<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, 2000
[ ] 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. Yes [ x ] No [ ]
The number of shares outstanding of the registrant's common stock as of
May 5, 2000 was 38,924,961.
<PAGE>
AVANT! CORPORATION
FORM 10-Q
March 31, 2000
INDEX
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<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 1
Consolidated Statements of Earnings for the Three Months
Ended March 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
Item 2A RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK, DERIVATIVES
AND FINANCIAL INSTRUMENTS 15
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE PAGE 18
EXHIBIT INDEX 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 83,512 $ 79,766
Short-term investments ..................................................................... 164,185 160,631
Accounts receivable, net of allowances of $11,592 and $12,772, respectively ................ 68,533 52,730
Due from affiliates ........................................................................ 6,424 4,555
Deferred income taxes ...................................................................... 19,140 21,266
Prepaid expenses and other current assets .................................................. 17,418 16,856
--------- ---------
Total current assets .................................................................... 359,212 335,804
Equipment, furniture and fixtures, net ........................................................ 27,994 26,562
Deferred income taxes ......................................................................... 23,465 22,789
Goodwill and other intangibles, net ........................................................... 47,576 31,009
Other assets .................................................................................. 25,508 19,363
--------- ---------
Total assets ............................................................................ $ 483,755 $ 435,527
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................... $ 13,872 $ 11,075
Accrued compensation ....................................................................... 24,211 19,297
Accrued income taxes ....................................................................... 34,739 25,614
Current portion of long term obligation .................................................... -- 61
Other accrued liabilities .................................................................. 18,246 17,595
Deferred revenue ........................................................................... 55,969 45,916
--------- ---------
Total current liabilities ............................................................... 147,037 119,558
Other noncurrent liabilities .................................................................. 2,201 1,668
--------- ---------
Total liabilities ....................................................................... 149,238 121,226
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.0001 par value; 5,000,000 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; 75,000,000 shares authorized, 38,991,000 and 38,874,000 shares
issued and outstanding in March 31, 2000 and December 31, 1999, respectively ............... 4 4
Additional paid-in capital .................................................................... 231,853 230,733
Deferred compensation ......................................................................... (40) (329)
Other accumulated comprehensive loss .......................................................... (1,776) (1,678)
Retained earnings ............................................................................. 104,476 85,571
--------- ---------
Total stockholders' equity .............................................................. 334,517 314,301
--------- ---------
Total liabilities and stockholders' equity .............................................. $ 483,755 $ 435,527
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Revenue:
Software .............................................. $54,200 $45,310
Services .............................................. 31,019 26,369
------- -------
Total revenue ...................................... 85,219 71,679
------- -------
Costs and expenses:
Costs of software ..................................... 1,092 1,302
Costs of services ..................................... 5,358 4,771
Selling and marketing ................................. 24,089 19,206
Research and development .............................. 21,641 17,986
General and administrative ............................ 7,723 7,651
Merger and in-process research and development expenses 1,822 -
------- -------
Total operating expenses ........................... 61,725 50,916
------- -------
Earnings (loss) from operations .................... 23,494 20,763
Equity income(loss) from unconsolidated subsidiaries, net 6,332 (156)
Interest income and other, net ........................... 987 1,908
------- -------
Earnings before income taxes ....................... 30,813 22,515
Income taxes ............................................. 11,908 8,611
------- -------
Net earnings ....................................... $ 18,905 $ 13,904
======== ========
Earnings per share:
Basic .................................................... $ 0.49 $ 0.37
======== ========
Diluted .................................................. $ 0.47 $ 0.34
======== ========
Weighted average shares outstanding:
Basic .................................................... 38,908 37,673
======== ========
Diluted .................................................. 39,871 40,559
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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AVANT! CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net earnings .......................................................................... $ 18,905 $ 13,904
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization ...................................................... 6,469 5,149
Acquired in-process research and development ....................................... 940 -
Compensation expenses related to stock option and purchase plans ................... 289 348
Loss on disposal of assets ......................................................... - 133
Equity (income)loss from unconsolidated subsidiaries ............................... (6,332) 155
Deferred income taxes .............................................................. 1,450 1,252
