UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
|X|/X/ Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 200130, 2002
OR
| |/ / 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: 000-20923
INNOVEDA, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 93-1137888
- -------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
293 BOSTON POST ROAD WEST, MARLBORO, MASSACHUSETTSBoston Post Road West, Marlboro, Massachusetts 01752-4615
-------------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (508) 480-0881
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|/X/ No | |/ /
As of April 30, 2001,2002, the Registrant had outstanding 39,102,15940,514,518 shares of Common
Stock, $0.01 par value per share.
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 FINANCIAL INFORMATION PAGE
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 30, 2000 3
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 2001 (unaudited) and April 1, 2000
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2001 (unaudited) and April 1, 2000
(unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 25
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit Index 28
2
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 30,
2001 2000
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,477 $ 20,799
Accounts receivable, net 21,712 27,260
Prepaid expenses and other 3,016 2,800
Deferred income taxes 5,813 6,626
---------- ----------
Total current assets 50,018 57,485
Equipment and furniture, net 7,860 7,642
Capitalized software costs, net 2,366 2,358
Purchased technology and other intangibles, net 58,008 62,198
Goodwill and other, net 12,516 12,941
---------- ----------
Total assets $ 130,768 $ 142,624
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 3,658 $ 3,550
Capital lease obligations, current portion 511 548
Accounts payable 4,096 3,652
Accrued liabilities 14,272 20,565
Deferred revenue 23,560 24,514
---------- ----------
Total current liabilities 46,097 52,829
Long-term debt 4,750 5,750
Capital lease obligations 145 250
Other long-term liabilities 1,523 1,553
Deferred tax liability 26,032 27,642
---------- ----------
Total liabilities 78,547 88,024
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 authorized,
39,625 oustanding at March 31, 2001, 39,347
oustanding at December 30, 2000 396 393
Additional paid-in-capital 116,821 116,047
Accumulated deficit (61,120) (59,013)
Accumulated other comprehensive income (loss) (314) 50
Notes from stockholders (932) (932)
Treasury stock, 551 and 341 shares at cost in
2001 and 2000, respectively (1,663) (832)
Deferred compensation (967) (1,113)
---------- ----------
Total stockholders' equity 52,221 54,600
---------- ----------
Total liabilities and stockholders' equity $ 130,768 $ 142,624
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
FOR THE QUARTER ENDED
-------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Revenue:
Software $ 15,381 $ 7,628
Services and other 11,877 6,757
---------- ----------
Total revenue 27,258 14,385
---------- ----------
Costs and expenses:
Cost of software 1,759 1,516
Cost of services and other 2,604 1,562
Sales and marketing 11,288 6,451
Research and development 7,652 3,528
General and administrative 2,166 1,260
Amortization of intangibles 4,702 477
Amortization of stock compensation 146 147
In-process research and development -- 2,400
Merger related restructuring costs -- 2,243
---------- ----------
Total operating expenses 30,317 19,584
---------- ----------
Operating loss (3,059) (5,199)
Other expense (18) (403)
---------- ----------
Loss before income tax benefit (3,077) (5,602)
Income tax benefit (970) (1,160)
---------- ----------
Net loss $ (2,107) $ (4,442)
========== ==========
Net loss per share:
Basic $ (0.05) $ (0.57)
========== ==========
Diluted $ (0.05) $ (0.57)
========== ==========
Weighted average shares outstanding:
Basic 39,036 7,837
========== ==========
Diluted 39,036 7,837
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE QUARTER ENDED
--------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,107) $ (4,442)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 5,920 1,480
Compensation under stock option agreements 146 147
Write-off of in-process research and development -- 2,400
Changes in assets and liabilities:
Accounts receivable 5,426 4,813
Prepaid and other current assets (307) 192
Deferred income taxes (797) (1,198)
Accounts payable (221) (205)
Accrued liabilities (5,832) 925
Tax benefit on stock option exercises 43 --
Deferred revenue (954) (1,130)
---------- ----------
Net cash provided by operating activities 1,317 2,982
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,179) (575)
Capitalized software costs (261) (321)
Cash acquired in acquisition of Summit, net of purchase costs -- 27,036
---------- ----------
Net cash provided by (used in) investing activities (1,440) 26,140
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (892) (1,950)
Proceeds from exercise of stock options and employee stock
purchase plan 734 28
Repayments of capital lease obligations (142) (94)
Purchase of treasury stock (831) --
---------- ----------
Net cash used in financing activities (1,131) (2,016)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (68) (5)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,322) 27,101
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,799 531
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,477 $ 27,632
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
INNOVEDA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except per Share Data)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Innoveda, Inc. (the "Company"), a Delaware corporation, was created by
the business combination of Summit Design, Inc. ("Summit") and Viewlogic
Systems, Inc. ("Viewlogic"), which was consummated on March 23, 2000. In
addition, the Company subsequently acquired PADS Software, Inc. ("PADS")
on September 22, 2000. The business combination of Summit with Viewlogic
was effected by means of the merger of a wholly owned subsidiary of
Summit with and into Viewlogic, with Viewlogic surviving as a wholly
owned subsidiary of Summit. The business combination was accounted for as
a reverse acquisition, as former stockholders of Viewlogic owned the
majority of the outstanding stock of Summit subsequent to the business
combination. Therefore, for accounting purposes, Viewlogic is deemed to
have acquired Summit. The business combination of Innoveda and PADS was
accounted for as a purchase of PADS by Innoveda.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included.
The fiscal 2000 financial information presented in the consolidated
statements of operations, and the consolidated statements of cash flows
represents the results for Viewlogic for the periods stated and includes
the financial results for Summit commencing March 24, 2000, and the
financial results for PADS commencing September 23, 2000.
2. ACQUISITIONS
ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into
a merger agreement with PADS. The merger was consummated on September 22,
2000. The merger agreement provided that a wholly owned subsidiary of
Innoveda would merge with and into PADS, with PADS surviving as a wholly
owned subsidiary of Innoveda following the merger. For the merger,
Innoveda issued 6,473 shares of its common stock and paid approximately
$2.0 million to the PADS stockholders. PADS capital stock outstanding at
the merger date was exchanged for shares of Innoveda common stock at the
rate of approximately 1 to 1.9 per share, plus $.579 per share in cash.
In addition, each outstanding option to purchase shares of PADS common
stock was converted into an option to purchase 2.0355 shares of Innoveda
common stock, and the option exercise prices were adjusted accordingly.
The operating results of PADS have been included in the accompanying
consolidated financial statements from the date of acquisition. Under the
purchase method of accounting, the acquired assets and assumed
liabilities have been recorded at their estimated fair values at the date
of acquisition.
6
2. ACQUISITIONS (CONTINUED)
Innoveda recorded merger costs of approximately $0.5 million in
restructuring charges relating to the PADS merger. This was primarily
comprised of severance payments related to one employee and exit costs to
close Innoveda duplicative facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an
Agreement and Plan of Reorganization. Summit was a publicly held company
engaged in a business similar to that of Viewlogic. In connection with
the business combination contemplated by the Agreement and Plan of
Reorganization, (1) each share of Viewlogic common stock and preferred
stock issued and outstanding at the effective time of the business
combination was converted into 0.67928 (the "Exchange Ratio") of a share
of Summit common stock, and (2) each option to purchase shares of
Viewlogic common stock was converted into an option to purchase Summit
common stock based upon the Exchange Ratio.
The business combination was accounted for under the purchase method of
accounting and was treated as a reverse acquisition, as the stockholders
of Viewlogic received the larger portion of the voting interests in the
combined company. Viewlogic was considered the acquirer for accounting
purposes and recorded Summit's assets and liabilities based upon their
estimated fair values. The operating results of Summit have been included
in the accompanying consolidated financial statements from the date of
acquisition. Under the purchase method of accounting, the acquired assets
and assumed liabilities have been recorded at their estimated fair values
at the date of acquisition.
During the first quarter ended April 1, 2000, Innoveda recorded
approximately $2.2 million in merger costs relating to the Summit
business combination. This primarily included severance and other costs
relating to the consolidation of duplicative facilities as a result of
the business combination between Summit and Viewlogic. Other costs
relating to property and equipment lease contracts (less any applicable
sublease income) after the properties were abandoned, lease buyout costs,
restoration costs associated with certain lease arrangements, and costs
to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure the Innoveda sales and
services business in Japan as a result of an exclusive distributor
agreement executed with Marubeni Solutions Corporation during the first
quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for
approximately 14 employees, costs associated with office closings and
subsequent lease termination, and other facility and exit related costs.
7
2. ACQUISITIONS (CONTINUED)
The following table presents the components of the merger costs accrued
during the mergers with PADS and Summit and the charges against these
reserves through March 31, 2001. All significant amounts are expected to
be settled within the second quarter of fiscal 2001.
TOTAL NON-CASH AMOUNT MARCH 31, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------------------- ------------------- -------------------- -------------------
PADS MERGER COSTS $ 250 $ -- $ 218 $ 32
Severance 199 -- 63 136
Non-cancelable commitments 44 44 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software $ 493 $ 44 $ 281 $ 168
------------------- ------------------- -------------------- -------------------
SUMMIT MERGER COSTS $ 780 $ -- $ 775 $ 5
Severance 1,389 -- 805 584
Non-cancelable commitments 74 74 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software $ 2,243 $ 74 $ 1,580 $ 589
------------------- ------------------- -------------------- -------------------
TOTALS $ 2,736 $ 118 $ 1,861 $ 757
=================== =================== ==================== ===================
8
3. EARNINGS PER SHARE
Basic earnings per share is calculated using weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares plus the effect, if
dilutive, of outstanding stock options using the treasury stock method.
FOR THE QUARTER ENDED
-----------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Net Loss $ (2,107) $ (4,442)
========== ==========
Weighted average number of common shares - Basic 39,036 7,837
========== ==========
Weighted average number of common and potential common
shares - Diluted 39,036 7,837
========== ==========
Net loss per share:
Basic $ (0.05) $ (0.57)
========== ==========
Diluted $ (0.05) $ (0.57)
========== ==========
For the quarters ended March 31, 2001 and April 1, 2000, there were 8,363
and 4,940 anti-dilutive weighted average potential common shares,
respectively, not included in the table above.
