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 June 30, 1997
[ ] 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.)
46871 Bayside Parkway
Fremont, California 94538
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (510) 413-8000
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 August
1, 1997 was 25,836,998.
<PAGE>
AVANT! CORPORATION
FORM 10-Q
June 30, 1997
INDEX
PART 1. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 1
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 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 11
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
Exhibit Index 15
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AVANT! CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 91,863 $ 33,067
Short-term investments 25,684 84,256
Accounts receivable, net 12,925 13,321
Deferred income taxes 4,363 6,450
Prepaid income taxes 2,198 1,254
Other assets 10,892 7,892
--------- ---------
Total current assets 147,925 146,240
Equipment, furniture and fixtures, net 14,977 8,929
Capitalized software, net 30 62
Other assets 2,662 872
--------- ---------
Total assets $ 165,594 $ 156,103
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital lease obligations $ 16 $ 52
Accounts payable 828 1,716
Accrued compensation 5,350 5,867
Other accrued liabilities 7,288 8,162
Current portion of technology acquisition payable 406 642
Deferred revenue 6,138 13,824
--------- ---------
Total current liabilities 20,026 30,263
Deferred rent 52 71
Other noncurrent liabilities -- 43
Technology acquisition payable, less current portion 497 903
--------- ---------
Total liabilities 20,575 31,280
--------- ---------
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred stock, $.000l par value;
5,000 shares authorized; no shares issued and
outstanding in 1997 and 1996 -- --
Common stock, $.0001 par value; 75,000 and 50,000 shares
authorized; 25,730 and 24,952 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 3 3
Additional paid-in capital 115,827 110,583
Deferred compensation (2,215) (2,820)
Net unrealized loss on short-term investments (144) (75)
Retained earnings 31,548 17,132
--------- ---------
Total shareholders' equity 145,019 124,823
--------- ---------
Total liabilities and shareholders' equity $ 165,594 $ 156,103
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenue:
Software $ 25,370 $ 19,807 $ 49,368 $ 38,410
Services 9,134 6,011 16,329 10,955
-------- -------- -------- --------
Total revenue 34,504 25,818 65,697 49,365
-------- -------- -------- --------
Costs and expenses:
Costs of software 488 509 936 1,124
Costs of services 2,823 1,750 5,841 3,548
Selling and marketing 10,679 7,641 18,901 14,508
Research and development 6,507 4,814 12,472 9,595
General and administrative 3,519 3,852 7,325 6,587
-------- -------- -------- --------
Total operating expenses 24,016 18,566 45,475 35,362
-------- -------- -------- --------
Income from operations 10,488 7,252 20,222 14,003
Interest income 1,459 1,135 2,528 2,043
Other expense (85) -- (225) --
-------- -------- -------- --------
Income before income taxes 11,862 8,387 22,525 16,046
Provision for income taxes 4,270 3,019 8,109 5,764
-------- -------- -------- --------
Net income $ 7,592 $ 5,368 $ 14,416 $ 10,282
======== ======== ======== ========
Net income per common share $ 0.28 $ 0.20 $ 0.53 $ 0.39
======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding 26,831 26,618 27,353 26,369
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
AVANT! CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,416 $ 10,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,132 1,588
Amortization of capitalized software costs 32 48
Amortization of deferred compensation 605 81
Deferred income taxes 2,087 (954)
Deferred rent (19) (19)
Stock compensation benefit (146) (43)
Changes in operating assets and liabilities:
Accounts receivable, net 396 (806)
Prepaid income taxes and other assets (5,116) (7,721)
Accounts payable (888) 207
Accrued compensation (517) 344
Accrued income taxes -- 593
Other accrued liabilities (917) 650
Deferred revenue (7,686) 3,695
--------- ---------
Net cash provided by operating activities 4,379 7,945
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (49,676) (124,587)
Maturities and sales of short-term investments 108,179 83,576
Purchases of equipment, furniture and fixtures (8,180) (2,828)
--------- ---------
Net cash provided by (used in) investing activities 50,323 (43,839)
--------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations (36) (68)
Payments on technology acquisition payable (642) (811)
Exercise of stock options 2,942 5,044
Shareholder distribution -- (1,800)
Issuance of common stock under employee stock purchase plan 1,830 --
--------- ---------
Net cash provided by financing activities 4,094 2,365
--------- ---------
Net increase (decrease) in cash and cash equivalents 58,796 (33,529)
Cash and cash equivalents, beginning of period 33,067 50,010
--------- ---------
Cash and cash equivalents, end of period $ 91,863 $ 16,481
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
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. The consolidated financial statements
have been restated to reflect the effect of the mergers with Anagram, Inc.
