charged to research and development expenses for
the respective periods in the accompanying financial statements.
Revenue Recognition. The Company recognizes revenue when the earning process
is complete, evidenced by an agreement between the Company and the customer,
delivery has occurred, collectibility is probable, and pricing is fixed or
determinable. If significant obligations remain after delivery, revenue is
deferred until such obligations are fulfilled. Revenues from maintenance
arrangements are recognized ratably over the term of the related contract.
F-8
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warranty. The Company warrants products sold to customers for ninety days
from shipment and such warranty covers repairs or replacement due to defects in
the delivered product. A provision for the estimated future cost of warranty is
recorded upon delivery.
Employee Stock Plans. The Company accounts for its stock option and employee
stock purchase plans in accordance with provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation."
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 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.
Such estimates related to the useful lives of fixed assets, allowances for
doubtful accounts and customer returns, inventory write-downs, other reserves
and income tax valuation allowances. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.
Translation of Foreign Currencies. For foreign operations with the local
currency as the functional currency, the translation of the applicable foreign
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. The gains or
losses resulting from translation are included in accumulated other
comprehensive income in the accompanying balance sheets. The Company also
recognizes foreign currency transaction gains and losses from its international
operations. Such gains or losses are charged to operations and have been
immaterial to the Company's operating results.
Derivative Financial Instruments. The Company enters into derivative
financial instruments such as forward exchange contracts to hedge certain
identifiable receivables denominated in Japanese yen against fluctuations in
exchange rates until such receivables are collected. The Company does not enter
into forward foreign contracts for speculative or trading purposes. The
Company's accounting policies for these contracts are based on the Company's
designation of the contracts as hedging transactions. The criteria the Company
uses for designating a contract as a hedge includes the contract's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. As such, the impact of exchange rate
changes on these contracts is offset by the impact of the changes in the rate
on the underlying transactions. Therefore, any market risks associated with
these contracts and related underlying transactions are considered minimal. As
of September 30, 2000, the Company did not have any foreign forward exchange
contracts outstanding.
F-9
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income (Loss) Per Share. The Company computes earnings per share in
accordance with the Financial Accounting Standards Board "(FASB) Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic earnings per
share is computed using weighted options outstanding for the period and
excluding the dilutive effect of stock options and warrants. Dilutive per share
data is computed using the weighted-average common and dilutive common
equivalent shares outstanding. The following table sets forth the computation
of basic and dilutive per share data:
Fiscal Years Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Basic Earnings (Loss) Per Share:
Net Income (loss)......................... $8,288 $2,456 $(27,254)
====== ====== ========
Weighted-average common shares
outstanding.............................. 8,563 8,306 8,418
====== ====== ========
Basic net income (loss) per share......... $ 0.97 $ 0.30 $ (3.24)
====== ====== ========
Dilutive Earnings (Loss) Per Share:
Net Income (loss)......................... $8,288 $2,456 $(27,254)
====== ====== ========
Weighted-average common shares
outstanding.............................. 8,563 8,306 8,418
Common equivalent shares attributable to
options (treasury stock method).......... 1,273 834 --
------ ------ --------
Total weighted-average common shares
outstanding............................ 9,836 9,140 8,418
====== ====== ========
Dilutive net income (loss) per share...... $ 0.84 $ 0.27 $ (3.24)
====== ====== ========
Outstanding options and warrants to purchase approximately 68,000, 214,000
and 1,706,000 shares, for the fiscal years 2000, 1999 and 1998, respectively,
were not included in the treasury stock calculation to derive diluted net
income (loss) per share as their inclusion would have had an anti-dilutive
effect.
Impact of Recently Issued Accounting Standards. In December 1999, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition in Financial Statements". In March 2000,
SAB 101 was amended by SAB 101A which delayed the implementation date of SAB
101 for calendar year end reporting companies, including IKOS, to the quarter
ending September 30, 2000. In June 2000, SAB 101 was amended a second time by
SAB101B further delaying the implementation date to no later than the quarter
ending September 29, 2001. The Company is currently evaluating the impact of
SAB 101 and is uncertain as to what impact, if any, SAB 101 will have on its
revenues and results of operations. The impact of SAB 101, if any, will be
reported as a change in accounting principle in accrodance with FASB Statement
No. 3. This may result in a significant cumulative effect change in accounting
adjustment that would be reflected in the Company's results of operations for
the fiscal year ended September 29, 2001.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the company's financial
position or results of operations.
F-10
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires the Company to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. It further provides criteria for derivative instruments to be
designated as fair value, cash flow, or foreign currency hedges, and
establishes accounting standards for reporting changes in the fair value of the
derivative instruments. Upon adoption, the Company will be required to adjust
hedging instruments to fair value in the balance sheet and recognize the
offsetting gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. The Company will adopt SFAS No. 133 in
fiscal 2001. Management does not believe the adoption of SFAS No. 133 will have
a material effect on the Company's results of operations or financial position.
2. Acquisition
Interra, Inc. In May 1998, the Company acquired certain technology and
research and development expertise from Interra, Inc. and its affiliate,
Delsoft India Pvt. Limited. The purchase price paid, including costs of the
transaction, was approximately $9,040,000. All amounts due under this purchase
agreement have been paid. During 1998, the Company recorded a charge of
approximately $7,600,000 related to the acquired technology to in-process
research and development. The evaluation of the underlying technology acquired
considered the inherent difficulties and uncertainties in completing the
development of the technology, and thereby achieving technological feasibility,
and the risks related to the viability of and potential changes in future
target markets. The underlying technology had no alternative use (in other
research and development projects or otherwise) since the technology was
acquired for the sole purpose of developing simulation and emulation products.
In connection with the technology acquisition, the Company recorded as an asset
approximately $1,400,000 for the acquired workforce and other intangibles,
which are to be amortized over 8 years. As of September 30, 2000, approximately
$883,000 remains to be amortized.
3. Borrowing Arrangements
In March 2000, the Company negotiated a $3,000,000 working capital line of
credit and $1,500,000 equipment line of credit with its bank. The agreement
expires one year from the commencement date of March 31, 2000 and is renewable
at the option of both parties. The lines are collateralized by the assets of
the Company. Any borrowings under the line of credit and equipment line bear
interest at the rate of 9.50% and 9.75%, respectively. At September 30, 2000,
the total amount utilized under the lines was approximately $3,309,000. Of the
total amount utilized, approximately $1,500,000 of the working capital line is
reserved as collateral against certain letter of credit arrangements the
Company has with its new landlords and approximately $1,809,000 was utilized to
fund its leasehold improvements at the Company's new headquarter facility. At
September 30, 2000, approximately $1,200,000 remained available for use by the
Company. Subsequent to the September 2000, the Company repaid the entire
outstanding balance. Under the terms of the credit facility, the Company is
required to maintain certain financial covenants. At September 30, 2000, the
Company was in compliance with all covenants.
4. Operating Leases
The Company's current building lease was originally scheduled to expire in
September 2000, but was extended through December 31, 2000. The Company will
then move to its new headquarters located in San Jose, California. The new
lease is a ten year lease commencing in January 2001. The Company has the
option to renew this building lease at its principal offices for up to an
additional ten years, commencing in December 2010, at approximately the fair
market value at the time of renewal.
F-11
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense approximated $1,961,885, $1,632,000 and $1,633,000, in fiscal
2000, 1999, 1998, respectively.
Future minimum payments (*) under non cancelable operating leases at
September 30, 2000 are as follows (in thousands):
Fiscal Year Amount
----------- -------
2001................................................................. $ 2,829
2002................................................................. 3,190
2003................................................................. 3,001
2004................................................................. 3,232
2005................................................................. 3,183
2006 and thereafter.................................................. 16,088
-------
Total.............................................................. $31,523
=======
- --------
(*) Includes the new headquarters operating lease which commences on January 1,
2001.
5. Stockholders' Equity
Preferred Stock Purchase Rights Plan. The Company has a Preferred Stock
Purchase Rights Plan (the "Rights Plan"), which provides existing shareholders
with the right to purchase 1/100 preferred share for each common share held in
the event of certain changes in the Company's ownership. The Rights Plan may
serve as a deterrent to takeover tactics, which are not in the best interests
of shareholders. Of the 10,000,000 preferred shares authorized, the Board of
Directors of the Company has designated 500,000 shares as Series G Preferred
Stock, $0.01 par value per share, and has reserved such shares for issuance
pursuant to the Company's Rights Plan.
Stock Repurchase. During fiscal 1998, the Company announced its intention to
repurchase up to 1,000,000 shares of its outstanding common stock on the open
market. Through September 30, 2000, the Company had repurchased 516,500 shares
at a weighted-average per share price of $5.96.
VMW Acquisition. In connection with the acquisition of (Virtual Machine
Works, Inc.) VMW in May 1996, the Company granted options to purchase
approximately 84,000 shares of common stock in exchange for VMW options. The
option prices range from $0.85-$2.54 and are included in the grants in the
table below. In connection with the acquisition, the Company also issued
warrants to purchase 25,000 shares of common stock at $23.50 per share in
return for professional services rendered. These warrants, which were valued at
approximately $200,000, were included as consideration in connection with the
acquisition. These warrants expire on April 19, 2001.
At September 30, 2000, options to purchase approximately 4,700 shares of
common stock and warrants to purchase 25,000 shares of common stock remain
outstanding. The Company has reserved approximately 29,700 shares of common
stock for issuance in connection with these options and warrants.
Stock Option Plans. In 1988, the Company established a Stock Option Plan
(the Plan) which provides for the granting of options to employees or directors
to purchase shares of the Company's common stock. During fiscal 1996, the
Company replaced the 1988 Stock Option Plan by establishing the 1995 Stock
Option Plan (the "1995 Plan"). The terms of the 1995 Plan are similar to the
1988 Plan. Any shares remaining available for grant under the 1988 Plan were
converted to the 1995 Plan, and an additional 750,000 shares were reserved for
future grants under the 1995 Plan. In connection with its 1997 Annual
Shareholders meeting, the
F-12
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company obtained approval whereby on the first day of each fiscal year of the
Company beginning after October 4, 1998, the maximum aggregate number of shares
of common stock issuable under the Company's 1995 plan will increase
automatically by that number of shares of common stock of the Company equal to
4.9% of the number of shares of the Company issued and outstanding on the last
day of the preceding fiscal year. During 1998, 1999 and 2000 an additional
430,000, 410,000 and 412,000, shares were reserved for future grants under the
1995 Plan, respectively.
In September 1998, the Board of Directors authorized the Company to offer
all employees the opportunity to cancel certain previously granted options in
exchange for new options with three year cliff vesting and a three year
expiration term at the then fair market value prices of $1.78 per share. In
connection with this offer, options to purchase 531,022 shares of common stock
with a weighted-average price of $6.93 were exchanged for new options.
The following table summarizes the activity for the stock option plans (in
thousands, except per share data):
Options and Rights Outstanding
--------------------------------------
Number Aggregate Price
of Shares Exercise Price Per Share
--------- -------------- -------------
(in thousands, except per share data)
Balance at September 27, 1997........... 1,484 $ 17,635 $0.850-28.375
Granted............................... 2,232 10,329 1.438-12.688
Exercised............................. (88) (359) 0.850-6.000
Forfeitures........................... (1,707) (19,748) 0.850-28.375
------ -------- -------------
Balance at October 3, 1998.............. 1,921 7,857 0.850-28.375
Granted............................... 777 2,863 1.406-11.000
Exercised............................. (29) (59) 0.850-9.125
Forfeitures........................... (260) (1,111) 1.438-28.375
------ -------- -------------
Balance at October 2, 1999.............. 2,409 9,550 0.850-25.00
Granted............................... 589 5,565 7.375-14.938
Exercised............................. (226) (849) 0.850-9.6875
Forfeitures........................... (250) (1,227) 1.438-10.875
------ -------- -------------
Balance at September 30, 2000........... 2,522 $ 13,039 $0.850-25.000
====== ======== =============
F-13
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding at
September 30, 2000:
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted-
Average
Number Remaining Weighted Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise at September 30, Life Exercise at September 30, Exercise
Prices 2000 (Years) Price 2000 Price
- -------------- ---------------- ----------- -------- ---------------- ---------
$0.8500-
$1.7500...... 206,661 7.88 $1.73 7,130 $ 1.34
$1.7813-
$1.7813...... 407,622 7.95 1.78 -- --
$1.8125-
$3.6250...... 397,626 6.39 2.80 358,180 2.77
$3.9063-
$5.3750...... 346,517 7.95 4.59 151,423 4.54
$5.5000-
$5.7500...... 451,990 7.09 5.74 338,279 5.73
$6.0000-
$9.8125...... 502,842 8.53 8.42 162,548 8.30
$9.8750-
$12.0000..... 167,400 9.59 10.68 3,627 10.93
$12.3750-
$15.250...... 35,750 8.82 12.70 9,164 12.90
$18.125-
$25.0000..... 5,500 6.28 24.38 500 18.13
--------- ---------
$0.8500-
$25.0000..... 2,521,908 7.78 $5.15 1,030,851 $ 4.98
Exercisable options were approximately 1,030,000, 745,000 and 489,000 at
fiscal year end for 2000, 1999 and 1998, respectively. At September 30, 2000,
there were no shares that were exercised and subject to repurchase.
Vesting provisions with respect to the Stock Option Plans are determined by
the Board of Directors at the date of grant. Generally, shares issued pursuant
to the Plan vest at 12 1/2% upon an employee's six-month employment date and
ratably thereafter in monthly installments over three and one-half years.
Included in the table above are options to purchase approximately 73,000
shares of common stock which were granted outside of the Plans during fiscal
1995. These options were granted to various employees and have rights and
vesting provisions which are the same as those granted pursuant to the Plan. At
September 30, 2000 options to purchase approximately 13,000 shares of common
stock remain outstanding.
Total shares reserved for grant under option plans total 4,594,000
(excluding options subject to grant under the 1995 Outside Directors Stock
Option Plan), of which approximately 4,410,000 shares were granted, leaving
approximately 184,000 shares available for grant at September 30, 2000.
The Company has reserved 2,706,000 shares of common stock for future
issuance under the stock option plans for outstanding options and options
available for grant at September 30, 2000 and for future issuance of shares
granted outside of the option plans.
1995 Outside Directors Stock Plan. Under its 1995 Directors Stock Option
Plan (the "Directors Plan"), the Company has established an option pool of
200,000 shares for granting to outside directors. The Company has reserved
200,000 shares of common stock for issuance under the plan. As of September 30,
2000, 152,000 shares had been granted to Directors, no shares had been
exercised and 18,000 shares had been canceled. As of September 30, 2000 options
to purchase 134,000 shares are outstanding and are included in the table
presented above.
1996 Stock Purchase Plan. In fiscal 1996, the 1996 Employee Stock Purchase
Plan (ESPP) was approved and 100,000 shares of common stock were reserved for
issuance under this plan. The ESPP provides that substantially all employees
may purchase stock at 85% of the lower price on either the first or last day of
the six-month offering period via a payroll deduction plan. During 1998 and
1999, the maximum aggregate
F-14
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
number of shares of common stock issuable under the Company's ESPP was
increased by 150,000 and 400,000, respectively. Through September 30, 2000
approximately 472,000 shares have been issued under this plan. A summary of
stock purchased under the plan is shown below (in thousands, except employee
participants).
2000 1999 1998
---------- -------- --------
Aggregate purchase price....................... $1,039,000 $470,000 $476,000
Shares purchased............................... 149,787 141,216 97,768
Employee participants.......................... 134 123 132
Stock Based Compensation. Pro forma information regarding net income (loss)
and net income (loss) per share is required by Statement of Financial
Accounting Standards No. 123 (SFAS 123) for awards granted after October 1,
1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's stock-
based awards to employees was estimated using a Black-Scholes option-pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock-
based awards to employees. The fair value of the Company's stock-based awards
to employees was estimated assuming no expected dividends and the following
weighted-average assumptions:
Options ESPP
------------------- -------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ----- ----- -----
Expected life (years)............. 3.49 3.40 3.57 0.5 0.5 0.5
Expected stock price volatility... 83.47% 81.28% 70.98% 82.31% 88.62% 65.22%
Risk-free interest rate........... 6.22% 4.95% 5.47% 6.19% 4.95% 5.58%
For pro forma purposes, the estimated fair value of the Company's stock
based awards to employees is amortized over the options' vesting period (for
options) and the six month purchase period (for stock purchased under the
ESPP). The weighted-average fair value of stock options and employee stock
purchase rights granted during 2000 was $5.64 and $2.97 per share,
respectively. The weighted-average fair value of stock options and employee
stock purchase rights granted during 1999 was $2.24 and $1.57 per share,
respectively. The weighted-average fair value of stock options and employee
stock purchase rights granted during 1998 was $2.31 and $3.93 per share,
respectively.
The Company's pro forma information follows (in thousands, except per share
amounts):
2000 1999 1998
------ ------ --------
Net income--as reported............................. $8,288 $2,456 $(27,254)
Net income (loss)--pro forma........................ 6,389 123 (30,242)
Diluted net income per share--as reported........... 0.84 0.27 (3.24)
Diluted net income (loss) per share--pro forma...... $ 0.65 $ 0.01 $ (3.59)
6. Employee Savings and Investment Plan
The Company offers all of its employees the opportunity to participate in
its 401(k) savings and investment plan. The amended plan allows for the Company
to make matching contributions based on an employee's elective deferrals. For
fiscal 2000, the matching contributions could not exceed $1,800 per
F-15
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
employee, and for the three fiscal years ended September 30, 2000 the matching
contributions were approximately $317,000, $290,000 for fiscal 1999, and
$299,000 in fiscal 1998.
7. Income Taxes
The tax provision (benefit) consists of the following (in thousands):
Fiscal Year Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Federal:
Current................................ $2,210 $110 $ --
Deferred............................... -- -- 3,584
------ ---- ------
2,210 110 3,584
State:
Current................................ 40 40 --
Deferred............................... -- -- 993
------ ---- ------
40 40 993
Foreign:
Current................................ 500 500 351
------ ---- ------
$2,750 $650 $4,928
====== ==== ======
Pretax income (loss) from foreign operations was $(1,330,000) in 2000,
$360,000 in 1999 and ($775,000) in 1998.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate of 35% follows (in thousands):
Fiscal Year Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Tax provision (benefit) at U.S.
statutory rate....................... $ 4,089 $1,090 $(7,814)
Change in valuation allowance......... -- -- 10,923
Utilization of losses not previously
benefited............................ (2,001) (756) --
Goodwill amortization................. 73 -- 1,468
Foreign taxes......................... 500 240 351
Other................................. 63 50 --
State taxes........................... 26 26 --
------- ------ -------
$ 2,750 $ 650 $ 4,928
======= ====== =======
As of September 30, 2000 the Company had California research and development
tax credit carryforwards of approximately $900,000. The Company also has
federal alternative minimum tax credit carryforwards of approximately $700,000.
The state research credit carryforwards and alternative minimum tax credit
carryforwards have no expiration date.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation could result in the expiration of net operating losses and
credits before utilization.
F-16
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
September 30, October 2,
2000 1999
------------- ----------
Deferred tax assets:
Net operating loss carryforwards................ $ -- $ 2,320
Research credits and alternative minimum tax
credit......................................... 1,390 3,130
Capitalized software............................ 350 450
Deferred revenue................................ 2,870 1,820
Purchased technology............................ 5,110 5,640
Accrued expenses and reserves................... 5,500 3,936
-------- --------
Total deferred tax assets..................... 15,220 17,296
Valuation allowance for deferred tax assets... (15,220) (17,296)
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
As of September 30, 2000, the Company had fully offset deferred tax assets
by a valuation allowance. Management believes that such net deferred tax
assets are not realizable on a more likely than not basis. The valuation
allowance decreased by $2,076,000 and $1,609,000 for the years ended September
30, 2000 and October 2, 1999, respectively. Approximately $4,500,000 of the
valuation allowance is attributable to stock options which will be credited to
equity when realized.
8. Segment Information
The Company adopted the Financial Accounting Standards Board's Statement
No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information." The standard revises the way operating segments are reported.
The Company operates and tracks its results in one operating segment. The
Company's operating segment is principally the development, manufacture, sale
and service of high performance systems for design verification of integrated
circuits (ICs) and IC-based electronic systems.
Enterprise wide information is provided in accordance with SFAS 131.
Geographic revenue information for the fiscal years 2000, 1999 and 1998 is
based on the shipping destination. Long-lived assets include primarily
property, plant and equipment as well as, intangible assets including
goodwill. Property, plant and equipment information is based on the physical
location of the asset at the end of each fiscal year while the intangibles are
based on the location of the owning entity.
Net revenues from unaffiliated customers by geographic region are as
follows (in thousands):
Fiscal Year Ended
-----------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
North America............................ $47,762 $35,257 $26,361
Far East................................. 10,883 8,258 4,912
Europe................................... 14,151 12,818 9,620
------- ------- -------
$72,796 $56,333 $40,893
======= ======= =======
F-17
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net long-lived assets by country are as follows (in thousands):
September 30, October 2,
2000 1999
------------- ----------
United States....................................... $5,266 $5,052
India............................................... 542 563
France.............................................. 95 110
United Kingdom...................................... 173 240
Germany............................................. 92 48
Japan............................................... 207 155
------ ------
$6,375 $6,208
====== ======
For fiscal years 2000, one customer, Broadcom Corporation, accounted for
approximately 12% of net revenues, respectively. For fiscal years 1999 and 1998
one customer, Lucent Technologies, Inc., accounted for approximately 14% and
13% of net revenues, respectively.
9. Concentration of Credit Risks and Other Risks
The Company sells its products to a broad range of customers in the
communications, multimedia/graphics, semiconductor, computer, aerospace and
consumer electronics industries. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses and such losses
have been within management's expectations.
The electronic design automation (EDA) industry is characterized by rapid
technological changes, intense competitive pressures and cyclical market
patterns. The Company's results are affected by a wide variety of factors,
including general economic patterns, conditions specifically relating to
technology companies and the semiconductor and EDA industries.
The Company's results are also affected by decreases in average selling
prices over the life of any particular product, the timing of new product
introductions (by the Company, its competitors and others), the evolution of
the electronic design community, the ability to manufacture new products, and
the ability to safeguard patents and intellectual property from competitors.
Based on the factors noted herein, the Company may experience substantial
period-to-period fluctuations in future operating results.
F-18
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Unaudited Quarterly Consolidated Financial Data
Fiscal Quarters Ended
----------------------------------
Jan. 1, April 1, July 1, Sep. 30,
2000 2000 2000 2000
------- -------- ------- --------
Net revenues............................... $15,405 $16,799 $18,443 $22,149
Gross profit............................... 11,677 13,128 14,507 17,453
Total operating expenses................... 10,311 11,043 11,632 13,359
Income from operations..................... 1,366 2,085 2,875 4,094
Net income................................. 1,093 1,644 2,303 3,248
Basic income per share(*).................. $ 0.13 $ 0.19 $ 0.27 $ 0.37
Weighted-average shares used in computing
per share amounts......................... 8,417 8,531 8,611 8,694
Diluted income per share(*)................ $ 0.11 $ 0.17 $ 0.23 $ 0.32
Weighted-average shares used in computing
per share amounts......................... 9,519 9,926 9,897 10,000
Fiscal Quarters Ended
----------------------------------
Jan. 2, April 3, July 3, Oct. 2,
1999 1999 1999 1999
------- -------- ------- --------
Net revenues............................... $11,344 $13,682 $15,012 $16,295
Gross profit............................... 8,529 10,263 11,274 12,489
Total operating expenses................... 8,625 10,083 10,336 10,900
Income (loss) from operations.............. (96) 180 938 1,589
Net income................................. 52 258 784 1,362
Basic income per share(*).................. $ 0.01 $ 0.03 $ 0.09 $ 0.16
Weighted-average shares used in computing
per share amounts......................... 8,302 8,265 8,288 8,369
Diluted income per share(*)................ $ 0.01 $ 0.03 $ 0.08 $ 0.14
Weighted-average shares used in computing
per share amounts......................... 8,644 8,974 9,406 9,533
- --------
(*) Quarterly per share amounts do not equal the annual per share total as a
result of rounding.
F-19
IKOS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SCHEDULE II
IKOS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Deduction Balance
Beginning Costs and Write- at End of
of Period Expenses offs Period
---------- ---------- --------- ---------
Allowance for doubtful accounts:
Year ended October 3, 1998.......... $501 $300 $ -- $801
==== ==== ===== ====
Year ended October 2, 1999.......... $801 $108 $ 108 $801
==== ==== ===== ====
Year ended September 30, 2000....... $801 $100 $ 256 $645
==== ==== ===== ====
F-20
IKOS SYSTEMS, INC. UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
MARCH 31, 2001
IKOS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share amounts)
March 31, September 30,
2001 2000
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 15,737 $ 12,032
Short-term investments.................................. 6,036 7,771
Accounts receivable (net of allowances for doubtful
accounts of $846 and $645, respectively)............... 12,614 19,716
Inventories............................................. 8,535 3,997
Prepaid expenses and other assets....................... 1,005 578
-------- --------
Total current assets................................ 43,927 44,094
Equipment and leasehold improvements 5,613 6,782
Office and evaluation equipment.......................
Machinery and equipment............................... 7,515 11,487
Leasehold improvements................................ 3,035 2,640
-------- --------
16,163 20,909
Less allowances for depreciation and amortization... (8,850) (14,534)
-------- --------
7,313 6,375
Intangible assets (net of amortization of $1,009 and
$924, respectively).................................... 799 883
Other assets............................................ 1,077 653
-------- --------
$ 53,116 $ 52,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................................... $ -- $ 1,809
Accounts payable........................................ 6,688 5,446
Accrued payroll and related expenses.................... 3,085 3,549
Accrued commissions..................................... 688 2,094
Income taxes payable.................................... 856 3,252
Other accrued liabilities............................... 1,909 2,511
Deferred revenues....................................... 11,109 8,388
-------- --------
Total current liabilities........................... 24,335 27,049
Accrued rent.............................................. 369 92
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value; 50,000 shares authorized,
8,985 and 8,797 shares issued and 8,985 and 8,778
outstanding, respectively.............................. 90 88
Additional paid-in capital.............................. 58,849 57,791
Treasury stock, at cost, no shares in 2001 and 19 in
2000................................................... -- (126)
Accumulated adjustments to comprehensive income......... (1,314) (842)
Accumulated deficit..................................... (29,213) (32,047)
-------- --------
Total stockholders' equity.......................... 28,412 24,864
-------- --------
$ 53,116 $ 52,005
======== ========
See notes to condensed consolidated financial statements.
F-21
IKOS SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------ ------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
--------- -------- --------- --------
(Unaudited)
Net revenues
Product............................... $11,803 $12,403 $28,182 $23,452
Maintenance........................... 5,607 4,396 10,237 8,752
------- ------- ------- -------
Total net revenues.................. 17,410 16,799 38,419 32,204
Cost of revenues
Product............................... 2,896 2,456 6,251 5,161
Maintenance........................... 1,166 1,215 2,280 2,238
------- ------- ------- -------
Total cost of revenues.............. 4,062 3,671 8,531 7,399
------- ------- ------- -------
Gross profit........................ 13,348 13,128 29,888 24,805
Operating expenses:
Research and development.............. 4,552 3,953 9,060 7,207
Sales and marketing................... 7,222 5,760 14,500 11,681
General and administration............ 1,462 1,288 3,046 2,341
Amortization of intangibles........... 42 42 84 125
------- ------- ------- -------
Total operating expenses............ 13,278 11,043 26,690 21,354
------- ------- ------- -------
Income from operations.................. 70 2,085 3,198 3,451
Interest and other income............... 392 99 611 191
------- ------- ------- -------
Income before provision for income
taxes.................................. 462 2,184 3,809 3,642
Provision for income taxes.............. 115 540 975 905
------- ------- ------- -------
Net income.......................... $ 347 $ 1,644 $ 2,834 $ 2,737
======= ======= ======= =======
Basic net income per share.............. $ 0.04 $ 0.19 $ 0.32 $ 0.32
======= ======= ======= =======
Common and common equivalent shares used
in computing per share amounts......... 8,924 8,531 8,865 8,474
======= ======= ======= =======
Dilutive net income per share........... $ 0.03 $ 0.17 $ 0.28 $ 0.28
======= ======= ======= =======
Common and common equivalent shares used
in computing per share amounts......... 10,278 9,926 10,151 9,723
======= ======= ======= =======
See notes to condensed consolidated financial statements.
