UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 29, 2001March 30, 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/ No / /
As of November 8, 2001,April 30, 2002, the Registrant had outstanding 40,265,12540,514,518 shares of Common
Stock, $0.01 par value per share.
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 fact included
in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, 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". 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 September 29, 2001March 30, 2002 4
(unaudited) and December 30, 200029, 2001
Condensed Consolidated Statements of Operations for the 5
Quarters 5
and Nine Months Ended September 29, 2001March 30, 2002 (unaudited) and September 30, 2000March
31, 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the 6
Quarters 6Ended March 30, 2002 (unaudited) and Nine Months Ended September 29,March
31, 2001 (unaudited)
and
September 30, 2000 (unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and 1514
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 3534
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
EXHIBITS 39
3
PART 1: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)(in thousands)
SeptemberMarch 30,
2002 December 29,
December 30,(unaudited) 2001
2000
(unaudited)
------------ --------------------- ---------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 7,5858,597 $ 20,7997,704
Accounts receivable, net ....................................................... 17,853 27,26016,087 21,876
Prepaid expenses and other ..................................................... 1,996 2,8002,347 3,744
Deferred income taxes .......................................................... 7,378 6,626
------------ ------------3,962 3,960
--------- ---------
Total current assets ......................................................... 34,812 57,48530,993 37,284
Equipment and furniture, net ...................................................... 5,553 7,6424,264 4,850
Capitalized software costs, net ................................................... 2,241 2,3582,415 2,342
Purchased technology and other intangibles, net ................................... 27,664 62,19822,439 25,404
Goodwill and other ................................................................ 2,249 12,941
------------ ------------3,057 2,412
--------- ---------
Total assets ................................................................. $ 72,519 $142,624
============ ============63,168 $ 72,292
========= =========
LIABILITIES
Current liabilities:
Long-term debt, current portion ................................................ $ 3,8754,875 $ 3,5504,000
Capital lease obligations, current portion ..................................... 378 548158 270
Accounts payable ............................................................... 2,333 3,6522,572 3,648
Accrued liabilities ............................................................ 15,421 20,56514,960 18,122
Deferred revenue ............................................................... 19,794 24,514
------------ ------------20,160 20,776
--------- ---------
Total current liabilities .................................................... 41,801 52,82942,725 46,816
Long-term debt .................................................................... 2,750 5,750
Capital lease obligations ......................................................... 16 250-- 1,750
Other long-term liabilities ....................................................... 1,455 1,5531,338 1,322
Deferred income taxes ............................................................. 15,284 27,642
------------ ------------9,299 10,013
--------- ---------
Total liabilities ............................................................ 61,306 88,024
------------ ------------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,
40,09340,567 outstanding at September 29, 2001, 39,347March 30, 2002, 40,271
outstanding at December 30, 2000 .............................................. 402 39329, 2001 406 403
Treasury stock, ....................................................................at cost, 550 shares at
March 30, 2002 and December 29, 2001 (1,663) (832)(1,663)
Additional paid-in-capital ........................................................ 117,367 116,047117,663 117,440
Notes due from stockholders ....................................................... (932) (932)
Deferred compensation ............................................................. (673) (1,113)(379) (526)
Accumulated deficit ............................................................... (102,608) (59,013)(104,711) (101,650)
Accumulated other comprehensive income (loss) ..................................... (680) 50
------------ ------------loss (578) (681)
--------- ---------
Total stockholders' equity ................................................... 11,213 54,600
------------ ------------9,806 12,391
--------- ---------
Total liabilities and stockholders' equity ................................... $ 72,519 $142,624
============ ============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)(in thousands, except per share data)
(unaudited)
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------- ----------------------------
September 29, September----------------------
March 30, September 29, September 30,March 31,
2002 2001
2000 2001 2000
------------- ------------- ------------- --------------------- --------
Revenue:
Software ............................................... $ 8,4475,730 $ 12,578 $ 33,821 $ 31,81915,381
Services and other ..................................... 11,585 10,525 35,546 27,229
------------- ------------- ------------- -------------9,977 11,877
-------- --------
Total revenue ........................................ 20,032 23,103 69,367 59,048
------------- ------------- ------------- -------------15,707 27,258
-------- --------
Cost and expenses:
Cost of software ....................................... 1,595 1,994 5,169 5,4661,226 1,759
Cost of services and other ............................. 2,767 2,214 8,203 5,8262,380 2,604
Sales and marketing .................................... 10,240 8,046 32,793 22,9837,991 11,288
Research and development ............................... 6,377 5,750 21,576 15,0214,920 7,652
General and administrative ............................. 1,996 1,776 6,316 4,5551,359 2,166
Amortization of intangibles ............................ 2,777 2,508 12,087 5,5881,890 4,702
Amortization of stock compensation ..................... 147 147 440 441
In-process research and development .................... -- 3,053 -- 5,453
Impairment of intangible assets ........................ 32,945 -- 32,945 --
Restructuring costs .................................... 5,271 493 5,865 2,736
------------- ------------- ------------- -------------146
-------- --------
Total operating expenses ............................. 64,115 25,981 125,394 68,069
------------- ------------- ------------- -------------19,913 30,317
-------- --------
Operating loss ....................................... (44,083) (2,878) (56,027) (9,021)(4,206) (3,059)
Other expense, net ........................................ (165) (200) (334) (340)
------------- ------------- ------------- -------------(295) (18)
-------- --------
Loss before provision (benefit) for income taxes .......... (44,248) (3,078) (56,361) (9,361)
Provision (benefit) for income taxes ...................... (9,497) 1,736 (12,766) 564
------------- ------------- ------------- -------------tax benefit (4,501) (3,077)
Income tax benefit (1,440) (970)
-------- --------
Net loss .................................................. $ (34,751)(3,061) $ (4,814) $ (43,595) $ (9,925)
============= ============= ============= =============(2,107)
======== ========
Net loss per share:
Basic and diluted .................................... $ (0.89)(0.08) $ (0.14) $ (1.12) $ (0.40)
============= ============= ============= =============(0.05)
======== ========
Weighted average shares outstanding:
Basic and diluted .................................... 39,108 33,336 39,080 24,590
============= ============= ============= =============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)(in thousands)
(unaudited)
For the Nine MonthsFirst Quarter Ended
-----------------------------
September 29, September---------------------
March 30, March 31,
2002 2001
2000
------------- -------------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(43,595)$(3,061) $ (9,925)(2,107)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................................. 16,254 9,649
Non-cash portion of restructuring and impairment costs ..................... 34,445 --2,792 5,920
Compensation under stock option agreements ................................. 440 440