Tax benefit related to stock options ............................................... (1,327) 687
Deferred rent ...................................................................... 324 162
Provision for doubtful accounts .................................................... (1,180) 850
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable .............................................................. (9,271) (5,148)
Due from affiliates .............................................................. (1,869) (402)
Prepaid expenses and other assets ................................................ (1,207) 261
Accounts payable ................................................................. 1,670 2,347
Accrued compensation ............................................................. 4,914 1,327
Accrued income taxes ............................................................. 8,824 4,653
Other accrued liabilities ........................................................ (1,488) (504)
Deferred revenue ................................................................. 9,048 5,249
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 30,159 30,423
--------- --------
Cash flows from investing activities:
Purchases of short-term investments ................................................... (25,419) (161,850)
Maturities and sales of short-term investments ........................................ 21,767 75,649
Purchases of equipment, furniture, fixtures and other assets .......................... (2,374) (1,685)
Purchase of Analogy, net of cash acquired ............................................. (22,014) -
--------- --------
NET CASH USED IN INVESTING ACTIVITIES ......................................... (28,040) (87,886)
--------- --------
Cash flows from financing activities:
Principal payments under debt obligations ............................................. - (220)
Repayment of notes receivable from officers ........................................... - 701
Exercise of stock options ............................................................. 1,627 1,887
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 1,627 2,368
--------- --------
Net increase(decrease) in cash and cash equivalents ...................................... 3,746 (55,095)
Cash and cash equivalents, beginning of period ........................................... 79,766 126,180
--------- --------
Cash and cash equivalents, end of period ................................................. $ 83,512 $71,085
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ........................................................................... $ 46 $ -
Income taxes ....................................................................... $ 3,425 $ 1,573
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AVANT! CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of 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, 1999,
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 EARNINGS AND EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted-average number of
common shares outstanding during each year. Diluted earnings per share is based
on the sum of the weighted-average number of common shares outstanding plus
common stock equivalents arising out of employee stock options. Excluded from
the computation of diluted earnings per share for the three months ended March
31, 2000 and March 31, 1999, are options to acquire 1,336,921 and 965,000
shares, respectively, of common stock with a weighted-average exercise price of
$23.43 and $24.91, respectively, because their effects are anti-dilutive.
The following is a reconciliation of the denominators of the basic and diluted
EPS computations for the quarters presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2000 1999
---- ----
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Weighted average number of common shares outstanding ........... 38,908 37,673
Common stock equivalents:
Stock options and awards ............................ 963 2,886
------- -------
Total weighted average number of common and common
equivalent shares outstanding ....................... 39,871 40,559
======= =======
</TABLE>
3. COMPREHENSIVE INCOME
The components of comprehensive income for the three months ended March 31, 2000
and March 31, 1999 were comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2000 1999
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<S> <C> <C>
Net Earnings ........................... $ 18,905 $ 13,904
Unrealized (losses) on short-term
investments, net ..................... $ (98) $ (82)
---------- ----------
Total comprehensive income ............. $ 18,807 $ 13,822
========== ==========
</TABLE>
4
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4. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, the Company adopted SOP 98-9, Software Revenue
Recognition, with Respect to Certain Arrangements ("SOP 98-9"), 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, Software Revenue Recognition. There
was no material impact as a result of adopting SOP 98-9.
In December 1999, SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements, as amended by SAB 101A, which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements; however, SAB No 101 does not change existing literature on
revenue recognition. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Company believes the current revenue recognition
policy is in compliance with this guidance; however, the Company continues to
evaluate the impact, if any, of SAB No. 101 and any possible, subsequent
interpretations of SAB No.101 on the Company's policies and procedures.
5. SEGMENT INFORMATION
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.
Revenue and asset information regarding operations in the different geographic
regions are as follows (in thousands):
<TABLE>
<CAPTION>
North America Europe Asia Consolidated
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Revenues:
Three months ended March 31, 1999 $ 47,850 $ 10,971 $ 12,858 $ 71,679
Three months ended March 31, 2000 59,726 7,155 18,338 85,219
Identifiable assets:
As of December 31, 1999 $ 411,571 $ 14,408 $ 9,548 $ 435,527
As of March 31, 2000 454,421 18,947 10,387 483,755
Long-lived assets:
As of December 31, 1999 $ 24,472 $ 608 $ 1,482 $ 26,562
As of March 31, 2000 25,177 655 2,162 27,994
</TABLE>
No single customer accounted for greater than 10% of revenues in any period
reported. It is not practicable to report the revenue from external customers
for each product or service.
