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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
- -------------------------------------------------------------------------------
Commission File Number 0-25864
AVANT! CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3133226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46871 Bayside Parkway
Fremont, California 94538
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (510) 413-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares outstanding of the registrant's common stock as of
October 30, 1998 was 31,679,890.
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AVANT! CORPORATION
FORM 10-Q
September 30, 1998
INDEX
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PART 1. FINANCIAL INFORMATION Page
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Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 14
Item 2. CHANGES IN SECURITIES 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE PAGE 19
EXHIBIT INDEX 20
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVANT! CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 87,965 $ 77,523
Short-term investments 38,354 57,394
Accounts receivable, net 34,565 24,777
Due from affiliates 10,347 6,171
Deferred income taxes 8,930 7,658
Prepaid expenses and other current assets 16,542 11,644
-------- --------
Total current assets 196,703 185,167
Equipment, furniture and fixtures, net 30,340 33,649
Deferred income taxes 16,003 16,208
Intangibles 15,344 15,461
Other assets 18,210 3,851
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Total assets $276,600 $254,336
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-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,823 $ 7,009
Accrued compensation 9,092 9,000
Other accrued liabilities 8,739 14,195
Accrued income taxes 21,454 6,717
Deferred revenue 17,169 17,945
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Total current liabilities 63,277 54,866
Other noncurrent liabilities 1,729 1,294
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Total liabilities 65,006 56,160
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Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par value; 75,000
authorized; none issued - -
Common stock, $.0001 par value; 75,000
authorized; 31,724
And 32,282 shares issued and outstanding
At September 30, 1998 and December 31, 1997,
respectively 3 3
Additional paid-in capital 160,765 174,180
Deferred compensation (1,314) (2,698)
Other accumulated comprehensive income (losses) 158 (50)
Retained earnings 51,982 26,741
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Total shareholders' equity 211,594 198,176
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Total liabilities and shareholders' equity $276,600 $254,336
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</TABLE>
See accompanying notes to consolidated financial statements.
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AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
Software $39,518 $ 30,167 $113,389 $ 86,199
Services 18,560 11,928 50,719 31,910
------- -------- -------- --------
Total revenue 58,078 42,095 164,108 118,109
------- -------- -------- --------
Costs and expenses:
Costs of software 1,242 1,008 3,631 2,587
Costs of services 3,846 3,390 10,460 10,148
Selling and marketing 14,304 12,423 41,461 34,955
Research and development 13,910 9,219 40,566 24,989
General and administrative 7,251 5,274 17,865 13,507
Acquired in-process research and development - 41,186 - 41,186
Merger expenses - - 10,747 -
------- -------- -------- --------
Total operating expenses 40,553 72,500 124,730 127,372
Income (loss) from operations 17,525 (30,405) 39,378 (9,263)
Interest income and other, net 1,476 1,738 4,402 4,907
------- -------- -------- --------
Income (loss) before income taxes 19,001 (28,667) 43,780 (4,356)
Income tax expense (benefit) 6,460 (10,394) 18,539 (1,564)
------- -------- -------- --------
Net income (loss) $12,541 $(18,273) $ 25,241 $ (2,792)
------- -------- -------- --------
------- -------- -------- --------
Earnings per share - Basic:
Earnings (loss) per share $ 0.39 $ (0.59) $ 0.78 $ (0.09)
------- -------- -------- --------
------- -------- -------- --------
Total weighted average number
of common shares outstanding 32,135 31,231 32,354 30,628
------- -------- -------- --------
------- -------- -------- --------
Earnings per share -- Diluted:
Earnings (loss) per share $ 0.38 $ (0.59) $ 0.75 $ (0.09)
------- -------- -------- --------
------- -------- -------- --------
Total weighted average number
of common and common equivalent
shares outstanding 33,109 31,231 33,718 30,628
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
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AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
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Cash flows from operating activities:
Net income $ 25,241 $ (2,792)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of capitalized software costs - 49
Depreciation and amortization 11,772 4,578
Deferred compensation expense 1,374 1,013
Deferred income taxes (1,067) (16,840)
Acquired in-process research and development - 41,186
Tax benefit related to stock options 360 -
Equity (income) loss in joint ventures (1,294) -
Deferred rent 486 (29)
Provision for doubtful accounts 947 86
Changes in operating assets and liabilities:
Accounts receivable (11,719) (9,746)
Due from affiliates (4,176) -
Prepaid expenses and other assets (7,713) (170)
Accounts payable (186) (15,011)
Accrued compensation 92 (563)
Accrued income taxes 14,737 3,766
Other accrued liabilities (5,403) (285)
Deferred revenue (776) (144)
--------- --------
Net cash provided by operating activities 22,675 5,098
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Cash flows from investing activities:
Purchases of short-term investments (464,291) (90,847)
Maturities and sales of short-term investments 483,539 142,710
Purchases of equipment, furniture and fixtures (5,461) (19,087)
Purchase of equity investments (10,250) -
Additional purchase price related to Compass
acquisition (1,901) (12,985)
Collection of notes receivable - 250
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Net cash provided by investing activities 1,636 20,041
--------- --------
Cash flows from financing activities:
Principal payments under capital lease obligations (104) (150)
Payment of notes payable - (227)
Payments on technology acquisition payable - (642)
Exercise of stock options 1,224 6,729
Repurchase of common stock (17,001) (957)
Repayment from shareholder - 122
Issuance of common stock under stock plans 2,012 1,830
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Net cash (used in) provided by financing
activities (13,869) 6,705
--------- --------
Net increase in cash and cash equivalents 10,442 31,844
Cash and cash equivalents, beginning of period 77,523 54,141
--------- --------
Cash and cash equivalents, end of period $ 87,965 $ 85,985
--------- --------
--------- --------
Cash paid:
Interest $ 101 $ 112
Income taxes $ 4,193 $ 7,550
</TABLE>
See accompanying notes to consolidated financial statements.
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AVANT! CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The consolidated financial
statements have been restated to reflect the effect of the merger with
Technology Modeling Associates, Inc. ("TMA"). In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of financial position and results of operations have
been made. Operating results for interim periods are not necessarily
indicative of results which may be expected for a full year. The information
included in this Form 10-Q should be read in conjunction with the Company's
annual report on Form 10-K for the year ended December 31, 1997, filed with
the Securities and Exchange Commission (SEC).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Certain financial
statement items have been reclassified to conform to the current period's
presentation.
2. NET INCOME PER SHARE
Basic earnings per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings per share
is computed using the weighted-average number of common shares outstanding
and common stock equivalent shares from stock options, and warrants, when
dilutive, using the treasury stock method. Excluded from the computation of
diluted earnings per share for the three months ended September 30, 1998 and
September 30, 1997, are options to acquire 1,014,000 and 4,838,000 shares,
respectively, of common stock with a weighted-average exercise price of
$23.31 and $17.01, respectively, and for the nine months ended September 30,
1998 and September 30, 1997, are options to acquire 571,000 and 4,838,000
shares, respectively, of common stock with a weighted-average exercise price
of $27.61 and $17.01, respectively, because their effects would be
anti-dilutive.
3. RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for
reporting and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods to be provided for comparative purposes. The Company has not
determined the manner in which it will present the information required by
SFAS No. 130 in its annual financial statements for the year ending December
31, 1998. The Company's total comprehensive income for all periods presented
herein would not be materially different from those amounts reported as net
income in the consolidated statements of income.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Statement establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company has not yet determined whether it has any
separately reportable business segments.
In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1. ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED
OR OBTAINED FOR INTERNAL USE. SOP No. 98-1 requires that certain costs
related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software.
