<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
June 30, 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
August 2, 2000 was 39,254,477.
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AVANT! CORPORATION
FORM 10-Q
June 30, 2000
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 1
Consolidated Statements of Earnings for the Three and
Six Months Ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK, DERIVATIVES AND FINANCIAL INSTRUMENTS 16
<CAPTION>
PART II OTHER INFORMATION
----------------------------
Item 1. LEGAL PROCEEDINGS 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE PAGE 19
EXHIBIT INDEX 20
</TABLE>
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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>
JUNE 30, DECEMBER 31,
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents................................................... $ 78,780 $ 79,766
Short-term investments...................................................... 160,860 160,631
Accounts receivable, net of allowances of $12,778 and $12,772 respectively.. 68,794 52,730
Due from affiliates......................................................... 6,046 4,555
Deferred income taxes....................................................... 16,904 21,266
Prepaid expenses and other current assets................................... 18,036 16,856
-------- --------
Total current assets..................................................... 349,420 335,804
Equipment, furniture and fixtures, net......................................... 25,723 26,562
Deferred income taxes.......................................................... 24,586 22,789
Goodwill and other intangibles, net............................................ 43,278 31,009
Other assets................................................................... 29,950 19,363
-------- --------
Total assets............................................................. $472,957 $435,527
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 12,098 $ 11,075
Accrued compensation........................................................ 33,800 19,297
Accrued income taxes........................................................ 26,001 25,614
Current portion of long term obligation..................................... 382 61
Other accrued liabilities................................................... 9,522 17,595
Deferred revenue............................................................ 61,417 45,916
-------- --------
Total current liabilities................................................ 143,220 119,558
Other noncurrent liabilities................................................... 2,817 1,668
-------- --------
Total liabilities........................................................ 146,037 121,226
-------- --------
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, 37,365,000 and
38,874,000 shares issued and outstanding in June 30, 2000 and December 31,
1999, respectively......................................................... 4 4
Additional paid-in capital..................................................... 237,105 230,733
Deferred compensation.......................................................... (4,983) (329)
Retained earnings.............................................................. 125,187 85,571
Other accumulated comprehensive loss........................................... (429) (1,678)
Treasury stock, at cost........................................................ (29,964) -
-------- --------
Total stockholders' equity............................................... 326,920 314,301
-------- --------
Total liabilities and stockholders' equity............................... $472,957 $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 Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software $ 56,398 $ 50,096 $110,598 $ 95,406
Services 33,353 25,254 64,372 51,623
--------- --------- -------- ---------
Total revenue 89,751 75,350 174,970 147,029
--------- --------- -------- ---------
Costs and expenses:
Costs of software 1,511 1,292 2,603 2,594
Costs of services 5,307 4,756 10,665 9,527
Selling and marketing 23,543 20,889 47,632 40,095
Research and development 21,654 18,185 43,295 36,171
General and administrative 10,451 9,131 18,174 16,782
Merger expenses and in-process
research and development expenses (2,165) - (343) -
--------- --------- -------- ---------
Total operating expenses 60,301 54,253 122,026 105,169
--------- --------- -------- ---------
Earnings from operations 29,450 21,097 52,944 41,860
Equity income from
unconsolidated subsidiaries, net 3,607 175 9,939 19
Interest income and other, net 81 945 1,068 2,853
--------- --------- -------- ---------
Earnings before income taxes 33,138 22,217 63,951 44,732
Income taxes 12,427 8,358 24,335 16,969
--------- --------- -------- ---------
Net earnings 20,711 13,859 39,616 27,763
========= ========= ======== =========
Earnings per share:
Basic: $ 0.55 $ 0.37 $ 1.03 $ 0.73
========= ========= ======== =========
Diluted: $ 0.52 $ 0.35 $ 1.00 $ 0.69
========= ========= ======== =========
Weighted average shares outstanding:
Basic: 37,955 37,937 38,432 37,805
========= ========= ======== =========
Diluted: 39,510 39,337 39,690 39,948
========= ========= ======== =========
</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)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
