<PAGE>
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 MARCH 31, 1999
[ ] 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 April
30, 1999 was 33,290,426.
<PAGE>
AVANT! CORPORATION
FORM 10-Q
March 31, 1999
INDEX
<TABLE>
<S> <C>
PART 1. FINANCIAL INFORMATION Page
----
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND
DECEMBER 31, 1998 1
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND 1998 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK DERIVATIVES
AND FINANCIAL INSTRUMENTS 11
PART 2. OTHER INFORMATION
Item 1. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 12
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
Item 3. DEFAULTS UPON SENIOR SECURITIES 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
Item 5. OTHER INFORMATION 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE PAGE 21
EXHIBIT INDEX 22
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PART 1. FINANCIAL INFORMATION
AVANT! CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 66,803 $ 121,206
Short-term investments 107,525 21,389
Accounts receivable, net 37,003 33,325
Due from affiliates 9,349 8,947
Deferred income taxes 12,904 14,418
Prepaid expenses and other current assets 14,441 14,566
------------- --------------
Total current assets 248,025 213,851
Equipment, furniture and fixtures, net 27,540 28,758
Deferred income taxes 16,131 15,965
Goodwill and other intangibles, net 38,929 41,343
Other assets 17,105 17,469
------------- --------------
Total assets $ 347,730 $ 317,386
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,843 $ 5,632
Accrued compensation 11,436 10,109
Other accrued liabilities 9,830 10,126
Accrued income taxes 30,110 25,457
Deferred revenue 34,606 28,985
------------- --------------
Total current liabilities 93,825 80,309
Other noncurrent liabilities: 1,763 1,879
------------- --------------
Total liabilities 95,588 82,188
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.0001 par value; 5,000
shares authorized; none issued and outstanding - -
Series A junior participating preferred stock, $.0001 par value;
75,000 shares authorized; none issued and outstanding - -
Common stock, $.0001 par value; 75,000 authorized;
33,370 and 33,059 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 3 3
Additional paid-in capital 184,439 182,081
Deferred compensation (612) (792)
Other accumulated comprehensive income (loss) (80) 2
Retained earnings 68,392 53,904
------------- --------------
Total stockholder's equity 252,142 235,198
------------- --------------
Total liabilities and stockholders' equity $ 347,730 $ 317,386
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------------- ------------
<S> <C> <C>
Revenue:
Software $ 41,869 $ 36,846
Services 24,115 15,170
-------- --------
Total revenue 65,984 52,016
-------- --------
Costs and expenses:
Costs of software 1,255 1,177
Costs of services 4,109 3,462
Selling and marketing 16,289 13,769
Research and development 16,229 13,350
General and adminstrative 7,017 5,166
Merger expenses - 10,747
-------- --------
Total operating expenses 44,899 47,671
-------- --------
Income from operations 21,085 4,345
Interest income and other, net 2,096 2,122
-------- --------
Income before income taxes 23,181 6,467
Provision for income taxes 8,693 5,853
-------- --------
Net income $ 14,488 $ 614
-------- --------
-------- --------
Other comprehensive income - change in unrealized gain (loss) on
short-term investments, net of related tax effects and reclassification
adjustments for realized gains and losses (82) 73
-------- --------
Total comprehensive income $ 14,406 $ 687
-------- --------
-------- --------
Earnings per share - Basic:
Earnings per share $ 0.44 $ 0.02
-------- --------
-------- --------
Total weighted average number of common
shares outstanding 33,254 32,364
-------- --------
-------- --------
Earnings per share - Diluted:
Earnings per share $ 0.41 $ 0.02
-------- --------
-------- --------
Total weighted average number of common
and common equivalent shares outstanding 35,413 33,433
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AVANT! CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,488 $ 614
Adjustments to reconcile net income to net cash
provided by operating actvities:
Depreciation and amortization 4,929 4,357
Amortization of deferred compensation 180 302
Deferred income taxes 1,348 1,806
Loss on disposal of equipment 91 -
Tax benefit related to stock options 502 28
Equity in earnings of joint ventures 155 (1,039)
Deferred rent 162 120
Provision for doubtful accounts 850 (27)
Changes in operating assets and liabilities:
Accounts receivable, net (4,528) (1,153)
Due from affiliates (402) (593)
Prepaid expenses and other assets 334 (4,746)
Accounts payable 2,211 (3,318)
Accrued compensation 1,327 106
Accrued income taxes 4,653 2,415
Other accrued liabilities (541) 745
Deferred revenue 5,621 4,437
------------ -----------
Net cash provided by operating activities 31,380 4,054
------------ -----------
Cash flows from investing activities:
Purchases of short-term investments (461,594) (275,211)
Maturities and sales of short-term investments 375,376 275,323
Purchases of equipment, furniture, fixtures and other assets (1,388) (2,164)
Investment in joint ventures - (6,250)
Purchase of acquired entities - (1,901)
------------ -----------
Net cash used by investing activities (87,606) (10,203)
------------ -----------
Cash flows from financing activities:
Principal payments under capital lease obligations (33) (33)
Exercise of stock options 1,856 222
Issuance of common stock under employee stock purchase plan - 358
------------ -----------
Net cash provided by financing activities 1,823 547
------------ -----------
Net decrease in cash and cash equivalents (54,403) (5,602)
Cash and cash equivalents, beginning of period 121,206 77,523
------------ -----------
Cash and cash equivalents, end of period $ 66,803 $ 71,921
------------ -----------
------------ -----------
Cash paid during the period for income taxes $ 1,573 $ 515
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AVANT! CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Avant! Corporation (Avant! or the Company) and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of financial
position and results of operations have been made. Operating results for
interim periods are not necessarily indicative of results, which may be
expected for a full year. The information included in this Form 10-Q should
be read in conjunction with the Company's annual report on Form 10-K for the
year ended December 31, 1998, 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 March 31, 1999 and
1998, are options to acquire 965,000 and 2,039,000 shares, respectively, of
common stock with a weighted-average exercise price of $24.91 and $24.35,
respectively, because their effects would be anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------ -------------
<S> <C> <C>
Diluted EPS:
Net Income $ 14,488 $ 614
-------- --------
-------- --------
Weighted average number of common
shares outstanding 33,254 32,364
Stock options 2,159 1,069
-------- --------
Total weighted average number
of common and common
equivalent shares outstanding 35,413 33,433
-------- --------
-------- --------
Basic earnings per share $ 0.44 $ 0.02
-------- --------
-------- --------
Diluted earnings per share $ 0.41 $ 0.02
-------- --------
-------- --------
</TABLE>
3. RECENT PRONOUNCEMENTS
The FASB recently 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
recognizes all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. 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. The
Company must adopt SFAS No. 133 by January 1, 2000. Management does not believe
the adoption of SFAS No. 133 will have a material effect on the financial
position or results of operations of the Company.
4. MERGERS
On May 5, 1999 and April 27, 1999 Avant! entered into definitive agreements
to acquire Chrysalis Symbolic Design Inc. (Chrysalis) and Xynetix Design
Systems, Inc. (Xynetix), respectively. The agreements provide that Avant!
will issue shares of Avant! common stock in exchange for all outstanding
Chrysalis and Xynetix equity. The proposed merger transactions are structured
as tax-free reorganizations and will be accounted for as poolings of
interests, and are expected to close in the second quarter of 1999. The
closing of the mergers are subject to regulatory approval, the availability
of pooling-of-interests accounting treatment, and other customary closing
conditions.