(Anagram), Meta-Software Inc. (Meta) and FrontLine Design Automation, Inc.
(FrontLine) discussed in Note 4. 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 1996 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-3 as declared effective by the SEC on January 31, 1997.
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. Certain financial statement items
have been reclassified to conform to the current period's format.
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 $5,973,000 and $6,230,000 were paid for the six months ended
June 30, 1997 and 1996, respectively. Interest of $112,000 and $75,000 was paid
for the six months ended June 30, 1997 and 1996, respectively. An income tax
benefit attributable to employee stock plans of $618,000 and $431,000 was
credited to equity for the six months ended June 31, 1997 and 1996,
respectively, which is included in the change in accrued income taxes and change
in prepaid income taxes and other assets. Noncash financing activities includes
$538,000 of vested stock appreciation rights liability converted to capital upon
exercise of stock options for the six months ended June 30, 1996.
4. MERGERS
On July 31, 1997, Avant! entered into a definitive agreement to acquire
Compass Design Automation, Inc. (Compass), a subsidiary of VLSI Technology, Inc.
The agreement provides that Avant! will issue cash and common stock totaling
approximately $44 million in exchange for all outstanding Compass equity. This
acquisition which Avant! intends to account for using the purchase method of
accounting, is subject to regulatory and other customary closing conditions and
is expected to close in the third quarter of 1997. As part of the acquisition,
Avant! expects a significant charge due to in process research and development
in the third quarter of 1997.
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
Avant! 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 various option
plans.
The FrontLine, Meta and Anagram mergers described above have been accounted
for as poolings of interests and, accordingly, the Company's consolidated
financial statements have been restated for all periods prior to the mergers to
4
<PAGE>
include the results of operations, financial position and cash flows of
FrontLine, Meta and Anagram.
5. LITIGATION
The Company is involved in various litigation matters as discussed in Item 1
of Part 2 of this Form 10-Q. On April 11, 1997, a criminal complaint was filed
against, among others, the Company and six of its officers and employees. The
Company has charged to expenses approximately $2,964,000 and $2,450,000 in
litigation expenses during the six months ended June 30, 1997 and 1996,
respectively.
6. RECENT PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128
requires the presentation of basic earnings per share ("EPS") and, for companies
with complex capital structures, diluted EPS. SFAS No. 128 is effective for
annual and interim periods ending after December 15, 1997. The Company expects
that basic EPS will be higher than earnings per share as presented in the
accompanying consolidated financial statements and the diluted EPS will not
differ materially from earnings per share as presented in the accompanying
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does not,
however, require a specific format for the statement, but requires the Company
to display an amount representing total comprehensive income for the period in
that financial statement. The Company is in the process of determining its
preferred format. This Statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial statements for
periods beginning after December 31, 1997. The Company does not believe it has
any separately reportable business segments.
5
<PAGE>
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), the Registration Statement on Form S-3 as declared
effective by the SEC on January 31, 1997, 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, 1996.
Overview
Avant! Corporation, (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 design automation (ICDA) segment of the electronic design
automation (EDA) market.
Effective September 27, 1996, October 29, 1996, and November 27, 1996, the
Company merged with Anagram, Meta, and FrontLine, respectively. The mergers have
been accounted for by the pooling-of-interests method, and accordingly, the
Company's consolidated financial statements give retroactive effect for all
periods presented to include the results of operations, financial position, and
cash flows of Anagram, Meta, and FrontLine.
The Company began shipping Hercules (formerly VeriCheck), its hierarchical
physical verification software, in the third quarter of 1992, and, Aquarius
(formerly ArcCell), its cell-based place and route software product, in 1993.
Anagram was founded in March 1993, and began shipping Star-Sim, 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 Star-Hspice. FrontLine was founded in 1993.
Substantially all of the Company's revenue for the six months ended June 30,
1997 and 1996 was derived from the licensing and support of Aquarius, Hercules,
Star-Sim and Star-Hspice.
