UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (date of earliest event reported): December 20, 1996
AVANT! CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-25864 94-3133226
-------- ------- ----------
(State or other jurisdiction of (Commission (I.R.S Employer
incorporation) File Number) Identification No.)
1208 East Arques Avenue, Sunnyvale, California 94086
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 738-8881
<PAGE>
ITEM 4. Changes in Registrant's Certifying Accountant.
As of December 12, 1996, the Registrant has dismissed Roberts
Accountancy Corporation as the independent accountant for Anagram, Inc.
("Anagram"), the Registrant's wholly owned subsidiary and appointed KPMG Peat
Marwick LLP as principal accountants. The Registrant acquired Anagram on
September 27, 1996, and the Registrant's principal accountants previously
expressed reliance on Roberts Accountancy Corporation's report in the
Registrant's Registration Statement on Form S-4 (File No. 333-11659). The Audit
Committee of the board of directors of the Registrant has approved the decision
to change accountants.
The reports of Roberts Accountancy Corporation on Anagram's financial
statements for each of the two years in the period ended December 31, 1995 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of Anagram's financial statements for the
two years ended December 31, 1995 and the subsequent interim periods prior to
September 20, 1996, there were no disagreements between Anagram and Roberts
Accouncy Corporation on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Roberts Accountancy Corporation, would have
caused Roberts Accountancy Corporation to make reference to the matter in their
reports.
There were no reportable events (as defined in Regulation S-K Item 304
(a)(1)(v)) during the two years ended December 31, 1995 and the subsequent
interim periods prior to September 20, 1996.
The Registrant requested Roberts Accountancy Corporation to furnish it
with a letter addressed to the Securities and Exchange Commission stating
whether or not Roberts Accountancy Corporation agrees with the above statements,
which letter is attached hereto as exhibit 16.1.
Item 5. Other Events.
On October 29, 1996 and November 27, 1996, the Company consummated
transactions to acquire Meta-Software, Inc. ("Meta") and FrontLine Design
Automation, Inc.("FrontLine"), respectively, in transactions accounted for as
poolings-of-interest. The Company is currently undertaking to file a Form S-3 to
register the shares issued in connection with the acquisition of FrontLine. In
accordance with SEC requirements, the Company is providing supplemental selected
financial data, supplemental quarterly financial information, supplemental
management's discussion and analysis of financial condition and results of
operations, and supplemental consolidated financial statements which give effect
to the acquisition of Meta and FrontLine. These supplemental financial
statements will become the historical financial statements of Avant! Corporation
and subsidiaries after financial statements covering the respective dates of the
consummation of the business combinations are issued.
In addition, the Company is providing historical selected financial
data, historical quarterly financial information, historical management's
discussion and analysis, and historical consolidated financial statements which
give effect to the acquisition of Anagram, Inc., which was consummated on
September 27, 1996.
The financial information referenced above is set forth as summarized
in the following index:
Supplemental Financial Information:
Selected Supplemental Financial Data ........................... SF-A
Selected Supplemental Quarterly Consolidated Financial
Information ................................................... SF-B
Management's Discussion and Analysis of Supplemental Financial
Condition and Results of Operations ........................... SMD&A
Supplemental Consolidated Financial Statements .................. SF
Historical Financial Information:
Selected Financial Data ......................................... F-A
Selected Quarterly Financial Information ........................ F-B
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... MD&A
Consolidated Financial Statements ............................... F
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
Exhibit
Number Description
------ -----------
16.1 Letter of Roberts Accountancy Corporation
regarding change in certfying accountant.
Supplemental Financial Information:
99.1 Selected Supplemental Consolidated Financial Data
99.1 Selected Supplemental Quarterly Financial Information
99.1 Management's Discussion and Analysis
of Supplemental Financial Condition and Results
of Operations
99.1 Supplemental Consolidated Financial Statements
Historical Financial Information:
99.2 Selected Consolidated Financial Data
99.2 Selected Quarterly Financial Information
99.2 Management's Discussion and Analysis
of Financial Condition and Results of Operations
99.2 Consolidated Financial Statements
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AVANT! CORPORATION.
-------------------
(Registrant)
Date: December 20, 1996 /s/ JOHN P. HUYETT
----------------- ------------------------------------------
John P. Huyett, Vice President of Finance,
Chief Financial Officer and Principal
Accounting Officer
Exhibit 16.1
December 20, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for Anagram, Inc. and, under
the date of March 14, 1996 and September 18, 1996, we reported on the financial
statements of Anagram, Inc. as of and for the years ended December 31, 1995 and
1994. In December 1996, our appointment as principal accountants was
terminated. We have read Anagram, Inc.'s statements included under Changes in
Registrants Certifying Accountant included in Avant! Corporation's Form 8-K
dated December 20, 1996, and we agree with such statements.
Very truly yours,
/s/ ROBERTS ACCOUNTANCY CORPORATION
------------------------------------
ROBERTS ACCOUNTANCY CORPORATION
Exhibit 99.1
<TABLE>
Selected Supplemental Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
Nine months ended
Year ended December 31, September 30,
1991 1992 1993 1994 1995 1995 1996
---------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Supplemental Consolidated Statement of Operations
Data:(1)
Total Sales $ 11,833 $ 14,806 $ 22,560 $ 39,344 $ 68,868 $ 47,650 $ 77,293
Net Income(2) 2,972 307 2,389 4,009 8,350 9,229 15,264
Net Income Per Share(2) $ 0.39 $ 0.03 $ 0.15 $ 0.20 $ 0.35 $ 0.39 $ 0.57
Weighted Average Common and
Equivalent Shares 7,606 8,954 16,284 20,457 24,159 23,814 26,594
Supplemental Consolidated Balance Sheet Data:
Total Assets $ 6,943 $ 13,397 $ 24,277 $ 52,222 $123,173 $ 99,085 $149,268
Long-term Obligations -- 152 173 1,021 1,730 562 1,230
Redeemable Preferred Stock $ -- $ 3,830 $ 8,312 $ 8,312 $ -- $ -- $ --
<FN>
(1) The selected supplemental consolidated financial data gives retroactive
recognition to the acquisition of Anagram, Meta and Frontline, each of
which have been accounted for as a pooling-of-interests.
(2) Supplemental net income and net income per share for the years ended
December 31, 1991, 1992, 1993, 1994, 1995 and nine months ended September
30, 1995 include a pro forma provision for income tax expense that would
have been recognized if Meta (an S corporation for income tax reporting
purposes) had been a C Corporation during these periods.
</FN>
</TABLE>
SF-A
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Supplemental Consolidated Financial Information
(In thousands, except per share data)
Three-Month Periods Ended
Supplemental Condensed Combined -------------------------------------------------------------------------------
Statements of Income Data(1) 1994 1995
-------------------------------------------------------------------------------
Mar.31 Jun.30 Sept. 30 Dec.31 Mar.31 Jun.30 Sept.30 Dec.31
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 6,429 $ 9,073 $10,180 $13,662 $12,347 $16,251 $19,052 $21,218
Income (loss) from operations 161 (410) 1,764 3,833 2,537 4,075 5,663 (485)
Net income (loss) (2) $ 175 $ (111) $ 1,251 $ 2,694 $ 1,937 $ 3,016 $ 4,276 $ (879)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share (2) $ 0.01 $ (0.01) $ 0.06 $ 0.13 $ 0.09 $ 0.12 $ 0.16 $ (0.03)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average Common
and equivalent shares 19,295 20,524 20,688 21,014 21,815 25,960 26,140 26,593
</TABLE>
Continued.....
Three-Month Periods Ended
Supplemental Condensed Combined ------------------------------
Statements of Income Data(1) 1996
------------------------------
Mar.31 Jun.30 Sept.30
------------------------------
Total revenue $23,547 $25,818 $27,928
Income (loss) from operations 6,905 7,429 6,494
Net income (loss) (2) $ 5,011 $ 5,478 $ 4,775
======= ======= =======
Net income (loss) per share (2) $ 0.19 $ 0.21 $ 0.18
======= ======= =======
Weighted average Common
and equivalent shares 26,120 26,618 26,983
1) The selected supplemental quarterly consolidated financial information
gives retroactive recognition to the acquisitions of Anagram, Meta and
FrontLine, each of which have been accounted for as a pooling of interests.
2) Supplemental quarterly net income and net income per share for the year
ended December 31, 1994 and the nine months ended September 30, 1995
includes a provision for income tax that would have been recognized if Meta
(an S corporation for income tax purposes) had been a C Corporation during
those periods.
SF-B
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Avant! resulted from the merger of ArcSys, Inc. ("ArcSys") and Integrated
Silicon Systems, Inc. ("ISS") on November 27, 1995. Effective September 27,
1996, October 29, 1996, and November 27, 1996 Avant! acquired Anagram
Incorporated ("Anagram"), Meta-Software, Inc. (Meta), and FrontLine Design
Automation, Inc. ("FrontLine"), respectively. The ISS merger, and the Anagram,
Meta and FrontLine acquisitions have been accounted for by the
pooling-of-interests method, and accordingly, Avant!'s supplemental consolidated
financial statements give retroactive effect for all periods presented to
include the results of operations, financial position, and cash flows of ISS,
Anagram, Meta, and FrontLine.
Avant! develops, markets, and supports software products that assist design
engineers in the physical layout, design, verification, simulation and timing
analysis of advanced ICs. Avant!'s strategy is to focus on productivity
enhancing software for the ICDA segment of the EDA market.
ArcSys was founded in February 1991, and began shipping Aquarius (formerly
ArcCell), its cell-based place and route software product, in 1993. ISS began
shipping its initial physical layout software products in 1988. ISS introduced
Hercules (formerly VeriCheck), its hierarchical physical verification software,
in the third quarter of 1992. ISS introduced its signal integrity analysis
software in 1994. Anagram was founded in March 1993, and began shipping ADM, its
high-capacity circuit simulation and high-accuracy timing analysis software, in
December 1994. Meta was founded in 1980, when it introduced its simulation and
library software products including HSPICE. FrontLine was founded in 1993.
Substantially all of Avant!'s, Anagram's, Meta's and FrontLine's revenue on a
combined basis for 1993, 1994, 1995 and the nine months ended September 30, 1996
was derived from the licensing and support of Aquarius, Hercules, ADM and
HSPICE.
SMDA-1
<PAGE>
Revenue
Revenue consists primarily of fees for licenses of Avant!'s software products,
maintenance and customer support. Revenue from the sale of software licenses is
recognized after shipment of the products, delivery of permanent authorization
codes, and fulfillment of acceptance terms, if any, providing that no
significant vendor and post-contract support obligations remain and collection
of the related receivable is probable. Any remaining insignificant vendor or
post-contract support obligations are accrued at the time the revenue is
recognized. In instances where there is a contingency regarding the sale,
revenue recognition is delayed until the contingency has been resolved. When
Avant! receives advance payment for software products, such payments are
reported as deferred revenue until all conditions for revenue recognition are
met. Avant! has entered into certain license agreements under which software,
support and other services are provided to a customer for a bundled price for a
specific period. Generally, revenue under such agreements is recognized ratably
over the contract period. Maintenance revenue is deferred and recognized ratably
over the term of the maintenance agreement, which is typically twelve months.
Revenue from customer training, support and other services is recognized as the
service is performed.
SMDA-2
<PAGE>
Avant!'s total revenue increased 74% from $22,560,000 in 1993 to $39,344,000 in
1994, increased 75% to $68,868,000 in 1995 from 1994, and increased 62% from
$47,650,000 in the first nine months of 1995 to $77,293,000 in the first nine
months of 1996. The percentage of Avant!'s revenue attributable to software
licenses decreased slightly from 81% in 1993 to 79% in 1994, and to 80% in 1995,
and decreased from 80% in the first nine months of 1995 to 78% for the first
nine months of 1996. This decrease is primarily due to the increased user base
and resulting increase in maintenance revenue.
Software revenue increased 70% from $18,238,000 in 1993 to $30,929,000 in 1994,
increased 78% to $55,164,000 in 1995 from 1994, and increased 58% from
$38,071,000 in the first nine months of 1995 to $60,030,000 in the first nine
months of 1996. Increases in software revenue were due primarily to increased
license revenue from Avant!'s place and route, physical verification and
simulation and timing software. Services revenue increased 95% from $4,322,000
in 1993 to $8,415,000 in 1994, and increased 63% to $13,704,000 in 1995 from
1994, and increased 80% from $9,579,000 in the first nine months of 1995 to
$17,263,000 in the first nine months of 1996, all such increases reflecting the
growing base of installed systems. Through September 30, 1996, price increases
have not been a material factor in Avant!'s revenue growth. Avant! does not
believe that period-to-period comparisons of past revenue growth should be
relied upon as indications of future performance.
As discussed in the supplemental consolidated financial statements, Avant! is
involved in litigation with Cadence Design Systems, Inc. ("Cadence") and other
related actions. As a result of such litigation, some customers may cancel or
postpone orders of Avant!'s products. As of September 30, 1996, such
cancellations and postponements had not had a material financial impact on
Avant!'s revenues, however, a significant delay of orders in the future may
impact Avant!'s business, financial condition and results of operations. An
adverse ruling in the litigation could result in Avant!'s inability to sell
certain of its products and, as a result, could materially affect Avant!'s
business, financial condition and results of operations. In particular, Avant!'s
place and route products in dispute, ArcCell-BV and ArcCell-XO (which have been
replaced by Aquarius-BV and Aquarius-XO), accounted for approximately 20% of
Avant!'s total supplemental consolidated revenues for the three-year period
ended December 31, 1995. See "Risk Factors--Litigation Risk."
Deferred revenue increased from $5,759,000 at December 31, 1994 to $9,585,000 at
December 31, 1995, and to $11,670,000 at September 30, 1996, due to the increase
in the number of maintenance agreements and license agreements where software
and services are provided for a specific period and revenue is recognized
ratably over the contract period.
Costs of Software
Costs of software consist primarily of expenses associated with product
documentation and production costs as well as amortization of capitalized
software costs. Costs of software decreased from $1,364,000 in 1993 to
$1,122,000 in 1994, and increased to $1,529,000 in 1995, and increased from
$1,077,000 in the first nine months of 1995 to $1,802,000 in the first nine
months of 1996. Costs of software included amortization of capitalized software
amounting to $145,000, $199,000 and $228,000 in 1993, 1994, and 1995,
respectively, and $155,000 and $70,000 in the first nine months of 1995 and
1996, respectively.
SMDA-3
<PAGE>
Costs of Services
Costs of services consist of costs of maintenance and customer support and
direct costs associated with providing other services. Maintenance includes
activities undertaken after the product is available for general release to
customers to correct errors and make routine changes and additions. Customer
support includes any installation assistance, training classes, telephone
question and answer services, newsletters, on-site visits and software or data
modifications. Costs of services increased from $1,904,000 in 1993 to $2,940,000
in 1994, and increased to $4,845,000 in 1995, representing 44%, 35% and 35% of
services revenue for 1993, 1994 and 1995, respectively, and increased from
$3,410,000 in the first nine months of 1995 to $5,383,000 in the first nine
months of 1996, representing 36% and 31% of services revenue for the first nine
months of 1995 and 1996, respectively. The increases in costs of services were
due primarily to an increase in personnel and expenses necessary to support
Avant!'s growing base of installed software. The reduction in costs of services
as a percentage of service revenue reflects the improved utilization of Avant!'s
customer support resources in servicing its increased customer base.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of costs, including sales
commissions, of all personnel involved in the sales process. This includes sales
representatives, marketing associates and application engineers. Selling and
marketing expenses also include costs of advertising, public relations,
conferences and trade shows. Selling and marketing expenses increased from
$8,065,000 in 1993 to $14,476,000 in 1994, and increased to $22,741,000 in 1995,
and increased from $15,770,000 in the first nine months of 1995 to $22,318,000
in the first nine months of 1996. The increases reflect higher sales commissions
associated with increased sales volumes and increases in sales and marketing
personnel. Selling and marketing expenses represented 36%, 37%, and 33% of total
revenue in 1993, 1994 and 1995, respectively, and 33% and 29% of total revenue
for the nine months ended September 30, 1995 and 1996, respectively. The
decrease in selling and marketing expenses as a percentage of total revenue for
these periods resulted primarily from revenue growth and improved sales
productivity. The increase in selling and marketing expenses as a percentage of
total revenue in 1994 resulted from higher costs associated with increased
international sales compared to 1993. Avant! expects to hire additional sales
and marketing personnel and to increase promotion and advertising expenditures
throughout the remainder of 1996.
Research and Development Expenses
Research and development expenses include all costs associated with the
development of new products and significant enhancements of existing products.
Research and development expenses increased from $6,979,000 in 1993 to
$9,728,000 in 1994, and increased to $15,318,000 in 1995, and increased from
$10,676,000 in the nine months ended September 30, 1995 to $15,133,000 in the
nine months ended September 30, 1996. Research and development expenses
represented 31%, 25% and 22% of total revenue in 1993, 1994 and 1995,
respectively, and 22% and 20% of total revenue in the nine months ended
September 30, 1995 and 1996, respectively. The increases resulted from increased
personnel-related costs associated with the development of new products and
significant enhancements of existing products. Avant! anticipates that it will
continue to devote substantial resources to product research and development.
During 1996, capitalized software costs have not been material as products have
been made available for general release upon achievement of technological
feasibility.
Software development costs are accounted for in accordance with the Statement of
Financial Accounting Standards No. 86, under which Avant! capitalizes software
development costs once technological feasibility has been established. Avant!
amortizes such amounts over three years. The amount of software development
costs capitalized for 1993, 1994, and 1995 and the nine months ended September
30, 1995 and 1996 was $140,000, $143,000, $63,000, $63,000 and none,
respectively, representing 2%, 1%, 0%, 1%, and 0% of total research and
development expenses, respectively.
