UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] 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)
(408)-738-8881
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.0001 par value (Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of February 28, 1997 was approximately $656,792,000 (based on the
last sale price of such stock as reported by the Nasdaq National Market).
The number of shares of the registrant's Common Stock outstanding as of February
28, 1997 was 25,184,497.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed by the Company with the Securities
and Exchange Commission within 120 days after the end of the fiscal year are
incorporated by reference in Part III of this Form 10-K.
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AVANT! CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
Table of Contents
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PART I.
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation 14
Item 8. Consolidated Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 40
PART III.
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
Signature Page 43
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PART I.
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in Item 1
under the heading "Business".
Item 1. Business
GENERAL
Avant! Corporation (the Company or Avant!) resulted from the merger of ArcSys,
Inc. (ArcSys) and Integrated Silicon Systems, Inc. (ISS) on November 27, 1995.
Avant! merged with Anagram, Inc. (Anagram) on September 27, 1996, Meta-Software,
Inc. (Meta) on October 29, 1996, FrontLine Design Automation, Inc. (FrontLine)
on November 27, 1996 and acquired Nexsyn Design Technology Inc. (Nexsyn) on
December 31, 1996. Avant! is a Delaware corporation that develops, markets and
supports software products that assist design engineers in the physical layout,
design, verification, simulation, timing and analysis of advanced integrated
circuits (ICs).
The Company's objective is to establish a significant market position as a
supplier of design software for the integrated circuit design automation (ICDA)
market. To achieve this objective, Avant! has adopted its mission, which is to
provide innovative technology, products, and business models that enable
customers to solve the toughest problems in deep submicron (less than 0.5-micron
feature size) IC design, improve their productivity and achieve a high return on
their investment. To effect its mission, Avant! has adopted the strategies of
maintaining focus on technological innovation and creating strategic
relationships with customers.
PRODUCTS
Avant! products are based on the Company's proprietary architecture and
technology, which provide a breadth of automated IC physical design
capabilities. Avant!'s product architecture is designed to solve the problems
inherent in submicron (less than 1.0-micron feature size) and deep submicron IC
design and to offer improved time to market, reduced development and
manufacturing costs, and enhanced IC performance when compared to previous
generations of ICDA software.
Avant! products are designed to be compatible with the most commonly used ICDA
tools and to be easily integrated into the customer's existing design
environments and methodologies through industry standard interfaces. Avant!'s
products are primarily written in C, run on UNIX workstations such as those from
Sun Microsystems, Inc. and Hewlett-Packard Company, and support industry
standards such as Motiff, Xwindows, GDSII Stream format, EDIF, SDF, SPICE and
Verilog.
The Company's Aquarius family of cell-based place and route products includes
Aquarius-BV, Aquarius-XO and Aquarius-GA. All products are based on Avant's
patented cell-path timing-driven algorithms which increase circuit performance
and reduce design iterations. Aquarius-BV is used for standard-cell IC designs
with up to three layers of metal. Aquarius-XO is used for more complex
standard-cell and mixed-block IC designs with up to six layers of metal.
Aquarius-BV and -XO reduce die size and shorten the design cycle by combining
the advantages of over-the-cell channel routing and channel compaction with the
flexibility of area-based maze routing.
The Company's Aquarius-GA product is an advanced multi-layer place and route
system for gate-array ICs. Aquarius-GA increases gate utilization and minimizes
design congestion by using proprietary congestion-driven placement and routing
algorithms. Aquarius-GA includes many of the same features as Aquarius-BV and
- -XO to improve circuit performance. Aquarius-GA supports embedded designs
through its horizontal integration with Aquarius-BV and -XO.
Avant!'s Planet product complements the Aquarius products and is a physical
floorplanning and analysis solution for accurate prediction of the impact of
physical effects on design performance and routability early in the design
process.
The Company's Solar family of products are synthesis-oriented layout refinement
tools designed to optimize the performance and area of ICs to meet new deep
submicron "golden file" needs. Solar is tightly integrated with Avant!'s
Aquarius family of place and route tools.
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The Company believes its Hercules family of design verification software is the
industry's most advanced suite of IC physical verification products. The
Hercules family of products provide geometric and electrical verification
physical design layouts. Hercules' first module for design rule checking (DRC)
was introduced in January 1992 and is the first hierarchical system offered for
complex submicron design.
The Company's Star-Hspice product is the industry-standard circuit simulator
that validates critical paths, performs noise margin analysis and optimizes the
tradeoffs between IC speed and power prior to commencement of fabrication.
Star-Hspice incorporates special analysis features for performance and for yield
optimization, which has become increasingly important in deep submicron chip
design.
Avant!'s Star-Sim family of products are high-capacity circuit simulators for
deep submicron process applications such as graphics, memory, communications,
and mixed-signal IC designs. The Star-Sim family of products help increase IC
performance and reliability and increase designer productivity by enabling
designers to characterize large blocks; to accurately simulate mixed-signal,
dynamic logic and memory circuits where performance, signal integrity and power
analyses are essential; and to reuse high-performance intellectual property
without changing the design process. Star-RC is a full-chip hierarchical
capacitance extractor and a critical net resistance and capacitance extractor.
All of Avant!'s Star products are tightly integrated with Avant!'s hierarchical
layout and verification tools, Aquarius and Hercules, to provide efficient,
accurate and predictable IC performance.
The Company's Polaris family of products utilize innovative Verilog simulation
solutions to ease the simulation, automated design verification and optimization
of IC design. To handle the complexity of large designs the Polaris family of
products is capable of several levels of design abstraction and uses a variety
of design capture techniques. The products run on Unix and Windows workstation
platforms and are therefore attractive tools for a variety of hardware logic
designers.
During each of 1996, 1995 and 1994, the Company derived substantially all of its
total revenue from the licensing and support of Aquarius, its cell-based place
and route software product, Hercules, its hierarchical physical verification
software product, Star-Hspice, its circuit simulator, Star-Sim products, its
high-capacity circuit simulation and high-accuracy timing analysis software, and
Polaris products, its Verilog simulation product. Absent any extraordinary
results from existing litigation, the Company currently expects that these
products will continue to account for a significant portion of the Company's
revenue for the foreseeable future. As a result, the Company's future operating
results are significantly dependent upon continued market acceptance of these
products. The Company believes that a number of factors will be necessary for
its products to achieve continued market acceptance. These factors include
performance of the Company's existing products, successful development of
advanced features, adaptability into the user's design environment, the
Company's technical, managerial, service and support expertise, and the
customer's assessment of the Company's financial resources. A decline in demand
for these products as a result of competition, technological change or other
factors would have a material adverse effect on the business, operating results
and financial condition of the Company. There can be no assurance that these
products will achieve continued market acceptance or that the Company will be
successful in marketing any new or enhanced products.
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During 1996, 1995 and 1994, the Company derived 34%, 32%, and 33%, respectively,
of its total revenue from the licensing and support of its software products
internationally, principally in Asia. The Company currently expects that the
percentage from the license and support of its software products in Asia will
continue to be a significant percentage of its total revenue. Any significant
decline in demand for the Company's products in Asia would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's international revenue involves a number of risks,
including the impact of possible recessionary environments in economies outside
the United States, longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in staffing and managing foreign
operations, political and economic instability, unexpected changes in regulatory
requirements, reduced protection for intellectual property rights in some
countries and tariffs and other trade barriers. There can be no assurance that
the Company will be able to sustain or increase revenue derived from
international licensing and service or that the forgoing factors will not have a
material adverse effect on the Company's future international license and
service revenue, and, consequently, on the Company's business, operating results
and financial condition. Failure to sustain or increase such revenue would
materially and adversely affect the Company's business, operating results and
financial condition. Although the Company has attempted to reduce the risk of
fluctuations in exchange rates associated with international revenue by pricing
its products and services in United States dollars, the Company pays the
expenses of its international operations in local currencies and does not
currently engage in hedging transactions with respect to such obligations.
Currency exchange fluctuations in countries in which the Company licenses its
products could have a material adverse effect on the Company's business,
operating results or financial condition by resulting in prices that are not
competitive with products priced in local currencies. Furthermore, there can be
no assurance that in the future the Company will be able to continue to price
its products and services internationally in United States dollars. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The ICDA industry is characterized by extremely rapid technological change,
frequent new product introductions and enhancements, evolving industry standards
and rapidly changing customer requirements. The development of more complex ICs
embodying new technologies will require increasingly sophisticated design tools.
The Company's future results of operations will depend in part upon its ability
to enhance its current products and to develop and introduce new products on a
timely and cost-effective basis that will keep pace with technological
developments and evolving industry standards and methodologies, as well as
address the increasingly sophisticated needs of the Company's customers. For
example, all of the Company's current products operate in, and planed future
products will operate in, the Unix operating system. In the event that another
operating system, such as Windows NT, were to achieve broad acceptance in the
ICDA industry, the Company would be required to port its products to such an
operating system, which would be costly, time consuming and could have a
material adverse effect on the Company's business, operating results or
financial condition. The Company has in the past and may in the future
experience delays in new product development. The introduction of certain
products in the past have been delayed by as much as 12 months beyond their
original scheduled release dates. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements, or that
its new products and product enhancements will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner would have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the introduction or even
announcement of products by the Company or one or more of its competitors
embodying new technologies or changes in industry standards or customer
requirements could render the Company's existing products obsolete or
unmarketable. There can be no assurance that the introduction or announcement of
new product offerings by the Company or one or more of its competitors will not
cause customers to defer purchases of existing Company products. Such deferment
of purchases could have a material adverse effect on the Company's business,
operating results or financial condition.
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CUSTOMERS
Avant! focuses its sales and marketing efforts on creating strategic
relationships with technology leaders in IC design and with early adopters of
the most advanced electronic design automation (EDA) tools. By creating strong
relationships with industry leaders, Avant! receives critical technical feedback
that enables it to develop and implement proprietary design technologies and
methodologies. In addition, strategic relationships with these companies can
create influential references for other prospective customers.
The market for the Company's physical layout, design, verification, simulation,
timing and analysis products encompasses a wide range of industries, including
semiconductor, computer, consumer electronics, multimedia and telecommunications
IC companies worldwide. End-users of the Company's products range from small
companies to a number of the world's largest manufacturing organizations.
Approximately 1,000 of the Company's physical layout and verification systems
are installed worldwide at approximately 200 companies as of December 31, 1996.
No one customer accounted for greater than 10% of the Company's revenue in 1996,
1995 or 1994. The Company does not believe that seasonality is a significant
factor in sales.
SALES AND MARKETING
The Company markets its products in North America and Europe primarily through
its direct sales and support force. Avant! employs highly skilled engineers and
technically proficient sales persons capable of serving the sophisticated needs
of its prospective customers' engineering and management staffs. Avant! has
domestic sales and support offices in or near Austin, Texas; Boston,
Massachusetts; Chicago, Illinois; Dallas, Texas; Los Angeles, California;
Phoenix, Arizona; Portland, Oregon; Philadelphia, Pennsylvania; Research
Triangle Park, North Carolina; and Sunnyvale, California; sales and support
offices in London, England; Paris, France and Tokyo, Japan; and support offices
in Munich, Germany; Geneva, Switzerland, and Seoul, South Korea. In addition to
its direct sales and marketing efforts, Avant! participates in industry trade
shows and organizes seminars to promote the adoption of its products and
methodologies.
In Asia, Avant! markets its products primarily through a limited number of
independent distributors and manufacturer's representatives (Third Party
Sellers) that license and service Avant! products in this market. Avant! also
supports these distributors and representatives and their customers with
technical, sales and management personnel.
The Company has relied on Third Party Sellers for licensing and support of its
products in Japan, Korea, Taiwan, and Singapore. A substantial portion of the
Company's international license and service revenue has resulted from a limited
number of these Third Party Sellers. During 1996, 1995, and 1994, revenue from
these channels accounted for an aggregate of approximately 27%, 28% and 30%,
respectively, of the Company's total revenue.