SOP No. 98-1 is effective for financial statements issued for fiscal years
beginning after December 15, 1998. The Company does not expect the adoption
of SOP No. 98-1 to have a material impact on its results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
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may be specifically designated and accounted for as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. This statement will be effective for all
annual and interim periods beginning after June 15, 1999 and management does
not believe the adoption of SFAS No. 133 will have a material effect on the
financial position of the Company.
4. MERGERS
MERGER EXPENSES. In connection with the merger with TMA in January, 1998,
the Company recorded direct transaction costs and merger-related integration
expenses of approximately $10.7 million. As of September 30, 1998, the Company
had $1.2 million remaining in accrued merger expenses, consisting of $0.6
million for transaction costs, $0.1 million for severance and certain other
related costs and $0.5 million for the elimination of duplicated facilities.
The Company expects that all significant amounts included in the September 30,
1998 reserve balance will be paid within the next three months. Of the $10.7
million of merger-related costs, approximately $8.3 million related to cash
expenditures while approximately $2.4 million related to noncash charges.
On April 9, 1998, the Company's subsidiary, Galax!, announced the
signing of a letter of intent to acquire Arcus Technology Limited, an ASIC
solutions company. On October 1, 1998, the Company announced the planned
acquisition of ACEO Technology, Inc., a synthesis technology company. The
closing of the transaction is subject to regulatory and other customary
closing conditions. On November 13, 1998 the Company announced completion of
its acquisition of interHDL Inc., a register-transfer-level (RTL) planning
and analysis software company.
5. LITIGATION
The Company is involved in various litigation matters as discussed below
as well as in Item 1 of Part 2 of this Form 10-Q. The Company has charged to
expenses approximately $7,460,000 and $6,282,000 in litigation expenses
during the nine months ended September 30, 1998 and 1997, respectively.
CADENCE LITIGATION.
On December 6, 1995, Cadence Design Systems, Inc. ("Cadence") filed an
action against the Company and certain of its officers in the United States
District Court for the Northern District of California alleging copyright
infringement, unfair competition, misappropriation of trade secrets,
conspiracy, breach of contract, inducing breach of contract and false
advertising. The essence of the complaint is that certain of the Company's
employees who were formerly Cadence employees allegedly misappropriated and
improperly copied source code for certain important functions of the
Company's 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. A trial date has not been set. On July 25,
1997, the District Court stayed the Cadence civil action pending completion
of the criminal proceedings described below, except for limited discovery on
certain matters approved by the District Court. Avant! posted a $5 million
bond pending the resumption of the civil action. In an order dated May 21,
1998, the District Court continued the stay previously entered.
In addition to actual and punitive damages, which were not quantified by
Cadence, Cadence is seeking to enjoin the sale of the Company's place and
route products pending trial of the action. On March 18, 1997, the District
Court granted in part and denied in part Cadence's motion for a preliminary
injunction. Cadence appealed the order denying a preliminary injunction. On
September 23, 1997, the United States Court of Appeals for the Ninth Circuit
overruled the District Court's denial of Cadence's motion with respect to the
Company's ArcCell product, a product the Company no longer sells, and held
that a preliminary injunction should be granted against the further sale of
the ArcCell product. The Court of Appeals did not enjoin the Company's
Aquarius place and route products, but rather remanded this aspect of
Cadence's motion to the District Court for further consideration. The Court
of Appeals stated that, if the Company's Aquarius products are determined to
infringe Cadence products, the sale of Aquarius products should be enjoined.
The Company requested a rehearing on the issue, but on November 21, 1997,
the Ninth Circuit denied this request. On December 19, 1997, the District
Court entered an injunction against continued sales or licensing of any
product or work copied or derived from Cadence's Design Framework II,
specifically including, but not limited to, ArcCell products. The injunction
also barred the Company from possessing or using any copies or any portion of
the source code or object code for ArcCell or any other product, to the
extent that portion is copied or derived from Cadence's Design Framework II.
(The Company had stopped selling or licensing ArcCell products or code in mid
1996.) The injunction also required the Company to inform its customers of
the injunction, to obtain confirmation as to whether the customers have a
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functioning copy of ArcCell or other such product, and to provide certain
information to the court. On January 25, 1998, the District Court entered a
modified preliminary injunction "to remove any implication that the Company's
customers are authorized by the preliminary injunction to continue to use the
enjoined products without exposure to claims of copyright violation."
Cadence continues to claim that the Company's Aquarius products infringe
Cadence's Design Framework II and the District Court is allowing Cadence to
take discovery concerning the Company's Aquarius and Apollo products. At the
December 19, 1997 hearing, the District Court did not rule on Cadence's
request to enjoin the sale, license or support of the Company's Aquarius
place and route products from which the Company derives a significant portion
of its total revenue. On February 28, 1998, the District Court requested an
additional briefing regarding whether Aquarius should be enjoined. On May 21,
1998, the District Court entered an order denying Cadence's request to enjoin
the sale of Aquarius and denying Cadence's request to lift the stay of the
civil action. On July 8, 1998, Cadence applied again for an injunction
against the sale of Aquarius on the basis that Aquarius contains code that is
substantially similar to Cadence's Design Framework II and that Aquarius
contains specific protected ideas from Cadence's Design Framework II. On
October 28, 1998, the District Court held a hearing on Cadence's motion for a
preliminary injunction against Aquarius. The judge also heard argument about
whether and to what extent they stay of the civil case should be lifted.
The judge did not rule on either issue. There can be no assurance that the
District Court will not grant a preliminary injunction with respect to the
sale or use of the Aquarius products, which could have a material adverse
effect on the Company's business, financial position and results of
operations.
On January 16, 1996, the Company filed a counterclaim against Cadence
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. On December 19, 1997, the Company
stipulated to temporarily dismissing its counterclaim in order to file more
detailed allegations. The Company refiled its counterclaim on January 29, 1998.
The District Court's May 21, 1998 order also stayed the Company's counterclaims
against Cadence.
The Company believes it has defenses to all of Cadence's claims and
intends to defend itself vigorously. If, however, the Company's defenses are
unsuccessful, the Company may ultimately be permanently enjoined from selling
certain place and route products and may be required to pay damages to
Cadence. In addition, upon further consideration by the District Court, the
Company could be preliminarily enjoined from selling its Aquarius or Apollo
place and route products. In such event, the Company's business, financial
condition and results of operations would be materially adversely affected.
In addition, it is likely that an adverse judgment against the Company would
result in a steep decline in the market price of the Company'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, based on information the Company presently possesses. There can be
no assurance that an adverse judgement, if granted on any claim would not
have a material adverse effect on the Company's business, financial position
or results of operations. Furthermore, there can be no assurance that the
Company's relationships with its customers and/or partners will not be
adversely affected in the future as a result of the Cadence litigation.
CRIMINAL COMPLAINT.
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 April 11, 1997, the Santa Clara County
District Attorney filed a criminal complaint alleging felony level offenses
against, among others, the Company and the following employees and/or
directors of the Company, Gerald C. Hsu, President, Chief Executive Officer
and Chairman of the Board of Directors, Y. Eric Cho, a former officer and
former member of the Board of Directors, Y. Z. Liao, Corporate Fellow,
Stephen Wuu, CEO Staff Operations, Leigh Huang, Marketing Manager and Eric
Cheng, Research and Development Manager, for allegedly violating various
California Penal Code Sections relating to the theft of trade secrets. The
Company and the individuals above have pleaded not guilty and are awaiting
further proceedings. The Company and the individual defendants have filed a
motion to recuse the District Attorney's office from prosecuting the case.