6
<PAGE>
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:
Three Months Ended Six Months Ended
June 30, June 30,
-------- ---- ---
1997 1996 1997 1996
---- ---- ---- ----
Percentage of total revenue
Software ............................. 74 77 75 78
Services ............................. 26 23 25 22
--- --- --- ---
Total revenue .................... 100% 100% 100% 100%
Costs and expenses:
Costs of software .................... 2 2 1 2
Costs of services .................... 8 7 9 7
Selling and marketing ................ 31 29 29 29
Research and development ............. 19 19 19 20
General and administrative ........... 10 15 11 13
--- --- --- ---
Total operating expenses .......... 70 72 69 71
--- --- --- ---
Income from operations ............ 30 28 31 29
Interest income ........................ 4 4 3 4
Other expense .......................... -- -- -- --
--- --- --- ---
Income before income taxes ........ 34 32 34 33
Provision for income taxes ............. 12 11 12 12
--- --- --- ---
Net income ........................ 22% 21% 22% 21%
=== === === ===
Comparison of Three and Six Months Ended June 30, 1997 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 33% to $65,697,000 in the first six
months of 1997 from $49,365,000 in the first six months of 1996. The percentage
of the Company's total revenue attributable to software licenses decreased to
75% in the first six months of 1997 from 78% in the first six months of 1996.
The Company's total revenue increased 34% to $34,504,000 in the second quarter
of 1997 from $25,818,000 in the second quarter of 1996. The percentage of the
Company's total revenue attributable to software licenses decreased to 74% in
the second quarter of 1997 from 77% in the second quarter of 1996. The decrease
in software license as a percentage of total revenue, in both the first six
months and second quarter, is primarily due to the increased user base and
resulting increase in service and maintenance revenue. Increases in total
revenue were due primarily to increased license revenue from the Company's place
and route, physical verification and analysis software. To date, price increases
have not been a material factor in the Company's revenue growth. Software
revenue increased 29% to $49,368,000 in the first six months of 1997 from
$38,410,000 in the first six months of 1996. Revenue from services increased 49%
to $16,329,000 in the first six months of 1997 from $10,955,000 in the first six
months of 1996, reflecting the growing base of installed systems.
7
<PAGE>
As discussed in the notes to the consolidated financial statements and Item
1 of Part 2, 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 June 30, 1997, 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 decreased to
$936,000 in the first six months of 1997 from $1,124,000 in the first six months
of 1996, and decreased to $488,000 in the second quarter of 1997 from $509,000
in the second quarter of 1996. Costs of software as a percentage of software
revenue decreased to 2% in the first six months of 1997 from 3% in the first six
months of 1996, and decreased to 2% in the second quarter of 1997 from 3% in the
second quarter of 1996. Costs of software decreased, in both the first six
months and second quarter because costs in the first quarter of 1996 were
unusually high due to a major product launch.
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, make routine changes and provide
additional features. 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 to
$5,841,000 in the first six months of 1997 from $3,548,000 in the first six
months of 1996, and increased to $2,823,000 in the second quarter of 1997 from
$1,750,000 in the second quarter of 1996. Costs of services as a percentage of
services revenue increased to 36% in the first six months of 1997 from 32% in
the first six months of 1996, and to 31% in the second quarter of 1997 and from
29% in the second quarter of 1996. The increases in costs of services, in both
the first six months and second quarter, were due primarily to an increase in
personnel and expenses necessary to support the Company's growing base of
installed software and customers.
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 to $18,901,000 in the
first six months of 1997 from $14,508,000 in the first six months of 1996, and
to $10,679,000 in the second quarter of 1997 from $7,641,000 in the second
quarter of 1996. As a percentage of total revenue, selling and marketing
expenses were constant at 29% in the first six months of both 1997 and 1996, and
increased to 31% in the second quarter of 1997 from 29% in the second quarter of
1996. The increases, in both the first six months and second quarter, reflect
significant increases in advertising, sales personnel and new sales offices.
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 to $12,472,000 in the first six months of 1997 from $9,595,000 in the
first six months of 1996, and to $6,507,000 in the second quarter of 1997 from
$4,814,000 in the second quarter of 1996. The increases, in both the first six
months and second quarter, resulted from increased personnel-related costs
associated with the development of new products and enhancement of existing
products. Research and development expenses represented 19% of total revenue for
the first six months of 1997 and 20% for the first six months of 1996, and 19%
for the second quarter of both 1997 and 1996. No software development costs were
capitalized in the first six months of 1997 and 1996. The Company currently does
not capitalize software development costs, primarily because achievement of
technological feasibility is typically concurrent with general release.
