AVANT CORP, 10-Q, 2000-11-14

AVANT CORP
10-Q, 2000-11-14
PREPACKAGED SOFTWARE

Previous: KENTUCKY FIRST BANCORP INC, 10QSB, EX-27, 2000-11-14

Next: AVANT CORP, 10-Q, EX-10.8, 2000-11-14

<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
September 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 November 6, 2000 was 38,429,989.

<PAGE>

AVANT! CORPORATION

FORM 10-Q

September 30, 2000

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 1

Condensed Consolidated Statements of Earnings for the Three and Nine Months
Ended September 30, 2000 and 1999 2

Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 3

Notes to Condensed Consolidated Financial Statements 4

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10

Item 2A RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 13

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK, DERIVATIVES
AND FINANCIAL INSTRUMENTS 17

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS 19

Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19

SIGNATURE PAGE 20

EXHIBIT INDEX
</TABLE>

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

AVANT! CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $114,512 $ 79,766
Investments.............................................................. 173,422 160,631
Accounts receivable, net of allowances of $14,180 and
$12,772, respectively................................................. 75,964 52,730
Due from affiliates...................................................... 1,703 4,555
Deferred income taxes.................................................... 14,433 21,266
Prepaid expenses and other current assets................................ 19,334 16,856
--------- ---------
Total current assets.................................................. 399,368 335,804
Equipment, furniture and fixtures, net...................................... 25,223 26,562
Deferred income taxes....................................................... 24,587 22,789
Goodwill and other intangibles, net......................................... 39,293 31,009
Other assets................................................................ 37,257 19,363
--------- ---------
Total assets.......................................................... $525,728 $435,527
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable......................................................... $ 11,797 $ 11,075
Accrued compensation..................................................... 32,858 19,297
Accrued income taxes..................................................... 25,072 25,614
Current portion of long term obligation.................................. 382 61
Other accrued liabilities................................................ 11,607 17,595
Deferred revenue......................................................... 60,653 45,916
--------- ---------
Total current liabilities............................................. 142,369 119,558
Other noncurrent liabilities................................................ 2,991 1,668
--------- ---------
Total liabilities..................................................... 145,360 121,226
--------- ---------
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,
39,136,000 and 38,874,000 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively................... 4 4
Additional paid-in capital.................................................. 270,061 230,733
Deferred compensation....................................................... (2,177) (329)
Retained earnings........................................................... 145,336 85,571

Other accumulated comprehensive gain/(loss)................................. 308 (1,678)
Treasury stock, at cost..................................................... (33,164) -
--------- ---------
Total stockholders' equity............................................ 380,368 314,301
--------- ---------
Total liabilities and stockholders' equity............................ $525,728 $435,527
========= =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

1
<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Software $55,046 $53,176 $165,644 $148,582
Services 35,462 22,308 99,834 73,931
-------- -------- --------- ---------
Total revenue 90,508 75,484 265,478 222,513
-------- -------- --------- ---------

Costs and expenses:
Costs of software 1,480 1,568 4,083 4,162
Costs of services 4,631 3,709 15,296 13,236
Selling and marketing 28,922 20,730 76,554 60,824
Research and development 19,108 17,670 62,403 53,841
General and administrative 9,864 11,142 28,038 27,924
Merger expenses and in-process
research and development expenses - 5,902 (343) 5,902
-------- -------- --------- ---------
Total operating expenses 64,005 60,721 186,031 165,889
-------- -------- --------- ---------
Earnings from operations 26,503 14,763 79,447 56,624
Equity income/(loss) from
unconsolidated subsidiaries, net 4,103 (75) 14,042 (56)
Interest income and other, net 1,632 3,038 2,700 5,891
-------- -------- --------- ---------
Earnings before income taxes 32,238 17,726 96,189 62,459
Income taxes 12,089 8,889 36,424 25,858
-------- -------- --------- ---------
Net earnings 20,149 8,837 59,765 36,601
======== ======== ========= =========

Earnings per share:
Basic: $ 0.51 $ 0.23 $ 1.54 $ 0.97
======== ======== ========= =========
Diluted: $ 0.50 $ 0.22 $ 1.49 $ 0.92
======== ======== ========= =========