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 $10,747,000, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and
stockholder meeting of approximately $5,400,000, charges for the elimination
of duplicate facilities of approximately $2,247,000 and severance and certain
other related costs of approximately $3,100,000. As of March 31, 1999, there
were no material remaining accrued liabilities relating to the merger. Of the
$10,747,000 of merger related costs, approximately $7,900,000 related to cash
expenditures while approximately $2,847,000 related to non-cash charges.
5. LEGAL PROCEEDINGS
Avant! and its subsidiaries are engaged in various material litigation
matters, including: a civil action brought by Cadence Design Systems, Inc.;
the criminal indictment of Avant! and certain of its employees, officers and
directors; securities class action and defamation claims stemming from the
Cadence litigation and the criminal indictment; civil
4
<PAGE>
actions brought by Silvaco Data Systems, Inc.; and a civil action brought by
Katherine Ngai Pesic and Ivan Pesic. The pending litigation against Avant!
and any future litigation against Avant! or its employees, regardless of the
outcome, may result in substantial costs and expenses and significant
diversion of effort by Avant!'s management. These various matters could
seriously harm Avant!'s business, financial condition and results of
operations.
CADENCE LITIGATION
On December 6, 1995, Cadence filed an action against Avant! and certain of
its officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition,
misappropriation of trade secrets, conspiracy, breach of contract, inducing
breach of contract and false advertising. The essence of the complaint is
that certain of Avant!'s employees who were formerly Cadence employees
allegedly misappropriated and improperly copied source code for certain
important functions of Avant!'s place and route products from Cadence, and
that Avant! has allegedly competed unfairly by making false statements
concerning Cadence and its products. The action also alleges that Avant!
induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. Trial has been scheduled for
October 12, 1999.
In addition to actual and punitive damages, which have not been quantified by
Cadence, Cadence is seeking to enjoin the sale of Avant!'s place and route
products pending trial of the action. 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, Avant!'s ArcCell products. The
injunction also barred Avant! 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. (Avant! had stopped selling or licensing ArcCell products or
code in mid 1996.) On December 7, 1998, the District Court entered an
injunction against Avant! prohibiting Avant! from directly or indirectly
marketing, selling, leasing, licensing, copywriting or transferring the
Aquarius, Aquarius XO and Aquarius BV products. The injunction also prohibits
Avant! from marketing, selling, leasing, licensing, copying or transferring
any translation code for an Aquarius product that infringes any protected
right of Cadence. With certain exceptions related to the pending litigation,
beginning February 5, 1999, the injunction prohibits Avant! from possessing
or using any copies of any portion of the source code or object code for the
Aquarius products to the extent that such portion is copied or derived from
the Design Framework II product of Cadence. The injunction further includes
certain notice and reporting requirements to be fulfilled by Avant!. The
preliminary injunction against Avant!'s Aquarius products could seriously
harm Avant!'s business, financial condition and results of operations.
On January 16, 1996, Avant! 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. Avant! filed an amended counterclaim on January
29, 1998.
Avant! believes it has defenses to all of Cadence's claims and intends to
defend itself vigorously. If, however, Avant!'s defenses are unsuccessful,
Avant! may ultimately be permanently enjoined from selling certain place and
route products and may be required to pay monetary damages to Cadence. In
addition, upon further consideration by the District Court, Avant! could be
preliminarily enjoined from selling its Apollo place and route products. 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. Accordingly,
an adverse judgement, if granted on any claim, would seriously harm Avant!'s
business, financial position and results of operations. Furthermore, it is
possible that Avant!'s relationships with its customers and/or partners will
be seriously harmed in the future as a result of the Cadence litigation.
CRIMINAL INDICTMENT
On December 16, 1998, after a grand jury investigation, the Santa Clara
County District Attorney's office filed a criminal indictment alleging felony
level offenses related to the allegations of misappropriation of trade
secrets set forth in Cadence's lawsuit against, among others, Avant! and the
following current or former employees and/or directors of Avant!:
- Gerald C. Hsu, President, Chief Executive Officer and Chairman of the
board of directors;
- Y. Eric Cho, a former officer and former member of Avant!'s board of
directors;
- Y. Z. Liao, Corporate Fellow;
- Stephen Wuu, Executive Staff, Operations;
- Leigh Huang, former marketing manager;
- Eric Cheng, Research and Development Manager; and
- Mike Tsai, a former officer and former member of Avant!'s board of
directors.
The indictment charges the defendants listed above with conspiring to commit
trade secret theft, trade secret theft, inducing the theft of a trade secret,
conspiracy to commit fraudulent practices in connection with the offer or sale
of a
5
<PAGE>
security and fraudulent practices in connection with the offer or sale of a
security. The criminal indictment could result in additional defense costs
and criminal fines against Avant!, as well as the potential incarceration of
certain members of its management team and board of directors. Such outcomes
would seriously harm Avant!'s business, financial condition and results of
operations and may also result in canceled or postponed orders, increased
future expenditures, the loss of management and other key personnel,
additional stockholder litigation and loss of goodwill.
SILVACO LITIGATION
In March 1993, Meta Software Inc., which Avant! acquired in October 1996 and
which is now a wholly owned subsidiary of Avant!, filed a complaint in the
Superior Court of California for Santa Clara County against Silvaco Data
Systems, Inc. seeking monetary damages and injunctive relief. In August 1995,
Silvaco filed a cross-complaint against Meta and Shawn Hailey, then the
President and Chief Executive Officer of Meta, alleging, among other things,
that Meta owed 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. In November 1997, a
judgment in the aggregate amount of $31.4 million was entered against Avant!.
Avant! filed appeals on its own behalf and on behalf of Mr. Hailey. If
Avant!'s appeal is unsuccessful, Avant! will be required to pay substantial
monetary damages to Silvaco. Payment of the damages previously awarded, and
damages which may be awarded in the future, would seriously harm Avant!'s
business, financial condition and results of operations.
On March 31, 1998, Silvaco filed an additional lawsuit, against Avant! and
Roy Jewell, Avant!'s Executive Staff, Business, in the Superior Court of
California for Santa Clara County. The lawsuit alleges causes of action for
defamation, negligent and intentional interference with economic advantage,
unfair competition, Lanham Act violations and consumer fraud. Silvaco is
seeking $20 million in compensatory damages, punitive damages and an
injunction. Avant! believes it has defenses to these claims and intends to
defend itself vigorously. In the event Avant!'s defenses are unsuccessful,
Avant! may be required to pay damages to Silvaco, and such a judgment would
seriously harm Avant!'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
Avant! (as successor in interest to Meta), Shawn Hailey, Meta's former
President and 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
discussed above. The action asserts claims for invasion of privacy under
California common law and the California Constitution and seeks compensatory
and punitive damages. Trial has been scheduled for October 18, 1999. Avant!
believes it has defenses to these claims and intends to defend itself
vigorously. In the event that Avant!'s defenses are unsuccessful, Avant! may
be required to pay damages to the plaintiffs, and such a judgment could
seriously harm Avant!'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 Avant!. This lawsuit alleges 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
addition, on May 30, 1997, Joanne Hoffman filed in the United States District
Court for the Northern District of California a class action lawsuit alleging
securities claims on behalf of purchasers of Avant!'s stock between March 29,
1996 and April 11, 1997, the date of the filing of a criminal complaint
against Avant! and six of its employees and/or officers. Plaintiff alleges
that Avant! and its officers misled the market as to the likelihood of
criminal charges being filed and as to the validity of the Cadence
allegations. The District Court has granted Avant!'s motion to coordinate the
Hoffman action for pretrial purposes with the earlier-filed Margetis action.