Write-off of in-process research and development ........................... -- 5,453147 146
Changes in assets and liabilities:
Accounts receivable ........................................................ 9,122 2,2945,760 5,426
Prepaid and other current assets ........................................... 773 6221,730 (307)
Deferred income taxes ...................................................... (13,110) (3,919)(717) (797)
Accounts payable ........................................................... (2,088) (1,427)(1,072) (221)
Accrued liabilities ........................................................ (5,199) 3,621(3,044) (5,832)
Tax benefit onof stock option exercises ......................................91 43 --
Deferred revenue ........................................................... (4,720) (3,104)
------------- -------------(585) (954)
------- --------
Net cash provided by (used in) operating activities ........................ (7,635) 3,704
------------- -------------2,041 1,317
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................ (2,047) (2,168)(99) (1,179)
Capitalized software costs ................................................. (794) (1,353)
Proceeds from sale of VirSim product line .................................. -- 7,000
Cash acquired in acquisition of PADS Software, Inc, net of
purchase costs ........................................................... -- 2,857
Cash acquired in acquisition of Summit, net of purchase costs .............. -- 27,036
------------- -------------(293) (261)
------- --------
Net cash provided by (used in)used in investing activities ........................ (2,841) 33,372
------------- -------------(392) (1,440)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt .............................................. (2,675) (14,320)(875) (892)
Proceeds from exercise of stock options and employee stock
purchase plan ............................................................ 1,286 872132 734
Payments of capital lease obligations ...................................... (404) (300)(111) (142)
Purchase of treasury stock .................................................-- (831)
--
------------- -------------------- --------
Net cash used in financing activities ...................................... (2,624) (13,748)
------------- -------------(854) (1,131)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ (114) (133)
------------- -------------98 (68)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (13,214) 23,195893 (1,322)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................7,704 20,799
531
------------- -------------------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 7,5858,597 $ 23,726
============= =============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
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 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 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 inACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
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. As required by SFAS 142, on December 30,
2001 the condensed consolidated
statementsCompany reclassified approximately $1,089 of operations and the condensed 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 enteredassembled
workforce related intangible assets 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 1.0 to 1.9 per share, plus
$0.579 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 condensed
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.
7
2. ACQUISITIONS (CONTINUED)
Innoveda recorded merger costs of approximately $0.5 million in merger related
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.goodwill. In connection with
the business
combination contemplated bySFAS No. 142, transitional goodwill impairment evaluation, the
Agreement and PlanCompany was required to perform an assessment of Reorganization, (1) each
sharewhether there was an
indication that goodwill was impaired as 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 majority 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 condensed consolidated financial statements from the date of acquisition. Underadoption, and
has determined that no transitional loss exists.
Effective December 30, 2001, Innoveda adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the purchase methodImpairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
and reporting for the acquired assetsimpairment or disposal of long-lived assets. This
statement supersedes SFAS 121, and assumed liabilities have been recorded at their estimated fair values at the dateaccounting and reporting
provisions of acquisition.
DuringAPB 30, for the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in merger costs relatingdisposal of a segment of a business. This
statement applies to the Summit business combination. This
primarily included severanceCompany's intangible assets that are being
amortized. These intangible assets include purchased technology, patents
and other costs relatingtrademarks. 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 the consolidation of
duplicative facilitiesexclude amortization expense is as a resultfollows:
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 business combination between Summit
and Viewlogic. Other costs relatingCompany's other acquired intangible assets are subject to
property and equipment lease contracts
(less any applicable sublease income) after the propertiesamortization. There 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 resultno material acquisitions of an exclusive distributor agreement
executed with Marubeni Solutions Corporationintangible assets
during the first quarter of fiscal 2000. Charges associated with2002. Intangible assets amortization
expense was $2,116 for 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.
8
2. ACQUISITIONS (CONTINUED)first quarter ending March 30, 2002. 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
September 29, 2001. All remaining amounts are expected to be settled within the
fourth quarter of fiscal 2001.intangible assets were as follows:
Total Non-CashFirst Quarter Ended
March 30, 2002
-------------------------------------
Gross Carrying Accumulated Net Carrying
Amount September 29, 2001
Accrual Write-Off Paid Accrual BalanceAmortization Value
------- --------- ------ -------------------------- -------
PADS MERGER COSTS
Severance ............................................Amortized intangible assets
Patents and trademarks $ 2501,486 $ 32452 $ 2181,034
Purchased technology 59,430 38,025 21,405
------- ------- -------
Total $60,916 $38,477 $22,439
======= ======= =======
Goodwill $ --
Non-cancelable commitments ........................... 199 -- 199 --
Capitalized software ................................. 44 44 -- --
------ ------ ------ ------
$ 493 $ 76 $ 417 $ --
------ ------ ------ ------
SUMMIT MERGER COSTS
Severance ............................................ $ 780 $ 5 $ 775 $ --
Non-cancelable commitments ........................... 1,389 -- 1,300 89
Capitalized software ................................. 74 74 -- --
------ ------ ------ ------
$2,243 $ 79 $2,075 $ 89
------ ------ ------ ------
TOTALS ............................................... $2,736 $ 155 $2,492 $ 89
====== ====== ====== ======2,040
-------
Total intangible assets $24,479
=======
9
3.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.
ThirdFirst Quarter Ended
Nine Months Ended
----------------------------- ----------------------------
September 29, September-------------------------
March 30, September 29, September 30,March 31,
2002 2001
2000 2001 2000
------------- ------------- ------------- --------------------- --------
Net Loss ............................... $(34,751) $ (4,814) $(43,595)(3,061) $ (9,925)
============= ============ ============ =============(2,107)
======== ========
Weighted average number of
common shares - Basic .............. 39,108 33,336 39,080 24,590
============= ============ ============ =============40,035 39,036
======== ========
Weighted average number of
common and potential common
shares - Diluted ................... 39,108 33,336 39,080 24,590
============= ============ ============ =============40,035 39,036
======== ========
Net loss per share:
Basic .............................. $ (0.89)(0.08) $ (0.14)(0.05)
======== ========
Diluted $ (1.12)(0.08) $ (0.40)
============= ============ ============ =============
Diluted ............................ $ (0.89) $ (0.14) $ (1.12) $ (0.40)
============= ============ ============ =============(0.05)
======== ========
For the three and nine months ended September 29,March 30, 2002 and March 31, 2001, and September 30, 2000, there were
10,3204,586 and 5,4498,363 anti-dilutive common shares, respectively, not included
in the table above.