Since the Company's products are used by highly skilled professional engineers,
in order to be effective, a Third Party Seller must possess sufficient
technical, marketing and sales resources and must devote these resources to a
lengthy sales cycle, customer training and product service and support. Only a
limited number of Third Party Sellers possess such resources. In addition, the
Company's Third Party Sellers generally offer products of several different
companies, including, in some cases, products that are competitive with the
Company's products. There can be no assurance that the Company's current Third
Party Sellers will choose to or be able to market or service and support the
Company's products effectively, that economic conditions or industry demand will
not adversely affect these or other Third Party Sellers, that any Third Party
Seller will continue to market and support the Company's products or that these
Third Party Sellers will not devote greater resources to marketing and
supporting products of other companies. The loss of, or a significant reduction
in revenue from, one of the Company's Third Party Sellers could have a material
adverse effect on the Company's business, operating results or financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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In 1997, Avant! combined most of its Japanese and Asian sales channels by using
a joint venture approach between the Company, the Company's President and former
third party distributors. No assurance can be provided that this joint venture
approach will be successful. If it is not successful, it could have a material
adverse effect on the Company's business, operating results or financial
condition.
The license of the Company's software products generally involves a significant
commitment of capital by prospective customers, with the attendant delays
frequently associated with large capital expenditures and lengthy acceptance
procedures. For these and other reasons, the sales cycle associated with the
license of the Company's products is typically lengthy and subject to a number
of significant risks over which the Company has little or no control and, as a
result, the Company believes that its quarterly operating results are likely to
vary significantly in the future. Due to the nature of the Company's business,
the Company does not believe any of its backlog orders to be firm.
CUSTOMER SERVICE AND SUPPORT
Avant!'s product management group provides customers with technical support,
training and consulting services. Avant! believes that a high level of customer
service and support is critical to the adoption and successful utilization of
its physical design technology and products.
To address technical issues, Avant! has established both field and corporate
technical application engineering groups that understand the design
methodologies of Avant!'s customers and generally have IC design backgrounds.
Most of Avant!'s customers currently have maintenance agreements that entitle
them to receive software updates, documentation updates and a formal problem
identification and resolution process through a support hotline. Questions or
suggestions may be submitted by facsimile or through the Internet network mail
system. Avant! also offers additional training and consulting services for a
fee. The Company provides on-site and in-house training on all products.
Avant! consultants are available to work closely with customer design
engineering teams for all phases of physical design from conception through
implementation. Avant! consultants provide customers with in-depth technical
expertise in the use of the Company's physical design methodology and products.
RESEARCH AND DEVELOPMENT
The ICDA industry is characterized by extremely rapid technological change,
frequent product introductions and enhancements, evolving industry standards and
rapidly changing customer requirements. The development of more complex ICs
embodying new technologies will require increasingly sophisticated design tools.
Avant! believes that its future competitive position and future results of
operations will depend in large part on its ability to quickly and
cost-effectively develop new products, maintain and enhance its current product
line, maintain technological competitiveness and meet an expanding range of
customer requirements. In addition to supporting and enhancing its existing
physical layout, design, verification, simulation, timing and analysis products,
Avant! maintains an advanced research group that is responsible for exploring
new directions and applications of Avant!'s proprietary technologies, migrating
new technologies into the existing product lines and maintaining strong research
relationships outside Avant! with industry and academia. During 1996, Avant!
created W.I.T. (World Institute of Technology) to close the gap between the
general broad based education provided by current academia and industry's needs
for engineers who know how to create marketable products and speed the products
to market. WIT has enrolled more than 100 students, the majority of which are
Avant! employees.
During 1996, 1995, and 1994 the Company's research and development expenditures
were approximately $20,696,000, $15,318,000, and $9,728,000 respectively
(including capitalized software development costs of none, $63,000 and $143,000,
respectively, for the same periods). The amount of capitalized software
development costs amortized was $88,000, $228,000, and $199,000 for 1996, 1995,
and 1994, respectively.
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The Company believes that it must continue to commit substantial resources to
enhance and extend its product lines in order to remain competitive in the ICDA
market. The Company intends to continue to increase its internally-funded
product development program and, if appropriate, to enter into development
agreements with customers and other third parties to develop specific new
product applications and features. The Company currently has no material
third-party funded development agreements.
COMPETITION AND RELATED LITIGATION
The ICDA software market, in which the Company competes, is intensely
competitive and subject to rapid change. The Company currently faces competition
from major ICDA vendors, including Cadence Design Systems, Inc. (Cadence), which
currently holds a dominant share of the market for IC physical design software,
and Mentor Graphics Corporation ("Mentor"). As the Company expands its product
offerings to include other library generation tools and other EDA tools, it will
compete increasingly with these EDA vendors. Each of these major ICDA vendors
has a longer operating history, significantly greater financial, technical and
marketing resources, greater name recognition and a larger installed customer
base than the Company. In addition, each of these competitors will likely be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, and to devote greater resources to the development,
promotion and sale of their products than the Company. These companies also have
established relationships with current and potential customers of the Company
and can devote substantial resources aimed at preventing the Company from
enhancing relationships with existing customers or establishing relationships
with potential customers. Moreover, the industry in which the Company competes
is undergoing a trend toward consolidation that is expected to result in large,
more financially flexible competitors with a broad range of product offerings.
Further, other companies may develop and bring new products to the market which
could create significant competition for the Company and its products.
Competition from EDA companies that currently offer only functional or logic
design products and that choose to enter the physical design market could
present particularly formidable competition due to their relationships with the
Company's current and potential customers, their ability to offer a complete
integrated IC design solution which Avant! does not currently offer and their
knowledge of the EDA industry.
The Company also competes with the internal ICDA development groups of its
existing and potential customers, many of whom design and develop customized
design tools for their particular needs and therefore may be reluctant to
purchase products offered by independent vendors, such as the Company.
Furthermore, because there are relatively low barriers to entry in the software
industry, the Company expects additional competition from other established and
emerging companies. There can be no assurance that the Company's current or
potential competitors will not develop products comparable or superior to those
developed by the Company or adapt more quickly than the Company to new
technologies, evolving industry trends or changing customer requirements.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which could materially and adversely affect the
Company's business, operating results or financial condition. In addition, the
EDA industry has become increasingly concentrated in recent years as a result of
consolidations, acquisitions and strategic alliances. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Alliances among competitors could
present particularly formidable competition to the Company by combining their
resources. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on its
business, operating results and financial condition. If the Company is unable to
compete successfully against current and future competitors, the Company's
business, operating results and financial condition will be materially and
adversely affected.
The Company competes on the basis of certain factors, including first-to-market
product capabilities, product performance, price, support of industry standards,
ease of use and customer technical support and service. The Company believes
that it currently competes favorably overall with respect to these factors,
particularly first-to-market product capabilities, technical support and
customer service.
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In addition, competitors and potential competitors may resort to litigation as a
means of competition. Cadence has initiated litigation against the Company and
certain of its officers and employees alleging trade secret misappropriation and
other claims. See "Legal Proceedings." There can be no assurance that
competitors of the Company, in particular Cadence, will not initiate additional
litigation against the Company and its officers, directors, employees or
consultants. The pending litigation against the Company and any future
litigation against the Company or its employees, regardless of the outcome, may
result in substantial costs and expenses to the Company and significant
diversion of effort by the Company's technical and management personnel. Any
such litigation could have a material adverse effect on the Company's business,
operating results or financial condition.
PROPRIETARY RIGHTS
The Company relies on a combination of license agreements, patents, copyright,
trademark and trade secret laws to establish and protect proprietary rights to
its technology. The Company holds several patents covering certain aspects of
its products. The Company generally provides products to end-users under
non-exclusive licenses, which typically have a perpetual term unless terminated
for breach. The license provides that the software may be used solely for
internal operations in designated computers at specified sites. The Company's
software is shipped with a software security lock which limits software access
to authorized users. The source code of the Company's products is protected both
as a trade secret and as an unpublished copyrighted work, and is not made
available to third parties. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products or
technology without authorization or to develop similar technology independently.
In addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. The Company believes that, due to the
rapid pace of innovation within the IC CAD software industry, factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are more important to establishing and maintaining a
technology leadership position than are the various legal protections of its
technology.
The Company is heavily dependent upon its proprietary software technology. The
Company currently holds several patents and also relies on a combination of
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights in its
products. Although the Company holds several patents, there can be no assurance
that the Company will develop additional proprietary products or technologies
that are patentable, that any issued patent will provide the Company with any
competitive advantages or will not be challenged by third parties or that the
patents of others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company. There can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, and such protections may not
preclude competitors from developing products with functionality or features
similar to the Company's products. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
The Company expects that software companies will increasingly be subject to
infringement claims as the number of products and competitors in the industry in
which the Company competes grows and the functionality of products in different
industry segments overlaps. In particular, Avant!'s current litigation with
Cadence involves such infringement claims. The Company believes that its
products and trademarks do not infringe upon the proprietary rights of third
parties. There can be no assurance, however, that third parties will not assert
infringement claims, regardless of merit, against the Company in the future or
that such claims will not require the Company to cease use of certain technology
or enter into expensive royalty arrangements, if licenses are available, or
result in costly litigation, any of which could materially and adversely affect
the Company's business, operating results or financial condition.
EMPLOYEES
As of February 28, 1997, the Company had 444 employees, including, 194 in
research and development, 194 in sales, marketing and related customer support
services, and 56 in finance and administration. Of these employees, 415 were
located in the United States, 15 in Europe, 13 in Japan and 1 in Korea. None of
the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement, nor has Avant! experienced any work stoppage.
Avant! considers its relations with its employees to be good.
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The Company has recently experienced a period of rapid growth and expansion,
especially the mergers of four companies in a four month period, that has placed
and continues to place a significant strain upon its management systems and
resources. The Company currently plans to continue to expand its staff. To
accommodate this recent growth, the Company will be required to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, some of which currently require substantial management effort. There
can be no assurance that the Company will be able to do so successfully. The
increase in the number of the Company's employees and the Company's market
diversification and product development activities have resulted in increased
responsibility for the Company's management. The Company anticipates that
continued growth, if any, will require it to recruit and hire a substantial
number of new engineering, managerial, finance, sales and marketing and support
personnel; however, there can be no assurance that the Company will be
successful at hiring or retaining these personnel. The Company's ability to
compete effectively and to manage future growth, if any, will require the
Company to continue to implement and improve operational, financial and
management information systems on a timely basis and to expand, train, motivate
and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees, could have a material adverse effect on the Company's
business, operating results or financial condition.
The Company's future operating results depend in significant part upon the
continued service of its key technical and senior management personnel,
including in particular, Gerald C. Hsu, the Company's President and Chief
Executive Officer. None of the Company's employees is bound by an employment
agreement. The Company's business, operating results and financial condition
also depend on its continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will retain its key technical and
managerial personnel or attract such personnel in the future. Uncertainty during
the existing litigation may adversely affect the Company's ability to attract
and retain such personnel. In particular, there are only a limited number of
qualified ICDA engineers, and competition for such individuals is especially
intense. The Company has at times experienced and continues to experience
difficulty in recruiting qualified personnel, and there can be no assurance that
the Company will not experience such difficulties in the future. The Company,
either directly or through personnel search firms, actively recruits qualified
research and development, financial and sales personnel. If the Company is
unable to hire and retain qualified personnel in the future, such inability
could have a material adverse effect on the Company's business, operating
results or financial condition. Additionally, if a criminal complaint is filed
relating to the matters underlying the pending litigation between Avant! and
Cadence resulting in a loss of Avant! personnel, then the Company's business,
operating results and financial condition may be materially adversely affected.
ENVIRONMENTAL AFFAIRS
The Company's operations are subject to numerous federal, state and local laws
and regulations designed to protect the environment. There are no administrative
or judicial proceedings pending or threatened against the Company alleging
violations of such environmental laws and regulations. Compliance with these
laws and regulations has not had, and is not expected to have, a material
adverse effect on the capital expenditures, earnings and competitive position of
the Company.