Avant! believes it has defenses to these securities class action claims, and
intends to defend itself vigorously. In the event Avant!'s defenses are
unsuccessful, Avant! may be required to pay damages to the securities class
action plaintiffs, and such a judgment would seriously harm Avant!'s
business, financial condition and results of operations.
NEQUIST LITIGATION
On July 15, 1998, Eric Nequist filed in the Santa Clara County Superior Court
a complaint against Avant!. The complaint alleges causes of action for
defamation, intentional infliction of emotional distress, negligent and
intentional interference with economic advantage, abuse of process and
violations of California Business and Profession Code section 17200. No trial
date has been set, and the parties have been ordered to mediation, which has
been scheduled for June 21, 1999. Avant! has moved that this litigation be
stayed pending resolution of the criminal case against Avant!, and Avant!'s
motion is currently pending before the Sixth District Court of Appeal. The
Sixth District has stayed all discovery pending resolution of that motion.
Avant! believes it has defenses to Mr. Nequist's claims and intends to defend
itself vigorously. In the event Avant!'s defenses are unsuccessful, Avant!
may be required to pay damages to Mr. Nequist, and such a judgment could
seriously harm Avant!'s business, financial condition and results of
operation.
6
<PAGE>
LITIGATION COSTS
The pending litigation and any future litigation against the Company and the
Company's employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company. The Company has charged to
expenses approximately $2,914,000 and $1,800,000 in litigation expenses
during the three months ended March 31, 1999 and 1998, respectively, related
to the various litigation issues. The Company currently expects legal costs
to continue in the future as a result of its current litigation issues.
Accordingly, any such litigation could have a material adverse effect on the
Company's business, financial position and results of operations.
Furthermore, if Avant! is required to satisfy the default judgments in full
in the Silvaco litigation, Avant! could be required to pay up to $31.4
million in damages, which would have a material adverse effect on Avant!'s
business, financial condition and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This report contains forward-looking statements that involve risks and
uncertainties. Our 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 "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 declared
effective by the Securities and Exchange Commission on March 12, 1999, and
other risks detailed from time to time in our Securities and Exchange
Commission reports. In addition, past results and trends should not be used
by investors to anticipate future results and trends.
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
January 16, 1998, November 27, 1996, October 29, 1996 and September 27, 1996
the Company merged with Technology Modeling Associates ("TMA"), FrontLine
Design Automation ("FrontLine"), Meta-Software Inc. ("Meta"), and Anagram,
Inc ("Anagram"), 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
TMA, FrontLine, Meta, Anagram and ISS. On November 19, 1998, November 13,
1998, September 12, 1997, September 30, 1997 and December 31, 1996, the
Company acquired ACEO Technology Inc. ("ACEO"), interHDL Inc. ("interHDL"),
Compass Design Automation, Inc. ("Compass"), Datalink Far East, Ltd.
("Datalink") and Nexsyn Design Technology Inc. ("Nexsyn"), 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 very deep submicron (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, a power driven
design and analysis tool, and Star-Time, a high-speed high capacity full chip
timing simulation tool. At the June 1998 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 technical computer aided design (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. The
addition of interHDL's tools and technology allows the Company to penetrate
into the market of register transfer level (RTL) planning and analysis
software, and high performance analysis
7
<PAGE>
for system on chip (SOC) designs. The acquisition of ACEO also allows the
company to develop the RTL virtual prototype. The projected costs and
completion dates of the in-process development projects acquired from
interHDL and ACEO have not changed significantly from the Company's original
assumptions. The acquisition of Xynetix will further broaden the Company's
ECAD-to-TCAD product offerings and will help the Company become a leader in
advanced IC packaging design software -- a growing requirement for next
generation system on chip (SOC) designs. The addition of Chrysalis gives the
Company the unique ability to offer integrated circuit (IC) designers
front-to-back solutions for the next generation of high-performance very deep
submicron designs.
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
March 31,
1999 1998
------------ -------------
<S> <C> <C>
Revenue:
Software 63 71
Services 37 29
------------ -------------
Total revenue 100% 100%
Costs and expenses:
Costs of software 2 2
Costs of services 6 7
Selling and marketing 25 26
Research and development 24 26
General and adminstrative 11 10
Merger expenses - 21
------------ -------------
Total operating expenses 68 92
------------ -------------
Income from operations 32 8
Interest income and other, net 3 4
------------ -------------
Income before income taxes 35 12
Provision for income taxes 13 11
------------ -------------
Net income 22% 1%
------------ -------------
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUE. Revenue consists primarily of fees for licenses of the Company's
software products, maintenance and customer support. In the fourth quarter of
1997, the Company adopted the provisions of AICPA SOP 97-2, SOFTWARE REVENUE
RECOGNITION (SOP 97-2). SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. The revenue
allocated to software products, including time-based software licenses,
generally is recognized after shipment of the products, delivery of permanent
authorization codes and fulfillment of acceptance terms. The revenue
allocated to postcontract customer support (PCS) is recognized ratably over
the term of the support; revenue allocated to service elements is recognized
as the services are performed. In connection with the adoption of SOP 97-2,
revenue for contracts with extended payment terms (generally greater than
twelve months) are recognized as payments become due. The effect of adopting
SOP 97-2 on October 1, 1997 was not material.
In December 1998, the AcSEC issued SOP 98-9, SOFTWARE REVENUE RECOGNITION,
WITH RESPECT TO CERTAIN ARRANGEMENTS, which requires recognition of revenue
using the "residual method" in a multiple element arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the "residual method", the total fair value of the undelivered elements
is deferred and subsequently recognized in accordance with SOP 97-2. The
Company does not expect a material change to its accounting for revenues as a
result of the provisions of SOP 98-9.
The Company's total revenue increased 27% to $66.0 million for the three
months ended March 31, 1999 from $52.0 million for the three months ended
March 31, 1998. The percentage of the Company's total revenue attributable to
software licenses decreased to 63% for the three months ended March 31, 1999
from 71% for the three months ended March 31, 1998. The decrease in software
license as a percentage of total revenue, for the three months ended March
31, 1999, is primarily due to the increased user base and resulting increase
in service and maintenance revenue.
8
<PAGE>
Software revenue increased 14% to $41.9 million for the three months ended
March 31, 1999 from $36.8 million for the three months ended March 31, 1998.
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 59% to $24.1 million
for the three months ended March 31, 1999 from $15.2 million for the three
months ended March 31, 1998. The increase reflects the growing base of
installed systems.
The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information
about operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on
the way that management organizes the operating segments within the Company
for making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by geographic region for purposes of making
operating decisions and assessing financial performance. The consolidated
financial information reviewed by the CEO is identical to the information
presented in the accompanying consolidated statement of operations.