As discussed in Part I, Item 2A, "Risk 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, some
customers may return, or cancel, or postpone orders of the Company's products.
As of March 31, 2000, such cancellations, postponements and returns had not had
a material financial impact on the Company's revenues. 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,
however.
5
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6. ACQUISITIONS
On March 22, 2000, the Company completed its acquisition of Analogy, Inc.
("Analogy") for approximately $32.1 million including $7.2 million of
liabilities assumed and $0.8 million based on the fair value of options
assumed. As part of the acquisition, the Company wrote-off $0.9 million of
in-process research and development expenses and paid $0.9 million severance.
The in-process research and development amounts were expensed, as the
underlying technology had not reached technological feasibility and, in
management's opinion, had no probable alternative future use.
The acquisition was recorded under the purchase method of accounting; and
accordingly, the results of operations of Analogy are included in the
consolidated financial statements from the date of acquisition. Pro forma
consolidated information is not presented as it is not deemed material. The
purchase price has been allocated to the assets acquired and liabilities assumed
based upon the fair market values at the date of acquisition, as summarized
below (in thousands):
<TABLE>
<S> <C>
Current assets (including cash and cash equivalents of $2,086) ....... $ 8,057
Long term assets $ 2,473
In-process research and development .................................. $ 940
Developed technology and other intangibles ........................... $ 9,609
Goodwill ............................................................. $ 11,060
----------
$ 32,139
==========
</TABLE>
The amounts allocated to technology were estimated using a risk adjusted income
approach applied to specifically identified technologies. In-process technology
was expensed upon acquisition because technological feasibility had not been
established and no alternative future uses existed. Amounts allocated to
developed technology and other intangibles are being amortized on a
straight-line basis over three years. Goodwill is being amortized on a
straight-line basis over five years.
Analogy is a leader in mixed-signal and mixed-technology simulation, analysis
and design. Analogy's products are used in the aerospace,
automotive/transportation, semiconductor, communications, computer peripherals,
medical and industrial control industries. Its Saber product, which includes the
Calaveras algorithm and other patented technology, is the world's most advanced
and flexible simulator for mixed-signal and mixed-technology simulation.
The Company determined that certain identifiable intangible assets acquired in
prior acquisitions were impaired and recorded a writedown of $1.3 million during
the quarter ended March 31, 2000.
6
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7. TREASURY STOCK
On April 18, 2000, the Company announced that its board of directors has
approved a new stock repurchase program. Under the terms of the program,
Avant! may purchase up to 6 million shares of its outstanding common stock in
the open market or in privately negotiated transactions.
The repurchased shares will be available for general corporate purposes,
including issuance of shares under the stock option and stock purchase plan
programs.
8. LEGAL PROCEEDINGS
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 complaint alleges that some of Avant!'s employees
formerly employed by Cadence misappropriated and improperly copied Cadence's
source code for important functions of Avant!'s place and route products, and
that Avant! has competed unfairly against Cadence by making false statements
about Cadence and its products. The action also alleges that Avant! induced
individuals, who have been named as defendants, to breach their employment and
confidentiality agreements with Cadence. No trial date has been set for this
matter.
In addition to seeking actual and punitive damages, which Cadence has not fully
quantified, Cadence has sought to enjoin the sale of Avant!'s ArcCell and
Aquarius place and route products. On December 19, 1997, the District Court
entered a preliminary injunction against continued sales or licensing of any
product or work copied or derived from Cadence's Design Framework II ("DFII"),
specifically including, but not limited to, the ArcCell products. The
preliminary injunction also bars Avant! from possessing or using any copies of
any portion of the source code or object code for ArcCell or any other product,
to the extent it had been copied or derived from DFII. (Avant! had ceased
licensing its ArcCell products in mid-1996.) On December 7, 1998, the District
Court also entered a preliminary injunction against Avant! prohibiting Avant!