F-22
IKOS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
March 31, April 1,
2001 2000
--------- --------
(Unaudited)
Operating activities:
Net income................................................ $ 2,834 $ 2,737
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,630 1,644
Gain on sale of capital equipment....................... 85 --
Accumulated translation adjustments..................... (472) (160)
Accrued rent............................................ 277 (64)
Changes in operating assets and liabilities:
Accounts receivable..................................... 7,102 (1,636)
Inventories............................................. (4,538) (58)
Prepaid expenses and other current assets............... (427) 270
Other assets............................................ (424) 334
Accounts payable........................................ 1,242 977
Accrued payroll and related expenses.................... (464) (755)
Accrued commissions..................................... (1,406) 117
Income taxes payable.................................... (2,396) 732
Other accrued liabilities............................... (602) (547)
Deferred revenues....................................... 2,721 1,820
------- -------
Net cash provided by operating activities............. 5,162 5,411
Investing activities:
Purchases of equipment and leasehold improvements......... (2,569) (1,490)
Purchase of short-term investments........................ (8,922) (2,969)
Maturities of short-term investments...................... 10,657 2,323
------- -------
Net cash used in investment activities................ (834) (2,136)
Financing activities:
Principal payments on short-term borrowings............... (1,809) --
Sale of common stock...................................... 1,186 893
------- -------
Net cash provided by (used in) financing activities... (623) 893
Increase in cash and cash equivalents....................... 3,705 4,168
Cash and cash equivalents at beginning of period............ 12,032 7,664
------- -------
Cash and cash equivalents at end of period.................. $15,737 $11,832
======= =======
See notes to condensed consolidated financial statements.
F-23
IKOS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements at March 31,
2001 and for the three and six months ended March 31, 2001 and April 1,
2000, have been prepared in conformity with generally accepted accounting
principles, consistent with those applied in, and should be read in
conjunction with, the audited consolidated financial statements for the
year ended September 30, 2000 included in the Form 10-K as filed with the
Securities and Exchange Commission on December 21, 2000. The unaudited
interim financial information reflects all normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. The results for the three and
six months ended March 31, 2001 are not necessarily indicative of results
expected for the full year.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of (in thousands):
March 31, September 30,
2001 2000
--------- -------------
Raw materials.................................... $1,091 $ 951
Work-in-process.................................. 5,105 1,386
Finished goods................................... 2,339 1,660
------ ------
$8,535 $3,997
====== ======
3. Net Income Per Share
The computation of basic net income per share for the periods presented is
derived from the information on the face of the income statement, and there
are no reconciling items in either the numerator or denominator.
Additionally, there are no reconciling items in the numerator used to
compute dilutive net income per share. The incremental common shares
attributable to outstanding options for the three and six month periods
ended March 31, 2001 and April 1, 2000 included in the total shares used in
the denominator of the diluted net income per share calculation are as
follows (in thousands):
March 31, April 1,
2001 2000
--------- --------
Three months ended.................................... 1,354 1,395
===== =====
Six months ended...................................... 1,286 1,249
===== =====
4. Comprehensive Income (loss)
Comprehensive income (loss) for the three and six months ending March 31,
2001 and April 1, 2000 are as follows (in thousands):
Three Months Ended Six Months Ended
------------------ ------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
--------- -------- --------- --------
Net income as reported............. $ 347 $1,644 $2,834 $2,737
Accumulated translation
adjustments....................... (397) (82) (472) (160)
----- ------ ------ ------
Comprehensive income (loss)........ $ (50) $1,562 $2,362 $2,577
===== ====== ====== ======
F-24
IKOS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
5. Income Taxes
The Company's effective tax rate on the consolidated pretax income was
approximately 25% for the three and six month periods ending March 31, 2001
and April 1, 2000. The Company's effective tax rate for both periods
differs from the federal statutory rate primarily due to benefits
associated with its net operating loss carryforward.
6. Litigation and Contingencies
On February 9, 2001, the Company filed a patent infringement complaint
against Axis Systems, Inc. (Axis) in the United States District Court in
the District of Delaware. The complaint alleges infringement by Axis of
four patents involving the Company's Virtual WiresTM technology, which
allows high resource utilization in FPGA-based emulators. The Company is
seeking both injunctive relief and monetary damages.
On March 22, 2001, Axis filed a patent infringement complaint against the
Company in the United States District Court for the Northern District of
California. The complaint alleges infringement by IKOS of Axis's patent for
a "Simulation/Emulation System and Method," U.S. Patent No 6,009,256. Axis
claims that this patent covers technology for a single system that provides
simulation, acceleration, and emulation of complex electronic integrated
circuit and system-on-chip designs. The compliant alleges that certain of
the Company's emulation products infringe on the patent. Axis is seeking
both injunctive relief and monetary damages. The Company believes the claim
is without merit and intends to vigorously defend the action.
7. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". IKOS is required to implement SAB101 no later than the quarter
ending September 29, 2001. The Company is currently evaluating the impact
of SAB 101 and is uncertain as to what impact, if any, SAB 101 will have on
its revenues and results of operations. The impact of SAB 101, if any, will
be reported as a change in accounting principle in accordance with FASB
Statement No. 3. This may result in a significant cumulative effect change
in accounting adjustment that would be reflected in the Company's results
of operations for the fiscal year ended September 29, 2001.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires the Company to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. It further provides criteria for
derivative instruments to be designated as fair value, cash flow, or
foreign currency hedges, and establishes accounting standards for reporting
changes in the fair value of the derivative instruments. Upon adoption, the
Company was required to adjust hedging instruments to fair value in the
balance sheet and recognize the offsetting gains or losses as adjustments
to be reported in net income or other comprehensive income, as appropriate.
The Company adopted SFAS No. 133 as of October 1, 2000. The adoption of
SFAS No. 133 did not have a material effect on the Company's results of
operations or financial position.
F-25
Appendix A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
SYNOPSYS, INC.
OAK MERGER CORPORATION
AND
IKOS SYSTEMS, INC.
dated as of
July 2, 2001
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS................................................... A-1
Section 1.1 Definitions............................................ A-1
ARTICLE II THE MERGER................................................... A-8
Section 2.1 The Merger............................................. A-8
Section 2.2 Closing; Effective Time................................ A-8
Section 2.3 Effect of the Merger................................... A-8
Section 2.4 Certificate of Incorporation; Bylaws................... A-8
Section 2.5 Directors and Officers................................. A-8
Section 2.6 Effect on Capital Stock................................ A-9
Section 2.7 Contingent Consideration............................... A-9
Section 2.8 Surrender of Certificates.............................. A-12
Section 2.9 Termination of Exchange Fund........................... A-13
Section 2.10 No Further Ownership Rights in Company Common Stock.... A-13
Section 2.11 Lost, Stolen or Destroyed Certificates................. A-14
Section 2.12 Tax and Accounting Consequences........................ A-14
Section 2.13 Withholding Rights..................................... A-14
Section 2.14 Taking of Necessary Action; Further Action............. A-14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMPANY................... A-14
Section 3.1 Organization, Standing and Power....................... A-14
Section 3.2 Capital Structure...................................... A-15
Section 3.3 Authority; No Conflicts................................ A-16
Section 3.4 SEC Documents; Financial Statements.................... A-16
Section 3.5 Absence of Certain Changes............................. A-17
Section 3.6 Absence of Undisclosed Liabilities..................... A-18
Section 3.7 Litigation............................................. A-18
Section 3.8 Restrictions on Business Activities.................... A-18
Section 3.9 Governmental Authorization............................. A-18
Section 3.10 Title to Property...................................... A-18
Section 3.11 Intellectual Property.................................. A-19
Section 3.12 Environmental Matters.................................. A-20
Section 3.13 Taxes.................................................. A-21
Section 3.14 Employee Benefit Plans................................. A-22
Section 3.15 Interested Party Transactions.......................... A-24
Section 3.16 Certain Agreements Affected by the Merger.............. A-24
Section 3.17 Employee Matters....................................... A-24
Section 3.18 Insurance.............................................. A-26
Section 3.19 Compliance With Laws................................... A-26
Section 3.20 Registration Statement; Proxy Statement/Prospectus..... A-26
Section 3.21 Vote Required.......................................... A-27
Section 3.22 Voting Agreements...................................... A-27
Section 3.23 Board Approval; Rights Plan; State Takeover Statutes... A-27
Section 3.24 Brokers' and Finders' Fees; Opinion of Financial
Adviser................................................ A-27
Section 3.25 Customers and Suppliers; Backlog....................... A-27
Section 3.26 No Default............................................. A-28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...... A-28
Section 4.1 Organization, Standing and Power....................... A-28
Section 4.2 Capital Structure...................................... A-28
Section 4.3 Authority.............................................. A-28
Page
----
Section 4.4 SEC Documents; Financial Statements.................... A-29
Section 4.5 Absence of Undisclosed Liabilities..................... A-30
Section 4.6 Litigation............................................. A-30
Section 4.7 Registration Statement; Proxy Statement/Prospectus..... A-30
Section 4.8 Board Approval......................................... A-30
Section 4.9 Broker's and Finders' Fees............................. A-30
Section 4.10 Tax Matters............................................ A-30
Section 4.11 Parent Owned Shares of Company Common Stock............ A-30
ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME........................... A-31
Section 5.1 Conduct of Business of Company......................... A-31
Section 5.2 No Solicitation........................................ A-33
ARTICLE VI ADDITIONAL AGREEMENTS........................................ A-35
Section 6.1 Proxy Statement/Prospectus; Registration Statement..... A-35
Section 6.2 Meeting of Stockholders................................ A-35
Section 6.3 Access to Information.................................. A-36
Section 6.4 Confidentiality........................................ A-36
Section 6.5 Public Disclosure...................................... A-37
Section 6.6 Consents; Cooperation.................................. A-37
Section 6.7 Legal Requirements..................................... A-38
Section 6.8 Blue Sky Laws.......................................... A-39
Section 6.9 Employee Benefit Plans................................. A-39
Section 6.10 Form S-8............................................... A-40
Section 6.11 Listing of Additional Shares........................... A-41
Section 6.12 Indemnification........................................ A-41
Section 6.13 Tax Treatment.......................................... A-41
Section 6.14 Stockholder Litigation................................. A-41
Section 6.15 Employee Agreements.................................... A-41
Section 6.16 Injunctions or Restraints.............................. A-41
Section 6.17 Certain Employee Actions............................... A-42
Section 6.18 Further Assurances..................................... A-42
ARTICLE VII CONDITIONS TO THE MERGER.................................... A-42
Section 7.1 Conditions to Obligations of Each Party to Effect the
Merger................................................. A-42
Section 7.2 Additional Conditions to Obligations of the Company.... A-43
Section 7.3 Additional Conditions to the Obligations of Parent and
Merger Sub............................................. A-43
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER.......................... A-44
Section 8.1 Termination............................................ A-44
Section 8.2 Effect of Termination.................................. A-46
Section 8.3 Expenses and Termination Fees.......................... A-46
Section 8.4 Amendment.............................................. A-47
Section 8.5 Extension; Waiver...................................... A-47
ARTICLE IX GENERAL PROVISIONS........................................... A-47
Section 9.1 Non-Survival at Effective Time......................... A-47
Section 9.2 Notices................................................ A-47
Section 9.3 Interpretation......................................... A-48
Section 9.4 Counterparts........................................... A-48
Entire Agreement; Nonassignability; Parties in
Section 9.5 Interest............................................... A-48
Section 9.6 Severability........................................... A-48
Section 9.7 Remedies Cumulative.................................... A-49
Section 9.8 Governing Law.......................................... A-49
Section 9.9 Rules of Construction.................................. A-49
SCHEDULES
Company Disclosure Schedule
Parent Disclosure Schedule
Schedule 6.9(g)
Schedule 6.15(a)
Schedule 6.15(b)
Schedule 6.15(c)
Schedule 6.15(d)
Schedule 7.3(c)
Schedule 7.3(f)
Schedule 7.3(g)
EXHIBITS
Exhibit A--Form of Voting Agreement
Exhibit B--Form of Certificate of Merger
Exhibit C--Form of Certificate of Incorporation of the Surviving
Corporation
Exhibit D--Form of Employee Agreement for employees of the Company listed
on Schedule 6.15(a)
Exhibit E--Form of Employee Agreement for employees of the Company listed
on Schedule 6.15(b)
Exhibit F--Form of Amendment to Severance Agreement for employees of the
Company listed on Schedule 6.15(c)
Exhibit G--Form of Amendment to Severance Agreement for employees of the
Company listed on Schedule 6.15(d)
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement") is
made and entered into as of July 2, 2001, by and among Synopsys, Inc., a
Delaware corporation ("Parent"), Oak Merger Corporation, a Delaware corporation
("Merger Sub") and wholly owned subsidiary of Parent, and IKOS Systems, Inc., a
Delaware corporation (the "Company").
Recitals
WHEREAS the Boards of Directors of the Company, Parent and Merger Sub
believe it is in the best interests of their respective corporations and the
stockholders of their respective corporations that the Company and Merger Sub
combine into a single corporation through the statutory merger of Merger Sub
with and into the Company (the "Merger") and, in furtherance thereof, have
approved the Merger;
WHEREAS by virtue of the Merger, the outstanding shares of Company Common
Stock, $0.01 par value ("Company Common Stock"), shall be converted into the
right to receive shares of Parent Common Stock, $0.01 par value ("Parent Common
Stock"), at the rate set forth herein;
WHEREAS the Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and other agreements in connection with
the Merger;
WHEREAS the parties intend, by executing this Agreement (a) to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"); (b) to cause the Merger
to qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code; and (c) for the Merger to be accounted for as a
purchase; and
WHEREAS concurrently with the execution of this Agreement and as an
inducement to Parent and Merger Sub to enter into this Agreement, certain
stockholders of the Company have on the date hereof entered into voting
agreements in substantially the form attached hereto as Exhibit A (the "Voting
Agreements") to vote the shares of Company Common Stock owned by such persons
in favor of adoption of this Agreement and approval of the Merger.
NOW, THEREFORE, in consideration of the premises, and the representations,
warranties, covenants, agreements and additional agreements set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions. As used in this Agreement, the following
capitalized terms shall have the meanings indicated below:
"Agreement" has the meaning ascribed to it in the forepart of this
Agreement.
"Antitrust Laws" has the meaning ascribed to it in Section 6.6(b).
"Authorized Fully Diluted Shares" means the sum of (a) the number of shares
of Company Common Stock outstanding as of June 15, 2001, (b) the Authorized
Option Shares, and (c) the number of shares of Company Common Stock that become
issuable prior to the Closing Date under the Company ESPP.
"Authorized Option Shares" means the sum of (a) the number of options
granted under the Company Stock Option Plans which are outstanding as of June
15, 2001; (b) the number of shares of Company Common
A-1
Stock remaining available for grant under the Company Stock Option Plans as of
June 15, 2001; and (c) such number of additional shares of Company Common Stock
(if any) that are made available for issuance under the 1995 Stock Option Plan
on October 1, 2001 pursuant to Section 4.1 thereof if the Closing Date is after
October 1, 2001.
"Average Parent Stock Price" means the average last sale price per share of
the Parent Common Stock on the Nasdaq Stock Market as reported in The Wall
Street Journal (or, if either party disputes the accuracy of the prices therein
reported, another mutually agreeable authoritative source) for the ten (10)
full trading-day period ending on the fifth (5th) full trading day prior to the
Closing Date (e.g., if the Closing Date falls on a Sunday, the ten (10) trading
day period used to calculate the Average Parent Stock Price on such date would
end on, and include, the previous Monday, assuming that Monday through Friday
are full trading days).
"Backlog" as of June 30, 2001 or June 30, 2002, means (a) the dollar amount
of all non-cancelable orders for products and services that (i) are not
discounted in excess of historical discounts consistent with past practice,
(ii) satisfy all criteria of the Company's orders acceptance policy as it
existed on June 6, 2001, as amended by the Company with Parent's consent prior
to the date of this Agreement (but excluding any orders for which an exception
to the order acceptance policy was approved by an officer of the Company,
regardless of whether the orders acceptance policy grants such officer
authority to make such exceptions), and (iii) have not been invoiced, plus (b)
all deferred revenue, as reflected in audited financial statements prepared in
accordance with GAAP applied on a consistent basis throughout the periods
indicated and consistent with the Company's annual fiscal year-end audited
financial statements, attributable to products and services that have been
invoiced; provided, however, that (AA), for the avoidance of doubt, items that
are included in the above clause (a) of this paragraph shall not be included in
the above clause (b) of this paragraph, (BB) in the case of hardware and
software, such products must have a scheduled ship date within six (6) months
of the applicable Backlog date (i.e. June 30, 2001 or June 30, 2002, as the
case may be) and (CC) in the case of software maintenance and support,
consulting and training, such services must be scheduled to be performed within
six (6) months of such date.
"Bonus Plan" has the meaning ascribed to it in Section 6.9(g)
"CERCLA" has the meaning ascribed to it in Section 3.12(b).
"Certificate of Incorporation" has the meaning ascribed to it in Section
3.1.
"Certificate of Merger" has the meaning ascribed to it in Section 2.2.
"Closing" has the meaning ascribed to it in Section 2.2.
"Closing Date" has the meaning ascribed to it in Section 2.2.
"COBRA" has the meaning ascribed to it in Section 3.14(d).
"Company" has the meaning ascribed to it in the forepart to this Agreement.
"Company Authorizations" has the meaning ascribed to it in Section 3.9.
"Company Balance Sheet" has the meaning ascribed to it in Section 3.6.
"Company Balance Sheet Date" has the meaning ascribed to it in Section 3.5.
"Company Certificates" has the meaning ascribed to it in Section 2.8(c).
"Company Common Stock" has the meaning ascribed to it in the Recitals to
this Agreement.
"Company Disclosure Schedule" has the meaning ascribed to it in the forepart
of Article III.
A-2
"Company Employee Plans" has the meaning ascribed to it in Section 3.14(a).
"Company ESPP" has the meaning ascribed to it in Section 3.2.
"Company Financial Statements" has the meaning ascribed to it in Section
3.4.
"Company Material Adverse Effect" means any event, matter, change,
condition, circumstance or effect that is materially adverse to the business,
condition (financial or otherwise), properties, assets (including intangible
assets), liabilities, operations or results of operations of the Company (or,
after the Effective Time, the Surviving Corporation) and its Subsidiaries,
taking the Company (or, after the Effective Time, the Surviving Corporation)
together with its Subsidiaries as a whole; provided, however, that none of the
following, in and of themselves, either alone or in combination, shall
constitute a Company Material Adverse Effect: (a) a decrease in the trading
price of Company Common Stock; (b) any event, matter, change, condition,
circumstance or effect which the Company successfully bears the burden of
proving results from changes affecting any of the industries or economies in
which the Company operates as a whole (which changes do not materially and
disproportionately affect the Company); (c) any adverse event, matter, change,
condition, circumstance or effect which the Company successfully bears the
burden of proving is directly and primarily caused by the announcement or
pendency of the Merger; (d) any adverse event, matter, change, condition,
circumstance or effect which the Company successfully bears the burden of
proving is directly and primarily caused by the taking of any action expressly
required by this Agreement; (e) any adverse event, matter, change, condition,
circumstance or effect which the Company successfully bears the burden of
proving is directly and primarily caused by any matter for which Parent has
agreed (other than in this Agreement) to indemnify the Company; or (f) a
failure in and of itself of results of operations of the Company and its
Subsidiaries (on a consolidated basis) to meet internal projections or
forecasts or published revenue or earnings predictions for any fiscal quarterly
or annual period of the Company after the date hereof and prior to the Closing
Date, but not either the underlying causes of such failure or the consequences
of such failure.
"Company Representatives" has the meaning ascribed to it in Section 5.2.
"Company SEC Documents" has the meaning ascribed to it in Section 3.4.
"Company Stock Option Plans" has the meaning ascribed to it in Section
2.6(c).
"Company Stockholders Meeting" has the meaning ascribed to it in Section
3.20.
"Competing Bidder" has the meaning ascribed to it in Section 5.2.
"Confidential Information" has the meaning ascribed to it in Section
3.11(g).
"Confidentiality Agreement" means the Confidentiality Agreement, dated as of
April 30, 2001, between the Company and Parent.
"Contingent Consideration" has the meaning ascribed to it in Section 2.7(a).
"Contingent Price Adjustment" has the meaning ascribed to it in Section
2.7(b).
"Continuing Employees" has the meaning ascribed to it in Section 6.9(d).
"CPA Firm" has the meaning ascribed to it in Section 2.7(d).
"DGCL" has the meaning ascribed to it in Section 2.1.
"Dilution Adjustment" has the meaning ascribed to it in Section 2.7(c).
"Effective Time" has the meaning ascribed to it in Section 2.2.
A-3
"Environmental and Safety Laws" has the meaning ascribed to it in Section
3.12(a).
"ERISA Affiliate" has the meaning ascribed to it in Section 3.14(a).
"ERISA" has the meaning ascribed to it in Section 3.14(a).
"Exchange Act" has the meaning ascribed to it in Section 3.4.
"Exchange Ratio" has the meaning ascribed to it in Section 2.6(a).
"Facilities" has the meaning ascribed to it in Section 3.12(a).
"Final Date" has the meaning ascribed to it in Section 8.1(b).
"Foreign Plan" has the meaning ascribed to it in Section 3.14(j).
"Fully Diluted Shares" means the number of shares of capital stock of the
Company issued and outstanding immediately prior to the Effective Time on a
fully converted basis, including all outstanding shares of capital stock and
the maximum potential number of shares of capital stock issuable pursuant to
options, warrants, convertible or exchangeable securities, subscriptions, and
agreements or commitments to issue shares of capital stock which are
outstanding immediately prior to the Effective Time.
"GAAP" has the meaning ascribed to it in Section 3.4.
"Governmental Entity" has the meaning ascribed to it in Section 3.3.
"Hazardous Materials" has the meaning ascribed to it in Section 3.12(a).
"HSR Act" has the meaning ascribed to it in Section 3.3.
"Indemnified Parties" has the meaning ascribed to it in Section 6.12.
"Intellectual Property" has the meaning ascribed to it in Section 3.11(a).
"Internal Revenue Code" has the meaning ascribed to it in the Recitals to
this Agreement.
"Knowledge" with respect to a party means such party's actual knowledge
after reasonable inquiry of officers, directors, vice presidents, persons of
higher authority than, or equivalent authority to, a vice president, and all
persons directly reporting to any of the foregoing.
"Merger" has the meaning ascribed to it in the Recitals to this Agreement.
"Merger Sub" has the meaning ascribed to it in the forepart of this
Agreement.
"Merger Sub Common Stock" has the meaning ascribed to it in Section 2.6(d).
"NASD" has the meaning ascribed to it in Section 3.3.
"Needham Letter" has the meaning ascribed to it in the definition of
Transaction Expenses.
A-4
"Net Backlog" means the difference resulting from (i) the dollar value of
Backlog as of June 30, 2002 less (ii) the dollar value of Backlog as of June
30, 2001; provided, however, that Net Backlog shall be limited to the following
amounts for the following levels of Revenue:
Limit on
Revenue Net Backlog
------- -----------
Less than $50 million............................................ $0
Between $50 million and $60 million.............................. $1 million
Between $60 million and $70 million.............................. $3 million
Between $70 million and $80 million.............................. $5 million
Between $80 million and $90 million.............................. $8 million
Over $90 million................................................. $10 million
"Order" has the meaning ascribed to it in Section 6.6(b).
"Parent" has the meaning ascribed to it in the forepart to this Agreement.
"Parent Balance Sheet" has the meaning ascribed to it in Section 4.5.
"Parent Common Stock" has the meaning ascribed to it in the Recitals to this
Agreement.
"Parent Confidential Information" has the meaning ascribed to it in Section
6.4(b).
"Parent Disclosure Schedule" has the meaning ascribed to it in the forepart
of Article IV.
"Parent Financial Statements" has the meaning ascribed to it in Section 4.4.
"Parent Material Adverse Effect" means any event, matter, change, condition,
circumstance or effect that is materially adverse to the business, condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities, operations or results of operations of Parent and its
Subsidiaries, taking Parent together with its Subsidiaries as a whole;
provided, however, that none of the following, in and of themselves, either
alone or in combination, shall constitute a Parent Material Adverse Effect: (a)
a decrease in the trading price of Parent Common Stock; (b) any event, matter,
change, condition, circumstance or effect which Parent successfully bears the
burden of proving results from changes affecting any of the industries or
economies in which Parent operates as a whole (which changes do not materially
and disproportionately affect Parent); (c) any adverse event, matter, change,
condition, circumstance or effect which Parent successfully bears the burden of
proving is directly and primarily caused by the announcement or pendency of the
Merger; (d) any adverse event, matter, change, condition, circumstance or
effect which Parent successfully bears the burden of proving is directly and
primarily caused by the taking of any action expressly required by this
Agreement; (e) any adverse event, matter, change, condition, circumstance or
effect which Parent successfully bears the burden of proving is directly and
primarily caused by any matter for which Parent has agreed (other than in this
Agreement) to indemnify the Company; or (f) a failure in and of itself of
results of operations of the Parent and its Subsidiaries (on a consolidated
basis) to meet internal projections or forecasts or published revenue or
earnings predictions for any fiscal quarterly or annual period of the Parent
after the date hereof and prior to the Closing Date, but not either the
underlying causes of such failure or the consequences of such failure.
"Parent SEC Documents" has the meaning ascribed to it in Section 4.4.
"PBT" means the Company's profit or loss before tax for the period of July
1, 2001 through June 30, 2002, inclusive, excluding amounts paid or accrued
pursuant to the Bonus Plan, the PBT Exclusion Items, each of the foregoing as
reflected in audited financial statements prepared in accordance with GAAP
applied on a consistent basis throughout the period indicated and consistent
with the Company's annual fiscal year-end audited financial statements.
"PBT Adjustment" has the meaning ascribed to it in Section 2.7(b)(ii).
A-5
"PBT Exclusion Items" means the following items which shall be excluded in
the calculation of PBT: (i) the following amounts to the extent that in the
aggregate they exceed five hundred thousand dollars ($500,000): (a) any net
reduction or reversal in balance sheet reserves between the date of this
Agreement and June 30, 2002 and (b) to the extent the settlement is different
from the recorded reserve for French VAT exposure at March 31, 2001, any
reversal of that reserve to income or any additional expense incurred on
settlement; (ii) any revenue recorded under the 3Dfx settlement including any
refund of associated sales taxes or other taxes; (iii) legal fees and related
expenses directly related to the litigation identified in Section 3.7 of the
Company Disclosure Schedule, and any cash received on settlement thereof; (iv)
tax or other refunds received related to events occurring in the prior year;
(v) expenses incurred and settlement amounts received by the Company for
matters for which indemnification by Parent is provided pursuant to the letter
between Parent and the Company dated as of the date hereof relating to
indemnification for certain claims; (vi) gains or revenue resulting from the
Company's selling, leasing, licensing or otherwise disposing of or encumbering
any of its properties or assets other than sales of products in the ordinary
course of business consistent with the Company's past practice; and (vii)
Transaction Expenses.
"PCBs" has the meaning ascribed to it in Section 3.12(b).
"Property" has the meaning ascribed to it in Section 3.12(a).
"Proxy Statement" has the meaning ascribed to it in Section 3.20.
"Quickturn" has the meaning ascribed to it in Section 7.3(e).
"Quickturn Non-Compete" has the meaning ascribed to it in Section 7.3(e).
"Recommendation" has the meaning ascribed to it in Section 8.1(e).
"Registration Statement" has the meaning ascribed to it in Section 3.20.
"Repurchase Options" has the meaning ascribed to it in Section 6.9(b).
"Revenue" means the Company's revenue for the period July 1, 2001 through
June 30, 2002, inclusive, as reflected in audited financial statements prepared
in accordance with GAAP applied on a consistent basis throughout the period
indicated and consistent with the Company's annual fiscal year-end audited
financial statements as of September 30, 2001.
"Revenue Adjustment" has the meaning ascribed to it in Section 2.7(b)(ii).
"Revenue Plus Net Backlog Adjustment" has the meaning ascribed to in Section
2.7(b)(ii).
"SEC" has the meaning ascribed to it in Section 3.3.
"Securities Act" has the meaning ascribed to it in Section 3.2.
"Subsidiary" and "Subsidiaries" mean, with respect to any person, any
corporation or other organization, whether incorporated or unincorporated, of
which (i) such person or any other subsidiary of such person is a general
partner (excluding partnerships, the general partnership interests of which
held by such person or any subsidiary of such person do not have a majority of
the voting interest in such partnership) or (ii) at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors, or others performing similar
functions with respect to such corporation or other organization, is directly
or indirectly owned or controlled by such person or by one or more of its
subsidiaries.
"Superior Proposal" has the meaning ascribed to it in Section 5.2.
"Surviving Corporation" has the meaning ascribed to it in Section 2.1.
