<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
----------------------------------------------------------
Commission File Number 0-25864
AVANT! CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3133226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
The number of shares outstanding of the registrant's common stock as of November
7, 1996 was 22,904,507.
<PAGE> 2
AVANT! CORPORATION
FORM 10-Q
September 30, 1996
INDEX
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995 1
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
Exhibit Index 15
</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
AVANT! CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,440 $ 23,808
Short-term investments 68,005 46,969
Accounts receivable, net 9,102 7,262
Deferred income taxes 2,790 1,646
Prepaid income taxes 1,488 --
Other 6,700 1,713
-------- --------
Total current assets 97,525 81,398
Equipment, furniture and fixtures, net 6,351 5,217
Capitalized software, net 80 150
Other 13 7
--------- --------
Total assets $ 103,969 $ 86,772
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 78 $ 145
Accounts payable 852 832
Accrued compensation 2,730 2,319
Accrued income taxes -- 553
Other accrued liabilities 3,357 1,842
Deferred revenue 6,567 5,545
--------- --------
Total current liabilities 13,584 11,236
Capital lease obligations, less current portion 3 40
Deferred rent 81 110
Deferred income taxes -- 381
--------- --------
Total liabilities 13,668 11,767
========= ========
Commitments and contingencies
Shareholders' equity:
Common stock, $.0001 par value; 50,000 and 25,000 shares
authorized; 18,428 and 17,747 shares issued and outstanding
at September 30, 1996 and December 31,1995, respectively 19 18
Additional paid-in capital 74,545 68,489
Deferred stock compensation (1,707) (517)
Net unrealized gain (loss) on short-term investments (69) 89
Retained earnings 17,513 6,926
--------- --------
Net shareholders' equity 90,301 75,005
--------- --------
Total liabilities and shareholders' equity $ 103,969 $ 86,772
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software $ 13,728 $ 9,801 $ 39,236 $ 24,703
Services 3,551 1,818 9,587 3,990
-------- -------- -------- --------
Total revenue 17,279 11,619 48,823 28,693
-------- -------- -------- --------
Costs and expenses:
Costs of software 244 106 687 338
Costs of services 1,086 876 3,521 2,066
Selling and marketing 4,371 3,496 12,634 9,485
Research and development 3,373 2,201 9,228 5,578
General and administrative 2,978 904 7,917 2,416
Merger expenses 920 -- 920 --
-------- -------- -------- --------
Total operating expenses 12,972 7,583 34,907 19,883
-------- -------- -------- --------
Income from operations 4,307 4,036 13,916 8,810
Interest income 865 822 2,550 1,623
Interest expense (2) (27) (9) (54)
-------- -------- -------- --------
Income before income taxes 5,170 4,831 16,457 10,379
Provision for income taxes 1,809 1,656 5,870 3,506
-------- -------- -------- --------
Net income $ 3,361 $ 3,175 $ 10,587 $ 6,873
======== ======== ======== ========
Net income per common share $ 0.17 $ 0.16 $ 0.53 $ 0.39
======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding 20,152 20,002 19,823 17,711
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,587 $ 6,873
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,423 1,005
Amortization of capitalized software costs 70 155
Amortization of deferred stock compensation 197 --
Deferred income taxes (1,525) 1,903
Deferred rent (29) --
Changes in operating assets and liabilities:
Accounts receivable, net (1,840) (309)
Other assets (4,993) (266)
Accounts payable 20 184
Accrued compensation 411 835
Prepaid and accrued income taxes (1,006) 539
Other accrued liabilities 1,515 159
Deferred revenue 1,022 1,778
--------- ---------
Net cash provided by operating activities 5,852 12,856
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (129,294) (126,273)
Sales of short-term investments 108,100 92,754
Purchases of equipment, furniture and fixtures (2,557) (2,497)
Capitalized software development costs -- (63)
--------- ---------
Net cash used in investing activities (23,751) (36,079)
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations (104) (190)
Repurchase of common stock -- (2)
Exercise of stock options 3,005 4,188
Issuance of common stock under employee stock purchase plan 630 183
Proceeds from issuance of preferred stock, net -- 130
Proceeds from issuance of common stock, net -- 27,794
--------- ---------
Net cash provided by financing activities 3,531 32,103
--------- ---------
Net increase (decrease) in cash and cash equivalents (14,368) 8,880
Cash and cash equivalents, beginning of period 23,808 5,848
--------- ---------
Cash and cash equivalents, end of period $ 9,440 $ 14,728
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
AVANT! CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of financial position and results of operations have been
made. Operating results for interim periods are not necessarily indicative of
results which may be expected for a full year. The information included in this
Form 10-Q should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the 1995
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K filed with the Securities and Exchange Commission
(SEC) and Form S-4 as declared effective by the SEC on September 30, 1996.