8
<PAGE>
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; FUTURE OPERATING RESULTS UNCERTAIN
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, quarterly operating results of one of the Company's
wholly owned subsidiaries 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. The Company'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 the Company'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 the Company'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
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.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These broad market fluctuations
may adversely affect the market price of the Company's common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often occurred against a
company, as evidenced by the Company's current status as a defendant in a class
action lawsuit following a sharp decline in the price of the Company's common
stock. See "Legal Proceedings." There can be no assurance that such litigation
will not occur again in the future with respect to the Company. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
9
<PAGE>
<TABLE>
<CAPTION>
Q1/95 Q2/95 Q3/95 Q4/95 Q1/96 Q2/96 Q3/96 Q4/96
-------- -------- -------- -------- -------- -------- -------- --------
(in 000's, except per share data,
price and percentages)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Software $ 9,791 $ 13,187 $ 15,093 $ 17,093 $ 18,603 $ 19,807 $ 21,620 $ 22,104
Services 2,556 3,064 3,959 4,125 4,944 6,011 6,308 6,690
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 12,347 16,251 19,052 21,218 23,547 25,818 27,928 28,794
-------- -------- -------- -------- -------- -------- -------- --------
COSTS AND EXPENSES:
Costs of software 310 417 350 452 615 509 678 710
Costs of services 930 1,166 1,314 1,435 1,798 1,750 1,835 1,886
Selling and marketing 4,356 5,629 5,785 6,971 6,867 7,641 7,810 7,610
Research and development 3,002 3,590 4,084 4,642 4,781 4,814 5,538 5,563
General and administrative 1,212 1,374 1,856 1,920 2,735 3,852 4,022 4,841
Acquisition of technology -- -- -- 2,693 -- -- 300 1,400
Merger expenses -- -- -- 3,590 -- -- 920 8,380
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 9,810 12,176 13,389 21,703 16,796 18,566 21,103 30,390
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 2,537 4,075 5,663 (485) 6,751 7,252 6,825 (1,596)
Interest income, net 383 512 890 1,002 908 1,135 1,057 1,104
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 2,920 4,587 6,553 517 7,659 8,387 7,882 (492)
Provision for income taxes (pro
forma in 1995) 983 1,571 2,277 1,396 2,745 3,019 2,900 2,288
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (pro forma
in 1995) $ 1,937 3,016 4,276 (879) 4,914 5,368 4,982 (2,780)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
common share (pro forma
in 1995) $ 0.09 $ 0.12 $ 0.16 $ (0.03) $ 0.19 $ 0.20 $ 0.18 $ (0.11)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of
shares outstanding 21,815 25,960 26,140 26,593 26,120 26,618 27,125 24,775
Common stock price (1):
High $- $ 36.00 $ 51.00 $ 47.00 $ 26.25 $ 27.75 $ 34.25 $ 37.00
Low $- $ 20.75 $ 33.25 $ 12.50 $ 14.00 $ 16.25 $ 20.50 $ 25.50
<FN>
(1) Initial public offering was completed during June 1995 at $13 per share.
</FN>
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Q1/95 Q2/95 Q3/95 Q4/95 Q1/96 Q2/96 Q3/96 Q4/96
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of total revenue
REVENUE:
Software 79% 81% 79% 81% 79% 77% 77% 77%
Services 21% 19% 21% 19% 21% 23% 23% 23%
---- ---- ---- ---- ---- ---- ---- ----
Total revenue 100% 100% 100% 100% 100% 100% 100% 100%
---- ---- ---- ---- ---- ---- ---- ----
COSTS AND EXPENSES:
Costs of software 2% 3% 2% 2% 2% 2% 3% 2%
Costs of services 8% 7% 7% 7% 8% 7% 7% 7%
Selling and marketing 35% 35% 30% 33% 29% 29% 28% 26%
Research and development 24% 22% 21% 22% 20% 19% 20% 20%
General and administrative 10% 8% 10% 9% 12% 15% 14% 17%
Acquisition of technology -% -% -% 12% -% -% 1% 5%
Merger expenses -% -% -% 17% -% -% 3% 29%
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 79% 75% 70% 102% 71% 72% 76% 106%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from operations 21% 25% 30% (2)% 29% 28% 24% (6)%
Interest income, net 3% 3% 4% 4% 4% 4% 4% 4%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before
income taxes 24% 28% 34% 2% 33% 32% 28% (2)%
Provision for income taxes (pro
forma in 1995) 8% 9% 12% 6% 12% 11% 10% 8%
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) (pro forma
in 1995) 16% 19% 22% (4)% 21% 21% 18% (10)%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Item 2. Properties
The Company occupies approximately 115,000 square feet of space for its
headquarters in Sunnyvale, California with an annual base rent of approximately
$1,120,000. This lease expires on February 15, 1998. The Company also occupies a
facility near Research Triangle Park in Durham, North Carolina with an annual
base rent of approximately $666,000. This lease expires on November 30, 2005.
The Company also leases 10 sales and support offices in the United States, four
in Europe, one in Japan and one in Korea. Avant! believes that its existing
facilities are adequate for its current needs.
In February 1997, the Company signed a lease for its headquarters in Fremont,
California. The lease covers four buildings with an aggregate of approximately
281,000 square feet of space with an aggregate annual base rent amount of
approximately $4,800,000. The lease for three of the buildings expires on
September 1, 2000 and for the fourth building on May 1, 2010. The Company
expects to move into its new headquarters in June 1997.
11
<PAGE>
Item 3. 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. 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 been set.
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. No criminal charges have been filed against the
Company, the Company's management or its employees, but no assurance can be
given that such charges will not be filed in the future. A criminal complaint,
if filed against the Company, the Company's management or its employees, could
result in a loss of management and other personnel and could have other material
adverse effects on the Company.
On 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.
The Margetis action has been informally stayed pending resolution of Cadence's
preliminary injunction motion.
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.
12
<PAGE>
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 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 which would not have a material adverse effect on the Company's
consolidated financial position if unfavorably resolved.
Item 4. Submission of Matters to a Vote of Security Holders
On October 29, 1996, a special meeting of Stockholders of the Registrant was
held at which stockholders approved a proposal to issue shares of the Company's
common stock in connection with the merger of Natasha Merger Corp., a California
corporation and a wholly owned subsidiary of the Company (Merger Sub), with and
into Meta-Software, Inc., a California corporation (Meta), pursuant to which,
amount other things, (a) Merger Sub merged with and into Meta, following which
Meta became a wholly owned subsidiary of the Company, (b) each share of Meta's
common stock outstanding as of the closing of the merger was converted into the
right to receive 0.438 of a share of the Company's common stock, and (c) all
Meta stock options and subscription rights, together with the underlying Meta
stock plans, were assumed by the Company and converted into options and
subscription rights to purchase shares of the Company's Common Stock. 11,160,341
votes were for the proposal, 2,329 votes were against the proposal, and 6,420
votes were broker non-votes.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the Nasdaq National Market under the
Nasdaq symbol AVNT since November 27, 1995. The Company's Common Stock traded on
the National Market System under the Nasdaq symbol ARCS from the Company's
initial public offering on June 7, 1995 until November 26, 1995. The Company has
not paid cash dividends in the past and none are expected to be paid in the
future. As of February 28, 1997, the Company had approximately 198 shareholders
of record.
The information required by Item 5 concerning the high and low sales prices for
the Company's common stock is incorporated by reference from Item 1. Such
quotations reflect inter-dealer prices without mark-up, mark-down or commissions
and may not necessarily represent actual transactions.
13
<PAGE>
Item 6. Selected Consolidated Financial Data
(in 000's, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Total revenue $106,087 68,868 39,344 22,560 14,806
Income from operations $ 19,232 11,790 5,348 1,231 1,171
Pro forma net income $ 12,484 8,350 4,009 2,389 307
Pro forma income per common share $ 0.47 0.35 0.20 0.15 0.03
Weighted average number of common and
common equivalent shares outstanding 26,761 24,159 20,457 16,284 8,954
December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Consolidated Balance Sheets Data:
Cash and cash equivalents $ 33,067 50,010 9,925 9,682 6,966
Working capital $115,977 93,005 36,464 12,530 7,397
Total assets $156,103 123,173 52,222 24,277 13,397
Long-term obligations $ 1,017 1,730 1,021 173 152
Manditorily redeemable convertible
preferred stock $ -- -- 8,312 8,312 3,830
Shareholders' equity $124,823 99,411 31,525 7,177 5,868
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This discussion contains forward-looking statements 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 report, and the risks discussed in the "Risk
Factors" section on Form S-3 as declared effective by the Securities and
Exchange Commission on January 31, 1997, and other risks detailed from time to
time in the Company's Securities and Exchange Commission reports.
Overview
The Company develops, markets and supports software products that assist design
engineers in the physical layout, design, verification, simulation and timing
analysis of advanced ICs. The Company's strategy is to focus on productivity
enhancing software for the ICDA segment of the EDA market.
Effective September 27, 1996, October 29, 1996 and November 27, 1996, the
Company merged with Anagram, Inc. (Anagram), Meta-Software, Inc. (Meta) and
FrontLine Design Automation, Inc. (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 1996, 1995, and 1994 was derived
from the licensing and support of Aquarius, Hercules, Star-Sim and Star-Hspice.
14
<PAGE>
<TABLE>
Results of Operations
The following table sets forth the percentage of total revenue and the
percentage change for certain items in the Company's Consolidated Financial
Statements (after giving effect to rounding) for the periods indicated:
<CAPTION>
Year Ended December 31, Percentage Change
----------------------- -----------------
1996 1995 1994 1995-1996 1994-1995
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUE:
Software.........................................77% 80% 79% 49% 78%
Services....................................... 23 20 21 75 63
--- --- --- --- ---
Total revenue................................100% 100% 100% 54% 75%
--- --- --- --- ---
COSTS AND EXPENSES:
Costs of software................................ 2 2 3 64 36
Costs of services................................ 7 7 7 50 65
Selling and marketing........................... 28 33 37 32 57
Research and development.........................20 23 25 35 58
General and administrative.......................14 9 10 143 54
Acquisition of technology........................ 2 4 4 (37) 68
Merger expenses................................. 9 5 - 159 n/a
--- --- --- --- ---
Total operating expenses..................... 82 83 86 52 68
--- --- --- --- ---
Income from operations........................18 17 14 63 121
Interest income, net.............................. 4 4 2 51 233
--- --- --- --- ---
Income before income taxes....................22 21 16 61 136
Provision for income taxes (pro forma in 1995
and 1994)........................................10 9 6 76 186
--- --- --- --- ---
Net income (pro forma in 1995 and 1994)..... 12% 12% 10% 50% 108%
=== === === === ===
</TABLE>
Comparison of Years Ended December 31, 1996, 1995 and 1994
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 payments for software products,
such payments are reported as deferred revenue until all conditions for revenue
recognition are met. The Company has entered into certain license agreements
under which software, support and other services are provided to customers for a
bundled price for a specific period of time. 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 12 months. Revenue from customer training, support and other
services is recognized as the service is performed.
The Company's total revenue increased 54% to $106,087,000 in 1996 from
$68,868,000 in 1995 and 75% in 1995 from $39,344,000 in 1994. The percentage of
the Company's revenue attributable to software licenses decreased slightly to
77% in 1996 from 80% in 1995 and 79% in 1994 due to the larger user base and
resulting increase in maintenance revenue.
Software revenue increased 49% to $82,134,000 in 1996 from $55,164,000 in 1995
and 78% in 1995 from $30,929,000 in 1994. Increases in software revenue were due
primarily to increased license revenue from the Company's place and route,
physical verification, simulation and timing software. Services revenue
increased 75% to $23,953,000 in 1996 from $13,704,000 in 1995 and 63% in 1995
from $8,415,000 in 1994, reflecting the growing base of installed systems.
Through December 31, 1996, price increases have not been a material factor in
the Company's revenue growth. The Company does not believe that period-to-period
comparisons of past revenue growth should be relied upon as indications of
future performance.
15
<PAGE>
As discussed in Legal Proceedings, the Company is involved in litigation with
Cadence, 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 December 31, 1996, such cancellations and
postponements had not had a material financial impact on the Company's revenues.