10calculation.
8
4.3. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
Innoveda operatesSFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes standards for reporting information regarding
operating segments in a single industryannual 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 comprisingwith three distinct product groups: Printed Circuit Board
Design ("PCB"), System Level Design ("SLD"), and Electromechanical Design
("EM"). Revenues for each of the electronic design
automation industry.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:
For the ThirdFirst Quarter Ended
For the Nine Months Ended
--------------------------- -------------------------
September 29, SeptemberMarch 30, September 29, September 30,March 31,
2002 2001
2000 2001 2000
------------- ------------ ------------ ------------------- -------
Revenue:
North America ....................... $13,645 $14,017 $46,437 $37,956$10,835 $18,422
Europe .............................. 3,164 2,584 11,095 7,3252,563 4,340
Japan ............................... 2,499 4,094 7,378 9,5991,731 2,016
Other ............................... 724 2,408 4,457 4,168
------- -------578 2,480
------- -------
Total Revenue ......................... $20,032 $23,103 $69,367 $59,048
======= =======$15,707 $27,258
======= =======
As a percentage of Total Revenue
North America .......................69% 68%
61% 67% 64%
Europe .............................. 16% 16%
Japan 11% 16% 13%
Japan ............................... 12% 18% 11% 16%7%
Other ............................... 4% 10% 6% 7%
------- -------9%
------- -------
Total ................................. 100% 100% 100% 100%
======= =======
======= =======
5.4. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
For the ThirdFirst Quarter Ended
For the Nine Months Ended
---------------------------------- -------------------------------
September 29, September-------------------------
March 30, September 29, September 30,March 31,
2002 2001
2000 2001 2000
------------- ------------- ------------ ------------------- -------
Net loss ........................................ $(34,751) $ (4,814) $(43,595) $ (9,925)$(3,061) $(2,107)
Foreign currency translation adjustments ........ (202) (88) (730) (217)
-------- -------- -------- --------41 (364)
Fair value adjustment of interest rate swap 62 --
------- -------
Comprehensive loss .............................. $(34,953) $ (4,902) $(44,325) $(10,142)
======== ======== ======== ========$(2,958) $(2,471)
======= =======
1110
6.5. DEBT
CREDIT FACILITY -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 JuneMarch 30, 2001,2002, the Company did not meet
certain financial covenants under itsthe Credit Facility. Effective
September 29, 2001, the Company and the lender have amended the terms and
conditionsThe Company's
failure to meet these financial covenants constitutes an event of
its existing $6.6 million term loan (the "Term Loan") and its
revolving line of credit ("Line of Credit") (together, the "Credit Facility")
to revise certain covenants and provide a waiver for past violations. Under
this amendment, the Term Loan portion ofdefault under the Credit Facility, remains in place
withallowing the original repayment schedule, andcommercial bank to
declare all obligations of the Line of Credit portion ofCompany under the Credit Facility has been reduceddue 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 approximately $0.4 millionforbear 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 forbearance agreement provides that the interest rate under the Credit
Facility be increased to cover only
existing letters of credit issued bybe equal to the lender at the requestcommercial bank's prime rate plus
3% and that all of the Company. BorrowingsCompany's obligations under the Credit Facility are
secureddue and payable in full on the earlier of August 15, 2002 or the closing of
the transactions contemplated by substantially
allthe Agreement and Plan of Innoveda's assets. The amendedMerger dated
April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger
Corporation and Innoveda, Inc. (See Note 7).
Under the Credit Facility, contains limitations on
additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to maintaining certain levels of
profitability, deferred revenue, working capital ratio and debt service
coverage ratio.
Interest rates on the Line of Credit and the Term Loan are determined, at the
option of the Company for varying periods. The Company may electis required 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 rates on the Line of
Credit at September 29, 2001 and December 30, 2000 were 6% and 10%,
respectively. The interest ratesmake 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 September 29, 2001 and
December 30, 2000 were 5.6% and 9.2%, respectively. Paymentsthe beginning of principal
outstanding under either the Linethird quarter
of Credit orfiscal 2002. As amended by the forbearance agreement, the balance of
the Term Loan may be made at
any time and must be repaid in full by September 30, 2003. A payment of $0.9
million is due in the fourth quarter of fiscal 2001. Successive payments of
$1.0 million are due each quarter through September 2002, and $1.4 million
and $0.4 million are due in the first and second quarters of fiscal 2003,
respectively.
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.
12
8.August 15, 2002.
6. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to currentsignificant negative economic
conditions and as part
of its revised strategic direction and technology focus, completedtrends, implemented a restructuring and streamlining of companyCompany 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 $5.3 million.$5,271.
The restructuring costs include workforce reductions, closing orfacilities,
reducing space in certainother facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately 140one hundred forty employees across all business functions and
geographic regions. The workforce reductions were substantially completed
by the end of the third quarter.quarter of 2001. The Company recorded a workforce
reduction charge of $2.3
million$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 $1.5 million$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
$0.4
million$408 in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1.1 million$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.
IMPAIRMENT OF LONG-LIVED ASSETS
As part of our review of financial results during the quarter ended September
29, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with the acquisitions of PADS and Summit
Design. The assessment was performed as a result of the current economic
downturn and negative industry trends impacting our current operations and
expected future growth rates. The conclusion of that assessment was that the
decline in economic conditions within our industry was significant and other
than temporary. As a result, we recognized pre-tax charges of $32.9 million
representing write downs to record intangible assets at their estimated fair
values. The impaired intangible assets include goodwill, purchased
technology, workforce and customer base. The estimated fair value was based
on expected future cash flows, discounted at a rate commensurate with the
risks involved.