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Cash flows from operating activities:
Net earnings........................................................... $ 39,616 $ 27,763
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 13,395 10,086
Merger accruals..................................................... (2,165) -
Acquired in-process research and development........................ 940 -
Compensation expenses related to stock option and purchase plans.... 804 1,334
Loss on disposal of assets.......................................... 275 133
Equity income from unconsolidated subsidiaries...................... (9,939) (19)
Deferred income taxes............................................... 2,565 (6,118)
Tax (expense)/benefit related to stock options...................... (2,348) 633
Deferred rent....................................................... 1,073 324
Provision for doubtful accounts..................................... (6) 1,915
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable............................................... (10,706) (11,527)
Due from affiliates............................................... (1,491) 1,065
Prepaid expenses and other assets................................. (2,660) 3,587
Accounts payable.................................................. (104) 3,805
Accrued compensation.............................................. 14,503 1,865
Accrued income taxes.............................................. 86 7,564
Other accrued liabilities......................................... (7,787) (232)
Deferred revenue.................................................. 14,496 6,714
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NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 50,547 48,892
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments.................................... (89,225) (356,988)
Maturities and sales of short-term investments......................... 90,245 229,609
Purchases of equipment, furniture, fixtures and other assets........... (3,006) (3,053)
Purchase of Analogy, net of cash acquired.............................. (22,014) -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES.......................... (24,000) (130,432)
--------- ---------
Cash flows from financing activities:
Principal payments under debt obligations.............................. - (700)
Proceeds from issuance of notes payable................................ - 1,895
Purchase of treasury stock............................................. (29,964) (92)
Exercise of stock options.............................................. 2,431 3,565
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... (27,533) 4,668
--------- ---------
Net increase(decrease) in cash and cash equivalents....................... (986) (76,872)
Cash and cash equivalents, beginning of period............................ 79,766 126,180
--------- ---------
Cash and cash equivalents, end of period.................................. $ 78,780 $ 49,308
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ........................................................... $ 80 $ -
Income taxes........................................................ $ 19,600 $ 13,624
</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. COMPREHENSIVE INCOME
The following table sets forth the calculation of comprehensive income as
required by SFAS No. 130. Comprehensive income has no impact on the Company's
net income, balance sheet, or stockholders' equity. The components of
comprehensive income, net of tax, were comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net earnings $ 20,711 $ 13,859 $ 39,616 $ 27,763
Unrealized gains/(losses)
on short-term investments, net 1,347 (770) 1,249 (831)
-------- -------- -------- --------
Total comprehensive income $ 22,058 $ 13,089 $ 40,865 $ 26,932
-------- -------- -------- --------
</TABLE>
4
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3. 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 on the Company's consolidated financial statements as a result of
adopting SOP 98-9.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements, as amended by SAB 101, 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 its current revenue recognition
policy is in compliance with this guidance.
4. 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
statements of operations. Therefore, the Company operates in a single operating
segment: electronic design automation software and services.
Revenue and asset information regarding operations in different geographic
regions are as follows (in thousands):
<TABLE>
<CAPTION>
North America Europe Asia Consolidated
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Revenues:
Three months ended June 30 2000 $ 63,152 $ 8,870 $ 17,729 $ 89,751
Three months ended June 30, 1999 53,254 6,298 15,798 75,350
Six months ended June 30, 2000 122,878 16,025 36,067 174,970
Six months ended June 30, 1999 101,105 17,268 28,656 147,029
Identifiable assets:
As of June 30, 2000 $421,872 $ 38,722 $ 12,363 $472,957
As of December 31, 1999 411,571 14,408 9,548 435,527
Long-lived assets:
As of June 30, 2000 $ 22,766 $ 831 $ 2,126 $ 25,723
As of December 31, 1999 24,472 608 1,482 26,562
</TABLE>
No single customer accounted for greater than 10% of revenues in any period
presented.