Therefore, the Company operates in a single operating segment: electronic
design automation software and services. There have been no differences from
the last annual report as of December 31, 1998 in the basis of segmentation
or in the basis of measurement of segment profit or loss. Furthermore, since
the Company operates in a single operating segment, total assets and
operating income disclosed in the condensed consolidated financial statements
as of March 31, 1999 represent the total assets and operating income of the
segment.
<TABLE>
<CAPTION>
North America Europe Asia Consolidated
------------- ------ ---- ------------
<S> <C> <C> <C> <C>
Revenues:
Quarter ended March 31, 1998 $ 33,753 $ 6,104 $ 12,159 $ 52,016
Quarter ended March 31, 1999 42,425 10,700 12,859 65,984
Identifiable assets:
March 31, 1998 $247,772 $ 10,313 $ 2,320 $260,405
March 31, 1999 330,224 13,497 4,009 347,730
Long-lived assets:
March 31, 1998 $ 30,914 $ 1,186 $ 228 $ 32,328
March 31, 1999 26,203 843 494 27,540
</TABLE>
As discussed in the section entitled "Factors That May Affect Future
Results," the Company is involved in several litigation matters, including a
lawsuit with Cadence Design Systems, Inc. ("Cadence"). As a result of the
litigation issues, some customers may return, or cancel, or postpone orders
of, the Company's products. As of March 31, 1999, such cancellations,
postponements and returns had not had a material financial impact on the
Company's revenues. However, cancellations, returns, or a significant delay
of orders in the future would have a material adverse effect on the Company's
business, financial condition and results of operations.
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 $1.3 million from $1.2 million for
the three months ended March 31, 1999 and 1998, respectively. As a percentage
of software revenue, costs of software remained at 3% for the three months
ended March 31, 1999 and 1998, respectively. 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 $4.1 million from $3.5 million
for the three months ended March 31, 1999 and 1998, respectively. Costs of
services as a percentage of services revenue decreased to 17% from 23% for
the three months ended March 31, 1999 and 1998. The reduction in costs of
services as a percentage of service revenue reflects higher revenue growth
and improved productivity of the Company's customer 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
and application engineers. Selling and marketing expenses also include costs
of advertising, public relations, conferences, trade shows and allowance for
doubtful accounts. Selling and marketing expenses increased to $16.3 million
from $13.8 million for the three months ended March 31, 1999 and 1998,
respectively. The increase was primarily due to increased headcount and
allowance for doubtful accounts. The allowance for doubtful accounts was
increased $850,000 during the quarter ended March 31, 1999 to reflect sales
levels and collection experience. As a percentage of total revenue, selling
and marketing expenses decreased to 25% from 26% for the three months ended
March 31, 1999 and 1998, 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 $16.2 million from $13.4 million for the three months ended March 31, 1999
and 1998, respectively. The increase was primarily due to increased
amortization of intangibles due to the purchase of interHDL and ACEO and
increased incentive compensation expense. Research and development expenses
decreased to 24% from 26% of total revenue for the three months ended March
31, 1999 and 1998, respectively. The Company anticipates that it will
continue to devote substantial resources to product research and development
throughout 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $7.0 million from $5.2 million
9
<PAGE>
for the three months ended March 31, 1999 and 1998, respectively. The
increase was primarily due to increases in legal and personnel costs. As a
percentage of total revenue, general and administrative expenses increased to
11% from 10% for the three months ended March 31, 1999 and 1998,
respectively. The increase was primarily from legal costs relating to the
Company's various litigation matters.
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 $10,747,000, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing and
stockholder meeting of approximately $5,400,000, charges for the elimination
of duplicate facilities of approximately $2,247,000 and severance and certain
other related costs of approximately $3,100,000. As of March 31, 1999, there
were no material remaining accrued liabilities relating to the merger. Of the
$10,747,000 of merger related costs, approximately $7,900,000 related to cash
expenditures while approximately $2,847,000 related to non-cash charges.
INTEREST INCOME AND OTHER, NET. Interest income and other remained at $2.1
million for the three months ended March 31, 1999 and 1998, respectively. The
resulting minimal change was due primarily to higher investment balance
offset by lower interest rates during the quarter ended March 31, 1999 as
compared to March 31, 1998.
INCOME TAX EXPENSE. The Company accounts for income taxes in accordance with
SFAS No. 109. The provision for income taxes was $8.7 million and $5.9
million for the three months ended March 31, 1999 and 1998, respectively. The
provision for income taxes, as a percentage of pre-tax income and excluding
merger expense, was 37.5% and 34% for the three months ended March 31, 1999
and 1998, respectively. The increase of tax rates was due primarily to the
effect of increased goodwill amortization which was not deductible for income
tax purposes.
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, we may be unable to adjust
spending sufficiently quickly to compensate. 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 $31,380,000 for the three months ended
March 31, 1999. The Company's investing activities used $87,606,000 of net
cash for the three months ended March 31, 1999. Net cash used resulted from
the purchase of securities and purchases of computer equipment and office
furniture. Net cash provided by financing activities was $1,823,000 for the
three months ended March 31, 1999. Financing activities consisted primarily
of the exercise of stock options.
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 March 31, 1999, the Company had $174,328,000 of cash, cash equivalents
and short-term investments, compared to $142,595,000 at December 31, 1998.
Working capital also increased from $ 133,542,000 at December 31, 1998 to
$154,200,000 at March 31, 1999. 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, cash secured by the Company.
10
<PAGE>
Based on its operating plan and absent any adverse judgments in its various
litigation issues, the Company believes that it has available cash and
short-term investments sufficient to fund the Company's operations through at
least the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK DERIVATIVES
AND FINANCIAL INSTRUMENTS
Information relating to quantitative and qualitative disclosure about market
risk is set forth in Part 2, Item 1 of this Form 10Q and in the Company's 1998
Annual Reports to Stockholders under the caption "Factors That may Affect
Future Results" in Management's Discussion and Analysis of Financial
Condition and Results of Operations. Such information is incorporated herein
by reference.
FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company transacts business in various foreign currencies. Accordingly,
the Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to payments from MainGate,
a Japanese distributor. As of March 31, 1999, the Company had no hedging
contracts outstanding.
The Company assesses the need to utilize financial instruments to hedge
currency exposures on an ongoing basis. The Company does not use derivative
financial instruments for speculative trading purposes, nor does the Company
hedge its foreign currency exposure in a manner that entirely offsets the
effects of changes in foreign exchange rates. The Company regularly reviews
its hedging program and may as part of this review determine at any time to
change its hedging program.
FIXED INCOME INVESTMENTS
The Company's exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government
agencies and corporate debt securities. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer.
The Company's general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with a maturity of three months or less at the date
of purchase are considered to be cash equivalents; investments with
maturities between three months or less are considered cash equivalents;
investments with maturities between three and twelve months are considered to
be short-term investments; investments with maturities in excess of twelve
months are considered to be long-term investments. The weighted average
pre-tax interest rate on the investment portfolio is approximately 4.71%. The
Company does not expect any material loss with respect to its investment
portfolio.
PART 2. OTHER INFORMATION
ITEM 1. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
WE ARE INVOLVED IN SEVERAL LITIGATION MATTERS THAT COULD SERIOUSLY HARM OUR
BUSINESS
Avant! and its subsidiaries are engaged in various litigation matters,
including: a civil action brought by Cadence Design Systems, Inc.; the
criminal indictment of Avant! and certain of its employees, officers and
directors; securities class action and defamation claims stemming from the
Cadence litigation and the criminal indictment; civil actions brought by
Silvaco Data Systems, Inc.; and a civil action brought by Katherine Ngai
Pesic and Ivan Pesic. The pending litigation against Avant! and any future
litigation against Avant! or its employees, regardless of the outcome, may
result in substantial costs and expenses and significant diversion of effort
by Avant!'s management. These various matters could seriously harm Avant!'s
business, financial condition and results of operations.
