At the same time, Santa Clara County Superior Court Judge Conrad Rushing ordered Avanti to pay $195 million in restitution, including interest, to Cadence Design Systems Inc., an amount that Avanti apparently has on hand in cash and investments.

The six-year-old criminal case against Avanti and its founders, one of the most closely watched dramas in the high-tech industry, concluded dramatically Wednesday (July 25) as Avanti co-founder Stephen Wuu was led away in handcuffs to serve two years in San Quentin State Prison. Three other defendants were sentenced to one-year terms in county jail.

On Wednesday night, Avanti announced that Hsu, citing a recent heart attack, had resigned from the chief executive's and president's posts but would remain chairman of the board and "chief strategist." Paul Lo, the company's chief operating officer, will take on the presidency, leaving the job of chief executive officer unoccupied.

No further information was available on the medical status of Hsu, who served as Avanti president and chief executive for some 30 quarters and who was at the center of the storm following the December 1995 police raid that launched the criminal case against the Fremont, Calif., company.

It remains unclear whether Avanti can or will seek an appeal. A provision of the no-contest plea entered by the company and seven current or former employees on code theft and other counts states that all parties — defendants as well as the district attorney — waived their appellate rights.

Avanti will reportedly pay $100 million of the ordered restitution to Cadence this week, $40 million next week and the remaining $55 million within the next six months. Avanti's attorneys said that Rushing revised the base figure of $182 million he had handed down a week earlier, and added $9.4 million in interest, bringing the final total to $195,399,855.

In addition, Avanti owes $35 million in corporate fines and millions more in fines levied against the defendants, which the company has said it will pay, along with defendants' legal fees. A shareholders group has filed a suit demanding that the employees pay out of their own pockets.

The end of the criminal case is far from the end of Avanti's woes. It still faces a civil suit in which Cadence (San Jose) will seek hundreds of millions of dollars and, perhaps, injunctions against Avanti's Apollo place and route software.

"Falling apart at the seams" is how Erach Desai, analyst at Credit Suisse First Boston, described Avanti in a memorandum this week. Desai said the company has gone into a "virtual meltdown" as customers take their business elsewhere and employees begin "rushing for the doors." Desai also cited rumors that Avanti may be negotiating a purchase deal with Cadence, whose source code Avanti founders stole beginning in 1991.

As Avanti stock plummeted to an all-time low Thursday (July 26), closing at $6.95 per share, the company did not respond to requests for interviews or information. In a prepared statement, Lo, the new president, said that Avanti is "facing great challenges but also tremendous opportunities."

Defections detected

Financial and industry analysts reported that Avanti was hemorrhaging R&D brain power and also losing application engineers as well as customers.

Avanti's power-user customers now have several alternatives, and some are taking them, said Gary Smith, chief EDA analyst at Gartner Dataquest. Earlier, Smith had said that Synopsys' new Route Compiler could take away 50 percent of Avanti's placement and routing business.

"It is easy for users to be moral now, because there are alternative companies like Monterey, Magma and, soon, Synopsys," said Smith. "Back in the 1995-97 time frame, it was hard for power users to be moral, because Avanti was the only one offering tools that could do the job well. Now that isn't the case."

Smith said that Avanti has been steadily losing key R&D employees since last October, and that he believes the company won't have a competitive product for the next-generation IC implementation tool set. "They still don't have a viable synthesis engine, and I think it will take them three years to rebuild their R&D staff — they will likely miss this next retooling cycle," he said.

Financial analysts Bill Frerichs of DA Davidson and Garo Toomajanian of Dain Raucher Wessels, two of the handful of financial analysts following Avanti, said this week that the corporation's future is highly questionable.

"It is a bad situation getting worse," said Toomajanian. "I think people are starting to take a harder look at this thing and realize that customers are going to start looking for alternatives. They have to stay focused on technology and if you look at the company today, with people being forced to leave the company and some of them going to jail, I'm sure internally that work is not a subject foremost on the minds of Avanti's employees. I think customers are realizing that maybe Avanti won't be around."

"The company is going to need to work very hard to re-establish its credibility in the marketplace," said Frerichs. "The restructuring of the top management is a step in the right direction, but a truly independent board of directors is needed, and a lot of work needs to be done. So the question becomes: Will they take the necessary steps to restore Avanti as a strong competitor? Wall Street is saying 'no.' "

"Customers look at technology and stability, and this is going to stimulate their interest in evaluating alternatives," said John Barr, financial analyst with Robertson Stephens. "Absolutely, customers will be less willing to use Avanti."

But one major Avanti customer, LSI Logic Corp., will keep using that company's tools, according to a spokesman — even though LSI also uses competing place and route tools from Monterey Design Systems. "We will continue to use multiple vendors, and they [Avanti] will be one of the vendors," the spokesman said. "We meet with them periodically, and we are satisfied they will meet our needs."

Pasquale Pistorio, president and chief executive of STMicroelectonics, who professed ignorance of this week's legal decision when asked for comments, said his company uses some Avanti place and route tools on an ad hoc basis. "We use Avanti tools, though I don't know to what extent," said Pistorio. "They are not a major partner like Cadence and Synopsys. If they were a major partner it would be an ethical issue for us, but they are not."