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 products, or cancel or postpone orders for the Company's
products. As of June 30, 2000, such cancellations, postponements and returns had
not had a material impact on the Company's revenues. Cancellations, returns, or
a significant delay of orders in the future could have a material adverse effect
on the Company's business, financial condition and results of operations,
however.
5
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5. 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 related to the fair value of options
assumed. The Company paid $24.0 million in cash to acquire all of the
outstanding shares of Analogy. As part of the acquisition, the Company expensed
$0.9 million of acquired in-process research and development expenses and paid
$0.9 million in severance. The in-process research and development amount was
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 their fair market values at the date of acquisition, as summarized
below (in thousands):
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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 acquired. 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.
During the six months ended June 30, 2000, the Company has written off $1.6
million of certain identifiable intangible assets that related to work force in
place which as result of employee turnover were deemed impaired.
During the quarter ended June 30, 2000, the Company completed its analysis of
the remaining liabilities that related to the August 1999 acquisitions of
Chrysalis and Xynetix and reversed $2.2 million of accrued expenses as they were
determined to be no longer required.
6. TREASURY STOCK
On April 18, 2000, the Company announced that its board of directors 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. To date, the Company has
repurchased two million shares of its common stock with an average price of
$15.38 per share. The repurchased shares will be available for general corporate
purposes, including issuance of shares under the stock option and stock purchase
plan programs and for other corporate purposes.
7. SHARE PLACEMENT
On July 17, 2000, the Company completed the sale of two million newly issued
shares of common stock to Metchem Engineering S.A. The shares were priced at
$17.03 per share, reflecting a 5% discount from the average closing price of the
five trading days prior to the date of the sale and purchase agreement.
Metchem Engineering S.A., owned by the Chandaria Group in Singapore, is
expanding into software development activities. Metchem has a major investment
of over 20% in Venture Manufacturing (Singapore) Ltd, a leading contract
manufacturer in the world and one of the largest technology-related companies
listed on the Stock Exchange of Singapore.
6
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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 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.
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. Briefing before the Circuit Court has
been completed, but no date for oral argument has been set.
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.
CRIMINAL INDICTMENT.
7
<PAGE>
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 was brought 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 1998 indictment charged 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 1998
indictment against the company and all of the current and former executives
charged in the case. The District Attorney appealed the dismissal of the 1998
indictment and indicated an intent to seek another indictment.
On August 10, 2000, a Santa Clara County grand jury returned an indictment
against the same current or former employees and/or directors of Avant! as the
1998 indictment. The defendants are charged with conspiracy to commit trade
secret theft, conspiracy to withhold and conceal stolen property, conspiracy to
commit securities fraud, theft of trade secrets, withholding or concealing
stolen property, making an unauthorized copy of an article containing a trade
secret, and committing a fraudulent practice in connection with the offer or
sale of a security. Arraignment is scheduled for August 21, 2000. No other dates
are currently scheduled.
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.
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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 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 $1.8 million for the three and six
months ended June 30, 2000, 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. As a result, the
Company has not recorded any loss reserves which might be required to resolve
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 19.1% to $89.8 million in the
three months ended June 30, 2000 from $75.4 million in the three months ended
June 30, 1999. In the first six months of 2000, total revenues increased 19.0%
to $175.0 million from $147.0 million in 1999. Revenue from sales to two
affiliates, Maingate and Davan Tech for the three months ended June 30, 2000
were $6.2 million and $1.8 million, respectively, and for the six months ended
June 30, 2000 were $13.6 million and $1.8 million, respectively. The Company has
ownership of 35% and 19.8% of Maingate and Davan Tech, respectively, and
accounts for these investments by the equity method. The Company's Chairman of
the Board, President and Chief Executive officer owns 40.0% of Maingate and 9.3%
of Davan Tech. The Company's Executive Operating Officer, Operations, owns 2% of
Maingate.