Weighted average shares outstanding:
Basic: 39,867 38,172 38,910 37,927
======== ======== ========= =========
Diluted: 40,703 39,520 40,028 39,805
======== ======== ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

2
<PAGE>

AVANT! CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................... $ 59,765 $ 36,601
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization....................................... 20,258 15,370
Merger accruals..................................................... (2,165) -
Acquired in-process research and development........................ 940 -
Compensation expenses related to stock option and
purchase plans.................................................... 567 464
Loss on disposal of assets.......................................... 275 90
Equity income from unconsolidated subsidiaries...................... (14,042) 56
Deferred income taxes............................................... 5,035 3,027
Tax benefit/(expense) related to stock options...................... (782) 2,026
Deferred rent....................................................... 1,277 486
Provision for doubtful accounts..................................... 1,408 3,871
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable............................................... (19,290) (6,102)
Due from affiliates............................................... 2,852 3,970
Prepaid expenses and other assets................................. (7,162) 8,504
Accounts payable.................................................. (405) 4,024
Accrued compensation.............................................. 13,561 5,748
Accrued income taxes.............................................. (843) (7,163)
Other accrued liabilities......................................... (5,732) 1,532
Deferred revenue.................................................. 13,732 7,849
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 69,249 80,353
---------- ----------
Cash flows from investing activities:
Purchases of investments............................................... (178,401) (505,365)
Maturities and sales of investments.................................... 167,596 369,057
Purchases of equipment, furniture, fixtures and other assets........... (5,384) (5,501)
Purchase of Analogy, net of cash acquired.............................. (22,014) -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES.......................... (38,203) (141,809)
---------- ----------
Cash flows from financing activities:
Principal payments under debt obligations.............................. - (1,053)
Purchases of treasury stock............................................ (33,164) (32)
Exercise of stock options.............................................. 4,018 5,889
Issuance of common stock for share placement........................... 32,846 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................... 3,700 4,804
---------- ----------
Net increase (decrease) in cash and cash equivalents...................... 34,746 (56,652)
Cash and cash equivalents, beginning of period............................ 79,766 126,180
---------- ----------
Cash and cash equivalents, end of period.................................. $ 114,512 $ 69,528
========== ==========

SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ........................................................... $ 138 $ 202
Income taxes........................................................ $ 30,015 $ 25,407

</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE>

AVANT! CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of Avant!
Corporation ("Avant!" or the "Company") and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position and results
of operations have been made. Operating results for interim periods are not
necessarily indicative of results, which may be expected for a full year. The
information included in this Form 10-Q should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 31, 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 Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME. Comprehensive income has no impact on the Company's net
earnings, balance sheet, or stockholders' equity. The components of
comprehensive income, net of tax, were comprised of the following:

<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------------
2000 1999 2000 1999
----------------------------------------------
<S> <C> <C> <C> <C>
Net earnings................................... $20,149 $8,837 $59,765 $36,601
Unrealized gains/(losses)
on investments, net....................... 737 (75) 1,986 (906)
------- ------- -------- --------
Total comprehensive income..................... $20,886 $8,762 $61,751 $35,695
------- ------- -------- --------
</TABLE>

4
<PAGE>

3. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted-average number of common and dilutive potential common shares
outstanding during the period. Dilutive potential common shares consist of
employee stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Earnings $20,149 $ 8,837 $59,765 $36,601
======= ======= ======= =======

Weighted average number of common
shares outstanding 39,867 38,172 38,910 37,927
Common Stock Equivalents:
Stock options and awards 836 1,348 1,118 1,878
------- ------- ------- -------
Total weighted average number
of common and common
equivalent shares outstanding 40,703 39,520 40,028 39,805
======= ======= ======= =======

Basic earnings per share $ 0.51 $ 0.23 $ 1.54 $ 0.97
======= ======= ======= =======

Diluted earnings per share $ 0.50 $ 0.22 $ 1.49 $ 0.92
======= ======= ======= =======
</TABLE>

4. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, the FASB
issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS No.
137 defers the effective date of Statement No. 133 for one year. SFAS No. 133 is
now effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company does not expect that these statements will have a
significant impact on its financial condition or results of operations.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, as amended by SAB 101A and SAB 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements;
however, SAB 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. In
June 2000, the SEC issued SAB 101B that delayed the implementation date of SAB
101. The Company must adopt SAB 101 no later than in the fourth quarter of 2000.
The Company believes its current revenue recognition policy is in compliance
with this guidance.