from directly or indirectly marketing, selling, leasing, licensing, copying or
transferring the Aquarius, Aquarius XO and Aquarius BV products. Pending the
outcome of the trial of Cadence's action, the injunction further prohibits
Avant! from marketing, selling, leasing, licensing, copying or transferring any
translation code for any Aquarius product that infringes any protected right of
Cadence and 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
it has been copied or derived from DFII. Avant! ceased licensing the Aquarius
products in February 1999. Nevertheless, the preliminary injunctions could
seriously harm Avant!'s business, financial condition and results of operations
going forward.
On January 16, 1996, Avant! filed an answer to the complaint denying
wrongdoing. On the same day, the Company filed a counterclaim against Cadence
and its CEO, Joseph Costello, alleging antitrust violations, racketeering,
false advertising, defamation, trade libel, unfair competition, unfair trade
practices, negligent and intentional interference with prospective economic
advantage, and intentional interference with contractual relations. The
counterclaim alleges, among other things, that Cadence's lawsuit is part of a
scheme to harm Avant! competitively, because Avant! is winning against Cadence
in the marketplace. On December 19, 1997, pursuant to a stipulation by the
parties, the District Court dismissed Avant!'s counterclaim with leave to
amend. Avant! filed its amended counterclaim on January 29, 1998. Pursuant to a
stipulated court order, Cadence and the other counterclaim defendants have not
responded to the amended counterclaim, and Avant!'s counterclaim is currently
stayed.
In April 1999, Avant! and Cadence filed cross-motions for summary adjudication
as to whether a 1994 written release agreement between the two companies
extinguished all Cadence claims regarding Avant!'s continued use of
intellectual property claimed by Cadence in any Avant! place and route product
in existence when the release was signed by the parties. On September 8, 1999,
the District Court granted Avant!'s motion in part and ruled that Cadence's
trade secret claim regarding use of DFII source code was barred by the release.
The District Court also ruled that the release did not bar Cadence's copyright
infringement claims regarding Avant!'s alleged use of DFII source code. Subject
to appeal, Avant! believes that this ruling makes it likely that Cadence will
prevail on its copyright infringement claims regarding Avant!'s use of DFII
source code in the ArcCell products. While the ruling also increases the
likelihood that Cadence will prevail on the same claims as they might apply to
the Aquarius products, Avant! believes that it possesses additional meritorious
defenses with respect to Aquarius that are not available with respect to
ArcCell. On October 15, 1999, the District Court issued an amended order
certifying its September 8, 1999 order for interlocutory appeal to the United
States Circuit Court of Appeals for the Ninth Circuit. Cadence and Avant!
petitioned for leave to file an interlocutory appeal, and the Circuit Court
granted their petitions on December 20, 1999. Proceedings in the District Court
have been stayed pending the Circuit Court's decision on appeal.
Avant! believes it has defenses to all of Cadence's claims and intends to
defend itself vigorously. Should Cadence ultimately succeed in the prosecution
of its claims, however, Avant! could be permanently enjoined from using and
marketing any place and route products held to incorporate DFII source code,
and may be required to pay substantial monetary damages to Cadence. In
addition, Avant! could be enjoined preliminarily from selling its current
Apollo place and route products. It is possible that Avant!'s relationships
with its customers will be seriously harmed in the future as a result of the
Cadence litigation. Accordingly, an adverse judgment, if entered on any Cadence
claim, could seriously harm Avant!'s business, financial position and results
of operations and cause Avant!'s stock price to decline substantially.
7
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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. This criminal action is currently pending 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. Z. Liao, Stephen Wuu, Leigh Huang, Eric
Cheng and Mike Tsai. One former defendant has been dismissed from the action,
but the District Attorney has appealed the dismissal order.