SMDA-4
<PAGE>
General and Administrative Expenses
General and administrative expenses increased from $3,017,000 in 1993 to
$4,130,000 in 1994, and increased to $6,362,000 in 1995, and increased from
$4,442,000 in the nine months ended September 30, 1995 to $10,609,000 in the
nine months ended September 30, 1996. The increases were primarily due to
increases in personnel and related costs necessary to support Avant!'s growth
and legal and other costs incurred in the first nine months of 1996 relating to
the litigation with Cadence. General and administrative expenses represented
13%, 11% and 9% of total revenue, in 1993, 1994, and 1995, respectively, and 9%
and 14% of total revenue in the first nine months of 1995 and 1996,
respectively. The Company charged to expenses approximately $4,400,000 during
the nine months ended September 30, 1996, net of expected recoveries from
insurance related to the Cadence litigation. Avant! expects these legal
expenditures to continue at least through the remainder of 1996 and into 1997.
Acquisition of Technology
In April 1994, the Company purchased and expensed in-process library generation
and automated cell characterization technology now embodied in its MASTER
Toolbox product. As the acquired technology had not reached technological
feasibility, it was expensed upon acquisition. In November 1995, the Company
purchased a set of timing simulator algorithms which had not reached
technological feasibility and the cost associated with the technology was
expensed upon acquisition. In September 1996, the Company acquired rights to
certain software technology under development. As the acquired technology had
not reached technological feasibility, it was expensed on acquisition.
Merger Expenses
In connection with the merger with ISS, costs of approximately $3,590,000 were
incurred. These costs consisted primarily of the following: (a) approximately
$2,858,000 for transaction fees for attorneys, accountants, investment bankers
and other related charges; (b) approximately $233,000 for the elimination of
duplicate facilities and equipment; (c) approximately $337,000 for severance;
and (d) approximately $162,000 for incremental travel, communications,
consulting and other costs associated with internal and customer related
integration activities. In connection with the merger with Anagram, costs of
$920,000 were recorded. These costs consisted primarily of the following: (a)
approximately $300,000 for transaction fees for attorneys, accountants and other
related charges; (b) approximately $250,000 for the elimination of duplicate
facilities and equipment; and (c) approximately $370,000 for severance. In
connection with the merger with Meta, the Company expects to incur direct
transaction costs and merger-related integration expenses in the fourth quarter
of 1996 of approximately $5.7 million, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and shareholder
meetings of approximately $3.2 million and severance costs, charges for
duplicate facilities, and certain other related costs of approximately $2.5
million. In connection with the merger with FrontLine, costs of $2.3 million are
expected to be incurred in the fourth quarter of 1996. These costs consist
primarily for the following: (a) 2.2 million for transaction fees for attorneys,
accountants and other related charges and (b) 100,000 for the elimination of
duplicate facilities and equipment. As of September 30, 1996, accrued
liabilities included approximately $865,000 of expected future cash
expenditures.
Income from Operations
Avant! had income from operations of $1,231,000, $5,348,000, and $11,790,000 in
1993, 1994, and 1995, respectively, and $12,275,000 and $20,828,000 in the first
nine months of 1995 and 1996, respectively. The changes in operating results are
attributable to revenue growth net of increased expenses necessary to support
Avant!'s growth. Operating income represented 5%, 14% and 17% of total revenue
in 1993, 1994 and 1995, respectively, and 26% and 27% of total revenue for the
nine months ended September 30, 1995 and 1996, respectively.
SMDA-5
<PAGE>
Interest Income, Net
Net interest income was $151,000, $836,000, and $2,787,000 in 1993, 1994 and
1995, respectively, and was $1,785,000 and $3,100,000 in the first nine months
of 1995 and 1996, respectively. Interest income increased in 1994 and 1995 and
the first nine months of 1996, due to larger cash balances resulting primarily
from the proceeds of the ISS public offering which was completed in February
1994, the ArcSys public offering, which was completed in June 1995, and the Meta
public offering, which was completed in November 1995. Interest expense
represents interest paid on capital leases.
Income Taxes
Avant! accounts for income taxes in accordance with SFAS No. 109. Prior to 1995,
Avant! had experienced net operating losses and had established a valuation
allowance against its deferred tax assets relating to the resulting net
operating loss carryforwards. As a result of the restatement of its consolidated
financial statements relating to the ISS merger, the valuation allowance was
eliminated during 1993. Pro forma income taxes have been provided for 1993,
1994, and 1995 as if Meta (an S corporation for income tax reporting purposes)
had been a C corporation. The pro forma provision (benefit) for income taxes as
a percentage of pre-tax income was (73%), 35%, 43%, and 34% for 1993, 1994, 1995
and the nine months ended September 30, 1995, respectively. The provision for
income taxes was 36% of pretax income for the nine months ended September 30,
1996.
Liquidity and Capital Resources
Net cash provided by operations was $3,723,000, $5,568,000, and $19,696,000 in
1993, 1994 and 1995, respectively, and $18,078,000 and $9,602,000 in the nine
months ended September 30, 1995 and 1996, respectively. The increases in cash
provided by operations through 1995 primarily result from increases in net
income. The decrease in cash provided by operations in the nine months ended
September 30, 1996 is primarily due to increases in accounts receivable and
other assts, offset by a continued increase in net income. Avant! used
$3,571,000, $23,488,000, and $28,267,000 of net cash in 1993, 1994, and 1995,
respectively, and $36,861,000 and $47,211,000 in the nine months ended September
30, 1995 and 1996, respectively, for investing activities. Net cash used in
investing activities relates primarily to net purchases of short-term
"available-for-sale" securities. These securities, consist of short-term debt
securities, U.S. Government Agency debt securities, U.S. Treasury Bills,
municipal/corporate auction preferred stock, municipal bonds and demand deposit
investments in limited-maturity fixed-income mutual funds. Cash was also used to
acquire equipment, furniture and fixtures. Purchases of equipment, furniture and
fixtures primarily represent computer workstations and file servers for Avant!'s
employees. Avant! expects that purchases of equipment will likely increase as
Avant!'s employee base grows. Net cash provided by financing activities was
$3,441,000, $17,953,000, and $48,656,000 in 1993, 1994, 1995, respectively, and
$31,777,000 and $2,670,000 in the nine months ended September 30, 1995 and 1996,
respectively. The increase in cash provided by financing activities primarily
results from the sale of preferred and common stock through 1995. The Company
did not issue any significant amounts of common or preferred stock through
September 30, 1996, except for stock issued in connection with option exercises.
Avant!'s stated payment terms generally are net 30 days. However, in Avant!'s
experience, many customers do not comply with stated payment terms due to
industry practice, slower payment by certain major companies and most foreign
customers and general economic conditions. Avant! periodically increases its
allowance for doubtful accounts to reflect increased sales levels and collection
experience. Avant! believes that its allowance for doubtful accounts is
adequate.
SMDA-6
<PAGE>
As of September 30, 1996, Avant! had $104,542,000 of cash and short-term
investments, $113,890,000 in working capital and $24,532,000 in current
liabilities, including $11,670,000 of deferred revenue. As of September 30,
1996, there was no bank indebtedness outstanding and Avant! had no long-term
commitments other than technology acquisition payable and operating and capital
lease obligations.
Based on its operating plan, and absent any adverse judgments in the litigation
with Cadence, Avant! believes that it has available cash and short-term
investments sufficient to fund Avant!'s operations through at least the next 12
months.
Factors That May Affect Future Results
On December 6, 1995, Cadence filed an action against Avant! and certain
of its officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition, misappropriation
of trade secrets, conspiracy, breach of contract, inducing breach of contract
and false advertising. In addition to actual and punitive damages, Cadence seeks
to enjoin the sale of certain place and route products and has filed a motion to
obtain a preliminary injunction pending trial of the action. Avant! has filed a
counterclaim alleging antitrust violations, racketeering, false advertising,
defamation, trade libel, unfair competition, unfair trade practices, negligent
and intentional interference with prospective economic advantage and intentional
interference with contractual relations. The Santa Clara County District
Attorney's office also is investigating the allegations of misappropriation of
trade secrets set forth in Cadence's lawsuit. A criminal complaint, if filed,
against Avant!, the Company's management or its employees, could result in a
loss of management and other personnel and could have other material adverse
effects on the Company. The litigation with Cadence may result in canceled or
postponed customer orders and increased future expenditures. Since only a small
portion of Avant!'s expenses varies with its revenue, canceled orders or
significant expenses related to the Cadence litigation may have an adverse
affect on Avant!'s business, operating results and financial condition.
Furthermore, an adverse ruling in the Cadence litigation could result in
Avant!'s inability to sell certain of its products and, as a result, could have
a material adverse effect on Avant!'s business, operating results and financial
condition. In particular, Avant!'s place and route products in dispute,
ArcCell-BV and ArcCell-XO (which have been replaced by Aquarius-BV and
Aquarius-XO), accounted for approximately 20% of Avant!'s total supplemental
consolidated revenues for the three-year period ended December 31, 1995. See
"Risk Factors--Litigation Risk," in the Company's registration statement on Form
S-3 filed concurrently herewith.
Avant!'s products compete with similar products from both larger and
smaller EDA vendors, and with dissimilar EDA products for a share of their
customers' EDA budgets. The EDA industry, and as a result Avant!'s business, has
benefited from the rapid world-wide growth of the semiconductor industry. There
can be no assurance that this rapid growth will continue. The EDA industry as a
whole may experience pricing and margin pressures from a decrease in growth in
the semiconductor industry, or other changes in the overall computing
environment. In fact, during 1996 the semiconductor industry experienced slower
growth than in 1995. In addition, the EDA industry is experiencing consolidation
as the major EDA vendors are seeking to provide a complete range of EDA products
to customers. There can be no assurance that Avant! will be able to compete
successfully against current and future competitors, or that market conditions
faced by Avant! will not adversely affect its business, operating results and
financial condition.
Avant!'s future success depends upon its ability to improve current
products and develop new products that address the increasingly sophisticated
needs of its customers. There can be no assurance that Avant! will continue to
be successful in developing technologically acceptable products on a timely
basis. Avant!'s ability to develop and improve products is dependent on key
individuals for their technical and other contributions. There can be no
assurance that Avant! can continue to attract and retain these key personnel.
Loss of certain key personnel could result in loss of Avant!'s market advantage
and could adversely affect its operating results and financial condition.
Avant! has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans, including employee stock
purchase plans and stock option plans. Management plans to use the pro forma
approach allowed by this standard, but plans to remain on Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, for purposes of
measurement of compensation expense. Therefore, the Company will provide the
disclosures required by SFAS No. 123, but its adoption will not have a material
effect on Avant!'s consolidated results of operations.
SMDA-7
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Page
Independent Auditors' Report ......................................... SF-2
Supplemental Consolidated Balance Sheets ............................. SF-3
Supplemental Consolidated Statements of Income ....................... SF-4
Supplemental Consolidated Statements of Shareholders' Equity ......... SF-5
Supplemental Consolidated Statements of Cash Flows ................... SF-7
Notes to Supplemental Consolidated Financial Statements .............. SF-8
Supplemental Financial Statement Schedule of Valuation and
Qualifying Accounts--Allowance for doubtful accounts ............ SF-28
Computation of Supplemental Net Income and Pro Forma Net Income
per Share ....................................................... SF-29
SF-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Avant! Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Avant! Corporation and subsidiaries (the Company) as of December 31, 1994 and
1995, and the related supplemental consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. In connection with our audit of the accompanying
supplemental consolidated financial statements, we also have audited the
accompanying supplemental financial statement schedule. These supplemental
consolidated financial statements and supplemental financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements and
supplemental financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers of Avant! Corporation and Meta-Software, Inc. on October 29, 1996,
and FrontLine Design Automation, Inc. on November 27, 1996, which have been
accounted for as poolings of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the respective dates of consummation. However, they will become the
historical consolidated financial statements of Avant! Corporation and
subsidiaries after financial statements covering the respective dates of
consummation of the business combinations are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Avant!
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the respective dates of consummation of the business combinations. Also
in our opinion, the related supplemental financial statement schedule, when
considered in relation to the supplemental consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
December 16, 1996
San Jose, California
SF-2
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
December 31,
---------------------- September 30,
ASSETS 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 9,925 $ 50,010 $ 15,071
Short-term investments 23,561 46,969 89,471
Accounts receivable, net 9,865 12,839 18,601
Deferred income taxes 3,224 3,167 4,258
Prepaid income taxes 283 328 3,481
Other 970 1,724 7,540
--------- ---------- ----------
Total current assets 47,828 115,037 138,422
Equipment, furniture, and fixtures, net 3,982 7,003 9,357
Capitalized software, net 315 150 80
Other 97 97 209
Deferred income taxes - 886 1,200
--------- ---------- ----------
Total assets $ 52,222 $ 123,173 $ 149,268
========= ========== ==========
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE
PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 273 $ 145 $ 78
Accounts payable 723 1,000 1,453
Accrued compensation 1,768 2,418 3,140
Accrued income taxes 150 553 -
Other accrued liabilities 2,690 5,655 7,577
Current portion of technology acquisition payable - 876 614
Deferred revenue 5,759 9,585 11,670
Shareholder distribution payable 1 1,800 -
--------- ---------- ----------
Total current liabilities 11,364 22,032 24,532
Capital lease obligations, less current portion 147 40 3
Deferred rent - 110 81
Deferred income taxes 622 - -
Other noncurrent liabilities 152 156 243
Long-term portion of technology acquisition payable - 1,424 903
Convertible notes payable 100 - -
--------- ---------- ----------
Total liabilities 12,385 23,762 25,762
Mandatory redeemable convertible preferred stock:
Mandatory redeemable convertible preferred stock, and convertible
preferred stock with put option, $.0001 par value; 3,655 shares
authorized; 3,570 shares issued and outstanding (liquidation value
of $8,536) in 1994; no shares issued and outstanding in 1995 and 1996 8,312 - -
Shareholders' equity:
Series A convertible preferred stock, $.0001 par value; 5,000 shares
authorized; 687 shares issued and outstanding (liquidation value of
$907) in 1994; no shares issued and outstanding in 1995 and 1996 - - -
Common stock, $.0001 par value; 10,000, 25,000, and 50,000 shares
authorized; 14,463, 23,845, and 24,711 shares issued and
outstanding in 1994, 1995, and 1996, respectively 1 2 2
Additional paid-in capital 26,558 95,189 105,985
Deferred stock compensation (62) (517) (2,319)
Net unrealized gain (loss) on short-term investments (222) 89 (74)
Retained earnings 5,250 4,648 19,912
--------- ---------- ----------
Total shareholders' equity 31,525 99,411 123,506
--------- ---------- ----------
Total liabilities, mandatory redeemable convertible preferred
stock, and shareholders' equity $ 52,222 $ 123,173 $ 149,268
========= ========== ==========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
SF-3
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Per Share Data)
<CAPTION>
Years ended Nine months ended
December 31, September 30,
-------------------------------------- -------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software $ 18,238 $ 30,929 $ 55,164 $ 38,071 $ 60,030
Services 4,322 8,415 13,704 9,579 17,263
--------- -------- --------- --------- ---------
Total revenue 22,560 39,344 68,868 47,650 77,293
--------- -------- --------- --------- ---------
Costs and expenses:
Costs of software 1,364 1,122 1,529 1,077 1,802
Costs of service 1,904 2,940 4,845 3,410 5,383
Selling and marketing 8,065 14,476 22,741 15,770 22,318
Research and development 6,979 9,728 15,318 10,676 15,133
General and administrative 3,017 4,130 6,362 4,442 10,609
Acquisition of technology - 1,600 2,693 - 300
Merger expenses - - 3,590 - 920
--------- -------- --------- --------- ---------
Total operating expenses 21,329 33,996 57,078 35,375 56,465
--------- -------- --------- --------- ---------
Income from operations 1,231 5,348 11,790 12,275 20,828
Interest income, net 151 836 2,787 1,785 3,100
--------- -------- --------- --------- ---------
Income before income taxes 1,382 6,184 14,577 14,060 23,928
Provision for income taxes (benefit) (1,655) 1,549 4,053 3,953 8,664
--------- -------- --------- --------- ---------
Net income $ 3,037 $ 4,635 $ 10,524 $ 10,107 $ 15,264
========= ======== ========= ========= =========
Net income per common share $ 0.57
=====
Pro forma net income and per share data:
Income before taxes as reported $ 1,382 $ 6,184 $ 14,577 $ 14,060
Pro forma provision for income taxes (benefit) (1,007) 2,175 6,227 4,831
--------- -------- --------- ---------
Pro forma net income $ 2,389 $ 4,009 $ 8,350 $ 9,229
========= ======== ========= =========
Pro forma net income per common share $ 0.15 $ 0.20 $ 0.35 $ 0.39
===== ===== ===== =====
Weighted average number of common and
common equivalent shares outstanding 16,284 20,457 24,159 23,814 26,594
========= ======== ========= ========= =========
<FN>
See accompanying notes to supplemental consolidated financial statements.