A-6
"Takeover Proposal" means any agreement, offer or proposal for, or any
indication of interest, written or oral, in (A) a merger, reorganization, share
exchange, consolidation, or other business combination involving the Company or
any of its Subsidiaries, which would result in the holders of the Company's
Common Stock immediately prior to the consummation of such transaction holding
less than eighty five percent (85%) of the outstanding shares of any class of
capital stock or voting power of the surviving, resulting or acquiring entity
immediately following the consummation of such transaction; or (B) a tender
offer for securities of the Company, which, if successful, would result in the
tender offeror, either alone or as part of a group, holding beneficial
ownership of fifteen percent (15%) or more of the outstanding shares of any
class of capital stock or voting power of the Company immediately following the
consummation of such tender offer; (C) the acquisition of fifteen percent (15%)
or more of the outstanding shares of any class of capital stock or voting power
of the Company; or (D) the acquisition of fifteen percent (15%) or more of the
assets of the Company and its Subsidiaries (either on the basis of book value
or fair market value, calculated in each case on a consolidated basis), other
than, in each case, the transactions contemplated by this Agreement. For
purposes of this definition, the terms "person", "group" and "beneficial
ownership" have the meanings ascribed to them in the Securities Exchange Act of
1934, as amended and the rules and regulations of the SEC thereunder.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed by
any Tax Authority; (ii) any liability for the payment of any amounts of the
type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any Taxable period; and (iii) any
liability for the payment of any amounts of the type described in clause (i) or
clause (ii) as a result of being a transferee of or successor to any person or
as a result of any express or implied obligation to indemnify any other person,
including pursuant to any Tax sharing or Tax allocation agreement.
"Tax Authority" means any Governmental Entity responsible for the imposition
of any Tax (domestic or foreign).
"Tax Return" means any return, statement, report or form (including
estimated Tax returns and reports, withholding Tax returns and reports and
information reports and returns) required to be filed with respect to Taxes.
"Third Party Intellectual Property Rights" has the meaning ascribed to it in
Section 3.11(b).
"Transaction Expenses" means the actual, reasonable, documented fees, costs
and expenses incurred by the Company and payable to Needham & Co. as financial
advisor to the Company pursuant to its letter agreement with the Company dated
as of June 28, 2000 (the "Needham Letter"), Gray Cary Ware & Freidenrich LLP as
outside legal counsel to the Company, and the Company's outside accountants, in
each case in connection with the negotiations leading to this Agreement, the
negotiation and documentation of this Agreement (including due diligence in
connection therewith), the performance of the Company's obligations under this
Agreement, and the consummation of the Merger and the other transactions
contemplated by this Agreement, and expenses incurred in connection with
printing the Company's proxy materials and the Registration Statement,
registration and filing fees in connection with the Registration Statement, the
proxy materials and the listing of additional shares, and fees, costs and
expenses associated with complying with applicable Blue Sky securities laws in
connection with the Merger and filing fees under the HSR Act. Fees, costs and
expenses incurred by the Company in connection with legal, accounting and
financial advisory work in the ordinary course of business shall not constitute
Transaction Expenses, even though they may be incurred after the date hereof or
during the pendency of this Agreement.
"Trigger Event" means the acquisition by any person or group (other than a
stockholder who is party to an enforceable Voting Agreement) of beneficial
ownership of securities representing fifteen percent (15%) or
A-7
more of the outstanding shares of any class of capital stock or voting power of
the Company, or the commencement or public announcement of a tender or exchange
offer, other publicly announced initiative or open market purchase program
following the successful consummation of which such person or group would have
beneficial ownership of securities representing fifteen percent (15%) or more
of the outstanding shares of any class of capital stock or voting power of the
Company. For purposes of this definition, the terms "person", "group" and
"beneficial ownership" have the meanings ascribed to them in the Securities
Exchange Act of 1934 as amended and the rules and regulations of the SEC
thereunder.
"Voting Agreements" has the meaning ascribed to it in the Recitals to this
Agreement.
"WARN" has the meaning ascribed to it in Section 3.17(g).
ARTICLE II
The Merger
Section 2.1 The Merger. At the Effective Time (as defined in Section 2.2)
and upon the terms and subject to the conditions set forth in this Agreement
and the applicable provisions of the General Corporation Law of the State of
Delaware (the "DGCL"), Merger Sub shall be merged with and into the Company,
the separate corporate existence of Merger Sub shall cease and the Company
shall continue as the surviving corporation. The Company as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
Section 2.2 Closing; Effective Time. The closing of the Merger (the
"Closing") shall take place as soon as reasonably practicable (and in any event
not later than two business days) after the satisfaction or waiver of each of
the conditions set forth in Article VII hereof or at such other time as the
parties hereto agree (the "Closing Date"). The Closing shall take place at the
offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California, 94303, or at such other location as the parties
hereto agree. As part of the Closing, the parties hereto shall cause the Merger
to be consummated by filing a certificate of merger in the form attached hereto
as Exhibit B (the "Certificate of Merger") with the Secretary of State of the
State of Delaware, in accordance with the relevant provisions of the DGCL (the
time of the filing of such document, or such later time as may be agreed to by
the parties and specified in the Certificate of Merger in accordance with
Section 103(d) of the DGCL, being the "Effective Time").
Section 2.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Certificate of Merger and
the applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all property, rights,
privileges, powers and franchises of the Company and Merger Sub shall vest in
the Surviving Corporation, without revision or impairment, and debts,
liabilities and duties of the Company and Merger Sub shall be the debts,
liabilities and duties of the Surviving Corporation.
Section 2.4 Certificate of Incorporation; Bylaws. At the Effective Time, the
Certificate of Incorporation of the Surviving Corporation shall be amended in
its entirety to read as set forth in Exhibit C hereto. From and after the
Effective Time, Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended in accordance with the DGCL, the Certificate of
Incorporation of the Surviving Corporation and such Bylaws.
Section 2.5 Directors and Officers. From and after the Effective Time, the
directors and officers of Merger Sub immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation, in each case
until their successors are elected or appointed and qualified or until their
earlier resignation or removal.
A-8
Section 2.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of Merger Sub, the Company or the holders of any of the
following securities:
(a) Conversion of Company Common Stock. At the Effective Time, subject
to Section 2.6(f), each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than any shares
of Company Common Stock to be canceled pursuant to Section 2.6(b)) shall be
automatically converted into the right to receive that number of shares (or
a fraction of a share, as the case may be) of Parent Common Stock (the
"Exchange Ratio") equal to the quotient obtained by dividing (i) the sum of
six dollars ($6) per share and the Contingent Consideration, if any,
calculated in accordance with Section 2.7, by (ii) the Average Parent Stock
Price;
(b) Cancellation of Company Common Stock Owned by Parent or Company. At
the Effective Time, all shares of Company Common Stock that are owned by
the Company as treasury stock and each share of Company Common Stock owned
by Parent or any direct or indirect wholly owned Subsidiary of Parent or
the Company immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof or any other consideration paid
or issued therefore.
(c) Company Stock Option Plans; Company ESPP. At the Effective Time,
the Company's 1995 Stock Option Plan, 1995 Outside Directors Stock Option
Plan, 2000 Nonstatutory Stock Option Plan, Virtual Machine Works 1994
Incentive Stock Option Plan and the non-plan options to purchase Company
Common Stock set forth in Section 2.6(c) of the Company Disclosure Schedule
(collectively the "Company Stock Option Plans") and all options to purchase
Company Common Stock then outstanding under the Company Stock Option Plans
shall be assumed by Parent in accordance with Section 6.9. The Company ESPP
(as defined in Section 3.2) shall be terminated in accordance with Section
6.9(c).
(d) Capital Stock of Merger Sub. At the Effective Time, each share of
common stock, $0.01 par value, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation, and the
Surviving Corporation shall be a wholly owned Subsidiary of Parent. Each
stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible
into Parent Common Stock or Company Common Stock), reorganization,
recapitalization or other like change with respect to Parent Common Stock
or Company Common Stock occurring after the date hereof and prior to the
Effective Time so as to provide holders of Company Common Stock and Parent
the same economic effect as contemplated by this Agreement prior to such
stock split, reverse split, stock dividend, reorganization,
recapitalization, like change or increase.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common
Stock to be received by such holder) shall receive from Parent an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the Average Parent Stock Price.
Section 2.7 Contingent Consideration.
(a) Contingent Consideration.
The "Contingent Consideration", if any, equals (i) the Contingent Price
Adjustment, if any, calculated pursuant to Section 2.7(b) less (ii) the
Dilution Adjustment calculated pursuant to Section 2.7(c). In no event shall
any person who immediately prior to the Effective Time was a holder of capital
stock of the Company be required to repay or return any consideration which
such holder receives or which such holder has the right to receive, as a result
of the determination of the Contingent Consideration hereunder, and for such
purposes, the
A-9
calculation of the Contingent Consideration in accordance with the procedures
set forth in Section 2.7(d) shall be final and binding on all parties to this
Agreement and on the holders of Company capital stock and options.
(b) Contingent Price Adjustment. The "Contingent Price Adjustment" shall be
calculated as follows:
(i) If the Closing Date is prior to June 30, 2002, the Contingent Price
Adjustment shall equal nine dollars ($9) per share of Company Common Stock
and the second paragraph of Section 2.7(d) shall not apply; provided, that
the Closing may not occur prior to June 30, 2002 without the agreement of
both Parent and the Company.
(ii) If the Closing Date is on or after June 30, 2002, the Contingent
Price Adjustment shall equal an amount per share of Company Common Stock
equal to either the Revenue Plus Net Backlog Adjustment or the PBT
Adjustment, whichever produces a lower dollar per share value, except that
if the PBT Adjustment produces a lower dollar per share value than the
Revenue Plus Net Backlog Adjustment but the same or higher dollar per share
value than the Revenue Adjustment, the Contingent Price Adjustment shall
equal the Revenue Plus Net Backlog Adjustment.
(A) The "Revenue Plus Net Backlog Adjustment" shall be calculated
using Revenue plus Net Backlog as provided in the following table using
either (aa) Revenue plus the absolute value of Net Backlog if Net
Backlog is positive or (bb) Revenue minus the absolute value of Net
Backlog if Net Backlog is negative and shall equal the dollar per share
value that results from the formula in the applicable right-hand column
of the table (such formula is located in the row that contains the
applicable Revenue plus Net Backlog in the left-hand column of the
table):
Revenue plus Net Backlog ("RB") Revenue Plus Net Backlog Adjustment
------------------------------- -----------------------------------
(millions)
RB (greater than or =) $100 $14
$90 (less than or =) RB < $100 $14 - $((100 - RB)/10) *2
$80 (less than or =) RB < $90 $12 - $((90 - RB)/10) *3
$70 (less than or =) RB < $80 $9 - $((80 - RB)/10) *3
$60 (less than or =) RB < $70 $6 - $((70 - RB)/10) *3
$50 (less than or =) RB < $60 $3 - $((60 - RB)/10) *3
RB < $50 $0
The "Revenue Adjustment" shall be calculated using Revenue as provided in
the following table and shall equal the dollar per share value that results
from the formula in the applicable right-hand column of the table (such formula
is located in the row that contains the applicable Revenue in the left-hand
column of the table):
Revenue ("R") Revenue Adjustment
------------- ------------------
(millions)
R (greater than or =) $100 $14
$90 (less than or =) R < $100 $14 - $((100 - R)/10) *2
$80 (less than or =) R < $90 $12 - $((90 - R)/10) *3
$70 (less than or =) R < $80 $9 - $((80 - R)/10) *3
$60 (less than or =) R < $70 $6 - $((70 - R)/10) *3
$50 (less than or =) R < $60 $3 - $((60 - R)/10) *3
RB < $50 $0
A-10
(B) The "PBT Adjustment" shall be calculated using PBT as provided
in the following table and shall equal the dollar per share value that
results from the formula in the applicable right-hand column of the
table (such formula is located in the row that contains the applicable
PBT in the left-hand column of the table):
PBT PBT Adjustment
--- --------------
(millions)
PBT (greater than or =) $18 $14
$14 (less than or =) PBT < $18 $14 - $((18 - PBT)/4) *2
$8 (less than or =) PBT < $14 $12 - $((14 - PBT)/6) *3
$0 (less than or =) PBT < $8 $9 - $((8 - PBT)/8) *3
$(5) (less than or =) PBT < $0 $6 - $((0 - PBT)/5) *3
$(10) (less than or =) PBT <
$(5) $3 - $((-5 - PBT)/5) *3
PBT < $(10) $0
(c) Dilution Adjustment. The "Dilution Adjustment" shall be determined by
dividing (i) the product obtained from multiplying (x) the excess of the number
of Fully Diluted Shares over the Authorized Fully Diluted Shares and (y) the
sum of six dollars ($6) plus the Contingent Price Adjustment by (ii) the Fully
Diluted Shares.
(d) Calculation of Contingent Consideration.
As soon as practicable after June 30, 2001 but in no event later than July
21, 2001, Ernst & Young LLP shall audit the Company in order to calculate the
Backlog as of June 30, 2001. As soon as practicable after June 30, 2001 but in
no event later than July 21, 2001, Ernst & Young LLP and the Company shall
provide to Parent and KPMG LLP all supporting materials and information
(including all audit and tax working papers of the Company and Ernst & Young
LLP) necessary or appropriate for Parent and KPMG LLP to calculate the Backlog
as of June 30, 2001. As soon as practicable after the parties have completed
their respective calculations of the Backlog as of June 30, 2001, but in no
event later than July 28, 2001, if such calculations differ, Parent, KPMG LLP,
the Company, and Ernst & Young LLP shall seek in good faith to resolve such
differences in order to agree on a calculation of the Backlog as of June 30,
2001. If Parent and the Company are unable to resolve such differences by July
31, 2001, Parent and the Company shall revise their respective calculations so
that each such revised calculation identifies the differences remaining between
the two such calculations. No later than August 5, 2001, Parent and the Company
shall submit such revised calculations to PriceWaterhouseCoopers (or Deloitte &
Touche if PriceWaterhouseCoopers does not agree to provide services pursuant to
this paragraph or has a material relationship with either of the parties) (the
"CPA Firm"). Acting as experts and not as arbitrators, and based solely on its
independent review and analysis of the revised calculations (without review,
analysis or audit of the data underlying such calculations), the CPA Firm shall
determine the Backlog as of June 30, 2001, based on its determination of which
calculation (Parent's calculation or the Company's calculation) better
approximates the Backlog as of June 30, 2001; provided that to make such
determination the CPA Firm shall choose, without any modification, either the
Company's calculation of the Backlog as of June 30, 2001, taken as a whole as
submitted in its entirety to the CPA Firm by the Company, or Parent's
calculation of Backlog as of June 30, 2001, taken as a whole as submitted in
its entirety to the CPA Firm by Parent. The Company and Parent shall direct the
CPA Firm to use its best efforts to render such determination no later than
August 10, 2001. Such determination shall be final, conclusive and binding upon
the Company and Parent. Fifty percent (50%) of the fees of the CPA Firm billed
to the parties shall be paid by Parent, and the other fifty percent (50%) of
such fees shall be paid from the Contingent Consideration, if any. To the
extent such Contingent Consideration is insufficient to pay such fees, Parent
shall pay the remainder.
As soon as practicable after June 30, 2002 but in no event later than August
5, 2002 (unless the Closing Date has occurred prior to June 30, 2002, in which
case, as provided in Section 2.7(b)(i), this second paragraph of Section 2.7(d)
shall not apply), Ernst & Young LLP shall audit the Company in order to
calculate the
A-11
Backlog as of June 30, 2002, the Contingent Price Adjustment, and the Dilution
Adjustment. As soon as practicable after June 30, 2002 but in no event later
than August 5, 2002, Ernst & Young LLP and the Company shall provide to Parent
and KPMG LLP all supporting materials and information (including all audit and
tax working papers of the Company and Ernst & Young LLP) necessary or
appropriate for Parent and KPMG LLP to calculate the Backlog as of June 30,
2002, the Contingent Price Adjustment, and the Dilution Adjustment. As soon as
practicable after the parties have completed their respective calculations of
the Backlog as of June 30, 2002, the Contingent Price Adjustment, and the
Dilution Adjustment but in no event later than August 12, 2002, if any of such
calculations differ, Parent, KPMG LLP, the Company, and Ernst & Young LLP shall
seek in good faith to resolve such differences in order to agree on a
calculation of the Backlog as of June 30, 2002, the Contingent Price
Adjustment, and the Dilution Adjustment. If Parent and the Company are unable
to resolve such differences by August 15, 2002, Parent and the Company shall
revise their respective calculations so that each such revised calculation
identifies the differences remaining between the two such calculations. No
later than August 19, 2002, Parent and the Company shall submit such revised
calculations to the CPA Firm. Acting as experts and not as arbitrators, and
based solely on its independent review and analysis of the revised calculations
(without review, analysis or audit of the data underlying such calculations),
the CPA Firm shall determine the Backlog as of June 30, 2002, the Contingent
Price Adjustment, and the Dilution Adjustment, based on its determination of
which calculation (Parent's calculation or the Company's calculation) better
approximates the Backlog as of June 30, 2002, the Contingent Price Adjustment,
and the Dilution Adjustment; provided that to make such determination the CPA
Firm shall choose, without any modification, either the Company's calculations
of the Backlog as of June 30, 2002, the Contingent Price Adjustment, and the
Dilution Adjustment, taken as a whole as submitted in their entirety to the CPA
Firm by the Company, or Parent's calculations of Backlog as of June 30, 2002,
Contingent Price Adjustment, and Dilution Adjustment, taken as a whole as
submitted in their entirety to the CPA Firm by Parent. The Company and Parent
shall direct the CPA Firm to use its best efforts to render such determination
no later than August 26, 2002, respectively. Such determination shall be final,
conclusive and binding upon the Company and Parent. Fifty percent (50%) of the
fees of the CPA Firm billed to the parties shall be paid by Parent, and the
other fifty percent (50%) of such fees shall be paid from the Contingent
Consideration, if any. To the extent such Contingent Consideration is
insufficient to pay such fees, Parent shall pay the remainder.
Section 2.8 Surrender of Certificates.
(a) Exchange Agent. Parent's transfer agent shall act as exchange agent
(the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock and Cash. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article II, through such reasonable procedures as Parent
may adopt, (i) the shares of Parent Common Stock issuable pursuant to Section
2.6(a) in exchange for shares of Company Common Stock outstanding immediately
prior to the Effective Time (provided that delivery of any shares that are
subject to vesting and/or repurchase rights in favor of the Company shall be in
book entry form until such vesting and/or repurchase rights lapse) and (ii)
cash in an amount sufficient to permit payment of cash in lieu of fractional
shares pursuant to Section 2.6(f).
(c) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, subject to Section 2.7, the Surviving Corporation shall cause
to be mailed to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock (the "Company Certificates"), whose shares were converted
into the right to receive shares of Parent Common Stock (and cash in lieu of
fractional shares) pursuant to Section 2.6(a) (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Company Certificates shall pass, only upon receipt of the Company
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Company Certificates in exchange for
certificates (or book entries in the case of shares that are subject to vesting
and/or repurchase rights in favor of the Company) representing shares of Parent
Common Stock (and cash in lieu of fractional shares). Upon surrender of a
Company Certificate for cancellation to the Exchange
A-12
Agent (or to such other agent or agents as may be appointed by Parent),
together with such letter of transmittal, duly completed and validly executed
in accordance with the instructions thereto, the Company Certificate so
surrendered shall forthwith be canceled and the holder of such Company
Certificate shall be sent in exchange therefor a certificate or certificates
(or book entry in the case of shares that are subject to vesting and/or
repurchase rights) representing the number of whole shares of Parent Common
Stock which such holder has the right to receive pursuant to Section 2.6(a) and
cash payment in lieu of fractional shares which such holder has the right to
receive pursuant to Section 2.6(f). Until so surrendered, each outstanding
Company Certificate that will be deemed from and after the Effective Time to
represent only the right to receive the merger consideration contemplated by
Section 2.6(a) upon surrender of such Company Certificate. Notwithstanding any
other provision of this Agreement, no interest will be paid or will accrue on
any cash payable to holders of Company Certificates pursuant to the provisions
of this Article II.
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to Parent Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Company
Certificate with respect to the shares of Parent Common Stock which the holder
thereof has the right to receive until the holder of record of such Company
Certificate shall surrender such Company Certificate. Subject to applicable
law, following surrender of any such Company Certificate, there shall be paid
to the record holder of the Parent Common Stock certificates issued in exchange
therefor, without interest, the amount of any such dividends or other
distributions with a record date after the Effective Time theretofore payable
(but for the provisions of this Section 2.8(d)) with respect to such shares of
Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Company
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Company Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and that
the person requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the issuance
of a certificate for shares of Parent Common Stock in any name other than that
of the registered holder of the Company Certificate surrendered, or established
to the satisfaction of Parent or any agent designated by it that such tax has
been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
2.8, none of the Exchange Agent, the Surviving Corporation, Parent or any party
hereto shall be liable to any person for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Company Certificate has not been surrendered prior to five (5) years
after the Effective Time (or immediately prior to such earlier date on which
the merger consideration contemplated by Section 2.6 in respect of such Company
Certificate would otherwise escheat to or become the property of any
Governmental Entity), any amounts payable in respect of such Company
Certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or
interests of any person previously entitled thereto.
Section 2.9 Termination of Exchange Fund. Any portion of funds (including
any interest earned thereon) or certificates for shares of Parent Common Stock
held by the Exchange Agent which have not been delivered to holders of Company
Certificates pursuant to this Article II within seven (7) months after the
Effective Time shall promptly be paid or delivered, as appropriate, to Parent,
and thereafter holders of Company Certificates who have not theretofore
complied with the exchange procedures set forth in and contemplated by Section
2.8 shall thereafter look only to Parent (subject to abandoned property,
escheat and similar laws) for their claim for shares of Parent Common Stock
and, only as general creditors thereof, any cash in lieu of fractional shares
of Parent Common Stock and any dividends or distributions (with a record date
after the Effective Time) with respect to Parent Common Stock to which they are
entitled.
Section 2.10 No Further Ownership Rights in Company Common Stock. All shares
of Parent Common Stock issued upon the surrender for exchange of shares of
Company Common Stock in accordance with the
A-13
terms hereof (including any cash paid in lieu of fractional shares) shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock, and there shall be no further registration
of transfers on the records of the Surviving Corporation of shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, any Company Certificate is presented to the
Surviving Corporation for any reason, it shall be canceled and exchanged as
provided in this Article II.
Section 2.11 Lost, Stolen or Destroyed Certificates. In the event any
Company Certificate shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Company
Certificate, upon the making of an affidavit of that fact by the holder
thereof, such shares of Parent Common Stock (and cash in lieu of fractional
shares) as may be required pursuant to Section 2.6; provided, however, that
Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Company
Certificate to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent, the Surviving
Corporation or the Exchange Agent with respect to the Company Certificate
alleged to have been lost, stolen or destroyed.
Section 2.12 Tax and Accounting Consequences. It is intended by the parties
hereto that the Merger shall (a) constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and (b) be accounted for as a
purchase.
Section 2.13 Withholding Rights. Parent and the Surviving Corporation shall
be entitled to deduct and withhold from the number of shares of Parent Common
Stock otherwise deliverable under this Agreement, and from any other payments
made pursuant to this Agreement, such amounts as Parent and the Surviving
Corporation are required to deduct and withhold with respect to such delivery
and payment under the Internal Revenue Code or any provision of United States
federal, state, local, or foreign national, provincial, local or other Tax law.
To the extent that amounts are so withheld, such withheld amounts shall be
treated for all purposes of this Agreement as having been delivered and paid to
the holder of shares of Company Common Stock in respect of which such deduction
and withholding was made by Parent and the Surviving Corporation.
Section 2.14 Taking of Necessary Action; Further Action. If, at any time
after the Effective Time, any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Merger Sub, the officers and directors
of the Company and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful
and necessary action, as long as such action is not inconsistent with this
Agreement.
ARTICLE III
Representations and Warranties of Company
The Company represents and warrants to Parent and Merger Sub that the
statements contained in this Article III are true and correct except as set
forth herein and in the disclosure schedule dated as of and delivered by the
Company to Parent on the date of this Agreement (the "Company Disclosure
Schedule"). The disclosures set forth in the Company Disclosure Schedule shall
qualify only the disclosure under the section number referred to in the Company
Disclosure Schedule.
Section 3.1 Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. Each of the
Company and its Subsidiaries has the corporate power to own its properties and
to carry on its business as now being conducted and as presently proposed to be
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified and in good standing could
reasonably be expected to have a Company Material Adverse Effect. The Company
has delivered to Parent a true and correct copy of the Certificate of
Incorporation, (the "Certificate of
A-14
Incorporation"), and Bylaws or other charter documents, as applicable, of the
Company and each of its Subsidiaries, each as amended to date. Neither the
Company nor any of its Subsidiaries is in violation of any of the provisions of
its respective charter or bylaws or equivalent organizational documents. The
Company is the owner of all outstanding shares of capital stock of each of its
Subsidiaries and all such shares are duly authorized, validly issued, fully
paid and nonassessable. All of the outstanding shares of capital stock of each
such Subsidiary are owned by the Company free and clear of all liens, charges,
claims or encumbrances or rights of others and are not subject to preemptive
rights or rights of first refusal created by statute, the certificate of
incorporation, or Bylaws of such Subsidiary or any agreement to which such
Subsidiary is a party or by which it is bound. There are no outstanding
subscriptions, options, warrants, puts, calls, rights, exchangeable or
convertible securities or other commitments or agreements of any character
relating to the issued or unissued capital stock or other securities of any
such Subsidiary, or otherwise obligating the Company or any such Subsidiary to
issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. The Company does not directly or indirectly own any equity or
similar interest in, or any interest convertible or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, limited
liability company, joint venture or other business association or entity
(excluding the Subsidiaries and securities in publicly traded companies held
for passive investment and comprising less than one percent (1%) of the
outstanding stock of such company).
Section 3.2 Capital Structure. The authorized capital stock of the Company
consists of fifty million (50,000,000) shares of Common Stock, $0.01 par value,
of which there were issued and outstanding as of the close of business on June
15, 2001, 9,061,620 shares, and ten million (10,000,000) shares of Preferred
Stock $0.01 par value of which five hundred thousand (500,000) shares have been
designated as Series G Preferred Stock. As of the close of business on June 15,
2001 there were no shares of Preferred Stock issued and outstanding. No shares
of Company Common Stock are held in treasury of the Company or by its
Subsidiaries. There are no other outstanding shares of capital stock or voting
securities and no outstanding commitments to issue any shares of capital stock
or voting securities after June 15, 2001, except upon the exercise of options
outstanding as of such date under the Company Stock Option Plans (as defined in
Section 2.6(c)) or pursuant to the Company's 1996 Employee Stock Purchase Plan
(the "Company ESPP"). All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and are free and
clear of any liens or encumbrances, other than any liens, charges, claims,
encumbrances or rights of others, and are not subject to preemptive rights or
rights of first refusal created by statute, the Certificate of Incorporation,
or Bylaws of the Company or any agreement to which the Company is a party or by
which it is bound. As of the close of business on June 15, 2001, the Company
had reserved (i) 5,736,884 shares of Common Stock for issuance to employees,
consultants and directors pursuant to the Company Stock Option Plans, of which
2,264,058 shares had been issued pursuant to option exercises or direct stock
purchases, 3,155,594 shares were subject to outstanding, unexercised options,
no shares were subject to outstanding stock purchase rights, and 316,872 shares
were available for issuance thereunder and (ii) 1,050,000 shares of Common
Stock for issuance to employees pursuant to the Company ESPP, of which 535,153
shares had been issued. Between June 15, 2001 and the date hereof, Company has
not (i) issued or granted additional options under the Company Stock Option
Plans, or (ii) accepted enrollments in the Company ESPP. Except for (i) the
rights created pursuant to this Agreement, the Company Stock Option Plans and
the Company ESPP and (ii) the Company's rights to repurchase any unvested
shares under the Company Stock Option Plans, there are no other options,
warrants, calls, rights, commitments or agreements of any character to which
the Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. There are no contracts, commitments or
agreements relating to voting, purchase or sale of the Company's capital stock
(other than those granting the Company the right to purchase unvested shares
upon employment or service termination, and the Voting Agreements) (i) between
or among the Company and any of its stockholders and (ii) to the Company's
Knowledge, between or among any of the Company's stockholders. The terms of the
Company Stock Option Plans permit the assumption or substitution of options to
purchase Parent Common Stock as provided in this Agreement, without the consent
A-15
or approval of the holders of such securities, stockholders, or otherwise. The
current Offering Period (as defined in the Company ESPP) commenced under the
Company ESPP on February 1, 2001 and will end on July 31, 2001, and except for
the purchase rights granted on such commencement date to participants in the
current Purchase Period (as defined in the Company ESPP), there are no other
purchase rights or options outstanding under the Company ESPP. True and
complete copies of all forms of agreements and instruments relating to or
issued under the Company Stock Option Plans or Company ESPP (and true and
complete copies of all such agreements and instruments which differ in any
material respect from any of such forms) have been provided to Parent and such
agreements and instruments have not been amended, modified or supplemented
since being provided to Parent, and there are no agreements to amend, modify or
supplement such agreements or instruments in any case from the form provided to
Parent. The shares of Company Common Stock issued under the Company Stock
Option Plans, as amended and under all prior versions thereof, have either been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or were issued in transactions which qualified for exemptions under either
Section 4(2) of, or Rule 701 under, the Securities Act for stock issuances
under compensatory benefit plans.