Effective January 1, 2000, the Company adopted Statement of Position 98-9,
MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS, (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

<PAGE>

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 March 2000, FASB issued FASB Interpretation (FIN) 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION, which clarifies the application of
APB 25 for certain issues. The interpretation is effective July 1, 2000, except
for the provisions that relate to modifications that directly or indirectly
reduce the exercise price of an award and the definition of an employee, which
are effective after December 15, 1998. There was no material impact on the
Company's consolidated financial statements as a result of adopting the
interpretation.

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
statements of operations. 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
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Three months ended September 30, 2000 $ 58,459 $10,677 $21,372 $ 90,508
Three months ended September 30, 1999 56,735 6,763 11,986 75,484

Nine months ended September 30, 2000 181,336 26,703 57,439 265,478
Nine months ended September 30, 1999 157,840 24,031 40,642 222,513

Identifiable assets:
As of September 30, 2000 $466,608 $48,460 $10,660 $525,728
As of December 31, 1999 411,571 14,408 9,548 435,527

Long-lived assets:
As of September 30, 2000 $ 20,970 $ 1,049 $ 3,204 $ 25,223
As of December 31, 1999 24,472 608 1,482 26,562
</TABLE>

During the three months ended September 30, 2000, revenues from one major
customer amounted to approximately 11% of total revenues. The customer's
revenues were included in the Asia region. During the nine months ended
September 30, 2000, no revenues from any one customer exceeded 10% of total
revenues.

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 September 30, 2000, such cancellations, postponements and
returns had not had a material impact on the Company's revenues. However,
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.

6
<PAGE>

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 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):

<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 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 nine months ended September 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.

In 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.

7. 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. As of November 6, 2000, the
Company has repurchased 2.8 million shares of its common stock for an aggregate
amount of approximately $44 million. 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.

8. 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. Net
proceeds from the placement were $32.8 million.

9. LEGAL PROCEEDINGS

CADENCE LITIGATION.

7
<PAGE>

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.

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, and no trial date has been set. 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.

8
<PAGE>

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 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 was dismissed from the action, and the District
Attorney 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. The District
Attorney has since dismissed the appeal in favor of the indictment described
below.

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 was held on August 21, 2000, and all defendants
pled not guilty. Trial has been scheduled for February 13, 2001, although the
trial date may be affected by pre-trial motions or other proceedings.

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

<PAGE>

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 17200. 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 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 $2.1 million and $4.6 million for the three and nine
months ended September 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 19.9% to $90.5 million in the
three months ended September 30, 2000 from $75.5 million in the three months
ended September 30, 1999. In the first nine months of 2000, total revenues
increased 19.3% to $265.5 million from $222.5 million in 1999. Revenue from
sales to two affiliates, Maingate Electronics, KK ("Maingate") and Davan Tech
Co., Ltd ("Davan Tech"), for the three months ended September 30, 2000 were
$10.3 million and $1.7 million, respectively, and for the nine months ended
September 30, 2000 were $23.9 million and $3.5 million, respectively. The
Company has 35% ownership of Maingate and accounts for the investment by the
equity method. The Company's Chief Executive Officer owns 40% of Maingate.
The Company's Executive Operating Officer, Operations, owns 2% of Maingate.
The remaining 23% is owned by a private investment fund whose owners include
other current directors and executives of the Company. The Company has 19.4%
ownership of Davan Tech and accounts for the investment by the equity method.
The Company's Chief Executive Officer owns 8.2% of Davan Tech.

10
<PAGE>

Software revenue increased 3.5% to $55.0 million in the three months ended
September 30, 2000 from $53.2 million in the three months ended September 30,
1999. Software revenue increased 11.5% to $165.6 million for the nine months
ended September 30, 2000 from $148.6 million for the first nine months ended
September 30, 1999. The growth in revenue results primarily from growing
demand for Avant!'s SinglePass and Silicon Early Access design solutions,
especially its place and route, circuit simulation and analysis, physical
verification, libraries, and its mask-synthesis software.