The following table sets forth an analysis of the components of the fiscal 2001
third quarter restructuring and intangible asset impairment charges. The table indicates payments made against the reserve through September 29, 2001.during
the fiscal quarter ended March 30, 2002.
TOTAL NON-CASH AMOUNT SEPTEMBERDecember 29, 2001 ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- ---------Amount March 30, 2002
Accrual Balance Paid Accrual Balance
---------------- ------ ----------------------------------
Impairment of intangibles ........................... $32,945 $32,945 $ -- $ --
Disposal of fixed assets ............................ 1,085 1,085 --
Severance and related expenses ...................... 2,267 -- 1,330 937$ 115 $ 77 $ 38
Lease commitment and related fees ................... 1,511 -- 62 1,4491,218 258 960
Other ............................................... 408 -- 116 292207 6 201
------- --------- ------- ------------------
$38,216 $34,030------
$ 1,5081,540 $ 2,678341 $1,199
======= ========= ======= ========================
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0
million, with theAll remaining amounts to be paid in subsequent periods.
13
8. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
PITTSBURGH OFFICE CLOSURE
In May 2001, the Company closed an office located in Pittsburgh, Pennsylvania
and transferred the operations to other offices in the United States and
overseas. The total charge of $0.6 million consists of intangible asset and
fixed asset impairment charges of $0.4 million, $0.1 million of severance
related to the termination of 8 employees and $0.1 million of other costs
incurred due to the closure. All significant amounts are expected to be settled withinpaid 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 yearwholly-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 office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles
and fixed assets ................. $415 $415 $-- $--
Severance .......................... 64 -- 64 --
Lease commitment ................... 48 -- 20 28
Other .............................. 67 -- 20 47
------- --------- ------ ------------------
$594 $415 $104 $ 75
======= ========= ====== ==================
9. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001,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 Financial Accounting Standards Board (the "FASB"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") issued
SFAS No. 144, "Accountingproduct 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 Impairmentdivestiture, but it does not believe any gain 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 supercedes SFAS 121,
and the accounting and reporting provisions of APB 30, for the disposal of a
segment of a business. The provisions of SFAS 144 are required toloss
will be adopted by
the Company effective January 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that an entity account for business combinations
using the purchase method and eliminates the pooling method. In addition, SFAS
No. 141 provides guidance regarding the initial recognition and measurement of
goodwill and other intangible assets. SFAS No.142 requires that goodwill no
longer be amortized and instead be tested annually for impairment. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001 and the provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact of adopting these statements.
14significant.
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 and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. This Item contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 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 differ materially
include those set forth under "Additional Risk Factors that Could Affect
Operating Results and Market Price of Stock" commencing on page 26,25, as well as
those otherwise discussed in this section and elsewhere in this Quarterly Report
on Form 10-Q. See "Important Note About Forward-Looking Statements" above.
OVERVIEW
Innoveda, Inc., a Delaware corporation, was created by the business combination
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 majority of
the outstanding stock of Summit subsequent to the business combination. For
accounting purposes, Viewlogic is deemed to have acquired Summit Design. On
September 22, 2000, Innoveda completed its acquisition 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, 2000 and
the results of PADS from September 22, 2000.
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.
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 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 our condensed consolidated statements of operations:
For the ThirdFirst Quarter Ended
For the Nine Months Ended
--------------------------- ---------------------------
September 29, September-------------------
March 30, September 29, September 30,March 31,
2002 2001
2000 2001 2000
------------- ------------- ------------- --------------- ---
Revenue:
Software ......................................... 42% 54% 49% 54%36% 56%
Services and other ............................... 58% 46% 51% 46%
------------- ------------- ------------- ------------64% 44%
--- ---
Total Revenue ...................................... 100% 100%
100% 100%
------------- ------------- ------------- --------------- ---
Costs and expenses:
Cost of software ................................. 8% 9% 8% 9%6%
Cost of services and other ....................... 14% 10% 12%15% 10%
Sales and marketing .............................. 51% 35% 47% 39%41%
Research and development ......................... 32% 25% 31% 25%28%
General and administrative ....................... 10% 8% 9% 8%
Amortization of intangibles and stock compensation ................................... 15% 11%13% 18%
10%
In-process research and development .............. -- 13% -- 9%
Impairment of intangible assets .................. 164% -- 47% --
Restructuring costs .............................. 26% 2% 8% 5%
------------- ------------- ------------- --------------- ---
Total operating expenses ........................... 320% 113% 180% 115%
------------- ------------- ------------- ------------127% 111%
--- ---
Loss from operations ............................... -220% -13% -80% -15%-27% -11%
Other expense, net ................................. -1% -1% -1% -1%
------------- ------------- ------------- -------------2% --
--- ---
Loss before provision (benefit)benefit for income taxes ... -221% -14% -81% -16%
------------- ------------- ------------- ------------
Provision (benefit) for income taxes ............... -47% 7% -18% 1%
------------- ------------- ------------- -------------29% -11%
--- ---
Income tax benefit -9% -3%
--- ---
Net loss ........................................... -174% -21% -63% -17%
------------- ------------- ------------- -------------20% -8%
=== ===
1619
QUARTERS ENDED MARCH 30, 2002 AND NINE MONTHS ENDED SEPTEMBER 29,MARCH 31, 2001
AND SEPTEMBER 30, 2000SOFTWARE REVENUE
For the quarter ended September 29, 2001, totalMarch 30, 2002, software license revenue decreased 13%62% to
$20.0$5.7 million from $23.1$15.4 million for the quarter ended September 30, 2000.March 31, 2001. The
decrease in revenue consisted of a 33%
decrease in software license revenue to
$8.4 million from $12.6 million, offset by a 10% increase in services and other
revenue to $11.6 million from $10.5 million. For the nine months ended September
29, 2001, total revenue increased 17% to $69.4 million from $59.0 million for
the nine months ended September 30, 2000. The increase consisted of a 31%
increase in services and other revenue to $35.5 million from $27.2 million and a
6% increase in software license revenue to $33.8 million from $31.8 million. The
decrease in total revenue for the third quarter ended September 29, 2001 is primarily attributable to the impact of
the global economic downturn, particularly with our target customers in the telecomtelecommunications and
computer industries. DiscretionaryBeginning in the second quarter of fiscal 2001, software
license revenue was negatively affected as discretionary spending by these customers
has beenwas reduced, causing delays and postponement of orders. The decrease is also attributable to revenue no longer
being realized from our VirSim product line, which was sold duringAlso, the third
quarterCompany's
restructuring in August of 2000. The increase in services and other revenue in the third quarter
year over year is primarily related2001 has contributed to the products acquireddecline, as partthe Company
has fewer sales and marketing resources and is focused on selling a narrower set
of the
acquisition of PADS.