The indictment charges the defendants listed above with conspiring to commit
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. On
April 28, 2000, the Santa Clara Superior Court dismissed all charges in the
indictment against the company and all of the current and former executives
charged in the case. Trial of the case, which had been set for May 15, 2000,
will not proceed as scheduled, as a result of the court's dismissal. The
District Attorney's future actions may include appealing the dismissal, seeking
to re-file charges, or dropping the case. The criminal proceedings will result
in additional defense costs to Avant! and could result in criminal fines against
Avant!, as well as the potential incarceration of key members of its management
team, including its Chairman of the Board of Directors. Any of these outcomes
could seriously harm Avant!'s business, financial condition and results of
operations and might result in canceled or postponed orders, substantial
additional legal fees and personnel costs, the loss of senior management and
other key personnel, additional stockholder litigation and loss of reputation
and 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 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. In order to appeal the judgment, Avant!
had to post a bond, which has been collateralized with a $23.6 million letter of
credit. If Avant!'s and Mr. Hailey's appeals are 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,
and could cause the price of its stock to decline substantially.
On March 31, 1998, Silvaco filed an additional lawsuit, against Avant! and Roy
Jewell, a former member of Avant!'s Executive Staff, 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. On February 8,
2000, the Court granted Silvaco's motion to add President, Chief Executive
Officer and Chairman Hsu as a party to the action. Silvaco seeks $20.0 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 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 a securities fraud
class action complaint against Avant! in the United States District Court for
the Northern District of California. This lawsuit alleges securities laws
violations, including omissions and/or misrepresentations of material facts
related to the events and transactions which are the subject of the claims
contained in Cadence's civil lawsuit against Avant!. In addition, on May 30,
1997, Joanne Hoffman filed a securities fraud class action in the United States
District Court for the Northern District of California 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
directors. The plaintiff alleges that Avant! and its officers misled the market
as to the likelihood of the criminal indictment and as to the validity of the
Cadence allegations. If the plaintiff is successful, Avant! may be required to
pay substantial damages to plaintiffs, and such a judgment could seriously harm
Avant!'s business, financial condition and results of operations, and cause its
stock price to decline substantially.
NEQUIST LITIGATION.
On July 15, 1998, Eric Nequist, a Cadence employee, filed a complaint against
Avant! in the Santa Clara County Superior Court. 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
8
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17200. In the event Avant!'s defenses are unsuccessful, Avant! may be required
to pay damages to Mr. Nequist, which judgment could seriously harm Avant!'s
business, financial condition and results of operation, and cause its stock
price to decline substantially.
In addition, from time to time, Avant! is subject to legal proceedings and
claims in the ordinary course of business, which even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
Aside from the matters described above, the Company does not believe that it is
a party to any legal proceedings or claims that it believes could materially
harm its business, financial condition and results of operations.
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's legal expenses for
these matters have been $0.7 million and $2.9 million for the three months ended
March 31, 2000 and 1999, respectively. The Company currently expects legal costs
to substantially increase in the future as a result of its current litigation
issues. Thus, this litigation could seriously harm Avant!'s business, financial
condition and results of operations.
At this time, the Company is unable to determine the estimated loss or range of
loss, if any, from the ultimate outcome of these matters.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes included in this report. This Form
10-Q contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Any statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. The forward-looking
statements include, without limitation, statements about the market opportunity
for electronic design automation software and services, new product development,
our strategy, competition and expected expense levels, and the adequacy of our
available cash resources. Our actual results could differ materially from those
expressed by these forward-looking statements as a result of various factors,
including the risk factors described in "Risk Factors That May Affect Future
Results" as discussed in Item 2A below and other risks detailed from time to
time in the Company's SEC reports. In addition, past results and trends should
not be used by investors to anticipate future results and trends. We undertake
no obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
RESULTS OF OPERATIONS
REVENUE. The Company's total revenue increased 19% to $85.2 million in the three
months ended March 31, 2000 from $71.7 million in the three months ended March
31, 1999. Revenue from sales to affiliates, Maingate and Davan Tech were $7.4
million and $0 million, respectively, for the quarter ended March 31, 2000. The
Company has ownership of 35% and 39.6% of Maingate and Davan Tech, respectively,
and accounts for them by the equity method. The Company's Chairman of the Board,
President and Chief Executive officer owns 40% of Maingate and 2.6% of Davan
Tech. The Company's Executive Operating Officer, Operations, owns 2% of
Maingate.