</FN>
</TABLE>
SF-4
<PAGE>
<TABLE>
AVANT! CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands)
<CAPTION>
Series A Net
convertible unrealized
preferred stock Common stock Additional Deferred gain (loss) on Total
----------------- --------------- paid-in stock short-term Retained shareholders'
Shares Amount Shares Amount capital compensation investments earnings equity
------ ------ ------ ------ ------- ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1992 1,710 $ 630 8,258 $ 1 $ 3,089 $ - $ - $ 2,157 $ 5,877
Issuance of common stock - - 2,455 - 1,007 - - - 1,007
Repurchase of common stock - - (2) - (2) - - - (2)
Unrealized loss on
short-term investments - - - - - - (8) - (8)
Distributions to shareholders - - - - - - - (2,150) (2,150)
Net income for 1993 - - - - - - - 3,037 3,037
-------- ----- -------- ---- -------- ----- -------- -------- --------
Balances as of December 31, 1993 1,710 630 10,711 1 4,094 - (8) 3,044 7,761
Issuance of common stock - - 239 - 517 - - - 517
Conversion of preferred
stock to common stock (1,023) (630) 1,023 - 630 - - - -
Issuance of shares in public
offering, net of expenses - - 2,250 - 20,342 - - - 20,342
Exercise of stock options,
including related
tax benefits - - 134 - 848 - - - 848
Issuance of common stock
under employee stock
purchase plan - - 5 - 66 - - - 66
Issuance of shares and
accumulated deficit
of merged company (PSI) - - 113 - 1 - - (103) (102)
Repurchase of common stock - - (12) - (2) - - - (2)
Issuance of common stock
options at below
market value - - - - 62 (62) - - -
Unrealized loss on
short-term investments - - - - - - (214) - (214)
Distributions to shareholders - - - - - - - (2,326) (2,326)
Net income for 1994 - - - - - - - 4,635 4,635
-------- ----- -------- ---- -------- ----- -------- -------- --------
Balances as of December 31, 1994 687 - 14,463 1 26,558 (62) (222) 5,250 31,525
Issuance of common stock - - 1,063 - 660 - - - 660
Conversion of debt to
common stock - - 100 - 100 - - - 100
Issuance of common stock
in public offering,
net of expenses - - 2,360 - 27,713 - - - 27,713
Conversion of mandatory
redeemable convertible
preferred stock into
common stock - - 3,570 1 8,311 - - - 8,312
Conversion of preferred stock
into common stock (687) - 687 - - - - - -
Exercise of stock options
and warrants, including
related tax benefits - - 570 - 5,948 - - - 5,948
Repurchase of common stock - - (18) - (3) - - - (3)
Issuance of common stock
options at below
market value - - - - 588 (588) - - -
Amortization of deferred
stock compensation - - - - - 133 - - 133
Issuance of common stock
under employee stock
purchase plan - - 43 - 534 - - - 534
Unrealized gain on
short-term investments - - - - - - 311 - 311
Distributions to shareholders - - - - - - - (11,126) (11,126)
Issuance of common stock upon
exercise of stock appreciation
rights (unaudited) - - - - 112 - - - 112
Issuance of shares in public
offering, net of expenses - - 1,007 - 24,668 - - - 24,668
Net income for 1995 - - - - - - - 10,524 10,524
-------- ----- -------- ---- -------- ----- -------- -------- --------
Balances as of December 31, 1995 - - 23,845 2 95,189 (517) 89 4,648 99,411
</TABLE>
SF-5
<PAGE>
<TABLE>
AVANT! CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, (Continued)
(Amounts in Thousands)
<CAPTION>
Series A Net
convertible unrealized
preferred stock Common stock Additional Deferred gain (loss) on Total
--------------- --------------- paid-in stock short-term Retained shareholders'
Shares Amount Shares Amount capital compensation investments earnings equity
------ ------ ------ ------ ------- ------------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 - $ - 23,845 $ 2 $ 95,189 $ (517) $ 89 $ 4,648 $ 99,411
Issuance of common stock for
services (unaudited) - - 6 - 140 - - - 140
Exercise of common stock
options, including
related tax benefits
(unaudited) - - 813 - 7,243 - - - 7,243
Issuance of common stock
under employee stock
purchase plan (unaudited) - - 47 - 630 - - - 630
Issuance of common stock
options at below
market value (unaudited) - - - - 2,122 (2,122) - - -
Amortization of deferred stock
compensation (unaudited) - - - - - 320 - - 320
Unrealized loss on short-term
investments (unaudited) - - - - - - (163) - (163)
Issuance of common stock upon
exercise of stock appreciation
rights (unaudited) - - - - 567 - - - 567
Reversal of prior year shareholder
distribution (unaudited) - - - - 46 - - - 46
Contributed capital related to
stock compensation
expense (unaudited) - - - - 48 - - - 48
Net income for nine months
ended September 30, 1996
(unaudited) - - - - - - - 15,264 15,264
--- --- ------- ----- --------- -------- ------ -------- ---------
Balances as of September 30, 1996
(unaudited) - $ - 24,711 $ 2 $ 105,985 $ (2,319) $ (74) $ 19,912 $ 123,506
=== === ======= ===== ========= ======== ====== ======== =========
<FN>
See accompanying notes to supplemental consolidated financial statements.
</FN>
</TABLE>
SF-6
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
<CAPTION>
Years ended Nine months ended
December 31, September 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,037 $ 4,635 $ 10,524 $ 10,107 $ 15,264
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,043 1,520 2,112 1,674 2,178
Gain on sale of securities - - - - 14
Compensation expense (benefit) attributable
to stock appreciation rights 39 380 484 480 (31)
Stock compensation expense - - 112 67 48
Loss on disposal of equipment 20 16 19 - -
Amortization of capitalized software costs 145 199 228 155 70
Amortization of deferred stock
compensation - - 133 - 320
Deferred income taxes (2,610) 156 (1,431) 1,888 (1,409)
Deferred rent (19) 70 110 31 (29)
Stock issued for services 69 52 - - 140
Changes in operating assets and liabilities:
Accounts receivable, net (1,340) (4,826) (2,974) (423) (5,762)
Prepaid expenses and other assets (199) (217) (799) (579) (5,736)
Shareholder advances (300) 300 - - -
Accounts payable (52) 266 277 334 453
Accrued compensation 916 1,521 650 835 722
Accrued income taxes 221 (221) 403 539 (553)
Other accrued liabilities 269 318 3,722 986 2,611
Technology acquisition payable - - 2,300 - (783)
Deferred revenue 2,484 1,399 3,826 1,984 2,085
--------- --------- --------- --------- ---------
Net cash provided by operating activities 3,723 5,568 19,696 18,078 9,602
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (2,529) (92,615) (79,568) (126,273) (177,335)
Maturities and sales of short-term investments 667 71,366 56,471 92,754 134,656
Purchases of equipment, furniture, and fixtures (1,569) (2,115) (5,107) (3,279) (4,532)
Capitalized software development costs (140) (143) (63) (63) -
Cash received in merger - 19 - - -
--------- --------- --------- --------- ---------
Net cash used in investing activities (3,571) (23,488) (28,274) (36,861) (47,211)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Distributions to shareholders (1,579) (2,896) (9,327) (827) (1,754)
Payments on notes payable - (163) - - -
Principal payments under capital lease obligations (134) (235) (235) (190) (104)
Issuance of preferred stock, net 5,056 427 500 630 -
Repurchase of common stock - (2) (3) (2) -
Exercise of stock options - 201 4,646 4,188 3,898
Issuance of common stock under employee stock purchase plan - 66 534 183 630
Issuance of common stock, net 98 20,365 52,541 27,795 -
Issuance of convertible note - 190 - - -
--------- --------- --------- --------- ---------
Net cash provided by financing activities 3,441 17,953 48,656 31,777 2,670
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,593 33 40,085 12,994 (34,939)
Cash and cash equivalents, beginning of year/period 6,299 9,892 9,925 9,925 50,010
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of year/period $ 9,892 $ 9,925 $ 50,010 $ 22,919 $ 15,071
========= ========= ========= ========= =========
<FN>
See accompanying notes to supplemental consolidated financial statements.
</FN>
</TABLE>
SF-7
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Avant! Corporation (the Company or Avant!), formerly ArcSys, Inc.,
develops, markets and supports software products that assist design
engineers in the automated design, layout, physical verification, and
analysis of advanced integrated circuits. Its primary customers are
semiconductor manufacturers in the United States, Japan, Korea, Taiwan,
and Europe.
Principles of Presentation and Preparation and Use of Estimates
The accompanying supplemental consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation. The supplemental consolidated financial statements
have been restated to reflect the effect of the mergers with Integrated
Silicon Systems, Inc. (ISS), Anagram, Incorporated (Anagram),
Meta-Software, Inc. (Meta), and FrontLine Design Automation, Inc.
(FrontLine) discussed in Note 2.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
Revenue consists primarily of fees for licenses of the Company's
software products, maintenance, and customer support.
Software Revenue
Revenue from the sale of software licenses is recognized upon shipment
of the products, delivery of permanent authorization codes, and
fulfillment of acceptance terms, if any, providing that no significant
vendor and post-contract support obligations remain and collection of
the related receivable is probable. Any remaining insignificant vendor
obligations are accrued at the time the revenue is recognized. In
instances where there is a contingency regarding the sale, revenue
recognition is delayed until the contingency has been resolved. When
the Company receives advance payments for software products, such
payments are reported as deferred revenue until all conditions for
revenue recognition are met. The Company has entered into certain
license agreements under which software, support, and other services
are provided to a customer for a bundled price for a specific period of
time. Generally, revenue under such agreements is recognized ratably
over the contract period.
SF-8
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Services Revenue
Maintenance revenue is deferred and recognized ratably over the term of
the maintenance agreement, which is typically 12 months. Revenue from
customer training, support, and other services is recognized as the
service is performed.
Cash and Cash Equivalents
For the purpose of the accompanying supplemental consolidated
statements of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less to be
cash equivalents.
Cash equivalents are stated at cost and consist primarily of overnight
Eurodollar deposits, certificates of deposit, and commercial paper. The
carrying amount of cash and cash equivalents approximates fair value.
Short-Term Investments
Short-term investments, which consist of demand deposit investments in
limited-maturity fixed-income mutual funds, short-term debt securities,
U.S. government agency debt securities, U.S. Treasury Bills,
municipal/corporate auction preferred stock, and municipal bonds, are
reported at fair value and are classified as available-for-sale
securities. The cost of securities sold is determined using the
specific identification method when computing realized gains and
losses. Fair value is determined using available market information.
There were no realized gains or losses on investments sold during 1993,
1994, or 1995. As of December 31, 1994, the gross unrealized loss on
short-term investments was $222,000. As of December 31, 1995, the net
unrealized gain on short-term investments of $89,000 consisted of
$136,000 of gross unrealized gains and $47,000 of gross unrealized
losses.
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures consist primarily of computer
workstations and file servers for employees and are stated at cost net
of accumulated depreciation of $3,422,000 and $5,127,000 as of December
31, 1994 and 1995, respectively. Depreciation is provided on the
straight-line method over the estimated useful lives of the related
assets (generally five years).
SF-9
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Software Development Costs
Certain software development costs for new products and product
enhancements are capitalized upon the establishment of technological
feasibility, which is defined by the Company as the completion of a
working model of the software. Capitalization of computer software
development costs ceases, and amortization begins, when the product is
available for general release to customers. The ongoing assessment of
the realizability of these costs requires considerable judgment related
to anticipated future product revenues, estimated economic life, and
changes in hardware and software technology. The amount of software
development costs capitalized for the years 1993, 1994, and 1995 was
$140,000, $143,000, and $63,000, respectively. Accumulated amortization
of software development costs was $849,000 and $1,077,000 as of
December 31, 1994 and 1995, respectively.
Amortization of software development costs is provided on a
product-by-product basis. Annual amortization is the greater of the
amount computed using the ratio of current product revenue to the total
of current and anticipated future product revenue or the straight-line
method over the remaining estimated economic life of the product. All
current products have estimated economic lives of three years.
Amortization of software development costs for the years 1993, 1994,
and 1995 was $145,000, $199,000, and $228,000, respectively.
Amortization of software development costs is included in costs of
software in the accompanying supplemental consolidated statements of
income.
Income Taxes
Income taxes are provided under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Prior to 1995, the Company had experienced net operating losses and had
established a valuation allowance against its deferred tax assets
relating to the resulting net operating loss carryforwards due to the
uncertainty regarding realization of the Company's deferred tax assets.
In connection with the merger with ISS, the Company's income tax
provisions were restated and the valuation allowance was eliminated
during 1993.
The pro forma provision for income taxes for 1993, 1994, and 1995
reflects the tax expense that would have been reported if Meta (an S
corporation for income tax reporting purposes) had been a C corporation
during those periods.
SF-10
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Net Income and Pro Forma Net Income Per Common Share
Net income per common share is computed using the weighted average
number of common and common equivalent shares outstanding during each
period presented using the treasury stock method. Common stock
equivalents consist of stock options and awards (using the treasury
stock method).
Pro forma net income per common share is computed using pro forma net
income which reflects the tax expense that would have been reported if
Meta (an S corporation for income tax reporting purposes) had been a C
corporation. Common stock equivalents are excluded from the computation
if their effect is antidilutive, except that common stock issued and
stock options and awards during the 12 months preceding the initial
filing of the Registration Statement for the Company's initial public
offering have been included in the calculation of common and common
equivalent shares using the treasury stock method as if they were
outstanding for all periods presented. In addition, the calculation
includes shares deemed to be outstanding, which represent the number of
shares to fund Meta's final S corporation distribution.
Statements of Cash Flows
Interest of $36,000, $42,000, $51,000, $44,000, and $9,000 was paid in
the years ended 1993, 1994, and 1995, and the nine months ended
September 30, 1995 and 1996, respectively. Income taxes of $823,000,
$1,125,000, $2,041,000, $687,000, and $10,946,000 were paid in the
years ended 1993, 1994, and 1995, and the nine months ended September
30, 1995 and 1996, respectively. Acquisition of equipment under capital
lease obligations was $247,000 and $298,000 during 1993 and 1994,
respectively. Deferred stock compensation of $62,000, $588,000,
$588,000, and $2,122,000, was recognized in the years ended 1994 and
1995, and the nine months ended September 30, 1995 and 1996,
respectively, for stock options issued below market value. An income
tax benefit attributable to employee stock plans of $647,000,
$1,302,000, $1,100,000, and $3,345,000 was credited to equity in the
years ended 1994 and 1995, and the nine months ended September 30, 1995
and 1996, respectively. In connection with the Company's initial public
offering in 1995, mandatory redeemable convertible preferred stock was
converted to common stock in the amount of $8,312,000. Conversion of
long-term debt to common stock was $100,000 in 1995.
Translation of Foreign Currencies
The functional currency of the Company's foreign subsidiaries is the
U.S. dollar. Resulting foreign exchange gains and losses, which have
been insignificant, are included in the results of operations.
SF-11
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Stock-Based Compensation
The Company has various stock-based compensation plans as discussed in
Note 4. The Company has accounted for its stock-based compensation
plans under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 123, and plans to use the pro
forma approach allowed under this standard. Disclosures under SFAS No.
123 will be required in the Company's December 31, 1996 consolidated
financial statements.
Reclassification
Certain amounts in the 1993, 1994, and 1995 supplemental consolidated
financial statements have been reclassified to conform to the 1996
presentation.
Unaudited Interim Supplemental Consolidated Financial Statements
The accompanying unaudited supplemental consolidated financial
statements as of September 30, 1996, and for the nine months ended
September 30, 1995 and 1996, have been prepared on substantially the
same basis as the audited supplemental consolidated financial
statements, and include all adjustments, consisting only of normal
recurring adjustments, which management believes are necessary for a
fair presentation of the financial information set forth herein.
(2) Mergers
On November 27, 1996, the Company issued approximately 1,812,000 shares
of its common stock for all of the outstanding common stock of
FrontLine, and assumed approximately 410,000 warrants and stock options
under option plans.
On October 29, 1996, the Company issued approximately 4,471,000 shares
of its common stock for all of the outstanding common stock of Meta,
and assumed approximately 608,000 stock options and subscriptions under
option and purchase plans.
On September 27, 1996, the Company issued approximately 2,154,000
shares of its common stock for all of the outstanding common and
preferred stock of Anagram, and assumed approximately 260,000 stock
options under option plans. The Anagram outstanding preferred stock has
been presented as common stock for all periods presented in the
supplemental consolidated financial statements.
The mergers described above have been accounted for as poolings of
interests, and, accordingly, the Company's supplemental consolidated
financial statements have been restated for all periods prior to the
mergers to include the results of operations, financial position, and
cash flows of FrontLine, Meta, and Anagram.
SF-12
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
<TABLE>
Total revenue and net income (loss) for the individual entities as
previously reported are as follows (in thousands, amounts for Anagram
for the nine months ending September 30, 1996 are combined with
Avant!):
<CAPTION>
Years ended Nine-month
December 31, period ended
------------------------ September 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total revenue:
Avant! $ 18,958 $ 38,004 $ 48,823
Anagram 241 3,508 -
Meta 19,652 25,281 24,121
FrontLine 493 2,075 4,349
--------- --------- --------
$ 39,344 $ 68,868 77,293
========= ========= ========
Net income:
Avant! $ 2,260 $ 5,065 $ 10,587
Anagram 19 1,170 -
Meta (pro forma 1994 and 1995) 2,134 2,177 4,477
FrontLine (646) (99) 70
--------- --------- --------
3,767 8,313 15,134
Adjustment for deferred taxes 242 37 130
--------- --------- --------
$ 4,009 $ 8,350 $ 15,264
========= ========= ========
</TABLE>
In connection with the mergers with Anagram, Meta, and FrontLine, the
Company expects to incur direct transaction costs and merger-related
integration expenses of approximately $8,900,000, consisting of
transaction fees for investment bankers, attorneys, accountants,
financial printing and shareholder meetings of approximately $5,700,000
and severance costs, charges for duplicate facilities, and certain
other related costs of approximately $3,200,000. As of September 30,
1996, accrued liabilities included approximately $865,000 of expected
future cash expenditures.