Software revenue increased for the nine-month period ended September 29, 2001
over the same period of the prior year due primarily to additional productproducts. The Company has also experienced significant declines in
distributor sales in the firstJapan and Asia regions. During the quarter, relatedthe
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 products acquired as partDivestiture Growth Capital, a technology
investment fund. See "Overview" above. For the quarter ended March 31, 2001,
PCB, SLD, and EM accounted for $10.9 million or 71%, $3.9 million or 25% and
$0.6 million or 4%, respectively, of the acquisition of
Summit Design in March 2000 and products acquired as part of the acquisition of
PADS Software in September 2000. This has been offset by a decrease in orders,
as discussed above. Furthermore, we realized increased consulting revenue during
the first three quarters of 2001 versus the same periods in 2000 attributable to
an increased focus in this area.software license revenue.
As a percentage of total revenue, software license revenue decreased to 42%36% for
the quarter ended September 29, 2001March 30, 2002 from 54%56% for the quarter ended SeptemberMarch 31, 2001.
SERVICES AND OTHER REVENUE
For the quarter ended March 30, 20002002, services and other revenue decreased 16%
to 49%$10.0 million from $11.9 million for the nine monthsquarter ended September 29,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 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,
from
54%PCB, SLD, and EM accounted for the nine months ended September 30, 2000.$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 increased to 58%64%
for the quarter ended September 29, 2001March 30, 2002 from 46%44% for the quarter ended September 29, 2000, and
increased to 51% for the nine months ended September 29, 2001 from 46% for the
nine months ended September 30, 2000.March 31,
2001.
20
COST OF SOFTWARE
Cost of software revenue consists primarily of the cost of product media,
documentation, duplication, packagingmanufacturing, order
processing, distributions and royalties. Cost of software revenue decreased 20%30%
to $1.6$1.2 million for the quarter ended September 29, 2001March 30, 2002 from $2.0$1.8 million for the
quarter ended September 30, 2000. For the nine months ended
September 29, 2001, cost of software revenue decreased 5% to $5.2 million from
$5.5 million for the nine months ended September 30, 2000.March 31, 2001. The decrease in the
third quarter of 2001 versus the same period in 2000 was primarily due to the decreased
royalty costs consistent with the decrease in software license revenue, along
with the retirement of products with large royalty costs and economiesas part of scale resulting from the
acquisition of Summit Design and PADS Software. TheCompany's restructuring announced in August 2001. To a lesser extent, the
decrease in the nine-month period ended September 29, 2001 also relates to the decreasing royalty costs and economies of scale resultingcost savings realized from the acquisition
of Summit DesignAugust 2001 restructuring
and PADS Software offset by increased salary and related costs
of additional headcount resulting from the acquisitions of Summit Design in
March 2000 and PADS Software in September 2000.
17
other cost reduction activities.
As a percentage of total revenue, cost of software decreasedincreased to 8% for the
quarter ended September 29, 2001March 30, 2002 from 9%6% for the quarter ended September 30,
2000, and decreased to 8% for the nine months ended September 29, 2001 from 9%
for the nine months ended September 30, 2000.March 31, 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 services and other increased
25%decreased
9% to $2.8$2.4 million for the quarter ended September 29, 2001March 30, 2002 from $2.2$2.6 million for
the quarter ended September 30, 2000. For the nine months ended September
29, 2001, cost of services and other increased 41% to $8.2 million from $5.8
million for the nine months ended September 30, 2000. These increases areMarch 31, 2001. 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 services and other increased to 14%15%
for the quarter ended September 29, 2001March 30, 2002 from 10% for the quarter ended September 30, 2000, and increased to 12% for the nine months ended September 29,
2001 from 10% for the nine months ended September 30, 2000.March 31,
2001.
SALES AND MARKETING
Sales and marketing expenses increased 27%decreased 29% to $10.2 million for the quarter
ended September 29, 2001 from $8.0 million for the quarter ended
SeptemberMarch 30, 2000. For the nine months ended September 29, 2001, sales and marketing expense
increased 43% to $32.8 million2002 from $23.0$11.3 million for the nine monthsquarter ended September 30, 2000. These increases areMarch 31, 2001. 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 as well as additional
new hires in thefacility shutdowns. The
decrease also relates to limiting discretionary spending on marketing programs,
travel, and sales area. Additionally, discretionary marketing spending for
trade shows, direct mail solicitations 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 increased to 51%
for the quarter ended September 29, 2001March 30, 2002 from 35%41% for the quarter ended September 30, 2000, and increased to 47% for the nine months ended September 29,
2001 from 39% for the nine months ended September 30, 2000.March 31,
2001.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs related to support
product
development. Research and development expenses increased 11%decreased 36% to $6.4$4.9 million for
the quarter ended September 29, 2001March 30, 2002 from $5.8$7.7 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001,
research and development expense increased 44% to $21.6 million from $15.0
million for the nine months ended September 30, 2000. These increases areMarch
31, 2001. 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.
18
facility
shutdowns. In addition, the decrease also relates to limiting discretionary
spending on outside consulting, travel, and temporary help.
As a percentage of total revenue, research and development expenses increased to
32%31% for the quarter ended September 29, 2001March 30, 2002 from 25%28% for the quarter ended September 30, 2000, and increased to 31% for the nine months ended September 29,
2001 from 25% for the nine months ended September 30, 2000.March
31, 2001.
The amount of software development costs capitalized for the quarterquarters ended
September 29,March 30, 2002 and March 31, 2001 was approximately $0.3 million or 6% and $0.3
million or 4% of research and development expense, for that period, and for the quarter ended September 30,
2000 was $0.1 million or 3% of research and development expense for that
period. For the nine months ended September 29, 2001 capitalized software
development costs were $0.8 million, and for the nine months ended September
30, 2000, approximately $0.7 million was capitalized.respectively.