Software revenue increased 20% to $54.2 million in the three months ended March
31, 2000 from $45.3 million in the three months ended March 31, 1999. Increases
in software revenue were due primarily to increased license revenue from the
Company's place and route, physical verification, simulation and timing
software. Services revenue increased 18% to $31.0 million in the three months
ended March 31, 2000 from $26.4 million in the three months ended March 31,
1999, reflecting the growing base of installed systems. Through March 31, 2000,
price increases have not been a material factor in the Company's revenue growth.
COSTS OF SOFTWARE AND SERVICES. Costs of software decreased to $1.1 million in
the three months ended March 31, 2000 from $1.3 million in the three months
ended March 31, 1999. The decrease was attributable to reduction of personnel
costs associated with contractors and temporary employees.
Costs of services increased to $5.4 million in the three months ended March 31,
2000 from $ 4.8 million in the three months ended March 31, 1999, representing
17% and 18% of services revenue for the three months ended March 31, 2000 and
1999, respectively. The increase in costs of services was due primarily to
increases in personnel and expenses necessary to support the Company's growing
base of installed software. For the three months ended March 31, 2000 and 1999,
the reduction in costs of services as a
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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 increased to
$24.1 million from $19.2 million for the three months ended March 31, 2000 and
1999, respectively. The increase was primarily due to increased headcount,
commission and advertising expenses. Selling and marketing expenses were 44% and
42% of software revenue for the three months ended March 31, 2000 and 1999. The
allowance for doubtful accounts decreased by $1.2 million during the three
months ended March 31, 2000 reflecting improved collection experience. The
Company expects to hire additional sales personnel and to increase promotion and
advertising cost throughout 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $21.6
million and $18.0 million for the three months ended March 31, 2000 and 1999,
respectively and remained flat at 25% of total revenue. Increased spending
during the quarter related primarily to increased headcount and higher incentive
compensation.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
remained at $7.7 million for the three months ended March 31, 2000, materially
the same as for the three months ended March 31, 1999. Legal expenses were $0.7
million and $2.9 million for the three months ended March 31, 2000 and 1999,
respectively. Increases in personnel related expenses offset the reduction in
legal expenses. As a percentage of total revenue, general and administrative
expenses decreased to 9% for the three months ended March 31, 2000 from 11% for
the comparable period in 1999, as a result of the Company's continued effort to
maintain efficiency in the general and administrative area.
MERGER AND IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES
On March 22, 2000, the Company completed its acquisition of Analogy, Inc.
("Analogy") for approximately $32.1 million including $7.2 million of
liabilities assumed and $0.8 million based on the fair value of options
assumed. As part of the acquisition, the Company wrote-off $0.9 million of
in-process research and development expenses and paid $0.9 million severance.
The in-process research and development amounts were expensed, as the
underlying technology had not reached technological feasibility and, in
management's opinion, had no probable alternative future use.
As of March 31, 2000 accrued expenses related to the 1999 acquisitions of
Chrysalis and Xynetix were $2.8 million; these expenses relate to professional
service fees, severance and facility closure costs. The Company expects to pay
the majority of these costs by June 30, 2000.
EQUITY INCOME FROM UNCONSOLIDATED SUBSIDIARIES. The Company had equity
income(loss) from unconsolidated subsidiaries of $6.3 million and $(0.2) million
in the three months ended March 31, 2000 and March 31,1999, respectively. These
represent the Company's share of equity interest in investments in Forefront
Venture Partners, L.P. ("Forefront"), Maingate Electronics, KK ("Maingate") and
Davan Tech Co., Ltd. ("Davan Tech"). The equity income in 2000 primarily
resulted from unrealized appreciation of the Company's venture capital
investments in Forefront which occurred during the quarter. The Company believes
that due to the nature of venture capital investing, the value of its investment
in Forefront may be subject to significant fluctuation which may result in the
Company recording significant gains and losses in the future.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was $1 million
and $1.9 million in the three months ended March 31, 2000 and March 31, 1999,
respectively. The decrease related primarily to increased interest income
resulting from the increase in the short-term investments balance offset by
increase in foreign exchange losses.
INCOME TAXES. The underlying tax rate excluding in-process research and
development expenses for the quarter was 37.5% compared to 38.2% last year.