In October 1998, the District Attorney informed the defendants in the
criminal action that a grand jury is investigating certain possible offenses,
including theft of trade secrets; conspiracy to commit trade secret theft;
making payments, promises, or offers in exchange for trade secrets; fraud in
the failure to disclose theft of trade secrets in relation with the offer of
stock; and whether the alleged offenses resulted in a loss in excess of $2.5
million. The criminal complaint or the grand jury investigation could result
in additional defense costs and criminal fines against the Company, as well
as the potential incarceration of certain members of its management team.
Such outcomes could result in canceled or postponed orders, increased future
expenditures, the loss of management and other key personnel, additional
shareholder litigation, loss of goodwill and would have other material
adverse effects on the Company's business, financial position and results of
operations.
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SILVACO LITIGATION.
In March 1993, Meta Software Inc. ("Meta"), which the Company acquired
in October 1996 and which is now a wholly owned subsidiary of the Company,
filed a complaint in the Superior Court of California for Santa Clara County
against Silvaco Data Systems, Inc. and related parties (collectively,
"Silvaco") seeking monetary damages and injunctive relief. Meta's complaint
alleged, among other things, that Silvaco breached its representative
agreement with Meta by withholding customer payments for products and
services that had been delivered, and by failing to pay royalties on software
that Silvaco sold to others. In August 1995, Meta was awarded $529,828 under
the Superior Court's judicial arbitration program. Both parties rejected the
award and requested a trial de novo on the issues involved. In August 1995,
Silvaco filed a cross-complaint against Meta alleging, among other things,
that Meta owes Silvaco royalties and license fees pursuant to a product
development and marketing program and unpaid commissions related to Silvaco's
sale of Meta's products and services under such program. Meta filed an
answer to the cross-complaint denying the allegations contained therein. In
July 1996, Silvaco filed a first amended cross-complaint, adding Shawn
Hailey, then the President, Chief Executive Officer and a major shareholder
of Meta, and, from October 1996 when Meta was acquired by the Company until
July 1997, the Senior Vice President of the Company's Silicon Division, as a
personal defendant, and further alleging defamation, interference with
economic advantage, unfair competition and abuse of process by acts or
statements made by Meta or its agents.
In August 1997, the Superior Court entered a default judgment against
Mr. Hailey for failure to timely answer the complaint. In October 1997, Mr.
Hailey's application for relief from the default judgment was denied. In
August 1997, the Superior Court entered a default judgment against Meta as to
the defamation and interference with economic advantage claims. On October
31, 1997, Meta's application for relief from the default judgment was denied.
On October 28, 1997, Silvaco first presented its theory of damages and a
trial began on November 3, 1997. On November 4, 1997, the Superior Court
dismissed Meta's remaining affirmative claims. On November 5, 1997, the
Superior Court awarded Silvaco $20 million in damages against Mr. Hailey and
Meta related to the defamation and interference with economic advantage
claims, and on November 6, 1997, the Superior Court awarded Silvaco $11.4
million in damages related to the unfair competition claim. On November 12,
1997, the Superior Court awarded nominal damages to Silvaco related to the
product development claim. Silvaco's claims based on the marketing program
and abuse of process were dismissed. A default judgment in the aggregate
amount of $31.4 million was entered against the Company. The Company filed
appeals on behalf of Shawn Hailey, and, on its own behalf. As required, the
Company posted a bond on behalf of itself and Shawn Hailey in excess of the
amount necessary to satisfy the judgment. The bond is collateralized by a
$23,583,000 letter of credit.
Meta intends to pursue all remedies available to it in connection with
the litigation with Silvaco. Meta believes it has substantial appellate
issues that could cause the judgment to be reversed and remanded to the trial
court for further proceedings. Should Meta be permitted to participate fully
in further trial court proceedings, Meta believes it would have substantial
defenses to Silvaco's claims. However, there can be no assurance that any
such remedies will be successful. Although it is reasonably possible the
Company will incur a loss in relation to this claim, it is currently unable
to estimate the actual loss or range of loss. Payment of the damages
previously awarded, and damages which may be awarded in the future, would
have a material adverse effect on the Company's business, financial condition
and results of operations.
On March 31, 1998, Silvaco filed an additional lawsuit, against the
Company and Roy Jewell, the Company's CEO Staff, Corporate Affairs and
General Manager of the TCAD Business Unit, in the Superior Court of
California for Santa Clara County. The complaint alleges causes of action
for defamation, negligent and intentional interference with economic
advantage, and unfair competition and business practices based on statements
allegedly made by the Company that Silvaco claims disparaged Silvaco and its
TCAD products. Silvaco is seeking $20 million in compensatory damages,
punitive damages, and an injunction. The Company believes it has defenses to
these claims and intends to defend itself vigorously. Although it is
reasonably possible the Company will incur a loss in relation to these
claims, it is currently unable to estimate the actual loss or range of loss.
In the event the Company's defenses are unsuccessful, the Company may be
required to pay damages to the plaintiffs, and such a judgment could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PESIC LITIGATION.
In September 1996, Katherine Ngai Pesic and Ivan Pesic commenced an
action in the Superior Court of California for Santa Clara County naming as
defendants the Company (as successor in interest to Meta), Shawn Hailey,
Meta's former Chief Executive Officer, and Thomas N. White, Jr. and George S.
Cole, both of whom were Meta's former counsel in the Meta v. Silvaco matter,
as discussed above. The action asserts claims for invasion of privacy under
California common law and the California Constitution and seeks compensatory
and punitive damages. The Company has answered the complaint, but no trial
date has been set. The Company believes it has defenses to these claims and
intends to defend itself vigorously. Although it is reasonably possible the
Company will incur a loss in relation to these claims, it is
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currently unable to estimate the actual loss or range of loss. In the event
the Company's defenses are unsuccessful, the Company may be required to pay
damages to the plaintiffs, and such a judgment could have a material adverse
effect on the Company's business, financial condition and results of
operations.
MICROUNITY LITIGATION.
On October 14, 1997, Microunity Systems Engineering, Inc. ("Microunity")
filed in the United States District Court for the Northern District of
California a complaint against Precim Corporation ("Precim"). Precim was a
wholly owned subsidiary of Technology Modeling Associates ("TMA"), which was
acquired by the Company in January 1998. This lawsuit alleges liability for
patent infringement, unfair competition, and tortious interference with
prospective economic advantage. The action requests unspecified damages and
an injunction against Precim. Precim has answered the complaint and filed
counterclaims against Microunity seeking a declaration that the patents at
issue are invalid and that Precim does not infringe. Trial has been
scheduled for September 20, 1999. Precim believes it has defenses to these
claims and intends to defend itself vigorously. Although it is reasonably
possible the Company will incur a loss in relation to these claims, it is
currently unable to estimate the actual loss or range of loss. In the event
Precim's defenses are unsuccessful, Precim may be required to pay damages to
the plaintiffs, and such a judgment could have a material adverse effect on
the Company's business, financial condition and results of operations.
SECURITIES CLASS ACTION CLAIMS.
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 against the Company. 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 against the
Company 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, described above. In February 1997, plaintiff Tarca voluntarily
dismissed his action and the Margetis plaintiffs were certified as class
representatives in their action. On July 25, 1997, a federal judge stayed the
Margetis action, except for certain documentary and third-party discovery,
pending resolution of the Cadence suit.