Services revenue increased 59.0% to $35.5 million in the three months ended
September 30, 2000 from $22.3 million in the three months ended September 30,
1999. In the first nine months of 2000, services revenue increased 35.0% to
$99.8 million from $73.9 million in 1999. The percentage of the Company's
total revenue attributable to services increased to 39.2% in the quarter
ended September 30, 2000, compared to 29.6% in the same quarter of last year.
The increase was primarily due to increased customer installed base and
increase in maintenance renewals.

COSTS OF SOFTWARE AND SERVICES. Costs of software decreased to $1.5 million
in the three months ended September 30, 2000 from $1.6 million in the three
months ended September 30, 1999. Costs of services increased to $4.6 million
in the three months ended September 30, 2000 from $3.7 million in the three
months ended September 30, 1999, representing 13.1% and 16.6% of services
revenue for the three months ended September 30, 2000 and 1999, respectively.
Cost of software decreased to $4.1 million for the nine months ended
September 30, 2000 from $4.2 million in the nine months ended September 30,
1999. As a percentage of software revenue, costs of software decreased to
2.5% from 2.8% for the nine months ended September 30, 2000 and 1999,
respectively. Cost of services as a percentage of services revenue decreased
to 15.3% from 17.9% for the nine months ended September 30, 2000 and 1999,
respectively. The gross margin improvements were primarily due to the
increased 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
$28.9 million from $20.7 million for the three months ended September 30,
2000 and 1999, respectively. Selling and marketing expenses increased 25.9%
to $76.6 million from $60.8 million for the nine months ended September 30,
2000 and 1999, respectively. As a percentage of total revenue, selling and
marketing expenses were 32.0% and 27.5% for the three months ended September
30, 2000 and 1999, respectively, and increased to 28.8% from 27.3% for the
nine months ended September 30, 2000 and 1999, respectively. The increase in
selling and marketing expense in amounts and as a percentage of revenue was
primarily due to an increase in bonus expenses, the acquisition of Analogy in
March 2000, and increases in distributor commissions.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $19.1 million from $17.7 million for the three months ended
September 30, 2000 and 1999, respectively. Research and development expenses
increased 15.9% to $62.4 million from $53.8 million for the nine months ended
September 30, 2000 and 1999, respectively. As a percentage of total revenue,
research and development expenses were 21.1% and 23.4% for the three months
ended September 30, 2000 and 1999, respectively, and decreased to 23.5% from
24.2% for the nine months ended September 30, 2000 and 1999, respectively.
The increase in amounts was primarily due to increased headcount and the
acquisition of Analogy. The decrease in research and development expenses as
a percentage of revenue is due to the globalization of activities which has
resulted in lower costs per employee.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $9.9 million from $11.1 million for the three months ended
September 30, 2000 and 1999, respectively. As a percentage of total revenue,
general and administrative expenses decreased to 10.9% from 14.8% for the
three months ended September 30, 2000 and 1999 respectively. General and
administrative expenses increased slightly to $28.0 million from $27.9
million for the nine months ended September 30, 2000 and 1999, respectively.
As a percentage of total revenue, general and administrative expenses
decreased to 10.6% from 12.5% for the nine months ended September 30, 2000
and 1999, respectively. Legal expense was $2.1 million for the three months
ended September 30, 2000, compared with $6.4 million for the three months
ended September 30, 1999. Legal expenses were $4.6 million and $13.8 million
for the nine months ended September 30, 2000 and 1999, respectively. The
decreases in legal expenses were offset by increases in operational expenses
including, the acquisition of Analogy and increases in facilities expenses.

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.

11
<PAGE>

EQUITY INCOME FROM UNCONSOLIDATED SUBSIDIARIES. The Company had equity income
from unconsolidated subsidiaries of $4.1 million and a loss of $0.1 million
in the three months ended September 30, 2000 and 1999, respectively. Equity
income from unconsolidated subsidiaries was $14.0 million and a loss of $0.1
million for the nine months ended September 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. 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 was $1.6
million and $3.0 million in the three months ended September 30, 2000 and
1999, respectively. Interest income and other net, decreased to $2.7 million
from $5.9 million for the nine months ended September 30, 2000 and 1999,
respectively. The decreases in both periods are due to the increased expenses
related to charitable contributions and increased foreign exchange losses,
offset by an increase in interest income.