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.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
and common equivalent shares outstanding during each period presented. Fully
diluted and primary income per share are the same for each of the periods
presented. Common stock equivalents consist of stock options and awards (using
the treasury stock method).
3. STATEMENTS OF CASH FLOWS
Income taxes of $8,401,000 and $155,000 were paid during the nine months
ended September 30, 1996 and 1995, respectively. Deferred stock compensation of
$1,387,000 and $588,000 was recognized during the nine months ended September
30, 1996 and 1995, respectively for stock options issued below market value.
Interest of $9,000 and $44,000 was paid during the nine months ended September
30, 1996 and 1995, respectively. An income tax benefit attributable to employee
stock plans of $1,035,000 and $1,100,000 was credited to equity during the nine
months ended September 30, 1996 and 1995, respectively.
4. INITIAL PUBLIC OFFERING OF STOCK
In June 1995, the Company closed its initial public offering of common stock
at $13 per share. The net proceeds of the offering were $27,713,000 after
deducting applicable issuance 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.
5. MERGERS
On November 27, 1995, the Company issued approximately 6,400,000 shares of
its common stock for all of the outstanding common stock of Integrated Silicon
Systems, Inc. (ISS), and assumed approximately 1,500,000 stock options and
subscriptions under various ISS stock 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 stock of Anagram, Inc.
(Anagram), and assumed approximately 260,000 stock options under various Anagram
stock option plans.
4
<PAGE> 7
These mergers have been accounted for as pooling of interests and,
accordingly, the Company's 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 Anagram and ISS.
On August 22, 1996, Avant! entered into a definitive agreement to merge with
Meta-Software Inc. This merger was approved by the shareholders of each company
at their respective Special Meeting of Shareholders on October 29, 1996. The
Company issued approximately 4,471,161 shares of Avant! common stock for all of
the outstanding common stock of Meta-Software Inc. (Meta) and assumed
approximately 608,204 stock options and subscriptions under various Meta stock
option and purchase plans. The merger will be accounted for using the pooling of
interests method of accounting.
On October 9, 1996, Avant! entered into a definitive agreement to merge with
FrontLine Design Automation Inc. (FrontLine). The Company will issue an
aggregate of approximately 2,222,222 shares and options to acquire shares of
Avant! common stock in exchange for all outstanding FrontLine equity interests
in connection with the merger. This merger, which Avant! intends to account for
as a pooling of interests and which is subject to customary closing conditions,
is expected to be completed in the fourth quarter of 1996.
6. LITIGATION
The Company is involved in various litigation as discussed in Item 1 of Part
II of this Form 10-Q. The Company has charged to expenses approximately
$4,500,000 during the nine-month period ended September 30, 1996, net of
expected recoveries from insurance. The receivable for expected recoveries from
insurance is included in other current assets.
5
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion in this Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Quarterly Results" and "Factors That May Impact
Future Operations" as well as those discussed in this section and elsewhere in
this Form 10-Q, and the risks discussed in the "Risk Factors" section included
in the Company's Registration Statement on Form S-1 as declared effective by the
Securities and Exchange Commission on June 6, 1995 (Reg. No. 33-91128), the
Registration Statements on Form S-4 as declared effective by the Securities and
Exchange Commission on October 23, 1995 (Reg. No. 33-96648) and on September 30,
1996 (Reg. No. 333-11659), and other risks detailed from time to time in the
Company's Securities and Exchange Commission reports, including the report on
Form 10-K for the year ended December 31, 1995.
OVERVIEW
Avant! Corporation (the "Company") resulted from the merger of ArcSys, Inc.
(ArcSys) and Integrated Silicon Systems, Inc. (ISS) on November 27, 1995. Also,
on September 27, 1996, the Company issued approximately 2,154,000 shares of its
common stock for all of the outstanding common stock of Anagram, Inc. (Anagram)
and assumed approximately 260,000 stock options under various Anagram stock
option plans. Results and discussion for all periods relate to the Company,
unless otherwise indicated. These mergers have been accounted for as pooling of
interests, and accordingly, the Company's 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 Anagram and ISS.