On May 30, 1997, Joanne Hoffman filed in the United States District
Court for the Northern District of California a purported class action
alleging securities claims on behalf of purchasers of the Company's stock
between March 29, 1996 and April 11, 1997, the date of the filing of the
criminal complaints against the Company and six of its employees and/or
officers. Plaintiff alleges that the Company and various of its officers
misled the market as to the likelihood of criminal charges being filed and as
to the validity of the Cadence allegations. The Company moved to dismiss the
Hoffman complaint for failure to state a claim, but the District Court in
December 1997 denied the motion. The District Court has also granted
plaintiff's motions for appointment as lead plaintiff, and to certify the
case as a class action. Recently, the District Court granted the Company's
motion to consolidate or coordinate the Hoffman action for pretrial purposes
with the earlier-filed Margetis action.
The Company believes it has defenses to all of the securities class
action claims described above, and intends to defend itself vigorously.
There can be no assurance, however, that the Company's defenses will be
successful. Although it is reasonably possible the Company will incur a loss
in relation to these claims, it is currently unable to estimate the actual
loss or range of loss, either individually or in aggregate. In the event
the Company's defenses are unsuccessful, the Company may be required to pay
damages to the securities class action plaintiffs, and such a judgment would
likely have a material adverse effect on the Company's business, financial
condition and results of operations.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Act of 1934, including statements
regarding the Company's expectations, beliefs, hopes, intentions or
strategies regarding the future. Forward looking statements include
statements regarding future sales, market growth and competition. All
forward looking statements included in this document are based upon
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward looking statement. 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
Affect Future Operations" as well as those discussed in this section and
elsewhere in this Form 10-Q, and the risks discussed in the "Risk Factors"
section included in the Company's Registration Statement on Form S-3 filed
with the SEC on January 13, 1998 and other risks detailed from time to time
in the Company's Securities and Exchange Commission reports, including the
report on Form 10-K for the year ended December 31, 1997.
OVERVIEW
Avant! Corporation, (the "Company") develops, markets and supports
software products that assist design engineers in the physical layout,
design, verification, simulation and timing analysis of advanced integrated
circuits ("ICs"). The Company's strategy is to focus on productivity
enhancing software for the integrated circuit design automation ("ICDA")
segment of the electronic design automation ("EDA") market.
The Company resulted from the merger of ArcSys, Inc. ("ArcSys") and
Integrated Silicon Systems, Inc. ("ISS") on November 27, 1995. Effective
September 27, 1996, October 29, 1996, November 27, 1996 and January 16, 1998,
the Company merged with Anagram, Inc ("Anagram"), Meta-Software Inc.
("Meta"), FrontLine Design Automation ("FrontLine") and Technology Modeling
Associates ("TMA"), respectively. These mergers have all 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 positions, and cash
flows of ISS, Anagram, Meta, FrontLine and TMA. On September 12, 1997 and
September 30, 1997, the Company acquired Compass Design Automation, Inc.
("Compass") and Datalink Far East, Ltd. ("Datalink"), respectively. These
acquisitions have been accounted for by the purchase method, and accordingly,
the Company's consolidated financial statements do not include the results of
operations, financial position or cash flows prior to the dates of
acquisition.
The Company began shipping Hercules (formerly VeriCheck), its
hierarchical physical verification software, in 1992, and Aquarius, 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. TMA was
founded in 1979 and began its device and process simulation products, Medici
and TSUPREM-4 in 1985 and 1988, respectively.
In January of 1998, the Company announced and began shipping five new
products specifically designed to address VDSM challenges. They are Apollo,
its next generation place and route product, Milkyway, VDSM's only common
database and graphical user interface, Saturn, a breakthrough VDSM synthesis
optimization tool, Mars-Rail, power driven design and analysis tool, and
Star-Time, a high-speed high capacity full chip timing simulation tool. At
June 1998's Design Automation Conference, Avant! announced a Single Pass
design solution which eliminates traditional design iterations due to timing,
power and noise concerns. Avant! also released two additional new physical
design products, Columbia-CE, a shaped-based routing editor, and Mars-Xtalk,
a tool to overcome noise problems in designs. A number of TCAD products
were also released: Optical Proximity Correction (Taurus-OPC), a tool to
anticipate and correct deep submicron lithography variations; Taurus-Process
and Taurus-Device, tools for process and device simulation; and the Silicon
Early Access suite of tools where Star-RC, Raphael-NES, HSpice and Design for
Manufacturing all work together to provide early silicon information to
Apollo, Saturn and Mars. The Company's library business unit also released
the industry's first 0.18 micron and 0.25 micron foundry portable "Fast
Track" libraries.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue for certain
items in the Company's Consolidated Financial Statements (after giving effect
to rounding) for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software.................................... 68 72 69 73
Services.................................... 32 28 31 27
--- --- --- ---
Total revenue............................. 100% 100% 100% 100%
--- --- --- ---
Costs and expenses:
Costs of software........................... 2 2 2 2
Costs of services........................... 7 8 6 9
Selling and marketing....................... 25 29 25 30
Research and development.................... 24 22 25 21
General and administrative.................. 12 13 11 11
Merger expenses............................. - 98 7 35
--- --- --- ---
Total operating expenses.................. 70 172 76 108
--- --- --- ---
Income from operations.................... 30 (72) 24 (8)
Interest income and other, net.............. 3 4 3 4
--- --- --- ---
Income before income taxes............... 33 (68) 27 (4)
Provision for income taxes.................. 11 (25) 11 (1)
--- --- --- ---
Net income ............................... 22% (43)% 15% (3)%
--- --- --- ---
--- --- --- ---
</TABLE>
COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE. The Company's total revenue increased 38% to $58.1 million for
the three months ended September 30, 1998 from $42.1 million for the three
months ended September 30, 1997. The percentage of the Company's total
revenue attributable to software licenses decreased to 68% for the three
months ended September 30, 1998 from 72% for the three months ended September
30, 1997. The decreases in software license as a percentage of total revenue,
for the three months and nine months ended September 30, 1998 and 1997 are
primarily due to the increased user base and resulting increase in service
and maintenance revenue. Total revenue increased 39% to $164.1 million for
the nine months ended September 30, 1998 from $118.1 million for the nine
months ended September 30, 1997.
Software revenue increased 31% to $39.5 million for the three months
ended September 30, 1998 from $30.2 million for the three months ended
September 30, 1997. Increases in software revenue were due primarily to
increased license revenue from the Company's place and route, physical
verification, analysis and library software. Software revenue increased 32%
to $113.4 million for the nine months ended September 30, 1998 from $86.2
million for the nine months ended September 30, 1997. Increases in software
revenue were due primarily to increased license revenue from the Company's
place and route, physical verification, analysis and library software. To
date, price increases have not been a material factor in the Company's
revenue growth. Services revenue increased 56% to $18.6 million for the
three months ended September 30, 1998 from $11.9 million for the three months
ended September 30, 1997. The increase reflects the growing base of
installed systems, integration of Compass' maintenance revenue and addition
of the services business. Services revenue increased 59% to $50.8 million for
the nine months ended September 30, 1998 from $31.9 million for the nine
months ended September 30, 1997. The increase reflects the growing base of
installed systems, integration of Compass' maintenance revenue and addition
of the services business.
COSTS OF SOFTWARE AND SERVICES. Costs of software consist primarily of
expenses associated with product documentation, production costs and
personnel. Costs of software increased to $1.2 million from $1.0 million for
the three months ended September 30, 1998 and 1997, respectively. As a
percentage of software revenue, costs of software remained at 2% for the
three months ended September 30, 1998 and 1997, respectively. Costs of
services consist of costs of maintenance and customer support, and direct
costs associated with providing other services.