Section 3.3 Authority; No Conflicts. The Company has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Company,
subject only to the approval of the Merger by the Company's stockholders
holding a majority of the outstanding shares of Company Common Stock as
contemplated by Section 7.1(a). This Agreement has been duly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery of this Agreement by Parent and Merger Sub, constitutes the valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as enforceability may be limited by bankruptcy and other
similar laws affecting the rights and remedies of creditors generally and
general principles of equity. The execution and delivery of this Agreement by
the Company do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default under
(with or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under, or require the consent or approval of any person in respect of:
(i) any provision of the Certificate of Incorporation or Bylaws of the Company
or any of its Subsidiaries, as amended, or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries or any of their properties or assets. No consent, approval, order
or authorization of, or registration, declaration or filing with, any court,
arbitrator, tribunal, administrative agency or commission or other governmental
authority or instrumentality, stock exchange or market system, in each case
whether domestic or foreign (each a "Governmental Entity"), is required by or
with respect to the Company or any of its Subsidiaries in connection with the
execution and delivery of this Agreement, or the consummation of the
transactions contemplated hereby, except for (i) the filing of the Certificate
of Merger as provided in Section 2.2; (ii) the filing with the Securities and
Exchange Commission (the "SEC") and the National Association of Securities
Dealers, Inc. (the "NASD") of the Proxy Statement (as defined in Section 3.20)
relating to the Company Stockholders Meeting (as defined in Section 3.20);
(iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and the securities laws of any foreign country; (iv) such filings as may
be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (v) the filing of a Form S-4 Registration Statement
with the SEC in accordance with the Securities Act of 1933, as amended; (vi)
the filing of a Current Report on Form 8-K with the SEC; (vii) filings pursuant
to Rule 165 and Rule 425 of the Securities Act; and (viii) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not have a Company Material Adverse Effect and would not prevent,
or materially alter or delay any of the transactions contemplated by this
Agreement.
Section 3.4 SEC Documents; Financial Statements. The Company has provided
(or made available if publicly available at www.sec.gov or www.10kwizard.com or
other widely available online EDGAR retrieval
A-16
service) to Parent a true and complete copy of each statement, report,
registration statement (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities Act), definitive proxy statement and other filings
made with the SEC by the Company since March 31, 2001 and, prior to the
Effective Time, the Company will have provided (or made available if publicly
available at www.sec.gov or www.10kwizard.com or other widely available online
Edgar retrieval service) to Parent true and complete copies of any additional
documents filed with the SEC by the Company prior to the Effective Time
(collectively, the "Company SEC Documents"). The Company has timely filed all
forms, statements and documents required to be filed by it with the SEC and The
Nasdaq Stock Market since March 31, 2001. In addition, the Company has provided
(or made available if publicly available at www.sec.gov or www.10kwizard.com or
other widely available online Edgar retrieval service) to Parent true and
complete copies of all exhibits to the Company SEC Documents filed prior to the
date hereof, and will promptly provide (or make available if publicly available
at www.sec.gov or www.10kwizard.com or other widely available online Edgar
retrieval service) to Parent true and complete copies of all exhibits to any
additional Company SEC Documents filed prior to the Effective Time. All
documents required to be filed as exhibits to the Company SEC Documents have
been so filed, and all material contracts so filed as exhibits are in full
force and effect, except those which have expired in accordance with their
terms. As of their respective filing dates, the Company SEC Documents complied
in all material respects with the requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the Securities Act, and none of
the Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a subsequently
filed Company SEC Document. The financial statements of the Company, including
the notes thereto, included in the Company SEC Documents (the "Company
Financial Statements") were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Q, as permitted by Form 10-Q of the SEC). The Company
Financial Statements fairly present the consolidated financial condition and
operating results of the Company and its Subsidiaries at the dates and during
the periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments none of which individually, or in the
aggregate, are material). There has been no change in Company accounting
policies since March 31, 2001.
Section 3.5 Absence of Certain Changes. Since March 31, 2001 (the "Company
Balance Sheet Date"), the Company has conducted its business in the ordinary
course consistent with past practice and there has not occurred: (i) any
change, event or condition (whether or not covered by insurance) that has
resulted in, or could reasonably be expected to result in, a Company Material
Adverse Effect; (ii) any acquisition, sale or transfer of any material asset of
the Company or any of its Subsidiaries other than in the ordinary course of
business and consistent with past practice; (iii) any change in accounting
methods or practices (including any change in depreciation or amortization
policies or rates) by the Company or any revaluation by the Company of any of
its or any of its Subsidiaries' assets; (iv) any declaration, setting aside, or
payment of a dividend or other distribution with respect to the shares of the
Company, or any direct or indirect redemption, purchase or other acquisition by
the Company of any of its shares of capital stock other than the purchase of
unvested shares upon employment or service termination; (v) any entering into
by the Company or any of its Subsidiaries of any material contract or
agreement, or any material amendment or termination of, other than in the
ordinary course of business, or default by the Company or any of its
Subsidiaries under, any material contract or agreement to which the Company or
any of its Subsidiaries is a party or by which it is bound (or, to the
Knowledge of the Company, by any other party thereto); (vi) any amendment or
change to the Certificate of Incorporation or Bylaws; or (vii) any increase in
or modification of the compensation or benefits payable, or to become payable,
by the Company to any of its directors, consultants or employees, other than
pursuant to scheduled annual performance reviews, provided that any resulting
modifications are in the ordinary course of business and consistent with the
Company's past practices. The Company has not agreed since March 31, 2001
A-17
to effect any changes, events, or conditions or take any of the actions
described in the preceding clauses (i) through (vii) and is not currently
involved in any negotiations to do any of the things described in the preceding
clauses (i) through (vii) (other than negotiations with Parent and its
representatives regarding the transactions contemplated by this Agreement).
Section 3.6 Absence of Undisclosed Liabilities. The Company has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Consolidated Balance Sheets or in the related Notes to Consolidated Financial
Statements included in the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 (the "Company Balance Sheet"), (ii) those incurred
in the ordinary course of business since the Company Balance Sheet Date which
are consistent with past practice and which could not reasonably be expected to
have a Company Material Adverse Effect; and (iii) those incurred in connection
with the execution of this Agreement.
Section 3.7 Litigation. There is no litigation, arbitration or investigation
pending before any Governmental Entity, or, to the Knowledge of the Company or
any of its Subsidiaries, threatened against the Company or any of its
Subsidiaries or any of their respective properties or any of their respective
officers or directors (in their capacities as such) that, individually or in
the aggregate, could reasonably be expected to have a Company Material Adverse
Effect or an adverse impact on the ability of the Company to consummate the
transactions contemplated by this Agreement. There is no judgment, decree or
order against the Company or any of its Subsidiaries, or, to the Knowledge of
the Company and its Subsidiaries, any of their respective directors or officers
(in their capacities as such), that could prevent, enjoin, alter or materially
delay any of the transactions contemplated by this Agreement, or that could
reasonably be expected to have a Company Material Adverse Effect.
Section 3.8 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon the Company or any of its
Subsidiaries which has or reasonably could be expected to have, whether before
or after consummation of the Merger, the effect of prohibiting or materially
impairing any current business practice of the Company or any of its
Subsidiaries, any contemplated acquisition of property by the Company or any of
its Subsidiaries or the conduct by the Company or any of its Subsidiaries of
its business as currently conducted or as currently proposed to be conducted.
Section 3.9 Governmental Authorization. The Company and each of its
Subsidiaries have obtained each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization of a
Governmental Entity (i) pursuant to which the Company or any of its
Subsidiaries currently operates or holds any interest in any of its properties
or (ii) that is required for the operation of the Company's or any of its
Subsidiaries' business or the holding of any such interest ((i) and (ii) herein
collectively called "Company Authorizations"), and all of such Company
Authorizations are in full force and effect, except where the failure to obtain
or have any of such Company Authorizations could not reasonably be expected to
have a Company Material Adverse Effect.
Section 3.10 Title to Property. The Company and its Subsidiaries have good
and valid title to all of their respective properties, interests in properties
and assets, real and personal, reflected in the Company Balance Sheet or
acquired after the Company Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Company Balance
Sheet Date in the ordinary course of business), or in the case of leased
properties and assets, valid leasehold interests in, in each case free and
clear of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except (i) the lien of current taxes not yet due and payable, (ii)
such imperfections of title, liens and easements as do not and will not
materially detract from or interfere with the use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties, and (iii) purchase money liens incurred in the
ordinary course of business and liens securing debt which is reflected on the
Company Balance Sheet. The plants, property and equipment of the Company and
its Subsidiaries that are used in the operations of their businesses are in
good operating condition and repair, ordinary wear and tear excepted, and
except where the failure to be in good condition or repair would not have a
Company Material Adverse Effect. Section 3.10 of
A-18
the Company Disclosure Schedule identifies each parcel of real property owned
or leased by the Company or any of its Subsidiaries. No lease relating to a
foreign parcel contains any extraordinary payment obligation.
Section 3.11 Intellectual Property.
(a) The Company and its Subsidiaries own, or are licensed or otherwise
possess legally enforceable and unencumbered rights to use all patents,
trademarks, trade names, service marks, domain names, database rights,
copyrights, and any other similar intellectual property rights or applications
therefor, maskworks, net lists, schematics, technology, know-how, trade
secrets, inventions, ideas, algorithms, processes, computer software programs
or applications (in both source code and/or object code form), and tangible or
intangible proprietary information or material ("Intellectual Property") that
are used, or currently proposed to be used, in the business of the Company and
its Subsidiaries as currently conducted, or currently proposed to be conducted.
The Company has not (i) licensed any of its Intellectual Property in source
code form to any person or (ii) entered into any exclusive agreements relating
to its Intellectual Property to with any person.
(b) Section 3.11(b) of the Company Disclosure Schedule lists (i) all
patents and patent applications and all registered trademarks, trade names and
service marks, registered copyrights, registered domain names, and registered
maskworks included in the Intellectual Property owned by the Company, including
the jurisdictions in which each such Intellectual Property right has been
issued or registered or in which any application for such issuance and
registration has been filed, (ii) all licenses (both in-bound and outbound),
sublicenses and other agreements as to which the Company is a party and
pursuant to which any person is authorized to use any Intellectual Property,
and (iii) all licenses, sublicenses and other agreements (other than licenses
for standard commercially available off-the-shelf software) as to which the
Company is a party and pursuant to which the Company is authorized to use any
third party patents, trademarks or copyrights, including software ("Third Party
Intellectual Property Rights") which are incorporated in, are, or form a part
of any the Company product.
(c) To the Company's Knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Intellectual Property rights of the
Company or any of its Subsidiaries, or any Third Party Intellectual Property
Rights by any third party, including any employee or former employee of the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property, other than
indemnification provisions contained in purchase orders or license agreements
arising in the ordinary course of business. No royalties or other continuing
payment obligations are due in respect of Third Party Intellectual Property
Rights.
(d) The Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any material license, sublicense or other agreement
relating to the Intellectual Property or Third Party Intellectual Property
Rights.
(e) All patents, trademarks, service marks and copyrights held by the
Company are valid and subsisting and have been properly assigned to the Company
by the inventors, authors or previous owners thereof. The Company (i) has not
been sued in any suit, action or proceeding (or received any notice or, to the
Company's Knowledge, threat) which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party and (ii) has not brought any
action, suit or proceeding for infringement of Intellectual Property or breach
of any license or agreement involving Intellectual Property against any third
party. The manufacture, marketing, licensing or sale of the Company's products
does not infringe any patent, trademark, service mark, copyright, trade secret
or other proprietary right of any third party and, to the Knowledge of the
Company, there is no substantial basis for a claim that any of the Company's
past or current products are infringing or have infringed on any Third Party
Intellectual Property Rights.
(f) The Company has secured valid written assignments from all consultants
and employees who contributed to the creation or development of Intellectual
Property of the rights to such contributions that the Company does not already
own by operation of law.
A-19
(g) The Company has taken all necessary and appropriate steps to protect
and preserve the confidentiality of all Intellectual Property not otherwise
protected by patents or copyright ("Confidential Information"). All use,
disclosure or appropriation of Confidential Information owned by the Company by
or to a third party has been pursuant to the terms of a written agreement
between the Company and such third party. All use, disclosure or appropriation
of Confidential Information not owned by the Company has been pursuant to the
terms of a written agreement between Company and the owner of such Confidential
Information, or is otherwise lawful.
(h) There are no actions that must be taken by the Company or any
Subsidiary within ninety (90) days of the Closing Date that, if not taken, will
result in the loss of any Intellectual Property, including the payment of any
registration, maintenance or renewal fees or the filing of any responses to the
U.S. Patent and Trademark Office actions, documents, applications or
certificates for the purposes of obtaining, maintaining, perfecting or
preserving or renewing any Intellectual Property.
(i) The Company has not received any opinion of counsel that any third
party patents apply to the Company's products.
(j) The period of exclusivity under Section 2.5 of the Patent License
Agreement between MIT and Virtual Machine Works, Inc., dated December 22, 1993,
extends until December, 2004.
(k) Neither the Company nor any of its Subsidiaries is a party to any non-
competition or non-solicitation or other similar restrictive agreement or
arrangement relating to any business or service anywhere in the world.
(l) The Company and its Subsidiaries have not disclosed or delivered, or
permitted the disclosure or delivery, to any escrow holder or other third
party, all or any part of the source code (including, without limitation, any
algorithm or documentation contained in or relating to any source code) of its
Intellectual Property.
Section 3.12 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental and Safety Laws" means any federal, state or local
laws, ordinances, codes, regulations, rules, policies and orders that are
intended to assure the protection of the environment, or that classify,
regulate, call for the remediation of, require reporting with respect to,
or list or define air, water, groundwater, solid waste, hazardous or toxic
substances, materials, wastes, pollutants or contaminants, or which are
intended to assure the safety of employees, workers or other persons,
including the public.
(ii) "Hazardous Materials" means any toxic or hazardous substance,
material or waste or any pollutant or contaminant, or infectious or
radioactive substance or material, including those substances, materials
and wastes defined in or regulated under any Environmental and Safety Laws.
(iii) "Property" means all real property leased or owned by the Company
or its Subsidiaries either currently or in the past.
(iv) "Facilities" means all buildings and improvements on the Property
of the Company or its Subsidiaries.
(b) Except in all cases as, in the aggregate, would not have a Company
Material Adverse Effect, (i) no methylene chloride or asbestos is contained in
or has been used at or released from the Facilities; (ii) all Hazardous
Materials and wastes have been disposed of in accordance with all Environmental
and Safety Laws; (iii) the Company and its Subsidiaries have received no notice
(verbal or written) of any noncompliance of the Facilities or its past or
present operations with Environmental and Safety Laws; (iv) no notices,
administrative actions or suits are pending or, to the Company's Knowledge,
threatened relating to a violation of any Environmental and Safety Laws; (v) to
the Company's Knowledge, neither the Company nor its Subsidiaries
A-20
have been or are a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), or state analog statute; (vi) there have not been in the past, and
are not now, any Hazardous Materials on, under or migrating to or from the
Facilities or Property; (vii) there have not been in the past, and are not now,
any underground tanks or underground improvements at, on or under the Property
including treatment or storage tanks, sumps, or water, gas or oil wells; (viii)
there are no polychlorinated biphenyls ("PCBs") deposited, stored, disposed of
or located on the Property or Facilities or any equipment on the Property
containing PCBs at levels in excess of fifty (50) parts per million; (ix) there
is no formaldehyde on the Property or in the Facilities, nor any insulating
material containing urea formaldehyde in the Facilities; (x) the Facilities and
the Company's and its Subsidiaries uses and activities therein have at all
times complied with all Environmental and Safety Laws; and (xi) the Company and
its Subsidiaries have all the permits and licenses required to be issued and
are in full compliance with the terms and conditions of those permits.
Section 3.13 Taxes. The Company and each of its Subsidiaries, and any
consolidated, combined, unitary or aggregate group for Tax (as defined below)
purposes of which the Company or any of its Subsidiaries is or has been a
member, have properly completed and timely filed all Tax Returns required to be
filed by them and have paid all Taxes shown thereon to be due. All unpaid taxes
of the Company and its Subsidiaries for periods through the Company Balance
Sheet Date are reflected on the Company Balance Sheet. The Company has no
liability for unpaid Taxes accruing after the Company Balance Sheet Date other
than Taxes arising in the ordinary course of its business subsequent to the
Company Balance Sheet Date. There is (i) no material claim for Taxes that is a
lien against the property of the Company or any of its Subsidiaries or is being
asserted against the Company or any of its Subsidiaries other than liens for
Taxes not yet due and payable; (ii) no audit of any Tax Return of the Company
or any of its Subsidiaries that is being conducted by a Tax authority; and
(iii) no extension of the statute of limitations on the assessment of any Taxes
that has been granted by the Company or any of its Subsidiaries and that is
currently in effect. Neither the Company nor any of its Subsidiaries has been
or will be required to include any material adjustment in Taxable income for
any Tax period (or portion thereof) pursuant to Section 481 or 263A of the
Internal Revenue Code or any comparable provision under state or foreign Tax
laws solely as a result of transactions, events or accounting methods employed
prior to the Merger other than as reported in the Tax Returns that have been
provided to Parent. The Company has not been distributed in a transaction
qualifying under Section 355 of the Internal Revenue Code within the last two
years, nor has Company distributed any corporation in a transaction qualifying
under Section 355 of the Code within the last two years. There is no agreement,
plan or arrangement to which Company or any of its Subsidiaries is a party,
including this Agreement, covering any employee or former employee of Company
or any of its Subsidiaries that, individually or collectively, would be
reasonably likely to give rise to the payment of any amount that would not be
deductible pursuant to Section 280G, 404 or 162(m) of the Internal Revenue
Code. There is no contract, agreement, plan or arrangement to which Company is
a party or by which it is bound to compensate any individual for excise taxes
pursuant to Section 4999 of the Internal Revenue Code. The Company and each of
its Subsidiaries have withheld or collected and paid over to the appropriate
Tax Authorities (or are properly holding for such timely payment) all Taxes
required by law to be withheld or collected. Neither the Company nor any of its
Subsidiaries has filed or will file any consent to have the provisions of
paragraph 341(f)(2) of the Internal Revenue Code (or comparable provisions of
any state Tax laws) apply to the Company or any of its Subsidiaries. Neither
the Company nor any of its Subsidiaries is a party to, nor does the Company or
any of its Subsidiaries have any liability under, any Tax sharing or Tax
allocation agreements. Neither the Company nor any of its Subsidiaries has
filed any disclosures under Section 6662 of the Internal Revenue Code or
comparable provisions of state, local or foreign law to prevent the imposition
of penalties with respect to any Tax reporting position taken on any Tax
Return. Neither the Company nor any of its Subsidiaries has refrained from
filing any disclosures under Section 6662 of the Internal Revenue Code or
comparable provisions of state, local or foreign law to prevent the imposition
of penalties with respect to any Tax reporting position taken on any Tax Return
based on or in substantial reliance on advice of outside counsel or other
consultants. Neither the Company nor any of its Subsidiaries has ever been a
United States real property holding corporation within the meaning of Section
897 of the Internal Revenue Code. Neither the Company nor any of its
Subsidiaries has ever been a member of a consolidated,
A-21
combined or unitary group of which the Company was not the ultimate parent
corporation. The Company and each of its Subsidiaries have in their possession
receipts for any Taxes paid to foreign Tax authorities. Neither the Company nor
any of its affiliates has taken or agreed to take any action, nor does the
Company have Knowledge of any fact or circumstance, that would prevent the
Merger from qualifying as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code.
Section 3.14 Employee Benefit Plans.
(a) Section 3.14(a) of the Company Disclosure Schedule lists, with respect
to the Company, any Subsidiary of the Company and any trade or business
(whether or not incorporated) which is treated as a single employer with the
Company (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m)
or (o) of the Internal Revenue Code, (i) all material employee benefit plans
(as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")), (ii) any such employee benefit plan that has been
adopted, maintained, contributed to, or required to be contributed to by the
Company or any Subsidiary, whether formally or informally, for the benefit of
employees outside the United States; (iii) each loan to a non-officer employee
in excess of fifty thousand dollars ($50,000), loans to officers and directors
and any stock option, stock purchase, phantom stock, stock appreciation right,
supplemental retirement, severance, sabbatical, medical, dental, vision care,
disability, employee relocation, cafeteria benefit (Internal Revenue Code
Section 125) or dependent care (Internal Revenue Code Section 129), life
insurance or accident insurance plans, programs or arrangements; (iv) all
bonus, pension, profit sharing, savings, deferred compensation or incentive
plans, programs or arrangements; (v) other fringe or employee benefit plans,
programs or arrangements that apply to senior management of the Company and
that do not generally apply to all employees; and (vi) any current or former
employment or executive compensation or severance agreements, written or
otherwise, as to which unsatisfied obligations of the Company of greater than
fifty thousand dollars ($50,000) remain for the benefit of, or relating to, any
present or former employee, consultant or director of the Company
(collectively, the "Company Employee Plans").
(b) The Company has provided to Parent a copy of each of the Company
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any material employee communications relating
thereto) and has, with respect to each Company Employee Plan which is subject
to ERISA reporting requirements, provided copies of the Form 5500 reports filed
for the last three (3) plan years. Any Company Employee Plan intended to be
qualified under Section 401(a) of the Internal Revenue Code either (i) has
obtained from the Internal Revenue Service a favorable determination letter as
to its qualified status under the Internal Revenue Code, including all
amendments to the Internal Revenue Code effected by the Tax Reform Act of 1986
and subsequent legislation other than the Uruguay Round Agreements Act of 1994,
the Uniformed Services Employment and Reemployment Rights Act of 1994, the
Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997,
or (ii) has applied to the Internal Revenue Service for such a determination
letter prior to the expiration of the requisite period under applicable
Treasury Regulations or Internal Revenue Service pronouncements in which to
apply for such determination letter and to make any amendments necessary to
obtain a favorable determination or (iii) the requisite period for application
has not expired. The Company has also furnished Parent with the most recent
Internal Revenue Service determination, opinion, advisory, or notification
letter issued with respect to each such Company Employee Plan, and nothing has
occurred since the issuance of each such letter which would reasonably be
expected to cause the loss of the tax-qualified status of any Company Employee
Plan subject to Internal Revenue Code Section 401(a). Company has also provided
to Parent all registration statements and prospectuses prepared in connection
with each Company Employee Plan.
(c) (i) None of the Company Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person, except as required by
applicable law; (ii) there has been no "prohibited transaction," as such term
is defined in Section 406 of ERISA and Section 4975 of the Internal Revenue
Code, with respect to any Company Employee Plan, which would reasonably be
expected to have, in the aggregate, a Company Material Adverse Effect; (iii)
each Company Employee Plan has been administered in accordance
A-22
with its terms and in compliance with the requirements prescribed by any and
all statutes, rules and regulations (including ERISA and the Internal Revenue
Code), except as would not have, in the aggregate, a Company Material Adverse
Effect, and the Company and each Subsidiary or ERISA Affiliate have performed
in all material respects all obligations required to be performed by them
under, are not in default in any material respect under or violation of, and
have no Knowledge of any material default or violation by any other party to,
any of the Company Employee Plans; (iv) neither the Company nor any Subsidiary
or ERISA Affiliate is subject to any material liability or material penalty
under Sections 4976 through 4980 of the Internal Revenue Code or Title I of
ERISA with respect to any of the Company Employee Plans; (v) all material
contributions required to be made by the Company or any Subsidiary or ERISA
Affiliate to any Company Employee Plan have been made on or before their due
dates and a reasonable amount has been accrued for contributions to each
Company Employee Plan for the current plan years; (vi) with respect to each
Company Employee Plan, no "reportable event" within the meaning of Section 4043
of ERISA (excluding any such event for which the thirty (30) day notice
requirement has been waived under the regulations to Section 4043 of ERISA) nor
any event described in Section 4062, 4063 or 4041 or ERISA has occurred; (vii)
no Company Employee Plan is covered by, and neither the Company nor any
Subsidiary or ERISA Affiliate has incurred or expects to incur any liability
under Title IV of ERISA or Section 412 of the Internal Revenue Code; and (viii)
each Company Employee Plan can be amended, terminated or otherwise discontinued
after the Effective Time in accordance with its terms, without liability to
Parent (other than for benefits accrued through the date of termination and
ordinary administrative expenses typically incurred in a termination event).
With respect to each Company Employee Plan subject to ERISA or applicable
foreign law as an employee pension plan within the meaning of Section 3(2) of
ERISA, an employee welfare benefit plan within the meaning of Section 3(1) of
ERISA, or an employee compensation, pension, welfare, or other benefit plan
under applicable foreign law, the Company has prepared in good faith and timely
filed all requisite governmental reports (which were true and correct as of the
date filed) and has properly and timely filed and distributed or posted all
notices and reports to employees required to be filed, distributed or posted
with respect to each such Company Employee Plan, except where the failure to do
so would not have a Company Material Adverse Effect. No suit, administrative
proceeding, action or other litigation has been brought, or to the Knowledge of
the Company is threatened, against or with respect to any such Company Employee
Plan, including any audit or inquiry by the IRS or United States Department of
Labor.
(d) With respect to each Company Employee Plan, the Company and each of its
United States Subsidiaries have complied except to the extent that such failure
to comply would not, individually or in the aggregate, have a Company Material
Adverse Effect, with (i) the applicable health care continuation and notice
provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") and the regulations (including proposed regulations) thereunder, (ii)
the applicable requirements of the Family Medical and Leave Act of 1993 and the
regulations thereunder, and (iii) the applicable requirements of the Health
Insurance Portability and Accountability Act of 1996 and the regulations
(including proposed regulations) thereunder.
(e) The consummation of the transactions contemplated by this Agreement
will not (i) entitle any current or former employee or other service provider
of the Company, any Company Subsidiary or any other ERISA Affiliate to
severance benefits or any other payment, except as expressly provided in this
Agreement, or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due any such employee or service provider, except as may
be required by Section 6.9 of this Agreement. Without limiting the generality
of the foregoing, the execution and delivery of this Agreement, without more,
does not constitute a change in or of control or a termination or constructive
termination of employment within the meaning of any severance or option plan or
agreement to which the Company or any of its Subsidiaries is a party.
(f) There has been no amendment to, written interpretation or announcement
(whether or not written) by the Company, any Company Subsidiary or other ERISA
Affiliate relating to, or change in participation or coverage under, any
Company Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to that
Plan for the most recent fiscal quarter included in the Company's financial
statements.
A-23
(g) The Company does not currently maintain, sponsor, participate in or
contribute to, nor has it ever maintained, established, sponsored, participated
in, or contributed to, any pension plan (within the meaning of Section 3(2) of
ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV
of ERISA or Section 412 of the Internal Revenue Code.
(h) Neither the Company nor any Company Subsidiary or other ERISA Affiliate
is a party to, or has made any contribution to or otherwise incurred any
obligation under, any "multiemployer plan" as defined in Section 3(37) of
ERISA.
(i) There is no agreement, contract or arrangement to which the Company or
any of its Subsidiaries is a party that may result in the payment of any amount
that would not be deductible by reason of Section 280G or Section 404 of the
Internal Revenue Code.
(j) Each compensation and benefit plan adopted, maintained or contributed
to or required to be maintained or contributed to by the Company or any of its
Subsidiaries by the law or applicable custom or rule of a jurisdiction outside
of the United States (the "Foreign Plans") is listed in Section 3.14(j) of the
Company Disclosure Schedule. In regards to each such Foreign Plan (i) all
material contributions to, and material payments from, the Foreign Plans which
may have been required to be made in accordance with the terms of any such
Foreign Plan, and, when applicable, the law, custom and rule of the
jurisdiction in which such Foreign Plan is maintained, have been timely made or
shall be made by the Closing Date, and all such contributions to the Foreign
Plans, and all payments under the Foreign Plans, for any period ending before
the Closing Date that are not yet, but will be, required to be made, are
reflected as an accrued liability on the Company Balance Sheet, (ii) the
Company and each of its Subsidiaries have complied in all material respects
with all applicable reporting and notice requirements, and each of the Foreign
Plans has obtained from the Governmental Entity having jurisdiction with
respect to such plan all required determinations, if any, that such Foreign
Plan is in compliance with the laws, customs and rules of the relevant
jurisdiction if such determination is required in order to give effect to such
Foreign Plan; (iv) each of the Foreign Plans has been administered in all
material respects at all times in accordance with its terms and applicable law
and regulations.
Section 3.15 Interested Party Transactions. Except as disclosed in the
Company SEC Documents, neither the Company nor any of its Subsidiaries is
indebted to any director, officer or employee of the Company or any of its
Subsidiaries (except for amounts due as normal salaries and bonuses and in
reimbursement of ordinary expenses), and no such person is indebted to the
Company or any of its Subsidiaries, and there are no other transactions of the
type required to be disclosed pursuant to Item 404 of Regulation S-K under the
Securities Act and the Exchange Act.