The Company develops, markets, and supports software products that assist
design engineers in the physical layout, design, verification, simulation, and
timing analysis of advanced integrated circuits (ICs). The Company's strategy is
to focus on productivity enhancing software for the integrated circuit
computer-aided design (IC CAD) segment of the electronic design automation (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 the Company's revenue to-date has been
derived from the licensing and support of Aquarius, Hercules and ADM.
On August 22, 1996, Avant! entered into a definitive agreement to merge
with Meta-Software, Inc. This merger was approved by the shareholders of each
company at their respective Special Meeting of Shareholders on October 29,
1996.
On October 9, 1996, Avant! entered into a definitive agreement to merge
with Frontline Design Automation Inc.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for certain
items in the Company's Consolidated Financial Statements (after giving effect to
rounding) for the periods indicated:
6
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue ................. 100% 100% 100% 100%
Software .................... 79 84 80 86
Services .................... 21 16 20 14
Costs and expenses:
Costs of software ........... 1 1 1 1
Costs of services ........... 6 7 7 7
Selling and marketing ....... 25 30 26 33
Research and development .... 20 19 19 20
General and administrative .. 17 8 16 8
Merger expenses ............. 6 -- 2 --
--- --- --- ---
Total operating expenses . 75 65 71 69
--- --- --- ---
Income from operations ... 25 35 29 31
Other income, net ............. 5 6 5 5
--- --- --- ---
Income before income taxes 30 41 34 36
Provision for income taxes .... 11 14 12 12
--- --- --- ---
Net income ............... 19% 27% 22% 24%
=== === === ===
</TABLE>
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Revenue. Revenue consists primarily of fees for licenses of the
Company'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 the Company receives advance payment 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. 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.
The Company's total revenue 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 the Company's total revenue attributable to software licenses
decreased from 86% in the first nine months of 1995 to 80% in the first nine
months of 1996. The Company's total revenue increased 49% from $11,619,000 in
the third quarter of 1995 to $17,279,000 in the third quarter of 1996. The
percentage of the Company's total revenue attributable to software licenses
decreased from 84% in the third quarter of 1995 to 79% in the third quarter of
1996. This decrease is primarily due to the increased user base and resulting
increase in maintenance revenue. Increases in total revenue were due primarily
to increased license revenue from the Company's place and route, physical
verification and simulation and timing analysis software. To date, price
increases have not been a material factor in the Company's revenue growth.
Software revenue increased 59% from $24,703,000 in the first nine months of 1995
to $39,236,000 in the first nine months of 1996, and 40% from $9,801,000 in the
third quarter of 1995 to $13,728,000 in the third quarter of 1996. Revenue from
services increased 140% from $3,990,000 in the first nine months of 1995 to
$9,587,000 in the first nine months of 1996, and 95% from $1,818,000 in the
third quarter of 1995 to $3,551,000 in the third quarter of 1996, reflecting the
growing base of installed systems.
7
<PAGE> 10
As discussed in the notes to the consolidated financial statements and Item
1 of Part II, the Company is involved in litigation with Cadence Design Systems,
Inc., and other related actions (collectively "the Cadence litigation"). As a
result of the Cadence litigation, some customers may cancel or postpone orders
of the Company's products. As of September 30, 1996, there had not been a
material financial impact on the Company's revenues as a result of the Cadence
litigation; however significant order delays or cancellations in the future may
impact the Company's business, financial condition and results of operations.