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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 $3.8 million from $3.4 million for the three months
ended September 30, 1998 and 1997, respectively. Costs of services as a
percentage of services revenue decreased to 21% from 32% for the nine months
ended September 30, 1998 and 1997. The reduction in costs of services as a
percentage of service revenue reflects higher revenue growth due to a larger
user base, integration of Compass' service and maintenance revenue and
improved productivity of the Company's support resources in serving its
increasing customer base. Costs of software increased to $3.6 million from
$2.6 million for the nine months ended September 30, 1998 and 1997,
respectively. As a percentage of software revenue, costs of software
remained at 3% for the nine months ended September 30, 1998 and 1997,
respectively. Costs of services increased to $10.5 million from $10.1
million for the nine months ended September 30, 1998 and 1997, respectively.
Costs of services as a percentage of services revenue decreased to 21% from
28% for the three months ended September 30, 1998 and 1997. The reduction in
costs of services as a percentage of service revenue reflects higher revenue
growth due to a larger user base and integration of Compass' service and
maintenance revenue and improved productivity of the Company's support
resources in serving its increasing customer base.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs, including sales commissions, of all personnel involved in
the sales process. This includes sales representatives, marketing associates,
benchmarking personnel and field application engineers. Selling and marketing
expenses also include costs of advertising, public relations, conferences and
trade shows. Selling and marketing expenses increased to $14.3 million from
$12.4 million for the three months ended September 30, 1998 and 1997,
respectively. The increase was primarily due to the Compass operations, which
were acquired in September 1997, offset by a decrease in distributor
commissions. As a percentage of total revenue, selling and marketing
expenses decreased to 25% from 29% for the three months ended September 30,
1998 and 1997, respectively. As a percentage of revenue, selling and
marketing expenses have decreased, due to a more rapid growth rate in
revenue. Selling and marketing expenses increased to $41.5 million from
$35.0 million for the nine months ended September 30, 1998 and 1997,
respectively. The net increase is due to increases in the Compass
operations, primarily in personnel, increases in advertising and marketing
expenses and a decrease in distributor commissions. As a percentage of total
revenue, selling and marketing expenses decreased to 25% from 30% for the
nine months ended September 30, 1998 and 1997, respectively. As a percentage
of revenue, selling and marketing expenses have decreased, due to a more
rapid growth rate in revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include all costs associated with the development of new products and
significant enhancement of existing products. Research and development
expenses increased to $13.9 million from $9.2 million for the three months
ended September 30, 1998 and 1997, respectively. Research and development
expenses increased to 24% from 22% of total revenue for the three months
ended September 30, 1998 and 1997, respectively. The increases in expenses
resulted from increased personnel and facility costs, from the development of
new products and enhancement of existing products, and $3.0 million from the
Compass operations. The increase in research and development expenses as a
percentage of revenue, was due to the commitment from the Company to devote
substantial resources to product research and development. Research and
development expenses increased to $40.6 million from $25.0 million for the
nine months ended September 30, 1998 and 1997, respectively. Research and
development expenses increased to 25% from 21% of total revenue for the nine
months ended September 30, 1998 and 1997, respectively. The increases in
expenses are from personnel costs, including incentive bonus expenses, and
related facility costs and $7.2 million from the Compass operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $7.3 million from $5.3 million for the three months ended
September 30, 1998 and 1997, respectively. The increase was primarily due to
increases in legal and personnel costs and $1.0 million contribution to the
Avant! Foundation, an organization for the benefit of school children.
Excluding the impact of the $1.0 million contribution, as a percentage of
total revenue, general and administrative expenses decreased to 11% from 13%
for the three months ended September 30, 1998 and 1997, respectively. General
and administrative expenses increased to $17.9 million from $13.5 million for
the nine months ended September 30, 1998 and 1997, respectively. The increase
was primarily due to increases in legal and personnel, $1.0 million
contribution to the Avant! Foundation, as well as occupancy costs,
professional costs and Compass operations. Excluding the impact of the $1.0
million contribution, as a percentage of total revenue, general and
administrative expenses decreased to 10% from 11% for the nine months ended
September 30, 1998 and 1997, respectively.
IN-PROCESS RESEARCH AND DEVELOPMENT. In September 1997, the Company
acquired Compass. In connection with the acquisition, net intangibles of $56.0
million were acquired, of which $41.2 million related to acquired in-process
research and development. This amount was expensed, as the underlying
technology had not reached technological feasibility and, in management's
opinion, had no probable alternative future use.
MERGER EXPENSES. In connection with the merger with TMA in January 1998,
the Company recorded direct
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transaction costs and merger-related integration expenses of approximately
$10.7 million. As of September 30, 1998, the Company had $1.2 million
remaining in accrued merger expenses, consisting of $0.6 million for
transaction costs, $0.1 million for severance and certain other related costs
and $0.5 million for the elimination of duplicated facilities. The Company
expects that all significant amounts included in the September 30, 1998
reserve balance will be paid within the next three months. Of the $10.7
million of merger-related costs, approximately $8.3 million related to cash
expenditures while approximately $2.4 million related to noncash charges.
INTEREST INCOME AND OTHER, NET. Interest income and other decreased to
$1.5 million from $1.7 million for the three months ended September 30, 1998
and 1997, respectively. The decrease relates primarily to decreased equity
earnings in joint ventures and interest income. Interest income and other
decreased to $4.4 million from $4.9 million for the nine months ended
September 30, 1998 and 1997, respectively. The decrease is primarily due to
decreased interest income and foreign exchange loss.
INCOME TAX EXPENSE. The provision for income taxes was $6.5 million for
the three months ended September 30, 1998 as compared to a tax benefit of
$10.4 million for the three months ended September 30, 1997. The tax benefit
for the three months ended September 30, 1997 related primarily to the
benefit of the in-process research and development write off. The provision
for income taxes and tax benefit as a percentage of pre-tax income was 34%
and 36% for the three months and nine months ended September 30, 1998 and
1997, respectively. The provision for income taxes was $18.5 million for the
nine months ended September 30, 1998 as compared to a tax benefit of $1.6
million for the nine months ended September 30, 1997.
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. The Company's expense levels are based, in part,
on its expectations as to future revenue. The Company continues to expand
and increase its operating expenses in order to generate and support future
revenue. If revenue levels are below expectations, operating results are
likely to be disproportionately affected because only a small portion of the
Company's expenses varies with its revenue. As a result, the Company
believes that period to period comparison of financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenues or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Additionally, the Company
may not learn of such shortfalls until late in a fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of
the Company's common stock.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $22,675,000 for the nine months
ended September 30, 1998. The Company's investing activities provided
$1,636,000 of net cash for the nine months ended September 30, 1998. Net
cash provided resulted from the sales and maturities of securities offset by
purchases of equity investments and purchases of computer equipment and
office furniture. Net cash used in financing activities was $13,869,000 for
the nine months ended September 30, 1998. Financing activities consisted of
the exercise of stock options and issuance of common stock under the employee
stock purchase plan, and the repurchase of 1,082,000 shares of common stock
at prices ranged from $11.88 to $16.94 per share.
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 or local practice, slower payment by certain major
companies and most foreign customers, and general economic conditions. The
Company periodically increases its allowance for doubtful accounts to reflect
increased sales levels and collection experience. The Company believes that
its allowance for doubtful accounts is adequate.
As of September 30, 1998, the Company had $126,319,000 of cash, cash
equivalents and short-term investments, compared to $ 134,917,000 at December
31, 1997. Working capital also increased from $ 130,301,000 at December 31,
1997 to $ 133,426,000 at September 30, 1998. In connection with the Silvaco
litigation, the Company was required to post a bond. The bond is
collaterized by a $23,583,000 letter of credit.