21
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of the administrative,
finance, human resources, legal and information systems departments. General and
administrative expenses increased 12%decreased 37% to $2.0$1.4 million for the quarter ended
September 29, 2001March 30, 2002 from $1.8$2.2 million for the quarter ended September 30, 2000.
For the nine months ended September 29, 2001, general and administrative
expenses increased 39% to $6.3 million from $4.6 million for the nine months
ended September 30, 2000. These increases areMarch 31, 2001. The
decrease was primarily a result of building our
general and administrative infrastructure to support the planned growth in
revenue of our 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 increased
to 10%9% for the quarter ended September 29, 2001March 30, 2002 from 8% for the quarter ended September 30, 2000, and increased to 9% for the nine months
ended September 29, 2001 from 8% for the nine months ended September 30, 2000.March
31, 2001.
AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION
Amortization expense increased 10%decreased 58% to $2.9$2.0 million in the quarter ended September 29, 2001March
30, 2002 from $2.7$4.8 million for the quarter ended September 30, 2000,
and increased 108% for the nine months ended September 29, 2001 to $12.5 million
from $6.0 million for the nine months ended September 30, 2000. These increasesMarch 31, 2001. This decrease
in amortization expense arewas mainly due to the increaseimpairment in intangibles fromrecorded
during the acquisitionsthird 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 whole, 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 quarter 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 no 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 $28.7$24.5 million and $74$69.3 million in intangible assets as of September
29,March 30,
2002 and March 31, 2001, and December 30, 2000, respectively. Intangible assets as of September
29, 2001March 30, 2002
consisted primarily of purchased technology, goodwill workforce and trademarks, resulting
from the Summit Design acquisition in March 2000, the PADS Software acquisition
in September 2000, and the acquisition of Transcendent Design Technology, Inc.
in 1999. As of December 30, 2000, there was $74 million inMarch 31, 2001, intangible assets consistingconsisted of purchased
technology, goodwill workforce and customer base resulting primarily from the Summit
Design acquisition, the PADS Software acquisition, assets acquired from
OmniView, Inc. in March 1999, and the acquisitionTranscendent acquisition.
Amortization of Transcendent
Design Technology, Inc. in August 1999. 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 using the straight-line method over periods ranging from three to seven4 years. See "Impairment of Long-Lived
Assets" below.
19
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In conjunction with the acquisition of PADS in the third quarter ended September
30, 2000, Innoveda charged to expense $3.1 million representing the write-off of
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. Similarly, in conjunction with the business combination
of Summit and Viewlogic in the first quarter ended April 1, 2000, we 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 another independent appraiser. For the nine months ended
September 30, 2000, Innoveda charged approximately $5.5 million to expense.
RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to current economic conditions and as part
of our revised strategic direction and technology focus, implemented a
restructuring and streamlining of company operations.
RESTRUCTURING COSTS
As a result of the restructuring, we recorded charges of $5.3 million. The
restructuring costs include workforce reductions, closing or reducing space in
certain facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately 140 employees across all business functions and geographic
regions. The workforce reductions were substantially completed by the end of
the third quarter. We recorded a workforce reduction charge of $2.3 million
relating primarily to severance, fringe benefits and outplacement services.
We recorded a restructuring charge of $1.5 million 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 $0.4
million in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1.1 million restructuring
charge related to certain fixed assets that became impaired as a result of the
decision to reduce the workforce and close facilities.
20
IMPAIRMENT OF LONG-LIVED ASSETS
As part of our review of financial results during the quarter ended September
29, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with the acquisitions of PADS and Summit
Design. The assessment was performed as a result of the current economic
downturn and negative industry trends impacting our current operations and
expected future growth rates. The conclusion of that assessment was that the
decline in economic conditions within our industry was significant and other
than temporary. As a result, we recognized pre-tax charges of $32.9 million
representing write downs to record intangible assets at their estimated fair
values. The impaired intangible assets include goodwill, purchased
technology, workforce and customer base. The estimated fair value was based
on expected future cash flows to be generated, discounted at a rate
commensurate with the risks involved.
The following table sets forth an analysis of the components of the fiscal 2001
third quarter restructuring and intangible asset impairment charges. The table
indicates payments made against the reserve through September 29, 2001.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles ............... $32,945 $32,945 $ -- $ --
Disposal of fixed assets ................ 1,085 1,085 -- --
Severance and related expenses .......... 2,267 -- 1,330 937
Lease commitment and related fees ....... 1,511 -- 62 1,449
Other ................................... 408 -- 116 292
------- ------- ------- -------
$38,216 $34,030 $ 1,508 $ 2,678
======= ======= ======= =======
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0
million, with the remaining amounts to be paid in subsequent periods.
21
PITTSBURGH OFFICE CLOSURE
In May 2001, we closed an office located in Pittsburgh, Pennsylvania and
transferred the operations to other offices in the United States and overseas.
The total charge of $0.6 million consists of intangible asset and fixed asset
impairment charges of $0.4 million, $0.1 million of severance related to the
termination of 8 employees and $0.1 million of other costs incurred due to the
closure. All significant amounts are expected to be settled within a year of the
office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles
and fixed assets .................. $415 $415 $ -- $ --
Severance ........................... 64 -- 64 --
Lease commitment .................... 48 -- 20 28
Other ............................... 67 -- 20 47
----- ------- ---- --------
$594 $415 $104 $ 75
===== ======= ==== ========
22
MERGER RELATED RESTRUCTURING CHARGES
During the third quarter ended September 30, 2000, we recorded approximately
$0.5 million in restructuring charges relating to the PADS merger. This was
primarily comprised of severance and exit costs to close duplicative facilities.
During the first quarter ended April 1, 2000, we recorded approximately $2.2
million in merger related 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 our 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.
For the nine months ended September 30, 2000, Innoveda charged approximately
$2.7 million to expense for merger related charges.