Section 3.16 Certain Agreements Affected by the Merger. At the Closing
neither the execution and delivery of this Agreement nor the consummation of
the transactions contemplated hereby will: (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any, current or former, director or employee or service
provider of the Company or any of its Subsidiaries; (ii) increase any benefits
otherwise payable by the Company or its Subsidiaries; or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
Section 3.17 Employee Matters.
(a) Neither the Company nor any of its Subsidiaries is a party to any
collective bargaining or other labor union contract applicable to employees of
the Company or any of its Subsidiaries, no collective bargaining agreement is
being negotiated by the Company or any of its Subsidiaries and neither the
Company nor any of its Subsidiaries has any duty to bargain with any labor
organization with respect to such persons. There is no pending demand for
recognition or any other request or demand from a labor organization for
representative status with respect to any persons employed by the Company or
any of its Subsidiaries. There is no labor dispute, strike or work stoppage
against the Company or any of its Subsidiaries pending or, to the Knowledge of
the Company, threatened which may interfere with the respective business
activities of the Company or any
A-24
of its Subsidiaries. Neither the Company nor any of its Subsidiaries, or, to
the Knowledge of the Company, any of their respective representatives or
employees, has committed any unfair labor practices in connection with the
operation of the respective businesses of the Company or any of its
Subsidiaries, and there is no charge or complaint against the Company or any of
its Subsidiaries by the National Labor Relations Board or any comparable
Governmental Entity pending or, to the Knowledge of the Company, threatened.
Neither the Company nor any of its Subsidiaries have any pending contract
grievances under any collective bargaining agreements, other administrative
charges, claims, grievances or lawsuits before any Governmental Entity or
arbiter or arbitrator arising under any laws govern employment and, to the
Knowledge of the Company and its Subsidiaries, there exist no facts that could
reasonably be expected to give rise to such a claim.
(b) The Company and each of its Subsidiaries are in compliance in all
material respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices. The
Company has in all material respects withheld all amounts required by law or by
agreement to be withheld from the wages, salaries, and other payments to
employees; and is not liable for any material arrears of wages or any material
taxes or any material penalty for failure to comply with any of the foregoing.
The Company is not liable for any material payment to any trust or other fund
or to any Governmental Entity, with respect to unemployment compensation
benefits, social security or other benefits or obligations for employees (other
than routine payments to be made in the normal course of business and
consistent with past practice). There are no pending claims against the Company
or any of its Subsidiaries for any material amounts under any workers
compensation plan or policy or for long term disability. Neither the Company
nor any of its Subsidiaries has any obligations under COBRA with respect to any
former employees or qualifying beneficiaries thereunder, except for obligations
that are not material in amount. There are no material controversies pending
or, to the Knowledge of the Company or any of its Subsidiaries, threatened,
between the Company or any of its Subsidiaries and any of their respective
employees, which controversies have or could reasonably be expected to result
in an action, suit, proceeding, claim, arbitration or investigation before any
Governmental Entity.
(c) To the Company's Knowledge, no employees of the Company or any of its
Subsidiaries are in violation of any term of any employment contract, patent
disclosure agreement, noncompetition agreement, or any restrictive covenant to
a former employer relating to the right of any such employee to be employed by
the Company or its Subsidiaries because of the nature of the business conducted
or presently proposed to be conducted by the Company or any of its
Subsidiaries, or to the use of trade secrets or proprietary information of
others. No employees of the Company or any of its Subsidiaries material to the
conduct of their respective businesses have given written notice to the
Company, nor is the Company otherwise aware, that any such employee intends to
terminate his or her employment with the Company or any of its Subsidiaries.
(d) The Company and its Subsidiaries have provided to Parent a list of the
names, positions, rates and elements of compensation for all officers,
directors, employees, advisory board members and consultants of the Company and
its Subsidiaries who are currently receiving compensation or other benefits or
remuneration from the Company and its Subsidiaries, showing each such person's
name, positions, an annual remuneration, bonuses and benefits for the current
fiscal year and the most recently completed fiscal year.
(e) With respect to any persons employed by the Company or any of its
Subsidiaries, (i) the Company and the Company's Subsidiaries have not violated
any legal requirement prohibiting discrimination on the basis of race, color,
national origin, sex, religion, age, marital status, or handicap in its
employment conditions or practices; and (ii) there are no pending or, to the
Knowledge of the Company and the Company's Subsidiaries, threatened
discrimination complaints relating to race, color, national origin, sex,
religion, age, marital status, or handicap against the Company or its
Subsidiaries, before any governmental entity nor, to the Knowledge of the
Company and its Subsidiaries, does any basis therefor exist.
(f) The Company and its Subsidiaries have complied, in all material
respects, with all laws governing the employment of personnel by U.S. companies
and the employment of non-U.S. nationals in the United States, including the
Immigration and Nationality Act 8 U.S.C. Sections 1101 et seq. and its
implementing regulations.
A-25
(g) The Company and the employees of its Subsidiaries have timely given all
notices required to be given to employees under, or otherwise complied with by
Worker Adjustment and Retraining Notification Act of 1988, as amended, and any
rules and regulations promulgated thereunder ("WARN") or similar statutes or
regulations of any jurisdiction relating to any plant closing or mass layoff
(or similar triggering event) caused by or relating to the Merger.
(h) Section 3.17(h) of the Company Disclosure Schedule lists of all non-
U.S. employees of the Company or its Subsidiaries showing each such person's
name, title (if applicable), city/country of employment, rate of annual
remuneration, citizenship, stock option grants, terms and conditions of
employment not in the ordinary course of business, manager's name and work
location.
Section 3.18 Insurance. Section 3.18 of the Company Disclosure Schedule
lists all Company insurance policies as of the date hereof. The Company and
each of its Subsidiaries have policies of insurance and bonds of the type and
in amounts customarily carried by persons conducting businesses or owning
assets similar to those of the Company and its Subsidiaries. There is no
material claim pending under any of such policies or bonds as to which coverage
has been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company and its Subsidiaries are otherwise in compliance in all
material respects with the terms of such policies and bonds. The Company has no
Knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
Section 3.19 Compliance With Laws. Each of the Company and its Subsidiaries
has complied in all material respects with, are not in violation of, and have
not received any written or, to the Knowledge of the Company, other notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business. Without limiting the generality of the foregoing,
the Company has conducted its export transactions in accordance with applicable
provisions of United States export control laws and regulations, including to
the Export Administration Act and implementing Export Administration
Regulations, except for such violations which could not reasonably be expected
to have a Company Material Adverse Effect. Without limiting the foregoing,
except as could not reasonably be expected to have a Company Material Adverse
Effect:
(a) the Company has obtained all export licenses and other approvals
required for its exports of products, software and technologies from the
United States;
(b) the Company is in compliance with the terms of all applicable
export licenses or other approvals;
(c) there are no pending or, to the Knowledge of the Company,
threatened claims against the Company with respect to such export licenses
or other approvals;
(d) there are no actions, conditions or circumstances pertaining to the
Company's export transactions that may give rise to any future claims; and
(e) no consents or approvals for the transfer of export licenses to
Parent are required, or such consents and approvals can be obtained without
material cost and without undue delay.
Section 3.20 Registration Statement; Proxy Statement/Prospectus. The
information supplied by the Company for inclusion in the registration statement
on Form S-4 (or such other or successor form as shall be appropriate) pursuant
to which the shares of Parent Common Stock to be issued in the Merger will be
registered with the SEC (the "Registration Statement") shall not at the time
the Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The information supplied by the Company
for inclusion in the proxy statement/prospectus to be sent to the stockholders
of the Company in connection with the meeting of the Company's stockholders to
consider the
A-26
Merger (the "Company Stockholders Meeting") (such proxy statement/prospectus as
amended or supplemented is referred to herein as the "Proxy Statement") shall
not, on the date the Proxy Statement is first mailed to the Company's
stockholders, at the time of the Company Stockholders Meeting and at the
Effective Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by the
Company which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, the Company shall promptly inform
Parent and Merger Sub. Notwithstanding the foregoing, the Company makes no
representation, warranty or covenant with respect to any information supplied
by Parent or Merger Sub or any other third party which is contained in any of
the foregoing documents.
Section 3.21 Vote Required. The affirmative vote of the holders of a
majority of the shares of the Company Common Stock outstanding on the record
date set for the Company Stockholders Meeting is the only vote of the holders
of any of the Company's capital stock necessary to adopt this Agreement.
Section 3.22 Voting Agreements. All of the persons listed on Section 3.22 of
the Company Disclosure Schedule have signed and delivered a Voting Agreement,
and such Voting Agreement is in full force and effect.
Section 3.23 Board Approval; Rights Plan; State Takeover Statutes. The Board
of Directors of the Company has unanimously (i) approved this Agreement and the
Merger, (ii) determined that this Agreement and the Merger are advisable and in
the best interests of the stockholders of the Company and are on terms that are
fair to such stockholders (iii) recommended that the stockholders of the
Company adopt this Agreement and approve the consummation of the Merger and
(iv) taken all action to the extent necessary to render inapplicable to the
Merger the rights distributed to the holders of Company Common Stock, pursuant
to the Amended and Restated Rights Agreement dated as of January 22, 1999
between the Company and Bank Boston, N.A. (as Rights Agent). Assuming the
accuracy of Parent's representation set forth in Section 4.11 of this
Agreement, the Board of Directors' approval of this Agreement and the Merger is
sufficient to render inapplicable to this Agreement, the Merger, and the
transactions contemplated by this Agreement, the restrictions of Section 203 of
the DGCL to the extent, if any, such Section is applicable to this Agreement,
the Merger, or the transactions contemplated by this Agreement. No other state
takeover statute or similar statute or regulation applies to or purports to
apply to this Agreement, the Merger, or the transactions contemplated by this
Agreement.
Section 3.24 Brokers' and Finders' Fees; Opinion of Financial Adviser. The
Company has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or investment
bankers' fees or any similar charges in connection with this Agreement or any
transaction contemplated hereby, except as specified in the Needham Letter. The
Company has been advised by its financial advisor, Needham & Company, Inc.,
that in such advisor's opinion, as of the date hereof, the Exchange Ratio is
fair, from a financial point of view, to the stockholders of the Company.
Section 3.25 Customers and Suppliers; Backlog. As of the date hereof, none
of the Company's customers which individually accounted for more than five
percent (5%) of the Company's gross revenues during the 12-month period
preceding the Company Balance Sheet Date has terminated or materially reduced,
or indicated in writing, or to the Knowledge of the Company, otherwise to the
Company that it intends to terminate or materially reduce, any agreement with
the Company. As of the date hereof, no material supplier of the Company has
indicated in writing, or to the Knowledge of the Company, otherwise that it
will stop, or decrease the rate of, supplying materials, products or services
to the Company. All orders contained in Backlog have been accepted by the
Company and the customer without exception to any of the original terms of the
order and the Company has received no notice that any such customer intends to
cancel its order, nor does the Company have a substantial basis to believe any
such cancellation is likely.
A-27
Section 3.26 No Default. Neither the Company nor any of its Subsidiaries is,
and has not received written, or to the Knowledge of the Company, other notice
that it is or would be with the passage of time, (a) in violation of any
provision of its Certificate of Incorporation or Bylaws or other organizational
documents, or (b) in default or violation with any term, condition or
provisions of (i) any judgment, decree, order, injunction or stipulation
applicable to the Company or its Subsidiaries or (ii) any agreement, note,
mortgage, indenture, contract, lease, instrument, permit, concession, franchise
or license to which the Company or its Subsidiaries are party or by which their
assets or properties are bound, except where such default or violation could
not reasonably be expected to result in a Company Material Adverse Effect.
ARTICLE IV
Representations and Warranties of Parent and Merger Sub
Parent and Merger Sub represent and warrant to the Company that the
statements contained in this Article IV are true and correct except as set
forth herein and in the disclosure schedule dated as of and delivered by Parent
to the Company on the date of this Agreement (the "Parent Disclosure
Schedule"). The disclosures set forth in the Parent Disclosure Schedule shall
qualify only the disclosure under the section number referred to in the Parent
Disclosure Schedule.
Section 4.1 Organization, Standing and Power. Each of Parent and Merger Sub
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization. Each of Parent and Merger Sub has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to
be so qualified and in good standing could reasonably be expected to have a
Parent Material Adverse Effect. Neither Parent nor Merger Sub is in violation
of any of the provisions of its Certificate of Incorporation or Bylaws or
equivalent organizational documents.
Section 4.2 Capital Structure.
(a) The authorized capital stock of Parent consists of two hundred million
(200,000,000) shares of Common Stock, $0.01 par value, of which there were
issued and outstanding as of the close of business on June 9, 2001, 60,856,710
shares, and two million (2,000,000) shares of Preferred Stock, $0.01 par value,
of which one hundred thousand (100,000) shares have been designated as Series A
Participating Preferred Stock. As of close of business on June 2, 2001 there
were no shares of Preferred Stock issued and outstanding. The shares of Parent
Common Stock to be issued pursuant to the Merger (including pursuant to the
exercise of any options assumed pursuant to Section 6.9) will be duly
authorized, validly issued, fully paid, and non-assessable, free of any liens
or encumbrances imposed by Parent or Merger Sub.
(b) The authorized capital stock of Merger Sub consists of one thousand
(1,000) shares of Common Stock, $0.0001 par value, of which one thousand
(1,000) shares and no shares of Preferred Stock, $0.0001 par value were issued
and outstanding as of the date hereof. The shares of Merger Sub Common Stock to
be issued pursuant to the Merger will be duly authorized, validly issued, fully
paid, and non-assessable, free of any liens or encumbrances imposed by Parent
or Merger Sub.
Section 4.3 Authority. Parent and Merger Sub have all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Sub. This Agreement has been duly executed and delivered by Parent and Merger
Sub and, assuming the due authorization, execution and delivery of this
Agreement by the Company, constitutes the valid and binding obligation of
Parent and Merger Sub enforceable against Parent and Merger Sub in accordance
with its terms, except as enforceability may be limited by bankruptcy and other
similar laws affecting the rights and remedies of creditors generally and
general principles of equity. The execution and delivery of this Agreement do
not, and the consummation of the transactions
A-28
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of a benefit under (i) any provision of the Certificate of Incorporation
or Bylaws of Parent or any of its Subsidiaries, as amended, or (ii) any
material mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or any of its Subsidiaries
or any of their properties or assets. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by or with respect to Parent or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Parent and
Merger Sub or the consummation by Parent and Merger Sub of the transactions
contemplated hereby, except for (i) the filing of the Certificate of Merger
provided in Section 2.2; (ii) the filing with the SEC and NASD of the
Registration Statement; (iii) the filing of a Schedule 13D with the SEC with
respect to the Voting Agreements; (iv) the filing of a Form 8-K and Schedule
13D with the SEC and NASD within fifteen (15) days after the Closing Date; (v)
any filings as may be required under applicable state securities laws and the
securities laws of any foreign country; (vi) such filings as may be required
under the HSR Act; (vii) the filing, if required, with The Nasdaq Stock Market
of a Notification Form for Listing of Additional Shares with respect to the
shares of Parent Common Stock issuable upon conversion of the Company Common
Stock in the Merger and upon exercise of the options under the Company Stock
Option Plans assumed by Parent; (viii) the filing of a registration statement
on Form S-8 with the SEC, or other applicable form covering the shares of
Parent Common Stock issuable pursuant to outstanding options under the Company
Stock Option Plans assumed by Parent; (ix) filings pursuant to Rule 165 and
Rule 425 of the Securities Act; and (x) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Parent Material Adverse Effect and would not prevent or materially alter
or delay any of the transactions contemplated by this Agreement.
Section 4.4 SEC Documents; Financial Statements. Parent has made available
to the Company a true and complete copy of each statement, report, registration
statement (with the prospectus in the form filed pursuant to Rule 424(b) of the
Securities Act), definitive proxy statement, and other filings filed with the
SEC by Parent since March 20, 2001, and, prior to the Effective Time, Parent
will have provided or made available to the Company true and complete copies of
any additional documents filed with the SEC by Parent prior to the Effective
Time (collectively, the "Parent SEC Documents"). Parent has timely filed all
forms, statements and documents required to be filed by it with the SEC and The
Nasdaq Stock Market since March 20, 2001. In addition, Parent has made
available to the Company true and complete copies of all exhibits to the Parent
SEC Documents filed prior to the date hereof, and will promptly make available
to the Company true and complete copies of all exhibits to any additional
Parent SEC Documents filed prior to the Effective Time. All documents required
to be filed as exhibits to the Company SEC Documents have been so filed, and
all material contracts so filed as exhibits are in full force and effect,
except those which have expired in accordance with their terms. As of their
respective filing dates, the Parent SEC Documents complied in all material
respects with the requirements of the Exchange Act and the Securities Act, and
none of the Parent SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they were made, not misleading, except to the extent corrected by a
subsequently filed Parent SEC Document. The financial statements of Parent,
including the notes thereto, included in the Parent SEC Documents (the "Parent
Financial Statements") were complete and correct in all material respects as of
their respective dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods indicated and consistent with each other (except as may be indicated in
the notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Q, as permitted by Form 10-Q of the SEC). The Parent
Financial Statements fairly present the consolidated financial condition and
operating results of Parent and its Subsidiaries at the dates and during the
periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments none of which individually, or in the
aggregate, are material). There has been no change in Parent accounting
policies since March 20, 2001.
A-29
Section 4.5 Absence of Undisclosed Liabilities. Parent has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in Parent's Form 10-Q for the period ended January 31,
2001 (the "Parent Balance Sheet"), (ii) those incurred in the ordinary course
of business since January 31, 2001, which are consistent with past practice and
which could not reasonably be expected to have a Parent Material Adverse
Effect; and (iii) those incurred in connection with the execution of this
Agreement.
Section 4.6 Litigation. There is no litigation, arbitration or investigation
pending against Parent or any of its Subsidiaries before any Governmental
Entity, or, to the Knowledge of Parent, threatened against Parent or any of its
Subsidiaries or any of their respective properties that, individually or in the
aggregate, could reasonably be expected to have a Parent Material Adverse
Effect or to materially and adversely affect the ability of Parent or its
Subsidiaries to consummate the transactions contemplated by this Agreement.
There is no judgment, decree or order against Parent or any of its
Subsidiaries, or, to the Knowledge of Parent, any of their respective directors
or officers (in their capacities as such), that would prevent, enjoin, alter or
materially delay any of the transactions contemplated by this Agreement, or
that would have a Parent Material Adverse Effect.
Section 4.7 Registration Statement; Proxy Statement/Prospectus. The
information supplied by Parent and Merger Sub for inclusion in the Registration
Statement shall not, at the time the Registration Statement (including any
amendments or supplements thereto) is declared effective by the SEC, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information supplied by Parent for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is first mailed to the
Company's stockholders, at the time of the Company Stockholders Meeting and at
the Effective Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which it is made, not false or misleading; or omit to state
any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by Parent
or Merger Sub which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, Parent or Merger Sub will
promptly inform the Company. Notwithstanding the foregoing, Parent and Merger
Sub make no representation, warranty or covenant with respect to any
information supplied by the Company or any third party which is contained in
any of the foregoing documents.
Section 4.8 Board Approval. The Boards of Directors of Parent and Merger
Sub, as the case may be, have (i) approved this Agreement and the Merger, (ii)
determined that the Merger is advisable and in the best interests of their
respective stockholders and is on terms that are fair to such stockholders and
(iii) recommended that the stockholder of Merger Sub adopt this Agreement and
approve the consummation of the Merger. The stockholder of Merger Sub has
adopted this Agreement and approved the consummation of the Merger. No vote of
the holders of Parent Common Stock is required under applicable law or Nasdaq
National Market rules in connection with this Agreement or the Merger.
Section 4.9 Broker's and Finders' Fees. Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
Section 4.10 Tax Matters. Neither Parent nor any of its affiliates has taken
or agreed to take any action, nor does Parent have Knowledge of any fact or
circumstance, that would prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code.
Section 4.11 Parent Owned Shares of Company Common Stock. Neither Parent,
Merger Sub or their respective Subsidiaries own any shares of Company Common
Stock.
A-30
ARTICLE V
Conduct Prior to the Effective Time
Section 5.1 Conduct of Business of Company. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent
expressly contemplated by this Agreement), to carry on its and its
Subsidiaries' business in the ordinary course in substantially the same manner
as heretofore conducted, to pay and to cause its Subsidiaries to pay debts and
Taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform other material obligations when due, and to use its commercially
reasonable efforts consistent with past practice and policies to preserve
intact its and its Subsidiaries' present business organizations, use its
commercially reasonable efforts consistent with past practice to keep available
the services of its and its Subsidiaries' present officers and key employees
and use its commercially reasonable efforts consistent with past practice to
preserve its and its Subsidiaries' relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it
or its Subsidiaries, to the end that its and its Subsidiaries' goodwill and
ongoing businesses shall be unimpaired at the Effective Time. The Company
agrees to promptly notify Parent of any material event or occurrence not in the
ordinary course of its or its Subsidiaries' business, and of any event which
could reasonably be expected to have a Company Material Adverse Effect. Without
limiting the generality of the foregoing, during the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company shall not do, cause or permit any
of the following actions, or allow, cause or permit any of its Subsidiaries to
do, cause or permit any of the following actions:
(a) Charter Documents. cause or permit any amendments to its Certificate
of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. declare or pay any cash or
property dividends on or make any other cash or property distributions in
respect of any of its capital stock, or repurchase or otherwise acquire,
directly or indirectly, any shares of its capital stock except from former
employees, directors and consultants in accordance with the Company's
standard or usual (as at the date hereof) agreements providing for the
repurchase of shares in connection with any termination of service to it or
its Subsidiaries;
(c) Stock Option Plans, Etc. take any action to accelerate, amend or
change the period of exercisability or vesting, or waive any repurchase
rights, in respect of options or other rights granted under the Company
Stock Option Plans or authorize cash payments in exchange for any options
or other rights granted under any of such plans or with respect to any
restricted stock.
(d) Material Contracts. enter into any contract or commitment involving
payments by the Company or its Subsidiaries in excess of five hundred
thousand dollars ($500,000) individually or three million dollars
($3,000,000) in the aggregate or which are otherwise material to the
Company and its Subsidiaries (excluding sales of products or purchases of
supplies in the ordinary course of business consistent with past practice),
or violate, amend or otherwise modify or waive any of the terms of any of
its material contracts;
(e) Issuance of Securities. issue, deliver, encumber or, sell, authorize
or propose the issuance, delivery, encumbrance, or sale of, or purchase or
propose the purchase of, any shares of its or its Subsidiaries' capital
stock or securities convertible into, or subscriptions, rights, warrants or
options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities,
other than (i) the issuance of shares of its Common Stock pursuant to the
exercise of stock options, warrants or other rights therefor outstanding as
of the date of this Agreement, (ii) the grant of stock options under
Company Stock Option Plans to employees and non-employee directors in the
ordinary course of business (not to exceed the Authorized Option Shares),
with an exercise price equal to the fair market value of the Company Common
Stock on the date of grant and otherwise on terms (including vesting
schedules) consistent with the Company's past practice with similarly
situated
A-31
employees, (iii) issuance of shares of Company Common Stock to participants
in the Company ESPP pursuant to the terms thereof and (iv) the repurchase
of Company Common Stock from former employees, directors and consultants in
accordance with the Company's standard or usual (as at the date hereof)
agreements providing for the repurchase of shares in connection with any
termination of service;
(f) Intellectual Property. transfer or license to any person or entity
any rights to its Intellectual Property other than the license of non-
exclusive rights to its Intellectual Property except for standard tool
integrations, joint marketing and joint promotional arrangements entered
into by the Company and another entity, in each case in the ordinary course
of business consistent with past practice;
(g) Exclusive Rights. enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or
technology;
(h) Dispositions. sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its Subsidiaries' business, taking the
Company together with its Subsidiaries as a whole, or which have a value in
excess of five million dollars ($5,000,000) other than sales of products in
the ordinary course of business consistent with the Company's past
practice;
(i) Indebtedness. incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee any
debt securities of others other than pursuant to the Modification of
Revolving Credit and Security Agreement, dated March 27, 2001 by and
between the Company and Comerica Bank;
(j) Leases. enter into any operating leases obligating the Company or
any of its Subsidiaries to make payments over the life of the lease term in
excess of two hundred fifty thousand dollars ($250,000) in the case of any
individual lease or three million dollars ($3,000,000) with respect to all
such leases in the aggregate;
(k) Payment of Obligations. pay, discharge or satisfy in an amount in
excess of one million dollars ($1,000,000) in any one case, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the Transaction Expenses or the payment, discharge or
satisfaction of liabilities reflected or reserved against in the Company
Financial Statements;
(l) Capital Expenditures. make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
consistent with the Company's past practice that exceed two million dollars
($2,000,000) individually or seven million five hundred thousand dollars
($7,500,000) in the aggregate;
(m) Insurance. materially reduce the amount or scope of any material
insurance coverage provided by existing insurance policies;
(n) Termination or Waiver. terminate or waive any right or claim of
substantial value under contracts listed under Section 3.11(b) of the
Company Disclosure Schedule or in connection with any litigation disclosed
in the Company SEC Documents;
(o) Employee Benefit Plans; Pay Increases. adopt or amend any employee
benefit or stock purchase or option plan, pay any special bonus or special
remuneration to any employees or consultants or directors (except as in
accordance with the Bonus Plan), or increase the salaries, wage rates,
target incentive percentages or fringe benefits or otherwise increase the
benefits of its employees or consultants or directors other than pursuant
to scheduled annual performance reviews, except, in each case, for
modifications in the ordinary course of business consistent with the
Company's past practices, any amendments to any Company Employee Plan that
may be required by applicable law, and any other incentive or retention
bonuses or amendments or modifications to any Company Employee Plan that
(i) the Company's board of directors approves and reasonably believes
necessary in order for the Company to
A-32
compete effectively with businesses of a similar nature to the Company's
business and (ii) are paid or accrued on the Company's Financial Statements
for a period ending not later than June 30, 2002.
(p) Labor Agreements. enter into any employment contract (other than an
offer letter for at will employment) or, except if required by applicable
law, any collective bargaining agreement.
(q) Severance Arrangements. grant any severance or termination pay, or
any additional notice of termination, to, or grant any acceleration or
extension of the exercisability or vesting of any equity securities held
by, (i) any director or officer, or (ii) any other employee except,
payments and stock option grants required by standard written agreements
which are in force on the date hereof or are in the ordinary course of
business consistent with past practice in nature and amount and provided,
in each case, that such amounts shall be paid or accrued on the Company's
Financial Statements for a period ending not later than June 30, 2002;
(r) Lawsuits. commence a lawsuit other than (i) for the routine
collection of obligations, (ii) in such cases where it in good faith
determines that failure to commence suit would result in the material
impairment of a valuable aspect of its business, or (iii) for a breach of
this Agreement;
(s) Acquisitions. acquire or agree to acquire any business, corporation,
limited liability company, partnership, association, entity, or other
business organization or division thereof (whether by merger,
consolidation, share exchange, reorganization, stock purchase, asset
purchase, or otherwise) or otherwise acquire or agree to acquire any assets
which are material, individually or in the aggregate, to its and its
Subsidiaries' business, taking the Company together with its Subsidiaries
as a whole (except for purchases of supplies and components in the ordinary
course of business consistent with past practice), or acquire or agree to
acquire any equity securities of or interests in any corporation,
partnership, limited liability company, association, entity, or business
organization, or enter into any material strategic relationships or
alliances, except for standard tool integrations, joint marketing and joint
promotional arrangements entered into by the Company and another entity in
the ordinary course of business consistent with past practice;
(t) Taxes. make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes, file any
material Tax Return or any amendment to a material Tax Return, enter into
any closing agreement, settle any claim or assessment in respect of Taxes,
or consent to any extension or waiver of the limitation period applicable
to any claim or assessment in respect of Taxes;
(u) Revaluation. write down the value of inventory or write off notes or
accounts receivable or otherwise revalue any of its assets except in a
manner consistent with past practice;
(v) Accounting Policies and Procedures. make any change to its
accounting methods, principles, assumptions, policies (including reserve
policies), procedures or practices, except as may be required by GAAP,
Regulation S-X promulgated by the SEC or applicable statutory accounting
principles; or
(w) Other. take or agree in writing or otherwise to take any of the
actions described in Section 5.1(a) through (v).