NET EARNINGS AND EARNINGS PER SHARE. Net earnings excluding merger and
in-process research and development expenses and equity income (losses) from the
venture capital investment was $16.5 million and $13.8 million in the three
months ended March 31, 2000 and March 31, 1999, respectively. Reported net
earnings were $18.9 million and $13.9 million in the three months ended March
31, 2000 and March 31, 1999, respectively. Net earnings per share on a diluted
basis excluding merger, in-process research and development expenses and equity
income (losses) from the venture capital investment was $0.41 and $0.34 in the
three months ended March 31, 2000 and March 31, 1999, respectively. Reported net
earnings per share on a diluted basis were $0.47 and $0.34 in the three months
ended March 31, 2000 and March 31, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $ 30.2 million for the three months ended
March 31, 2000. The Company's investing activities used $28.0 million of net
cash for the three months ended March 31, 2000 resulting from the purchases of
computer equipment and office furniture, purchase of Analogy and net maturities
of short term investments. Net cash provided by financing activities was $1.6
million for the three months ended March 31, 2000 primarily from the exercise of
stock options.
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The Company recently announced a new stock repurchase program to buy back up to
6 million shares or 15% of its outstanding Common Stock.
As of March 31, 2000, the Company had $247.7 million of cash, cash equivalents
and short-term investments, compared to $240.4 million at December 31, 1999.
Working capital decreased from $216.2 million at December 31, 1999 to $212.2
million at March 31, 2000. In connection with the Silvaco litigation, the
Company was required to post a bond, which is collaterized by a $23.6 million
letter of credit.
Based on its current Year 2000 operating plan and without regard to the
potential consequences of any adverse judgements in any pending litigation
matters, 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.
YEAR 2000 ISSUES
During 1998, Avant! conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to resolve the issues. Avant! has adopted SAP R/3
software as an enterprise system managing its financial and logistical
operations in the United States and Europe. SAP R/3 software has been
certified by SAP as Year 2000 compliant. Avant! performed testing on selected
critical business functions on January 1, 2000 and did not find any material
problems related to Year 2000. As of May 15, 2000, Avant! has not experienced
any material impact due to a Year 2000 problem on its internal systems and
applications.
ITEM 2A. 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 a number of 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, and civil actions brought by
Silvaco Data Systems, Inc. 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. An adverse result in any of these litigation matters could
seriously harm Avant!'s business, financial condition and results of operations,
and cause Avant!'s stock price to decline substantially. See "Legal Proceedings
under Part I, Item 1. Notes to Consolidated Financial Statements."
In addition, 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.
The indictment charges the defendants listed above with conspiring to commit
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. On
April 28, 2000, the Santa Clara Superior Court dismissed all charges in the
indictment against the company and all of the current and former executives
charged in the case. Trial of the case, which had been set for May 15, 2000,
will not proceed as scheduled, as a result of the court's dismissal. The
District Attorney's future actions may include appealing the dismissal, seeking
to re-file charges, or dropping the case. The criminal proceedings will result
in additional defense costs to Avant! and could result in criminal fines against
Avant!, as well as the potential incarceration of key members of its management
team, including its Chairman of the Board of Directors. Any of these outcomes
could seriously harm Avant!'s business, financial condition and results of
operations and might result in canceled or postponed orders, substantial
additional legal fees and personnel costs, the loss of senior management and
other key personnel, additional stockholder litigation and loss of reputation
and goodwill. See "Legal Proceedings" under Part I, Item 1. "Notes to
Consolidated Financial Statements." .
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS AND PRODUCT LINES WITH
THOSE OF THE ACQUIRED COMPANIES
Avant! and its 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
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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, including Gerald C. Hsu, 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 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 may 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.
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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 an 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;
- 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 domestic and international markets;
- Our ability to continue to market our products in domestic and
international 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 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 unrelated 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
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Historically, we have derived substantially all of our total revenue from the
licensing and support of the following products:
- Apollo (place and route);
- Hercules (design verification);
- Star-Hspice (circuit simulator);
- Star-Sim (high-capacity circuit simulator);
- Star-RC (high-performance parasitic extraction tool); and
- TCAD tools (family of silicon manufacturing process simulation tools,
such as Taurus Process and Taurus OPC).