However, cancellations or a significant delay of orders in the future may impact
the Company's business, financial condition and results of operations. An
adverse ruling in the Cadence litigation could result in Avant!'s inability to
sell certain of its products and, as a result, could materially adversely affect
Avant!'s business, financial condition and results of operations. In particular,
Avant!'s place and route products in dispute, ArcCell-BV and ArcCell-XO (which
have been replaced by Aquarius-BV and Aquarius-XO), accounted for approximately
30% of the Company's consolidated revenues for the three-year period ended
December 31, 1996.
Deferred revenue increased to $13,824,000 as of December 31, 1996 from
$9,585,000 as of December 31, 1995 due to increases in the number of maintenance
agreements and license agreements where software and services are provided for a
specific period and revenue is recognized ratably over the contract period.
Costs of Software. Costs of software consist primarily of expenses associated
with product documentation and production costs. Costs of software increased to
$2,512,000 in 1996 from $1,529,000 in 1995 and $1,122,000 in 1994. Costs of
software as a percentage of software revenue was 3% in both 1996 and 1995
compared to 4% in 1994. Costs of software included amortization of capitalized
software amounting to $88,000, $228,000 and $199,000 in 1996, 1995 and 1994,
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, 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
$7,269,000 in 1996 from $4,845,000 in 1995 and $2,940,000 in 1994, representing
30%, 35% and 35% of services revenue for 1996, 1995 and 1994, respectively. The
increases in costs of services were due primarily to increases in personnel and
expenses necessary to support the Company's growing base of installed software.
The reduction in costs of services as a percentage of service revenue reflects
the improved utilization of the Company's customer support resources in serving
its increasing customer base.
Selling and Marketing. Selling and marketing expenses consist primarily of
costs, including sales commissions, of all personnel involved in the sales
process. This includes sales representatives, marketing associates and
application engineers. Selling and marketing expenses also include costs of
advertising, public relations, conferences and trade shows. Selling and
marketing expenses increased to $29,928,000 in 1996 from $22,741,000 in 1995 and
$14,476,000 in 1994. The increases reflect higher sales commissions associated
with increased sales volumes and increases in sales and marketing personnel.
Selling and marketing expenses represented 28%, 33% and 37% of total revenue in
1996, 1995 and 1994, respectively. The decrease in selling and marketing
expenses as a percentage of total revenue for these periods resulted primarily
from revenue growth and improved sales productivity. The Company expects to hire
additional sales and marketing personnel and to increase promotion and
advertising expenditures throughout 1997.
Research and Development. 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 $20,696,000 in
1996 from $15,318,000 in 1995 and $9,728,000 in 1994. The increases resulted
from increased personnel-related costs associated with the development of new
products and significant enhancements of existing products. Research and
development expenses represented 20%, 23% and 25% of total revenue in 1996, 1995
and 1994, respectively. The Company anticipates that it will continue to devote
substantial resources to product research and development throughout 1997.
16
<PAGE>
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, under which the Company
capitalizes software development costs once technological feasibility has been
established. The Company amortizes such amounts over three years. The amount of
software development costs capitalized for 1996, 1995 and 1994 was none, $63,000
and $143,000, respectively.
General and Administrative. General and administrative expenses increased to
$15,450,000 in 1996 from $6,362,000 in 1995 and $4,130,000 in 1994. The
increases were primarily due to increases in personnel and related costs
necessary to support the Company's growth and legal and other costs incurred
relating to the Cadence litigation. General and administrative expenses
represented 14%, 9% and 10%, of total revenue in 1996, 1995 and 1994,
respectively. The Company charged to expenses approximately $6,850,000 during
1996, net of expected recoveries from insurance related to the Cadence
litigation. The Company expects these legal expenditures to continue throughout
1997.
Acquisition of Technology. In September and December 1996, the Company acquired
rights to certain software technology under development. As the acquired
technology had not reached technological feasibility at the date of acquisition,
it was expensed upon acquisition. In October 1995, the Company purchased a set
of timing simulator algorithms which had not reached technological feasibility
at the date of acquisition and the cost associated with the technology was
expensed upon acquisition. In April 1994, the Company purchased and expensed
in-process library generation and automated cell characterization technology now
embodied in its MASTER Toolbox product, recently renamed Gemini. As the acquired
technology had not reached technological feasibility at the date of acquisition,
it was expensed upon acquisition.
Merger Expenses. In connection with the 1996 mergers with Anagram, Meta and
FrontLine, the Company incurred direct transaction costs and merger-related
integration expenses of approximately $9,300,000, consisting of transaction fees
for investment bankers, attorneys, accountants, financial printing and
shareholder meetings of approximately $5,352,000, charges for the elimination of
duplicate facilities of approximately $2,250,000, and severance and other
related costs of approximately $1,698,000.
In connection with the 1995 merger with ISS, the Company incurred direct
transaction costs and merger-related integration expenses of approximately
$3,590,000 consisting of transaction fees for investment bankers, attorneys,
accountants, financial printing and shareholder meetings of approximately
$2,858,000, charges for the elimination of duplicate facilities of approximately
$233,000 and severance and certain other related costs of approximately
$499,000.
As of December 31, 1996, accrued liabilities included approximately $3,910,000
of merger-related costs, which the Company expects to pay in 1997, all of which
are related to the 1996 mergers.
Income from Operations. The Company had income from operations of $19,232,000,
$11,790,000 and $5,348,000 in 1996, 1995 and 1994, respectively. The changes in
operating results are attributable to revenue growth net of increased expenses
necessary to support the Company's growth. Operating income represented 18%, 17%
and 14% of total revenue in 1996, 1995 and 1994, respectively.
Interest Income. Interest income was $4,204,000, $2,787,000 and $836,000 in
1996, 1995 and 1994, respectively. Interest income increased due to larger cash
balances resulting primarily from the proceeds of the Company's initial public
offering which was completed in June 1995, and the Meta initial public offering
which was completed in November 1995.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No.
109. Pro forma income taxes have been provided for 1995 and 1994 as if Meta (an
S corporation for income tax reporting purposes) had been a C corporation. The
provision for income taxes (pro forma in 1995 and 1994) as a percentage of
pre-tax income was 47%, 43% and 35% for 1996, 1995 and 1994, respectively. The
percentage in 1996 and 1995 (pro forma) was higher than the federal statutory
income tax rate of approximately 35% due to the effect of certain merger
expenses that were not deductible for income tax purposes.
17
<PAGE>
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 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 operating activities was $21,414,000, $20,089,000 and
$5,568,000 in 1996, 1995 and 1994, respectively. The increases in cash provided
by operating activities primarily results from increases in net income,
depreciation, accrued liabilities and deferred revenue. The Company used
$42,020,000, $28,267,000 and $23,488,000 of net cash in 1996, 1995 and 1994,
respectively, for investing activities. Net cash used in investing activities
relates primarily to net purchases of short-term "available-for-sale"
securities. 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.
Purchases of equipment, furniture and fixtures primarily represent computer
workstations and file servers for 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 $3,663,000, $48,263,000 and
$17,953,000 in 1996, 1995 and 1994, respectively. Net cash provided by financing
activities was lower in 1996 than in 1995 and 1994 due to the Company receiving
the proceeds from the ISS initial public offering, which was completed in
February 1994, the Avant! initial public offering, which was completed in June
1995 and the Meta initial public offering, which was completed in November 1995.
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 December 31, 1996, the Company had $117,323,000 of cash and short-term
investments and $115,977,000 in working capital. As of December 31, 1996, the
Company had $30,263,000 in current liabilities, including $13,824,000 of
deferred revenue. As of December 31, 1996, 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.
Based on its operating plan and absent any adverse judgments in the Cadence
litigation, the Company believes that it has available cash and short-term
investments sufficient to fund the Company's operations through at least the
next 12 months.
18
<PAGE>
Factors That May Affect Future Results
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. 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. A criminal complaint, if filed
against the Company, the Company's management or its employees, could result in
a loss of management and other personnel and could have other material adverse
effects on the Company. The Cadence litigation may result in canceled or
postponed customer orders and increased future expenditures. Since only a small
portion of Avant!'s expenses varies with its revenue, canceled orders or
significant expenses related to the Cadence litigation may have an adverse
affect on Avant!'s business, operating results and financial condition.
Furthermore, an adverse ruling in the Cadence litigation could result in
Avant!'s inability to sell certain of its place and route products and as a
result could have a material adverse effect on Avant!'s business, operating
results and financial condition. 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 30% of total consolidated revenues for
the three-year period ended December 31, 1996.
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 fact during 1996, the semiconductor industry experienced
slower growth than in 1995. In addition, the EDA industry is experiencing
consolidation as the major EDA vendors are seeking to provide a complete range
of EDA products to customers. There can be no assurance that 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 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 or financial position.
19
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Independent Auditors' Report
The Board of Directors
Avant! Corporation:
We have audited the accompanying consolidated balance sheets of Avant!