CADENCE LITIGATION
On December 6, 1995, Cadence filed an action against Avant! and certain of
its officers in the United States District Court for the Northern District of
California alleging copyright infringement, unfair competition,
misappropriation of trade secrets, conspiracy, breach of contract, inducing
breach of contract and false advertising. The essence of the complaint is
that certain of Avant!'s employees who were formerly Cadence employees
allegedly misappropriated and improperly copied source code for certain
important functions of Avant!'s place and route products from Cadence, and
that Avant! has allegedly competed unfairly by making false statements
concerning Cadence and its products. The action also alleges that Avant!
induced certain individual defendants to breach their agreements of
employment and confidentiality with Cadence. Trial has been scheduled for
October 12, 1999.
In addition to actual and punitive damages, which have not been quantified by
Cadence, Cadence is seeking to enjoin the sale of Avant!'s place and route
products pending trial of the action. 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, Avant!'s ArcCell products. The
injunction also barred Avant! 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. (Avant! had stopped selling or licensing ArcCell products or
code in mid 1996.) On December 7, 1998, the District Court entered an
injunction against Avant! prohibiting Avant! from directly or indirectly
marketing, selling, leasing, licensing, copywriting or transferring the
Aquarius, Aquarius XO and Aquarius BV products. The injunction also prohibits
Avant! from marketing, selling, leasing, licensing, copying or transferring
any translation code for an Aquarius product that infringes any protected
right of Cadence. With certain exceptions related to the pending litigation,
beginning February 5, 1999, the injunction prohibits Avant! from possessing
or using any copies of any portion of the source code or object code for the
Aquarius products to the extent that such portion is copied or derived from
the Design Framework II product of Cadence. The injunction further includes
certain notice and reporting requirements to be fulfilled by Avant!. The
preliminary injunction against Avant!'s Aquarius products could seriously
harm Avant!'s business, financial condition and results of operations.
On January 16, 1996, Avant! 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. Avant! filed an amended counterclaim on January
29, 1998.
Avant! believes it has defenses to all of Cadence's claims and intends to
defend itself vigorously. If, however, Avant!'s defenses are unsuccessful,
Avant! may ultimately be permanently enjoined from selling certain place and
route products and may be required to pay monetary damages to Cadence. In
addition, upon further consideration by the District Court, Avant! could be
preliminarily enjoined from selling its Apollo place and route products. 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. Accordingly,
an adverse judgement, if granted on any claim, would seriously harm Avant!'s
business, financial position and results of operations. Furthermore, it is
possible that Avant!'s relationships with its customers and/or partners will
be seriously harmed in the future as a result of the Cadence litigation.
CRIMINAL INDICTMENT
On December 16, 1998, after a grand jury investigation, the Santa Clara
County District Attorney's office filed a criminal indictment alleging felony
level offenses related to the allegations of misappropriation of trade
secrets set forth in Cadence's lawsuit against, among others, Avant! and the
following current or former employees and/or directors of Avant!:
- Gerald C. Hsu, President, Chief Executive Officer and Chairman of the
board of directors;
11
<PAGE>
- Y. Eric Cho, a former officer and former member of Avant!'s board of
directors;
- Y. Z. Liao, Corporate Fellow;
- Stephen Wuu, Executive Staff, Operations;
- Leigh Huang, former marketing manager;
- Eric Cheng, Research and Development Manager; and
- Mike Tsai, a former officer and former member of Avant!'s board of
directors.
The indictment charges the defendants listed above with conspiring to commit
trade secret theft, trade secret theft, inducing the theft of a trade secret,
conspiracy to commit fraudulent practices in connection with the offer or
sale of a security and fraudulent practices in connection with the offer or
sale of a security. The criminal indictment could result in additional
defense costs and criminal fines against Avant!, as well as the potential
incarceration of certain members of its management team and board of
directors. Such outcomes would seriously harm Avant!'s business, financial
condition and results of operations and may also result in canceled or
postponed orders, increased future expenditures, the loss of management and
other key personnel, additional stockholder litigation and loss of goodwill.
SILVACO LITIGATION
In March 1993, Meta Software Inc., which Avant! acquired in October 1996 and
which is now a wholly owned subsidiary of Avant!, filed a complaint in the
Superior Court of California for Santa Clara County against Silvaco Data
Systems, Inc. seeking monetary damages and injunctive relief. In August 1995,
Silvaco filed a cross-complaint against Meta and Shawn Hailey, then the
President and Chief Executive Officer of Meta, alleging, among other things,
that Meta owed 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. In November 1997, a
judgment in the aggregate amount of $31.4 million was entered against Avant!.
Avant! filed appeals on its own behalf and on behalf of Mr. Hailey. If
Avant!'s appeal is unsuccessful, Avant! will be required to pay substantial
monetary damages to Silvaco. Payment of the damages previously awarded, and
damages which may be awarded in the future, would seriously harm Avant!'s
business, financial condition and results of operations.
On March 31, 1998, Silvaco filed an additional lawsuit, against Avant! and
Roy Jewell, Avant!'s Executive Staff, Business, in the Superior Court of
California for Santa Clara County. The lawsuit alleges causes of action for
defamation, negligent and intentional interference with economic advantage,
unfair competition, Lanham Act violations and consumer fraud. Silvaco is
seeking $20 million in compensatory damages, punitive damages and an
injunction. Avant! believes it has defenses to these claims and intends to
defend itself vigorously. In the event Avant!'s defenses are unsuccessful,
Avant! may be required to pay damages to Silvaco, and such a judgment would
seriously harm Avant!'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
Avant! (as successor in interest to Meta), Shawn Hailey, Meta's former
President and 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
discussed above. The action asserts claims for invasion of privacy under
California common law and the California Constitution and seeks compensatory
and punitive damages. Trial has been scheduled for October 18, 1999. Avant!
believes it has defenses to these claims and intends to defend itself
vigorously. In the event that Avant!'s defenses are unsuccessful, Avant! may
be required to pay damages to the plaintiffs, and such a judgment could
seriously harm Avant!'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 Avant!. This lawsuit alleges 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
addition, on May 30, 1997, Joanne Hoffman filed in the United States District
Court for the Northern District of California a class action lawsuit alleging
securities claims on behalf of purchasers of Avant!'s stock between March 29,
1996 and April 11, 1997, the date of the filing of a criminal complaint
against Avant! and six of its employees and/or officers. Plaintiff alleges
that Avant! and its officers misled the market as to the likelihood of
criminal charges being filed and as to the validity of the Cadence
allegations. The District Court has granted Avant!'s motion to coordinate the
Hoffman action for pretrial purposes with the earlier-filed Margetis action.
Avant! believes it has defenses to these securities class action claims, and
intends to defend itself vigorously. In the event Avant!'s defenses are
unsuccessful, Avant! may be required to pay damages to the securities class
action plaintiffs, and such a judgment would seriously harm Avant!'s
business, financial condition and results of operations.