SF-13
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
<TABLE>
On November 27, 1995, the Company issued approximately 6,400,000 shares
of its common stock for all of the outstanding common stock of ISS, and
assumed approximately 1,500,000 stock options and subscriptions under
various ISS stock option and purchase plans. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements have been restated for all periods
prior to the merger to include the results of operations, financial
position, and cash flows of ISS. As a result of the merger, the
Company's income tax provisions were restated and the deferred tax
valuation allowance was eliminated during 1993. Total revenue and net
income for the individual entities as previously reported are as
follows (in thousands):
<CAPTION>
Years ended Nine-month
December 31, period ended
------------------------- September 30,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Total revenue:
Avant! $ 1,696 $ 6,191 $ 12,087
ISS 7,012 12,767 14,414
--------- --------- --------
$ 8,708 $ 18,958 $ 26,501
========= ========= ========
Net income:
Avant! $ (2,174) $ (1,206) $ 3,073
ISS 1,370 3,128 3,890
--------- --------- --------
(804) 1,922 6,963
Adjustment for deferred taxes 2,146 338 (957)
--------- --------- --------
$ 1,342 $ 2,260 $ 6,006
========= ========= ========
</TABLE>
In connection with the merger with ISS, the Company recorded merger
related costs of approximately $3,600,000. These costs consisted
primarily of approximately $2,858,000 for transaction fees for
attorneys, accountants, investment bankers, and other related charges;
approximately $233,000 for the elimination of duplicate facilities and
equipment; approximately $337,000 for severance; and approximately
$162,000 for incremental travel, communications, consulting, and other
costs associated with internal activities. Of the $3,600,000 of
merger-related costs, approximately $3,400,000 related to cash
expenditures while approximately $200,000 related to noncash charges.
As of December 31, 1995, accrued liabilities included $392,000 of
expected future cash expenditures.
On May 5, 1994, ISS completed a merger with Performance Signal
Integrity, Inc. (PSI), a Pennsylvania corporation. The financial
position, results of operations and cash flows of PSI were not material
to ISS, and the merger was accounted for as an immaterial pooling of
interests. Therefore, ISS's previously reported financial results were
not restated for the PSI merger.
SF-14
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
(3) Mandatory Redeemable Convertible Preferred Stock Conversion
In connection with the completion of the Company's initial public
offering in June 1995, all the outstanding mandatory redeemable
convertible preferred stock was automatically converted into
approximately 3,570,000 shares of the Company's common stock. In
addition, outstanding warrants to acquire Series B preferred stock were
automatically converted into approximately 26,000 shares of the
Company's common stock.
As of December 31, 1994, mandatory redeemable convertible preferred
stock consisted of the following (in thousands):
Shares Issued and Liquidation
Series authorized outstanding value
------ ----------- ----------- ------------
A 313 313 $ 693
B 1,942 1,910 3,343
C 1,400 1,347 4,500
-------- -------- -------
3,655 3,570 $ 8,536
======== ======== =======
(4) Shareholders' Equity
Initial Public Offering and Changes in Authorized Common and Preferred
Stock
In April 1995, the Company's Board of Directors authorized the Company
to issue up to 5,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, and restrictions
thereof, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, and the number of shares
constituting any series or the designation of such series, without any
further vote or action by the shareholders. In addition, the Company
increased its authorized number of shares of common stock from
10,000,000 to 25,000,000 shares.
In June 1995, the Company closed its initial public offering of common
stock at $13.00 per share. The net proceeds of the offering were
$27,713,000 after deducting applicable costs and expenses. In
connection with the public offering, all the outstanding Series A
preferred stock automatically converted into approximately 687,000
shares of the Company's common stock.
SF-15
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Common Stock
The Company has issued to the Company's founders and employees
2,683,000 shares of its common stock, which are subject to repurchase
upon termination of employment. The number of shares of common stock
subject to the Company's right to repurchase declines 25% after the
founder or employee has been employed one year, and thereafter ratably
over three years on a monthly basis. As of December 31, 1994 and 1995,
232,000 and 66,000 shares, respectively, were subject to repurchase.
Shareholder Distributions
Meta (an S corporation for income tax reporting purposes) made
distributions to its shareholders to provide them with funds to pay
income taxes on corporate earnings. Prior to the completion of the Meta
initial public offering and the termination of the S corporation
election in November 1995, Meta declared a distribution payable to
existing shareholders of Meta. This distribution represented
undistributed tax basis earnings of Meta through the termination of the
S corporation election.
1995 Stock Option/Stock Issuance Plan
The Company approved the 1995 Stock Option/Stock Issuance Plan (the
1995 Plan) in April 1995, under which all remaining outstanding stock
options and shares available for grant under the Company's 1993 Stock
Option/Stock Issuance Plan and 1,000,000 additional shares of the
Company's common stock have been authorized for issuance, for a total
of 2,336,000 shares of the Company's common stock. The 1995 Plan is
intended to serve as a successor to the 1993 Stock Option/Stock
Issuance Plan (see below) and has terms similar to those of the 1993
Stock Option/Stock Issuance Plan. Under the 1995 Plan, however, each
individual serving as a nonemployee member of the Company's Board of
Directors on the date the Underwriting Agreement for the initial public
offering was executed received an option grant on such date for 20,000
shares of the Company's common stock, provided such individual had not
otherwise been in the prior employ of the Company. Each individual who
first becomes a nonemployee member of the Board of Directors thereafter
will receive a 20,000 share option grant on the date such individual
joins the Board of Directors provided such individual has not been in
the prior employ of the Company. In addition, at each annual
shareholders' meeting, beginning with the 1996 Annual Shareholders'
Meeting, each individual who is to continue to serve as a nonemployee
member of the Board of Directors after the meeting will receive an
additional option grant to purchase 5,000 shares of common stock
whether or not such individual has been in the prior employ of the
Company.
SF-16
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
1993 Stock Option/Stock Issuance Plan
In September 1993, the Board of Directors approved the 1993 Stock
Option/Stock Issuance Plan (the 1993 Plan). Options granted under the
1993 Plan may be either incentive stock options or nonstatutory stock
options, as designated by the Company's Board of Directors. The 1993
Plan provides that the exercise price of an incentive stock option and
a nonstatutory option will be no less than the fair market value and
85% of the fair market value, respectively, of the Company's common
stock at the date of grant, as determined by the Company's Board of
Directors.
The Company's Board of Directors also has the authority to set exercise
dates (no longer than 10 years from the date of grant), payment terms,
and other provisions for each grant. Generally options granted under
the 1993 Plan become exercisable as to 25% of the shares on the
anniversary date of grant and thereafter become exercisable ratably
over three years.
The Company has recorded a deferred charge of $650,000, representing
the difference between the exercise price and the deemed fair value of
the Company's common stock for 355,000 shares subject to common stock
options granted in the fourth quarter of 1994 and the first quarter of
1995. The deferred stock compensation will be amortized to compensation
expense over the period during which the options become exercisable,
generally four years.
ISS Option Plans
In connection with the ISS merger discussed in Note 2, various ISS
option plans were assumed by the Company, thereby allowing participants
to purchase Avant! stock in amounts and at prices adjusted to reflect
the exchange ratio of the merger.
The Company incurred stock compensation expense, representing the
difference between the exercise price and the deemed fair value of the
Company's common stock, relating to nonqualified stock options of
$151,000 during 1993 and $20,000 during 1994.
Anagram Option Plans
In connection with the Anagram merger discussed in Note 2, various
Anagram option plans were assumed by the Company, thereby allowing
participants to purchase Avant! stock in amounts and at prices adjusted
to reflect a two for one stock split effective June 1996 and the
exchange ratio of the merger.
As of December 31, 1995, there were approximately 698,000 shares of
Anagram restricted common stock outstanding that were subject to
repurchase by the Company.
Meta Option Plans
In connection with the Meta merger discussed in Note 2, various Meta
option plans were assumed by the Company, thereby allowing participants
to purchase Avant! stock in amounts and at prices adjusted to reflect
the exchange ratio of the merger.
SF-17
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
1992 Stock Option/Appreciation Plan
Under Meta's 1992 Stock Option/Appreciation Plan (the 1992 Plan),
854,100 shares of common stock were reserved for the issuance of stock
options for grant at not less than 90% of the fair market value at the
date of grant. Fair market value, in the absence of trading on a
national or regional stock exchange, was established by the Meta's
Board of Directors based on an independent valuation of Meta. Options
generally vested over a period of 1 to 4 years from the date of grant,
expire 10 years from the date of grant, and terminated, to the extent
not exercised, 1 month after termination of employment.
The 1992 Plan provides for the exercise of stock appreciation rights
with respect to outstanding options in the absence of trading of Meta's
stock on a national or regional stock exchange. Upon the exercise of
stock appreciation rights, the employee surrendered the related
unexercised option and received cash payment equal to the excess of the
fair market value of the underlying shares at the time of exercise over
the aggregate exercise price of the related option. Compensation
expense was recognized for the appreciation in value from the date of
grant.
During the months of June, July, and August 1995, Meta entered into
agreements with substantially all individual option holders under the
1992 Plan terminating the stock appreciation right feature of the
individual awards. Compensation expense of $484,000, representing the
difference between the exercise price and the fair market value of the
stock, was recorded based on the vested stock appreciation rights of
the individual shareholders through the date such rights were
terminated. Upon effectiveness of the Meta initial public offering, all
stock appreciation rights terminated, and no further compensation
expense was recorded.
FrontLine Option Plan
In connection with the FrontLine merger discussed in Note 2, the
FrontLine option plan was assumed by the Company, thereby allowing
participants to purchase Avant! stock in amounts and at prices adjusted
to reflect the exchange ratio of the merger.
In 1996, FrontLine adopted an Equity Incentive Plan (the 1996 Plan) and
reserved 523,000 shares of common stock for issuance of stock options.
Under the 1996 Plan, options may be granted at not less than 100% of
the fair market value at the date of grant. Options generally vested
over a period of 1 to 4 years from the date of grant and expire 10
years from the date of grant.
The Company has recorded deferred stock compensation in the nine months
ended September 30, 1996 of $735,000, representing the difference
between the exercise price and the deemed fair value of the Company's
common stock for approximately 51,000 shares of common stock subject to
common stock options granted in 1996. The deferred stock compensation
will be amortized to compensation expense over the periods in which the
options become exercisable, generally four years.
SF-18
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
<TABLE>
The following is a summary of activity under all of the option plans:
<CAPTION>
Shares
available for Options Exercise
future grant outstanding price
------------- ----------- --------
<S> <C> <C> <C>
Balances as of December 31, 1992 523,000 154,000 $ 0.01 - 2.50
Additional shares reserved 652,000 -
Granted (776,000) 776,000 3.24
Canceled 176,000 (176,000) 3.24
Exercised - (20,000) 1.00-1.47
------------- ------------
Balances as of December 31, 1993 575,000 734,000 0.01 - 3.24
Additional shares reserved 2,186,000 - -
Granted (2,275,000) 2,275,000 0.03 - 19.00
Canceled 275,000 (275,000) 0.30 - 3.52
Exercised - (134,000) 0.01 - 2.50
------------- ------------
Balances as of December 31, 1994 761,000 2,600,000 0.05 - 19.00
Additional shares reserved 3,421,000 - -
Granted (1,888,000) 1,888,000 0.05 - 44.50
Canceled 341,000 (341,000) 0.30 - 33.50
Exercised - (598,000) 0.05 - 17.67
Eliminated in merger (1,337,000) - -
------------- ------------
Balances as of December 31, 1995 1,298,000 3,549,000 $ 0.05 - 44.50
============= ============
</TABLE>
As of December 31, 1995, 1,118,000 stock options were exercisable.
SF-19
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Warrants
During 1995, the Company issued a warrant to purchase 30,000 shares of
common stock at a price of $0.20 per share in connection with a
technology development agreement. These warrants expire on October 31,
2000 and are exercisable upon completion of certain milestones. As of
December 31, 1995, there were no warrants exercisable. Accounting for
the value of these warrants will be determined upon completion of the
milestones and will be charged to income at that time.
Common Stock Awards
An agreement with a distributor provides for the issuance of common
stock in lieu of cash sales commissions. In April 1996, the Company
issued approximately 6,000 shares of common stock for sales commissions
under the agreement which resulted in a charge to income of $140,000.
The Company may issue up to 15,000 additional shares of common stock
for future sales commissions through 1998.
(5) Leases
Capital Leases
Future minimum lease payments under capital lease arrangements as of
December 31, 1995, are as follows (in thousands):
Year ending
December 31,
------------
1996 $ 145
1997 53
-----
198
Less amount representing interest 13
-----
185
Less current portion 145
-----
Capital lease obligations, less current portion $ 40
=====
SF-20
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Operating Leases
The Company leases its Sunnyvale, California, Research Triangle Park,
North Carolina, and various sales office facilities under operating
lease agreements which expire over the next 10 years. Portions of the
Company's headquarters were subleased to an unrelated third party under
a lease that expired in June 1995. Rental expense incurred by the
Company under operating lease agreements totaled $854,000, $1,190,000,
and $1,366,000 for the years 1993, 1994, and 1995, respectively.
Future annual minimum lease payments under operating leases as of
December 31, 1995, are as follows (in thousands):
Year ending
December 31,
------------
1996 $ 1,163
1997 1,279
1998 839
1999 784
2000 713
Thereafter 4,000
-------
$ 8,778
=======
SF-21
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
(6) Income Taxes
<TABLE>
The components of income tax expense (benefit), as presented in the
accompanying supplemental consolidated statements of income, comprise
federal taxes, state taxes, and certain foreign taxes. The pro forma
provision for income taxes reflects the income tax expense that would
have been reported if Meta (an S corporation for income tax reporting
purposes) had been a C corporation for the years ended December 31,
1993, 1994, and 1995. The components of income taxes and pro forma
income taxes as of December 31, 1993, 1994, and 1995, are as follows
(in thousands):
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 586 $ 289 $ 1,745
Foreign 10 535 1,609
State 354 106 837
-------- -------- --------
Total 950 930 4,191
Deferred:
Federal (2,440) (82) (835)
State (165) 54 (605)
-------- -------- --------
Total (2,605) (28) (1,440)
Charge in lieu of taxes attributable
to employee stock plans - 647 1,302
-------- -------- --------
Total provision for income
taxes (benefit) $ (1,655) $ 1,549 $ 4,053
======== ======== ========
Pro forma income taxes:
1993 1994 1995
---- ---- ----
Current:
Federal $ 1,452 $ 1,073 $ 2,989
Foreign 172 535 1,609
State 475 332 1,240
-------- -------- --------
Total 2,099 1,940 5,838
Deferred:
Federal (2,797) (394) (396)
State (309) (18) (517)
-------- -------- --------
Total (3,106) (412) (913)
Charge in lieu of taxes attributable
to employee stock plans - 647 1,302
-------- -------- --------
Total provision for income
taxes (benefit) $ (1,007) $ 2,175 $ 6,227
======== ======== ========
</TABLE>
SF-22
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
<TABLE>
The Company's effective tax rate and pro forma effective rate differs
from the statutory rate as of December 31, 1993, 1994, and 1995, are as
follows (in thousands):
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense at statutory rate $ 470 $ 2,102 $ 4,956
State tax expense 207 153 491
Nondeductible merger costs - - 938
Change in valuation allowance (1,568) 89 (89)
Tax exempt income - (140) (306)
Tax credits (60) (78) (148)
Foreign sales corporation - - (96)
S corporation benefit (751) (1,134) (575)
Establishment of deferred tax assets in
conjunction with Meta's transition from
an S corporation to C corporation status - - (1,725)
Foreign taxes - 497 423
Other 47 60 184
-------- -------- -------
Actual income tax expense (benefit) $ (1,655) $ 1,549 $ 4,053
======== ======== =======
1993 1994 1995
---- ---- ----
Income tax expense at statutory rate $ 470 $ 2,102 $ 4,956
State tax expense 160 259 815
Nondeductible merger costs - - 938
Change in valuation allowance (1,568) 89 (89)
Tax exempt income (140) (306)
Tax credits (138) (222) (253)
Foreign sales corporation - - (96)
Other 69 87 262
-------- -------- -------
Pro forma income tax expense (benefit) $ (1,007) $ 2,175 $ 6,227
======== ======== =======
</TABLE>
SF-23
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
<TABLE>
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
December 31, 1994 and 1995, are as follows (in thousands):
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 129 $ 1,385
Allowance for doubtful accounts 39 158
Tax credit carryforwards 494 361
Unrealized loss on short-term investments 89 -
Net operating loss carryforwards 2,434 286
Deferred revenue 100 942
Property and equipment, principally due to depreciation - 1,140
Other 28 95
-------- -------
Total gross deferred tax asset 3,313 4,367
Less valuation allowance (89) -
-------- -------
Deferred tax assets, net of valuation allowance 3,224 4,367
Deferred tax liabilities:
Accrual to cash conversion 412 314
Depreciation and amortization 210 -
-------- -------
Total gross deferred tax liabilities 622 314
-------- -------
Net deferred tax asset $ 2,602 $ 4,053
======== =======
</TABLE>
As of December 31, 1995, the Company had $361,000 of foreign tax
credits, expiring in the year 2000, and net operating loss
carryforwards of $760,000, expiring through the year 2010, available to
offset future federal income taxes.
(7) Employee Benefit Plans
401(k) Plan
The Company has a 401(k) retirement savings plan covering substantially
all employees. Contributions are matched at the discretion of the
Company's Board of Directors. The matching contributions amounted to
$37,000, $77,000, and $115,000 for 1993, 1994, and 1995, respectively.
SF-24
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
Employee Stock Purchase Plan
The Company has a qualified Employee Stock Purchase Plan, which permits
eligible employees to purchase newly issued common stock of the Company
up to an aggregate of 500,000 shares. Under this plan, employees may
purchase from the Company a designated number of shares through payroll
deductions at a price per share equal to 85% of the lesser of the fair
market value of the Company's common stock as of the date of the grant
or the date the right to purchase is exercised.
(8) Concentrations of Credit Risk
The Company maintains excess cash balances in a variety of financial
instruments such as overnight Eurodollar deposits, securities backed by
the U.S. government, municipal/corporate auction preferred stock,
municipal bonds, short-term debt securities, and demand deposit
investments in limited-maturity fixed-income mutual funds. The Company
has not experienced any material losses in any of the instruments it
has used for excess cash balances.