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the accompanying consolidated financial
statements, we have also audited the accompanying consolidated financial
statement schedule. These consolidated financial statements and the related
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avant! Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG PEAT MARWICK LLP
January 22, 1997, except as to the
second paragraph of note 11
which is as of March 18, 1997
San Jose, California
20
<PAGE>
<TABLE>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands, except per share data)
<CAPTION>
1996 1995
--------- ---------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,067 $ 50,010
Short-term investments 84,256 46,969
Accounts receivable, net 13,321 12,839
Deferred income taxes 6,450 3,167
Prepaid income taxes 1,254 328
Other assets 7,892 1,724
--------- ---------
Total current assets 146,240 115,037
Equipment, furniture and fixtures, net 8,929 7,003
Capitalized software, net 62 150
Other assets 872 97
Deferred income taxes -- 886
--------- ---------
Total assets $ 156,103 $ 123,173
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of capital lease obligations $ 52 $ 145
Accounts payable 1,716 1,000
Accrued compensation 4,082 2,418
Accrued income taxes -- 553
Other accrued liabilities 9,947 5,655
Current portion of technology acquisition payable 642 876
Deferred revenue 13,824 9,585
Shareholder distribution payable -- 1,800
--------- ---------
Total current liabilities 30,263 22,032
Capital lease obligations, less current portion -- 40
Deferred rent 71 110
Other noncurrent liabilities 43 156
Technology acquisition payable, less current portion 903 1,424
--------- ---------
Total liabilities 31,280 23,762
--------- ---------
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred stock,
$.0001 par value; 5,000 shares authorized;
no shares issued and outstanding
in 1996 and 1995 -- --
Common stock, $.0001 par value;
50,000 and 25,000 shares authorized,
24,952 and 23,845 shares
issued and outstanding in
1996 and 1995, respectively 3 2
Additional paid-in capital 110,583 95,189
Deferred compensation (2,820) (517)
Net unrealized gain (loss) on short-term investments (75) 89
Retained earnings 17,132 4,648
--------- ---------
Total shareholders' equity 124,823 99,411
--------- ---------
Total liabilities and shareholders' equity $ 156,103 $ 123,173
========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
21
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per share data)
1996 1995 1994
-------- -------- --------
Revenue:
Software $ 82,134 $ 55,164 $ 30,929
Services 23,953 13,704 8,415
-------- -------- --------
Total revenue 106,087 68,868 39,344
-------- -------- --------
Costs and expenses:
Costs of software 2,512 1,529 1,122
Costs of services 7,269 4,845 2,940
Selling and marketing 29,928 22,741 14,476
Research and development 20,696 15,318 9,728
General and administrative 15,450 6,362 4,130
Acquisition of technology 1,700 2,693 1,600
Merger expenses 9,300 3,590 --
-------- -------- --------
Total operating expenses 86,855 57,078 33,996
-------- -------- --------
Income from operations 19,232 11,790 5,348
Interest income 4,204 2,787 836
-------- -------- --------
Income before income taxes 23,436 14,577 6,184
Provision for income taxes 10,952 4,053 1,549
-------- -------- --------
Net income $ 12,484 $ 10,524 $ 4,635
======== ======== ========
Net income per common share $ 0.47
========
Pro forma net income and per share data:
Income before income taxes as reported $ 14,577 $ 6,184
Pro forma provision for income taxes 6,227 2,175
-------- --------
Pro forma net income $ 8,350 $ 4,009
======== ========
Pro forma net income per common share $ 0.35 $ 0.20
======== ========
Weighted average number of common and common
equivalent shares outstanding 26,761 24,159 20,457
======== ======== ========
See accompanying notes to consolidated financial statements
22
<PAGE>
<TABLE>
AVANT! CORPORATION
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<CAPTION>
Net
unrealized
gain (loss)
Series A on
convertible short- Total
preferred stock Common stock Additional Deferred term share-
--------------- ---------------- paid-in compen- invest- Retained holders'
Shares Amount Shares Amount capital sation ments earnings equity
------ ------- ------- ------ -------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 1,710 $ 630 10,711 $ 1 $ 4,094 $ - $ (8) $ 3,044 $ 7,761
Issuance of common stock - - 239 - 517 - - - 517
Conversion of preferred
stock to common stock (1,023) (630) 1,023 - 630 - - - -
Issuance of common stock
in public offering, net of
expenses - - 2,250 - 20,342 - - - 20,342
Exercise of common stock options,
including related tax benefits - - 134 - 848 - - - 848
Issuance of common stock under
employee stock purchase plan - - 5 - 66 - - - 66
Issuance of shares and
accumulated deficit of
merged company - 113 - 1 - - (103) (102)
Repurchase of common stock - - (12) - (2) - - - (2)
Issuance of common stock
options at below market value - - - - 62 (62) - - -
Unrealized loss on short-term
investments - - - - - - (214) - (214)
Distributions to shareholders - - - - - - - (2,326) (2,326)
Net income - - - - - - - 4,635 4,635
------ ------- ------- ----- ------- ------ ------ ------ -------
Balances as of December 31, 1994 687 - 14,463 1 26,558 (62) (222) 5,250 31,525
Issuance of common stock - - 1,063 - 660 - - - 660
Conversion of long-term
debt to common stock - - 100 - 100 - - - 100
Issuance of common stock
in public offerings,
net of expenses - - 3,367 - 52,381 - - - 52,381
Conversion of mandatorily
redeemable convertible
preferred stock into
common stock - - 3,570 1 8,311 - - - 8,312
Conversion of preferred stock
into common stock (687) - 687 - - - - - -
Exercise of common stock
options and warrants,
including related tax benefits - - 570 - 5,948 - - - 5,948
Repurchase of common stock - - (18) - (3) - - - (3)
Issuance of common stock
options at below market value - - - - 588 (588) - - -
Amortization of deferred
compensation - - - - - 133 - - 133
Issuance of common stock
under employee stock
purchase plan - - 43 - 534 - - - 534
Unrealized gain on
short-term investments - - - - - - 311 - 311
Distributions to shareholders - - - - - - - (11,126) (11,126)
Issuance of common stock
upon exercise of stock
appreciation rights - - - - 112 - - - 112
Net income - - - - - - - 10,524 10,524
------ ------- ------- ----- ------- ------ ------ ------ -------
Balances as of December 31, 1995 - - 23,845 2 95,189 (517) 89 4,648 99,411
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Net
unrealized
gain (loss)
Series A on
convertible short- Total
preferred stock Common stock Additional Deferred term share-
--------------- ---------------- paid-in compen- invest- Retained holders'
Shares Amount Shares Amount capital sation ments earnings equity
------ ------- ------- ------- -------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995 - - 23,845 2 95,189 (517) 89 4,648 99,411
Issuance of common stock in acquisition
of technology - - 29 - 1,500 (750) - - 750
Issuance of common stock for services - - 6 - 140 - - - 140
Exercise of common stock options,
including related tax benefits - - 989 1 9,857 - - - 9,858
Issuance of common stock under employee
stock purchase plan - - 83 - 1,177 - - - 1,177
Issuance of common stock options at
below market value - - - - 2,122 (2,122) - - -
Amortization of deferred compensation - - - - - 569 - - 569
Unrealized loss on short-term
investments - - - - - - (164) - (164)
Issuance of common stock upon exercise
of stock appreciation rights - - - - 488 - - - 488
Reversal of prior year shareholder
distribution - - - - 46 - - - 46
Contributed capital related to stock
compensation expense - - - - 64 - - - 64
Net income - - - - - - - 12,484 12,484
------ ----- ------- ------ --------- --------- -------- -------- --------
Balances as of December 31, 1996 - $ - 24,952 $ 3 $110,583 $ (2,820) $ (75) $17,132 $124,823
======= ===== ======= ====== ========= ========= ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, 1994
(in thousands)
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,484 $ 10,524 $ 4,635
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,657 2,112 1,520
Gain on sale of securities (14) -- --
Compensation expense (benefit) attributable
to stock appreciation rights (31) 484 380
Stock compensation expense 64 112 --
Loss on disposal of equipment -- 19 16
Amortization of capitalized software costs 88 228 199
Amortization of deferred compensation 569 133 --
Deferred income taxes (2,397) (1,431) 156
Deferred rent (39) 110 70
Acquisition of technology 750 2,693 --
Stock issued for services 140 -- 52
Changes in operating assets and liabilities:
Accounts receivable, net (482) (2,974) (4,826)
Prepaid income taxes and other assets (3,139) (799) (217)
Shareholder advances -- -- 300
Accounts payable 716 277 266
Accrued compensation 1,664 650 1,521
Accrued income taxes (553) 403 (221)
Other accrued liabilities 4,698 3,722 318
Deferred revenue 4,239 3,826 1,399
--------- --------- ---------
Net cash provided by operating activities 21,414 20,089 5,568
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (206,593) (79,568) (92,615)
Maturities and sales of short-term investments 169,156 56,471 71,366
Purchases of equipment, furniture and fixtures (4,583) (5,107) (2,115)
Capitalized software development costs -- (63) (143)
Cash received in merger -- -- 19
--------- --------- ---------
Net cash used in investing activities (42,020) (28,267) (23,488)
--------- --------- ---------
Cash flows from financing activities:
Distributions to shareholders (1,754) (9,327) (2,896)
Payments on notes payable -- -- (163)
Principal payments under capital lease obligations (133) (235) (235)
Payments on technology acquisition payable (755) (393) --
Issuance of preferred stock, net -- 500 427
Repurchase of common stock -- (3) (2)
Exercise of stock options 5,128 4,646 201
Issuance of common stock under employee stock purchase plan 1,177 534 66
Issuance of common stock, net -- 52,541 20,365
Issuance of convertible note -- -- 19
--------- --------- ---------
Net cash provided by financing activities 3,663 48,263 17,953
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (16,943) 40,085 33
Cash and cash equivalents, beginning of year 50,010 9,925 9,892
--------- --------- ---------
Cash and cash equivalents, end of year $ 33,067 $ 50,010 $ 9,925
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
25
<PAGE>
AVANT! CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
1. Nature Of Business And Summary Of Significant Accounting Policies
Nature of Business
Avant! Corporation (the Company or Avant!) develops, markets and
supports software products that assist design engineers in the
automated design, layout, physical verification and analysis of
advanced integrated circuits. Its primary customers are semiconductor
companies in the United States, Japan, Korea, Taiwan and Europe.
Principles of Presentation and Preparation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements have been restated
to reflect the effect of the mergers with Integrated Silicon Systems,
Inc. (ISS), Anagram, Inc. (Anagram), Meta-Software, Inc. (Meta) and
FrontLine Design Automation, Inc. (FrontLine) discussed in Note 2.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
Revenue consists primarily of fees for licenses of the Company's
software products, maintenance and customer support.
Software Revenue
Revenue from the sale of software licenses is recognized upon
shipment of the products, delivery of permanent authorization codes
and fulfillment of acceptance terms, if any, providing that no
significant vendor and post-contract support obligations remain and
collection of the related receivable is probable. Any remaining
insignificant vendor 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
payments for software products, such payments are reported as
deferred revenue until all conditions for revenue recognition are
met. The Company has entered into certain license agreements under
which software, support and other services are provided to a customer
for a bundled price for a specific period of time. Generally, revenue
under such agreements is recognized ratably over the contract period.
Services Revenue
Maintenance revenue is deferred and recognized ratably over the term
of the maintenance agreement, which is typically 12 months. Revenue
from customer training, support and other services is recognized as
the service is performed.
26
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months at the date of acquisition or less to be cash
equivalents.
Cash equivalents are stated at cost and consist primarily of
certificates of deposit and commercial paper. The carrying amount of
cash and cash equivalents approximates fair value.
Short-Term Investments
Short-term investments, which consist of demand deposit investments in
limited maturity fixed-income mutual funds, short-term debt securities,
U.S. Government Agency debt securities, U.S. Treasury Bills,
municipal/corporate auction preferred stock, municipal bonds and demand
deposit investments in limited-maturity fixed-income mutual funds are
reported at fair value, and are classified as available-for-sale
securities. The cost of securities sold is determined using the
specific identification method when computing realized gains and
losses. Fair value is determined using available market information. As
of December 31, 1996, the net unrealized loss on short-term investments
of $75,000 consisted of $86,000 of gross unrealized gains, and $161,000
of gross unrealized losses. As of December 31, 1995, the net unrealized
gain on short-term investments of $89,000 consisted of $136,000 of
gross unrealized gains, and $47,000 of gross unrealized losses.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures consist primarily of computer
workstations and file servers for employees and are stated at cost net
of accumulated depreciation of $7,784,000 and $5,127,000 as of December
31, 1996 and 1995, respectively. Depreciation is provided on the
straight-line method over the estimated useful lives of the related
assets (generally, five years).
Software Development Costs
Certain software development costs for new products and product
enhancements are capitalized upon the establishment of technological
feasibility, which is defined by the Company as the completion of a
working model of the software. Capitalization of computer software
development costs ceases, and amortization begins, when the product is
available for general release to customers. The ongoing assessment of
the realizability of these costs requires considerable judgment related
to anticipated future product revenues, estimated economic life and
changes in hardware and software technology. The amount of software
development costs capitalized for the years 1996, 1995 and 1994 was
none, $63,000, and, $143,000 respectively. Accumulated amortization of
software development costs was $1,165,000 and $1,077,000 as of December
31, 1996 and 1995, respectively.
Amortization of software development costs is provided on a
product-by-product basis. Annual amortization is the greater of the
amount computed using the ratio of current product revenue to the total
of current and anticipated future product revenue or the straight-line
method over the remaining estimated economic life of the product. All
current products have estimated economic lives of three years.
Amortization of software development costs for the years 1996, 1995 and
1994 was $88,000, $228,000, and $199,000, respectively. Amortization of
software development costs is included in costs of software in the
accompanying consolidated statements of income.
27
<PAGE>
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
The pro forma provision for income taxes for 1995 and 1994 reflects the
tax expense that would have been reported if Meta (an S corporation for
income tax reporting purposes) had been a C corporation during those
periods.
Net Income and Pro Forma Net Income Per Common Share
Net income per common share is computed using the weighted average
number of common and common equivalent shares outstanding during each
period presented using the treasury stock method. Common stock
equivalents consist of stock options and awards.
Pro forma net income per common share is computed using pro forma net
income which reflects the tax expense that would have been reported if
Meta (an S corporation for income tax reporting purposes) had been a C
corporation.
Common stock equivalents are excluded from the computation if their
effect is antidilutive, except that common stock issued and stock
options and awards during the 12 months preceding the initial filing of
the Registration Statement for the Company's initial public offering
have been included in the calculation of common and common equivalent
shares using the treasury stock method as if they were outstanding for
all periods presented. In addition during 1995 and 1994, the
calculation includes shares deemed to be outstanding, which represent
the number of shares sufficient to fund Meta's final S corporation
distribution.
Stock Option and Stock Purchase Plans
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Under SFAS No. 123, the Company must disclose pro forma net income and
pro forma earnings per share for employee stock option grants and
employee stock purchases made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied.
28
<PAGE>
Statements of Cash Flows
Interest of $141,000, $51,000 and $42,000 was paid in 1996, 1995 and
1994, respectively. Income taxes of $11,076,000, $2,041,000 and
$1,125,000 was paid during 1996, 1995 and 1994, respectively.