12
<PAGE>
NEQUIST LITIGATION
On July 15, 1998, Eric Nequist filed in the Santa Clara County Superior Court
a complaint against Avant!. The complaint alleges causes of action for
defamation, intentional infliction of emotional distress, negligent and
intentional interference with economic advantage, abuse of process and
violations of California Business and Profession Code section 17200. No trial
date has been set, and the parties have been ordered to mediation, which has
been scheduled for June 21, 1999. Avant! has moved that this litigation be
stayed pending resolution of the criminal case against Avant!, and Avant!'s
motion is currently pending before the Sixth District Court of Appeal. The
Sixth District has stayed all discovery pending resolution of that motion.
Avant! believes it has defenses to Mr. Nequist's claims and intends to defend
itself vigorously. In the event Avant!'s defenses are unsuccessful, Avant!
may be required to pay damages to Mr. Nequist, and such a judgment could
seriously harm Avant!'s business, financial condition and results of
operation.
LITIGATION COSTS
The pending litigation and any future litigation against the Company and the
Company's employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company. The Company charged to
expenses approximately $12,342,000, $8,720,000 and $6,850,000 for the years
1998, 1997 and 1996, respectively, related to the various litigation issues.
The Company currently expects legal costs to continue in the future as a
result of its current litigation issues. Accordingly, any such litigation
could have a material adverse effect on the Company's business, financial
position and results of operations. Furthermore, if Avant! is required to
satisfy the default judgments in full in the Silvaco litigation, Avant! could
be required to pay up to $31.4 million in damages, which would have a
material adverse effect on Avant!'s business, financial condition and results
of operations.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS AND PRODUCT LINES
WITH THOSE OF INTERHDL AND ACEO
We have recently acquired interHDL, Inc. and ACEO Technology, Inc. The
integration of interHDL's and ACEO's business and personnel presents
difficult challenges for Avant!'s management. While Avant!'s management
believes that the combination of Avant!, interHDL and ACEO can be effected in
a manner that will realize the value of the combined entities, it is possible
that Avant!'s management will not effectively manage these business
combinations to realize the anticipated synergies.
Avant! acquired interHDL and ACEO, among other reasons, to acquire the
existing technology of these companies, including technology under
development. Avant! and its newly acquired companies each have different
systems and procedures in various operational areas that must be integrated.
Avant! may not be successful in completing such integration effectively,
expeditiously or efficiently. The difficulties of such integration may be
increased by the necessity of coordinating geographically separated
divisions, integrating personnel with disparate business backgrounds and
combining different corporate cultures. The integration of certain operations
will require the dedication of management resources, temporarily distracting
attention from Avant!'s day-to-day business. The business of the combined
company may also be disrupted by employee uncertainty and lack of focus
during the integration process. Accordingly, Avant! may not be able to retain
all of its key technical, sales and other key personnel. Avant!'s failure to
effectively integrate its operations with its newly acquired companies could
seriously harm Avant!'s business, financial condition and results of
operations.
WE NEED TO SUCCESSFULLY MANAGE OUR EXPANDING OPERATIONS
Avant! has experienced periods of rapid growth and significant expansion of
its operations that have placed a significant strain upon its management
systems and resources. In addition, Avant! has recently hired a significant
number of employees, and plans to further increase its total headcount.
Avant! also plans to expand the geographic scope of its customer base and
operations. This expansion has resulted and will continue to result in
substantial demands on Avant!'s management resources. Avant!'s ability to
compete effectively and to manage future expansion of its operations, if any,
will require Avant! to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and expand,
train and manage its employee work force. Avant! may not be successful in
addressing such risks, and the failure to do so would seriously harm Avant!'s
business, financial condition and results of operations.
WE MAY BE UNABLE TO ATTRACT AND RETAIN THE KEY MANAGEMENT AND TECHNICAL
PERSONNEL THAT WE NEED TO SUCCEED
Avant!'s future operating results depend in significant part upon the
continued service of key management and technical personnel. Several of
Avant!'s key personnel have been criminally indicted on charges relating to
the matters underlying the pending litigation between Avant! and Cadence. If
any of the individuals criminally indicted are found guilty and incarcerated
or are otherwise unable to continue to provide services to Avant!, its
business, financial condition and results of operations could be seriously
harmed. In addition, few of Avant!'s employees are bound by employment or
non-competition agreements, and due to the intense competition for such
personnel, as well as the uncertainty caused by the integration of Avant!'s
businesses and pending litigation, it is possible that Avant! will fail to
retain such key technical and managerial personnel. Moreover, there are only
a limited number of qualified integrated circuit design automation engineers,
and competition for these individuals is intense. If Avant! is unable to
attract, hire and retain qualified personnel in the future, the development
of new products and the management of Avant!'s increasingly
13
<PAGE>
complex business would be impaired. This would seriously harm Avant!'s
business, operating results and financial condition. See "--We are involved
in several litigation matters that could seriously harm our business."
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE HIGHLY COMPETITIVE INTEGRATED
CIRCUIT DESIGN AUTOMATION SOFTWARE MARKET
The integrated circuit design automation software market in which Avant!
competes is intensely competitive and subject to rapid change. Avant!
currently faces competition from major integrated circuit design automation
vendors, including Cadence Design Systems, Inc., which currently holds a
dominant share of the market for integrated circuit physical design software,
Synopsys, Inc. and Mentor Graphics Corporation. Avant! may not be able to
maintain a competitive position against these competitors. This is
particularly true because each of these companies has a longer operating
history, significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than Avant!. 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 Avant!. These competitors also have established
relationships with current and potential customers of Avant!, and they can
devote substantial resources aimed at preventing Avant! from enhancing
relationships with existing customers or establishing relationships with
potential customers.
Moreover, the integrated circuit design automation software industry is
undergoing a trend toward consolidation that is expected to result in large,
more financially flexible competitors with a broad range of product
offerings. Alliances among competitors could present particularly formidable
competition to Avant!. Furthermore, because there are relatively low barriers
to entry in the software industry, Avant! expects additional competition from
other established and emerging companies. Avant! also competes with the
internal integrated circuit design automation 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 Avant!. Avant!'s
current or potential competitors may develop products comparable or superior
to those developed by Avant! or adapt more quickly than Avant! 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 seriously harm Avant!'s business,
operating results or financial condition. Avant! may be unable to compete
successfully against current and future competitors, and competitive
pressures faced by Avant! could seriously harm Avant!'s business, operating
results and financial condition.
OUR QUARTERLY OPERATING RESULTS ARE DIFFICULT TO PREDICT
We are unable to accurately forecast our future revenues primarily because of
the emerging nature of the market in which we compete and because of the
unpredictability of the various litigation matters to which we are a party.
Our revenues and operating results generally depend on the size, timing and
structure of significant licenses. These factors have historically been, and
are likely to continue to be, difficult to forecast. In particular, we have
adopted a flexible pricing strategy pursuant to which we offer 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 received under these licenses is unpredictable. In addition, our
current and future expense levels are based largely on our operating plans
and estimates of future revenues and are, to a large extent, fixed. We may be
unable to adjust spending sufficiently quickly to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues in relation to our planned expenditures would seriously harm our
business, financial condition and results of operations. Such shortfalls in
our revenue or operating results from levels expected by public market
analysts and investors could seriously harm the trading price of our common
stock. Additionally, we may not learn of such revenue shortfalls, earnings
shortfalls or other failure to meet market expectations until late in a
fiscal quarter, which could result in an even more immediate and serious harm
to the trading price of our common stock.