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FACTORS THAT MAY AFFECT FUTURE OPERATIONS
As discussed in the notes to the consolidated financial statements and
Item 1 of Part 2 of this Form 10-Q, the Company is involved in a number of
litigation matters. An adverse outcome in any of the described litigation
matters could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many Asian countries are currently experiencing banking and currency
difficulties that could lead to economic recession in those countries which
could result in a decline in the purchasing power of the Company's Asian
customers. This in turn could result in the cancellation or delay of orders
for the Company's products from Asian customers, thus adversely affecting the
Company's results of operations.
The EDA business is highly competitive. The Company's products compete
with similar products from both larger and smaller EDA vendors and with
dissimilar EDA products for a share of their customers' EDA budgets. The EDA
industry, and as a result the Company's business, has benefited from the
rapid worldwide growth of the semiconductor industry. There can be no
assurance that this growth will continue. The EDA industry as a whole may
experience pricing and margin pressures from a decrease in growth in the
semiconductor industry, or other changes in the overall computer industry.
In addition, the EDA industry is experiencing consolidation as the major EDA
vendors are seeking to provide a complete range of EDA products to customers.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors, or that market
conditions faced by the Company will not adversely affect its business,
financial condition and results of operations.
The Company's future success depends upon its ability to improve current
products and develop new products that address the increasingly sophisticated
needs of its customers. There can be no assurance that the Company will
continue to successfully develop technologically acceptable products on a
timely basis. The Company's ability to develop and improve products is
dependent on key individuals for their technical and other contributions.
There can be no assurance that the Company can continue to attract and retain
these key personnel. Loss of certain key personnel could result in loss of
the Company's market advantage and could adversely affect its business,
financial condition and results of operations.
The Company sells its software products and provides services to
customers located throughout the world. Managing global operations and sites
located throughout the world presents challenges associated with cultural
differences and organizational alignment. Moreover, each region in the
global EDA market exhibits unique characteristics that can cause purchasing
patterns to vary significantly from period to period. Although international
markets historically have provided the Company with significant revenue
opportunities, periodic economic downturns, trade balance issues, political
instability and fluctuations in interest and foreign currency exchange rates
are all risks that could affect global product and service demand.
During 1998, the Company undertook an evaluation of the Company's
products currently supported to determine if they are Year 2000 ready.
STATE OF READINESS. The results of this evaluation revealed that most
supported products are Year 2000 ready. The Company has the intention to
upgrade or replace the supported products currently not Year 2000 ready with
fix patch or upgrade.
During 1998, an evaluation has also been done to the Company's internal
support systems to determine if they are Year 2000 ready to support the
Company's operations beyond the year 2000. The Company has adopted SAP R/3
software as an enterprise system managing its financial and logistical
operations in the United States. SAP R/3 software has been certified by SAP
as Year 2000 ready. Some other third party software systems and applications
currently used in the Company, however, are not Year 2000 ready. The Company
has the intention to stop using these software products or upgrade or replace
them as part of the Company's growth plans. The Company is also currently
engaged in setting up a plan to make the European accounting system,
currently not on SAP, Year 2000 ready.
Although the Company's intention is to complete the work prior to
December 31, 1998, the work may be extended into Q1 1999. The failure by the
Company to complete such work prior to December 31, 1999 would have a
material adverse effect on the Company's business, financial condition and
operations.
COSTS. The Company does not have a project tracking system that tracks
the cost and time that its own internal employees spend on the Year 2000
project. Based on the Company's assessment, the cost incurred to date has no
material impact to the Company's results of operations. The Company expects
that costs directly related to Year 2000 in excess of normal upgrade and
maintenance costs would not exceed approximately $250,000 for both costs
incurred
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to date and future costs.
RISKS. The Company requests its vendors to provide Year 2000 compliance
certificates for all its internal support systems. However, the Company only
intends to perform testing on its critical internal support systems.
Inoperability related to Year 2000 problems of internal systems that are
certified Year 2000 ready by the vendor and not tested by the Company could
have an adverse impact to the Company's operational efficiency.
The Company may not be able to certify itself as Year 2000 ready by
December 31, 1998. Products from companies to be acquired may not be Year
2000 ready by December 31, 1998. The Company's European accounting system, as
part of the Company's overall integration effort, may not be Year 2000 ready
by December 31, 1998. Upgrades and replacements of other support tools and
systems as part of supporting operations to accommodate the Company's growth
that also support the Year 2000 effort may not be complete before December 31,
1998.
The migration paths provided by the Company as the remedies to make its
products Year 2000 ready may not be accepted by the customer, which could
have an adverse impact on the Company's business.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 readiness. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company, which
could result in a material adverse effect on the Company's business,
financial condition and results of operation.
CONTINGENCY PLANS. The Company does not presently have a contingency
plan for handling Year 2000 problems that are not detected and corrected
prior to their occurrences. Upon completion of testing and implementation
activities, the Company will be able to assess the areas requiring
contingency planning and expects to develop appropriate planning at that
time. Any failure of the Company to address any unforeseen Year 2000 problems
could adversely affect the Company's business, financial condition and
results of operations.
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
CADENCE LITIGATION.
On December 6, 1995, Cadence Design Systems, Inc. ("Cadence") filed an
action against the Company and certain of its officers in the United States
District Court for the Northern District of California alleging copyright
infringement, unfair competition, misappropriation of trade secrets,
conspiracy, breach of contract, inducing breach of contract and false
advertising. The essence of the complaint is that certain of the Company's
employees who were formerly Cadence employees allegedly misappropriated and
improperly copied source code for certain important functions of the
Company's 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. A trial date has not been set. On July 25,
1997, the District Court stayed the Cadence civil action pending completion
of the criminal proceedings described below, except for limited discovery on
certain matters approved by the District Court. Avant! posted a $5 million
bond pending the resumption of the civil action. In an order dated May 21,
1998, the District Court continued the stay previously entered.
In addition to actual and punitive damages, which were not quantified by
Cadence, Cadence is seeking to enjoin the sale of the Company's place and
route products pending trial of the action. On March 18, 1997, the District
Court granted in part and denied in part Cadence's motion for a preliminary
injunction. Cadence appealed the order denying a preliminary injunction. On
September 23, 1997, the United States Court of Appeals for the Ninth Circuit
overruled the District Court's denial of Cadence's motion with respect to the
Company's ArcCell product, a product Avant! no longer sells, and held that a
preliminary injunction should be granted against the further sale of the
ArcCell product. The Court of Appeals did not enjoin the Company's Aquarius
place and route products, but rather remanded this aspect of Cadence's motion
to the District Court for further consideration. The Court of Appeals stated
that, if the Company's Aquarius products are determined to infringe Cadence
products, the sale of Aquarius products should be enjoined. The Company
requested a rehearing on the issue, but on November 21, 1997, the Ninth
Circuit denied this request. On December 19, 1997, the District Court
entered an injunction against continued sales or licensing of any product or
work copied or derived from Cadence's Design Framework II, specifically
including, but not limited to, ArcCell products. The injunction also barred
the Company from possessing or using any copies or any portion of the source
code or object code for ArcCell or any other product, to the extent that
portion is copied or derived from Cadence's Design Framework II. (The
Company had stopped selling or licensing ArcCell products or code in mid,
1996.) The injunction also required
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the Company to inform its customers of the injunction, to obtain confirmation
as to whether the customers have a functioning copy of ArcCell or other such
product, and to provide certain information to the court. On January 25,
1998, the District Court entered a modified preliminary injunction "to remove
any implication that the Company's customers are authorized by the
preliminary injunction to continue to use the enjoined products without
exposure to claims of copyright violation." Cadence continues to claim that
the Company's Aquarius products infringe Cadence's Design Framework II and
the District Court is allowing Cadence to take discovery concerning the
Company's Aquarius and Apollo products. At the December 19, 1997 hearing,
the District Court did not rule on Cadence's request to enjoin the sale,
license or support of the Company's Aquarius place and route products from
which the Company derives a significant portion of its total revenue. On
February 28, 1998, the District Court requested an additional briefing
regarding whether Aquarius should be enjoined. On May 21, 1998, the District
Court entered an order denying Cadence's request to enjoin the sale of
Aquarius and denying Cadence's request to lift the stay of the civil action.