To reduce credit risk, the Company performs ongoing credit evaluations
of its customers' financial condition. The Company maintains reserves
for potential credit losses, but historically has not experienced any
significant losses related to individual customers or groups of
customers in any geographic area. The Company's allowance for doubtful
accounts was $437,000 and $894,000 as of December 31, 1994 and 1995,
respectively.
(9) Business Segment and Geographic Information
The Company operates primarily in one business segment, comprising the
electronic design automation industry.
The Company's export revenues are all denominated in U.S. dollars.
International revenue, principally to customers in Asia, accounted for
approximately 26%, 33%, and 32% of total revenue in the years ended
December 31, 1993, 1994, and 1995, respectively.
In 1993, one key customer accounted for 11% of the Company's revenue.
As of December 31, 1994 and 1995, no customer comprised in excess of
10% of total accounts receivable.
(10) Acquisitions of Technology
In each of April 1994, October 1995, and September 1996, the Company
acquired rights to certain software technology under development. As
the acquired software had not reached technological feasibility, it was
expensed upon acquisition.
Under the October 1995 agreement, the Company will make payments
through March 2000. The net present value of these payments is included
in technology acquisition payable in the accompanying supplemental
consolidated balance sheets.
SF-25
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
(11) Commitments and Contingencies
On December 6, 1995, Cadence Design Systems, Inc. (Cadence) filed an
action against the Company and certain of its officers in the Northern
California United States District Court alleging copyright
infringement, unfair competition, misappropriation of trade secrets,
conspiracy, breach of contract, inducing breach of contract, and false
advertising. The essence of the complaint is that certain Avant!
employees who were formerly Cadence employees misappropriated and
improperly copied source code for certain important functions of Avant!
place and route products from Cadence, and that the Company has
competed unfairly by making false statements concerning Cadence and its
products. The action also alleges that the Company induced certain
individual defendants to breach their agreements of employment and
confidentiality with Cadence. In addition to actual and punitive
damages, Cadence seeks to enjoin the sale of certain place and route
products and has filed a motion to obtain a preliminary injunction
pending trial of the action. The Company filed its opposition to
Cadence's motion on June 28, 1996. Cadence filed a reply to Avant!'s
opposition on August 27, 1996. The preliminary injunction hearing took
place on September 10, 1996. No ruling on the preliminary injunction
motion has been issued as of the date hereof.
On January 16, 1996, Avant! filed a counterclaim alleging antitrust
violations, racketeering, false advertising, defamation, trade libel,
unfair competition, unfair trade practices, negligent and intentional
interference with prospective economic advantage, and intentional
interference with contractual relations.
The Santa Clara County District Attorney's office is also investigating
the allegations of misappropriation of trade secrets set forth in
Cadence's lawsuit, described above. On December 5, 1995, a search
warrant was executed at the Company's Sunnyvale, California, facility
to determine whether there was evidence of criminal conduct. No
criminal charges have been filed against the Company, the Company's
management or its employees, but no assurance can be given that such
charges will not be filed in the future. A criminal complaint, if filed
against the Company, the Company's management or its employees, could
result in a loss of management and other personnel and could have other
material adverse effects on the Company. On each of December 15, and
19, 1995, class action filings were made against the Company alleging
certain securities law violations, including omission and/or
misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely consistent with those outlined in the
Cadence claim.
SF-26
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
DECEMBER 31, 1993, 1994, AND 1995
(Information for the Nine Months Ended
September 30, 1995 and 1996 is Unaudited)
It is the Company's position that the plaintiffs' claims are without
merit. The Company believes it has sufficient defenses to all the
plaintiffs' claims and intends to defend itself vigorously. If however,
Avant! defenses are unsuccessful, the Company may be enjoined from
selling certain place and route products and may be required to pay
damages to Cadence. In such event, Avant!'s business, operating
results, and financial condition would be materially adversely
affected. In particular, Avant!'s place and route products in dispute,
ArcCell-BV and ArcCell XO (which have been replaced by Aquarius-BV and
Aquarius-XO) accounted for approximately 20% of total supplemental
consolidated revenues for the three-year period ended December 31,
1995. In addition, it is likely that an adverse judgment against Avant!
would result in a steep decline in the market price of Avant!'s common
stock. Although it is reasonably possible the Company may incur a loss
upon conclusion of these claims, an estimate of any loss or range of
loss cannot be made, and the Company believes, based on information it
presently possesses, that the conclusion of these claims will not have
a material adverse effect on the Company's supplemental consolidated
financial position. However, there can be no assurance that an adverse
judgment, if granted, in any claim would not have a material adverse
effect on the Company's business, supplemental consolidated financial
position, or supplemental consolidated results of operations.
The Company is subject to other claims that have arisen in the ordinary
course of business. In the opinion of management, all such matters are
without merit or involve amounts which would not have a material
adverse effect on the Company's supplemental consolidated financial
position if unfavorably resolved.
SF-27
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE OF
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Amounts in thousands)
<CAPTION>
Balance Additions Balance
at beginning charged at end
of period to expense Deductions of period
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1993 $ 299 $ 113 $ - $ 412
Year ended December 31, 1994 412 86 61 437
Year ended December 31, 1995 437 590 128 899
</TABLE>
SF-28
<PAGE>
Exhibit 11.1 Calculations of Supplemental Net Income and Pro Forma Net Income
per Share
<TABLE>
Avant! Corporation and Subsidiaries
Statements Re: Computations of Supplemental Net Income and Pro Forma Net Income per Share
(amounts in thousands, except per share data)
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Common shares outstanding 10,136 13,470 20,688 20,065 23,142
(weighted average)
Common stock equivalents
(using the treasury stock method):
Stock Options and Awardds 434 731 1,781 2,189 2,575
(weighted average)
Pursuant to Staff Accounting Bulletin No. 83 (A) 496 745 520 331 --
Preferred Stock 4,832 5,125 851 843 877
Shares deemed outstanding to fund shareholder
distribution 386 386 319 386 --
------- ------- ------- ------- -------
Total (B) 16,284 20,457 24,159 23,814 26,594
======= ======= ======= ======= =======
Supplemental net income $15,264
=======
Supplemental net income per common share (C) $ 0.57
=======
Supplemental pro forma net income $ 2,389 $ 4,009 $ 8,350 $ 9,229
======= ======= ======= =======
Supplemental pro forma net income per share $ 0.15 $ 0.20 $ 0.35 $ 0.39
======= ======= ======= =======
<FN>
(A) Treated as if outstanding for all periods presented.
(B) Total of all common stock and equivalents.
(C) Equal to income divided by (B).
</FN>
SF-29
</TABLE>
<TABLE>
Selected Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
Nine months ended
Year ended December 31, September 30,
1991 1992 1993 1994 1995 1995 1996
---------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:(1)
Total Sales $ 2,187 $ 3,583 $ 8,708 $ 19,199 $ 41,512 $ 28,693 $ 48,823
Net Income (Loss) (658) (1,281) 1,319 2,279 6,235 6,873 10,587
Net Income (Loss) Per Share $ (0.17) $ (0.24) $ 0.11 $ 0.15 $ 0.35 $ 0.39 $ 0.53
Weighted Average Common and
Equivalent Shares 3,935 5,283 11,879 14,845 18,008 17,711 19,823
Consolidated Balance Sheet Data:
Total Assets $1,813 $6,246 $15,078 $40,545 $86,772 $82,756 $103,969
Long-term Obligations -- 152 173 928 531 342 84
Redeemable Preferred Stock $ -- $3,830 $ 8,312 $ 8,312 $ -- $ -- $ --
<FN>
(1) The selected consolidated financial data gives retroactive recognition to
the Anagram Acquisition which has been accounted for as a pooling of
interests.
</FN>
</TABLE>
F-A
<PAGE>
<TABLE>
Selected Quarterly Consolidated Financial Information
(in thousands, except per share data)
<CAPTION>
Three-Month Period Ended
Condensed Combined -------------------------------------------------------------------------------
Statements of Income Data(1) 1994 1995
-------------------------------------------------------------------------------
Mar.31 Jun.30 Sept. 30 Dec.31 Mar.31 Jun.30 Sept.30 Dec.31
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 3,093 $ 4,316 $ 4,701 $ 7,089 $ 7,575 $ 9,499 $11,619 $12,819
------- ------ ------- ------- ------- ------ ------ -------
Income from operations 88 356 525 1,796 1,829 2,945 4,036 59
Net income (loss) $ 113 $ 355 $ 450 $ 1,361 $ 1,445 $ 2,253 $ 3,175 $ (638)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share $ 0.01 $ 0.02 $ 0.03 $ 0.09 $ 0.09 $ 0.11 $ 0.16 $ (0.03)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average Common
and equivalent shares 13,764 14,947 15,034 15,327 15,807 19,819 19,978 19,927
</TABLE>
Continued.....
Three-Month Period Ended
Condensed Combined ------------------------------
Statements of Income Data(1) 1996
------------------------------
Mar.31 Jun.30 Sept.30
------------------------------
Total revenue $14,811 $16,733 $17,279
------- ------- -------
Income from operations 4,599 5,010 4,307
Net income (loss) $ 3,436 $ 3,790 $ 3,361
======= ======= =======
Net income (loss) per share $ 0.18 $ 0.19 $ 0.17
======= ======= =======
Weighted average Common
and equivalent shares 19,465 19,789 20,152
1) The selected quarterly consolidated financial information gives retroactive
recognition to the acquisition of Anagram which has been accounted for as a
pooling-of-interests.
F-B
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Avant! resulted from the merger of ArcSys, Inc. ("ArcSys") and
Integrated Silicon Systems, Inc. ("ISS") on November 27, 1995. On September 27,
1996, Avant! acquired Anagram Incorporated ("Anagram"). The ISS merger and the
acquisition of Anagram have been accounted for by the pooling-of-interests
method. Avant!'s consolidated financial statements give retroactive effect for
all periods presented to include the results of operations, financial position,
and cash flows of ISS and Anagram.
Avant! develops, markets, and supports software products that assist
design engineers in the physical layout, design, verification, simulation and
timing analysis of advanced ICs. Avant!'s strategy is to focus on productivity
enhancing software for the ICDA segment of the EDA market.
ArcSys was founded in February 1991, and began shipping Aquarius
(formerly ArcCell), its cell-based place and route software product, in 1993.
ISS began shipping its initial physical layout software products in 1988. ISS
introduced Hercules (formerly VeriCheck), its hierarchical physical verification
software, in the third quarter of 1992. ISS introduced its signal integrity
analysis software in 1994. Anagram was founded in March 1993, and began shipping
ADM, its high-capacity circuit simulation and high-accuracy timing analysis
software, in December 1994. Substantially all of Avant!'s and Anagram's revenue
on a combined basis for 1993, 1994, 1995 and the nine months ended September 30,
1996 was derived from the licensing and support of Aquarius, Hercules and ADM.
MDA-1
<PAGE>
Results of Operations
Comparison of Years Ended December 31, 1995, 1994 and 1993, and the Nine Months
Ended September 30, 1996 and 1995
Revenue. Revenue consists primarily of fees for licenses of Avant!'s
software products, maintenance and customer support. Revenue from the sale of
software licenses is recognized after shipment of the products, delivery of
permanent authorization codes, and fulfillment of acceptance terms, if any,
providing that no significant vendor and post-contract support obligations
remain and collection of the related receivable is probable. Any remaining
insignificant vendor or post-contract support obligations are accrued at the
time the revenue is recognized. In instances where there is a contingency
regarding the sale, revenue recognition is delayed until the contingency has
been resolved. When Avant! receives advance payment for software products, such
payments are reported as deferred revenue until all conditions for revenue
recognition are met. Avant! has entered into certain license agreements under
which software, support and other services are provided to a customer for a
bundled price for a specific period. Generally, revenue under such agreements is
recognized ratably over the contract period. Maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement, which is
typically twelve months. Revenue from customer training, support and other
services is recognized as the service is performed.
Avant!'s total revenue increased 120% from $8,708,000 in 1993 to
$19,199,000 in 1994, increased 116% to $41,512,000 in 1995 from 1994, and
increased 70% from $28,693,000 in the first nine months of 1995 to $48,823,000
in the first nine months of 1996. The percentage of Avant!'s revenue
attributable to software licenses decreased slightly from 88% in 1993 to 87% in
1994, and to 86% in 1995, and decreased from 86% in the first nine months of
1995 to 80% for the first nine months of 1996. This decrease is primarily due to
the increased user base and resulting increase in maintenance revenue.
Software revenue increased 118% from $7,648,000 in 1993 to $16,660,000
in 1994, increased 114% to $35,633,000 in 1995 from 1994, and increased 59% from
$24,703,000 in the first nine months of 1995 to $39,236,000 in the first nine
months of 1996. Increases in software revenue were due primarily to increased
license revenue from Avant!'s place and route, physical verification and
simulation and timing software. Services revenue increased 140% from $1,060,000
in 1993 to $2,539,000 in 1994, and increased 132% to $5,879,000 in 1995 from
1994, and increased 140% from $3,990,000 in the first nine months of 1995 to
$9,587,000 in the first nine months of 1996, all such increases reflecting the
growing base of installed systems. Through September 30, 1996, price increases
have not been a material factor in Avant!'s revenue growth. Avant! does not
believe that period-to-period comparisons of past revenue growth should be
relied upon as indications of future performance. See "Risk Factors--Potential
Fluctuations in Quarterly Results."
As discussed in the consolidated financial statements, Avant! is
involved in litigation with Cadence, and other related actions. As a result of
such litigation, some customers may cancel or postpone orders of Avant!'s
products. As of September 30, 1996, such cancellations and postponements had not
had a material financial impact on Avant!'s revenues; however a significant
delay of orders in the future may impact Avant!'s business, financial condition
and results of operations. An adverse ruling in the litigation could result in
Avant!'s inability to sell certain of its products and, as a result, could
materially affect Avant!'s business, financial condition and results of
operations. In particular, Avant!'s place and route products in dispute,
ArcCell-BV and ArcCell-XO (which have been replaced by Aquarius-BV and
Aquarius-XO), accounted for approximately one-third of Avant!'s total revenues
for the three-year period ended December 31, 1995. See "Risk Factors--Litigation
Risk."
Deferred revenue increased from $2,308,000 at December 31, 1994 to
$5,545,000 at December 31, 1995, and to $6,567,000 at September 30, 1996, due to
the increase in the number of maintenance agreements and license agreements
where software and services are provided for a specific period and revenue is
recognized ratably over the contract period.
MDA-2
<PAGE>
Costs of Software. Costs of software consist primarily of expenses
associated with product documentation and production costs as well as
amortization of capitalized software costs. Costs of software increased from
$236,000 in 1993 to $341,000 in 1994, and increased to $444,000 in 1995, and
increased from $338,000 in the first nine months of 1995 to $687,000 in the
first nine months of 1996. Costs of software included amortization of
capitalized software amounting to $145,000, $199,000 and $228,000 in 1993, 1994,
and 1995, respectively, and $155,000 and $70,000 in the first nine months of
1995 and 1996, respectively.
Costs of Services. Costs of services consist of costs of maintenance
and customer support and direct costs associated with providing other services.
Maintenance includes activities undertaken after the product is available for
general release to customers to correct errors and make routine changes and
additions. Customer support includes any installation assistance, training
classes, telephone question and answer services, newsletters, on-site visits and
software or data modifications. Costs of services increased from $614,000 in
1993 to $1,352,000 in 1994, and increased to $2,988,000 in 1995, representing
58%, 53% and 51% of services revenue for 1993, 1994 and 1995, respectively, and
increased from $2,066,000 in the first nine months of 1995 to $3,521,000 in the
first nine months of 1996, representing 52% and 37% of services revenue for the
first nine months of 1995 and 1996, respectively. The increases in costs of
services were due primarily to an increase in personnel and expenses necessary
to support Avant!'s growing base of installed software. The reduction in costs
of services as a percentage of service revenue reflects the improved utilization
of Avant!'s customer support resources in servicing its increased customer base.
Selling and Marketing Expenses. Selling and marketing expenses consist
primarily of costs, including sales commissions, of all personnel involved in
the sales process. This includes sales representatives, marketing associates and
application engineers. Selling and marketing expenses also include costs of
advertising, public relations, conferences and trade shows. Selling and
marketing expenses increased from $3,305,000 in 1993 to $7,655,000 in 1994, and
increased to $13,722,000 in 1995, and increased from $9,485,000 in the first
nine months of 1995 to $12,634,000 in the first nine months of 1996. The
increases reflect higher sales commissions associated with increased sales
volumes and increases in sales and increases marketing personnel. Selling and
marketing expenses represented 38%, 40% and 33% of total revenue in 1993, 1994
and 1995, respectively, and 26% and 33% of total revenue for the nine months
ended September 30, 1995 and 1996, respectively. The decrease in selling and
marketing expenses as a percentage of total revenue for these periods resulted
primarily from revenue growth and improved sales productivity. The increase in
selling and marketing expenses as a percentage of total revenue in 1994 resulted
from higher costs associated with increased international sales compared to
1993. Avant! expects to hire additional sales and marketing personnel and to
increase promotion and advertising expenditures throughout the remainder of
1996.
Research and Development Expenses. Research and development expenses
include all costs associated with the development of new products and
significant enhancements of existing products. Research and development expenses
increased from $3,309,000 in 1993 to $4,963,000 in 1994, and increased to
$8,284,000 in 1995, and increased from $5,578,000 in the nine months ended
September 30, 1995 to $9,228,000 in the nine months ended September 30, 1996.
Research and development expenses represented 38%, 26% and 20% of total revenue
in 1993, 1994 and 1995, respectively, and 19% and 20% of total revenue in the
nine months ended September 30, 1995 and 1996, respectively. The increases
resulted from increased personnel-related costs associated with the development
of new products and significant enhancements of existing products and the
increase in the number of research and development personnel. Avant! anticipates
that it will continue to devote substantial resources to product research and
development.