Acquisition of equipment under capital lease obligations was $298,000
during 1994. Deferred compensation of $2,872,000, $588,000 and $62,000
was recognized in 1996, 1995 and 1994, respectively, for stock options
issued below market value. An income tax benefit attributable to
employee stock plans of $4,730,000, $1,302,000, and $647,000 was
credited to equity in the years ended December 31, 1996, 1995 and 1994,
respectively which is included in the change in prepaid income taxes
and other assets. In connection with the Company's initial public
offering in 1995, mandatorily redeemable convertible preferred stock
was converted to common stock in the amount of $8,312,000. Other
accrued liabilities were reduced $488,000 through the issuance of
common stock related to accrued stock appreciation rights liabilities.
The Company issued $750,000 of common stock for the acquisition of
technology during 1996. Conversion of long-term debt to common stock
was $100,000 in 1995.
Translation of Foreign Currencies
The functional currency of the Company's foreign subsidiaries is the
U.S. dollar. Resulting foreign exchange gains and losses, which have
been insignificant, are included in the results of operations.
Reclassification
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the 1996 presentation.
2. Mergers and Acquisitions
On December 31, 1996, the Company issued approximately 29,000 shares of
its common stock for all of the outstanding stock of Nexsyn Design
Technology Inc. (Nexsyn), and assumed approximately 22,000 stock
options under option plans. The financial position, results of
operations and cash flows of Nexsyn were not material to Avant!, and
the acquisition was accounted for by the purchase method.
On November 27, 1996, the Company issued approximately 1,812,000 shares
of its common stock for all of the outstanding common stock of
FrontLine, and assumed approximately 410,000 warrants and stock options
under option plans.
On October 29, 1996, the Company issued approximately 4,471,000 shares
of its common stock for all of the outstanding common stock of Meta,
and assumed approximately 608,000 stock options and subscriptions under
option and purchase plans.
On September 27, 1996, the Company issued approximately 2,154,000
shares of its common stock for all of the outstanding common and
preferred stock of Anagram, and assumed approximately 260,000 stock
options under option plans. The Anagram outstanding preferred stock has
been presented as common stock for all periods presented in the
consolidated financial statements.
The FrontLine, Meta and Anagram mergers 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 include the results of operations, financial position, and
cash flows of FrontLine, Meta and Anagram.
29
<PAGE>
Total revenue and net income (loss) for the individual entities
throughout their respective acquisition dates are as follows (in
thousands):
Years ended
December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
Total revenue:
Avant! $ 70,608 $ 38,004 $ 18,958
Anagram 7,009 3,508 241
Meta 24,121 25,281 19,652
FrontLine 4,349 2,075 493
-------- -------- --------
$106,087 $ 68,868 $ 39,344
======== ======== ========
Net income (loss):
Avant! $ 5,309 $ 5,065 $ 2,260
Anagram 2,498 1,170 19
Meta (pro forma 1995 and 1994) 4,477 2,177 2,134
FrontLine 70 (99) (646)
-------- -------- --------
12,354 8,313 3,767
Adjustment for deferred taxes 130 37 242
-------- -------- --------
As restated $ 12,484 $ 8,350 $ 4,009
======== ======== ========
In connection with the 1996 mergers with FrontLine, Meta and Anagram,
the Company incurred direct transaction costs and merger-related
integration expenses of approximately $9,300,000, consisting of
transaction fees for investment bankers, attorneys, accountants,
financial printing and shareholder meetings of approximately
$5,352,000, charges for the elimination of duplicate facilities of
approximately $2,250,000, and severance costs and certain other related
costs of approximately $1,698,000. Of the $9,300,000 of merger-related
costs, approximately $8,400,000 related to cash expenditures while
approximately $900,000 related to noncash charges.
On November 27, 1995, the Company issued approximately 6,400,000 shares
of its common stock for all of the outstanding common stock of ISS, and
assumed approximately 1,500,000 stock options and subscriptions under
various ISS stock option and purchase plans. The merger has been
accounted for as a pooling of interests, and accordingly, the Company's
consolidated financial statements have been restated for all periods
prior to the merger to include the results of operations, financial
position and cash flows of ISS.
In connection with the 1995 merger with ISS, the Company incurred
direct transaction costs and merger-related integration expenses of
approximately $3,590,000 consisting of transaction fees for investment
bankers, attorneys, accountants, financial printing and shareholder
meetings of approximately $2,858,000, charges for the elimination of
duplicate facilities of approximately $233,000, and severance and
certain other related costs of approximately $499,000. Of the
$3,590,000 of merger-related costs, approximately $3,390,000 related to
cash expenditures while approximately $200,000 related to noncash
charges.
As of December 31, 1996, accrued liabilities included approximately
$3,910,000 of merger related costs, which the Company expects to pay in
1997, all of which are related to the 1996 mergers.
On May 5, 1994, ISS completed a merger with Performance Signal
Integrity, Inc. (PSI), a Pennsylvania corporation. The financial
position, results of operations and cash flows of PSI were not material
to ISS, and the merger was accounted for as an immaterial pooling of
interests. Therefore, ISS's previously reported financial results were
not restated for the PSI merger.
30
<PAGE>
3. Mandatorily Redeemable Convertible Preferred stock
In connection with the completion of the Company's initial public
offering in June 1995, all the outstanding mandatorily redeemable
convertible preferred stock automatically converted into approximately
3,570,000 shares of the Company's common stock. In addition,
outstanding warrants to acquire Series B preferred stock were
automatically converted into approximately 26,000 shares of the
Company's common stock.
4. Shareholders' Equity
Initial Public Offering and Changes in Authorized Common and Preferred
Stock
In April 1995, the Company increased its authorized number of shares of
preferred stock to 5,000,000 shares and authorized the Board of
Directors to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series, without any
further vote or action by the shareholders.
In June 1995, the Company closed its initial public offering of common
stock at $13.00 per share. The net proceeds of the offering were
$27,713,000 after deducting applicable costs and expenses. In
connection with the public offering, all the outstanding Series A
preferred stock automatically converted into approximately 687,000
shares of the Company's common stock.
In May 1996, the Company increased its authorized number of shares of
common stock from 25,000,000 to 50,000,000 shares.
Shareholder Distributions
Meta (an S corporation for income tax reporting purposes) made
distributions to its shareholders to provide them with funds to pay
income taxes on corporate earnings. Prior to the completion of the Meta
initial public offering and the termination of the S corporation
election in November 1995, Meta declared a distribution payable to
existing shareholders of Meta. This distribution represented
undistributed tax basis earnings of Meta through the termination of the
S corporation election.
1995 Stock Option/Issuance Plan
The Company approved the 1995 Stock Option/Stock Issuance Plan (the
1995 Plan) in April 1995, under which all remaining outstanding stock
options and shares available for grant under the Company's 1993 Stock
Option/Stock Issuance Plan and 1,000,000 additional shares of the
Company's common stock has been authorized for issuance. The 1995 Plan
is intended to serve as a successor to the 1993 Stock Option/Stock
Issuance Plan (see below) and has terms similar to those of the 1993
Stock Option/Stock Issuance Plan. Under the 1995 Plan, however, each
individual serving as a nonemployee Board of Directors' member on the
date the Underwriting Agreement for the initial public offering was
executed received an option grant on such date for 20,000 shares of
common stock, provided such individual had not otherwise been in the
prior employ of the Company. Each individual who first becomes a
nonemployee Board of Directors' member thereafter receives a 20,000
share option grant on the date such individual joins the Board of
Directors provided such individual has not been in the prior employ of
the Company. In addition, at each annual shareholders' meeting,
beginning with the 1996 Annual Shareholders' Meeting, each individual
who continues to serve as a nonemployee Board of Directors' member
after the meeting receives an additional option grant to purchase 5,000
shares of common stock whether or not such individual has been in the
prior employ of the Company.
31
<PAGE>
1993 Stock Option/Stock Issuance Plan
In September 1993, the Board of Directors approved the 1993 Stock
Option/Stock Issuance Plan (the Plan). Options granted under the Plan
may be either incentive stock options or nonstatutory stock options, as
designated by the Board of Directors. The Plan provides that the
exercise price of an incentive stock option and a nonstatutory option
will be no less than the fair market value and 85% of the fair market
value, respectively, of the Company's common stock at the date of
grant, as determined by the Board of Directors.
The Company's Board of Directors also has the authority to set exercise
dates (no longer than 10 years from the date of grant), payment terms
and other provisions for each grant. Generally options granted under
the Plan become exercisable as to 25% of the shares on the anniversary
date of grant and thereafter become exercisable ratably over three
years.
The Company has recorded deferred compensation of $3,522,000,
representing the difference between the exercise price and the deemed
fair value of the Company's common stock for 604,000 shares subject to
common stock options granted in the fourth quarter of 1994, the first
quarter of 1995 and options assumed in the Anagram and FrontLine
mergers and Nexsyn acquisition during 1996. The deferred compensation
will be amortized to compensation expense over the period during which
the options become exercisable, generally four years.
In connection with the mergers discussed in Note 2, various ISS,
Anagram, Meta and FrontLine option plans were assumed by the Company,
thereby allowing participants to purchase Avant! stock in amounts and
at prices adjusted to reflect the relative exchange ratios of the
mergers.
1992 Stock Option/Appreciation Plan
Under Meta's 1992 Stock Option/Appreciation Plan (the 1992 Plan), the
exercise price of stock options is to be at not less than 90% of the
fair market value at the date of grant. Fair market value, in the
absence of trading on a national or regional stock exchange, was
established by Meta's Board of Directors based on an independent
valuation of Meta. Options generally vested over a period of one to
four years from the date of grant, expire ten years from the date of
grant, and are terminated, to the extent not exercised, one month after
termination of employment.
The 1992 Plan provides for the exercise of stock appreciation rights
with respect to outstanding options in the absence of trading of Meta's
stock on a national or regional stock exchange. Upon the exercise of
stock appreciation rights, the employee surrendered the related
unexercised option and received cash payment equal to the excess of the
fair market value of the underlying shares at the time of exercise over
the aggregate exercise price of the related option. Compensation
expense was recognized for the appreciation in value from the date of
grant.
During the months of June, July, and August 1995, Meta entered into
agreements with substantially all individual option holders under the
1992 Plan terminating the stock appreciation right feature of the
individual awards. Compensation expense of $484,000, representing the
difference between the exercise price and the fair market value of the
stock, was recorded based on the vested stock appreciation rights of
the individual shareholders through the date such rights were
terminated. Upon effectiveness of the Meta initial public offering, all
stock appreciation rights terminated, and no further compensation
expense was recorded.
32
<PAGE>
The Company applies APB Opinion No. 25 in accounting for its option and
purchase plans and accordingly, compensation expense has been
recognized for its stock options in the financial statements using the
intrinsic value method. Had the Company determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below for the
years ended December 31, (in thousands):
1996 1995
-------- --------
Net income
As reported (pro forma in 1995) $ 12,484 $ 8,350
Additional compensation cost resulting from:
Fixed stock options (4,592) (1,772)
Performance based stock options (2) (2)
Employee stock purchase rights (1,044) (309)
-------- --------
Pro forma $ 6,846 $ 6,267
======== ========
Earnings per share
As reported (pro forma in 1995) $ 0.47 $ 0.35
Pro forma $ 0.26 $ 0.26
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995,
respectively: expected volatility of 57% and 57%, risk-free interest
rates of 5.27% and 7.86%, expected lives of six months after vesting
and no dividend yield.
The effects of applying SFAS No. 123 for disclosing compensation cost
may not be representative of the effects on reported net income for
future years because pro forma net income reflects compensation costs
only for stock options granted in 1996 and 1995 and does not consider
compensation cost for stock options granted prior to January 1, 1995.