INCOME TAXES. The effective tax rate for the three and nine months ended
September 30, 2000 was 37.5% and 37.9%, respectively. The effective tax rate
excluding merger expenses for the three and nine months ended September 30,
1999 totaled 37.5% and 37.7%, 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 $18.5 million and $14.8 million for the three months
ended September 30, 2000 and 1999, respectively, an increase of 25.0%.
Reported net earnings were $20.1 million and $8.8 million in the three months
ended September 30, 2000 and 1999, respectively, an increase of 128.4%. Net
earnings per share on a diluted basis excluding merger, in-process research
and development expenses and equity income from venture capital investment
were $0.45 and $0.37 in the three months ended September 30, 2000 and 1999,
respectively. Reported net earnings per share on a diluted basis were $0.50
and $0.22 in the three months ended September 30, 2000 and 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $69.2 million for the nine months ended
September 30, 2000. The Company's investing activities used $38.2 million of net
cash for the nine months ended September 30, 2000, resulting from the purchase
of Analogy, net maturities of investments and purchases of computer equipment
and office furniture. Net cash provided from financing activities was $3.7
million for the nine months ended September 30, 2000. The cash inflow from
financing activities related to the issuance of stock in the share placement and
the exercise of employee stock options, offset by the repurchases of the
Company's common stock.

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. As of November 6, 2000, the Company has repurchased
2.8 million shares of its common stock for an aggregate amount of
approximately $44.0 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.
The net proceeds related to this sale were $32.8 million.

As of September 30, 2000, the Company had $287.9 million of cash, cash
equivalents,and investments, compared to $240.4 million at December 31, 1999.
Working capital increased to $257.0 million at September 30, 2000 from $216.2
million at December 31, 1999. In connection with the Silvaco litigation, the
Company was required to post a bond, which is collateralized by a $23.6
million letter of credit.

Based on its current operating plans and without regard to the potential
consequences of any adverse judgments in any pending litigation matters, the
Company believes that it has available cash and investments sufficient to
fund the Company's operations through at least the next twelve months.

YEAR 2000 ISSUES

12
<PAGE>

functions on January 1, 2000 and did not find any material problems related
to Year 2000. As of November 6, 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 was held on
August 21, 2000, and all defendants pled not guilty. Trial has been scheduled
for February 13, 2001, although the trial date may be affected by pre-trial
motions or other proceedings. 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
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.

13
<PAGE>

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.

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.

14
<PAGE>

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, 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 nine months
ended September 30, 2000, international revenue accounted for 32% of total
revenue. We

15
<PAGE>

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 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

16
<PAGE>

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 November 6, 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. 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 November 6, 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 DERIVATIVE 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 foreign currency derivative contracts
outstanding as of September 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.

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.

17
<PAGE>

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 September 30, 2000, in thousands:

<TABLE>
<CAPTION>
Carrying Average
Amount Return Rate
---------------- ------------------

<S> <C> <C>
Cash equivalents-variable rates...................... $ 102,818 6.39%
Investments-variable rates........................... 173,422 6.43%

---------------- ------------------
$ 276,240 6.42%
================ ==================
</TABLE>

As of September 30, 2000, the underlying maturities of financial instruments
are $164.5 million within one year and $111.7 million from 2001 to 2003.

18
<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 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.8 Employment Agreement

27.1 Financial Data Schedule (electronic version only).

(b) Reports on Form 8-K

Not applicable.

19
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AVANT! CORPORATION
------------------
(Registrant)

November 14, 2000 /s/ Viraj J. Patel
------------------------
Viraj J. Patel
Duly Authorized Officer
Head of Finance and Treasurer
(Principal Financial Officer)

November 14, 2000 /s/ Scott J. Spangenberg
------------------------
Scott J. Spangenberg
Corporate Controller
(Principal Accounting Officer)