General and Administrative Expenses. General and administrative expenses
increased to $7,325,000 in the first six months of 1997 from $6,587,000 in the
first six months of 1996, and decreased to $3,519,000 in the second quarter of
1997 from $3,852,000 in the second quarter of 1996. The increase for the six
months was primarily due to increases in legal and personnel costs. The decrease
in the second quarter was due to economies of scale resulting from the 1996
mergers. As a percentage of total revenue, general and administrative expenses
represented 11% for the first six months of 1997 and 13% for the first six
months of 1996, and 10% and 15% for the second quarter of 1997 and 1996,
respectively. The Company expects to incur significant legal expenses in the
future in connection with the Cadence litigation.
Income from Operations. The Company had operating income of $20,222,000 in
the first six months of 1997 and $14,003,000 in the first six months of 1996.
The Company had operating income of $10,488,000 in the second quarter of 1997
and $7,252,000 in the second quarter of 1996. Operating income represented 31%
of total revenue in the first six months of 1997 and 29% in the first six months
of 1996. Operating income represented 30% of total revenue in the second quarter
of 1997 and 28% in the second quarter of 1996. The increase in operating income
8
<PAGE>
is attributable to revenue growth net of increased expenses necessary to support
the Company's growth.
Interest Income. Interest income was $2,528,000 and $2,043,000 for the
first six months of 1997 and 1996, respectively. Interest income was $1,459,000
and $1,135,000 for the second quarter of 1997 and 1996, respectively.
Other income (expense). Other expense of $225,000 in the first six months
of 1997 was primarily due to the Company's pro-rata share of losses from the
Company's joint venture distributor in Korea.
Income Taxes. The Company accounts for income taxes in accordance with SFAS
No. 109. The provision for income taxes was $8,109,000 and $5,764,000 in the
first six months of 1997 and 1996, respectively. The provision for income taxes
was $4,270,000 and $3,019,000 for the second quarter of 1997 and 1996,
respectively. The provision for income taxes as a percentage of pre-tax income
was 36% for all periods presented.
Quarterly Results
The Company's quarterly results have varied in the past and may be subject
to fluctuations resulting from a variety of factors, including the outcome of
outstanding litigation, purchasing patterns of customers, the completion of
product evaluations by customers, the timing of product enhancements and product
introductions by the Company and its competitors and the timing of significant
orders. The customer evaluation process for the Company's products is lengthy,
and the timing and outcome of such evaluations have affected the Company's
historical quarterly performance and may impact future quarterly results. A
substantial portion of the Company's revenue in each quarter results from orders
received in the same quarter. The Company's expense levels are based, in part,
on its expectations as to future revenue. The Company continues to expand and
increase its operating expenses in order to generate and support future revenue.
If revenue levels are below expectations, operating results are likely to be
disproportionately affected because only a small portion of the Company's
expenses varies with its revenue. As a result, the Company believes that period
to period comparison of financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenues or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock. Additionally, the Company may not learn of
such shortfalls until late in a fiscal quarter, which could result in an even
more immediate and adverse effect on the trading price of the Company's common
stock.
Liquidity and Capital Resources
Net cash provided by operations was $4,379,000 and $7,945,000 in the first
six months of 1997 and 1996, respectively. The Company's investing activities
provided $50,323,000 and used $43,839,000 of net cash in the first six months of
1997 and 1996, respectively. Net cash provided by, used by, investing activities
relates primarily to net purchases and maturities of short-term
"available-for-sale" securities, which was $58,503,000 in the first six months
of 1997 and $41,011,000 in the first six months of 1996. 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, leasehold improvements due to the new headquarter facilities,
furniture and fixtures, including 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 $4,094,000 and $2,365,000 in the first six months of
1997 and 1996, respectively. The financing activities for the first six months
of 1997 and 1996 were primarily due to the exercise of stock options and
issuance of common stock under the employee stock purchase plan.
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 June 30, 1997, the Company had $117,547,000 of cash and short-term
investments and $127,899,000 of working capital. As of June 30, 1997, the
Company had $20,026,000 in current liabilities, including $6,138,000 of deferred
revenue. The increase in other current assets to $10,892,000 as of June 30, 1997
from $7,892,000 as of December 31, 1996 was primarily due to deposits for the
Company's new headquarter facilities in Fremont, California. As of June 30,
1997, there was no bank indebtedness outstanding and the Company had no
long-term commitments other than the technology acquisition payable and
operating and capital lease obligations. In the third quarter of 1997, the
9
<PAGE>
Company expects to pay $22 million in cash for the Compass purchase.