Section 5.2 No Solicitation. From and after the date hereof until the
earlier of the Effective Time or the termination of this Agreement in
accordance with Article VIII, the Company and each of its Subsidiaries and the
officers, directors, and other agents, representatives and advisors (including
any investment bankers, attorneys or accountants) of the Company or any of its
Subsidiaries (collectively, "Company Representatives") shall not, directly or
indirectly (and the Company shall not permit any of its or its Subsidiaries'
other employees to), (a) take any action to solicit, initiate, intentionally
encourage, or facilitate any Takeover Proposal, or (b) subject to the terms of
the immediately following sentence, engage in any discussions or negotiations
with, or disclose any nonpublic information relating to the Company or any of
it Subsidiaries to, or afford access to the properties, books or records of the
Company or any of its Subsidiaries to, any person that has advised the Company
that such person may be considering making a Takeover Proposal (or that the
Board of Directors or officers of the Company has reason to believe is seeking
to make, or that has made, a Takeover Proposal) (each such person, a "Competing
Bidder"), or endorse, approve or recommend any Takeover
A-33
Proposal or enter into any agreement (including any letter of intent,
preliminary agreement or similar arrangement) providing for any Takeover
Proposal; provided that nothing herein shall prohibit the Board of Directors of
the Company from complying with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act. If (i) a bona fide unsolicited written Takeover Proposal shall be
received by the Board of Directors of the Company, and (ii) the Board of
Directors of the Company determines in good faith (after consultation with its
outside financial advisor and after considering all terms and conditions of
such Takeover Proposal, including the likelihood and timing of its
consummation) that such Takeover Proposal (A) (if the determination of the
Board of Directors is made prior to adoption of this Agreement by the Company's
stockholders) would result in a transaction more favorable to the Company's
stockholders from a financial point of view than the Merger as contemplated by
this Agreement or (B) (if the determination is made following adoption of this
Agreement and after March 31, 2002 and the Board of Directors of the Company
has determined in good faith that the conditions set forth Section 7.3(b) will
not be satisfied) would result in a transaction with a value of six dollars
($6) or less per share of Company Common Stock or (C) (if the determination of
the Board of Directors is made following adoption of this Agreement by the
Company's stockholders and the other determination specified in the immediately
preceding clause (B) has not been made) would result in a transaction with a
value greater than twenty four dollars and seventy cents ($24.70) per share of
Company Common Stock (any such more favorable Takeover Proposal being referred
to in this Agreement as a "Superior Proposal"), and (iii) the Board of
Directors of the Company determines in good faith, after consultation with
outside legal counsel, that it is necessary in order for the Board of Directors
of the Company to comply with its fiduciary duties to stockholders under
applicable law, and (iv) the Company has notified Parent of such determination
by the Board of Directors of the Company and has provided Parent with true and
complete copies of the Takeover Proposal received from the Competing Bidder and
the financial assumptions and projections reviewed and relied upon by the Board
of Directors of the Company (including assumptions and projections regarding
the anticipated amount of Contingent Consideration) in determining that a
Takeover Proposal constitutes a Superior Proposal, and in the case of clause
(B) above in determining that the conditions set forth in Section 7.3(b) will
not be satisfied, then Company Representatives may engage in discussions and
negotiations with the Competing Bidder, disclose nonpublic information relating
to the Company and its Subsidiaries to the Competing Bidder, afford access to
the properties, books or records of the Company and its Subsidiaries to the
Competing Bidder, modify or withdraw its Recommendation, recommend such
Superior Proposal to the stockholders of the Company, and (subject to Section
8.3(b)) approve the entering (but not enter) into an agreement for a Superior
Proposal in accordance with Section 8.1(g), subject to compliance with each of
the following requirements: (X) prior to furnishing such information, engaging
in such discussions or negotiations, disclosing such nonpublic information, or
affording such access, the Company shall provide to Parent all documents
containing or referring to non-public information of the Company that are
supplied to the Competing Bidder; and (Y) the Company shall enter into a
nondisclosure agreement with the Competing Bidder containing, and shall provide
such non-public information subject to, terms at least as restrictive on the
Competing Bidder as the Confidentiality Agreement is on Parent; and (Z) the
Company shall provide Parent at least three (3) business days prior notice
before any modification or withdrawal of its Recommendation or any
recommendation of a Superior Proposal or any approval of the entering into of
an agreement for a Superior Proposal in accordance with Section 8.1(g) and
Section 8.3(b). The Company shall immediately notify Parent after receipt of
any Takeover Proposal, any inquiry looking toward a Takeover Proposal, or any
request for non-public information relating to the Company or any of its
Subsidiaries or for access to the properties, books or records of the Company
or any of its Subsidiaries by any person that has made (or that the Company has
reason to believe is considering making), a Takeover Proposal (such notice to
include the identity of the person or persons making such proposal, inquiry, or
request), and will keep Parent fully informed of the status and details of any
such proposal, inquiry, or request (including all terms and conditions and
modifications thereto) and shall provide Parent with a true and complete copy
of such proposal, inquiry, or request and any amendment thereto, if it is in
writing, or a written summary of the material terms thereof, if it is not in
writing. The Company shall immediately cease and cause to be terminated all
existing discussions or negotiations with any persons (other than Parent)
conducted heretofore with respect to a Takeover Proposal. Promptly following
the signing and delivery of this Agreement the Company shall inform all
employees of the Company and its Subsidiaries of the actions which the Company
is prohibited from taking by the first sentence of this Section 5.2 and shall
direct
A-34
each such employee to refrain from taking any such action. The Company shall
further inform all such employees that any violation of such direction shall be
grounds for immediate termination of employment. The Company shall not be
considered to be in breach of the first sentence of this Section 5.2 with
respect to the acts of any employee who is not a Company Representative unless
such acts were performed at the direction or with the knowledge of a Company
Representative.
ARTICLE VI
Additional Agreements
Section 6.1 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement, the
Company and Parent shall prepare, and (i) the Company shall file with the SEC
(if necessary), preliminary proxy materials relating to the approval of the
Merger by the stockholders of the Company, and (ii) Parent shall file with the
SEC, a Registration Statement on Form S-4 (or such other or successor form as
shall be appropriate). As promptly as practicable following receipt of SEC
comments thereon, if any, or upon receipt of notification that the SEC with not
comment thereon, the Company shall file with the SEC definitive proxy materials
and Parent shall file with the SEC amendments to its Registration Statement on
Form S-4 (or such other or successor form as shall be appropriate), in each
case which complies in form with applicable SEC requirements and the Company
shall use commercially reasonable efforts to cause the Registration Statement
to become effective as soon thereafter as practicable. The Company and Parent
will notify each other promptly of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff or any other government
officials for amendments or supplements to the Proxy Statement or any other
filing or for additional information and will supply each other with copies of
all correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the other
hand, with respect to the Proxy Statement or other filing. Whenever any event
occurs that is required to be set forth in an amendment or supplement to the
Proxy Statement or any other filing, the Company shall promptly inform Parent
of such occurrence and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to stockholders of the Company, such
amendment or supplement. The Proxy Statement shall solicit the approval of the
Merger and adoption of this Agreement by the stockholders of the Company and
shall include the approval of this Agreement and the Merger by the Board of
Directors of the Company and, subject to the fiduciary duties of the directors
of the Company and the provisions of Section 5.2, Section 8.1(e), and
Section 8.3(b)(i), the unanimous recommendation of the Board of Directors of
the Company to the Company's stockholders that they vote in favor of the
adoption of this Agreement (provided that the Board of Directors of the Company
may exclude such recommendation if, pursuant to Section 5.2, it is permitted to
endorse or recommend a Superior Proposal) and shall include the opinion of the
Company's financial advisors as described in Section 3.24 (unless subsequently
withdrawn).
(b) Each of Parent and the Company shall provide promptly to the other such
information concerning its business and financial statements and affairs as, in
the reasonable judgment of the providing party or its counsel, may be required
or appropriate for inclusion in the Proxy Statement and the Registration
Statement, or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the other with the other's counsel and
auditors in the preparation of the Proxy Statement and the Registration
Statement. Each of the Company and Parent will respond to any comments of the
SEC and, will use its respective commercially reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and the Company will cause the Proxy Statement
to be mailed to its stockholders at the earliest practicable time after the
Registration Statement is declared effective by the SEC.
Section 6.2 Meeting of Stockholders. The Company shall promptly after the
date hereof take all action necessary in accordance with the DGCL and its
Certificate of Incorporation and Bylaws to convene the Company Stockholders
Meeting within forty-five (45) days after the Registration Statement has been
declared effective by the SEC. The Company shall consult with Parent regarding
the date of the Company Stockholders
A-35
Meeting and shall not postpone or adjourn (other than for the absence of a
quorum) the Company Stockholders Meeting without the consent of Parent. Subject
to Section 6.1, the Company shall use its commercially reasonable efforts to
solicit from stockholders of the Company proxies in favor of adoption of this
Agreement and shall take all other action reasonably necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
Section 6.3 Access to Information.
(a) The Company shall afford Parent and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of the Company's and its
Subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of the
Company and its Subsidiaries as Parent may reasonably request. The Company
agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
(b) No information or knowledge obtained in any investigation pursuant to
this Section 6.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
(c) The Company shall provide Parent and its accountants, counsel and other
representatives reasonable access, during normal business hours during the
period prior to the Effective Time, to all of the Company's and Subsidiaries
Tax Returns and other records and workpapers relating to Taxes, and shall also
provide the following information upon the request of Parent or its
Subsidiaries: (i) a schedule of the types of Tax Returns being filed by the
Company and each of its Subsidiaries in each taxing jurisdiction, (ii) a
schedule of the year of the commencement of the filing of each such type of Tax
Return, (iii) a schedule of all closed years with respect to each such type of
Tax Return filed in each jurisdiction, (iv) a schedule of all material Tax
elections filed in each jurisdiction by the Company and each of its
Subsidiaries, (v) a schedule of any deferred intercompany gain with respect to
transactions to which the Company or any of its Subsidiaries has been a party,
and (vi) receipts for any Taxes paid to foreign Tax authorities. The Company
shall also, promptly upon Parent's request during the period prior to the
Effective Time, prepare and provide the following information to Parent and its
accountants, counsel and other representatives in a form reasonably acceptable
to Parent: (i) such transfer-pricing information, studies and documentation as
may be requested by Parent relating to transactions between the Company and any
of its Subsidiaries (and any other related parties); (ii) such information,
studies and documentation relating to the amount and use of net operating
losses and Tax credits by Company and its Subsidiaries as may be requested by
Parent and (iii) such records and information as may be requested by Parent
substantiating any Tax credits claimed or to be claimed by the Company and any
of its Subsidiaries.
Section 6.4 Confidentiality.
(a) The parties acknowledge that the provisions of the Confidentiality
Agreement shall continue in full force and effect in accordance with its terms
until the Effective Time except that (i) the sixth and twelfth paragraphs of
the Confidentiality Agreement shall as of the date hereof be of no further
force or effect and (ii) employment offers made in connection with this
Agreement shall not violate any provision of the Confidentiality Agreement.
(b) The Company shall keep confidential all information and knowledge
concerning Parent obtained from Parent or any of its advisers in the course of
the negotiations relating to this Agreement or the consideration by the Company
of a possible transaction with the Parent, or the effectuation of the
transactions contemplated by this Agreement, including all notes, analyses,
compilations, studies, interpretations, or other documents prepared by the
Company which contain, reflect or are based upon, in whole or in part, the
information furnished to the Company (the "Parent Confidential Information");
provided, however, that the foregoing shall not apply to information or
knowledge which (i) the Company can demonstrate was already lawfully in its
possession prior to the disclosure thereof by Parent, (ii) has been approved in
writing for use or disclosure by
A-36
Parent, (iii) is or becomes generally known to the public and does not become
so known through any violation of law or this Agreement by the Company, (iv) is
later lawfully acquired by the Company from other sources, (v) is required to
be disclosed by order of court or government agency after seeking any
reasonably available protection against general disclosure, (vi) is required to
be disclosed in the course of any litigation between any of the parties hereto
and is disclosed in accordance with any protective order or confidentiality
order or arrangement applicable thereto, or (vii) is independently developed by
the Company without the use of any Parent Confidential Information; it being
understood that the Company may disclose relevant information and knowledge to
its employees and agents on a "need to know" basis, provided that the Company
causes such employees and agents to treat such information and knowledge
confidentially.
(c) The Company agrees that it shall use the Parent Confidential Information
solely for the purpose of effectuating the transactions contemplated by this
Agreement, that the Parent Confidential Information shall be kept confidential
and that the Company shall not disclose any of the Parent Confidential
Information in any manner whatsoever except as permitted in Section 6.4. The
Company agrees to be responsible for any breach of Section 6.4 and agrees, at
its sole expense, to take all reasonable measures (including court proceedings)
to restrain its representatives (including attorneys, accountants, consultants,
bankers, and financial advisors) from prohibited or unauthorized disclosure of
the Parent Confidential Information.
(d) In the event that the Company is requested or required (by deposition,
interrogatories, requests for information or documents or other discovery
mechanism in legal proceedings, subpoena, civil investigative demand or other
similar process) to disclose any of the Parent Confidential Information, the
Company shall provide Parent with prompt written notice of any such request or
requirement so that Parent may seek a protective order or other appropriate
remedy or waive compliance with the provisions of this Agreement. If, in the
absence of a protective order or other remedy or the receipt of a waiver by
Parent, the Company is nonetheless, in the written opinion of its counsel,
legally compelled to disclose the Parent Confidential Information to any court
or tribunal or else stand liable for contempt or suffer other censure or
penalty, the Company may, without liability hereunder, disclose to such court
or tribunal only that portion of the Parent Confidential Information which such
counsel advises the Company is legally required to be disclosed, provided that
the Company exercises its commercially reasonable efforts to preserve the
confidentiality of the Parent Confidential Information, including by
cooperating with Parent to obtain an appropriate protective order or other
assurance that confidential treatment will be accorded the Parent Confidential
Information by such court or tribunal.
(e) In the event this Agreement is terminated pursuant to Section 8.1 this
Section 6.4 shall survive indefinitely and otherwise shall survive until the
Effective Time.
Section 6.5 Public Disclosure. Unless otherwise permitted by this Agreement,
Parent and the Company shall consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry) about
the other party or their relationship or activities or regarding the terms of
this Agreement and the transactions contemplated hereby, and neither shall
issue any such press release or make any such statement or disclosure without
the prior approval of the other (which approval shall not be unreasonably
withheld), except as may be required by law or by obligations pursuant to any
listing agreement with any national securities exchange or with the NASD, in
which case the party proposing to issue such press release or make such public
statement or disclosure shall use its commercially reasonable efforts to
consult with the other party before issuing such press release or making such
public statement or disclosure.
Section 6.6 Consents; Cooperation.
(a) Each of Parent and the Company shall promptly apply for or otherwise
seek, and use its commercially reasonable efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger,
including those required under the HSR Act; provided, however, that neither
party shall be required to make any out-of-pocket expenditures (other than
filing or similar fees) to any Governmental Entity or third
A-37
party in connection therewith. The Company shall use its commercially
reasonable efforts to obtain all necessary consents, waivers and approvals
under any of its material contracts in connection with the Merger for the
assignment thereof or otherwise. The parties hereto will consult and cooperate
with one another, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any
party hereto in connection with proceedings under or relating to the HSR Act or
any other federal or state antitrust or fair trade law.
(b) Each of Parent and the Company shall use its commercially reasonable
efforts to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the transactions contemplated by this
Agreement under the HSR Act, the Sherman Act, as amended, the Clayton Act, as
amended, the Federal Trade Commission Act, as amended, and any other Federal,
state or foreign statutes, rules, regulations, orders or decrees that are
designed to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade (collectively, "Antitrust Laws"). In
connection therewith, if any administrative or judicial action or proceeding is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Antitrust Law, each of
Parent and the Company shall cooperate and use its commercially reasonable
efforts vigorously to contest and resist any such action or proceeding and to
have vacated, lifted, reversed, or overturned any decree, judgment, injunction
or other order, whether temporary, preliminary or permanent (each, an "Order"),
that is in effect and that prohibits, prevents, or restricts consummation of
the Merger or any such other transactions, unless by mutual agreement Parent
and the Company decide that litigation is not in their respective best
interests. Notwithstanding the provisions of the immediately preceding
sentence, it is expressly understood and agreed that neither Parent nor the
Company shall have any obligation to litigate or contest any administrative or
judicial action or proceeding or any Order beyond the Final Date (as defined in
Section 8.1(b)). Each of Parent and the Company shall use its commercially
reasonable efforts to take such action as may be required to cause the
expiration of the notice periods under the HSR Act or other Antitrust Laws with
respect to such transactions as promptly as possible after the execution of
this Agreement. Parent and the Company also agree to take any and all of the
following actions to the extent necessary to obtain the approval of any
Governmental Entity with jurisdiction over the enforcement of any applicable
laws regarding the transactions contemplated hereby: entering into
negotiations; providing information required by law or governmental regulation;
and substantially complying with any second request for information pursuant to
the Antitrust Laws.
(c) Notwithstanding anything to the contrary in this Agreement, (i) neither
Parent nor any of it Subsidiaries shall be required to divest any of their
respective businesses, product lines or assets, or the Company's or any of its
Subsidiaries' respective businesses, product lines or assets or to qualify to
do business in any jurisdiction in which it is not now so qualified, or to file
a general consent to service of process under any applicable state laws, and
(ii) without the prior written consent of Parent, neither the Company nor its
Subsidiaries shall, or shall be required to, divest any of their respective
businesses, product lines or assets, or to take or agree to take any other
action or agree to any limitation that would reasonably be expected to have a
Company Material Adverse Effect or a Parent Material Adverse Effect.
Section 6.7 Legal Requirements. Subject to the provisions and provisos of
Section 6.6, each of Parent, Merger Sub and the Company will, and will cause
their respective Subsidiaries to, (a) take all requisite commercially
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on them with respect to the consummation of the
transactions contemplated by this Agreement, (b) cooperate with and furnish
information to any party hereto necessary in connection with any such
requirements imposed upon such other party in connection with the consummation
of the transactions contemplated by this Agreement, and (c) subject to Section
6.6(c) take all requisite commercially reasonable actions necessary to obtain
(and cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity required to be obtained or made in connection
with the taking of any action contemplated by this Agreement.
A-38
Section 6.8 Blue Sky Laws. Parent shall take all commercially reasonable
steps to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Parent Common Stock in connection
with the Merger. The Company shall use its commercially reasonable efforts to
assist Parent as may be necessary to comply with the securities and blue sky
laws of all jurisdictions which are applicable in connection with the issuance
of Parent Common Stock in connection with the Merger.
Section 6.9 Employee Benefit Plans.
(a) At the Effective Time, the Company Stock Option Plans and each
outstanding option to purchase shares of Company Common Stock under the Company
Stock Option Plans, whether vested or unvested, shall be assumed by Parent. The
Company represents and warrants to Parent that Section 6.9(a) of the Company
Disclosure Schedule hereto sets forth a true and complete list as of the date
hereof of all holders of outstanding options under the Company Stock Option
Plans, including the number of shares of the Company's capital stock subject to
each such option, the exercise or vesting schedule, the exercise price per
share and the term of each such option. On the Closing Date, the Company shall
deliver to Parent an updated Section 6.9(a) of the Company Disclosure Schedule
hereto current as of such date. Each such option so assumed by Parent under
this Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Company Stock Option Plans and the applicable stock
option agreements, immediately prior to the Effective Time, except that (i)
such option will be exercisable for that number of whole shares of Parent
Common Stock equal to the product of the number of shares of Company Common
Stock that were issuable upon exercise of such option immediately prior to the
Effective Time multiplied by the Exchange Ratio and rounded down to the nearest
whole number of shares of Parent Common Stock, and (ii) the per share exercise
price for the shares of Parent Common Stock issuable upon exercise of such
assumed option shall be equal to the quotient determined by dividing the
exercise price per share of Company Common Stock at which such option was
exercisable immediately prior to the Effective Time by the Exchange Ratio,
rounded up to the nearest whole cent. The Merger shall not terminate any of the
outstanding options under the Company Stock Option Plans or accelerate the
exercisability or vesting of such options or the shares of Parent Common Stock
which shall be subject to those options upon Parent's assumption of the options
in the Merger. It is the intention of the parties that the options so assumed
by Parent qualify, to the maximum extent permissible, following the Effective
Time as incentive stock options as defined in Section 422 of the Internal
Revenue Code to the extent such options qualified as incentive stock options
prior to the Effective Time. Within ten (10) business days after the Effective
Time, Parent will issue to each person who, immediately prior to the Effective
Time was a holder of an outstanding option under the Company Stock Option Plans
a document evidencing the foregoing assumption of such option by Parent, and
Parent may prohibit option exercises prior to the filing of the registration
statement on Form S-8 in accordance with Section 6.10.
(b) All outstanding rights of the Company which it may hold immediately
prior to the Effective Time to repurchase unvested shares of Company Common
Stock (the "Repurchase Options") shall continue in effect following the Merger
and shall thereafter continue to be exercisable by Parent upon the same terms
and conditions in effect immediately prior to the Effective Time, except the
Merger shall not accelerate the vesting of unvested shares provided for in the
agreements evidencing the Repurchase Options and except that the shares
purchasable pursuant to the Repurchase Options and the purchase price per share
shall be adjusted to reflect the Exchange Ratio.
(c) Outstanding purchase rights under the Company ESPP shall be exercised
immediately prior to the Effective Time, and each participant in the Company
ESPP shall accordingly be issued shares of Company Common Stock at that time
which shall be converted into shares of Parent Common Stock in the Merger. The
Company ESPP shall terminate with such exercise date (after the purchase
described in the preceding sentence has been effected), and no purchase rights
shall be subsequently granted or exercised under the Company ESPP and no
Company ESPP payroll deductions from Company employees shall be made
thereafter. Company employees who meet the eligibility requirements for
participation in the Parent Employee Stock Purchase Plan shall be eligible to
begin payroll deductions under that plan as of the start date of the first
offering period thereunder beginning after the Effective Time and prior to such
date, Parent shall name the Surviving
A-39
Corporation as a subsidiary whose employees may participate in the Parent ESPP,
provided that such employees satisfy the eligibility requirements for
participation.
(d) On or as soon as practicable following the Effective Time, continuing
employees of the Company and its Subsidiaries ("Continuing Employees") shall be
eligible to participate in those benefit plans and programs maintained for
similarly situated employees of Parent (or in substantially similar programs),
on the same terms applicable to similarly situated employees of Parent and to
the extent that such plans and programs provide the following benefits:
medical/dental/vision care, life insurance, disability income, sick pay,
holiday and vacation pay, 401(k) plan coverage, Internal Revenue Code Section
125 benefit arrangements, bonus, profit-sharing or other incentive plans,
pension or retirement programs, dependent care assistance and severance
benefits. Each Continuing Employee shall be given credit, for purposes of any
service requirements for participation or vesting, for his or her period of
service with the Company or any of its Subsidiaries credited under a similar
plan prior to the Effective Time, subject to appropriate break in service
rules. Each such employee shall, with respect to any Parent plans or programs
which have co-payment, deductible or other co-insurance features, receive
credit for any amounts such individual has paid to date in the plan year of the
Effective Time under comparable plans or programs maintained by the Company or
any of its Subsidiaries prior to the Effective Time. Each Continuing Employee
and eligible dependent who, at the Effective Time, was participating in an
employee group health plan maintained by the Company or any of its Subsidiaries
shall not be excluded from Parent's employee group health plan or limited in
coverage thereunder by reason of any waiting period restriction or pre-existing
condition limitation.
(e) The Company shall take all action necessary to terminate, or cause to
terminate, before the Effective Time, any Company Benefit Plan that is a 401(k)
plan or other defined contribution retirement plan or the Company ESPP. With
respect to each Company Employee Plan subject to ERISA as an employee pension
plan within the meaning of Section 3(2) of ERISA, and to the Company's
knowledge, no partial termination could be deemed to have occurred as a result
of a reduction in the Company's workforce.
(f) Within five (5) business days following the date of this Agreement, the
Company shall set forth on Section 6.9(f) of the Company Disclosure Schedule a
list of all persons who the Company reasonably believes are, with respect to
the Company and as of the date of this Agreement, "disqualified individuals"
(within the meaning of Section 280G of the Internal Revenue Code and the
regulations promulgated thereunder). Within a reasonable period of time after
the last business day of the month prior to the expected Closing Date and on or
about the date five (5) business days prior to the expected Closing Date, the
Company shall revise Section 6.9(f) of the Company Disclosure Schedule to
reflect the most recently available closing price of Company Common Stock as of
the last business day of such month and to reflect any additional information
which the Company reasonably believes would impact the determination of persons
who are, with respect to the Company and as of the each such date,
"disqualified individuals" (within the meaning of Section 280G of the Internal
Revenue Code and the regulations promulgated thereunder).
(g) On or as soon as practicable following the Effective Time, certain
employees of the Company or its Subsidiaries shall be eligible to participate
in a bonus plan, which shall be accrued by the Company prior to the Closing
Date, in substantially the form attached hereto as Schedule 6.9(g) (the "Bonus
Plan"). The dollar amount available for distribution to such employees under
the Bonus Plan shall be as set forth in Schedule 6.9(g) and shall be calculated
pursuant to the Bonus Plan based on Revenue plus Net Backlog or PBT, whichever
produces a lower total Bonus Plan dollar amount, except that if PBT produces a
lower total Bonus Plan dollar amount than Revenue plus Net Backlog but the same
or higher total Bonus Plan dollar amount than Revenue, the total Bonus Plan
dollar amount shall be calculated based upon Revenue plus Net Backlog. The
aggregate dollar amount to be distributed to management and non-management
employees shall be as set forth on Schedule 6.9(g). The identification of
employees to participate in the Bonus Plan, as well as the amounts payable to
each shall be determined solely by the Company.
Section 6.10 Form S-8. Parent agrees to file, no later than ten (10)
business days after the Effective Time (provided that Parent has received
within five (5) business days after the Effective Time all option
A-40
documentation it reasonably requires relating to the outstanding options) a
registration statement on Form S-8 under the Securities Act covering the shares
of Parent Common Stock issuable pursuant to outstanding options and shares
granted to employees, officers, and directors of, and bona fide consultants to,
the Company if they are individuals for whom a Form S-8 registration statement
is available and are listed on Section 6.10 of the Company Disclosure Schedule.
The Company shall cooperate with and assist Parent in the preparation of such
registration statement.
Section 6.11 Listing of Additional Shares. Prior to the Effective Time,
Parent shall file with The Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the shares referred to in Section
7.2(b).
Section 6.12 Indemnification.
(a) For not less than six (6) years after the Effective Time, Parent will
indemnify and hold harmless the present and former officers, directors,
employees and agents of Company (the "Indemnified Parties") in respect of acts
or omissions occurring on or prior to the Effective Time to the extent provided
for under Company's Certificate of Incorporation and Bylaws and each
indemnification agreement with Company officers and directors to which Company
is a party, in each case in effect on the date hereof; provided that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law.
(b) For six (6) years after the Effective Time, Parent will provide
officers' and directors' liability insurance in respect of acts or omissions
occurring on or prior to the Effective Time covering each such Person currently
covered by Company's officers' and directors' liability insurance policy on
terms at least as favorable as the coverage currently in effect on the date
hereof, provided that, in satisfying its obligation under this Section 6.12(b),
Parent shall not be obligated to pay, or to cause the Surviving Corporation to
pay, premiums in excess of one hundred fifty percent (150%) of the amount per
annum Company paid in its last full fiscal year, which amount has been
disclosed to Parent, and if the Parent or the Surviving Corporation is unable
to obtain the insurance required by this Section 6.12(b) it shall obtain as
much comparable insurance as possible for an annual premium equal to such
maximum amount.
(c) The provisions of this Section 6.12 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs.
Section 6.13 Tax Treatment. The parties each intend that the Merger will
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and shall use their respective commercially reasonable
efforts to cause the Merger to so qualify. Each of Parent and the Company shall
execute and deliver a certificate in form reasonably acceptable to the other
party setting forth factual representations and covenants that will serve as a
basis for the tax opinions described in Section 7.1(e).
Section 6.14 Stockholder Litigation. Unless and until the Board of Directors
of the Company has withdrawn its Recommendation (as defined in Section 8.1(e)),
the Company shall give Parent the opportunity to participate at its own expense
in the defense of any stockholder litigation against the Company and/or its
directors relating to the transactions contemplated by this Agreement.
Section 6.15 Employee Agreements. The Company shall use its commercially
reasonable efforts to obtain the signatures of (i) the employees of the Company
specified in Schedules 6.15(a) and (b) to the Employee Agreements in the forms
attached as Exhibits D and E, respectively, and (ii) the employees of the
Company specified in Schedules 6.15(c) and (d) to the amendments to their
existing severance agreements in the forms attached as Exhibits F and G,
respectively, prior to the Closing Date.
Section 6.16 Injunctions or Restraints. In the event an injunction or other
order preventing the consummation of the Merger shall have been issued, each
party agrees to use commercially reasonable efforts to have such injunction or
other order lifted.
A-41
Section 6.17 Certain Employee Actions. Promptly following the signing and
delivery of this Agreement the Company shall inform all employees of the
Company and its Subsidiaries of the actions which Parent is prohibited from
taking by the Quickturn Non-Compete and shall direct each such employee to
refrain from taking any action that could reasonably be expected to subject
Parent to liability under the Quickturn Non-Compete. The Company shall
supervise all employees of the Company and its Subsidiaries in order to
reasonably ensure such employees' compliance with the provisions of this
Section 6.17.