9
4. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
Innoveda operates in a single industry segment comprising the electronic
design automation industry. Net revenue by geographic region (in
thousands) and as a percentage of total revenue for each region is as
follows:
FOR THE QUARTER ENDED
----------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Revenue
North America $ 18,422 $ 9,699
Europe 4,340 1,552
Japan 2,016 2,672
Other 2,480 462
----------- ----------
Total Revenue $ 27,258 $ 14,385
=========== ===========
As a percentage of Total Revenue
North America 68% 67%
Europe 16% 11%
Japan 7% 19%
Other 9% 3%
----------- ----------
Total 100% 100%
=========== ===========
5. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
FOR THE QUARTER ENDED
---------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Net loss $ (2,107) $ (4,442)
Foreign currency translation adjustments and other (364) (26)
---------- ----------
Comprehensive loss $ (2,471) $ (4,468)
========== ==========
10
6. DEBT
CREDIT FACILITY -The Company has a credit facility with a commercial bank
consisting of a $6.0 million revolving line of credit ("Line of Credit")
and an $8.4 million term loan (the "Term Loan") (together, the "Credit
Facility"). Interest terms on the Line of Credit and the Term Loan are
determined, at the option of the Company, for varying periods. The
Company may elect to have the interest rate based on the bank's prime
rate or based on the LIBOR rate at the time of the election, depending on
the Company's leverage financial ratio, as defined, in the Credit
Facility. The interest rate on the Line of Credit at March 31, 2001 and
December 30, 2000 were 8.5% and 10.0%, respectively. The interest rates
on the Term Loan at March 31, 2001 and December 30, 2000 were 6.9% and
9.5%, respectively. Payments of principal outstanding under either the
Line of Credit or the Term Loan may be made at any time and must be
repaid in full by September 30, 2003.
The Credit Facility contains certain limitations on additional
indebtedness, capital expenditures, and includes financial covenants,
which include, but are not limited to, the maintenance of certain minimum
levels of interest, and debt service coverage ratios and maximum leverage
ratios. Innoveda was in compliance with all of its debt covenants as of
March 31, 2001.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which established accounting and reporting
standards for derivative instruments. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective
portions of changes in fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. Adoption of SFAS
133 did not have a material effect on the Company's consolidated
financial position or results of operations.
11
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical factsfact included
in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospectus,the
availability of financial resources, prospects, plans and objectives of
management are forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "will", "believe", "anticipate", "intend", "estimate",
"expect", "project", "plans", and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee future results, levels of activity,
performance or achievements and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions,
reorganizations, restructurings, joint ventures or strategic alliances. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in the following discussion, and, in particular, the risks discussed below
under the subheading "Additional Risk Factors that Could Affect Operating
Results and Market Price of Stock." UnlessStock". The forward-looking statements provided by
Innoveda in this Quarterly Report on Form 10-Q represent Innoveda's estimates as
of the date this report is filed with the SEC. Innoveda anticipates that
subsequent events and developments will cause its estimates to change. While
Innoveda may elect to update its forward-looking statements in the future, it
specifically disclaims any obligation to do so. Innoveda's forward-looking
statements should not be relied upon as representing its estimates as of any
date subsequent to the date this report is filed with the SEC.
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements 4
Condensed Consolidated Balance Sheets as of March 30, 2002 4
(unaudited) and December 29, 2001
Condensed Consolidated Statements of Operations for the 5
Quarters Ended March 30, 2002 (unaudited) and March
31, 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the 6
Quarters Ended March 30, 2002 (unaudited) and March
31, 2001 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and 14
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 34
PART II OTHER INFORMATION
ITEM 3 Defaults Upon Senior Securities 35
ITEM 6 Exhibits and Reports on Form 8-K 36
SIGNATURE 37
EXHIBIT INDEX 38
3
PART 1: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 30,
2002 December 29,
(unaudited) 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,597 $ 7,704
Accounts receivable, net 16,087 21,876
Prepaid expenses and other 2,347 3,744
Deferred income taxes 3,962 3,960
--------- ---------
Total current assets 30,993 37,284
Equipment and furniture, net 4,264 4,850
Capitalized software costs, net 2,415 2,342
Purchased technology and other intangibles, net 22,439 25,404
Goodwill and other 3,057 2,412
--------- ---------
Total assets $ 63,168 $ 72,292
========= =========
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 4,875 $ 4,000
Capital lease obligations, current portion 158 270
Accounts payable 2,572 3,648
Accrued liabilities 14,960 18,122
Deferred revenue 20,160 20,776
--------- ---------
Total current liabilities 42,725 46,816
Long-term debt -- 1,750
Other long-term liabilities 1,338 1,322
Deferred income taxes 9,299 10,013
--------- ---------
Total liabilities 53,362 59,901
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; authorized 5,000, none issued
or outstanding at March 30, 2002 and December 29, 2001 -- --
Common stock, $0.01 par value, 100,000 authorized,
40,567 outstanding at March 30, 2002, 40,271
outstanding at December 29, 2001 406 403
Treasury stock, at cost, 550 shares at
March 30, 2002 and December 29, 2001 (1,663) (1,663)
Additional paid-in-capital 117,663 117,440
Notes due from stockholders (932) (932)
Deferred compensation (379) (526)
Accumulated deficit (104,711) (101,650)
Accumulated other comprehensive loss (578) (681)
--------- ---------
Total stockholders' equity 9,806 12,391
--------- ---------
Total liabilities and stockholders' equity $ 63,168 $ 72,292
========= =========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
First Quarter Ended
----------------------
March 30, March 31,
2002 2001
-------- --------
Revenue:
Software $ 5,730 $ 15,381
Services and other 9,977 11,877
-------- --------
Total revenue 15,707 27,258
-------- --------
Cost and expenses:
Cost of software 1,226 1,759
Cost of services and other 2,380 2,604
Sales and marketing 7,991 11,288
Research and development 4,920 7,652
General and administrative 1,359 2,166
Amortization of intangibles 1,890 4,702
Amortization of stock compensation 147 146
-------- --------
Total operating expenses 19,913 30,317
-------- --------
Operating loss (4,206) (3,059)
Other expense, net (295) (18)
-------- --------
Loss before income tax benefit (4,501) (3,077)
Income tax benefit (1,440) (970)
-------- --------
Net loss $ (3,061) $ (2,107)
======== ========
Net loss per share:
Basic and diluted $ (0.08) $ (0.05)
======== ========
Weighted average shares outstanding:
Basic and diluted 40,035 39,036
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
5
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
First Quarter Ended
---------------------
March 30, March 31,
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,061) $ (2,107)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,792 5,920
Compensation under stock option agreements 147 146
Changes in assets and liabilities:
Accounts receivable 5,760 5,426
Prepaid and other current assets 1,730 (307)
Deferred income taxes (717) (797)
Accounts payable (1,072) (221)
Accrued liabilities (3,044) (5,832)
Tax benefit of stock option exercises 91 43
Deferred revenue (585) (954)
------- --------
Net cash provided by operating activities 2,041 1,317
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (99) (1,179)
Capitalized software costs (293) (261)
------- --------
Net cash used in investing activities (392) (1,440)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (875) (892)
Proceeds from exercise of stock options and employee stock
purchase plan 132 734
Payments of capital lease obligations (111) (142)
Purchase of treasury stock -- (831)
------- --------
Net cash used in financing activities (854) (1,131)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 98 (68)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 893 (1,322)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,704 20,799
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,597 $ 19,477
======= ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
6
INNOVEDA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by law,generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments necessary to present fairly the information set forth therein
have been included.
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Effective December 30, 2001, Innoveda undertakesadopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). This statement requires that goodwill and certain other
intangibles no obligationlonger be amortized, but instead be tested for
impairment at least annually. As required by SFAS 142, on December 30,
2001 the Company reclassified approximately $1,089 of assembled
workforce related intangible assets into goodwill. In connection with
the SFAS No. 142, transitional goodwill impairment evaluation, the
Company was required to update publiclyperform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption, and
has determined that no transitional loss exists.
Effective December 30, 2001, Innoveda adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS 121, and the accounting and reporting
provisions of APB 30, for the disposal of a segment of a business. This
statement applies to the Company's intangible assets that are being
amortized. These intangible assets include purchased technology, patents
and trademarks. There was no effect of adopting SFAS 144 on the Company's
financial statements.
Net loss and loss per share for the quarters ended March 30, 2002 and March
31, 2001 adjusted to exclude amortization expense is as follows:
First Quarter Ended
------------------------
March 30, 2002 March 31, 2001
--------- ---------
Reported net loss $ (3,061) $ (2,107)
Add back: goodwill amortization -- 512
Add back: intangible workforce amortization -- 268
--------- ---------
Adjusted net loss $ (3,061) $ (1,327)
========= =========
Basic and diluted loss per share
Reported net loss $ (0.08) $ (0.05)
Goodwill amortization $ -- $ 0.01
Intangible workforce amortization $ -- $ 0.01
--------- ---------
Adjusted net loss $ (0.08) $ (0.03)
========= =========
7
1. BASIS OF PRESENTATION (CONTINUED)
All of the Company's other acquired intangible assets are subject to
amortization. There were no material acquisitions of intangible assets
during the first quarter of fiscal 2002. Intangible assets amortization
expense was $2,116 for the first quarter ending March 30, 2002. The
components of the intangible assets were as follows:
First Quarter Ended
March 30, 2002
-------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Value
------- ------- -------
Amortized intangible assets
Patents and trademarks $ 1,486 $ 452 $ 1,034
Purchased technology 59,430 38,025 21,405
------- ------- -------
Total $60,916 $38,477 $22,439
======= ======= =======
Goodwill $ 2,040
-------
Total intangible assets $24,479
=======
Amortization of intangible assets is expected to be approximately $7,450
in fiscal 2002, $6,613 in fiscal 2003, $5,861 in fiscal 2004 and $4,390
in fiscal 2005.