Software revenue increased 12.6% to $56.4 million in the three months ended June
30, 2000 from $50.1 million in the three months ended June 30, 1999. Software
revenue for the first six months ended June 30, 2000 was $110.6 million,
compared with $95.4 million for the first six months ended June 30, 1999. The
12.6% increase in software revenue between the two three-month periods and the
15.9% increase in software revenue between the two six-month periods ended June
30, 2000 were primarily due to increased license revenue from the Company's
place and route products such as the Apollo family, physical verification
products such as the Hercules family, and other simulation and design analysis
products including the Polaris and Star-Hspice/Avanwaves families.
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Services revenue increased 32.1% to $33.4 million in the three months ended June
30, 2000 from $25.3 million in the three months ended June 30, 1999. In the
first six months 2000, services revenue increased 24.7% to $64.4 million from
$51.6 million in 1999. The percentage of the Company's total revenue
attributable to services increased to 37.2% in the quarter ended June 30, 2000,
compared to 33.5% in the same quarter of last year. The increase was primarily
due to increased customer installed base.
COSTS OF SOFTWARE AND SERVICES. Costs of software increased to $1.5 million in
the three months ended June 30, 2000 from $1.3 million in the three months ended
June 30, 1999. Costs of services increased to $5.4 million in the three months
ended June 30, 2000 from $4.8 million in the three months ended June 30, 1999,
representing 15.9% and 18.8% of services revenue for the three months ended June
30, 2000 and 1999, respectively. Cost of software remained at $2.6 for the six
months ended June 30, 2000 and 1999, respectively. As a percentage of software
revenue, costs of software decreased to 2.4% from 2.7% for the six months ended
June 30, 2000 and 1999, respectively. Cost of services as a percentage of
services revenue decreased to 16.6% from 18.5% for the six months ended June 30,
2000 and 1999. The gross margin improvements were primarily due to the increased
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
$23.5 million from $20.9 million for the three months ended June 30, 2000 and
1999, respectively. The increase was primarily due to increased headcount.
Selling and marketing expenses increased 18.8% to $47.6 million from $40.1
million for the six months ended June 30, 2000 and 1999, respectively. As a
percentage of total revenue, selling and marketing expenses were 26.2% and 27.7%
for the three months ended June 30, 2000 and 1999, respectively, and remained
flat at 27.2% for the six months ended June 30, 2000 and 1999. The increase in
selling and marketing expense was primarily due to an increase in the size of
our direct sales force and related commissions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were $21.7
million and $18.1 million for the three months ended June 30, 2000 and 1999,
respectively, and remained flat at 24.1% of total revenue in these periods.
Research and development expenses increased to $43.3 million from $36.2 million
for the six months ended June 30, 2000 and 1999, respectively. As a percentage
of total revenue, research and development expenses were 24.7% and 24.6% for the
six months ended June 30, 2000 and 1999, respectively. Increased spending during
the first six months was related primarily to increased headcount worldwide.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $10.5 million from $9.1 million for the three months ended June 30,
2000 and 1999, respectively. As a percentage of total revenue, general and
administrative expenses decreased slightly to 11.6% from 12.1% for the three
months ended June 30, 2000 and 1999 respectively. General and administrative
expenses increased 8.3% to $18.2 million from $16.8 million for the six months
ended June 30, 2000 and 1999, respectively. Legal expense was $1.7 million for
the three months ended June 30, 2000, compared with $3.6 million for the three
months ended June 30, 1999. Legal expenses were $1.8 million and $6.0 million
for the six months ended June 30, 2000 and 1999, respectively. As a percentage
of total revenue, general and administrative expenses decreased slightly to
10.4% from 11.4% for the six months ended June 30, 2000 and 1999, respectively.