<TABLE>
A summary of the status of the Company's fixed stock option plans as
of December 31, 1996, 1995 and 1994, and changes during the years
ending on those dates is presented below:
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(000) price (000) price (000) price
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,477 $ 9.42 2,600 $ 6.42 734 $0.78
Granted 1,738 17.61 1,816 14.00 2,275 6.95
Exercised (990) 3.41 (598) 11.21 (134) 0.69
Canceled (362) 14.10 (341) 7.16 (275) 0.68
----- ----- -----
Outstanding at end of year 3,863 $12.84 3,477 $ 9.42 2,600 $6.42
===== ===== =====
Options exercisable at end
of year 1,996 1,444 881
Weighted average fair
value of options granted
during the year $7.28 $5.96 -
</TABLE>
33
<PAGE>
<TABLE>
The following summarizes information about fixed stock options
outstanding as of December 31, 1996:
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- -----------------------------
Weighted
Range average Weighted
of Number remaining Weighted Number average
exercise outstanding contractual average exercisable exercise
price (000) life (years) exercise price (000) price
- ----------------- ----- ------------ -------------- ----- -----
<S> <C> <C> <C> <C> <C>
$0.07-0.30 902 6.86 $ 0.28 647 $ 0.29
$0.31-15.00 1,367 8.48 7.13 617 6.47
$15.00-25.00 1,145 8.61 18.66 672 17.35
$25.01-44.50 449 9.42 35.66 60 38.01
----- ---- ------ ----- -------
$0.07-44.50 3,863 8.15 $ 12.84 1,996 $ 7.57
===== ==== ====== ===== =======
</TABLE>
FrontLine granted certain employees stock option awards whose vesting
is contingent upon achieving certain performance measures. The exercise
price of each option, which has a ten year life, is equal to the market
price of the Company's stock on the date of grant.
The fair value of each FrontLine option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995,
respectively: risk-free interest rates of 5.27% and 7.86%, and expected
lives six months after vesting and no dividend yield.
<TABLE>
The following is a summary of the activity under the Company's
performance based stock option plan:
<CAPTION>
1996 1995
------------------------ ------------------------
Weighted Weighted
average average
Shares exercise Shares exercise
(000) price (000) price
----- ----- ----- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 72 $0.58 - $ -
Granted 24 0.58 72 0.58
-- --
Outstanding at end of year 96 $0.58 72 $0.58
== ==
Options exercisable at end of year 35 13
Weighted average fair value of
options granted during the year $0.08 $0.11
</TABLE>
As of December 31, 1996, the 96,000 performance options outstanding
under the Plan have an exercise price of $0.58 and a weighted average
remaining contractual life of 8.68 years. The Company expects that
approximately 50% of the nonvested awards as of December 31, 1996 will
eventually vest.
Warrants
During 1995, FrontLine issued a warrant to purchase 10,380 shares of
common stock at a price of $0.58 per share in connection with a
technology development agreement. This warrant expires on October 31,
2000 and is exercisable upon completion of certain milestones. As of
December 31, 1996, there were no warrants exercisable. Accounting for
the value of this warrant will be determined upon completion of the
milestones and will be charged to income at that time because the
technology had not reached technological feasibility at the date of the
technology development agreement.
34
<PAGE>
Common Stock Awards
An agreement with a distributor provides for the issuance of common
stock in lieu of cash sales commissions. In April 1996, FrontLine
issued approximately 6,000 shares of common stock and recognized a
charge to income of approximately $140,000. The Company may issue up to
15,000 additional shares of common stock for future sales commissions
through 1998.
5. Leases
Capital Leases
The Company is obligated to make future minimum lease payments under
capital lease arrangements of $52,000 during 1997.
Operating Leases
The Company leases its Sunnyvale, California, Research Park Triangle,
North Carolina, and certain sales facilities under operating lease
agreements which expire over the next nine years. Rental expense
incurred by the Company under operating lease agreements totaled
$2,164,000, $1,366,000, and $1,190,000, and for the years ended
December 31, 1996, 1995 and 1994, respectively.
Future annual minimum lease payments under operating leases for the
years ended December 31, are as follows (in thousands):
1997 $ 2,047
1998 1,175
1999 851
2000 742
2001 700
Thereafter 2,741
--------
$ 8,256
========
6. Income Taxes
The components of income tax expense, as presented in the accompanying
consolidated statements of income, are comprised of federal taxes,
state taxes and certain foreign taxes. The pro forma provision for
income taxes reflects the income tax expense that would have been
reported if Meta (an S corporation for income tax reporting purposes)
had been a C corporation for the years ended December 31, 1995 and
1994. The components of income taxes and pro forma income taxes as of
December 31, 1996, 1995 and 1994, are as follows (in thousands):
1996 1995 1994
------ ------ ------
Provision for income taxes:
Current:
Federal $ 7,127 $ 1,736 $ 105
Foreign 725 1,609 535
State 767 837 106
------ ------ ------
Total 8,619 4,182 746
------ ------ ------
Deferred:
Federal (2,144) (826) 102
State (253) (605) 54
------ ------ ------
Total (2,397) (1,431) 156
------ ------ ------
Charge in lieu of taxes attributable
to employee stock plans 4,730 1,302 647
------ ----- ------
Total provision for income
taxes $ 10,952 $ 4,053 $ 1,549
====== ===== ======
35
<PAGE>
Pro forma income taxes:
Current:
Federal $ 2,989 $ 1,073
Foreign 1,609 535
State 1,240 332
------- -------
Total 5,838 1,940
------- -------
Deferred:
Federal (396) (394)
State (517) (18)
------- -------
Total (913) (412)
------- -------
Charge in lieu of taxes attributable
to employee stock plans 1,302 647
------- -------
Total pro forma provision for
income taxes $ 6,227 $ 2,175
======= =======
The Company's effective tax rate and pro forma effective rate differs
from the federal statutory income tax rate of 35% as follows (in
thousands):
1996 1995 1994
-------- -------- --------
Income tax expense at statutory rate $ 8,203 $ 5,102 $ 2,164
State tax expense 1,540 491 153
Nondeductible merger costs 2,355 938 --
Change in valuation allowance -- (89) 89
Tax exempt income (307) (306) (140)
Tax credits (387) (148) (78)
Foreign sales corporation (980) (96) --
S corporation benefit -- (575) (1,134)
Establishment of deferred tax assets
in conjunction with Meta's transition
from an S corporation to C corporation
status -- (1,725) --
Foreign taxes paid by S Corporation -- 423 497
Other 528 38 (2)
-------- -------- --------
Actual income tax expense $ 10,952 $ 4,053 $ 1,549
======== ======== ========
Income tax expense at statutory rate $ 5,102 $ 2,164
State tax expense 815 259
Nondeductible merger costs 938 --
Change in valuation allowance (89) 89
Tax exempt income (306) (140)
Tax credits (253) (222)
Foreign sales corporation (96) --
Other 116 25
------- -------
Pro forma income tax expense $ 6,227 $ 2,175
======= =======
36
<PAGE>
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
------ ------
Deferred tax assets:
Accrued liabilities $1,343 $1,385
Allowance for doubtful accounts 305 158
Tax credit carryforwards -- 361
Net operating loss carryforwards 201 286
Deferred revenue 4,682 942
Property and equipment, principally due to depreciation 760 1,140
Other 91 95
------ ------
Total gross deferred tax assets 7,382 4,367
------ ------
Less valuation allowance -- --
------ ------
Deferred tax assets, net of valuation allowance 7,382 4,367
Deferred tax liability - Accrual to cash conversion 932 31
------ ------
Net deferred tax assets $6,450 $4,053
====== ======
Management believes it is more likely than not that future operations
will generate sufficient taxable income to realize the deferred tax
assets.
The Company had net operating loss carryforwards of $503,000 and
$760,000 as of December 31, 1996 and 1995, respectively, expiring
through the year 2011.
7. Employee Benefit Plans
401(k) Plan
The Company has a 401(k) retirement savings plans covering
substantially all employees. Contributions are matched at the
discretion of the Board of Directors. The matching contributions
amounted to $769,000, $115,000 and $77,000 for 1996, 1995 and 1994,
respectively.
Employee Stock Purchase Plan
The Company has a Qualified Employee Stock Purchase Plan, which permits
eligible employees to purchase newly issued common stock of the Company
up to an aggregate of 500,000 shares. Under this plan, employees may
purchase from the Company a designated number of shares through payroll
deductions at a price per share equal to 85% of the lesser of the fair
market value of the Company's common stock as of the date of the grant
or the date the right to purchase is exercised. Under the Plan, the
Company sold 83,000, 43,000 and 5,000 shares, to employees in 1996,
1995 and 1994, respectively.
Under SFAS No. 123, compensation cost would be recognized for the fair
value of the employee's purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1996 and 1995,
respectively: expected volatility of 57% and 57%, risk-free interest
rates of 5.61% and 7.76% and no dividend yield. The weighted average
fair value of those purchase rights (including the 15% discount to the
fair value of the Company's common stock) granted in 1996 and 1995 were
$8.17 and $13.25, respectively.
37
<PAGE>
8. Concentrations of Credit Risk
The Company maintains excess cash balances in a variety of financial
instruments such as securities backed by the U.S. government,
municipal/corporate auction preferred stock, municipal bonds,
short-term debt securities, and demand deposit investments in
limited-maturity fixed-income mutual funds. The Company has not
experienced any material losses in any of the instruments it has used
for excess cash balances.
To reduce credit risk, the Company performs ongoing credit evaluations
of its customers' financial condition. The Company maintains reserves
for potential credit losses, but historically has not experienced any
significant losses related to individual customers or groups of
customers in any geographic area. The Company's allowance for doubtful
accounts was $762,000 and $899,000 as of December 31, 1996 and 1995,
respectively.
9. Business Segment and Geographic Information
The Company operates primarily in one business segment, comprising the
electronic design automation industry.
The Company's export revenues are all denominated in U.S. dollars.
International revenue, principally to customers in Asia, accounted for
approximately 34%, 32% and 33% of total revenue in the years ended
December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996 and 1995, no customer comprised in excess of
10% of total accounts receivable.
10. Acquisitions of Technology
In each of December 1996, September 1996, October 1995 and April 1994,
the Company acquired rights to certain software technology under
development. As the acquired software had not reached technological
feasibility at the date of acquisition, it was expensed upon
acquisition.
Under the October 1995 agreement, the Company will make payments of
approximately $670,000, $475,000, $350,000 and $200,000 in March 1997,
1998, 1999 and 2000, respectively. The net present value of these
payments is included in technology acquisition payable in the
accompanying consolidated balance sheets.
11. Commitments and Contingencies
On December 6, 1995, Cadence Design Systems, Inc. (Cadence) filed an
action against the Company and certain of its officers in the Northern
California United States District Court alleging copyright
infringement, unfair competition, misappropriation of trade secrets,
conspiracy, breach of contract, inducing breach of contract and false
advertising. The essence of the complaint is that certain Avant!
employees who were formerly Cadence employees 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.
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.
38
<PAGE>
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. No
criminal charges have been filed against the Company, the Company's
management or its employees, but no assurance can be given that such
charges will not be filed in the future. A criminal complaint, if filed
against the Company, the Company's management or its employees, could
result in a loss of management and other personnel and could have other
material adverse effects on the Company.
On 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. The Margetis action has been
informally stayed pending resolution of Cadence's preliminary
injunction motion.
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 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 30% of total consolidated
revenues for the three-year period ended December 31, 1996. 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.
As of December 31, 1996, the Company was contingently liable for a $4
million letter of credit for general corporate matters.
39
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
See Item 14, Exhibits, Financial Statement Schedules, and Reports on Form 8-K
regarding Form 8-K filed on December 20, 1996.
PART III.
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 as to directors is incorporated by reference
from the Company's Proxy Statement to be filed by the Company with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year.
Executive officers of the Company are appointed by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors. The
executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Gerald C. Hsu 50 President, Chief Executive Officer and
Chairman of the Board of Directors
Y. Eric Cho 49 Senior Vice President of Corporate
Operations and Director
John P. Huyett 43 Chief Financial Officer and Treasurer
Gerald C. Hsu joined the Company in March 1994 as President, Chief Executive
Officer and a director, and has been Chairman of the Avant! Board of Directors
since November 1995. From July 1991 to March 1994, Mr. Hsu was employed by
Cadence, where his last position was President and General Manager of the IC
Design Group. From June 1988 to July 1991, Mr. Hsu was employed by Sun
Microsystems, Inc., an engineering workstation company, where his last position
was Director of Strategic Business Development. Mr. Hsu holds an M.S. in Ocean
Engineering from the Massachusetts Institute of Technology, an M.S. in Mechanics
and Hydraulics form the University of Iowa and a B.S. in Applied Mathematics
from the National Chung-Hsing University, Taiwan.