OTHER EXPENSE
Other expenseincome (expense) consists of the net of interest expense relating to
our term loan and revolving credit line, interest income from cash and cash
equivalent balances, and gains and losses from foreign currency transactions
resulting from foreign operations conducted in local currencies. Other
expense remained
flat at $0.2increased to $0.3 million expensein the quarter ended March 30, 2002 from
$0.02 million for the third quarter ended September 29, 2001
and for the third quarter ended September 30, 2000. For the nine months ended
September 29, 2001, other expense also remained flat as compared to the nine
months ended September 30, 2000.March 31, 2001. Other expense remained essentially the sameincreased
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 TAX BENEFIT
TheTAXES
We recorded a benefit for income taxes increased to $9.5of $1.4 million and $1.0 million for the
quarterquarters ended September 29,March 30, 2002 and March 31, 2001, from a $1.7 million provision for the quarter ended
September 30, 2000. For the nine months ended September 29, 2001, the benefit
for income taxes increased to $12.8 million from a $0.6 million provision for
the nine months ended September 30, 2000. The benefit for income taxes in
2001 is primarily due to the reversal of deferred taxes related to the
impaired intangible assets and the tax benefit of the loss in 2001. The
income tax provision for 2000 includes an estimated $1.5 million resulting
from the sale of the VirSim product line on August 2, 2000.respectively. Quarterly tax
provisionsbenefits are based on the estimated effective tax ratesrate of 37.5% and 36% for
the respective
fiscal year.
23
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. At March 30, 2002, we had $8.6 million in cash and
cash equivalents. We have a Credit Facility with a commercial bank, which
includes a Term Loan and a Line of Credit. The Term Loan had $6.6$4.9 million
outstanding as of September 29, 2001.March 30, 2002. Borrowings under the Credit Facility are
secured by substantially all of our 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 profitability and deferred revenue, and minimum working
capital and debt service coverage ratios.
For the fiscal quarter ended JuneMarch 30, 2001, we2002, the Company did not meet certain
financial covenants under our Credit Facility. The Company and the lender have amended
the Credit Facility to revise certain of the covenants and provide a waiver
for past violations. See Exhibit 10.6. Under this amendment, the Term Loan
portion of the Credit Facility remains in place with the original repayment
schedule and the Line of Credit portion of the Credit Facility has been
reduced from $6.0 million to approximately $0.4 million and may be used only
to cover existing letters of credit issued by the lender at our request.
Innoveda is currently in negotiations with a commercial lender to replace the
Credit Facility.
Interest rates 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 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 forbearance agreement provides that the interest ratesrate 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 Lineearlier 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 at SeptemberFacility as of April 29,
20012002 were $3.8 million. The commercial bank may not extend its forbearance
from exercising its rights and December 30, 2000 were 6% and 10%,
respectively. The interest ratesremedies under the Credit Facility beyond May
21, 2002. In addition, the Company has a principal payment on the Term Loan
at September 29, 2001 and
December 30, 2000 were 5.6% and 9.2%, 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. A payment of $0.9
million is due in the fourth quarter of fiscal 2001. Successive payments of $1.0 million are due eachat the beginning of the third fiscal quarter through September 2002, and $1.4the
remaining balance of $2.7 million is now due and $0.4 million are duepayable on August 15, 2002.
The Company must secure alternative financing to pay its outstanding
obligations under the Credit Facility in the firstevent the acquisition of the
Company by Mentor does not close prior to those obligations becoming due and
second quarterspayable. The expiration date of fiscal 2003,
respectively.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 ninethree months ended September 29, 2001,March 30, 2002, net cash used inprovided by operating
activities was approximately $7.6 million$2.0 million. This was primarily due to non-cash
depreciation and amortization, decreases in accounts receivable, prepaid and
other current assets and a federal tax refund of approximately $1.2 million,
partially offset by the net operating
losses, net of non-cash items including amortization, impairment of
intangible assets, portions of the restructuring charge, deferred revenueloss and decreases in accounts payable, other
accrued liabilities and deferred taxes.revenue. Net cash used in investing activities
for the ninethree months ended September 29, 2001March 30, 2002 was approximately $2.8$0.4 million,
primarily due to the purchasecapitalization of property and equipment.software costs. Net cash used in
financing activities was approximately $2.6$0.8 million for the ninethree months ended
September 29, 2001,March 30, 2002, primarily due to the repayment of principal on debt, and the repurchaserepayment
of our
common stock,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 September 29,March 30, 2002
and March 31, 2001, and September 30, 2000, substantially all 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. Pursuant to the
Company's investment policy, all debt instruments must have quality ratings no
lower than an A rating.
24
On October 19, 2000, our boardApril 23, 2002, the Company entered into the Merger Agreement providing
for the acquisition of directors authorized the repurchase of upCompany by Mentor. If the transactions
contemplated by the Merger Agreement are not consummated, the Company will
need to 2
million shares of common stock duringsecure additional financing to repay its outstanding debt
obligations, and to provide working capital. Prior to entering into the
period ending October 31, 2001. The
repurchased shares will be held as treasury sharesMerger Agreement, the Company had been evaluating proposals for both a new
credit facility and used in company stock
option plans, employee stock purchase plansother financing alternatives and for general corporate purposes.
As of October 31, there were 550,606 shares of common stock purchased at an
aggregate cost of $1.7 million under the stock re-purchase program.believes it could secure
new financing if required. We believe that our current cash and cash
equivalents, when combined with the net proceeds of prospective additional
financing and cash
expected to be generated from operations will satisfy anticipated working
capital and other cash
requirements for at least the next 12 months. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001,However, our liquidity and
capital requirements will depend upon numerous factors, including, the
Financial Accounting Standards Board (the "FASB") issued
SFAS No. 144, "Accounting foravailability of additional financing on terms acceptable to us or at all, the
Impairment or Disposalavailability of Long-Lived
Assets" ("SFAS 144"), which addresses financial accountingadditional financing within the required time constraints,
market acceptance of our products, the size and reporting fortiming of customer orders,
product development costs and competitive and economic forces in the
impairment or disposalelectronic design automation industry. The effects of long-lived assets. This statement supercedes
SFAS 121,these factors may cause
our liquidity and the accounting and reporting provisions of APB 30, for the
disposal of a segment of a business. The provisions of SFAS 144 are requiredcapital requirements to be adopted by the Company effective January 1, 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that an entity account for business combinations
using the purchase method and eliminates the pooling method. In addition, SFAS
No. 141 provides guidance regarding the initial recognition and measurement of
goodwill and other intangible assets. SFAS No.142 requires that goodwill no
longer be amortized and instead be tested annually for impairment. The
provisions of SFAS No. 141 and SFAS No. 142 apply to all business combinations
initiated after June 30, 2001.