On July 8, 1998, Cadence applied again for an injunction against the sale of
Aquarius on the basis that Aquarius contains code that is substantially
similar to Cadence's Design Framework II and that Aquarius contains specific
protected ideas from Cadence's Design Framework II. On October 28, 1998, the
District Court held a hearing on Cadence's motion for a preliminary
injunction against Aquarius. The judge also heard argument about whether and
to what extent they stay of the civil case should be lifted. The judge did
not rule on either issue. There can be no assurance that the District Court
will not grant a preliminary injunction with respect to the sale or use of
the Aquarius products, which could have a material adverse effect on the
Company's business, financial position and results of operations.
On January 16, 1996, the Company filed a counterclaim against Cadence
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. On December 19, 1997, the Company
stipulated to temporarily dismissing its counterclaim in order to file more
detailed allegations. The Company refiled its counterclaim on January 29,
1998. The District Court's May 21, 1998 order also stayed the Company's
counterclaims against Cadence.
The Company believes it has defenses to all of Cadence's claims and
intends to defend itself vigorously. If, however, the Company's defenses are
unsuccessful, the Company may ultimately be permanently enjoined from selling
certain place and route products and may be required to pay damages to
Cadence. In addition, upon further consideration by the District Court, the
Company could be preliminarily enjoined from selling its Aquarius or Apollo
place and route products. In such event, the Company's business, financial
condition and results of operations would be materially adversely affected.
In addition, it is likely that an adverse judgment against the Company would
result in a steep decline in the market price of the Company'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, based on information the Company presently possesses. There can be
no assurance that an adverse judgement, if granted on any claim would not
have a material adverse effect on the Company's business, financial position
or results of operations. Furthermore, there can be no assurance that the
Company's relationships with its customers and/or partners will not be
adversely affected in the future as a result of the Cadence litigation.
CRIMINAL COMPLAINT.
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 April 11, 1997, the Santa Clara County District
Attorney filed a criminal complaint alleging felony level offenses against,
among others, the Company and the following employees and/or directors of the
Company, Gerald C. Hsu, President, Chief Executive Officer and Chairman of the
Board of Directors, Y. Eric Cho, a former officer and former member of the
Board of Directors, Y. Z. Liao, Corporate Fellow, Stephen Wuu, CEO Staff
Operations, Leigh Huang, Marketing Manager and Eric Cheng, Research and
Development Manager, for allegedly violating various California Penal Code
Sections relating to the theft of trade secrets. The Company and the
individuals above have pleaded not guilty and are awaiting further proceedings.
The Company and the individual defendants have filed a motion to recuse the
District Attorney's office from prosecuting the case.
In October 1998, the District Attorney informed the defendants in the
criminal action that a grand jury is investigating certain possible offenses,
including theft of trade secrets; conspiracy to commit trade secret theft;
making payments, promises, or offers in exchange for trade secrets; fraud in
the failure to disclose theft of trade secrets in relation with the offer of
stock; and whether the alleged offenses resulted in a loss in excess of $2.5
million. The criminal complaint or the grand jury investigation could result
in additional defense costs and criminal fines against the Company, as well
as the potential incarceration of certain members of its management team.
Such outcomes could result in canceled or postponed orders, increased future
expenditures, the loss of management and other key personnel, additional
shareholder litigation, loss of goodwill and would have other material
adverse effects on the Company's business, financial position and results of
operations.
15
<PAGE>
SILVACO LITIGATION.
In March 1993, Meta, which the Company acquired in October 1996 and
which is now a wholly owned subsidiary of the Company, filed a complaint in
the Superior Court of California for Santa Clara County against Silvaco Data
Systems, Inc. and related parties (collectively, "Silvaco") seeking monetary
damages and injunctive relief. Meta's complaint alleged, among other things,
that Silvaco breached its representative agreement with Meta by withholding
customer payments for products and services that had been delivered, and by
failing to pay royalties on software that Silvaco sold to others. In August
1995, Meta was awarded $529,828 under the Superior Court's judicial
arbitration program. Both parties rejected the award and requested a trial de
novo on the issues involved. In August 1995, Silvaco filed a cross-complaint
against Meta alleging, among other things, that Meta owes Silvaco royalties
and license fees pursuant to a product development and marketing program and
unpaid commissions related to Silvaco's sale of Meta's products and services
under such program. Meta filed an answer to the cross-complaint denying the
allegations contained therein. In July 1996, Silvaco filed a first amended
cross-complaint, adding Shawn Hailey, then the President, Chief Executive
Officer and a major shareholder of Meta, and, from October 1996 when Meta was
acquired by the Company until July 1997, the Senior Vice President of the
Company's Silicon Division, as a personal defendant, and further alleging
defamation, interference with economic advantage, unfair competition and
abuse of process by acts or statements made by Meta or its agents.
In August 1997, the Superior Court entered a default judgment against Mr.
Hailey for failure to timely answer the complaint. In October 1997, Mr.
Hailey's application for relief from the default judgment was denied. In
August 1997, the Superior Court entered a default judgment against Meta as to
the defamation and interference with economic advantage claims. On October 31,
1997, Meta's application for relief from the default judgment was denied. On
October 28, 1997, Silvaco first presented its theory of damages and a trial
began on November 3, 1997. On November 4, 1997, the Superior Court dismissed
Meta's remaining affirmative claims. On November 5, 1997, the Superior Court
awarded Silvaco $20 million in damages against Mr. Hailey and Meta related to
the defamation and interference with economic advantage claims, and on November
6, 1997, the Superior Court awarded Silvaco $11.4 million in damages related to
the unfair competition claim. On November 12, 1997, the Superior Court awarded
nominal damages to Silvaco related to the product development claim. Silvaco's
claims based on the marketing program and abuse of process were dismissed. A
default judgment in the aggregate amount of $31.4 million was entered against
the Company. The Company filed appeals on behalf of Shawn Hailey, and, on its
own behalf. As required, the Company posted a bond on behalf of itself and
Shawn Hailey in excess of the amount necessary to satisfy the judgment. The
bond is collateralized by a $23,583,000 letter of credit.
Meta intends to pursue all remedies available to it in connection with the
litigation with Silvaco. Meta believes it has substantial appellate issues
that could cause the judgment to be reversed and remanded to the trial court
for further proceedings. Should Meta be permitted to participate fully in
further trial court proceedings, Meta believes it would have substantial
defenses to Silvaco's claims. However, there can be no assurance that any such
remedies will be successful. Although it is reasonably possible the Company
will incur a loss in relation to this claim, it is currently unable to estimate
the actual loss or range of loss. Payment of the damages previously awarded,
and damages which may be awarded in the future, would have a material adverse
effect on the Company's business, financial condition and results of
operations.