Section 6.18 Further Assurances. Subject to Section 5.2, Section 6.1 and
Section 6.6(c) (a) each of the parties to this Agreement shall use its
commercially reasonable efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to closing under
this Agreement, and (b) each party hereto, at the reasonable request of another
party hereto, shall execute and deliver such other instruments and do and
perform such other acts and things as may be necessary or reasonably desirable
for effecting completely the consummation of this Agreement and the
transactions contemplated hereby. Nothing in this Agreement shall be construed
to require Parent to seek the approval of its stockholders for any of the
transactions contemplated by this Agreement.
ARTICLE VII
Conditions to the Merger
Section 7.1 Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each party to this Agreement to consummate and
effect the Merger shall be subject to the satisfaction at or prior to the
Closing of each of the following conditions, any of which may be waived, in
writing, by agreement of all the parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved by the requisite vote of the stockholders of the Company under the
DGCL and the Certificate of Incorporation of the Company.
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall be in
effect; and no proceeding for that purpose by the SEC shall be pending.
(c) No Injunctions, Restraints or Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor shall any proceeding brought by an administrative agency or commission
or other Governmental Entity seeking any of the foregoing be pending,
threatened; and no action shall have been taken by any Governmental Entity,
and no statute, rule, regulation or order shall have been enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation
of the Merger illegal.
(d) HSR. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have elapsed or been terminated.
(e) Tax Opinion. Parent and the Company each shall have received
substantially similar written opinions from their respective counsel in
form and substance reasonably satisfactory to them, dated on or about the
date of Closing to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, and such opinions shall not have been withdrawn. Parent and the
Company each shall use their best efforts to obtain such opinions from
their respective counsel; provided, however, that if the Company's outside
legal counsel does not render such opinion, this condition shall
nevertheless be deemed satisfied with respect to the Company if Parent's
outside legal counsel renders such opinion to Parent. In rendering such
opinions, counsel shall be entitled to rely upon, among other things,
reasonable assumptions as well as representations of Parent, Merger Sub and
the Company. In addition, Parent and the Company shall have received from
their respective counsel such tax opinions as may be required by the SEC in
connection with the filing of the Registration Statement.
A-42
(f) No Parent Stockholder Approval. The issuance of shares of Parent
Common Stock in connection with the transactions contemplated by this
Agreement (including shares issuable upon the exercise of any options
assumed hereunder) shall not require any approval of Parent stockholders
under applicable Nasdaq rules.
Section 7.2 Additional Conditions to Obligations of the Company. The
obligations of the Company to consummate and effect the Merger shall be subject
to the satisfaction at or prior to the Closing of each of the following
additional conditions, any of which may be waived, in writing, by the Company:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of Parent and Merger Sub in this Agreement shall be true and
correct in all material respects (except for such representations and
warranties that are qualified by their terms by a reference to materiality
or Parent Material Adverse Effect, which representations and warranties as
so qualified shall be true and correct in all respects) on and as of the
Closing Date as though such representations and warranties were made on and
as of the Closing Date, except where the failure to be so true and correct,
without regard to any materiality or Parent Material Adverse Effect
qualifications contained therein, could not reasonably be expected, either
individually or in the aggregate, to have a Parent Material Adverse Effect;
and (ii) Parent and Merger Sub shall have performed and complied in all
material respects with all covenants, agreements and obligations in this
Agreement required to be performed and complied with by them prior to the
Effective Time; and (iii) the Company shall have received a certificate of
an appropriate officer of Parent certifying that the conditions set forth
in this Section 7.2(a) are satisfied.
(b) Listing of Additional Shares. The shares of Parent Common Stock
issuable upon conversion of the Company Common Stock in the Merger and upon
exercise of the options under the Company Stock Option Plans assumed by
Parent shall have been approved for listing on The Nasdaq National Market,
or shall be exempt from such requirement under the then applicable laws,
regulations and rules of the Nasdaq National Market.
Section 7.3 Additional Conditions to the Obligations of Parent and Merger
Sub. The obligations of Parent and Merger Sub to consummate and effect the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Closing of each of the following additional conditions, any of
which may be waived, in writing, by Parent:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of the Company in this Agreement shall be true and correct
in all material respects (except for such representations and warranties
that are qualified by their terms by a reference to materiality or Company
Material Adverse Effect, which representations and warranties as so
qualified shall be true and correct in all respects) on and as of the
Closing Date as though such representations and warranties were made on and
as of the Closing Date, except, in the case of the representations and
warranties of the Company in Section 3.1 through Section 3.20, Section 3.25
and Section 3.26, where the failure to be so true and correct, without
regard to any materiality or Company Material Adverse Effect qualifications
contained therein, could not reasonably be expected, either individually or
in the aggregate, to have a Company Material Adverse Effect, (ii) the
Company shall have performed and complied in all material respects with all
covenants, agreements and obligations in this Agreement required to be
performed and complied with by it prior to the Effective Time, and (iii)
Parent shall have received a certificate of the chief executive officer and
chief financial officer of the Company certifying that the conditions set
forth in this Section 7.3(a) are satisfied.
(b) Financial Conditions. (i) Revenue, as finally determined pursuant to
Section 2.7(d), shall have been in the aggregate greater than or equal to
fifty million dollars ($50,000,000), and (ii) PBT, as finally determined
pursuant to Section 2.7(d), shall have been in the aggregate greater than
or equal to a loss of ten million dollars (-$10,000,000)
(c) Third Party Consents. Parent shall have received evidence reasonably
satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with
A-43
the Merger under each material contract of the Company or any of its
Subsidiaries set forth on Schedule 7.3(c).
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition materially limiting or restricting Parent's
ownership, conduct or operation of the business of the Company and its
Subsidiaries following the Effective Time shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
Governmental Entity, seeking the foregoing be pending or threatened.
(e) Quickturn Noncompetition Agreement. Section 6.2 of the Asset
Purchase Agreement, dated as of June 14, 1997 by and among Parent,
Quickturn Design Systems, Inc. ("Quickturn") and Arkos Design, Inc. (the
"Quickturn Non-Compete") shall have expired or been terminated or waived by
Quickturn, or other action shall have been taken which has the effect of
rendering such provision inapplicable to the Merger or unenforceable.
(f) Employee Retention.
(A) In the event the employee listed in Schedule 6.15(a) shall have
(i) accepted employment with Parent and (ii) executed the Employment
Agreement attached as Exhibit D, and such Employment Agreement shall be
in full force and effect, then at least seven (7) of the employees
listed in Schedule 6.15(b) shall have accepted employment with Parent;
(B) In the event the employee listed in Schedule 6.15(a) shall not
have (i) accepted employment with Parent and (ii) executed the
Employment Agreement attached as Exhibit D, then seven (7) of
the employees listed in Schedule 6.15(b) shall have (A) accepted
employment with Parent and (B) executed the Employment Agreement
attached as Exhibit E, and such Employment Agreements shall be in full
force and effect.
(C) Each of the employees listed in Schedules 6.15(c) shall have
executed an amendment to their existing severance agreement in the form
attached as Exhibit F, and such amendment shall be in full force and
effect.
(D) Each of the employees listed in Schedule 6.15(d) shall have
executed an amendment to their existing severance agreement in the form
attached as Exhibit G, and such amendment shall be in full force and
effect.
(E) The percentages of employees specified in Rows A, B, C, D and E
of Schedule 7.3(f) shall have accepted employment with Parent, subject
to the additional terms and conditions set forth therein.
(g) OEM Agreement. The Company shall have entered into an OEM license
agreement that meets the requirements of Schedule 7.3(g).
ARTICLE VIII
Termination, Amendment and Waiver
Section 8.1 Termination. At any time prior to the Effective Time, whether
before or after approval of the matters presented in connection with the Merger
by the stockholders of the Company, this Agreement may be terminated and the
Merger abandoned:
(a) by mutual consent of the Boards of Directors of Parent and the
Company;
(b) by either Parent or the Company, by written notice to the other
party, if the Closing shall not have occurred on or before September 14,
2002 or such later date as may be agreed upon in writing by the parties
hereto (the "Final Date"); provided, however, that the Final Date shall, at
the election of either party, be extended to October 14, 2002 if the
Closing shall not have occurred by September 14, 2002
A-44
because (i) any of the determinations required by Section 2.7(d) have not
been completed and (ii) the failure of such determinations to be completed
or the failure of the Merger to occur on or before the Final Date has not
principally been caused by action or failure to act constituting a breach,
in any material respect, of this Agreement, by the party seeking such
extension and (iii) all other conditions set forth in Article VII have been
satisfied or waived;
(c) by Parent, by written notice to the Company, if (i) any of the
Company's representations and warranties in the Agreement would be
inaccurate if made as of the time of such notice, or the Company shall have
breached any of its covenants, agreements or obligations in this Agreement,
and (ii) the condition set forth in Section 7.3(a) would not be satisfied
if such inaccuracy or breach were to remain uncured, and (iii) such
inaccuracy or breach, if curable, shall not have been cured within thirty
(30) business days after receipt by the Company of written notice of such
inaccuracy or breach;
(d) by the Company, by written notice to Parent, if (i) any of Parent's
representations and warranties in this Agreement would be inaccurate if
made as of the time of such notice, or Parent shall have breached any of
its covenants, agreements or obligations in this Agreement, and (ii) the
condition set forth in Section 7.2(a) would not be satisfied if such
inaccuracy or breach were to remain uncured, and (iii) such inaccuracy or
breach shall not have been cured within thirty (30) business days after
receipt by Parent of written notice of such inaccuracy or breach;
(e) by Parent, by written notice to the Company, if: (i) a Trigger Event
shall have occurred or a Takeover Proposal shall have been made and, in
either case, shall not have been absolutely and unconditionally abandoned
or withdrawn, and the Board of Directors of the Company, if so requested by
Parent, does not within ten (10) business days of such request, (A)
reconfirm its unanimous recommendation of this Agreement and the
transactions contemplated hereby, and (B) (in the case of a Takeover
Proposal or Trigger Event involving a tender or exchange offer) reject such
Takeover Proposal or Trigger Event; (ii) the Board of Directors of the
Company shall have failed to unanimously recommend that the Company's
stockholders vote to approve the Merger and adopt this Agreement (a
"Recommendation"), or shall have withdrawn (including by failing to include
such Recommendation in the Proxy Statement) or modified its Recommendation
in a manner adverse to Parent, or shall have resolved to do any of the
foregoing; (iii) the Board of Directors of the Company shall have
recommended, endorsed, accepted, approved, or otherwise agreed to a
Takeover Proposal or shall have resolved to do any of the foregoing; or
(iv) the Company or any Company Representative shall have failed to comply
with Section 5.2.
(f) by either Parent or the Company, by written notice to the other
party, if: (i) any permanent injunction or other order of a court or other
competent authority preventing the consummation of the Merger shall have
become final and nonappealable, provided such party used commercially
reasonable efforts to have such injunction or other order lifted or (ii)
any required vote of the stockholders of the Company shall not have been
obtained at a duly held meeting of stockholders or at any adjournment
thereof (provided that the right to terminate this Agreement under this
clause (ii) shall not be available to the Company where the failure to
obtain such stockholder approval shall have been caused by the action or
failure to act of the Company and such action or failure constitutes a
breach of this Agreement); or
(g) by the Company, by written notice to Parent and compliance with the
provisions of this Section 8.1(g), if (i) the Company has received a
Takeover Proposal constituting a Superior Proposal, the Board of Directors
of the Company in accordance with Section 5.2 has determined that it
desires to approve entering into a written agreement providing for such
Superior Proposal and has notified Parent in writing of such desire; and
(ii) five (5) business days have elapsed after Parent's receipt of such
written notification (which notification shall include a copy of such
Superior Proposal and a description of any additional material non-written
modifications thereof), and during such five (5) business day period the
Company has reasonably cooperated with Parent with the intent of enabling
Parent to make an offer that is at least as favorable to the stockholders
of the Company as such Superior Proposal; and (iii) prior to 6 p.m.
California time on the fifth business day of such five (5) business day
period Parent has not made an offer that is at least as favorable to the
Company's stockholders as such Superior Proposal (and, in the
A-45
case of a Superior Proposal within the scope of clause (B) of the second
sentence of Section 5.2, Parent has not waived the condition set forth in
Section 7.3(b)); and (iv) at the end of such five (5) business day period
the Board of Directors of the Company reasonably believes that such
Takeover Proposal continues to be a Superior Proposal; and (v) the Company
prior to such termination pays to Parent in immediately available funds all
amounts required to be paid pursuant to Section 8.3(b). The Company agrees
to notify Parent promptly if its desire to enter into a written agreement
with respect to the Superior Proposal referred to in its notification shall
change at any time after giving such notification.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 8.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of Parent,
Merger Sub or the Company or their respective officers, directors, stockholders
or affiliates; provided that (a) the provisions of Section 6.4 and Section 8.3,
this Section 8.2 and Article IX shall remain in full force and effect and
survive any termination of this Agreement, and (b) nothing herein shall relieve
any party from liability in connection with a willful or intentional breach of
any of such party's representations or warranties set forth in this Agreement
or the breach of any such party's covenants or agreements set forth in this
Agreement.
Section 8.3 Expenses and Termination Fees.
(a) Except as provided in subsections (b) and (c) of this Section 8.3,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
(including the fees and expenses of its advisers, accountants and legal
counsel) shall be paid by the party incurring such expense, except that
expenses incurred in connection with printing the Proxy Materials and the
Registration Statement, registration, and filing fees incurred in connection
with the Registration Statement, the Proxy Materials and the listing of
additional shares pursuant to Section 7.2(b), and fees, costs and expenses
associated with compliance with applicable Blue Sky securities laws in
connection with the Merger and filing fees under the HSR Act shall be shared
equally by the Company and Parent.
(b) In the event that: (i) Parent shall terminate this Agreement pursuant to
Section 8.1(e); (ii) the Company shall terminate this Agreement pursuant to
Section 8.1(g); or (iii) Parent or the Company shall terminate this Agreement
pursuant to Section 8.1(b) or Section 8.1(f)(ii) and, prior to such termination
pursuant to Section 8.1(b) or Section 8.1(f)(ii), there shall have been (A) a
Trigger Event with respect to the Company, or (B) a Takeover Proposal with
respect to the Company, in either case which at the time of such termination
shall not have been absolutely and unconditionally withdrawn or abandoned by
the other party thereto, then, in each such event, in addition to any other
remedies Parent may have, the Company shall pay to Parent (1) in the case of a
termination described in Section 8.3(b)(i) or Section 8.3(b)(ii), the sum of
five million five hundred thousand dollars ($5,500,000) (provided, however,
that if Section 5.2(ii)(B) is applicable to such termination, the amount
payable by the Company shall be two million six hundred thousand dollars
($2,600,000), and (2) in the case of a termination described in Section
8.3(b)(iii), if within twelve (12) months of a termination described in Section
8.3(b)(iii) any Takeover Proposal or any Trigger Event shall be consummated or
any letter of intent or preliminary or definitive agreement with respect
thereto shall be signed, the sum of five million five hundred thousand dollars
($5,500,000) (provided, however, that the amount payable by the Company shall
be five million dollars ($5,000,000) if the Takeover Proposal or Trigger Event
shall be consummated with a person or entity other than the person or entity
making the Takeover Proposal or Trigger Event which originally triggered the
right of termination under Section 8.1(b) or Section 8.1(f)(ii) or with an
affiliate of such person or entity). The payments required by this Section
8.3(b) shall be made within two (2) business days after termination in the case
of a termination by Parent pursuant to Section 8.1(e), prior to termination in
the event of a termination by the Company pursuant to Section 8.1(g), and upon
the earlier of the consummation of a Trigger Event or Takeover Proposal or the
execution and delivery of any letter of intent or preliminary or definitive
agreement with respect to a Takeover Proposal in the event of termination
pursuant to Section 8.1(b) or Section 8.1(f)(ii). Solely for purposes of
Section 8.3(b), all references to fifteen percent (15%) in the definition of
the term "Takeover Proposal" shall be increased to forty percent (40%) and all
references to eighty five percent (85%) therein shall be reduced to sixty
percent (60%).
A-46
Section 8.4 Amendment. Subject to Section 251(d) of the DGCL, the boards of
directors of the parties hereto may cause this Agreement to be amended at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto.
Section 8.5 Extension; Waiver. At any time prior to the Effective Time any
party hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE IX
General Provisions
Section 9.1 Non-Survival at Effective Time. The representations, warranties,
covenants and agreements set forth in this Agreement shall terminate at the
Effective Time, except that the agreements set forth in Article II, Section 6.4
(Confidentiality), Section 6.5 (Public Disclosure) Section 6.9 (Employee
Benefit Plans), Section 6.10 (Form S-8), Section 6.12 (Indemnification),
Section 6.18 (Further Assurances), Section 8.2 (Effect of Termination), Section
8.3 (Expenses and Termination Fees), Section 8.4 (Amendment), and this Article
IX shall survive the Effective Time.
Section 9.2 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be addressed to the intended
recipient as set forth below):
(a) if to Parent or Merger Sub, to:
Synopsys, Inc.
700 East Middlefield Road
Mountain View, CA 94043
Attention: General Counsel
Telephone No.: (650) 584-5000
Facsimile No.: (650) 584-4396
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Rod J. Howard, Esq.
Telephone No.: (650) 424-0160
Facsimile No.: (650) 496-2885
(b) if to the Company, to:
IKOS Systems, Inc.
79 Great Oaks Blvd.
San Jose, CA 95119
Attention: CEO
Telephone No.: (408) 284-0400
Facsimile No: (408) 361-9698
A-47
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: James M. Koshland
Diane Holt Frankle
Telephone No.: (650) 833-2000
Facsimile No.: (650) 833-2001
All notices so given shall be effective upon receipt, and shall in any event be
deemed received (a) three (3) calendar days after deposit with the U.S. Postal
Service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one (1) business day after the business day of
deposit with Federal Express or similar overnight courier, freight prepaid or
(d) upon telephonic confirmation of delivery, if delivered by facsimile
transmission.
Section 9.3 Interpretation.
(a) Prior to the Effective Time: (i) nothing in this Agreement shall be
construed as establishing a joint venture, strategic alliance, or license
between Parent or any of its Subsidiaries, on the one hand, and the Company or
any of its Subsidiaries, on the other hand, and (ii) nothing in this Agreement
shall be construed to require Parent or any of its Subsidiaries to make any
investment of cash or other property in or any loan to the Company or any of
its Subsidiaries.
(b) When a reference is made in this Agreement to Exhibits or Schedules,
such reference shall be to an Exhibit or Schedule to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
in this Agreement shall be deemed in each case to be followed by the words
"without limitation." The phrase "provided to," "furnished to," and terms of
similar import in this Agreement means that a paper copy of the information
referred to has been furnished to the party to whom such information is to be
provided. In this Agreement, the phrases "the date of this Agreement", "the
date hereof", and terms of similar import, unless the context otherwise
requires, shall be deemed to refer to July 2, 2001. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.5 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Company Disclosure Schedule and the Parent Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, excluding the Confidentiality Agreement to the extent
provided by Section 6.4 herein; (b) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided; and (c) are not
intended to, and shall not be construed as, conferring upon any person other
than the parties hereto any rights or remedies.
Section 9.6 Severability. In the event that any provision of this Agreement,
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
A-48
Section 9.7 Remedies Cumulative. Except as otherwise provided herein, any
and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy.
Section 9.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Delaware, without regard
to the laws that might otherwise govern under applicable principles of
conflicts of law. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction and venue of any court located within the County of New
Castle in the State of Delaware, in connection with any matter based upon or
arising out of this Agreement or the matters contemplated herein, agrees that
process may be served upon them in any manner authorized by the laws of the
State of Delaware for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
Section 9.9 Rules of Construction. The parties hereto agree that they have
been represented by counsel during the negotiation, preparation and execution
of this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or
other document will be construed against the party drafting such agreement or
document.
[Signature page follows.]
A-49
IN WITNESS WHEREOF, the Company, Parent and Merger Sub have caused this
Agreement and Plan of Merger and Reorganization to be executed and delivered by
their respective officers thereunto duly authorized, all as of the date first
written above.
SYNOPSYS, INC.
By: /s/ Aart J. de Geus
___________________________________
Name: Aart J. de Geus
_________________________________
Title: CEO
_________________________________
IKOS SYSTEMS, INC.
By: /s/ Ramon Nunez
___________________________________
Name: Ramon Nunez
_________________________________
Title: CEO
_________________________________
OAK MERGER CORPORATION
By: /s/ Steven K. Shevick
___________________________________
Name: Steven K. Shevick
_________________________________
Title: Vice President and Secretary
_________________________________
SIGNATURE PAGE TO AGREEMENT AND
PLAN OF MERGER AND REORGANIZATION
A-50
Appendix A-1
FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION
This FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
(this "Amendment") is made and entered into as of August 1, 2001, by and among
Synopsys, Inc., a Delaware corporation ("Parent"), Oak Merger Corporation, a
Delaware corporation and wholly-owned subsidiary of Synopsys ("Merger Sub") and
IKOS Systems, Inc., a Delaware corporation (the "Company").
WHEREAS, Parent, Merger Sub and the Company entered into that certain
Agreement and Plan of Merger and Reorganization by and among Parent, Merger Sub
and the Company dated July 2, 2001 (the "Merger Agreement"); and
WHEREAS, the parties desire to amend a certain provision of the Merger
Agreement.
THEREFORE, the parties hereby agree as follows:
1. Section 6.9(g) is hereby amended to add the following sentence to the end
of Section 6.9(g):
"In the event that (1) the Closing Date occurs prior to June 30, 2002
pursuant to Section 2.7(b)(i) of the Merger Agreement and (2) the Contingent
Consideration is $9.00, then the dollar amount of the Bonus Plan available for
distribution to Company employees shall be $5.0 million."
2. Capitalized terms that are not defined herein have the same meaning given
to them in the Merger Agreement. Except as amended hereby, all other provisions
of the Merger Agreement shall continue in full force and effect.
A-1(1)
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
First Amendment to the Agreement and Plan of Merger and Reorganization to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the date first written above.
SYNOPSYS, INC.
By: /s/ Robert B. Henske
_____________________________________
Name: Robert B. Henske
___________________________________
Title: Chief Financial Officer
____________________________________
OAK MERGER CORPORATION
By: /s/ Robert B. Henske
_____________________________________
Name: Robert B. Henske
___________________________________
Title: President
____________________________________
IKOS SYSTEMS, INC.
By: /s/ Joseph W. Rockom
_____________________________________
Name: Joseph W. Rockom
___________________________________
Title: Chief Financial Officer
____________________________________
A-1(2)
Appendix B
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is entered into as of July 2, 2001,
by and among Synopsys, Inc., a Delaware corporation ("Parent"), Oak Merger
Corporation, a Delaware corporation and wholly owned subsidiary of Parent
("Merger Sub"), and the undersigned stockholder ("Stockholder") of IKOS
Systems, Inc., a Delaware corporation (the "Company"). Capitalized terms used
but not defined herein shall have the meanings set forth in the Agreement and
Plan of Merger and Reorganization dated as of July 2, 2001 by and among Parent,
Merger Sub and Company (such agreement as it may be amended or restated is
hereinafter referred to as the "Merger Agreement").
Recitals
WHEREAS, concurrently with this Agreement Parent, Merger Sub and the Company
are entering into the Merger Agreement pursuant to which Merger Sub will be
merged with and into the Company (the "Merger") and the outstanding shares of
common stock of the Company ("Company Common Stock") will be converted into the
right to receive shares of common stock of Parent ("Parent Common Stock");
WHEREAS, Stockholder is the registered and beneficial owner of such number
of shares of the outstanding Company Common Stock as is indicated on the
signature page of this Agreement (the "Shares"); and
WHEREAS, in order to induce Parent to enter into the Merger Agreement,
certain stockholders of Company have agreed not to transfer or otherwise
dispose of (except in open market transactions on The Nasdaq Stock Market) any
of the Shares, or any New Shares (as defined in Section 1.2) prior to the
Expiration (as defined in Section 1.1), and have agreed to vote the Shares and
any other such shares of Company Common Stock as provided herein so as to
facilitate consummation of the Merger.
NOW, THEREFORE, in consideration of the promises and mutual agreements,
provisions and covenants set forth in the Merger Agreement, the parties hereto
agree as follows:
Section 1. Share Ownership and Agreement to Retain Shares.
Section 1.1 Transfer and Encumbrance.
(a) Stockholder represents and warrants to Parent that (i) Stockholder is
the beneficial owner of and has voting control with respect to the number of
Shares of Company Common Stock set forth on the signature page hereto; (ii) the
Shares constitute Stockholder's entire equity and voting interest in the
outstanding Company Common Stock as of the date hereof; (iii) no other person
or entity not a signatory to this Agreement has a beneficial interest in or a
right to acquire or voting control with respect to the Shares or any portion of
the Shares; and (iv) the Shares are and will be at all times until the
Expiration free and clear of any liens, claims, rights of first refusal,
options, charges or other encumbrances.
(b) Stockholder agrees not to transfer (except as may be specifically
required by court order or applicable law), sell, exchange, pledge or otherwise
dispose of (except (i) in open market transactions on The Nasdaq Stock Market
and (ii) any transfer of Shares by Stockholder to his spouse, lineal descendant
or antecedent father, mother, brother or sister, adopted child or adopted
grandchild, or the spouse of any child or grandchild, or to a trust or trusts
for the exclusive benefit of the Stockholder or his family members as described
in this Section 1.1(b)(ii) or transfers of Shares by Stockholder by devise or
descent; provided that any transferee or other recipient receiving Shares
pursuant to this Section 1.1(b)(ii) executes a counterpart of this Agreement
and becomes bound thereby in the same manner as Stockholder) or encumber the
Shares or any New Shares (as defined in Section 1.2), or to make any offer or
agreement relating thereto, at any time prior to the Expiration. As used
herein, the term "Expiration" shall mean the earlier to occur of (A) the
Effective Time (as defined in the Merger Agreement) of the Merger, and (B) the
termination of the Merger Agreement pursuant to its terms.
B-1
Section 1.2 New Shares. Stockholder agrees that any shares of Company Common
Stock that Stockholder purchases or with respect to which Stockholder otherwise
acquires beneficial ownership or voting control after the date of this
Agreement and prior to the Expiration ("New Shares") shall be subject to the
terms and conditions of this Agreement to the same extent as if they
constituted Shares.
Section 2. Agreement to Vote Shares. Prior to the Expiration, at every
annual and special meeting of the stockholders of Company called with respect
to any of the following, and at every adjournment thereof, and on every action
or approval by written consent of the stockholders of Company with respect to
any of the following, Stockholder shall vote the Shares and any New Shares,
subject to transfers permitted under Section 1.1(b):
(a) in favor of approval of the Merger and the adoption and approval of
the Merger Agreement, in favor of each of the other actions contemplated by
the Merger Agreement, and in favor of any matter that could reasonably be
expected to facilitate the Merger and the other transactions contemplated
by the Merger Agreement;
(b) against approval of any Takeover Proposal (as defined in the Merger
Agreement) or any proposal made in opposition to, or in competition with
consummation of the Merger and the transactions contemplated by the Merger
Agreement;
(c) against any action, transaction or agreement that would result in a
breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of the Company under the Merger Agreement;
(d) against any of the following actions: (A) any merger, consolidation,
business combination, sale of assets, reorganization or recapitalization of
the Company or any Subsidiary of the Company with any person or entity
other than Parent or Merger Sub, (B) any sale, lease or transfer of any
significant part of the assets of the Company or any Subsidiary of the
Company, (C) any reorganization, recapitalization, dissolution, liquidation
or winding up of the Company or any Subsidiary of the Company, (D) any
change in the capitalization of the Company or any Subsidiary of the
Company, or the corporate structure of the Company or any Subsidiary of the
Company, or (E) any other action that is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Merger Agreement; and
(e) in favor of waiving any notice that may have been or may be required
relating to any reorganization of Company or any Subsidiary of Company, any
reclassification or recapitalization of the capital stock of Company or any
Subsidiary of Company, or any sale of assets, change of control, or
acquisition of Company or any Subsidiary of Company by any other person, or
any consolidation or merger of Company or any Subsidiary of Company with or
into any other person.
Prior to the Expiration, the Stockholder shall not enter into any agreement
or understanding with any person to vote or give instructions in any manner
inconsistent with the terms of this Section 2.
Section 3. Irrevocable Proxy. At the request of Parent at any time prior to
the Expiration, Stockholder shall forthwith deliver to Parent a duly executed
proxy in the form attached hereto as Exhibit A (the "Proxy") with respect to
each meeting of Company stockholders, such Proxy to cover the total number of
Shares and New Shares in respect of which Stockholder is entitled to vote at
any such meeting. Upon the execution of this Agreement by Stockholder,
Stockholder hereby revokes any and all prior proxies given by Stockholder with
respect to the Shares and agrees not to grant any subsequent proxies with
respect to the Shares or any New Shares until after the Expiration.