2. EARNINGS PER SHARE
Basic earnings per share is calculated using weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares plus the effect, if
dilutive, of outstanding stock options using the treasury stock method.
First Quarter Ended
-------------------------
March 30, March 31,
2002 2001
-------- --------
Net Loss $ (3,061) $ (2,107)
======== ========
Weighted average number of
common shares - Basic 40,035 39,036
======== ========
Weighted average number of
common and potential common
shares - Diluted 40,035 39,036
======== ========
Net loss per share:
Basic $ (0.08) $ (0.05)
======== ========
Diluted $ (0.08) $ (0.05)
======== ========
For the three months ended March 30, 2002 and March 31, 2001, there were
4,586 and 8,363 anti-dilutive common shares, respectively, not included
in the calculation.
8
3. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision-maker, or decision-making group, in making decisions on
how to allocate resources and assess performance. The Company's chief
operating decision-makers, as defined under SFAS No. 131, is its executive
management team.
The Company views its operations and manages its business as principally
one segment with three distinct product groups: Printed Circuit Board
Design ("PCB"), System Level Design ("SLD"), and Electromechanical Design
("EM"). Revenues for each of the categories for the first quarters of 2002
and 2001 are as follows:
First Quarter Ended
March 30, 2002
------------------------------------------------------
Printed Electro-
Circuit Board System Level Mechanical
Design Design Design Consolidated
------- ------ ---- -------
Revenue:
Software $ 4,260 $1,349 $120 $ 5,729
Services and other 6,916 2,494 568 9,978
------- ------ ---- -------
Total revenue $11,176 $3,843 $688 $15,707
======= ====== ==== =======
First Quarter Ended
March 30, 2001
------------------------------------------------------
Printed Electro-
Circuit Board System Level Mechanical
Design Design Design Consolidated
Revenue:
Software $10,928 $3,898 $555 $15,381
Services and other 7,787 3,747 343 11,877
------- ------ ---- -------
Total revenue $18,715 $7,645 $898 $27,258
======= ====== ==== =======
9
3. BUSINESS SEGMENTS AND GEOGRAPHIC DATA (CONTINUED)
Revenue consists of software sales, maintenance, and services. Net revenue
by geographic region (in thousands) and as a percentage of total revenue
for each region is as follows:
First Quarter Ended
-------------------------
March 30, March 31,
2002 2001
------- -------
Revenue:
North America $10,835 $18,422
Europe 2,563 4,340
Japan 1,731 2,016
Other 578 2,480
------- -------
Total Revenue $15,707 $27,258
======= =======
As a percentage of Total Revenue
North America 69% 68%
Europe 16% 16%
Japan 11% 7%
Other 4% 9%
------- -------
Total 100% 100%
======= =======
4. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
First Quarter Ended
-------------------------
March 30, March 31,
2002 2001
------- -------
Net loss $(3,061) $(2,107)
Foreign currency translation adjustments 41 (364)
Fair value adjustment of interest rate swap 62 --
------- -------
Comprehensive loss $(2,958) $(2,471)
======= =======
10
5. DEBT
Innoveda has a credit facility with a commercial bank consisting of a
$0.3 million revolving line of credit ("Line of Credit") and a $4.9
million term loan as of March 30, 2002 (the "Term Loan") (together, the
"Credit Facility").
For the fiscal quarter ended March 30, 2002, the Company did not meet
certain financial covenants under the Credit Facility. The Company's
failure to meet these financial covenants constitutes an event of
default under the Credit Facility, allowing the commercial bank to
declare all obligations of the Company under the Credit Facility due and
payable in full. On April 23, 2002, the Company entered into a
forbearance agreement with the commercial bank under which the
commercial bank agreed to forbear from exercising its rights and
remedies under the Credit Facility until at least May 21, 2002. The
commercial bank's forbearance, as provided for in the forbearance
agreement, is conditioned upon the absence of any forward-lookingadditional events of
default under the Credit Facility.
The forbearance agreement provides that the interest rate under the Credit
Facility be increased to be equal to the commercial bank's prime rate plus
3% and that all of the Company's obligations under the Credit Facility are
due and payable in full on the earlier of August 15, 2002 or the closing of
the transactions contemplated by the Agreement and Plan of Merger dated
April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger
Corporation and Innoveda, Inc. (See Note 7).
Under the Credit Facility, the Company is required to make a principal
payment on the Term Loan of $1,000 in the second quarter of fiscal 2002 and
another Term Loan payment of $1,000 at the beginning of the third quarter
of fiscal 2002. As amended by the forbearance agreement, the balance of
the Term Loan is due on August 15, 2002.
6. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to significant negative economic
trends, implemented a restructuring and streamlining of Company operations.
IMPAIRMENT OF LONG-LIVED ASSETS
During the third quarter of 2001, the Company wrote down approximately
$32,945 of impaired long-lived assets related to the goodwill, purchased
technology, workforce and customer base associated with the Company's
acquisitions of PADS Software and Summit Design. Based on the declining
historical and forecasted operating results of such intangible assets as
they relate to earlier estimates and the general economic trends of the EDA
industry as a whole, their estimated value to the Company has decreased.
Based on the Company's expectation of future undiscounted net cash flows,
these assets have been written-down to their net realizable value.
RESTRUCTURING COSTS
As a result of the restructuring, the Company recorded charges of $5,271.
The restructuring costs include workforce reductions, closing facilities,
reducing space in other facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately one hundred forty employees across all business functions and
geographic regions. The workforce reductions were substantially completed
by the end of the third quarter of 2001. The Company recorded a workforce
reduction charge of $2,267 relating primarily to severance, fringe benefits
and outplacement services.
11
6. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
The Company also recorded a restructuring charge of $1,511 relating to
lease terminations, non-cancelable lease costs, and excess facility space.
These facility costs relate to business activities that have been exited or
restructured. In addition, the restructuring charge includes an additional
$408 in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1,085 restructuring
charge related to certain fixed assets that became impaired as a result of
the decision to reduce the workforce and close facilities.
The following table indicates payments made against the reserve during
the fiscal quarter ended March 30, 2002.
December 29, 2001 Amount March 30, 2002
Accrual Balance Paid Accrual Balance
---------------- ------ ----------------
Severance and related expenses $ 115 $ 77 $ 38
Lease commitment and related fees 1,218 258 960
Other 207 6 201
------- ------- ------
$ 1,540 $ 341 $1,199
======= ======= ======
All remaining amounts are expected to be paid by the end of fiscal 2002.
7. SUBSEQUENT EVENTS
PROPOSED MERGER
On April 23, 2002, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Mentor Graphics Corporation
("Mentor") and a wholly-owned subsidiary of Mentor ("Merger Sub")
providing for Mentor to acquire all the outstanding shares of Innoveda
for $3.95 per share in cash, for a total purchase price of approximately
$160 million.
Pursuant to the terms of the merger agreement, on April 30, 2002, Merger
Sub commenced a tender offer to purchase all outstanding shares of
common stock of Innoveda subject to certain conditions. The conditions
to the tender offer include the receipt of all necessary government
approvals and the tender, without withdrawal prior to the expiration of
the tender offer, of at least a majority of Innoveda's outstanding
shares of common stock on a fully diluted basis.
12
7. SUBSEQUENT EVENTS (CONTINUED)
The merger agreement contemplates that the tender offer will be followed,
subject to the satisfaction or waiver of certain conditions, by a second
step merger in which those shares of Innoveda's common stock not
tendered in the tender offer will be converted into the right to receive
$3.95 per share in cash. Stockholders representing approximately 39% of
the outstanding shares of Innoveda have entered into support agreements
under which they have agreed, among other things, to tender their shares
in the tender offer and if necessary, to vote their shares in favor of
the proposed merger.
SLD DIVESTITURE
On April 23, 2002, the Company divested certain assets and liabilities
related to its system-level design ("SLD") product group to Divestiture
Growth Capital ("DivestCap"), a technology investment fund.
The Company transferred to DivestCap certain assets related to the SLD
product group, including certain accounts receivable, intellectual
property, furniture and fixtures, contracts and other assets. DivestCap
will also assume certain liabilities related to the SLD product group,
including customer obligations relating to SLD customer contracts.
The Company will record the transaction in the second quarter of fiscal
2002. The Company did not receive any cash proceeds in this transaction.
As of the date of the filing, the Company had not finalized its
accounting for the divestiture, but it does not believe any gain or loss
will be significant.
13
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the condensed
consolidated financial statements madeand related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. OVERVIEW
Innoveda, Inc., a Delaware corporation, was created byThis Item contains forward-looking statements
within the business combinationmeaning of Summit Design, Inc. and Viewlogic Systems, Inc., which was consummated on
March 23, 2000. The merger of Summit Design with Viewlogic was accounted for as
a reverse acquisition as former stockholders of Viewlogic owned a majoritySection 27A of the outstanding stockSecurities Act of Summit subsequent1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties.
Actual results may differ materially from those included in such forward-looking
statements. Factors which could cause actual results to the business combination. For
accounting purposes, Viewlogic is deemed to have acquired Summit Design. On
September 22, 2000, Innoveda completed its acquisitiondiffer materially
include those set forth under "Additional Risk Factors that Could Affect
Operating Results and Market Price of PADS Software, Inc.
Accordingly, all financial information presented herein includes the results for
Viewlogic for the entire period, the results of Summit from March 24, 2000Stock" commencing on page 25, as well as
those otherwise discussed in this section and PADS from September 22, 2000.elsewhere in this Quarterly Report
on Form 10-Q. See "Important Note About Forward-Looking Statements" above.
OVERVIEW
Innoveda operates in the United States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
technical support and consulting services for those software tools. Innoveda
currently markets and sells its products worldwide through multiple distribution
channels, including independent distributors, value-added resellers, direct
sales and telesales.