Software development costs are accounted for in accordance with the
Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 86, under which Avant! capitalizes software
development costs once technological feasibility has been established. Avant!
amortizes such amounts over three years. The amount of software development
costs capitalized for 1993, 1994, and 1995 and the nine months ended September
30, 1995 and 1996 was $140,000, $143,000, $63,000, $63,000 and none,
respectively, representing 4%, 3%, 1%, 1% and 0% of total research and
development expenses, respectively.
MDA-3
<PAGE>
General and Administrative Expenses. General and administrative
expenses increased from $1,626,000 in 1993 to $2,123,000 in 1994, and increased
to $3,615,000 in 1995, and increased from $2,416,000 in the nine months ended
September 30, 1995 to $7,917,000 in the nine months ended September 30, 1996.
The increases were primarily due to increases in personnel and related costs
necessary to support Avant!'s growth and legal and other costs incurred in the
first nine months of 1996 relating to the litigation with Cadence. General and
administrative expenses represented 18%, 11% and 9% of total revenue, in 1993,
1994, and 1995, respectively, and 16% and 8% of total revenue in the first nine
months of 1995 and 1996, respectively. Avant! began to incur legal and other
costs in the fourth quarter of 1995 relating to the litigation with Cadence.
Avant! expects these legal expenditures to continue at least through the
remainder of 1996 and into 1997.
Merger Expenses. In connection with the merger with ISS, costs of
approximately $3,590,000 were incurred. These costs consisted primarily of the
following: (a) approximately $2,858,000 for transaction fees for attorneys,
accountants, investment bankers and other related charges; (b) approximately
$233,000 for the elimination of duplicate facilities and equipment; (c)
approximately $337,000 for severance; and (d) approximately $162,000 for
incremental travel, communications, consulting and other costs associated with
internal and customer related integration activities. Avant! incurred costs of
approximately $920,000 in the third quarter of 1996 related to the Anagram
Acquisition. Avant! expects to incur costs of approximately $8 million in the
fourth quarter of 1996, related to the Meta and FrontLine Acquisitions.
Income (Loss) from Operations. Avant! had a loss from operations of
$382,000 in 1993, and income from operations of $2,765,000 and $8,869,000 in
1994 and 1995, respectively, and $8,810,000 and $13,916,000 in the first nine
months of 1995 and 1996, respectively. The changes in operating results are
attributable to revenue growth net of increased expenses necessary to support
Avant!'s growth. The operating loss represented 4% of total revenue in 1993.
Operating income represented 14% and 21% of total revenue in 1994 and 1995,
respectively, and 31% and 29% of total revenue for the nine months ended
September 30, 1995 and 1996, respectively.
Interest Income and Expense. Interest income was $200,000, $878,000,
and $2,468,000 in 1993, 1994 and 1995, respectively, and was $1,569,000 and
$2,541,000 in the first nine months of 1995 and 1996, respectively. Interest
income increased in 1994 and 1995 and the first nine months of 1996, due to
larger cash balances resulting primarily from the proceeds of the ISS public
offering which was completed in February 1994, and the ArcSys public offering,
which was completed in June 1995. Interest expense represents interest paid on
capital leases.
Income Taxes. Avant! accounts for income taxes in accordance with SFAS
No. 109. Prior to 1995, Avant! had experienced net operating losses and had
established a valuation allowance against its deferred tax assets relating to
the resulting net operating loss carryforwards. As a result of the merger with
ISS, the consolidated financial statements have been restated and the valuation
allowance was eliminated during 1993. The provision (benefit) for income taxes
as a percentage of pre-tax income (loss) was (576%), 35%, 45%, 34% and 36% for
1993, 1994, 1995 and the nine months ended September 30, 1995 and 1996,
respectively. The percentage in 1993 was different from the federal statutory
rate of approximately 34% due to the elimination of the valuation allowance. The
percentage in 1995 was higher than the federal statutory rate of approximately
34% due to the effect of expenses related to the ISS merger which were not
deductible for income tax purposes.
MDA-4
<PAGE>
Liquidity and Capital Resources
Net cash provided by operations was $726,000, $2,307,000 and
$12,335,000 in 1993, 1994 and 1995, respectively, and $5,852,000 and $12,856,000
in the nine months ended September 30, 1995 and 1996, respectively. The
increases in cash provided by operations through 1995 primarily result from
increases in net income. The decrease in cash provided from operations on the
nine months ended September 30, 1996 is due primarily to an increase in other
assets, offset by in increase in net income. Avant! used $2,698,000, $22,891,000
and $27,186,000 of net cash in 1993, 1994, and 1995, respectively, and
$36,079,000 and $23,751,000 in the nine months ended September 30, 1995 and
1996, respectively, for investing activities. Net cash used in investing
activities relates primarily to net purchases of short-term "available-for-sale"
securities. These securities, which are accounted for in accordance with SFAS
No. 115, consist of short-term debt securities, U.S. Government Agency debt
securities, U.S. Treasury Bills, municipal/corporate auction preferred stock,
municipal bonds and demand deposit investments in limited-maturity fixed-income
mutual funds. Cash is also used to acquire equipment, furniture and fixtures.
Purchases of equipment, furniture and fixtures primarily represent computer
workstations and file servers for Avant!'s employees. Avant! expects that
purchases of equipment will likely increase as Avant!'s employee base grows. Net
cash provided by financing activities was $4,446,000, $20,404,000, and
$32,811,000 in 1993, 1994, 1995, respectively, and $32,103,000 and $3,531,000 in
the nine months ended September 30, 1995 and 1996, respectively. Cash provided
by financing activities primarily results from the sale of preferred and common
stock.
Avant!'s stated payment terms generally are net 30 days. However, in
Avant!'s experience, many customers do not comply with stated payment terms due
to industry practice, slower payment by certain major companies and most foreign
customers and general economic conditions. Avant! periodically increases its
allowance for doubtful accounts to reflect increased sales levels and collection
experience. Avant! believes that its allowance for doubtful accounts is
adequate.
As of September 30, 1996, Avant! had $77,445,000 of cash and short-term
investments and $83,941,000 in working capital. As of September 30, 1996, Avant!
had $13,584,000 in current liabilities, including $6,567,000 of deferred
revenue. As of September 30, 1996, there was no bank indebtedness outstanding
and Avant! had no long-term commitments other than operating and capital lease
obligations.
Based on its operating plan, and absent any adverse judgments in the
pending litigation with Cadence, Avant! believes that it has available cash and
short-term investments sufficient to fund Avant!'s operations through at least
the next 12 months.
MDA-5
<PAGE>
Factors That May Affect Future Results
On December 6, 1995, Cadence filed an action against Avant! and certain
of its officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition, misappropriation
of trade secrets, conspiracy, breach of contract, inducing breach of contract
and false advertising. In addition to actual and punitive damages, Cadence seeks
to enjoin the sale of certain place and route products and has filed a motion to
obtain a preliminary injunction pending trial of the action. Avant! has filed a
counterclaim alleging antitrust violations, racketeering, false advertising,
defamation, trade libel, unfair competition, unfair trade practices, negligent
and intentional interference with prospective economic advantage and intentional
interference with contractual relations. The Santa Clara County District
Attorney's office also is investigating the allegations of misappropriation of
trade secrets set forth in Cadence's lawsuit. A criminal complaint, if filed,
against Avant!, the Company's management or its employees, could result in a
loss of management and other personnel and could have other material adverse
effects on the Company. The litigation with Cadence may result in canceled or
postponed customer orders and increased future expenditures. Since only a small
portion of Avant!'s expenses varies with its revenue, canceled orders or
significant expenses related to the Cadence litigation may have an adverse
affect on Avant!'s business, operating results and financial condition.
Furthermore, an adverse ruling in the Cadence litigation could result in
Avant!'s inability to sell certain of its products and, as a result, could have
a material adverse effect on Avant!'s business, operating results and financial
condition. In particular, Avant!'s place and route products in dispute,
ArcCell-BV and ArcCell-XO (which have been replaced by Aquarius-BV and
Aquarius-XO), accounted for approximately one third of Avant!'s total
consolidated revenues for the three-year period ended December 31, 1995. See
"Risk Factors--Litigation Risk
Avant!'s products compete with similar products from both larger and
smaller EDA vendors, and with dissimilar EDA products for a share of their
customers' EDA budgets. The EDA industry, and as a result Avant!'s business, has
benefited from the rapid world-wide growth of the semiconductor industry. There
can be no assurance that this rapid growth will continue. The EDA industry as a
whole may experience pricing and margin pressures from a decrease in growth in
the semiconductor industry, or other changes in the overall computing
environment. In fact, during 1996 the semiconductor industry experienced slower
growth than in 1995. In addition, the EDA industry is experiencing consolidation
as the major EDA vendors are seeking to provide a complete range of EDA products
to customers. There can be no assurance that Avant! will be able to compete
successfully against current and future competitors, or that market conditions
faced by Avant! will not adversely affect its business, operating results and
financial condition.
Avant!'s future success depends upon its ability to improve current
products and develop new products that address the increasingly sophisticated
needs of its customers. There can be no assurance that Avant! will continue to
be successful in developing technologically acceptable products on a timely
basis. Avant!'s ability to develop and improve products is dependent on key
individuals for their technical and other contributions. There can be no
assurance that Avant! can continue to attract and retain these key personnel.
Loss of certain key personnel could result in loss of Avant!'s market advantage
and could adversely affect its operating results and financial condition.
Avant! has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans, including employee stock
purchase plans and stock option plans. Management plans to use the pro forma
approach allowed by this standard, but plans to remain on Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, for purposes of
measurement of compensation expense. Therefore, the Company will provide the
disclosures required by SFAS No. 123, but its adoption will not have a material
effect on Avant!'s consolidated results of operations.
MDA-6
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Income....................................... F-5
Consolidated Statements of Stockholders' Equity ........................ F-6
Consolidated Statements of Cash Flows................................... F-10
Notes to Consolidated Financial Statements.............................. F-12
Schedule of Valuation and Qualifying Accounts--Allowance for doubtful
accounts............................................................. F-25
Computation of Net Income Per Share .................................... F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Avant! Corporation:
We have audited the accompanying consolidated balance sheets of Avant!
Corporation and subsidiaries (the Company) as of December 31, 1994 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995. In
connection with our audit of the accompanying consolidated financial statements,
we also have audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avant!
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995. Also in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
December 16, 1996
San Jose, California
F-2
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
<CAPTION>
December 31,
------------------ Sept. 30,
1994 1995 1996
------- ------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 5,848 $23,808 $ 9,440
Short-term investments..................................................... 23,561 46,969 68,005
Accounts receivable, net................................................... 4,611 7,262 9,102
Deferred income taxes...................................................... 2,835 1,646 2,790
Prepaid income taxes ...................................................... -- -- 1,488
Other ..................................................................... 970 1,713 6,700
------- ------- --------
Total current assets.................................................. 37,825 81,398 97,525
Equipment, furniture, and fixtures, net......................................... 2,401 5,217 6,351
Capitalized software, net....................................................... 315 150 80
Other .......................................................................... 4 7 13
------- ------- --------
Total assets.......................................................... $40,545 $86,772 $103,969
======= ======= ========
LIABILITIES, MANDATORY REDEEMABLE
CONVERTIBLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations............................... $ 273 $ 145 $ 78
Accounts payable........................................................... 551 832 852
Accrued compensation....................................................... 1,754 2,319 2,730
Accrued income taxes....................................................... 150 553 --
Other accrued liabilities.................................................. 703 1,842 3,357
Deferred revenue........................................................... 2,308 5,545 6,567
------- ------- --------
Total current liabilities............................................. 5,739 11,236 13,584
Capital lease obligations, less current portion................................. 147 40 3
Deferred rent................................................................... -- 110 81
Deferred income taxes........................................................... 681 381 --
Convertible notes payable....................................................... 100 -- --
------- ------- --------
Total liabilities..................................................... 6,667 11,767 13,668
------- ------- --------
Mandatory redeemable convertible preferred stock:
Mandatory redeemable convertible preferred stock, and convertible preferred
stock with put option, $.0001 par value; 3,655 shares authorized; 3,570
shares issued and outstanding (liquidation value of
$8,536) in 1994; no shares issued and outstanding in 1995 and 1996...... 8,312 -- --
Stockholders' equity:
Series A convertible preferred stock, $.0001 par value; 5,000 shares
authorized; 687 shares issued and outstanding (liquidation value of
$907) in 1994; no shares issued and outstanding in 1995 and 1996 -- -- --
F-3
</TABLE>
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Common stock, $.0001 par value; 10,000, 25,000, and 25,000 shares
authorized; 9,722, 17,516, and 18,428 shares issued and outstanding in
1994, 1995, and 1996, respectively...................................... 1 2 2
Additional paid-in capital................................................. 25,158 68,505 74,562
Deferred stock compensation................................................ (62) (517) (1,707)
Net unrealized gain (loss) on short-term investments....................... (222) 89 (69)
Retained earnings.......................................................... 691 6,926 17,513
------- ------- --------
Shareholders' equity.................................................. 25,566 75,005 90,301
------- ------- --------
Total liabilities, mandatory redeemable convertible preferred stock,
and shareholders' equity........................................... $40,545 $86,772 $103,969
======= ======= ========
<FN>
See accompanying notes to consolidated financial
statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<CAPTION>
Nine months ended
Years ended December 31, Sept. 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software.......................................... $ 7,648 $16,660 $35,633 $24,703 $39,236
Services.......................................... 1,060 2,539 5,879 3,990 9,587
------- ------- ------- ------- -------
Total revenue................................ 8,708 19,199 41,512 28,693 48,823
------- ------- ------- ------- -------
Costs and expenses:
Costs of software................................. 236 341 444 338 687
Costs of services................................. 614 1,352 2,988 2,066 3,521
Selling and marketing............................. 3,305 7,655 13,722 9,485 12,634
Research and development.......................... 3,309 4,963 8,284 5,578 9,228
General and administrative........................ 1,626 2,123 3,615 2,416 7,917
Merger expenses................................... -- -- 3,590 -- 920
------- ------- ------- ------- -------
Total operating expenses..................... 9,090 16,434 32,643 19,883 34,907
------- ------- ------- ------- -------
Income (loss) from operations................ (382) 2,765 8,869 8,810 13,916
Interest income........................................ 200 878 2,468 1,623 2,550
Interest expense....................................... (95) (148) (62) (54) (9)
------- ------- ------- ------- -------
Income (loss) before income taxes............ (277) 3,495 11,275 10,379 16,457
Provision for income taxes (benefit)................... (1,596) 1,216 5,040 3,506 5,870
------- ------- ------- ------- -------
Net income................................... $ 1,319 $ 2,279 $ 6,235 $ 6,873 $10,587
======= ======= ======= ======= =======
Net income per common share............................ $ 0.11 $ 0.15 $ 0.35 $ 0.39 $ 0.53
======= ======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding....................... 11,879 14,845 18,008 17,711 19,823
======= ======= ======= ======= =======
<FN>
See accompanying notes to consolidated financial
statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<CAPTION>
Series A
convertible Additional
preferred stock Common stock paid-in
Shares Amount Shares Amount capital
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1992 ... 1,710 $ 630 4,973 $ 1 $ 3,079
Issuance of common stock ........... -- -- 1,218 -- 113
Repurchase and retirement of common
stock ............................ -- -- (2) -- (2)
Unrealized loss on short-term
investments ........................ -- -- -- -- --
Net income for 1993 ................ -- -- -- -- --
-------- -------- -------- -------- --------
Balances as of December 31, 1993 ... 1,710 630 6,189 1 3,190
Issuance of common stock ........... -- -- 20 -- 20
Conversion of preferred stock to
common stock ....................... (1,023) (630) 1,023 -- 630
Issuance of shares in public
offering, net of expenses .......... -- -- 2,250 -- 20,343
Issuance of common stock under stock
option plan, including related tax
benefits ......................... -- -- 134 -- 848
Issuance of common stock under
employee stock purchase plan ..... -- -- 5 -- 66
Issuance of shares and accumulated
deficit of merged company (PSI) .. -- -- 113 -- 1
Repurchase of common stock ......... -- -- (12) -- (2)
Issuance of common stock options at
below market value ............... -- -- -- -- 62
Unrealized loss on short-term
investments ...................... -- -- -- -- --
Net income for 1994 ................ -- -- -- -- --
-------- -------- -------- -------- --------
Balances as of December 31, 1994 ... 687 -- 9,722 1 25,158
</TABLE>
F-6
<PAGE>
<TABLE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<CAPTION>
Net
unrealized
Deferred gain (loss)
stock on Retained Share
compen- short-term earnings holders'
sation investments (deficit) equity
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balances as of December 31, 1992 ... $ -- $ -- $ (2,804) $ 906
Issuance of common stock ........... -- -- -- 113
Repurchase and retirement of common
stock ............................ -- -- -- (2)
Unrealized loss on short-term
investments ........................ -- (8) -- (8)
Net income for 1993 ................ -- -- 1,319 1,319
-------- -------- -------- --------
Balances as of December 31, 1993 ... -- (8) (1,485) 2,328
Issuance of common stock ........... -- -- -- 20
Conversion of preferred stock to
common stock ....................... -- -- -- --
Issuance of shares in public
offering, net of expenses .......... -- -- -- 20,343
Issuance of common stock under stock
option plan, including related tax
benefits ......................... -- -- -- 848
Issuance of common stock under
employee stock purchase plan ..... -- -- -- 66
Issuance of shares and accumulated
deficit of merged company (PSI) .. -- -- (103) (102)