Our quarterly operating results have varied, and it is anticipated that our
quarterly operating results will vary, substantially from period to period
depending on various factors, many of which are outside our control. In
addition to the factors discussed in the previous paragraph, other factors
that could affect our quarterly operating results include:
- Increased competition;
- The length of our sales cycle;
- The timing of new or enhanced product announcements, introductions, or
delays in the introductions of new or enhanced versions of products by
us or our competitors;
- Market acceptance of new and enhanced versions of our products;
- Changes in pricing policies by us or our competitors;
- Conditions in the semiconductor and electronics industries;
14
<PAGE>
- Cancellation of time-based licenses or maintenance agreements;
- The unavailability of technology of third parties;
- The mix of direct and indirect sales;
- Changes in operating expenses;
- Economic conditions in the Asian and other markets;
- Our ability to continue to market our products in Asian and other
markets;
- Foreign currency exchange rates; and
- General economic factors.
Due to the foregoing factors, we cannot predict with any significant degree of
certainty our quarterly revenue and operating results. Further, we believe that
period-to-period comparisons of our operating results are not necessarily a
meaningful indication of future performance.
OUR STOCK PRICE IS EXTREMELY VOLATILE
The trading price of our common stock has fluctuated significantly in the past,
and the trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to such factors as:
- The outcome of the various litigation matters to which we are a party;
- Actual or anticipated fluctuations in our operating results;
- Announcements of technological innovations and new products by us or
our competitors;
- New contractual relationships with strategic partners by us or our
competitors;
- Proposed acquisitions by us or our competitors; and
- Financial results that fail to meet public market analyst expectations
of performance.
In addition, the stock market in general, and The Nasdaq National Market and
the market for technology companies in particular has experienced extreme price
and volume fluctuations that have often been related or disproportionate to the
operating performance of such companies. These broad market and industry factors
may seriously harm the market price of our common stock in future periods.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF PRODUCTS
FOR SUBSTANTIALLY ALL OF OUR REVENUE
Historically, we have derived substantially all of our total revenue from the
licensing and support of the following products:
- Apollo (our successor product to Aquarius);
- Hercules (our hierarchical physical verification software product);
- Star-Hspice (our circuit simulator);
- Star-Sim (our high-capacity circuit simulation and high-accuracy
timing analysis software); and
- Polaris (our Verilog simulation product).
Absent any adverse results from existing litigation, we currently expect that
these products will continue to account for a significant portion of our revenue
for the foreseeable future. As a result, our business, operating results and
financial condition are significantly dependent upon the continued market
acceptance of these products and upon our ability to continue to sell, license
and support each of these products.
WE DEPEND ON INTERNATIONAL SALES FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUE
International revenue, principally from Asian customers, accounted for
approximately 31%, 42% and 36% of our total revenue in 1998, 1997, and 1996,
respectively. We expect that international license and service revenue,
particularly in Asia, will continue to account for a significant portion of our
total revenue. Our international business activities are subject to a variety of
potential risks, including:
- The impact of recessionary environments in foreign economies;
- Longer receivables collection periods and greater difficulty in
accounts receivable collection;
- Difficulties in staffing and managing foreign operations;
15
<PAGE>
- Political and economic instability;
- Unexpected changes in regulatory requirements;
- Reduced protection of intellectual property rights in some countries;
and
- Tariffs and other trade barriers.
Currency exchange fluctuations in countries in which we license our products
could also seriously harm our business, financial condition and results of
operations by resulting in pricing that is not competitive with products
priced in local currencies. Furthermore, we may not be able to continue to
generally price our products and services internationally in U.S. dollars
because of changing sovereign restrictions on importation and exportation of
foreign currencies as well as other practical considerations. In addition,
the laws of certain countries do not protect our products and intellectual
property rights to the same extent, as do the laws of the United States.
Moreover, it is possible that we may fail to sustain or increase revenue
derived from international licensing and service or that the foregoing
factors will seriously harm our future international license and service
revenue, and, consequently, seriously harm our business, financial condition
and results of operations.
WE DEPEND UPON THIRD PARTY DISTRIBUTORS AND MANUFACTURER'S REPRESENTATIVES TO
LICENSE AND SUPPORT OUR PRODUCTS IN ASIA
We rely on distributors and manufacturer's representatives for the licensing
and support of our products in Asia. A substantial portion of our
international license and service revenue is generated from a limited number
of these representatives, although we had no individual customer representing
over 10% of revenue in any of the years 1994-1998. In 1996, we consolidated
our Korean sales channel by forming DavanTech Co., Ltd., a distributor owned
by Avant!, Gerald C. Hsu (Avant!'s Chairman, President and CEO) and other
parties. In 1997, we consolidated our Japanese sales channel by forming
MainGate, a distributor owned by Avant!, Gerald C. Hsu, Avant!'s Chairman of
the Board, President and Chief Executive Officer, and other parties
(including other Avant! employees and former employees of Avant!'s third
party distributors). Our reliance on distributors and manufacturer's
representatives subjects us to a number of risks. For example, our current
distributors, manufacturer's representatives DavanTech or MainGate may not
choose to or be able to market, service or support our products effectively.
Economic conditions or industry demand may seriously harm these or other
distributors and manufacturer's representatives or these distributors,
manufacturer's representatives DavanTech or MainGate may devote greater
resources to marketing and supporting products of our competitors.
Additionally, because our products are used by highly skilled professional
engineers, a distributor or manufacturer's representative must possess
sufficient technical, marketing and sales resources in order to be effective
and must devote these resources to a lengthy sales cycle, customer training
and product service and support. Only a limited number of distributors or
manufacturer's representatives possess such resources. Accordingly, the loss
of, or a significant reduction in revenue from, one of our distributors,
manufacturer's representatives DavanTech or MainGate or any other distributor
or manufacturer's representative on which our revenues may, in the future,
become dependent, could seriously harm our business, financial condition and
results of operations.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO KEEP PACE WITH THE RAPIDLY
EVOLVING TECHNOLOGY STANDARDS OF OUR INDUSTRY
Because the semiconductor industry has made significant technological
advances recently, integrated circuit design automation companies, such as
Avant!, that license software to semiconductor companies have been required
to continuously develop new products and enhancements for existing products
to keep pace with the evolving industry standards and rapidly changing
customer requirements. The evolving nature of the integrated circuit design
automation industry could render our existing products and services obsolete.
Our success will depend, in part, on our ability to:
- Enhance our existing products and services;
- Develop and introduce new products and services on a timely and
cost-effective basis that will keep pace with technological
developments and evolving industry standards; and
- Address the increasingly sophisticated needs of our customers.
If we are unable, for technical, legal, financial or other reasons, to
respond in a timely manner to changing market conditions or customer
requirements, our business, financial condition and results of operations
could be seriously harmed.