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 28%, 31%, and 40% of our total revenue in 1999, 1998, and 1997,
respectively. For the three months ended March 31, 2000, international revenue
accounted for 30% of total revenue. We expect that international license and
service revenue, particularly in Asia, will continue to account for a
significant portion of our total revenue for the foreseeable future. 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;
- 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.
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 technologic 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. During such
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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
Computer systems and software products coded to accept only two digit entries
in the date code field cannot distinguish 21st century dates from 20th
century dates. This could have resulted 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! has also provided for those
supported products not Year 2000 compliant with fix patch or upgrade, as part
of the Company's standard maintenance programs. Although to the best of
Avant!'s knowledge, the Company has offered Year 2000 solutions for those
products, and as of May 15, 2000, has received no report of any Year 2000
problems on its Year 2000 ready products, unpredicted Year 2000 problems
might occur. Any unpredicted Year 2000 problem occurring in Avant!'s products
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 its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to resolve the issues. Avant! has adopted SAP R/3 software
as an enterprise system managing its financial and logistical operations in the
United States and Europe. SAP R/3 software has been certified by SAP as Year
2000 compliant. Avant! performed testing on selected critical business functions
on January 1, 2000 and did not find any material problems related to Year 2000.
As of May 15, 2000, Avant! has not experienced any material impact due to a Year
2000 problem on its internal systems and applications.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK, DERIVATIVES
AND FINANCIAL INSTRUMENTS
Information relating to this item is set forth in Part I., Item 2A of this Form
10-Q and is incorporated herein by reference.
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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
Electronics, KK ("Maingate"), an affiliated Japanese distributor. There were no
hedging contracts outstanding as of March 31, 2000.
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 places its investments with high credit quality issuers and
endeavors to limit the amount of its 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. The Company's
exposure to market risks for changes in interest rates arises from its
investments in debt securities issued by U.S. government agencies and corporate
debt securities. All highly liquid investments with a maturity of 90 days or
less at the date of purchase are considered to be cash equivalents. The Company
does not expect any material loss with respect to its investment portfolio.
The following table presents the carrying value and related weighted
average annualized return rates for the Company's investment portfolio. The
carrying value approximates fair value at March 31, 2000, in thousands:
<TABLE>
<CAPTION>
Carrying Average
Amount Return Rate
---------------- ------------------
<S> <C> <C>
Cash equivalents-variable rates...................... $ 60,458 5.50%
Short-term investments-variable rates................ 6.35%
164,185
---------------- ------------------
$ 224,643 6.12%
================ ==================
</TABLE>
As of March 31, 2000, the underlying maturities of financial
instruments are $71.8 million within one year and $152.8 million from 2001 to
2031.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding legal proceedings provided in Part I, Item 1 "Notes to
Consolidated Financial Statements", Item 2 "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and Item 2A, "Risk Factors
That May Affect Future Results" is incorporated by reference in response to this
item.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEEDS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (electronic version only).
(b) Reports on Form 8-K
The Company filed no reports on form 8-K during the quarter for which this
report is required to be is filed.
17
<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 15, 2000 /s/ Sam Chang
------------------------
Sam Chang
Duly Authorized Officer
Head of Finance and Treasurer
(principal accounting and financial officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule (electronic version only).
</TABLE>
19
<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 83,512
<SECURITIES> 164,185
<RECEIVABLES> 80,125
<ALLOWANCES> 11,592
<INVENTORY> 0
<CURRENT-ASSETS> 359,212
<PP&E> 66,232
<DEPRECIATION> 38,238
<TOTAL-ASSETS> 483,755
<CURRENT-LIABILITIES> 147,037
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 334,513
<TOTAL-LIABILITY-AND-EQUITY> 483,755
<SALES> 0
<TOTAL-REVENUES> 85,219
<CGS> 1,092
<TOTAL-COSTS> 6,450
<OTHER-EXPENSES> 55,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,813
<INCOME-TAX> 11,908
<INCOME-CONTINUING> 18,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,905
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.47
</TABLE>