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
On December 6, 1995, 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. In addition to actual and punitive damages, which were not
quantified by Cadence, Cadence seeks to enjoin the sale of certain place and
route products. On March 18, 1997, the Northern California United States
District Court denied Cadence's motion to obtain a preliminary injunction that
would have prohibited the production and sale of Avant!'s ArcCell, ArcCell XO,
Aquarius XO and Aquarius XO 2.0 products or any other product that Avant! is
currently selling. Cadence has appealed the order denying a preliminary
injunction. The appeal was argued on August 12, 1997. No decision has been
issued. The matter is currently awaiting trial, pending further pretrial
matters. A trial date has not been set. 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 is also investigating the
allegations of misappropriation of trade secrets set forth in Cadence's lawsuit
and filed a criminal complaint against the Company and six employees on April
11, 1997. The Company and the individuals have pleaded not guilty and are
awaiting further proceedings. The criminal complaint may result in canceled or
postponed customer orders, increased future expenditures, loss of certain key
employees and could have other material adverse effects on the Company.
On July 25, 1997, a federal judge stayed the civil action brought against
the Company and two of its employees by Cadence Design Systems, Inc., pending
completion of the criminal proceedings, except for certain documentary and
third-party discovery. Avant! posted a $5 million bond pending the resumption of
the civil action.
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 worldwide growth of the semiconductor
industry. There can be no assurance that this 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
computer industry. 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 successfully develop 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 operating results and financial
condition.
The American Institute of Certified Public Accountants approved for exposure
a draft Statement of Position (Exposure Draft) that would supersede SOP 91-1,
Software Revenue Recognition. The adoption of the provisions of the Exposure
Draft is not expected to have a material effect on the Company's consolidated
results of operations.
10
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
On December 6, 1995, 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 allegedly misappropriated and improperly copied
source code for certain important functions of Avant! place and route products
from Cadence, and that the Company has allegedly 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, which were not quantified by Cadence, Cadence seeks to
enjoin the sale of certain place and route products. Cadence has appealed the
order denying a preliminary injunction. The appeal was argued on August 12,
1997. No decision has been issued.
On March 18, 1997, the Northern California United States District Court
denied Cadence's motion to obtain a preliminary injunction that would have
prohibited the production and sale of Avant!'s ArcCell, ArcCell XO, Aquarius XO
and Aquarius XO 2.0 products or any other product that Avant! is currently
selling. The matter is currently awaiting trial, pending further pretrial
matters. A trial date has not yet been set.
On July 25, 1997, a federal judge stayed the civil action brought against
the Company and two of its employees by Cadence Design Systems, Inc., pending
completion of the criminal proceedings, except for certain documentary and
third-party discovery. Avant! posted a $5 million bond pending the resumption of
the civil action.
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. Although Avant!'s counterclaim seeks unquantified damages according
to proof, Avant! specifically alleges that it has suffered losses in excess of
$500 million. The alleged losses are due largely to the decline in Avant!'s
stock market value caused by Cadence's misconduct.
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. On April 11, 1997, a criminal complaint was filed
against, among others, the Company, Gerald C. Hsu, President, Chief Executive
Officer and Chairman of the Board of Directors, Y. Eric Cho, Senior Vice
President of Corporate Operations and a member of the Board of Directors, Y. Z.
Liao, Vice President, and three other employees of the Company for allegedly
violating various California Penal Code Sections relating to the theft of trade
secrets. The Company and the individuals above have pleaded not guilty and are
awaiting further proceedings. The criminal complaint could result in a loss of
these individuals and could have other material adverse effects on the Company.
On December 15, 1995, Paul Margetis and Helen Margetis filed in the United
States District Court for the Northern District of California a securities fraud
class action complaint. In addition, on December 19, 1995, Fred Tarca filed in
the United States District Court for the Northern District of California a class
action complaint for violations of the federal securities laws. These class
action lawsuits allege certain securities law violations, including omissions
and/or misrepresentation of material facts. The alleged omissions and/or
misrepresentations are largely consistent with those outlined in the Cadence
claim. In February 1997, plaintiff Tarca voluntarily dismissed his action and
the Margetis plaintiffs were certified as class representatives in their action.
On July 25, 1997, a federal judge stayed the Margetis action, except for certain
documentary and third-party discovery.