WE DEPEND ON THE GROWTH OF THE SEMICONDUCTOR AND ELECTRONICS INDUSTRIES
Avant! is dependent upon the semiconductor industry and, more generally, the
electronics industry. Both of these industries are characterized by rapid
technological change, short product life cycles, fluctuations in
manufacturing capacity and pricing and gross margin pressures. Segments of
these industries have from time to time experienced significant economic
downturns characterized by decreased product demand, production
over-capacity, price erosion, work slowdowns and layoffs. While these
industries have experienced an extended period of significant economic
16
<PAGE>
growth over the past few years, such economic growth may not continue, and if
it does not, any downturn could be especially severe on Avant!. During such
downturns, the number of new integrated circuit design projects often
decreases. Because acquisitions of new licenses from Avant! are largely
dependent upon the commencement of new design projects, any slowdown in these
industries could seriously harm Avant!'s business, financial condition and
results of operations.
WE MAY BEAR INCREASED EXPENSES TO PROTECT OUR PROPRIETARY RIGHTS OR DEFEND
AGAINST CLAIMS OF INFRINGEMENT, AND WE MAY LOSE COMPETITIVE ADVANTAGES IF OUR
PROPRIETARY RIGHTS ARE INADEQUATELY PROTECTED
We rely on a combination of patents, trade secrets, copyrights, trademarks
and contractual commitments to protect our proprietary rights in our software
products. We generally enter into confidentiality or license agreements with
our employees, distributors and customers, and limit access to and
distribution of our software, documentation and other proprietary
information. Despite these precautions, a third party may still copy or
otherwise obtain and use our products or technology without authorization, or
develop similar technology independently. In addition, effective patent,
copyright and trade secret protection may be unavailable or limited in
certain foreign countries. We expect that software companies will
increasingly be subject to infringement claims as the number of products and
competitors in the integrated circuit design automation industry grows and
the functionality of products in different industry segments overlaps. In
particular, our current litigation with Cadence involves such infringement
claims. Responding to such claims, regardless of merit, could consume
valuable time, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if available, may not be available on terms acceptable
to us. A forced license could seriously harm our business, financial
condition and results of operations.
ERRORS IN OUR SOFTWARE PRODUCTS COULD RESULT IN LOSS OF MARKET SHARE OR
FAILURE TO ACHIEVE MARKET ACCEPTANCE
Software products as complex as those offered by Avant! may contain defects
or failures when introduced or when new versions are released. Avant! has in
the past discovered software defects in certain of its products and may
experience delays or lost revenue to correct such defects in the future.
Despite testing by Avant!, errors may still be found in new products or
releases after commencement of commercial shipments, resulting in loss of
market share or failure to achieve market acceptance. Any such occurrence
could seriously harm Avant!'s business, financial condition and results of
operations.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES
STATE OF READINESS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. This could result in system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced
in order to comply with such "Year 2000" requirements. During 1998, Avant!
undertook an evaluation of its currently supported products to determine if
they are Year 2000 compliant. The results of this evaluation revealed that
most currently supported products are Year 2000 compliant. Avant! intends to
upgrade or replace the currently supported products (primarily old products)
not currently Year 2000 compliant with fix patch or upgrade, as part of the
company's standard maintenance programs. Any failure by Avant! to make its
products Year 2000 compliant could result in:
- A decrease in sales of our products;
- An increase in the allocation of resources to address the Year 2000
problems of our customers without additional revenue commensurate with
such dedication of resources; and
- An increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems.
During 1998, Avant! conducted a preliminary review of our internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to resolve the issue. Avant! 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 compliant. Some other third party software systems and
applications currently used by Avant!, however, are not Year 2000 compliant.
Avant! intends to stop using these software products or upgrade or replace
them as part of Avant!'s growth plans. Avant! only performs Year 2000
compliance testing on its critical internal support systems. Inoperability
related to Year 2000 problems of internal systems that are certified Year
2000 compliant by the vendor and not tested by Avant! could seriously harm
Avant!'s operational efficiency. Avant! is also currently engaged in setting
up a plan to make our European accounting system, currently not on SAP, Year
2000 compliant. Our failure to complete such work prior to December 31, 1999
could seriously harm our business, financial condition and results of
operations. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase products and
services such as those offered by Avant!,
17
<PAGE>
which could seriously harm Avant!'s business, operating results and financial
condition.
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 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 operations.
COSTS
Avant! 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
Avant!'s assessment, the costs incurred to date have had no material impact
on Avant!'s results of operations. Avant! expects that costs directly related
to Year 2000 compliance in excess of normal upgrade and maintenance costs
will not exceed approximately $250,000 for both costs incurred to date and
future costs.
CONTINGENCY PLANS
Avant! 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, Avant! will be able to
assess the areas requiring contingency planning and expects to develop
appropriate planning at that time. Any failure of Avant! to address any
unforeseen Year 2000 problems would seriously harm Avant!'s business,
financial condition and results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 no reports on form 8-K during the quarter for which
this report is filed.
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)
May 13, 1999 /s/ GERALD C. HSU
- ------------ -----------------------
Gerald C. Hsu
President, Chief Executive Officer
and Chairman of the Board of Directors
May 13, 1999 /s/ PETER S. TESHIMA
- ------------ ---------------------
Peter S. Teshima
Head of Finance
(principal accounting officer
and principal financial officer)
19
<PAGE>
INDEX TO EXHIBITS
(a)3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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)
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)
2.6 Agreement and Plan of Reorganization dated as of November 4, 1998, as
amended on November 12, 1998 among the Registrant, Artemis Corporation and
interHDL, Inc. (7)
3.1 Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (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)
4.4 Registration Rights Agreement dated November 13, 1998 (8)
4.5 Registration Rights Agreement dated September 4, 1998 between the
Registrant and Harris Trust Company of California (9)
10.1 1995 Stock Option/Stock Issuance Plan (1)
10.2 Employee Stock Purchase Plan (1)
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)
13.1 Portions of the Annual Report (10)
23.1 Report on Financial Statement Schedule and Consent of KPMG LLP, Independent
Auditors (10)
23.2 Consent of Arthur Anderson LLP, Independent Auditors (10)
27.1 Financial Data Schedule
99.1 Preliminary Injunction, Cadence Design Systems, Inc. v. Avant! Inc. (10)
99.2 Modification of Preliminary Injunction, Cadence Design Systems, Inc. v.
Avant! Inc. (10)
</TABLE>
- --------------
(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 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.
(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 Current Report on Form 8-K filed
with the SEC on November 19, 1998
(8) Incorporated by reference from the Company's Registration Statement on Form
S-3 (File No. 333-67629) as declared effective on March 9, 1999
(9) Incorporated by reference from the Company's Current Report on Form 8-K
filed with the SEC on September 18, 1998
(10) Incorporated by reference from the Company's Current Report on Form 10-K
filed with the SEC on March 29,1999
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FILED AS 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 66,803
<SECURITIES> 107,525
<RECEIVABLES> 46,790
<ALLOWANCES> 9,787
<INVENTORY> 0
<CURRENT-ASSETS> 248,025
<PP&E> 45,058
<DEPRECIATION> 17,518
<TOTAL-ASSETS> 347,730
<CURRENT-LIABILITIES> 93,825
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 252,139
<TOTAL-LIABILITY-AND-EQUITY> 347,730
<SALES> 0
<TOTAL-REVENUES> 65,984
<CGS> 1,255
<TOTAL-COSTS> 5,364
<OTHER-EXPENSES> 39,535
<LOSS-PROVISION> 850
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,181
<INCOME-TAX> 8,693
<INCOME-CONTINUING> 14,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,488
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.41
</TABLE>