The consistency in general and administrative expenses as a percentage of total
revenue resulted primarily from 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. for
approximately $32.1 million including $7.2 million of liabilities assumed and
$0.8 million related to the fair value of options assumed. As part of the
acquisition, the Company expensed $0.9 million of acquired in-process research
and development expenses and paid $0.9 million in severance. The in-process
research and development amount was expensed, as the underlying technology had
not reached technological feasibility and, in management's opinion, had no
probable alternative future use.
During the quarter ended June 30, 2000, the Company completed its analysis of
the remaining liabilities that related to the August 1999 acquisitions of
Chrysalis and Xynetix and reversed $2.2 million of accrued expenses as they were
determined to be no longer required.
EQUITY INCOME FROM UNCONSOLIDATED SUBSIDIARIES. The Company had equity income
from unconsolidated subsidiaries of $3.6 million and $0.2 million in the three
months ended June 30, 2000 and 1999, respectively. These amounts represent the
Company's share of equity interest in investments in Forefront Venture Partners,
L.P. ("Forefront"), Maingate Electronics and Davan Tech. The equity income in
2000 primarily resulted from unrealized appreciation of the Company's investment
in Forefront which occurred during each 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 or losses in the future.
INTEREST INCOME AND OTHER, NET. Interest income and other, net were $0.1 million
and $0.9 million in the three months ended June 30, 2000 and 1999, respectively.
The decrease was due primarily to increased interest income, offset by higher
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charity contribution expenses during the quarter. Interest income and other,
decreased to $1.1 million from $2.9 million for the six months ended June 30,
2000 and 1999, respectively; this decrease was primarily due to the same reasons
discussed above.
INCOME TAXES. The effective tax rate for the quarter was 37.5% compared to 37.6%
last year. The effective tax rate excluding in-process research and development
expenses were 37.5% and 37.9% for the six months ended June 30, 2000 and 1999,
respectively.
NET EARNINGS AND EARNINGS PER SHARE. Net earnings excluding merger and
in-process research and development expenses and equity income from venture
capital investment were $17.1 million and $14.0 million in the three months
ended June 30, 2000 and 1999, respectively. Reported net earnings were $20.7
million and $13.9 million in the three months ended June 30, 2000 and 1999,
respectively. Net earnings per share on a diluted basis excluding merger,
in-process research and development expenses and equity income from venture
capital investment were $0.43 and $0.36 in the three months ended June 30, 2000
and 1999, respectively. Reported net earnings per share on a diluted basis were
$0.52 and $0.35 in the three months ended June 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $50.5 million for the six months ended June
30, 2000. The Company's investing activities used $24.0 million of net cash for
the six months ended June 30, 2000 resulting from the purchases of computer
equipment and office furniture, purchase of Analogy and net maturities of short
term investments. Net cash used in financing activities was $27.5 million for
the six months ended June 30, 2000. The cash outflows from financing activities
primarily related to expenditures of approximately $30.0 million for repurchases
of the Company's common stock, offset by cash generated by the exercise of
employee stock options.
During the first quarter of 2000, the Company announced a new stock repurchase
program to buy back up to 6 million shares, or 15%, of its outstanding common
stock. To date, the Company has repurchased two million shares of its common
stock with an average price of $15.38 per share, for an aggregate amount of
approximately $30.0 million.
On July 17, 2000, the Company completed the sale of two million newly issued
shares of common stock to Metchem Engineering S.A. The shares were priced at
$17.03 per share, reflecting a 5% discount from the average closing price of the
five trading days prior to the date of the sale and purchase agreement.
As of June 30, 2000, the Company had $239.6 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 $206.2
million at June 30, 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.
RECENT DEVELOPMENTS
On July 25, 2000 the Board of Directors adopted the 2000 Stock Option/Stock
Issuance Plan (the "2000 Plan"), with an effective date of July 26, 2000. The
purpose of the 2000 Plan is to enable the Company to use equity incentives to
help attract, retain and reward employees in a highly competitive market. The
Company believes that equity incentives are an important employee benefit. The
2000 Plan qualifies as a "broadly-based plan" for purposes of the rules
promulgated by the National Association of Securities Dealers that apply to the
company.