On May 30, 1997, Joanne Hoffman filed in the United States District Court
for the Northern District of California a purported class action alleging
securities claims on behalf of purchasers of Avant! stock between March 29, 1996
and April 11, 1997, the date of the filing of the criminal complaints against
Avant! and various of its officers. Plaintiff alleges that the Company and
various of its officers misled the market as to the likelihood of criminal
charges being filed and as to the validity of the Cadence allegations. The
Company has moved to dismiss the Hoffman complaint for failure to state a claim,
but the court has not yet heard argument on that motion.
11
<PAGE>
When the lawsuits were originally filed against the Company, the Company
experienced delays in orders by customers due to the uncertainty of the pending
lawsuits against the Company. If the Company suffers an adverse outcome in
either the civil or criminal proceedings, then the Company would likely
experience future delays in orders from customers and would likely suffer the
loss of customers. If such events were to occur, there would be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes it has sufficient defenses to the 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
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 on 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 that 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
On May 15, 1997, the Annual Meeting of Shareholders of the Registrant
was held at which the following matters were submitted to and voted on
by the shareholders. The results of the votes are set forth below:
1. The following persons were elected to the Board of Directors to
hold office until the next Annual Meeting or until their
successors are elected and qualified. Each person received the
number of votes set opposite their respective names.
Name Votes for Votes Withheld
---- --------- --------------
Gerald C. Hsu 19,985,005 231,301
Y. Eric Cho 19,985,305 231,001
Eric A. Brill 19,985,392 230,914
Tench Coxe 19,985,392 230,914
Tatsuya Enomoto 19,985,392 230,914
2. Shareholders approved an amendment to the Company's 1995 Stock
Option/Stock Issuance Plan to increase the number of shares
reserved for issuance by 1,000,000. 18,220,162 votes were for the
amendment, 1,623,527 votes were against the amendment, 308,574
votes were withheld.
3. Shareholders approved an amendment to the Company's Certificate of
Incorporation increasing the authorized shares to 75,000,000.
19,164,670 votes were for the amendment, 790,413 votes were
against the amendment, 261,223 votes were withheld.
4. Shareholders approved the election of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1997. 20,001,248 votes were for the election, 4,371
were against the election, and 210,687 were withheld.
12
<PAGE>
Item 5. Other Information
Tatsuya Enomoto, a Director, resigned during the quarter due to
personal matters. Dr. Tatsuo Kawasaki was appointed as his replacement.
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
The Company filed form 8-K on April 11, 1997, to report an Other Event
under item number 5 with regard to the criminal complaint related to
the Cadence litigation.
13
<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 thereunto duly authorized.
Avant! Corporation
------------------
(Registrant)
August 13, 1997 /s/ GERALD C. HSU
- --------------- ------------------
Gerald C. Hsu
President and
Chief Executive Officer
August 13, 1997 /s/ JOHN P. HUYETT
- --------------- -------------------
John P. Huyett
Vice President of Finance,
Treasurer and Principal
Accounting Officer
14
<PAGE>
EXHIBIT INDEX
Sequential
Number Description Page Number
- ------ ----------- -----------
Exhibit 11.1 Computations of Net Income Per Common Share
Exhibit 27.1 Financial Data Schedules
15
Exhibit 11.1 Computations of Income Per Share
AVANT! CORPORATION
STATEMENTS RE: COMPUTATIONS OF NET INCOME PER COMMON SHARE
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Net income $ 7,592 $ 5,368 $14,416 $10,282
======= ======= ======= =======
Common shares outstanding 25,564 24,300 25,463 24,085
Common stock equivalents:
Stock options and awards 1,267 2,318 1,890 2,284
------- ------- ------- -------
Total weighted average number of
common and common equivalent
shares outstanding 26,831 26,618 27,353 26,369
======= ======= ======= =======
Net income per common share $ 0.28 $ 0.20 $ 0.53 $ 0.39
======= ======= ======= =======
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 91,863
<SECURITIES> 25,684
<RECEIVABLES> 14,007
<ALLOWANCES> 1,082
<INVENTORY> 0
<CURRENT-ASSETS> 147,925
<PP&E> 24,813
<DEPRECIATION> 9,836
<TOTAL-ASSETS> 165,594
<CURRENT-LIABILITIES> 20,026
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 14,016
<TOTAL-LIABILITY-AND-EQUITY> 165,594
<SALES> 49,368
<TOTAL-REVENUES> 65,697
<CGS> 936
<TOTAL-COSTS> 6,777
<OTHER-EXPENSES> 38,698
<LOSS-PROVISION> 635
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,525
<INCOME-TAX> 8,109
<INCOME-CONTINUING> 14,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,416
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
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