12PROPOSED MERGER
On April 23, 2002, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Mentor Graphics Corporation ("Mentor") and a
wholly-owned subsidiary of Mentor ("Merger Sub") providing for Mentor to
acquire all of the outstanding shares of Innoveda for $3.95 per share in
cash, for a total purchase price of approximately $160 million.
Pursuant to the terms of the merger agreement, on April 30, 2002, Merger Sub
commenced a tender offer to purchase all outstanding shares of common stock
of Innoveda subject to certain conditions. The conditions to the tender offer
include the receipt of all necessary government approvals and the tender,
without withdrawal prior to the expiration of the tender offer, of at least a
majority of Innoveda's outstanding shares of common stock on a fully diluted
basis.
The merger agreement contemplates that the tender offer will be followed,
subject to the satisfaction or waiver of certain condition, by a second step
merger in which those shares of Innoveda's common stock not tendered in the
tender offer will be converted into the right to receive $3.95 per share in
cash. Stockholders representing approximately 39% of the outstanding shares
of Innoveda have entered into support agreements under which they agreed,
among other things, to tender their shares in the tender offer and if
necessary, to vote their shares in favor of the proposed merger.
14
SLD DIVESTITURE
On April 23, 2002, the Company divested certain assets and liabilities
related to its system-level design ("SLD") product group to Divestiture
Growth Capital ("DivestCap"), a technology investment fund.
The Company transferred to DivestCap certain assets related to the SLD
product group, including certain accounts receivable, intellectual property,
furniture and fixtures, contracts and other assets. DivestCap will also
assume certain liabilities related to the SLD product group, including
customer obligations relating to SLD customer contracts.
The Company will record the transaction in the second quarter of fiscal 2002.
The Company did not receive any cash proceeds in this transaction. As of the
date of the filing, the Company had not finalized its accounting for the
divestiture, but it does not believe any gain or loss will be significant.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to bad debts, intangible assets, income taxes, financing
operations, restructuring, long-term service contracts, employee benefits, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified below the accounting policies that we believe are most
critical to our business operations and are discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results.
15
OUR CRITICAL ACCOUNTING POLICIES ARE AS FOLLOWS:
o Revenue recognition
o Allowance for doubtful accounts
o Valuation of long-lived assets
o Accounting for income taxes
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition," as amended by SOP 98-9,
and Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements"
Software revenue is recognized upon the shipment of the product provided that
persuasive evidence of an arrangement exists, the arrangement fee is fixed and
determinable and collection is probable. For arrangements involving multiple
elements, the arrangement fee is allocated to each element based on
vendor-specific objective evidence ("VSOE") of the fair value of the various
elements. VSOE of fair value is determined based on the prices at which the
elements are sold separately. If VSOE of fair value exists for all undelivered
elements but not for the delivered element, the portion of the arrangement fee
allocated to the delivered element is determined using the residual method. If
VSOE of fair value does not exist for all of the undelivered elements, the
arrangement fee is recognized ratably over the term of the arrangement. In
determining VSOE, management considers several factors which include product and
service price lists, historical transactions with similar terms and conditions,
and interpretation of contracts and agreements. If any of these factors were to
be misinterpreted, the result could be an error in determining which period
revenue should be recognized.
For term licenses of one year or less, which include post contract customer
support, revenue is recognized ratably over the term of the agreement, unless
the only support provided is telephone support, in which case the entire
arrangement fee is recognized at the beginning of the term.
Revenue from maintenance and support contracts is deferred and recognized
ratably over the term of the service period. Revenue from training and
consulting is recognized as the related services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts, which reflects our
estimate of the amounts owed by customers that customers will be unable to pay.
Management performs ongoing credit evaluations of its customers' financial
condition and limits the amount of customer credit when deemed necessary. The
Company bases its decision to extend credit to customers on a variety of factors
including ratings from a credit reporting bureau, bank and financial statements
provided by customers, and historical payment history of existing customers.
16
However, if the financial condition of our customers deteriorates and they are
not able to make payments in excess of our estimates of our allowance, then we
may need to increase our allowance for doubtful accounts which would adversely
impact our ability to collect cash, which could adversely impact operations. We
believe that the current estimate of the allowance for doubtful accounts
recorded as of March 30, 2002, adequately covers any potential credit risks.
VALUATION OF LONG-LIVED ASSETS
Effective December 30, 2001, Innoveda adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS 121, and the accounting and reporting provisions of APB 30,
for the disposal of a segment of a business. This statement applies to the
Company's intangible assets that are being amortized. These intangible assets
include purchased technology, patents and trademarks.
The Company would recognize an impairment loss if the carrying amount of these
assets exceeds their fair value. The carrying amount of these assets is tested
for impairment when events or circumstances indicate that the carrying amount
may not be recoverable. The following are examples, but not limited to, such
events or changes in circumstances:
o significant underperformance relative to expected historical or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
If an impairment review is indicated, the review includes an analysis of the
estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted
net cash flows are insufficient to recover the carrying value of the assets over
their estimated useful lives, we record an impairment charge in the amount by
which the carrying value of the assets exceeds their fair value. Fair value is
determined generally based on discounted cash flows.
If the Company were to incorrectly estimate the carrying value and estimated
useful life of its long-lived assets, it may incur an additional impairment
charge that would impact net income.
Effective December 30, 2001, Innoveda adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). This
statement requires that goodwill and certain other intangibles no longer be
amortized, but instead be tested for impairment at least annually.
17
The Company will test for goodwill impairment at least annually or more
frequently if events or circumstances indicate that the asset may be impaired.
If the fair value of the business segment, for which goodwill was recorded, is
less than the recorded value, then the amount of the impairment loss will be
recognized in accordance with this statement.
There was no impairment of goodwill or other intangible assets upon adoption
of SFAS 142 and SFAS 144.
ACCOUNTING FOR INCOME TAXES
The Company prepares estimates of income taxes in each of the jurisdictions in
which the Company operates when preparing its consolidated financial statements.
This includes estimating current tax exposure together with a review and
assessment of temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheet. The Company then assesses the likelihood
that its deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we include an expense within the tax provision in the
statement of operations for the period reported.
Significant management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets.
In the event that actual results differ from these estimates or the Company
adjusts these estimates in future periods we may need to establish an additional
valuation allowance which could impact our financial position and results of
operations.
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenue of certain items in Innoveda'sour condensed consolidated statements of operations:
FOR THE QUARTER ENDED
----------------------------------
MARCHFirst Quarter Ended
-------------------
March 30, March 31,
APRIL 1,2002 2001
2000
--------- ----------- ---
Revenue:
Software 36% 56% 53%
Services and other 44 47
------ ------64% 44%
--- ---
Total Revenue 100 100
------ ------
Cost100% 100%
--- ---
Costs and expenses:
Cost of software 6 108% 6%
Cost of services and other 10 1115% 10%
Sales and marketing 41 4551% 41%
Research and development 28 2431% 28%
General and administrative 8 99% 8%
Amortization of intangibles and stock compensation 18 4
In-process research and devleopment -- 17
Non-recurring charges -- 16
------ ------13% 18%
--- ---
Total operating expenses 111 136
------ ------127% 111%
--- ---
Loss from operations (11) (36)-27% -11%
Other expense, net -2% --
(3)
------ --------- ---
Loss before benefit for income taxes (11) (39)
------ -------29% -11%
--- ---
Income tax benefit (3) (8)
------ -------9% -3%
--- ---
Net loss (8)% (31)%
====== ======-20% -8%
=== ===
19
QUARTERS ENDED MARCH 30, 2002 AND MARCH 31, 2001
AND APRIL 1, 2000SOFTWARE REVENUE
For the quarter ended March 30, 2002, software license revenue decreased 62% to
$5.7 million from $15.4 million for the quarter ended March 31, 2001. The
decrease in software license revenue is primarily attributable to the impact of
the global economic downturn, particularly in the telecommunications and
computer industries. Beginning in the second quarter of fiscal 2001, software
license revenue was negatively affected as discretionary spending by customers
was reduced, causing delays and postponement of orders. Also, the Company's
restructuring in August of 2001 has contributed to the decline, as the Company
has fewer sales and marketing resources and is focused on selling a narrower set
of products. The Company has also experienced significant declines in
distributor sales in the Japan and Asia regions. During the quarter, the
Company received no software revenue from one of its distributors in Japan.
The Company recently terminated its distribution agreement with this
distributor. If the transactions contemplated by the Merger Agreement are not
consummated, the Company must seek distribution arrangements for the products
that were previously sold by this distributor. Until such distribution
arrangements are in place, the Company expects lower revenues in Japan.
Our products have been organized into three distinct product groups: Printed
Circuit Board Design ("PCB"), System Level Design ("SLD"), and
Electromechanical Design ("EM"). For the quarter ended March 30, 2002, PCB,
SLD, and EM accounted for $4.3 million or 74%, $1.3 million or 24% and $0.1
million or 2%, respectively, of software license revenue. In April 2002, we
divested our SLD business unit to Divestiture Growth Capital, a technology
investment fund. See "Overview" above. For the quarter ended March 31, 2001,
total revenue increased 89% to $27.3PCB, SLD, and EM accounted for $10.9 million from $14.4or 71%, $3.9 million for the quarter ended April 1, 2000. The increase
in revenue consistedor 25% and
$0.6 million or 4%, respectively, of a 102% increase in software license revenue to $15.4
million from $7.6 million, and an increase of 76% in services and other
revenue to $11.9 million from $6.8 million. These increases were primarily
due to additional sales related to the System Level Design ("SLD") product
line acquired as part of the acquisition of Summit Design in March 2000, and
printed circuit board ("PCB") product sales acquired as part of the
acquisition of PADS Software in September 2000. Additionally, the Company
realized increased consulting revenue as a result of an increased focus in
this area during the first quarter of 2001 versus the same period in 2000.
13
revenue.
As a percentage of total revenue, software license revenue increaseddecreased to 36% for
the quarter ended March 30, 2002 from 56% for the quarter ended March 31, 20012001.