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
$338,000 in the first nine months of 1995 to $687,000 in the first nine months
of 1996, and from $106,000 in the third quarter of 1995 to $244,000 in the third
quarter of 1996. Costs of software included amortization of capitalized software
amounting to $155,000 and $70,000 in the first nine months of 1995 and 1996,
respectively, and $42,000 and $22,000 in the third quarter 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 $2,066,000 in
the first nine months of 1995 to $3,521,000 in the first nine months of 1996,
and from $876,000 in the third quarter of 1995 to $1,086,000 in the third
quarter of 1996. The increase in costs of services was due primarily to an
increase in personnel and expenses necessary to support the Company's growing
base of installed software. Customer service personnel increased from 30 persons
at September 30, 1995 to 46 persons at September 30, 1996. The reduction in
costs of services revenue as a percentage of services revenue from 48% in the
three months ended September 30, 1995 to 31% in the three months ended September
30, 1996 reflects improved utilization of the Company's customer support
resources in servicing its increasing 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,
benchmarking personnel and field application engineers. Selling and marketing
expenses also include costs of advertising, public relations, conferences and
trade shows. Selling and marketing expenses increased from $9,485,000 in the
first nine months of 1995 to $12,634,000 in the first nine months of 1996, and
from $3,496,000 in the third quarter of 1995 to $4,371,000 in the third quarter
of 1996. The increases reflect increases in sales commissions associated with
increased sales volumes. As a percentage of total revenue, selling and marketing
expenses decreased from 33% in the first nine months of 1995 to 26% in the first
nine months of 1996, and from 30% in the third quarter of 1995 to 25% in the
third quarter of 1996. These decreases resulted primarily from economies of
scale and lower commission costs relating to certain international sales. Sales
and marketing personnel increased from 56 persons at September 30, 1995 to 71
persons at September 30, 1996. The Company expects to hire additional selling
and marketing personnel and to increase promotion and advertising expenditures
for the remainder of 1996.
Research and Development Expenses. Research and development expenses
include all costs associated with the development of new products and
significant enhancement of existing products. Research and development expenses
increased from $5,578,000 in the first nine months of 1995 to $9,228,000 in the
first nine months of 1996, and from $2,201,000 in the third quarter of 1995 to
$3,373,000 in the third quarter of 1996. Research and development expenses
represented 20% and 19% of total revenue in the first nine months of 1995 and
1996, respectively, and 19% and 20% of total revenue in the third quarter of
1995 and 1996, respectively. The increases in research and development expenses
resulted from increased personnel-related costs associated with the development
of new products and enhancement of existing products. The Company anticipates
that it will continue to devote substantial resources to product research and
development.
8
<PAGE> 11
Software development costs are accounted for in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 86, under which the Company is required to capitalize
software development costs once technological feasibility has been established.
The Company amortizes such amounts over three years. The amount of software
development costs capitalized in the first nine months of 1995 was $63,000 and
none in the first nine months of 1996, representing 1% and 0% of total research
and development costs, respectively. No software development costs were
capitalized in the third quarter of 1995 or 1996. During 1996, capitalized
software costs have not been material as products have been made available for
general release upon achievement of technological feasibility.
General and Administrative Expenses. General and administrative expenses
increased from $2,416,000 in the first nine months of 1995 to $7,917,000 in the
first nine months of 1996, and from $904,000 in the third quarter of 1995 to
$2,978,000 in the third quarter of 1996. As a percentage of total revenue,
general and administrative expenses increased from 8% in the first nine months
of 1995 to 16% in the first nine months of 1996, and from 8% in the third
quarter of 1995 to 17% in the third quarter of 1996. These increases were
primarily due to legal and other costs incurred in the first nine months of 1996
relating to the Cadence litigation. The Company has charged to expenses
approximately $4,400,000 during the nine-month period ended September 30, 1996,
net of expected recoveries from insurance related to the Cadence litigation. The
receivable for expected recoveries from insurance is included in other current
assets. The Company expects these legal expenditures to continue at least
through the remainder of 1996 and into 1997.
Merger Expenses. In connection with the merger with Anagram, costs of
$920,000 were accrued. 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. Avant!
expects to incur costs of approximately $5,700,000 and $500,000 in the fourth
quarter of 1996 related to the mergers with Meta and FrontLine, respectively.
Income from Operations. The Company had operating income of $8,810,000 and
$13,916,000 in the first nine months of 1995 and 1996, respectively, and
$4,036,000 and $4,307,000 in the third quarter of 1995 and 1996, respectively.
These increases in operating income are attributable to revenue growth net of
increased expenses necessary to support the Company's growth. Operating income
represented 31% and 29% of total revenue in the first nine months of 1995 and
1996, respectively, and 35% and 25% in the third quarters of 1995 and 1996,
respectively. The decrease in the third quarter of 1996 compared to the third
quarter of 1995 is due partially to expenses related to the merger with Anagram.