Y. Eric Cho co-founded the Company in February 1991 and has been a director of
the Company since such date. From January 1996 to the present, Dr. Cho has
served as the Senior Vice President of Corporate Operations. From October 1993
until January 1996, he served as the Vice President of Asian Operations. From
the inception of Avant! until October 1993, Dr. Cho served as Vice President of
Sales and Marketing. From September 1986 to February 1991, Dr. Cho was employed
by Cadence where his last position was Marketing Director of the IC Division.
Dr. Cho holds an M.B.A. form New York University, a Ph.D. in Computer Science
from the University of California, Berkeley and a B.S. in Electrical Engineering
from National Chiao-Tung University, Taiwan.
John P. Huyett has served as Chief Financial Officer and Treasurer of the
Company since he joined Avant! in connection with the merger of Integrated
Silicon Solutions, Inc. (ISS) with and into Avant! in November 1995. Mr. Huyett
also served as Vice President of Financial and Administrative Services from
November 1995 to January 1997. From July 1993 to November 1995, Mr. Huyett
served as Vice President of Finance and Chief Financial Officer of ISS. Mr.
Huyett also served as Treasurer and Secretary of ISS from October 1994 to
November 1995. Prior to July 1993, Mr. Huyett was a partner with KPMG Peat
Marwick LLP, independent auditors of Avant!.
The information required by Item 10 as to the filings of Forms 3, 4, and 5 as
required by Section 16(a) of the Securities Exchange Act of 1934 is incorporated
by reference from the Company's Proxy to be filed by the Company with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days after the end of the fiscal year.
40
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement to be filed by the Company with the Securities and
Exchange Commission within 120 days after the end of the fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's Proxy to be filed by the Company with the Securities and Exchange
Commission within 120 days after the end of the fiscal year.
PART IV.
<TABLE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<CAPTION>
Page number
in this Form 10-K
-----------------
<S> <C> <C>
(a) 1. Financial Statements
Independent Auditors' Report 20
Consolidated Balance Sheets as of December 31, 1996 and 1995 21
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994 22
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994 23
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 25
Notes to Consolidated Financial Statements 26
Page number
in this Form 10-K
(a)2. Financial Statement Schedule -----------------
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1996, 1995 and 1994 44
</TABLE>
All other financial statement schedules required under Regulation S-X
are omitted as the required information is not applicable.
(a)3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such Exhibits and are incorporated by
reference.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, under Item 2, dated September
27, 1996. Pursuant to this report, the Company announced that it had
completed its merger with Anagram. Anagram's shareholders approved the
merger with consents duly adopted and approved in accordance with the
California Corporations' Code, on September 27, 1996. Upon the closing
of the merger, Anagram became a wholly owned subsidiary of Avant!.
The Company filed a report on Form 8-K, under Item 5, dated October 9,
1996. Pursuant to this report, the Company announced that it entered
into an Agreement and Plan of Reorganization with FrontLine under which
FrontLine would become a wholly owned subsidiary of Avant!.
41
<PAGE>
The Company filed a report on Form 8-K under Items 2 and 5, dated
October 29, 1996. Pursuant to this report, the Company announced that
it had completed its merger with Meta. Both companies' shareholders
approved the merger at the companies' respective special shareholder
meetings convened on October 29, 1996. Upon closing of the merger, Meta
became a wholly owned subsidiary of Avant!. Effective upon consummation
of the merger, Shawn M. Hailey, President and Chief Executive Officer
of Meta, was appointed to Avant!'s Board of Directors. Robert C. Kagle,
a member of the Company's Board of Directors at the time of the merger,
resigned upon consummation of the merger.
The Company filed a report on Form 8-K, under Item 2, dated November
27, 1996. Pursuant to this report, the Company announced that it had
completed its merger with FrontLine. FrontLine's shareholders approved
the merger on November 26, 1996. Upon the closing of the merger,
FrontLine became a wholly owned subsidiary of Avant!.
The Company filed a report on Form 8-K, under Items 4 and 5, dated
December 20, 1996. Pursuant to this report, the Company announced that
it dismissed Roberts Accountancy Corporation as the independent
accountant for Anagram and appointed KPMG Peat Marwick LLP as principal
accountants. The Company acquired Anagram on September 27, 1996, and
the Company's principal accountants previously expressed reliance on
Roberts Accountancy Corporation's report in the Company's registration
statement on Form S-4 dated September 30, 1996. The Company's Audit
Committee of the Board of Directors approved the decision to change
accountants. The Company provided historical selected financial data,
quarterly financial information management's discussion and analysis
and consolidated financial statements which gave effect to the
acquisition of Anagram consummated on September 27, 1996. The Company
also provided supplemental selected financial data, quarterly financial
information management's discussion and analysis and consolidated
financial statements which gave effect to the acquisition of Meta and
FrontLine.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 28, 1997 /s/ GERALD C. HSU
- -------------- -----------------------------------------
Gerald C. Hsu
President, Chief Executive Officer,
and Chairman of the Board of Directors
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ GERALD C. HSU President (principal executive March 28, 1997
- ------------------ officer), Chief Executive Officer --------------
Gerald C. Hsu and Chairman of the Board of Directors
/s/ JOHN P. HUYETT Chief Financial Officer and Treasurer March 28, 1997
- ------------------- (principal accounting officer and --------------
John P. Huyett principal financial officer)
/s/ Y. ERIC CHO Senior Vice President of Corporate March 28, 1997
- --------------- Operations and Director --------------
Y. Eric Cho
/s/ ERIC A. BRILL Director March 28, 1997
- ----------------- --------------
Eric A. Brill
/s/ TENCH COXE Director March 28, 1997
- -------------- --------------
Tench Coxe
/s/ TATSUYA ENOMOTO Director March 28, 1997
- ------------------- --------------
Tatsuya Enomoto
/s/ SHAWN M. HAILEY Senior Vice President of Silicon Tool March 28, 1997
- ------------------- Division and Director --------------
Shawn M. Hailey
</TABLE>
43
<PAGE>
Schedule II
AVANT! CORPORATION
VALUATION AND QUALIFYING ACCOUNTS -
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
Balance Additions Balance
At Beginning Charged At End
of Period to Expense Deductions of Period
---------- ---------- ---------- ---------
Year ended December 31, 1994 $412 $ 86 $ 61 $437
Year ended December 31, 1995 437 590 128 899
Year ended December 31, 1996 899 454 591 762
44
<PAGE>
INDEX TO EXHIBITS
(a)3. Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Reorganization dated as of August 18, 1996 among
the Registrant, AGM Acquisition Corporation and Anagram, Inc. (2)
2.2 Agreement and Plan of Reorganization dated as of August 22, 1996 among
the Registrant, Natasha Merger Corporation and Meta-Software, Inc. (2)
2.3 Agreement and Plan of Reorganization dated as of October 9, 1996 among
the Registrant, DSM Acquisition Corporation and FrontLine Design
Automation, Inc. (3)
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Amended and Restated Investors Rights Agreement between the Company and
the Investors specified therin dated September 24, 1993 (1)
4.2 Specimen Common Stock Certificate (1)
4.3 Registration Rights Agreement between the Registrant and certain
investors dated November 27, 1996 (4)
10.1 Distribution Agreement between the Company and Marubeni Hytech
Corporation as of September 30, 1994 (1)
10.2 Distribution Agreement between the Company and Design Solutions, Inc.
dated as of September 30, 1994 (1)
10.3 Real Property Lease between the Company and TRI/VEST Properties I dated
as of January 5, 1993 (1)
10.4 In-Sync Cooperative Technical and Marketing Agreement between the
Company and Synopsys, Inc. dated March 1, 1995 (1)
10.5 1995 Stock Option/Stock Issuance Plan (1)
10.6 Employee Stock Purchase Plan (1)
10.7 Form of Indemnification Agreement (1)
10.8 Indemnification Agreement entered into between the Company and Gerald
C. Hsu dated May 24, 1994 (1)
11.1 Statement regarding Computation of Net Income Per Share
21.1 List of subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors
- --------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-91128) as declared effective on June 6, 1995.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-4 (File No. 333-11659) as declared effective on September 30, 1996.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
filed with the SEC on October 24, 1996.
(4) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-18445) as filed on January 27, 1997.
The Company's 1996 Annual Report to Shareholders is not to be deemed filed as a
part of this Report.
45
Exhibit 11.1 Calculations of Net Income and Pro Forma Net Income Per Share.
AVANT! CORPORATION AND SUBSIDIARIES
STATEMENTS RE: COMPUTATIONS OF NET INCOME AND PRO FORMA NET INCOME PER SHARE
(in thousands, except per share data)
Years Ended
December 31,
-------------------------------
1996 1995 1994
------- ------- -------
Common shares outstanding: 24,581 20,688 13,470
Common stock equivalents:
Stock options and awards 2,180 1,781 731
Pursuant to Staff Accounting
Bulletin No. 83 -- 520 745
Preferred stock -- 851 5,125
Shares deemed to be outstanding
to fund shareholder distribution -- 319 386
------- ------- -------
Total 26,761 24,159 20,457
======= ======= =======
Net income $12,484
=======
Net income per common share $ 0.47
=======
Pro forma net income $ 8,350 $ 4,009
======= =======
Pro forma net income per share $ 0.35 $ 0.20
======= =======
46
Exhibit 21.1 Subsidiaries of Registrant
Name Jurisdiction of Incorporation
- ---- -----------------------------
Integrated Silicon Systems, Inc. North Carolina
ISS Software Inc. California
ISS Corporate Services, Inc. North Carolina
ArcSys UK Limited England
Avant! Export FSC, Inc. Barbados
FrontLine Design Automation, Inc. California
Meta-Software, Inc. California
Anagram, Inc. California
Avant! Japan KK Japan
Meta-Software KK Japan
Meta-Software SA Switzerland
Meta-Software Deutschland, GMBH Germany
AvanWise, Inc. Delaware
AvanSmart, Inc. Delaware
Nexsyn Design Technologies, Inc. California
47
Exhibit 23.1 Consent of KPMG Peat Marwick LLP
Consent of Independent Auditors
The Board of Directors
Avant! Corporation:
We consent to incorporation by reference in the Registration Statement (No.
333-18445) on Form S-3 and in the Registration Statements (Nos. 333-16981,
333-16303, 333-15159, 333-06405, 33-77196 and 33-77242) on Form S-8 of Avant!
Corporation of our report dated January 22, 1997, except as to the second
paragraph of note 11 which is as of March 18, 1997, relating to the consolidated
balance sheets of Avant! Corporation as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, and the
related consolidated financial statement schedule, which report appears in this
December 31, 1996 annual report on Form 10-K of Avant! Corporation.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
March 28, 1997
48
<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-K and is qualified in its entirety by reference to such financial
statements on this form 10-K
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 33,067
<SECURITIES> 84,256
<RECEIVABLES> 14,220
<ALLOWANCES> 899
<INVENTORY> 0
<CURRENT-ASSETS> 146,240
<PP&E> 16,713
<DEPRECIATION> 7,784
<TOTAL-ASSETS> 156,103
<CURRENT-LIABILITIES> 30,263
<BONDS> 0
<COMMON> 3
0
0
<OTHER-SE> 124,820
<TOTAL-LIABILITY-AND-EQUITY> 156,103
<SALES> 82,134
<TOTAL-REVENUES> 106,087
<CGS> 2,512
<TOTAL-COSTS> 9,781
<OTHER-EXPENSES> 50,624
<LOSS-PROVISION> 454
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,436
<INCOME-TAX> 10,952
<INCOME-CONTINUING> 12,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,484
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