SERVICES AND OTHER REVENUE
For the quarter ended March 30, 2002, services and other revenue decreased 16%
to $10.0 million from 53%$11.9 million for the quarter ended March 31, 2001. The
decrease is primarily due to a declining maintenance revenue stream related to
the drop in software license revenue. In addition, maintenance revenue decreased
relating to a decline in customers renewing maintenance contracts on existing
software. Consulting and training revenue remained substantially constant
quarter-to-quarter.
As discussed above, our products have been organized into three distinct
product groups: PCB, SLD, and EM. For the quarter ended March 30, 2002, PCB,
SLD, and EM accounted for $6.9 million or 69%, $2.5 million or 25% and $0.6
million or 6%, respectively, of services and other revenue. In April 1, 2000.
Services2002, we
divested our SLD business unit to Divestiture Growth Capital, a technology
investment fund. See "Overview" above. For the quarter ended March 31, 2001,
PCB, SLD, and EM accounted for $7.8 million or 66%, $3.8 million or 32% and
$0.3 million or 2%, respectively, of services and other revenue.
As a percentage of total revenue, services and other revenue decreasedincreased to 64%
for the quarter ended March 30, 2002 from 44% for the quarter ended March 31,
2001
from 47% for the quarter ended April 1, 2000.2001.
20
COST OF SOFTWARE
Cost of software revenue consists primarily of the cost of product media,
documentation, duplication, packaging,manufacturing, order
processing, distributions and royalties. Cost of software revenue increased 16%decreased 30%
to $1.2 million for the quarter ended March 30, 2002 from $1.8 million for the
quarter ended March 31, 2001 from $1.5
million for the quarter ended April 1, 2000. This increase2001. The decrease was primarily due to increased salary and relatedthe decreased
royalty costs consistent with the decrease in software license revenue, along
with the retirement of additional headcount resulting fromproducts with large royalty costs as part of the
acquisitions of Summit DesignCompany's restructuring announced in March 2000 and PADS Software in September 2000,
and toAugust 2001. To a lesser extent, increased royalty costs relatedthe
decrease relates to increased software
license revenue.the cost savings realized from the August 2001 restructuring
and other cost reduction activities.
As a percentage of total revenue, cost of software decreasedincreased to 8% for the
quarter ended March 30, 2002 from 6% for the quarter ended March 31, 2001 from 10% for the quarter ended April 1, 2000,
primarily due to economies of scale resulting from Innoveda's acquisitions of
Summit Design and PADS Software.2001.
COST OF SERVICES AND OTHER
Cost of services and other consists primarily of costs of providing technical
support, education and consulting services. Cost of maintenanceservices and services
increased 67%other decreased
9% to $2.4 million for the quarter ended March 30, 2002 from $2.6 million for
the quarter ended March 31, 2001 from $1.6
million for the quarter ended April 1, 2000. This2001. The decrease was primarily due to increased
salary and related costs of additional headcount resultingthe cost
savings realized from the acquisitions
of Summit Design in March 2000August 2001 restructuring and PADS Software in September 2000, as well as
increased staffing and related costs in our consulting organization necessary to
build the infrastructure to support expansion in that area of our business.other cost reduction
activities.
As a percentage of total revenue, cost of maintenanceservices and services decreasedother increased to 15%
for the quarter ended March 30, 2002 from 10% for the quarter ended March 31,
2001 from 11% for the quarter ended April 1,
2000.2001.
SALES AND MARKETING
Sales and marketing expenses increased 75%decreased 29% to $8.0 million for the quarter ended
March 30, 2002 from $11.3 million for the quarter ended March 31, 2001 from $6.5 million for the quarter ended April 1, 2000. This2001. The
decrease was primarily due to increased salary and related costs of additional headcount
resultingthe cost savings realized from the acquisition of Summit Design in March 2000August 2001
restructuring, including workforce reductions and PADS Software
in September 2000. Innovedafacility shutdowns. The
decrease also incurred increased costs associated with
variable compensation plans as a result of the increase in revenue.
Additionally,relates to limiting discretionary spending on marketing spending for trade shows, direct mail
solicitationsprograms,
travel, and advertising campaigns designed to increase awareness of the
Innoveda name, and marketing of our product lines resulted in higher sales and
marketing expenses.meetings.
As a percentage of total revenue, sales and marketing expenses decreasedincreased to 51%
for the quarter ended March 30, 2002 from 41% for the quarter ended March 31,
2001 from 45% for the quarter ended April 1,
2000.
14
2001.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 117%consist primarily of costs related to product
development. Research and development expenses decreased 36% to $4.9 million for
the quarter ended March 30, 2002 from $7.7 million for the quarter ended March
31, 2001 from $3.5 million for the quarter ended April 1, 2000. This2001. The decrease was primarily due to increased salary and related costs of additional headcount
resultingthe cost savings realized from the
acquisition of Summit Design in March 2000August 2001 restructuring, including workforce reductions and PADS Software
in September 2000. The increase wasfacility
shutdowns. In addition, the decrease also attributablerelates to the development of new
products, including Visual Elite, a new SLD product that provides added
functionality to existing SLD tools, FabFactory, a tool for PCB fabricators,limiting discretionary
spending on outside consulting, travel, and TransOVM and TransBridge, for the design of complex wiring harnesses for large
electrical systems. The Company also released the latest version of the CAM350
PCB design tool, which further integrates the design and manufacturing tasks in
the PCB design flow.temporary help.
As a percentage of total revenue, research and development expenses increased to
31% for the quarter ended March 30, 2002 from 28% for the quarter ended March
31, 2001 from 24% for the quarter ended April 1,
2000.2001.
The amount of software development costs capitalized for the quarterquarters ended
March 30, 2002 and March 31, 2001 was approximately $0.3 million or 3%6% and $0.3
million or 4% of research and development expense, for that period, and for the quarter ended April 1, 2000 was $0.3
million or 9% of research and development expense for that period.respectively.
21
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of the administrative,
finance, human resources, legal and information systems departments of
Innoveda.departments. General and
administrative expenses increased 72%decreased 37% to $1.4 million for the quarter ended
March 30, 2002 from $2.2 million for the quarter ended March 31, 2001 from $1.3 million for the quarter ended April
1, 2000. This increase2001. The
decrease was primarily a result of Innoveda building its general
and administrative infrastructure to support the growth in revenue of Innoveda's
products and services and related acquisitions. To a lesser extent, the increase
is due to expenses associated with becoming a publicly traded company.the cost savings realized from the August 2001
restructuring, including workforce reductions and facility shutdowns. In
addition, the decrease also relates to limiting discretionary spending on
outside consulting and temporary help, recruiting costs, telephone, and office
expenses.
As a percentage of total revenue, general and administrative expenses decreasedincreased
to 9% for the quarter ended March 30, 2002 from 8% for the quarter ended March
31, 2001 from 9% for the quarter ended April
1, 2000.2001.
AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION
Amortization expense increaseddecreased 58% to $4.8$2.0 million in the quarter ended March
31,
200130, 2002 from $0.6$4.8 million for the quarter ended April 1, 2000,March 31, 2001. This decrease
in amortization expense was mainly due to the impairment in intangibles recorded
during the third quarter of 2001. The Company wrote down approximately $32.9
million of impaired long-lived assets related to the goodwill, purchased
technology, workforce and customer base primarily associated with the
acquisition of Summit Design and to a lesser extent the acquisition of PADS
Software. Based on the declining historical and forecasted operating results of
such intangible assets as they relate to earlier estimates and the general
economic trends of the EDA industry as a resultwhole, their estimated value to the
Company had decreased. Based on the Company's expectation of future discounted
net cash flows, these assets were written-down to their net realizable value.
Additionally, during the increase inquarter ended March 30, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). This statement requires that goodwill and
certain other intangibles from acquisitions. Innoveda hadno longer be amortized, but instead be tested for
impairment at least annually. As such, there was no amortization recorded for
goodwill during the quarter ended March 30, 2002, compared to $0.5 million of
goodwill amortization that was recorded during the quarter ended March 31,
2001.
There were $24.5 million and $69.3 million in intangible assets as of March 30,
2002 and March 31, 2001, consistingrespectively. Intangible assets as of March 30, 2002
consisted primarily of purchased technology, goodwill workforce, customer base and trademarks, resulting
from the Summit Design business combinationacquisition in March 2000, and the PADS Software acquisition
in September 2000, and the remainingacquisition of Transcendent Design Technology, Inc.
in 1999. As of March 31, 2001, intangible assets from the OmniView and
Transcendent transactions described below. Innoveda had $40.8 million in
intangible assets as of April 1, 2000, consistingconsisted of purchased
technology, goodwill workforce and customer base resulting primarily from the Summit
Design acquisition, along
with certainthe PADS Software acquisition, assets acquired from
OmniView, Inc. in March 1999, and purchased
technology related to the acquisitionTranscendent acquisition.
Amortization of Transcendent Design Technology, Inc. in
August 1999. Innoveda's intangible assets arestock compensation remained constant at $0.1 million for the
quarters ended March 30, 2002 and March 31, 2001. Amortization of stock
compensation is being amortized to expenseusing the straight-line method over periods ranging from three to seven4 years.
1522
RESTRUCTURING CHARGES RELATED TO SUMMIT MERGER
During the quarter ended April 1, 2000, Innoveda recorded approximately $2.2
million in restructuring charges relating to the Summit merger. This primarily
included severance and other costs relating to the consolidation of duplicative
facilities.OTHER INCOME (EXPENSE), NET
Other costs relating to property and equipment lease contracts (less
any applicable sublease income) after the properties were abandoned, lease
buyout costs, restoration costs associated with certain lease arrangements, and
costs to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure the Innoveda sales and
services business in Japan as a result of an exclusive distributor agreement
executed with Marubeni Solutions Corporation during the first quarter of fiscal
2000. Charges associated with the Japanese reorganization include severance and
benefit continuance for approximately 14 employees, costs associated with office
closings and subsequent lease termination, and other facility and exit related
costs.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In conjunction with the business combination of Summit and Viewlogic in the
quarter ended April 1, 2000 Innoveda charged to expense $2.4 million
representing acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use, as
determined by an independent appraiser.