Repurchase of common stock ......... -- -- -- (2)
Issuance of common stock options at
below market value ............... (62) -- -- --
Unrealized loss on short-term
investments ...................... -- (214) -- (214)
Net income for 1994 ................ -- -- 2,279 2,279
-------- -------- -------- --------
Balances as of December 31, 1994 ... (62) (222) 691 25,566
</TABLE>
F-7
<PAGE>
<TABLE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<CAPTION>
Series A
convertible Additional
preferred stock Common stock paid-in
Shares Amount Shares Amount capital
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Issuance of common stock ........... -- -- 713 -- 159
Conversion of debt to common stock . -- -- 100 -- 100
Issuance of shares in public
offering, net of expenses .......... -- -- 2,360 -- 27,713
Conversion of mandatory redeemable
convertible preferred stock into
common stock ..................... -- -- 3,570 1 8,311
Conversion of preferred stock into
common stock ..................... (687) -- 687 -- --
Exercise of stock options and
warrants, including related
tax benefits ..................... -- -- 570 -- 5,945
Repurchase of common stock ......... -- -- (18) -- (3)
Issuance of common stock options at
below market value ............... -- -- -- -- 588
Amortization of deferred stock
compensation ..................... -- -- -- -- --
Issuance of common stock under
employee stock purchase plan ..... -- -- 43 -- 534
Unrealized gain on short-term
investments ...................... -- -- -- -- --
Net income for 1995................. -- -- -- -- --
-------- -------- -------- -------- --------
Balances as of December 31, 1995 ... -- -- 17,747 2 68,505
Exercise of common stock options
including related tax benefits
(unaudited) ...................... -- -- 645 -- 4,040
Issuance of common stock under
employee stock purchase plan
(unaudited) ...................... -- -- 36 -- 630
Issuance of common stock options
at below market value (unaudited). -- -- -- -- 1,387
Amortization of deferred stock
compensation (unaudited) ......... -- -- -- -- --
Unrealized loss on investments
(unaudited) ...................... -- -- -- -- --
Net income for nine months ended
September
30, 1996 (unaudited) ............. -- -- -- -- --
-------- -------- -------- -------- --------
Balances as of September 30, 1996
(unaudited) ...................... $ -- $ -- 18,428 2 74,562
======== ======== ======== ======== ========
</TABLE>
F-8
<PAGE>
<TABLE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<CAPTION>
Net
unrealized
Deferred gain (loss)
stock on Retained Share
compen- short-term earnings holders'
sation investments (deficit) equity
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
Issuance of common stock ........... -- -- -- 159
Conversion of debt to common stock . -- -- -- 100
Issuance of shares in public
offering, net of expenses .......... -- -- -- 27,713
Conversion of mandatory redeemable
convertible preferred stock into
common stock ..................... -- -- -- 8,312
Conversion of preferred stock into
common stock ..................... -- -- -- --
Exercise of stock options and
warrants, including related
tax benefits ..................... -- -- -- 5,945
Repurchase of common stock ......... -- -- -- (3)
Issuance of common stock options at
below market value ............... (588) -- -- --
Amortization of deferred stock
compensation ..................... 133 -- -- 133
Issuance of common stock under
employee stock purchase plan ..... -- -- -- 534
Unrealized gain on short-term
investments ...................... -- 311 -- 311
Net income for 1995
-- -- 6,235 6,235
-------- -------- -------- --------
Balances as of December 31, 1995 ... (517) 89 6,926 75,005
Exercise of common stock options
including related tax benefits
(unaudited) ...................... -- -- -- 4,040
Issuance of common stock under
employee stock purchase plan
(unaudited) ...................... -- -- -- 630
Issuance of common stock options
at below market value
(unaudited)....................... (1,387) -- -- --
Amortization of deferred stock
compensation (unaudited) ......... 197 -- -- 197
Unrealized loss on investments
(unaudited) ...................... -- (158) -- (158)
Net income for nine months ended
September
30, 1996 (unaudited) ............. -- -- 10,587 10,587
-------- -------- -------- --------
Balances as of September 30, 1996
(unaudited) (1,707) (69) 17,513 90,301
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<CAPTION>
Nine months ended
Years ended December 31, Sept. 30,
---------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 1,319 $ 2,279 $ 6,235 $ 6,873 $ 10,587
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation. 340 644 1,206 1,005 1,423
Loss on disposal of equipment............................ -- -- 4 -- --
Amortization of capitalized software cost................ 145 199 228 155 70
Amortization of deferred stock compensation.............. -- -- 133 -- 197
Deferred income taxes.................................... (2,404) 398 2,192 1,903 (1,525)
Deferred rent............................................ (19) (5) 110 -- (29)
Changes in operating assets and liabilities:
Accounts receivable, net............................ (1,245) (2,483) (2,651) (309) (1,840)
Other assets........................................ (103) (51) (747) (266) (4,993)
Accounts payable.................................... 151 266 281 184 20
Accrued compensation................................ 576 1,057 565 835 411
Prepaid and accrued income taxes.................... 221 (221) 403 539 (1,006)
Other accrued liabilities........................... 252 301 1,139 159 1,515
Deferred revenue.................................... 1,493 (77) 3,237 1,778 1,022
------- ------- -------- -------- ---------
Net cash provided by operating activities...... 726 2,307 12,335 12,856 5,852
------- ------- -------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments........................... (2,529) (92,615) (79,568) (126,273) (129,294)
Maturities and sales of short-term investments................ 667 71,366 56,471 92,754 108,100
Purchases of equipment, furniture, and fixtures............... (696) (1,518) (4,026) (2,497) (2,557)
Capitalized software development costs........................ (140) (143) (63) (63) --
Cash received in merger....................................... -- 19 -- --
------- ------- -------- -------- ---------
--
Net cash used in investing activities.......... (2,698) (22,891) (27,186) (36,079) (23,751)
------- ------- -------- -------- ---------
Cash flows from financing activities:
Payment on note assumed in merger............................. -- (89) -- -- --
Principal payments under capital lease obligations............ (134) (235) (235) (190) (104)
Proceeds from issuance of preferred stock, net................ 4,482 -- -- -- --
Repurchase of common stock.................................... -- (2) (3) (2) --
Exercise of stock options..................................... -- 201 4,643 4,188 3,005
Issuance of common stock under employee stock purchase
plan . -- 66 534 183 630
Proceeds from issuance of common stock, net................... 98 20,363 27,872 27,924 --
Proceeds from issuance of convertible note.................... -- 100 -- --
------- ------- -------- -------- ---------
--
Net cash provided by financing activities...... 4,446 20,404 32,811 32,103 3,531
------- ------- -------- -------- ---------
</TABLE>
F-10
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents............... 2,474 (180) 17,960 8,880 (14,368)
Cash and cash equivalents, beginning of year....................... 3,554 6,028 5,848 5,848 23,808
------- ------- -------- -------- ---------
Cash and cash equivalents, end of year............................. $ 6,028 $ 5,848 $23,808 $14,728 $9,440
======= ======= ======= ======== =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-11
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
(1) Nature Of Business And Summary Of Significant Accounting Policies
Nature of Business
Avant! Corporation (the Company or Avant!), formerly ArcSys, Inc., develops,
markets and supports software products that assist design engineers in the
automated design, layout, physical verification, and analysis of advanced
integrated circuits. Its primary customers are semiconductor manufacturers in
the United States, Japan, Korea, Taiwan, and Europe.
Principles of Presentation and Preparation and Use of Estimates
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The consolidated
financial statements have been restated to reflect the effect of the mergers
with Integrated Silicon Systems, Inc. (ISS) and Anagram, Incorporated (Anagram)
discussed in Note 2.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance, and customer support.
Software Revenue
Revenue from the sale of software licenses is recognized upon shipment of the
products, delivery of permanent authorization codes, and fulfillment of
acceptance terms, if any, providing that no significant vendor and post-contract
support obligations remain and collection of the related receivable is probable.
Any remaining insignificant vendor obligations are accrued at the time the
revenue is recognized. In instances where there is a contingency regarding the
sale, revenue recognition is delayed until the contingency has been resolved.
When the Company receives advance payments for software products, such payments
are reported as deferred revenue until all conditions for revenue recognition
are met. The Company has entered into certain license agreements under which
software, support and other services are provided to a customer for a bundled
price for a specific period of time. Generally, revenue under such agreements is
recognized ratably over the contract period.
Services Revenue
Maintenance revenue is deferred and recognized ratably over the term of the
maintenance agreement, which is typically 12 months. Revenue from customer
training, support, and other services is recognized as the service is performed.
F-12
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
Cash and Cash Equivalents
For the purpose of the accompanying consolidated statements of cash flows, the
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents are stated at cost
and consist primarily of overnight Eurodollar deposits, certificates of deposit,
and commercial paper. The carrying amount of cash and cash equivalents
approximates fair value.
Short-Term Investments
Short-term investments, which consist of demand deposit investments in
limited-maturity fixed-income mutual funds, short-term debt securities, U.S.
government agency debt securities, U.S. Treasury Bills, municipal/corporate
auction preferred stock, and municipal bonds, are reported at fair value and are
classified as available-for-sale securities. The cost of securities sold is
determined using the specific identification method when computing realized
gains and losses. Fair value is determined using available market information.
There were no realized gains or losses on investments sold during 1993, 1994, or
1995. As of December 31, 1994, the gross unrealized loss on short-term
investments was $222,000. As of December 31, 1995, the net unrealized gain on
short-term investments of $89,000 consisted of $136,000 of gross unrealized
gains, and $47,000 of gross unrealized losses.
Equipment, Furniture, and Fixtures
Equipment, furniture, and fixtures consist primarily of computer workstations
and file servers for employees and are stated at cost net of accumulated
depreciation of $1,421,000 and $2,271,000 as of December 31, 1994 and 1995,
respectively. Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets (generally five years).
Software Development Costs
Certain software development costs for new products and product enhancements are
capitalized upon the establishment of technological feasibility, which is
defined by the Company as the completion of a working model of the software.
Capitalization of computer software development costs ceases, and amortization
begins, when the product is available for general release to customers. The
ongoing assessment of the realizability of these costs requires considerable
judgment related to anticipated future product revenues, estimated economic
life, and changes in hardware and software technology. The amount of software
development costs capitalized for the years 1993, 1994, and 1995 was $140,000,
$143,000, and $63,000, respectively. Accumulated amortization of software
development costs was $849,000 and $997,000 as of December 31, 1994 and 1995,
respectively.
Amortization of software development costs is provided on a product-by-product
basis. Annual amortization is the greater of the amount computed using the ratio
of current product revenue to the total of current and anticipated future
product revenue or the straight-line method over the remaining estimated
economic life of the product. All current products have estimated economic lives
of three years. Amortization of software development costs for the years 1993,
1994, and 1995 was $145,000, $199,000, and $228,000, respectively. Amortization
of software development costs is included in costs of software in the
accompanying consolidated statements of income.
F-13
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
Income Taxes
Income taxes are provided under the asset and liability method, whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Prior to 1995, the
Company had experienced net operating losses and had established a valuation
allowance against its deferred tax assets relating to the resulting net
operating loss carryforwards for tax purposes due to the uncertainty surrounding
the realization of such assets. As a result of the mergers discussed in Note 2,
the Company's income tax provisions were restated and the valuation allowance
was eliminated during 1993.
Net Income Per Common Share
Net income per common share is computed using the weighted average number of
common and common equivalent shares outstanding during each period presented
using the treasury stock method.
Common stock equivalents consist of stock options and awards (using the treasury
stock method) and convertible preferred stock. Common stock equivalents are
excluded from the computation if their effect is antidilutive, except that
common stock issued and stock options and awards during the 12 months preceding
the initial filing of the Registration Statement for the Company's initial
public offering have been included in the calculation of common and common
equivalent shares using the treasury stock method as if they were outstanding
for all periods presented.
Statements of Cash Flows
Interest of $36,000, $42,000, $51,000, $44,000 and $9,000 was paid in the years
ended 1993, 1994, and 1995, and the nine-month periods ended September 30, 1995
and 1996 respectively. Income taxes of $619,000, $600,000, $1,311,000, $155,000,
and $8,401,000 were paid in the years ended 1993, 1994, and 1995, and the nine
months ended September 30, 1995 and 1996, respectively. Acquisition of equipment
under capital lease obligations was $247,000 and $298,000 during 1993, and 1994,
respectively. Deferred stock compensation of $62,000, $588,000, and $1,387,000,
was recognized in the years ended 1994 and 1995, and the nine months ended
September 30, 1995, and 1996 respectively, for stock options issued below market
value. In connection with the Company's initial public offering in 1995,
mandatory redeemable convertible preferred stock was converted to common stock
in the amount of $8,312,000. Conversion of long-term debt to common stock was
$100,000 in 1995.
Translation of Foreign Currencies
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Resulting foreign exchange gains and losses, which have been
insignificant, are included in the results of operations.
Stock-Based Compensation
The Company has various stock-based compensation plans as discussed in Note 4.
The Company has accounted for its stock-based compensation plans under
Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees.
The Company has adopted Statement of Financial Accounting
F-14
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
Standards (SFAS) No. 123, and plans to use the pro forma approach allowed under
this standard. Disclosures under SFAS No. 123 will be required in the Company's
December 31, 1996 consolidated financial statements.
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated financial statements as of September 30,
1996 and for the nine months ended September 30, 1995 and 1996, have been
prepared on substantially the same basis as the audited supplemental
consolidated financial statements, and included all adjustments, consisting only
of normal recurring adjustments, which management believes are necessary for a
fair presentation of the financial information set forth herein.
(2) Mergers
On September 27, 1996, the Company issued approximately 2,154,000 shares of its
common stock for all of the outstanding common and preferred stock of Anagram,
and assumed approximately 260,000 stock options and subscriptions under option
plans. The Anagram outstanding preferred stock has been presented as common
stock for all periods presented in the consolidated financial statements. The
merger has been accounted for as a pooling of interests, and, accordingly, the
Company's consolidated financial statements have been restated for all periods
prior to the merger to include the results of operations, financial position,
and cash flows of Anagram. Total revenue and net income for the individual
entities as previously reported are as follows (in thousands):
Years ended Six months
December 31, ended
---------------------- June 30,
1994 1995 1996
------- ------- --------
Total revenue
Avant! ................ $18,958 $38,004 $ 27,169
Anagram ............... 241 3,508 4,375
------- ------- --------
$19,199 $41,512 $ 31,544
======= ======= ========
Net income
Avant! ................ $ 2,260 $ 5,065 $ 5,593
Anagram ............... 19 1,170 1,633
------- ------- --------
$ 2,279 $ 6,235 $ 7,226
======= ======= ========
In connection with the merger with Anagram, the Company recorded estimated
merger related costs of approximately $920,000 in the quarter ended September
30, 1996. These costs consist primarily of the following: (i) approximately
$300,000 for transaction fees for attorneys, accountants, investment bankers,
and other related charges; (ii) approximately $250,000 for the elimination of
duplicate facilities and equipment; (iii) approximately $370,000 for severance,
relocation, and related costs. All of the merger-related costs relate to cash
expenditures.
On November 27, 1995, the Company issued approximately 6,400,000 shares of its
common stock for all of the outstanding common stock of ISS, and assumed
approximately 1,500,000 stock options and subscriptions under various ISS stock
option and purchase plans. The merger has been accounted for as a pooling of
interests, and accordingly, the Company's consolidated financial statements have
been restated for all periods prior to the merger to include the results of
operations, financial position, and cash flows of ISS. As a result of the
merger, the
F-15
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
Company's income tax provisions were restated and the deferred tax valuation
allowance was eliminated during 1993. Total revenue and net income for the
individual entities as previously reported are as follows (in thousands):
Years ended Nine-month
December 31, period ended
-------------------- September 30,
1993 1994 1995
-------- -------- --------
Total revenue
Avant! ...................... $ 1,696 $ 6,191 $ 12,087
ISS ......................... 7,012 12,767 14,414
-------- -------- --------
$ 8,708 $ 18,958 $ 26,501
======== ======== ========
Net income
Avant! ...................... $ (2,174) $ (1,206) $ 3,073
ISS ......................... 1,370 3,128 3,890
-------- -------- --------
(804) 1,922 6,963
Adjustment for deferred taxes 2,146 338 (957)
-------- -------- --------
$ 1,342 $ 2,260 $ 6,006
======== ======== ========
In connection with the merger with ISS, the Company recorded merger related
costs of approximately $3,600,000. These costs consisted primarily of the
following: (i) approximately $2,858,000 for transaction fees for attorneys,
accountants, investment bankers, and other related charges; (ii) approximately
$233,000 for the elimination of duplicate facilities and equipment; (iii)
approximately $337,000 for severance; and (iv) approximately $162,000 for
incremental travel, communications, consulting, and other costs associated with
internal activities. Of the $3,600,000 million of merger-related costs,
approximately $3,400,000 related to cash expenditures while approximately
$200,000 related to noncash charges. As of December 31, 1995, accrued
liabilities included $392,000 of expected future cash expenditures.
On May 5, 1994, ISS completed a merger with Performance Signal Integrity, Inc.
(PSI), a Pennsylvania corporation. The financial position, results of operations
and cash flows of PSI were not material to ISS, and the merger was accounted for
as an immaterial pooling of interests. Therefore, ISS's previously reported
financial results were not restated for the PSI merger.
(3) Mandatory Redeemable Convertible Preferred Stock Conversion
In connection with the completion of the Company's initial public offering in
June 1995, all the outstanding mandatory redeemable convertible preferred stock
was automatically converted into approximately 3,570,000 shares of the Company's
common stock. In addition, outstanding warrants to acquire Series B preferred
stock were automatically converted into approximately 26,000 shares of the
Company's common stock.