On March 31, 1998, Silvaco filed an additional lawsuit, against the
Company and Roy Jewell, the Company's CEO Staff, Corporate Affairs and
General Manager of the TCAD Business Unit, in the Superior Court of
California for Santa Clara County. The complaint alleges causes of action
for defamation, negligent and intentional interference with economic
advantage, and unfair competition and business practices based on statements
allegedly made by the Company that Silvaco claims disparaged Silvaco and its
TCAD products. Silvaco is seeking $20 million in compensatory damages,
punitive damages, and an injunction. The Company believes it has defenses to
these claims and intends to defend itself vigorously. Although it is
reasonably possible the Company will incur a loss in relation to these
claims, it is currently unable to estimate the actual loss or range of loss.
In the event the Company's defenses are unsuccessful, the Company may be
required to pay damages to the plaintiffs, and such a judgment could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PESIC LITIGATION.
In September 1996, Katherine Ngai Pesic and Ivan Pesic commenced an
action in the Superior Court of California for Santa Clara County naming as
defendants the Company (as successor in interest to Meta), Shawn Hailey,
Meta's former Chief Executive Officer, and Thomas N. White, Jr. and George S.
Cole, both of whom were Meta's former counsel in the Meta v. Silvaco matter,
as discussed above. The action asserts claims for invasion of privacy under
California common law and the California Constitution and seeks compensatory
and punitive damages. The Company has answered the complaint, but no trial
date has been set. The Company believes it has defenses to these claims and
intends to defend
16
<PAGE>
itself vigorously. Although it is reasonably possible the Company will incur
a loss in relation to these claims, it is currently unable to estimate the
actual loss or range of loss. In the event the Company's defenses are
unsuccessful, the Company may be required to pay damages to the plaintiffs,
and such a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations.
MICROUNITY LITIGATION.
On October 14, 1997, Microunity Systems Engineering ("Microunity"), Inc.
filed in the United States District Court for the Northern District of
California a complaint against Precim Corporation ("Precim"). Precim was a
wholly owned subsidiary of TMA, which was acquired by the Company in January
1998. This lawsuit alleges liability for patent infringement, unfair
competition, and tortious interference with prospective economic advantage.
The action requests unspecified damages and an injunction against Precim.
Precim has answered the complaint and filed counterclaims against Microunity
seeking a declaration that the patents at issue are invalid and that Precim
does not infringe. Trial has been scheduled for September 20, 1999. Precim
believes it has defenses to these claims and intends to defend itself
vigorously. Although it is reasonably possible the Company will incur a loss
in relation to these claims, it is currently unable to estimate the actual
loss or range of loss. In the event Precim's defenses are unsuccessful,
Precim may be required to pay damages to the plaintiffs, and such a judgment
could have a material adverse effect on the Company's business, financial
condition and results of operations.
SECURITIES CLASS ACTION CLAIMS.
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 against the Company. 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 against the
Company 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, described above. In February 1997, plaintiff Tarca voluntarily
dismissed his action and the Margetis plaintiffs were certified as class
representatives in their action. On July 25, 1997, a federal judge stayed the
Margetis action, except for certain documentary and third-party discovery,
pending resolution of the Cadence suit.
On May 30, 1997, Joanne Hoffman filed in the United States District
Court for the Northern District of California a purported class action
alleging securities claims on behalf of purchasers of the Company's stock
between March 29, 1996 and April 11, 1997, the date of the filing of the
criminal complaints against the Company and six of its employees and/or
officers. Plaintiff alleges that the Company and various of its officers
misled the market as to the likelihood of criminal charges being filed and as
to the validity of the Cadence allegations. The Company moved to dismiss the
Hoffman complaint for failure to state a claim, but the District Court in
December 1997 denied the motion. The District Court has also granted
plaintiff's motion for appointment as lead plaintiff. Recently, the
plaintiff filed a motion for class certification, noticed for hearing on
September 4, 1998. The stay of the Margetis securities class action pending
resolution of the Cadence suit will likely apply to this securities action as
well.
The Company believes it has defenses to all of the securities class
action claims described above, and intends to defend itself vigorously.
There can be no assurance, however, that the Company's defenses will be
successful. Although it is reasonably possible the Company will incur a loss
in relation to these claims, it is currently unable to estimate the actual
loss or range of loss, either individually or in aggregate. In the event
the Company's defenses are unsuccessful, the Company may be required to pay
damages to the securities class action plaintiffs, and such a judgment would
likely have a material adverse effect on the Company's business, financial
condition and results of operations, financial condition and results of
operations.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
<PAGE>
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q
are listed on the Exhibit Index immediately preceding such exhibits and
are incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed Form 8 on September 18, 1998, to report an Other
Event under item number 5.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avant! Corporation
(Registrant)
November 16, 1998 /s/ GERALD C. HSU
--------------------------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors
November 16, 1998 /s/ LINDA CHINN
--------------------------------------
Linda Chinn
Head of Finance and Administration
(principal accounting officer
and principal financial officer)
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of August 18,
1996 amount 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)
2.4 Agreement and Plan of Reorganization dated as of July 31,
1997, as amended on August 27, 1997 among the Registrant,
GB Acquisition Corporation, VLSI Technology, Inc. and
Compass Design Automation, Inc. (6)
2.5 Agreement and Plan of Reorganization dated as of
September 10, 1997 among the Registrant, Cardinal Merger
Corporation and Technology Modeling Associates, Inc. (5)
3.1 Restated Certificate of Incorporation (1)
3.2 Amended and Restated By laws (9)
4.1 Amended and Restated Investors Rights Agreement between
the Company And the Investors specified therein 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 1995 Stock Option/Stock Issuance Plan (7)
10.2 Employee Stock Purchase Plan (7)
10.3 Form of Indemnification Agreement (1)
10.4 Indemnification Agreement entered into between the
Company and Gerald C. Hsu dated May 24, 1994 (1)
21.1 List of subsidiaries of the Company (8)
27.1 Financial Data Schedule
99.1 Preliminary Injunction, Cadence Design Systems, Inc. v.
Avant! Corporation (8)
99.2 Modification of Preliminary Injunction, Cadence Design
Systems, Inc. v. Avant! Corporation (8)
</TABLE>
20
<PAGE>
(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-91128) 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 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-4 (File No. 333-18445) as filed on January 27, 1997.
(5) Incorporated by reference from the Company's Registration Statement on
Form S-4 (File No. 333-42923) as filed on December 22, 1997.
(6) Incorporated by reference from the Company's Registration Statement on
Form S-3 (File No. 333-43087) as filed on January 13, 1998.
(7) Incorporated by reference from the Company's Schedule 14A filed with the
SEC on April 7, 1998.
(8) Incorporated by reference from the Company's Report on 10-K filed with the
SEC on March 31, 1998.
(9) Incorporated by reference from the Company's Report on Form 8-K filed with
the SEC on Sepetember 18, 1998.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FILED AS A
PART OF THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 87,965
<SECURITIES> 38,354
<RECEIVABLES> 40,071
<ALLOWANCES> 5,506
<INVENTORY> 0
<CURRENT-ASSETS> 196,703
<PP&E> 53,717
<DEPRECIATION> 23,377
<TOTAL-ASSETS> 276,600
<CURRENT-LIABILITIES> 63,277
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 211,591
<TOTAL-LIABILITY-AND-EQUITY> 276,600
<SALES> 0
<TOTAL-REVENUES> 58,078
<CGS> 1,242
<TOTAL-COSTS> 5,088
<OTHER-EXPENSES> 35,465
<LOSS-PROVISION> 177
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 19,001
<INCOME-TAX> 6,460
<INCOME-CONTINUING> 12,541
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,541
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>