Interest Income and Expense. Interest income was $1,623,000 and $2,550,000
in the first nine months of 1995 and 1996, respectively, and $822,000 and
$865,000 in the third quarter of 1995 and 1996, respectively. Interest income
increased in 1996 over 1995 due to larger cash balances resulting primarily from
the proceeds of the Company's initial public offering which was completed in
June 1995. Interest expense represents interest paid on capital leases.
Income Taxes. The Company accounts for income taxes in accordance with SFAS
No. 109. The provision for income taxes was $3,506,000 and $5,870,000 in the
first nine months of 1995 and 1996, respectively, and $1,656,000 and $1,809,000
in the third quarter of 1995 and 1996, respectively. The provision for income
taxes as a percentage of pre-tax income was 34% for the first nine months and
third quarter of 1995 and 36% and 35% for the first nine months and third
quarter of 1996, respectively.
9
<PAGE> 12
QUARTERLY RESULTS
The quarterly operating results of the Company may vary substantially from
period to period depending on factors such as the outcome of outstanding
litigation, increased competition, the size, timing and structure of significant
licenses, the timing of revenue recognition under its time-based license
agreements, the timing of new or enhanced product announcements, introductions,
or delays in the introductions, of new or enhanced versions of the Company's
products, changes in pricing policies by the Company or its competitors, market
acceptance of new and enhanced versions of the Company's products, the
cancellation of time-based licenses or maintenance agreements, the mix of direct
and indirect sales, changes in operating expenses, changes in the Company's
strategy, seasonal factors, personnel changes, foreign currency exchange rates
and general economic factors. Due to the foregoing factors, and particularly the
variability of the size, timing and structure of significant licenses, quarterly
revenue and operating results are difficult to forecast. In particular, Avant!
has adopted a flexible pricing strategy pursuant to which Avant! offers both
perpetual and time-based software licenses to customers, depending on customer
requirements and financial constraints. Because each time-based license may have
a different structure and could be subject to cancellation, future revenue is
unpredictable, In addition, Meta's quarterly operating results have in the past
fluctuated as a result of seasonality of customer buying patterns, with revenues
for the first quarter of a year often lower than those for the last quarter of
the preceding year, and a significant portion of revenue in a quarter typically
is received in the last few weeks or days of that quarter. Avant!'s and Meta's
expense levels are based, in part, on expectations as to future revenue levels.
Accordingly, net income, if any, may be disproportionately affected by a
reduction in revenue because only a small portion of Avant!'s and Meta's
expenses fluctuate with revenue. If revenue levels are below expectations, the
Company's business, operating results and financial condition are likely to be
materially adversely affected. Such shortfalls in the Company's revenue or
operating results from levels expected by public market analysts and investors
could have an immediate and significant material adverse effect on the market
price of Avant!'s common stock. Additionally, the Company may not learn of such
revenue shortfalls or earnings shortfalls or other failures to meet market
expectations for results of operations until late in a fiscal quarter, which
could result in an even more immediate and material adverse effect on the
trading price of Avant! common stock. In such event, the market price of
Avant!'s common stock would be materially adversely affected. Due to the
foregoing, the Company believes that period to period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $12,856,000 and $5,852,000 in the first
nine months of 1995 and 1996, respectively. The Company used $36,079,000 and
$23,751,000 of net cash in the first nine months of 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, which
were $33,519,000 and $21,194,000 in the first nine months of 1995 and 1996,
respectively. The 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 was also used to acquire equipment, furniture and fixtures,
primarily computer workstations and file servers for use by the Company's
employees. The Company expects that purchases of equipment will likely increase
as the Company's employee base grows. Net cash provided by financing activities
was $32,103,000 and $3,531,000 in the first nine months of 1995 and 1996,
respectively. Cash provided by financing activities primarily results from the
sale of common stock.
10
<PAGE> 13
The Company's stated payment terms generally are net 30 days. However, in
the Company'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. The Company periodically
increases its allowance for doubtful accounts to reflect increased sales levels
and collection experience. The Company believes that its allowance for doubtful
accounts is adequate.
As of September 30, 1996, the Company had $77,445,000 of cash and
short-term investments and $83,941,000 of working capital. As of September 30,
1996, the Company 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 the Company had no long-term commitments other than operating
lease obligations.
Based on its operating plan, and absent any adverse judgments in the
pending Cadence litigation, the Company believes that it has available cash and
short-term investments sufficient to fund the Company's operations for at least
the next twelve months.