OTHER EXPENSE
Other expenseincome (expense) consists of the net of interest expense relating to
Innoveda'sour term loan and revolving credit line, interest income from cash and cash
equivalent balances, and gains and losses from foreign currency exchange rate differencestransactions
resulting from foreign operations conducted in local currencies. Other
expense decreased by $0.4increased to $0.3 million to $0.02 million forin the first quarter ended March 31, 200130, 2002 from
$0.4 million
for the first quarter ended April 1, 2000. This decrease is primarily a result
of an increase in interest income from cash acquired as part of the Summit
Design business combination, offset partially by a decrease in interest expense
as Innoveda paid down a portion of its long term debt obligations.
INCOME TAX BENEFIT
The benefit for income taxes decreased by $0.2 million, to $1.0$0.02 million for the quarter ended March 31, 2001 from $1.22001. Other expense increased
primarily as a result of a sharp decrease in interest income due to the
reduction of cash and cash equivalents, partially offset by the decrease in
interest expense due to the pay down of debt obligations.
BENEFIT FOR INCOME TAXES
We recorded a benefit for income taxes of $1.4 million and $1.0 million for the
quarterquarters ended April 1,
2000 .March 30, 2002 and March 31, 2001, respectively. Quarterly tax
provisionsbenefits are based on the estimated effective tax ratesrate of 37.5% and 36% for
the fiscal years.years 2002 and 2001, respectively.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Innoveda finances its operations primarily through its cash balance and cash
generated from operations and short-term borrowings available from a revolving credit line. As
ofoperations. At March 31, 2001, Innoveda30, 2002, we had approximately $19.5$8.6 million in cash and
cash equivalentsequivalents. We have a Credit Facility with a commercial bank, which
includes a Term Loan and working capitala Line of approximately $3.9 million. Innoveda has a
$6.0 million revolving line of credit with Fleet Bank. As of April 30, 2001,
there was no balance outstanding under this line of credit. Innoveda has a term
loan with Fleet Bank, with approximately $7.5Credit. The Term Loan had $4.9 million
outstanding as of AprilMarch 30, 2001.2002. Borrowings under the credit facilityCredit Facility are
secured by substantially all of Innoveda'sour assets. The credit facilityCredit Facility contains
limitations on additional indebtedness and capital expenditures, and includes
financial covenants, which include but are not limited to the maintenance of
minimum levels of profitability interestand deferred revenue, and minimum working
capital and debt service coverage ratios and maximum leverage
ratios and minimum working capital ratios.
To avoidFor the fiscal quarter ended March 30, 2002, the Company did not meet certain
financial covenants under the Credit Facility. The Company's failure to meet
these financial covenants constitutes an event of default under this credit
facility, Innoveda must remainthe Credit
Facility, allowing the commercial bank to declare all obligations of the Company
under the Credit Facility due and payable in compliancefull. On April 23, 2002, the
Company entered into a forbearance agreement with these limitationsthe commercial bank under
which the commercial bank agreed to forbear from exercising its rights and
covenantsremedies under the Credit Facility until at least May 21, 2002. The commercial
bank's forbearance, as provided for in the forbearance agreement, is conditioned
upon the absence of any additional events of default under the Credit Facility.
The forbearance agreement provides that the interest rate under the Credit
Facility be increased to be equal to the commercial bank's prime rate plus 3%
and make all required repayments or Innoveda must obtain replacement
financing. Innoveda was in compliance withthat all of its debt covenantsthe Company's obligations under the Credit Facility are due and
payable in full on the earlier of August 15, 2002 or the closing of the
transactions contemplated by the Agreement and Plan of Merger dated April 23,
2002 by and among Mentor Graphics Corporation, Indiana Merger Corporation and
Innoveda, Inc.
23
As of April 29, 2002, the Company had approximately $3.7 million in cash. The
Company's outstanding obligations under the Credit Facility as of March
31, 2001.
16
April 29,
2002 were $3.8 million. The commercial bank may not extend its forbearance
from exercising its rights and remedies under the Credit Facility beyond May
21, 2002. In addition, the Company has a principal payment on the Term Loan
of $1.0 million due at the beginning of the third fiscal quarter and the
remaining balance of $2.7 million is now due and payable on August 15, 2002.
The Company must secure alternative financing to pay its outstanding
obligations under the Credit Facility in the event the acquisition of the
Company by Mentor does not close prior to those obligations becoming due and
payable. The expiration date of the tender offer commenced by Merger Sub on
April 30, 2002 is 12:00 Midnight, New York City time, on Tuesday, May 28,
2002, subject to extension under certain circumstances. As noted above, the
tender offer is subject to certain conditions, including the receipt of all
necessary government approvals and the tender, without withdrawal prior to
the expiration of the tender offer, of at least a majority of Innoveda's
outstanding shares of common stock on a fully diluted basis.
For the three months ended March 31, 2001,30, 2002, net cash provided by operating
activities was approximately $1.3$2.0 million. This was primarily due to a net loss
of $2.1 million, offset by non-cash
depreciation and amortization, of
approximately $5.9 million, a decreasedecreases in accounts receivable, of $5.4 million,
an $0.8 million increase in deferred income taxesprepaid and
other current assets and a decreasefederal tax refund of approximately $1.2 million,
partially offset by the net loss and decreases in accounts payable, of approximately $0.2 million and a decrease inother
accrued liabilities of
$5.8 million.and deferred revenue. Net cash used byin investing activities
for the three months ended March 31, 200130, 2002 was approximately $1.4$0.4 million,
primarily due to the purchasecapitalization of property and
equipment.
Innoveda considerssoftware costs. Net cash used in
financing activities was approximately $0.8 million for the three months ended
March 30, 2002, primarily due to the repayment of principal on debt, repayment
of capital lease obligations, partially offset by proceeds from exercises of
employee stock options.
We consider all highly liquid debt instruments with a remaining maturity of
three months or less when purchased to be cash equivalents. At March 30, 2002
and March 31, 2001, and April 1, 2000, substantially all of Innoveda's cash and cash equivalents were invested in
interest-bearing deposits and other short-term investments with an original
maturity of three months or less as of the date of purchase. ByPursuant to the
Company's investment policy, of Innoveda's board of directors, all debt instruments must have quality ratings no
lower than an A rating.
Net cash used in financing activities was approximately $1.1 millionOn April 23, 2002, the Company entered into the Merger Agreement providing
for the three months ended March 31, 2001, primarily dueacquisition of the Company by Mentor. If the transactions
contemplated by the Merger Agreement are not consummated, the Company will
need to secure additional financing to repay its outstanding debt
obligations, and to provide working capital. Prior to entering into the
repayment of principal
on debtMerger Agreement, the Company had been evaluating proposals for both a new
credit facility and the repurchase of common stock as discussed below.
On October 19, 2000, Innoveda's board of directors authorized Innoveda to
repurchase up to 2 million shares of its common stock during the period ending
October 31, 2001. The repurchased shares will be held as treasury sharesother financing alternatives and used in company stock option plans, employee stock purchase plans and for
general corporate purposes. As of April 30, 2001, Innoveda had purchased 550,606
shares of common stock at an aggregate cost of $1,663,371 under its stock
re-purchase program.
Innoveda believes it could secure
new financing if required. We believe that itsour current cash and cash
equivalents, when combined with the net proceeds of prospective additional
financing and cash generated from operations and amounts available under the revolving line of
credit, will satisfy Innoveda's anticipated working capital and other cash
requirements for at least the next 12 months. However, our liquidity and
capital requirements will depend upon numerous factors, including, the
availability of additional financing on terms acceptable to us or at all, the
availability of additional financing within the required time constraints,
market acceptance of our products, the size and timing of customer orders,
product development costs and competitive and economic forces in the
electronic design automation industry. The effects of these factors may cause
our liquidity and capital requirements to vary.
24
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
INNOVEDA IS CURRENTLY IN DEFAULT UNDER ITS CREDIT FACILITY , AND INNOVEDA MAY
NOT BE ABLE TO REPLACE ITS CREDIT LINE OR TERM DEBT.
For the fiscal quarter ended March 30, 2002, the Company did not meet certain
financial covenants under the Credit Facility. The Company's failure to meet
these financial covenants constitutes an event of default under the Credit
Facility, allowing the commercial bank to declare all obligations of the Company
under the Credit Facility due and payable in full. On April 23, 2002, the
Company entered into a forbearance agreement with the commercial bank under
which the commercial bank agreed to forbear from exercising its rights and
remedies under the Credit Facility until at least May 21, 2002. The commercial
bank's forbearance, as provided for in the forbearance agreement, is conditioned
upon the absence of any additional events of default under the Credit Facility.
The Company's outstanding obligations under the Credit Facility as of April
29, 2002 were $3.8 million. The commercial bank may not extend its
forbearance from exercising its rights and remedies under the Credit Facility
beyond May 21, 2002. If the commercial bank extends its forbearance, the
Company is required to make a term loan payment of $1.0 million at the
beginning of the third quarter of fiscal 2002 and the balance is due on
August 15, 2002. The Company must secure alternative financing to pay its
outstanding obligations under the Credit Facility in the event the
acquisition of the Company by Mentor does not close prior to those
obligations becoming due and payable. The expiration date of the tender offer
commenced by Merger Sub on April 30, 2002 is 12:00 Midnight, New York City
time, on Tuesday, May 28, 2002, subject to extension under certain
circumstances. As noted above, the tender offer is subject to certain
conditions, including the receipt of all necessary government approvals and
the tender, without withdrawal prior to the expiration of the tender offer,
of at least a majority of Innoveda's outstanding shares of common stock on a
fully diluted basis.
If the transactions contemplated by the Merger Agreement entered into by the
Company on April 23, 2002 are not consummated, in addition to requiring
additional financing to pay its outstanding debt obligations, the Company will
require additional financing for working capital. We may not be able to secure
additional financing on terms acceptable to us or at all or within the time
constraints we require. In addition, any future financing could result in
substantial dilution to our stockholders.
INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves:
o rapid technological change;
o short product life cycles;
o fluctuations in manufacturing capacity; and
o pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
and research and development budgets often fall, and the number of design
projects often decreases. Because Innoveda's sales depend upon capital spending
trends, research and development budgets and new design projects, negative
factors affecting the electronics industry could have a material adverse effect
on Innoveda's business, financial condition, results of operations, or cash
flows.
25
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE SUMMITDEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND VIEWLOGIC AND/OR THE
ACQUISITION BY INNOVEDA OF PADS, THE ANTICIPATED ADVANTAGES OF THEEVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS COMBINATION BETWEEN SUMMIT AND VIEWLOGIC AND/OR INNOVEDA AND PADS MAY NOT BE
REALIZED, IN FULL, IF AT ALL.WILL SUFFER.
If Innoveda was formedcannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the business combinationemergence
of Viewlogic Systems, Inc.,new industry standards can render existing products obsolete and
Summit Design, Inc.unmarketable. In addition, customers in March 2000.the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Innoveda's future success will depend upon its ability to
enhance its current products, develop and introduce new products that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of Innoveda's customers. Innoveda also acquired PADS Software, Inc.may not
succeed in September 2000. The integrationdeveloping and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of Summit Design and Viewlogic requiresthese products. Innoveda's products may not
adequately meet the dedication of Innoveda management resources. This may distract management's
attention from the effort to integrate PADS into Innoveda and from the
managementrequirements of the day-to-day business of Innoveda. Employee uncertaintymarketplace and lack
of focus during integration may also disrupt the business of Innoveda. Retention
of key employees by Innoveda has been, and will remain, critical to ensure
continued advancement, development and support of the Company's technologies and
ongoing sales and marketing efforts. During the integration phase, competitors
may intensify their efforts to recruit key employees. The inability to
successfully integrate Summit Design and Viewlogic and/or Innoveda and PADS and
to retain key technical, sales or marketing personnel after the Summit Design
and Viewlogic combination and the merger of Innoveda and PADS would adversely
affect the combined company's business.
17achieve market
acceptance.
26
VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE AND
FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantlywill likely continue to fluctuate in certain quarters.the future. These fluctuations resultedmay
result from several factors, including, among others:
o the size and timing of orders;
o large one-time charges incurred as a result of an acquisitionrestructurings, acquisitions
or consolidation;consolidations;
o seasonal factors;
o the rate of acceptance of new products;
o product, customer and channel mix;
o lengthy sales cycles;
and
o level of sales and marketing staff.
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
o corporate acquisitions and consolidations and the integration of acquired
entities and any resulting large one-time charges;staff;
o the timing of new product announcements and introductions by Innoveda and
Innoveda's competitors;
o the rescheduling or cancellation of customer orders;
o the ability to continue to develop and introduce new products and product
enhancements on a timely basis;
o the level of competition;
o purchasing and payment patterns, pricing policies of competitors;
o product quality issues;
o currency fluctuations; and
o general economic conditions.
18
Innoveda believes that period-to-period comparisons of Innoveda's operating
results are not necessarily meaningful. As a result, you should not rely on
these comparisons as indications of Innoveda's future performance. In addition,
Innoveda operates with high gross margins, and a downturn in revenue could have
a significant impact on income from operations and net income. Innoveda's
results of operations could be below investors' and market makers' expectations
in future quarters, which could have a material adverse effect on the market
price of Innoveda's common stock.
27
INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.FORECAST.
Innoveda's revenue is difficult to forecast for several reasons. Innoveda
operates with little product backlog because Innoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, Innoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Innoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. If
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Innoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, Innoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
Innoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Innoveda's
expectations as to future revenue. Because a high percentage of Innoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Innoveda's operating
results.
28
IF THE SYSTEM DESIGN PORTIONMARKET SEGMENTS OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON WHICH
INNOVEDA PRIMARILY FOCUSES DOESDO NOT GROW OR IF INNOVEDA CANNOT INCREASE ITS MARKET SHARE IN
THOSE SEGMENTS, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda focuses on the electro-mechanical and printed circuit board and
system-level design automation(PCB)
markets, while most major competitorselectronic design automation software providers
focus their resources on the application-specific integrated circuit and
integrated circuit design automation markets. Innoveda has adopted this focus
because it believes that the increased complexity of application-specific
integrated circuits and integrated circuit designs, and the resulting
increase in design time, will cause electronic product manufacturers to
differentiate their products at the system and PCB level. If the systemPCB and
electro-mechanical design portionportions of the electronic design automation
industry doesdo not grow, it could have a material adverse effect on Innoveda's
business, financial condition, results of operations or cash flows.
19
INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and Innoveda
expects competition to increase as other electronic design automation companies
introduce products. In the electronic design automation market, Innoveda
principally competes with Mentor Graphics, and Cadence Design Systems, Zuken K.K., Altium, Inc.,
Intercept Technology, DDE, USA., and a number of smallerother firms. Indirectly,
Innoveda also competes with other firms that offer alternative products. These
other firms could also offer more directly competitive products in the future.
Some of these companies have significantly greater financial, technical and
marketing resources and larger installed customer bases than Innoveda. Some of
Innoveda's current and future competitors offer a more complete range of
electronic design automation products.
Innoveda also competes with manufacturers of electronic devices that have
developed or have the capability to internally develop their own electronic
design automation products. Many manufacturers of electronic devices may be
reluctant to purchase services from independent vendors such as Innoveda because
they wish to promote their own internal design departments. In the electronics
design automation industry, Innoveda competes with numerous electronic design
and consulting companies as well as with the internal design capabilities of
electronics manufacturers. Other electronics companies and management consulting
firms continue to enter the electronics design automation industry.
29
Innoveda competes on the basis of various factors including, among others:
o product capabilities;
o product performance;
o price;
o support of industry standards;
o ease of use;
o firsthelping customers get their products to market;market first; and
o customer technical support and service.
Innoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Innoveda's competitors may offer
products with functionality sought by Innoveda's prospective customers and which
differs from those Innoveda offers. In addition, some competitors may achieve a
marketing advantage by establishing formal alliances with other electronic
design automation vendors. Further, the electronic design automation industry in
general has experienced significant consolidation in recent years, and the
acquisition of one of Innoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor. Innoveda may not compete successfully against current
and future competitors, and competitive pressures may have a material adverse
effect on Innoveda's business, financial condition, results of operations, or
cash flows. Innoveda's current and future competitors may develop products
comparable or superior to Innoveda's or more quickly adapt new technologies,
evolving industry trends or customer requirements. Increased competition could
result in price reductions, reduced margins and loss of market share, all of
which could have a material
adverse effect on Innoveda's business, financial condition, results of
operations or cash flows.
20
INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves:
o rapid technological change;
o short product life cycles;
o fluctuations in manufacturing capacity; and
o pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
and research and development budgets often fall, and the number of design
projects often decreases. Because Innoveda's sales depend upon capital spending
trends, research and development budgets and new design projects, negative
factors affecting the electronics industry could have a material adverse effect on Innoveda's business, financial
condition, results of operations or cash flows.
INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Innoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, Innoveda must have timely access
to third party software to perform development and testing of products. Although
Innoveda has established relationships with a variety of electronic design
automation vendors to gain early access to new product information, any of these
parties may terminate these relationships with limited notice. In addition,
these relationships are with companies that are Innoveda's current or potential
future competitors, including Synopsys, Mentor Graphics and Cadence. If any of
these relationships terminate and Innoveda
were unable to obtain, in a timely manner, information regarding modifications
of third party products, Innoveda would not have the ability to modify its
software products to interoperate with these third party products. As a result,
Innoveda could experience a significant increase in development costs, the
development process would take longer, product introductions would be delayed,
and Innoveda's business, financial condition, results of operations or cash
flows could be materially adversely affected.
IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the emergence
2130
of new industry standards can render existing products obsolete and
unmarketable. In addition, customers in the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Innoveda's future success will depend upon its ability to
enhance its current products, develop and introduce new products that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of Innoveda's customers. Innoveda may not
succeed in developing and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products. Innoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
INNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Innoveda's software products may contain errors that may not be detected until
late in the products' life cycles. Innoveda has in the past discovered software
errors in certain of its products and has experienced delays in shipment of
products during the period required to correct these errors. Despite testing by
Innoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Innoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors fails,
Innoveda's business may suffer. Innoveda relies on distributors for licensing
and support of Innoveda's products, particularly in Japan and other parts of
Asia. Innoveda depends on the relationships with its distributors to maintain or
increase sales. Since Innoveda's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. Accordingly, Innoveda depends on the continued viability and
financial stability of these distributors.
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's distributors
may offer products of several different companies, including Innoveda's
competitors. Innoveda's current distributors may not continue to market or
service and support Innoveda's products effectively. Any distributor may
discontinue to sell Innoveda's products or devote its resources to products of
other companies. The loss of, or a significant reduction in, revenue from
Innoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
JAPAN.JAPAN DISTRIBUTION. Innoveda has exclusive distribution agreements with twothree
distributors in Japan, which collectively cover a significant portion of
Innoveda's products in Japan. If eitherany of these distributors terminates its
relationship with Innoveda, it could have a material adverse affect on
Innoveda's business, financial condition, results of operations or cash
flows. 22The Company recently terminated its distribution agreement with one of
its distributors in Japan. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
31
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND ASIA.
International revenue and expenses represent a significant portion of Innoveda's
total revenue and expenses, and Innoveda expects this trend to continue.
International sales and operations involve numerous risks, including, among
others:
o fluctuations in the value of the dollar relative to foreign currencies can
make Innoveda's products and services more expensive in foreign markets or
increase Innoveda's expenses;
o tariff regulations and other trade barriers;
o requirements for licenses, particularly with respect to the export of
certain technologies;
o collectibility of accounts receivable;
o changes in regulatory requirements; and
o difficulties in staffing and managing foreign operations and extended
payment terms.
These factors may have a material adverse effect on Innoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions, and these adverse economic conditions may worsen. Demand for and
sales of Innoveda's products in this region may decrease.