John Cooley, moderator of the E-Mail Synopsys User's Group, said he's getting "mixed reviews" from Avanti users as he compiles his annual Design Automation Conference user survey. Cooley said that some Avanti users don't care about the latest legal developments, while others are saying they're less likely to buy Avanti software, primarily out of fear that the software won't be supported if the company goes belly-up.

Long sentences

Of the five defendants present in court this week, Wuu got the harshest sentence. He took the Symbad database code from Cadence in 1991 while employed there, and then modified small parts of it to create the database technology for the new company, ArcSys, which later became Avanti. Following his term in San Quentin, Wuu will face three years of probation, Judge Rushing ordered. A sheriff placed Wuu in handcuffs immediately following the sentencing. He was then taken to the jury box and stripped of his jacket, belt and tie as a courtroom full of friends, family and co-workers looked on. Earlier, Wuu was hit with $2.7 million in fines.

Other Avanti defendants, all of them also former employees of Cadence, were sentenced for lesser charges including minor acts of theft, conspiracy and securities fraud. Avanti co-founder Yuh-Zen Liao will serve one year in county jail and three years' probation. He is eligible for work furlough. Liao too was fined $2.7 million.

Eric Cheng received 364 days in county jail, work furlough and a fine of $27,000. It was also revealed this week that as of Wednesday, Wuu, Cheng and Liau are no longer employees of Avanti Corp.

Hsu, the chairman, will serve no jail time; his $2.7 million fine has already been paid. Judge Rushing reduced Hsu's charges to misdemeanors.

Another Avanti co-founder, Eric Cho, will serve a year in jail and has been slapped with $108,000 in fines. He is also available for work furlough.

Leigh Huang, at one time Avanti's director of business operations, will get three years of probation but no jail time. Like Cho's, Huang's fine was set at $108,000.

Mitch Igusa, now an R&D engineer at Silicon Perspective Corp., was sentenced late last month to one year in county jail. Igusa will be able to participate in a work-release program while serving his sentence.

Charges against Mike Tsai, another Avanti co-founder and the company's first chief executive officer, were dismissed early in the proceedings.

None of the Avanti employees has to pay his or her own fines or legal fees, because the corporation is paying on their behalf. This action has triggered a class-action suit filed by the law firm Milburg and Weiss on behalf of Avanti shareholders against the company's board of directors. One defendant's attorney suggested that this suit may result in the defendants paying the fines and attorneys' fees out of their own pockets.

The final judgment in the Avanti case elated Joseph Costello, the former president and chief executive at Cadence Design Systems who aggressively pursued the case for years. "I really feel this is a great outcome," Costello said. "It sends a really strong message that this kind of crime won't be tolerated. It sets a different tone on IP [intellectual property] — it's a crime when you steal something like this."

Costello lauded the "outstanding and exemplary" performance of Julius Finkelstein, Santa Clara County's deputy district attorney, who pursued the criminal case for six years with a small staff and limited funds, Costello noted. "He has done the whole high-tech community and the United States a service by taking the stance that he did, and persevering against incredible odds," Costello said. "And thank goodness we had a judge like Conrad Rushing, who put an end to the delays, manipulation and game-playing that went on and on."

But at least one part of the judgment didn't sit right with Costello. "When a guy like Gerry [Hsu], who's the leader, gets off with no jail time, that doesn't seem fair in the large scheme of things," he said. But Costello said he understood the need for the plea bargaining that resulted in Hsu avoiding a prison term.

Costello also expressed frustration with the time it took for the case to come to resolution. "This proves how much inequality there is, when a company with these kinds of financial resources can delay judgment day for years, and then the company pays off your fine," he said.

Punitive damages

But judgment day isn't quite over for Avanti, which now must face Cadence's long-running civil suit. Smith McKeithen, senior vice president and general counsel at Cadence, said that Cadence will seek punitive damages as well as additional direct damages on top of the $195 million in court-ordered restitution. Further, McKeithen said that Cadence is "absolutely" considering seeking an injunction against Avanti's current Apollo placement and routing products.

"We're fairly pleased with his [Rushing's] order of restitution of $195 million to Cadence for the theft of our [intellectual property]," said McKeithen, adding that the sentences imposed on the individual defendants "are serious enough to send a message that the theft of [intellectual property] is not correct."

McKeithen said that discovery in the civil suit was held up for a long period as the defendants in the criminal case took the Fifth Amendment against self-incrimination. Now that the criminal trial is over, he said, "We have a lot of things we're going to want to ask questions about. We expect to begin the discovery process as soon as the court schedule permits." McKeithen noted, however, that the civil case probably won't come to trial until "well into the next year."

"We are very pleased with the result of this criminal case," said Finkelstein, who prosecuted the case. "Judge Rushing imposed the maximum penalty. The court's sentencing recognizes the seriousness of trade secret theft."

Avanti's new president, Paul Lo, has served as chief operating officer since September 2000. He directed the development of many Avanti products, including the Apollo placement and routing tool set and the Hercules-II physical verification tool. Lo came to Avanti in 1995 from Quickturn Design Systems, where he worked on emulation products.