The Company is evaluating the impact of adopting these statements.
25vary.
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 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
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.
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 restructurings, acquisitions
or 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: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.
27
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.
INNOVEDA HAS SUBSTANTIAL TERM DEBT, AND ITS CREDIT LINE HAS BEEN SUBSTANTIALLY
REDUCED, AND INNOVEDA MAY NOT BE ABLE TO REPLACE ITS CREDIT LINE OR TERM DEBT.
For the fiscal quarter ended June 30, 2001, Innoveda did not meet certain
financial covenants under its Credit Facility (see Management's Discussion
and Analysis of Financial Condition and Results of Operations). Innoveda and
its lender have amended the Credit Facility to revise certain of the
covenants and provide a waiver for past violations. See Exhibit 10.6. Under
this amendment, the Term Loan portion of the Credit Facility remains in place
with the original repayment schedule. However, the Line of Credit portion of
the Credit Facility has been reduced from approximately $6.0 million to
approximately $0.4 million and may be used only to cover existing letters of
credit issued by the lender at the request of the Company. Innoveda is
currently in negotiations with a commercial lender to replace the Credit
Facility but there can be no guaranty that Innoveda will be able to secure a
replacement for the Credit Facility.
28
COVENANTS AND RESTRICTIONS INCLUDED IN INNOVEDA'S CREDIT FACILITY LIMIT
MANAGEMENT'S FLEXIBILITY TO ADJUST INNOVEDA'S BUSINESS AND STRATEGIES TO CURRENT
MARKET AND ECONOMIC CONDITIONS.
As of September 29, 2001, Innoveda had borrowings of approximately $6.6 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 profitability and deferred revenue, and minimum working capital and
debt service coverage ratios. 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.
Collectively, these limitations and covenants 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.
INNOVEDA HAS A LIMITED AMOUNT OF CASH AND UNEXPECTED SHORTFALLS IN CASH FLOW
COULD RESTRICT THE COMPANY'S OPERATING ABILITY
As of September 29, 2001, Innoveda had approximately $7.6 million in cash and
cash equivalents. While Innoveda expects that its current cash and cash
equivalents, combined with cash expected to be generated from operations,
will be sufficient to fund its operations for at least the next 12 months, if
Innoveda does not meet its financial projections it may not have sufficient
cash to fund its operations. Innoveda is currently in negotiations with a
commercial lender to obtain a line of credit, but there can be no assurance
that Innoveda will be able to do so.
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE THE ACQUISITION BY INNOVEDA OF PADS,
THE ANTICIPATED ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN INNOVEDA AND PADS
MAY NOT BE REALIZED, IN FULL, IF AT ALL.
Innoveda acquired PADS Software, Inc. in September 2000. The integration of
Innoveda and PADS requires the dedication of Innoveda management resources. This
may distract management's attention from the management of the day-to-day
business of Innoveda. Employee uncertainty 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 Innoveda'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
Innoveda and PADS and to retain key technical, sales or marketing personnel
would adversely affect the combined company's business.
29
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.
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.
30
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.
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.
30
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.
31
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. The 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.
32
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.
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.
33
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 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.
34
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 $0.4$0.3
million revolving line of credit ("Line of Credit") and a $6.6$4.9 million term
loan as of September 29, 2001March 30, 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 September 29, 2001 was 6.0% and 5.6%, 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 $6.6 million as of September 29, 2001. The interest rate-swap agreement
exposes InnovedaCompany agreed to losses in the event Innoveda repays its Term Loan that is
different than currently scheduled. Open interest rate contracts are reviewed
regularly by Innoveda to evaluate their effectiveness as hedges of interest
rate exposure. Management of Innoveda believes that the rate-swap agreement
approximates fair value.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 September 29,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.
Pursuant to the Company's investment policy, all debt instruments must have
quality ratings no lower than A rating.
35
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 ninethree months ended September 29, 2001.March 30, 2002. Realized and unrealized
gains and losses on foreign exchange contracts for the ninethree months ended September 29, 2001March
30, 2002 were insignificant. There were no outstanding foreign exchange
contracts as of SeptemberMarch 30, 2002.
PART II: 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, 2001.2002, 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
EXHIBIT NO. DESCRIPTION
10.1 AmendmentExhibit No. Description
- ----------- -----------
2.1(1) Agreement and Plan of Merger dated September 25, 2001 to Secured Promissory Note by
Paula Cassidy and John Cassidy in favoras of Viewlogic dated August
11, 1999.
10.2 Amendment dated September 25, 2001 to Secured Promissory Note by
William J. Herman in favor of Viewlogic dated August 11, 1999.
10.3 Amendment dated September 25, 2001 to Secured Promissory Note by
Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic
dated August 11, 1999.
10.4 Amendment dated September 25, 2001 to Secured Promissory Note by
Richard G. Lucier in favor of Viewlogic dated August 12, 1999.
10.5 Amendment dated September 25, 2001 to Secured Promissory Note by
Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999.
10.6 Second Amendment and Waiver effective September 29, 2001April 23, 2002 by and
Betweenamong 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 Fleet National Bank.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 September 29, 2001.March 30, 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: November 13, 2001May 14, 2002
37
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 AmendmentExhibit No. Description
- ----------- -----------
2.1(1) Agreement and Plan of Merger dated September 25, 2001 to Secured Promissory Note by
Paula Cassidy and John Cassidy in favoras of Viewlogic dated August
11, 1999.
10.2 Amendment dated September 25, 2001 to secured Promissory Note by
William J. Herman in favor of Viewlogic dated August 11, 1999.
10.3 Amendment dated September 25, 2001 to Secured Promissory Note by
Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic
dated August 11, 1999.
10.4 Amendment dated September 25, 2001 to Secured Promissory Note by
Richard G. Lucier in favor of Viewlogic dated August 12, 1999.
10.5 Amendment dated September 25, 2001 to secured Promissory Note by
Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999.
10.6 Second Amendment and Waiver effective September 29, 2001April 23, 2002 by and
betweenamong 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 Fleet National Bank.Exchange Commission on April 24, 2002.
38