FACTORS THAT MAY AFFECT FUTURE OPERATIONS
The Company'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 the Company'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
has 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 the
Company will be able to compete successfully against current and future
competitors, or that market conditions faced by the Company will not adversely
affect its operating results and financial condition.
The Company'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 the Company will continue
to be successful in developing technologically acceptable products on a timely
basis. The Company's ability to develop and improve products is dependent on key
individuals for their technical and other contributions. There can be no
assurance that the Company can continue to attract and retain these key
personnel. Loss of certain key personnel could result in loss of the Company's
market advantage and could adversely affect its business, operating results and
financial condition.
The Cadence litigation may result in canceled or postponed customer orders
and increased future expenditures. Since only a small portion of the Company's
expenses varies with revenue, canceled orders or significant expenses related to
the Cadence litigation may have an adverse effect on the Company's business,
operating results and financial condition.
The Company has adopted SFAS 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.
The integration of Anagram's and Meta's business and personnel presents
difficult challenges for Avant!'s management. All of the companies merged with
the expectation that the mergers would result in synergies for the combined
company. The combined company, however, will be more complex and diverse than
either Avant! or Anagram or Meta individually, and the combination and
continued operation of their distinct business operations will be difficult.
While management believes that the contemporaneous combination of Avant!,
Anagram and Meta can be effected in a manner that will realize the value of the
combined company, the management group of the combined company has limited
experience in combinations of this complexity or size. Accordingly, there can
be no assurance that the process of effecting these business combinations can
be effectively managed to realize the synergies anticipated to result
therefrom.
11
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 formerly were 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 the
Company's opposition on August 27, 1996. The preliminary injunction hearing took
place on September 10, 1996. No ruling on the preliminary injunction 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 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, but no assurance can be given that such charges will not be filed in
the future. A criminal complaint, if filed, 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 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.
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!'s 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 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! common stock. Although 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,
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.
In the opinion of management, based on information it presently possesses,
the conclusion of these claims will not have a material adverse effect on the
Company's consolidated financial position.
12
<PAGE> 15
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.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q
are listed on the Exhibit Index immediately preceding such
exhibits and are incorporated herein by reference.
(b) Reports on Form 8-K
None
13
<PAGE> 16
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 thereunto duly authorized.
Avant! Corporation
__________________
(Registrant)
November 14, 1996 /s/ GERALD C. HSU
_________________ ______________________
Gerald C. Hsu
President and
Chief Executive Officer
November 14, 1996 /s/ JOHN P. HUYETT
_________________ ______________________
John P. Huyett
Vice President of Financial &
Administrative Services, Chief
Financial Officer, Treasurer
and Principal Accounting
Officer
14
<PAGE> 17
EXHIBIT INDEX
Sequential
Number Description Page Number
- ------ ----------- -----------
Exhibit 11.1 Computations of Income Per Share 16
Exhibit 27.1 Financial Data Schedules 17
15
<PAGE> 1
Exhibit 11.1 Computations of Income Per Share
AVANT! CORPORATION
STATEMENTS RE: COMPUTATIONS OF INCOME PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 3,361 $ 3,175 $10,587 $ 6,873
======= ======= ======= =======
Common shares outstanding
(weighted average) 18,376 17,807 17,826 15,846
Common stock equivalents
(using the treasury stock method):
Stock Options and Awards
(weighted average) 1,776 2,195 1,997 1,865
------- ------- ------- -------
Total 20,152 20,002 19,823 17,711
======= ======= ======= =======
Net income per common share $ 0.17 $ 0.16 $ 0.53 $ 0.39
======= ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FILED AS PART OF THIS
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS ON THIS FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,440
<SECURITIES> 68,005
<RECEIVABLES> 9,450
<ALLOWANCES> 348
<INVENTORY> 0
<CURRENT-ASSETS> 97,525
<PP&E> 10,045
<DEPRECIATION> 3,694
<TOTAL-ASSETS> 103,969
<CURRENT-LIABILITIES> 13,584
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 90,282
<TOTAL-LIABILITY-AND-EQUITY> 103,969
<SALES> 39,236
<TOTAL-REVENUES> 48,823
<CGS> 687
<TOTAL-COSTS> 4,208
<OTHER-EXPENSES> 21,862
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 16,457
<INCOME-TAX> 5,870
<INCOME-CONTINUING> 10,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,587
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