F-16
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
As of December 31, 1994, mandatory redeemable convertible preferred stock
consisted of the following (in thousands):
Shares Issued and Liquidation
Series authorized outstanding value
---------- ----------- ----------
A 313 313 $ 693
B 1,942 1,910 3,343
C 1,400 1,347 4,500
===== ===== ======
3,655 3,570 $8,536
===== ===== ======
(4) Shareholders' Equity
Initial Public Offering and Changes in Authorized Common and Preferred Stock
In April 1995, the Company's Board of Directors authorized the Company to issue
up to 5,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges, and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, and the number of shares constituting any series or the designation
of such series, without any further vote or action by the shareholders. In
addition, the Company increased its authorized number of shares of common stock
from 10,000,000 to 25,000,000 shares.
In June 1995, the Company closed its initial public offering of common stock at
$13.00 per share. The net proceeds of the offering were $27,713,000 after
deducting applicable costs and expenses. In connection with the public offering,
all the outstanding Series A preferred stock automatically converted into
approximately 687,000 shares of the Company's common stock.
Common Stock
The Company has issued to the Company's founders and employees 2,683,000 shares
of its common stock, which are subject to repurchase upon termination of
employment. The number of shares of common stock subject to the Company's right
to repurchase declines 25% after the founder or employee has been employed one
year, and thereafter ratably over three years on a monthly basis. As of December
31, 1994 and 1995, 232,000 and 66,000 shares, respectively, were subject to
repurchase. In addition, certain Anagram shares of common stock were subject to
repurchase.
1995 Stock Option/Stock Issuance Plan
The Company approved the 1995 Stock Option/Stock Issuance Plan (the 1995 Plan)
in April 1995, under which all remaining outstanding stock options and shares
available for grant under the Company's 1993 Stock Option/Stock Issuance Plan
and 1,000,000 additional shares of the Company's common stock have been
authorized for issuance, for a total of 2,336,000 shares of the Company's common
stock. The 1995 Plan is intended to serve as a successor to the 1993 Stock
Option/Stock Issuance Plan (see below) and has terms similar to those of the
1993 Stock Option/Stock Issuance Plan. Under the 1995 Plan, however, each
individual serving as a nonemployee member of the Company's Board of Directors
on the date the Underwriting Agreement for the initial public offering was
executed received an option grant on such date for 20,000 shares of the
Company's common stock, provided such individual had not otherwise been in the
prior employ of the Company. Each individual who first becomes a
F-17
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
nonemployee member of the Board of Directors thereafter will receive a share
option grant on the date such individual joins the Board of Directors provided
such individual has not been in the prior employ of the Company. In addition, at
each annual shareholders' meeting, beginning with the 1996 Annual Shareholders'
Meeting, each individual who is to continue to serve as a nonemployee member of
the Board of Directors after the meeting will receive an additional option grant
to purchase 5,000 shares of common stock whether or not such individual has been
in the prior employ of the Company.
1993 Stock Option/Stock Issuance Plan
In September 1993, the Board of Directors approved the 1993 Stock Option/Stock
Issuance Plan (the 1993 Plan). Options granted under the 1993 Plan may be either
incentive stock options or nonstatutory stock options, as designated by the
Company's Board of Directors. The 1993 Plan provides that the exercise price of
an incentive stock option and a nonstatutory option will be no less than the
fair market value and 85% of the fair market value, respectively, of the
Company's common stock at the date of grant, as determined by the Company's
Board of Directors.
The Company's Board of Directors also has the authority to set exercise dates
(no longer than 10 years from the date of grant), payment terms, and other
provisions for each grant. Generally options granted under the 1993 Plan become
exercisable as to 25% of the shares on the anniversary date of grant and
thereafter become exercisable ratably over three years.
The Company has recorded for financial statement purposes a deferred charge of
$650,000, representing the difference between the exercise price and the deemed
fair value of the Company's common stock for 355,000 shares subject to common
stock options granted in the fourth quarter of 1994 and the first quarter of
1995. The deferred stock compensation will be amortized to compensation expense
over the period during which the options become exercisable, generally four
years.
F-18
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
ISS Option Plans
In connection with the ISS merger discussed in Note 2, various ISS option plans
were assumed by the Company, thereby allowing participants to purchase Avant!
stock in amounts and at prices adjusted to reflect the exchange ratio of the
merger.
The Company incurred stock compensation expense, representing the difference
between the exercise price and the deemed fair value of the Company's common
stock, relating to nonqualified stock options of $151,000 during 1993 and
$20,000, during 1994.
Anagram Option Plans
In connection with the Anagram merger discussed in Note 2, various Anagram
option plans were assumed by the Company, thereby allowing participants to
purchase Avant! stock in amounts and at prices adjusted to reflect a two for one
stock split effective June 1996 and the exchange ratio of the merger.
As of December 31, 1995, there were approximately 698,000 shares of Anagram
restricted common stock outstanding which were subject to repurchase by the
Company.
F-19
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
The following is a summary of activity under all of the option plans:
<CAPTION>
Shares
available Options Exercise
for grant outstanding price
-------- ----------- ---------
<S> <C> <C> <C>
Balances as of December 31, 1992 .......................... 158,000 154,000 $0.01-2.50
Additional Shares reserved ........................... 652,000 - -
Granted .............................................. (515,000) 515,000 0.05-2.53
Exercised ............................................ - 20,000 1.00-1.47
Canceled ............................................. 134,000 (134,000) 0.30-2.53
---------- --------- ---- -----
Balance as of December 31, 1993 ........................... 429,000 515,000 $0.01-2.53
Additional Shares reserved ........................... 1,960,000 - -
Granted .............................................. (1,972,000) 1,972,000 0.03-19.00
Canceled ............................................. 209,000 (209,000) 0.30-3.52
Exercised ............................................ - (134,000) 0.01-2.50
---------- --------- ---- -----
Balances as of December 31, 1994 .......................... 626,000 2,144,000 $0.05-19.00
Additional Shares reserved ........................... 3,158,000 - -
Granted .............................................. (1,543,000) 1,543,000 0.05-44.50
Canceled ............................................. 198,000 (198,000) 0.30-33.50
Exercised ............................................ - (598,000) 0.05-17.67
Eliminated in merger ................................. (1,337,000) - -
---------- --------- ---- -----
Balances as of December 31, 1995 .......................... 1,102,000 2,891,000 $0.05-44.50
========== ========= ===========
</TABLE>
As of December 31, 1995, 969,000 stock options were exercisable.
(5) Leases
Capital Leases
Future minimum lease payments under these capital lease arrangements as of
December 31, 1995, are as follows (in thousands):
Year ending
December 31,
------------
1996................................................... $145
1997................................................... 53
----
198
Less amount representing interest...................... 13
----
185
Less current portion................................... 145
----
Capital lease obligations, less current portion........ $ 40
====
Operating Leases
The Company leases in Sunnyvale, California, and Research Triangle Park, North
Carolina, facilities under operating lease agreements which expire over the next
10 years. Portions of the Company's headquarters were subleased to an unrelated
third party under a lease that expired in June 1995. Rental expense incurred by
the Company under operating lease agreements totaled $395,000, $522,000, and
$702,000, for the years 1993, 1994.
Future annual minimum lease payments under operating leases as of December 31,
1995, are as follows (in thousands):
F-20
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
Year ending
December 31,
------------
1996 ......................... $1,102
1997 ......................... 1,250
1998 ......................... 839
1999 ......................... 784
2000 ......................... 713
Thereafter ................... 4,000
------
$8,688
======
<TABLE>
(6) Income Taxes
The component of income tax expense (benefit), as presented in the accompanying
consolidated statements of income, comprise federal taxes, state taxes, and
certain foreign taxes. The components of income taxes as of December 31, 1993,
1994, and 1995, are as follows (in thousands):
<CAPTION>
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Current:
Federal......................................................... $ 586 $ 289 $1,212
Foreign......................................................... 10 38 1,160
State........................................................... 207 28 477
------- ------ ------
Total....................................................... 803 355 2,849
------- ------ ------
Deferred:
Federal......................................................... (2,285) 100 982
Foreign......................................................... - - -
State........................................................... (114) 114 (93)
------- ------ ------
Total....................................................... (2,399) 214 889
------- ------ ------
Charge in lieu of taxes attributable to employee stock plans......... - 647 1,302
------- ------ ------
Total provisions for income taxes (benefit)................. $(1,596) $1,216 $5,040
======= ====== ======
</TABLE>
The Company's effective tax rate differs from the statutory rate as of December
31, 1993, 1994, and 1995 as follows (in thousands):
1993 1994 1995
------- ------- -------
Income tax expense at statutory rate .......... $ (94) $ 1,188 $ 3,833
State tax expense ............................. 93 152 685
Nondeductible merger .......................... -- -- 938
Change in valuation allowance ................. (1,568) 89 (89)
Tax exempt income ............................. -- (140) (306)
Tax credits ................................... (60) (78) (148)
Foreign sales corporation ..................... -- -- (96)
S election corporation ........................ -- (51) --
Other ......................................... 33 56 223
------- ------- -------
Actual income tax expense (benefit) .. $(1,596) $ 1,216 $ 5,040
======= ======= =======
F-21
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1994 and
1995, are as follows (in thousands):
1994 1995
------ ------
Deferred tax assets:
Accrued liabilities .................................... $ 123 $ 334
Allowance for doubtful accounts ........................ 37 155
Tax credit carryforwards ............................... 494 361
Unrealized loss on short-term investments .............. 89 --
Net operating loss carryforwards ....................... 2,153 --
Deferred revenue ....................................... -- 796
Other .................................................. 28 --
------ ------
Total gross deferred tax assets ................. 2,924 1,646
Less valuation allowance ................................. 89 --
------ ------
Deferred tax assets, net of valuation allowance ........ 2,835 1,646
------ ------
Deferred tax liabilities:
Accrual to cash conversion ............................. 412 321
Depreciation and amortization .......................... 269 60
------ ------
Total gross deferred tax liabilities ............ 681 381
------ ------
Net deferred tax asset .......................... $2,154 $1,265
====== ======
As of December 31, 1995, the Company had $361,000 of foreign tax credits,
expiring in the year 2000, available to offset future federal income taxes.
(7) Employee Benefit Plans
401(k) Plan
The Company and ISS each had 401(k) retirement savings plans covering
substantially all employees. Contributions in the ISS plan were matched at the
discretion of the Company's Board of Directors. The matching contributions
amounted to $37,000, $77,000, and $115,000 for 1993, 1994, and 1995,
respectively. The Company intends to merge its plans in 1996.
Employee Stock Purchase Plan
The Company has a qualified Employee Stock Purchase Plan, which permits eligible
employees to purchase newly issued common stock of the Company up to an
aggregate of 500,000 shares. Under this plan, employees may purchase from the
Company a designated number of shares through payroll deductions at a price per
share equal to 85% of the lesser of the fair market value of the Company's
common stock as of the date of the grant or the date the right to purchase is
exercised.
F-22
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
(8) Concentrations of Credit Risk
The Company maintains excess cash balances in a variety of financial instruments
such as overnight Eurodollar deposits, securities backed by the U.S. government,
municipal/corporate auction preferred stock, municipal bonds, short-term debt
securities, and demand deposit investments in limited-maturity fixed-income
mutual funds. The Company has not experienced any material losses in any of the
instruments it has used for excess cash balances.
To reduce credit risk, the Company performs ongoing credit evaluations of its
customers' financial condition. The Company maintains reserves for potential
credit losses, but historically has not experienced any significant losses
related to individual customers or groups of customers in any geographic area.
The Company's allowance for doubtful accounts was $125,000 and $309,000 as of
December 31, 1994 and 1995, respectively.
(9) Business Segment and Geographic Information
The Company operates primarily in one business segment, comprising the
electronic design automation industry.
The Company's export revenues are all denominated in U.S. dollars, International
revenue, principally to customers in Asia, accounted for approximately 10%, 27%
and 29% of total consolidated revenue in the years ended December 31, 1993, 1994
and 1995, respectively.
In 1995, one key customer accounted for 11% of the Company's revenue. Another
key customer accounted for 13% of the Company's revenue in 1994 and 12% of the
Company's revenue in 1993. A third key customer accounted for 29% of the
Company's revenue in 1993.
(10) Commitments and Contingencies
On December 6, 1995, Cadence Design Systems, Inc. (Cadence) filed an action
against the Company and certain of its officers in the Northern California
United States District Court alleging copyright infringement, unfair
competition, misappropriation of trade secrets, conspiracy, breach of contract,
inducing breach of contract, and false advertising. The essence of the complaint
is that the Company misappropriated and improperly copied source code from
Cadence, and that the Company has competed unfairly by making false statements
concerning Cadence and its products. The action also alleges that the Company
induced certain individual defendants to breach their agreements of employment
and confidentiality with Cadence. In addition to actual and punitive damages,
Cadence seeks to enjoin the sale of certain place and route products and has
filed a motion to obtain a preliminary injunction pending trial of the action.
Avant! filed its opposition to Cadence's motion on June 28, 1996. Cadence filed
a reply to Avant!'s opposition on August 27, 1996. The preliminary injunction
F-23
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1994, and 1995
(Information for the nine months ended September 30, 1995
and 1996 is unaudited)
hearing took place on September 10, 1996. No ruling on the preliminary
injunction motion has been issued as of the date hereof.
On January 16, 1996, Avant! filed a counterclaim alleging antitrust violations,
racketeering, false advertising, defamation, trade libel, unfair competition,
unfair trade practices, negligent and intentional interference with prospective
economic advantage, and intentional interference with contractual relations.
The Santa Clara County District Attorney's office is also investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit,
described above. On December 5, 1995, a search warrant was executed at Avant!'s
Sunnyvale, California, facility to determine whether there was evidence of
criminal conduct. No criminal charges have been filed against Avant!, the
Company's management or its employees, but no assurance can be given that such
charges will not be filed in the future. A criminal complaint, if filed against
the Company, the Company's management or its employees, could result in a loss
of management and other personnel and could have other material adverse effects.
On each of December 15 and 19, 1995, class action filings were made against
Avant! alleging certain securities law violations, including omission and/or
misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely consistent with those outlined in the Cadence
claim.
It is the Company's position that the plaintiffs' claims are without merit. The
Company believes it has sufficient defenses to all the plaintiffs' claims and
intends to defend itself vigorously. If however, Avant! defenses are
unsuccessful, the Company may be enjoined from selling certain place and route
products and may be required to pay damages to Cadence. In such event, Avant!'s
business, operating results, and financial condition would be materially
adversely affected. In particular, Avant!'s place and route products in dispute,
ArcCell-BV and ArcCell XO (which have been replaced by Aquarius-BV and
Aquarius-XO) accounted for approximately one third of total consolidated
revenues for the three-year period ended December 31, 1995. In addition, it is
likely that an adverse judgment against Avant! would result in a steep decline
in the market price of Avant!'s common stock. Although it is reasonably possible
the Company may incur a loss upon conclusion of these claims, an estimate of any
loss or range of loss cannot be made, and the Company believes, based on
information it presently possesses, that the conclusion of these claims will not
have a material adverse effect on the Company's consolidated financial position.
However, there can be no assurance that an adverse judgment, if granted, in any
claim would not have a material adverse effect on the Company's business,
consolidated financial position, or consolidated results of operations.
The Company is subject to other claims that have arisen in the ordinary course
of business. In the opinion of management, all such matters are without merit or
involve amounts which would not have a material adverse effect on the Company's
consolidated financial position if unfavorably resolved.
11. Subsequent Events
On November 27, 1996, the Company issued approximately 1,812,000 shares of its
common stock for all of the outstanding common stock of FrontLine, and assumed
approximately 410,000 warrants and stock options under option plans.
On October 29, 1996, the Company issued approximately 4,471,000 shares of its
common stock for all of the outstanding common stock of Meta, and assumed
approximately 608,000 stock options and subscriptions under option and purchase
plans.
The mergers described above are expected to be accounted for as
pooling-of-interests, and, accordingly, the Company's consolidated financial
statements will be restated for all periods prior to the mergers to include the
results of operations, financial position, and cash flows of FrontLine and Meta.
In connection with the mergers with Meta and FrontLine, the Company expects to
incur direct transaction costs and merger-related integration expenses of
approximately $8,000,000, consisting of transaction fees for investment bankers,
attorneys, accountants, financial printing and shareholder meetings of
approximately $4,400,000 and severance costs, charges for duplicate facilities,
and certain other related costs of approximately $3,600,000. As of September 30,
1996, accrued liabilities included approximately $865,000 of expected future
cash expenditures.
F-24
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(amounts in thousands)
<CAPTION>
Additions Balance
Balance At Charged At
Beginning to End of
of Period Expense Deductions Period
------------ --------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1993 ................. $ 4 $101 $ 0 $105
Year ended December 31, 1994 ................. 105 67 47 125
Year ended December 31, 1995 ................. 125 285 101 309
</TABLE>
F-25
<PAGE>
Exhibit 11.1 Calculations of Income Per Share
<TABLE>
Avant! Corporation and Subsidiaries
Statements Re: Computations of Net Income per Share
(amounts in thousands, except per share data)
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Common shares outstanding 6,469 9,309 16,325 15,846 17,826
(weighted average)
Common stock equivalents
(using the treasury stock method):
Stock Options and Awards 236 362 1,435 1,534 1,997
(weighted average)
Pursuant to Staff Accounting Bulletin No. 83 (A) 496 496 248 331 --
Preferred Stock 4,678 4,678 -- -- --
Shares deemed outstanding to fund shareholder
distribution -- -- -- -- --
------- ------- ------- ------- -------
Total (B) 11,879 14,845 18,008 17,711 19,823
======= ======= ======= ======= =======
Net income $ 1,319 $ 2,279 $ 6,325 $ 6,873 $10,587
======= ======= ======= ======= =======
Net income per common share (C) $ 0.11 $ 0.15 $ 0.35 $ 0.39 $ 0.53
======= ======= ======= ======= =======
<FN>
(A) Treated as if outstanding for all periods presented.
(B) Total of all common stock and equivalents.
(C) Equal to income divided by (B).
</FN>
</TABLE>
F-26