In order to successfully expand international sales, Innoveda may need to
establish additional foreign operations, hire additional personnel and recruit
additional international distributors. This will require significant management
attention and financial resources and could adversely affect Innoveda's
operating margins. In addition, to the extent that Innoveda cannot effect these
additions in a timely manner, Innoveda can only generate limited growth in
international sales, if any. Innoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
32
INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Innoveda's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit additional
employees and train and manage current and future employees. Innoveda expects
any growth to place a significant strain on its operational resources and
systems. Failure to effectively manage any growth would have a material adverse
effect on Innoveda's business, financial condition, results of operations or
cash flows. Innoveda regularly evaluates acquisition opportunities. Innoveda's
future acquisitions, if any, could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, and large one-time charges
which could materially adversely affect Innoveda's results of operations.
Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern, risks
of entering markets in which Innoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Innoveda may not
integrate successfully the operations, personnel or products that have been
acquired or that might be acquired in the future, and the failure to do so could
have a material adverse affect on its results of operations.
23
INNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL AND COORDINATION RISKS.
POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL and Visual Elite products are
located in Israel. Economic, political and military conditions may affect
Innoveda's operations in that country. Hostilities involving Israel, for
example, could materially adversely affect Innoveda's business, financial
condition and results of operations. Innoveda's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants from the government of Israel is subject to Israeli
government restrictions which may limit Innoveda's ability to extract the full
benefit of that technology.
COORDINATION RISKS. In addition, coordination with and management of the Israeli
operations requires Innoveda to address differences in culture, regulations and
time zones. Failure to successfully address these differences could disrupt
Innoveda's operations.
INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED
PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain highly
skilled technical, sales and marketing and management personnel. Innoveda's
business could be seriously harmed if it lost the services of its PresidentChairman of
the Board and Chief Executive Officer, William J. Herman and its President,
Richard G. Lucier, or if it fails to attract and retain other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. Innoveda has in
the past experienced difficulty in retaining and recruiting qualified personnel.
Innoveda may fail to retain its key personnel or attract and retain other
qualified technical, sales and marketing and management personnel in the future.
The loss of any key employees or the inability to attract and retain additional
qualified personnel may have a material adverse effect on Innoveda's business,
financial condition, results of operations or cash flows. Additions of new
personnel and departures of existing personnel, particularly in key positions,
can be disruptive and can result in departures of additional personnel, which
could have a material adverse effect on Innoveda's business, financial
condition, results of operations or cash flows.
IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build and expand its sales and marketing
organizations. Innoveda's future success will depend in part on its ability to
hire, train and retain qualified sales and marketing personnel and the ability
of these new persons to rapidly and effectively transition into their new
positions. Competition for qualified sales and marketing personnel is intense,
and Innoveda may not be able to hire, train and retain the number of sales and
marketing personnel needed, which would have a material adverse effect on its
business, financial condition, results of operations or cash flows.
33
INNOVEDA MUST CONTINUE TO ADD VALUE TO ITS CURRENT PRODUCTS TO SERVE ITS
INSTALLED CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL
DECREASE.
A substantial portion of Innoveda's revenue is derived from maintenance
agreements for existing products. In order to maintain that revenue, Innoveda
must continue to offer those customers updates for those products or convert
those customers to new products. Innoveda may not be able to do so.
24
INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT
INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE
ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE.
As of April 30, 2001, Innoveda had borrowings of approximately $7.5 million
under its credit facility. Borrowings under the credit facility are secured by
substantially all of Innoveda's assets. The credit facility contains limitations
on additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to the maintenance of minimum
levels of profits, interest and debt service coverage ratios and maximum
leverage ratios. Collectively, these limitations and covenants may substantially
restrict the flexibility of Innoveda's management in quickly adjusting its
financial and operational strategies to react to changing economic and business
conditions and may compromise Innoveda's ability to react to the rapidly
evolving environment of the electronic design automation industry. To avoid
default under this credit facility, Innoveda must remain in compliance with
these limitations and covenants and make all required repayments or Innoveda
must obtain replacement financing. Innoveda may not be able to secure
replacement financing on terms acceptable to it or to its stockholders, or at
all. In the event of a default by Innoveda, Innoveda's lender may enforce its
security interest and take possession of substantially all or some of Innoveda's
assets.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Innoveda is exposed to interest rate risk primarily through its credit facility.
Innoveda has a credit facility with a commercial bank consisting of a $6.0$0.3
million revolving line of credit ("Line of Credit") and an $8.4a $4.9 million term
loan as of March 31, 200130, 2002 (the "Term Loan") (together, the "Credit Facility").
Interest terms on the Line of Credit and the Term Loan are determined, at the
option of Innoveda, for varying periods. Innoveda may elect to have theThe current interest rate based onunder the Credit Facility has been increased to be
equal to the commercial bank's prime rate or based onplus 3%.
Prior to the LIBOR rate at the time of
the election, depending on Innoveda's leverage financial ratio, as defined, in
the Credit Facility. The interest rates on the Line of Credit and the Term Loan
at March 31, 2001 was 8.5% and 6.9%, respectively.
Payments of principal outstanding under either the Line of Credit or the Term
Loan may be made at any time and must be repaid in full by September 30, 2003.
Asforbearance agreement, Innoveda had been required under the
Credit Facility Innoveda enteredto enter into a no feeno-fee interest rate-swaprate swap agreement with a
bank to reduce the impact of changes in interest rates on its floating rate
Credit Facility. ThisIn connection with the termination of this interest-rate
swap agreement effectively converts
a portion ofon April 24, 2002, the floating-rate obligation into a fixed-rate obligation of 7.4%
for a period of 60 months, expiring on March 31, 2003. The notional principal
amount of the interest rate-swap agreement was $8.4 million as of March 31,
2001. The counter partiesCompany agreed to the interest rate-swap agreement expose Innoveda to
credit loss in the event of nonperformance. Open interest rate contracts are
reviewed regularly by Innoveda to ensure that they remain effective as hedges of
interest rate exposure. Management of Innoveda believes that the rate-swap
agreement approximates fair value.
25
pay $0.1 million.
Innoveda invests its excess cash in debt instruments of the U.S. Government and
its agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issue. Innoveda attempts to protect and
preserve its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, Innoveda's future investment income may fall short
of expectations due to changes in interest rates and Innoveda may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
34
Innoveda considers all highly liquid debt instruments with a remaining maturity
of three months or less when purchased to be cash equivalents. At March 30, 2002
and March 31, 2001,
and December 30, 2000, substantially all of the Company's cash and cash equivalents
were invested in interest-bearing deposits and other short-term investments with
an original maturity of three months or less as of the date of purchase.
ByPursuant to the Company's investment policy, of Innoveda's board of directors, all debt instruments must have
quality ratings no lower than A rating.
FOREIGN CURRENCY EXCHANGE RATE RISK
Innoveda is also exposed to the impact of foreign currency fluctuations. Since
Innoveda translates foreign currencies into U.S. dollars for reporting purposes,
weakened currencies in its subsidiaries have a negative, though immaterial,
impact on its results. Innoveda also believes that the exposure to currency
exchange fluctuation risk is insignificant because its international
subsidiaries sell to customers, and satisfy their financial obligations, almost
exclusively in their local currencies. Innoveda entered into foreign exchange
contracts as a hedge against certain accounts receivable denominated in foreign
currencies during the twelvethree months ended March 31, 2001.30, 2002. Realized and unrealized
gains and losses on foreign exchange contracts for the three months ended March
31, 200130, 2002 were insignificant. There were no outstanding foreign exchange
contracts as of March 31, 2001.30, 2002.
PART IIII: OTHER INFORMATION
ITEM 3:
DEFAULTS UPON SENIOR SECURITIES
Innoveda has a credit facility with a commercial bank consisting of a $0.3
million revolving line of credit ("Line of Credit") and a $4.9 million term
loan as of March 30, 2002 (the "Term Loan") (together, the "Credit
Facility"). As of March 30, 2002 and April 29, 2002, the Company had an
aggregate of $4.9 million and $3.8 million, respectively, in outstanding
obligations under the Credit Facility.
For the fiscal quarter ended March 30, 2002, the Company did not meet certain
financial covenants under the Credit Facility. The Company's failure to meet
these financial covenants constitutes an event of default under the Credit
Facility, allowing the commercial bank to declare all obligations of the Company
under the Credit Facility due and payable in full. On April 23, 2002, the
Company entered into a forbearance agreement with the commercial bank under
which the commercial bank agreed to forbear from exercising its rights and
remedies under the Credit Facility until at least May 21, 2002. The commercial
bank's forbearance, as provided for in the forbearance agreement, is conditioned
upon the absence of any additional events of default under the Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" above.
35
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.Exhibit No. Description
- ----------- -----------
2.1(1) Agreement and Plan of Merger dated as of April 23, 2002 by and
among Mentor Graphics Corporation, Indiana Merger Corporation
and Innoveda, Inc.
- -----------------------
(1.) Incorporated herein by reference to the Current Report on Form 8-K dated
April 23, 2002 of Mentor Graphics Corporation, as filed with the
Securities and Exchange Commission on April 24, 2002.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during the fiscal
quarter ended March 31, 2001.
2630, 2002.
36
SIGNATURE
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.
INNOVEDA, INC.
By: /s/ Kevin P. O'Brien
------------------------------------
Kevin P. O'Brien
Vice President, Finance and Chief Financial
Officer (Principal Financial Officer and Chief
Accounting Officer)
Date: May 15, 2001
2714, 2002
37
EXHIBIT INDEX
None.
28Exhibit No. Description
- ----------- -----------
2.1(1) Agreement and Plan of Merger dated as of April 23, 2002 by and
among Mentor Graphics Corporation, Indiana Merger Corporation
and Innoveda, Inc.
- -----------------------
(1.) Incorporated herein by reference to the Current Report on Form 8-K dated
April 23, 2002 of Mentor Graphics Corporation, as filed with the
Securities and Exchange Commission on April 24, 2002.
38