The 2000 Plan provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, restricted stock,
performance shares or any combination of the foregoing. The Board has reserved
2,000,000 shares for issuance under the 2000 Plan. In addition, the share
reserve will increase automatically by 500,000 shares annually, and the Board
has discretion to allocate shares held in the Company's treasury. Employees,
officers, directors, consultants and advisors who render services to the Company
or its subsidiary corporations are eligible for awards under the plan.
YEAR 2000 ISSUES
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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 August 14, 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 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. The District Attorney appealed the dismissal of the 1998
indictment and indicated an intent to seek another indictment. On August 10,
2000, a Santa Clara County grand jury returned an indictment against the same
current or former employees and/or directors of Avant! as the 1998 indictment.
The defendants are charged with conspiracy to commit trade secret theft,
conspiracy to withhold and conceal stolen property, conspiracy to commit
securities fraud, theft of trade secrets, withholding or concealing stolen
property, making an unauthorized copy of an article containing a trade secret,
and committing a fraudulent practice in connection with the offer or sale of a
security. Arraignment is scheduled for August 21, 2000. No other dates are
currently scheduled. 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 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
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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 could 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.
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.
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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
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,
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license and support each of these products.
WE DEPEND ON INTERNATIONAL SALES FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUE
International revenue accounted for approximately 28%, 31%, and 40% of our total
revenue in 1999, 1998, and 1997, respectively. For the six months ended June 30,
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 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
15
<PAGE>
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 August 14, 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 August 14, 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 under the heading "We depend on international sales for a significant
percentage of our revenue," and 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. There were no hedging contracts outstanding as of June 30, 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.
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<PAGE>
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 June 30, 2000, in thousands:
<TABLE>
<CAPTION>
Carrying Average
Amount Return Rate
-------- -----------
<S> <C> <C>
Cash equivalents-variable rates ............... $ 52,043 6.17%
Short-term investments-variable rates ......... 160,857 6.54%
--------- -----
$ 212,900 6.45%
========= =====
</TABLE>
As of June 30, 2000, the underlying maturities of financial instruments
are $154.3 million within one year and $58.6 million from 2001 to 2031.
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<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 2000, the Annual Meeting of Stockholders of the Company was held.
The matters voted upon and the results of the voting were as follow:
1. The following persons were elected to the Board of Directors to hold office
until the next Annual Meeting, or until their successors are elected and
qualified. The number of votes cast for each nominee were as indicated
below:
<TABLE>
<CAPTION>
Directors For Withheld
--------------------------- -------------- -------------
<S> <C> <C>
Gerald C. Hsu 31,919,630 1,319,701
Charles L. St. Clair 26,910,081 6,329,250
Moriyuki Chimura 31,893,658 1,345,673
Dan Taylor 32,013,244 1,226,087
Kenneth Tai 32,014,051 1,225,280
</TABLE>
2. The proposal for an amendment to the Company's 1995 Stock Option/Stock
Issuance Plan to increase the total number of shares of the Company's
Common Stock reserved for issuance thereunder by two million shares was not
approved as follows: for 6,918,185; against 15,123,520 and 187,214 abstain.
3. Stockholders approved the ratification of KPMG LLP as the Company's
independent certified public accountants for the fiscal year ending
December 31, 2000 as follows: for 33,156,947; against 49,295 and 33,089
abstain.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 2000 Stock Options/Stock Issuance Plan
27.1 Financial Data Schedule (electronic version only).
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVANT! CORPORATION
------------------
(Registrant)
August 14, 2000 /S/ Viraj J. Patel
------------------
Viraj J. Patel
Duly Authorized Officer
Head of Finance and Treasurer
(Principal Accounting and Financial Officer)
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