Section 4. Representations, Warranties and Covenants of Stockholder.
Stockholder hereby represents, warrants and/or covenants to Parent as follows:
(a) Prior to the Expiration, except as permitted by the Merger
Agreement (and then only in Stockholder's capacity as a director or officer
of the Company) Stockholder will not directly or indirectly,
B-2
(i) take any action to solicit, initiate, intentionally encourage, or
facilitate, or enter into any agreement (including any letter of intent,
preliminary agreement or similar arrangement) providing for any Takeover
Proposal (as defined in the Merger Agreement), or (ii) engage in any
discussions or negotiations with, or disclose any nonpublic information
relating to the Company or any of it Subsidiaries to, or afford access to
the properties, books or records of the Company or any of its Subsidiaries
to, any person or entity that has advised the Company that such person or
entity may be considering making, that the Board of Directors of the
Company in good faith understands that such person is seeking to make, or
that has made, a Takeover Proposal or endorse, approve or recommend any
such Takeover Proposal.
(b) Stockholder has the legal capacity, power and authority to execute
and deliver this Agreement, to perform his or her obligations hereunder and
to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Stockholder and, assuming the
due authorization, execution and delivery by Parent and Merger Sub,
constitutes a legal, valid and binding obligation of Stockholder,
enforceable against Stockholder in accordance with its terms.
(c) The execution and delivery of this Agreement by Stockholder does
not, and the performance of this Agreement by Stockholder shall not, result
in any breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or
result in the creation of a lien or encumbrance on, any of the Shares or
New Shares pursuant to any note, bond, mortgage, indenture, contract,
agreement, commitment, lease, license, permit, franchise or other
instrument or obligation to which Stockholder is a party or by which
Stockholder or the Shares or New Shares are or will be bound or affected.
Section 5. Consent and Waiver. Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreements between Stockholder and the Company or pursuant to
any other rights Stockholder may have.
Section 6. Additional Documents. Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary, in the reasonable
opinion of Parent, to carry out the purpose and intent of this Agreement.
Section 7. Termination. This Agreement and the Proxy (if delivered pursuant
to Section 3) shall terminate and shall have no further force or effect at and
as of the Expiration.
Section 8. Confidentiality. Stockholder agrees (i) to hold any information
regarding this Agreement and the Merger in strict confidence, and (ii) not to
divulge any such information to any third person not subject to confidentiality
obligations, until such time as the Merger has been publicly disclosed by
Parent, except as may otherwise be required by law.
Section 9. Miscellaneous.
Section 9.1 Severability. In the event that any provision of this Agreement,
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
Section 9.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by
either of the parties hereto without the prior written
B-3
consent of the other. This Agreement is binding upon Stockholder in
Stockholder's capacity as a stockholder of Company (and not in Stockholder's
capacity as a director or officer, as the case may be, of Company) and only
with respect to the specific matters set forth herein.
Section 9.3 Amendment and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
Section 9.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent or Merger Sub upon any such
violation, Parent and Merger Sub shall have the right to seek to enforce such
covenants and agreements by specific performance, injunctive relief or by any
other means available to Parent or Merger Sub at law or in equity, and
Stockholder hereby waives any and all defenses which could exist in its favor,
including the absence of irreparable harm as a defense, in connection with such
enforcement and waives any requirement for the security or posting of any bond
in connection with such enforcement.
Section 9.5 Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one (1) business day after the business day of
deposit with Federal Express or similar overnight courier, freight prepaid or
(d) one (1) business day after the business day of facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed to the intended recipient as set forth below):
(a) if to Parent or Merger Sub, to:
Synopsys, Inc.
700 East Middlefield Road
Mountain View, CA 94043
Attention: General Counsel
Telephone No.: (650) 584-5000
Facsimile No.: (650) 584-4396
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Rod J. Howard, Esq.
Telephone No.: (650) 424-0160
Facsimile No.: (650) 496-2777
(b) if to the Company, to:
IKOS Systems, Inc.
79 Great Oaks Blvd.
San Jose, CA 95119
Attention: General Counsel
Telephone No.: (408) 284-0400
Facsimile No: (408) 361-9698
B-4
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: James M. Koshland
Diane Holt Frankle
Telephone No.: (650) 833-2000
Facsimile No.: (650) 833-2001
Section 9.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California, without regard
to the laws that might otherwise govern under applicable choice- or conflicts-
of-laws principles of any jurisdiction. Each of the parties hereto irrevocably
consents to the exclusive jurisdiction and venue of any court located within
Santa Clara County in the State of California, in connection with any matter
based upon or arising out of this Agreement or the matters contemplated herein,
agrees that process may be served upon them in any manner authorized by the
laws of the State of California for such persons and waives and covenants not
to assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
Section 9.7 Entire Agreement. This Agreement contains the entire agreement
and understanding of the parties and supersedes all prior discussions,
agreements and understandings relating to the subject matter hereof.
Section 9.8 Legal Counsel. Stockholder acknowledges that he, she or it has
been advised to, and has had the opportunity to consult with his, her or its
personal attorney prior to entering into this Agreement and the Proxy.
Stockholder acknowledges that attorneys for Company represent Company and do
not represent any of the stockholders of Company in connection with the Merger
Agreement, this Agreement or any of the transactions contemplated hereby or
thereby.
Section 9.9 Agreement Negotiated. The form of this Agreement has been
negotiated by or on behalf of Parent and Company, each of which was represented
by attorneys who have carefully negotiated the provisions hereof. Stockholder
acknowledges that he, she or it has been advised to, and has had the
opportunity to, consult with his, her or its personal attorney prior to
entering into this Agreement. As a consequence, Parent and Stockholder do not
believe that any laws or rules relating to the interpretation of contracts
against the drafter of any particular clause should be applied in this case and
therefore waive, the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
Section 9.10 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.11 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
[Signature page follows.]
B-5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
STOCKHOLDER
By: _________________________________
SYNOPSYS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
IKOS SYSTEMS, INC.
By: _________________________________
Name: _______________________________
Title: ______________________________
OAK MERGER CORPORATION
By: _________________________________
Name: _______________________________
Title: ______________________________
Total Number of Shares of Company Common Stock owned on the date hereof:
Common Stock:[ ]
Shares of Company Common Stock
issuable upon the exercise of
outstanding options, warrants,
or other rights:[ ]
[SIGNATURE PAGE TO VOTING AGREEMENT]
B-6
Exhibit A
IRREVOCABLE PROXY
TO VOTE STOCK OF
IKOS SYSTEMS, INC.
The undersigned stockholder of IKOS Systems, Inc., a Delaware corporation
("Company"), hereby irrevocably (to the full extent permitted by the General
Corporation Law of the State of Delaware appoints the members of the Board of
Directors of Synopsys, Inc., a Delaware corporation ("Parent"), and each of
them, or any other designee of Parent, as the sole and exclusive attorneys and
proxies of the undersigned, with full power of substitution and resubstitution,
to vote and exercise all voting and related rights (to the full extent that the
undersigned is entitled to do so) with respect to all of the shares of capital
stock of Company that now are or hereafter may be beneficially owned by the
undersigned, or as to which the undersigned now or hereafter exercises voting
control, and any and all other shares or securities of Company issued or
issuable in respect thereof, or otherwise acquired by the undersigned on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Irrevocable Proxy. The Shares beneficially owned by the undersigned
stockholder of Company as of the date of this Irrevocable Proxy are listed on
the final page of this Irrevocable Proxy. Upon the undersigned's execution of
this Irrevocable Proxy, any and all prior proxies given by the undersigned with
respect to any Shares are hereby revoked and the undersigned agrees not to
grant any subsequent proxies with respect to the Shares until after the
Expiration (as defined below).
This Irrevocable Proxy is irrevocable (to the extent provided under law), is
coupled with an interest, and is granted pursuant to that certain Stockholder
Agreement dated as of even date herewith by and among Parent, Oak Merger
Corporation ("Merger Sub") and the undersigned, and is granted in consideration
of Parent's entering into that certain Agreement and Plan of Merger and
Reorganization by and among Company, Parent and Merger Sub (the "Merger
Agreement"), which agreement provides for the merger of Merger Sub with and
into Company (the "Merger") and the outstanding shares of common stock of
Company will be converted into the right to receive shares of common stock of
Parent;
As used herein, the term "Expiration" shall mean the earlier to occur of (i)
such date and time as the Merger shall become effective in accordance with the
terms and provisions of the Merger Agreement, and (ii) the date of termination
of the Merger Agreement pursuant to its terms. This Irrevocable Proxy shall
terminate at and as of the Expiration.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the
Expiration Date, to act as the undersigned's attorney and proxy to vote the
Shares, and to exercise all voting and other rights of the undersigned with
respect to the Shares (including, without limitation, the power to execute and
deliver written consents), at every annual, special or adjourned meeting of the
stockholders of Company and in every action or approval by written consent in
lieu of such meeting as follows:
(a) in favor of approval of the Merger and the adoption and approval of
the Merger Agreement, in favor of each of the other actions contemplated by
the Merger Agreement, and in favor of any matter that could reasonably be
expected to facilitate the Merger and the other transactions contemplated
by the Merger Agreement;
(b) against approval of any Takeover Proposal (as defined in the Merger
Agreement) or any proposal made in opposition to, or in competition with
consummation of the Merger and the transactions contemplated by the Merger
Agreement;
B-7
(c) against any action, transaction or agreement that would result in a
breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of the Company under the Merger Agreement;
(d) against any of the following actions: (A) any merger, consolidation,
business combination, sale of assets, reorganization or recapitalization of
the Company or any Subsidiary of the Company with any person or entity
other than Parent or Merger Sub, (B) any sale, lease or transfer of any
significant part of the assets of the Company or any Subsidiary of the
Company, (C) any reorganization, recapitalization, dissolution, liquidation
or winding up of the Company or any Subsidiary of the Company, (D) any
change in the capitalization of the Company or any Subsidiary of the
Company, or the corporate structure of the Company or any Subsidiary of the
Company, or (E) any other action that is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Merger Agreement; and
(e) in favor of waiving any notice that may have been or may be required
relating to any reorganization of Company or any Subsidiary of Company, any
reclassification or recapitalization of the capital stock of Company or any
Subsidiary of Company, or any sale of assets, change of control, or
acquisition of Company or any Subsidiary of Company by any other person, or
any consolidation or merger of Company or any Subsidiary of Company with or
into any other person.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
B-8
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: July 2, 2001 STOCKHOLDER
By: _________________________________
Name: _______________________________
Title: ______________________________
Shares beneficially owned:
[ ] shares of Company Common Stock
[ ] shares of Company Common Stock
issuable upon the exercise of
outstanding options, warrants, or
other rights
B-9
Appendix C
June 27, 2001
Board of Directors
IKOS Systems, Inc.
79 Great Oaks Blvd.
San Jose, CA 95119
Gentlemen:
We understand that IKOS Systems, Inc. ("IKOS"), Synopsys, Inc. ("Synopsys"),
and Oak Merger Corporation, a wholly-owned subsidiary of Synopsys ("Merger
Sub"), propose to enter into an Agreement and Plan of Merger and Reorganization
(the "Merger Agreement") whereby Merger Sub will be merged with and into IKOS
and IKOS will become a wholly-owned subsidiary of Synopsys (the "Merger"). The
terms of the Merger will be set forth more fully in the Merger Agreement.
Pursuant to the proposed Merger Agreement, we understand that at the
Effective Time (as defined in the Merger Agreement) each issued and outstanding
share of common stock, $0.01 par value, of IKOS ("IKOS Common Stock") (other
than shares held in IKOS's treasury or by Synopsys or Merger Sub) will be
converted into the right to receive the number of shares (the "Exchange Ratio")
of common stock, $0.01 par value, of Synopsys ("Synopsys Common Stock") equal
to the quotient obtained by dividing (i) the sum of $6.00 and the Contingent
Consideration, if any, calculated in accordance with the Merger Agreement, by
(ii) the average last sale price per share of the Synopsys Common Stock for the
ten trading day period ending on the fifth trading day prior to the closing
date of the Merger. The Contingent Consideration, as set forth in the Merger
Agreement, will equal the difference between (x) an amount between zero and
$14.00, depending upon the amount of Revenues, Net Backlog and Profit Before
Taxes of IKOS, all as determined pursuant to the Merger Agreement, less (y) the
Dilution Adjustment, calculated as set forth in the Merger Agreement.
You have asked us to advise you as to the fairness, from a financial point
of view, of the Exchange Ratio to the holders of IKOS Common Stock (other than
Synopsys and its affiliates). Needham & Company, Inc., as part of its
investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. We have been engaged by IKOS as financial
advisor in connection with the Merger and to render this opinion and will
receive a fee for our services, a substantial portion of which is contingent on
the consummation of the Merger. In addition, IKOS has agreed to indemnify us
for certain liabilities arising from our role as financial advisor and out of
the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed a
draft of the Merger Agreement dated June 22, 2001, together with correspondence
dated June 27, 2001 from IKOS outlining the proposed modifications to the
financial terms of the draft Merger Agreement (collectively, the "June 27
Proposal"); (ii) reviewed certain publicly available information concerning
IKOS and Synopsys and certain other relevant financial and operating data of
IKOS furnished to us by IKOS; (iii) held discussions with members of management
of IKOS concerning the current and future business prospects of IKOS and the
estimated financial results of IKOS for the quarter ending June 30, 2001; (iv)
reviewed and discussed with members of management of IKOS certain financial
forecasts and projections prepared by such management; (v) reviewed the
historical stock prices and trading volumes of IKOS Common Stock and Synopsys
Common Stock; (vi) compared certain publicly available financial data of
companies whose securities are traded in the public markets and that we deemed
generally relevant to similar data for IKOS; (vii) reviewed the financial terms
of certain other business combinations that we deemed generally relevant; and
(viii) performed and/or considered such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on the accuracy and completeness of all of the financial and
other information reviewed by us for purposes of this opinion and
C-1
have neither attempted to verify independently nor assumed responsibility for
verifying any of such information. In addition, we have assumed, with your
consent, that (i) any material liabilities (contingent or otherwise, known or
unknown) of IKOS are as set forth in the financial statements of IKOS, (ii) the
Merger will be accounted for as a purchase for financial reporting purposes,
(iii) the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, (iv) the Merger will be
consummated on a timely basis following computation of the amount of Contingent
Consideration, if any, in accordance with the terms set forth in the Merger
Agreement, and (v) the terms set forth in the executed Merger Agreement will
not differ materially from the proposed terms provided to us in the June 27
Proposal. With respect to IKOS's financial forecasts provided to us by its
management, we have assumed for purposes of our opinion that such forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of such management, at the time of preparation, of the
future operating and financial performance of IKOS. We express no opinion with
respect to such forecasts or the assumptions on which they were based. We have
not assumed any responsibility for or made or obtained any independent
evaluation, appraisal or physical inspection of the assets or liabilities of
IKOS. Further, our opinion is based on economic, monetary and market conditions
as they exist and can be evaluated as of the date hereof. We are not expressing
any opinion as to the amount of Contingent Consideration, if any, that will
actually be paid in the Merger. Whether and the extent to which Contingent
Consideration will be paid in the Merger depends upon the operating performance
of IKOS in the twelve-month period ending June 30, 2002, which is subject to,
among other things, economic and market developments affecting IKOS, its
industry and the general economy.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, of the Exchange Ratio to the holders of IKOS Common Stock (other
than Synopsys and its affiliates) and does not address (i) IKOS's underlying
business decision to engage in the Merger, (ii) the relative merits of the
merger as compared to any alternative business strategies that might exist for
IKOS, (iii) the effect of any of other transaction in which IKOS might engage,
or (iv) the consideration to be received by any individual stockholder. Our
opinion does not constitute a recommendation to any stockholder of IKOS as to
how such stockholder should vote on the proposed Merger. We are not expressing
any opinion as to the prices at which the Synopsys Common Stock or IKOS Common
Stock will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of IKOS and Synopsys for our own account or for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of IKOS and may not be quoted or
referred to or used for any purpose without our prior written consent, except
that this letter may be disclosed in connection with any registration statement
or proxy statement used in connection with the Merger so long as this letter is
quoted in full in such registration statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof the Exchange Ratio is fair to the holders of IKOS Common Stock
(other than Synopsys and its affiliates) from a financial point of view.
Very truly yours,
/s/ Needham & Company, Inc.
Needham & Company, Inc.
C-2
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article X of the Registrant's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permitted under
Delaware law.
Article VII of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation to
the fullest extent permitted under the General Corporation Law of Delaware.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee, or other agent of the Registrant.
Item 21. Exhibits and Financial Statement Schedules.
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger dated October 14, 1997 by and among the
Registrant, Post Acquisition Corp. and Viewlogic Systems, Inc. (1)
2.2 Agreement and Plan of Merger and Reorganization dated July 2, 2001 by
and among the Registrant, Oak Merger Corporation and IKOS Systems,
Inc. (19)
2.3 First Amendment to Agreement and Plan of Merger and Reorganization
dated August 2, 2001 by and among the Registrant, Oak Merger
Corporation and IKOS Systems, Inc. (20)
3.1 Fourth Amended and Restated Certificate of Incorporation (2)
3.2 Certificate of Designation of Series A Participating Preferred Stock
(3)
3.3 Certificate of Amendment of Fourth Amended and Restated Certificate of
Incorporation (4)
3.4 Restated Bylaws of Synopsys, Inc. (2)
4.1 Amended and Restated Preferred Shares Rights Agreement, dated November
24, 1999 (3)
4.3 Specimen Common Stock Certificate (5)
5.1 Opinion of Brobeck, Phleger & Harrison LLP (23)
8.1 Tax Opinion of Brobeck, Phleger & Harrison LLP (23)
8.2 Tax Opinion of Gray Cary Ware & Freidenrich LLP (23)
10.1 Form of Indemnification Agreement (5)
10.2 Director's and Officer's Insurance and Registrant Reimbursement Policy
(5)
II-1
Exhibit
Number Description of Document
------- -----------------------
10.6 Lease Agreement, dated August 17, 1990, between the Registrant and
John Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and Richard
T. Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (5)
10.7 Lease Agreement, dated March 29, 1991, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (5)
10.15 Lease Agreement, dated June 16, 1992, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (6)
10.16 Lease Agreement, dated June 23, 1993, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (7)
10.21 Lease Agreement, August 24, 1995, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (8)
10.25 Amendment No. 5 to Lease, dated October 4, 1995, to Lease Agreement
dated August 17, 1990, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended (9)
10.26 Amendment No. 3 to Lease, dated October 4, 1995, to Lease Agreement
dated June 16, 1992, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended (9)
10.27 Amendment No. 2 to Lease, dated October 4, 1995, to Lease Agreement
dated June 23, 1993, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended (9)
10.28 Lease dated January 2, 1996 between the Registrant and Tarigo-Paul, a
California Limited Partnership (10)
10.29 1992 Stock Option Plan, as amended and restated (11) (12)
10.30 Employee Stock Purchase Program, as amended and restated (12) (13)
10.31 International Employee Stock Purchase Plan, as amended and restated
(12) (13)
10.32 Synopsys deferred compensation plan, dated September 30, 1996 (12) (14)
10.33 1994 Non-Employee Directors Stock Option Plan, as amended and restated
(12) (15)
10.34 Form of Executive Employment Agreement, dated October 1, 1997 (12) (16)
10.35 Schedule of Executive Employment Agreements (11)
10.36 1998 Nonstatutory Stock Option Plan (12) (17)
10.37 1992 Stock Option Plan, as amended through May 25, 2001 (12) (18)
10.38 Employee Stock Purchase Plan, as amended through February 28, 2001
(12) (18)
II-2
Exhibit
Number Description of Document
------- -----------------------
10.39 International Employee Stock Purchase Plan, as amended through
February 28, 2001 (12) (18)
21.1 Subsidiaries of the Registrant (21)
23.1 Consent KPMG LLP, Independent Auditors
23.2 Consent Ernst & Young LLP, Independent Auditors
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1
and 8.1)
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 8.2)
24.1 Power of Attorney (See Signature Page)
99.1 Opinion of Needham & Company, Inc. (22)
99.2 Consent of Needham & Company, Inc.
99.3 Form of Proxy Card
- --------
(1) Incorporated by reference to Annex A to the form of prospectus contained
in the Registration Statement on Form S-4 (File No. 333-39713) of
Synopsys, Inc. as filed with the Securities and Exchange Commission on
November 7, 1997.
(2) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 3, 1999.
(3) Incorporated by reference from exhibit to Amendment No. 1 to the
Registrant's Registration Statement on Form 8-A as filed with the
Securities and Exchange Commission on December 13, 1999.
(4) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000.
(5) Incorporated by reference from exhibit of the same number filed with the
Registrant's Registration Statement on Form S-1 (File No. 33-45138) which
became effective February 24, 1992.
(6) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1992.
(7) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993.
(8) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
(9) Incorporated by reference from exhibit of the same number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995.
(10) Incorporated by reference from exhibit of the same number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996.
(11) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000, as
filed with the Securities and Exchange Commission on June 13, 2000.
(12) Compensatory plan or agreement in which an executive officer participates.
(13) Incorporated by reference from exhibit to the Registrant's Registration
Statement on Form S-8 (File no. 333-38810), as filed with the Securities
and Exchange Commission on June 8, 2000.
(14) Incorporated by reference from exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. as filed with the
Securities and Exchange Commission on February 5, 1997.
(15) Incorporated by reference from exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 333-77597), as filed with the Securities
and Exchange Commission on May 3, 1999.
(16) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended January 3, 1998.
(17) Incorporated by reference to exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-90643) as filed with the Securities
and Exchange Commission on November 9, 1999.
(18) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2001.
II-3
(19) Included as Appendix A to this Registration Statement.
(20) Included as Appendix A-1 to this Registration Statement.
(21) Incorporated by reference from the exhibit of the same number filed with
the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 2000.
(22) Included as Appendix C to this Registration Statement.
(23) To be filed by pre-effective amendment.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(5) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mountain
View, State of California, on this 9th day of August, 2001.
Synopsys, Inc.
/s/ Aart J. de Geus
By: _________________________________
Aart J. de Geus
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Aart J. de Geus and Robert B. Henske, and each
of them, as such person's true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Aart J. de Geus Chief Executive Officer August 9, 2001
______________________________________ (Principal Executive
Aart J. de Geus Officer) and Chairman of
the Board of Directors
/s/ Chi-Foon Chan President, Chief Operating August 9, 2001
______________________________________ Officer and Director
Chi-Foon Chan
/s/ Robert B. Henske Chief Financial Officer August 9, 2001
______________________________________ (Principal Financial
Robert B. Henske Officer)
/s/ Richard Rowley Corporate Controller August 9, 2001
______________________________________ (Principal Accounting
Richard Rowley Officer)
/s/ Andy D. Bryant Director August 9, 2001
______________________________________
Andy D. Bryant
/s/ Deborah A. Coleman Director August 9, 2001
______________________________________
Deborah A. Coleman
II-5
Signature Title Date
--------- ----- ----
/s/ Bruce R. Chizen Director August 9, 2001
______________________________________
Bruce R. Chizen
Director
______________________________________
A. Richard Newton
/s/ Sasson Somekh Director August 9, 2001
______________________________________
Sasson Somekh
/s/ Steven C. Walske Director August 9, 2001
______________________________________
Steven C. Walske
II-6
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Merger dated October 14, 1997 by and among the
Registrant, Post Acquisition Corp. and Viewlogic Systems, Inc.(1)
2.2 Agreement and Plan of Merger and Reorganization dated July 2, 2001 by
and among the Registrant, Oak Merger Corporation and IKOS Systems,
Inc.(19)
2.3 First Amendment to Agreement and Plan of Merger and Reorganization
dated August 2, 2001 by and among the Registrant, Oak Merger
Corporation and IKOS Systems, Inc.(20)
3.1 Fourth Amended and Restated Certificate of Incorporation(2)
3.2 Certificate of Designation of Series A Participating Preferred
Stock(3)
3.3 Certificate of Amendment of Fourth Amended and Restated Certificate of
Incorporation(4)
3.4 Restated Bylaws of Synopsys, Inc.(2)
4.1 Amended and Restated Preferred Shares Rights Agreement, dated November
24, 1999(3)
4.3 Specimen Common Stock Certificate(5)
5.1 Opinion of Brobeck, Phleger & Harrison LLP(23)
8.1 Tax Opinion of Brobeck, Phleger & Harrison LLP(23)
8.2 Tax Opinion of Gray Cary Ware & Freidenrich LLP(23)
10.1 Form of Indemnification Agreement(5)
10.2 Director's and Officer's Insurance and Registrant Reimbursement
Policy(5)
10.6 Lease Agreement, dated August 17, 1990, between the Registrant and
John Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and Richard
T. Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(5)
10.7 Lease Agreement, dated March 29, 1991, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(5)
10.15 Lease Agreement, dated June 16, 1992, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(6)
10.16 Lease Agreement, dated June 23, 1993, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(7)
10.21 Lease Agreement, August 24, 1995, between the Registrant and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(8)
10.25 Amendment No. 5 to Lease, dated October 4, 1995, to Lease Agreement
dated August 17, 1990, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended(9)
10.26 Amendment No. 3 to Lease, dated October 4, 1995, to Lease Agreement
dated June 16, 1992, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended(9)
Exhibit
Number Description of Document
------- -----------------------
10.27 Amendment No. 2 to Lease, dated October 4, 1995, to Lease Agreement
dated June 23, 1993, between the Registrant and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997 (Arrillaga
Family Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended(9)
10.28 Lease dated January 2, 1996 between the Registrant and Tarigo-Paul, a
California Limited Partnership(10)
10.29 1992 Stock Option Plan, as amended and restated(11)(12)
10.30 Employee Stock Purchase Program, as amended and restated(12)(13)
10.31 International Employee Stock Purchase Plan, as amended and
restated(12)(13)
10.32 Synopsys deferred compensation plan, dated September 30, 1996(12)(14)
10.33 1994 Non-Employee Directors Stock Option Plan, as amended and
restated(12)(15)
10.34 Form of Executive Employment Agreement, dated October 1, 1997(12)(16)
10.35 Schedule of Executive Employment Agreements(11)
10.36 1998 Nonstatutory Stock Option Plan(12)(17)
10.37 1992 Stock Option Plan, as amended through May 25, 2001(12)(18)
10.38 Employee Stock Purchase Plan, as amended through February 28,
2001(12)(18)
10.39 International Employee Stock Purchase Plan, as amended through
February 28, 2001(12)(18)
21.1 Subsidiaries of the Registrant(21)
23.1 Consent KPMG LLP, Independent Auditors
23.2 Consent Ernst & Young LLP, Independent Auditors
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1
and 8.1)
23.4 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 8.2)
24.1 Power of Attorney (See Signature Page)
99.1 Opinion of Needham & Company, Inc.(22)
99.2 Consent of Needham & Company, Inc.
99.3 Form of Proxy Card
- --------
(1) Incorporated by reference to Annex A to the form of prospectus contained in
the Registration Statement on Form S-4 (File No. 333-39713) of Synopsys,
Inc. as filed with the Securities and Exchange Commission on November 7,
1997.
(2) Incorporated by reference from exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 3, 1999.
(3) Incorporated by reference from exhibit to Amendment No. 1 to the
Registrant's Registration Statement on Form 8-A as filed with the
Securities and Exchange Commission on December 13, 1999.
(4) Incorporated by reference from exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 2000.
(5) Incorporated by reference from exhibit of the same number filed with the
Registrant's Registration Statement on Form S-1 (File No. 33-45138) which
became effective February 24, 1992.
(6) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended September
30, 1992.
(7) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1993.
(8) Incorporated by reference from exhibit of the same number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995.
(9) Incorporated by reference from exhibit of the same number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1995.
(10) Incorporated by reference from exhibit of the same number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996.
(11) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000, as
filed with the Securities and Exchange Commission on June 13, 2000.
(12) Compensatory plan or agreement in which an executive officer participates.
(13) Incorporated by reference from exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 333-38810), as filed with the Securities
and Exchange Commission on June 8, 2000.
(14) Incorporated by reference from exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. as filed with the
Securities and Exchange Commission on February 5, 1997.
(15) Incorporated by reference from exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 333-77597), as filed with the Securities
and Exchange Commission on May 3, 1999.
(16) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended January 3, 1998.
(17) Incorporated by reference to exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-90643) as filed with the Securities
and Exchange Commission on November 9, 1999.
(18) Incorporated by reference from exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2001.
(19) Included as Appendix A to this Registration Statement.
(20) Included as Appendix A-1 to this Registration Statement.
(21) Incorporated by reference from the exhibit of the same number filed with
the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 2000.
(22) Included as Appendix C to this Registration Statement.
(23) To be filed by pre-effective amendment.