UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ------ -------------------------------------------------------------------------
X Quarterly report pursuant to Section/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
Exchange Act ofOF
THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999 or
- ------ -------------------------------------------------------------------------
- ------ -------------------------------------------------------------------------
Transition report pursuant to SectionFOR THE QUARTERLY
PERIOD ENDED JULY 1, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities
Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to________
- ------ -------------------------------------------------------------------------
Commission file number:FOR THE
TRANSITION PERIOD FROM _________ TO________
COMMISSION FILE NUMBER: 000-20923
SUMMIT DESIGN,INNOVEDA, INC.
(Exact name of registrant as specified in its charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1137888
(State or other jurisdiction of(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. Employer Identification
incorporation or organization) Number)
9305 S. W. GEMINI DRIVE,
BEAVERTON, OREGON 97008
(Address of principal executive office)
Registrant's Telephone number, including area code: (503) 643-9281EMPLOYER
ORGANIZATION) IDENTIFICATION NUMBER)
293 BOSTON 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 registrantRegistrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X/X/ No ---/ /
As of November 11, 1999,August 7, 2000, the Registrant had outstanding 15,801,46532,736,519 shares of Common
Stock.Stock, $.01 par value per share.
SUMMIT DESIGN,INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited)July 1, 2000
and December 31, 1998.January 1, 2000. 3
Condensed Consolidated Statements of Operations for the
three months ended September 30,Second Quarter Ended July 1, 2000 and July 3, 1999 and 1998the
Six Months Ended July 1, 2000 and for the nine months ended September 30, 1999 and 1998(unaudited).July 3, 1999. 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999Six Months Ended July 1, 2000 and 1998 (unaudited).July 3, 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 911
Item 3 Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 6 Exhibits and Reports on Form 8-K 41
Items 1, 2,3, 4 and 5 Not Applicable 4125
Signature 42
Exhibit Index 4328
-2-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)thousands, except per share amounts)
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)July 1, 2000 January 1, 2000
------------ ---------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 27,00821,708 $ 27,693531
Accounts receivable, net ....................... 6,217 8,85215,173 14,290
Prepaid expenses and other ..................... 1,003 8622,737 2,722
Prepaid income taxes 1,204 1,228
Deferred income taxes .......................... 792 7926,396 1,342
-------- --------
Total current assets ......................... 35,020 38,199
Furniture47,218 20,113
Equipment and equipment,furniture, net ...................... 3,734 4,113
Intangibles,6,932 4,477
Capitalized software costs, net .................................. 1,038 2,8702,341 2,427
Purchased technology and other intangibles, net 24,223 3,508
Goodwill, net ..................................... 2,179 2,74213,817 --
Deposits and other assets ......................... 146 2,2861,026 920
-------- --------
Total assets .............................. $ 42,11795,557 $ 50,21031,445
======== ========
LIABILITIES
Current liabilities:
Long-term debt,Notes payable, current portion ................ $ 563,375 $ 543,125
Capital lease obligation,obligations, current portion ...... 8 43390 372
Accounts payable ............................... 1,072 2,5202,621 2,840
Accrued liabilities ............................ 5,287 5,68713,974 7,140
Deferred revenue ............................... 4,843 5,64018,695 14,595
-------- --------
Total current liabilities .................... 11,266 13,944
Long-term debt,39,055 28,072
-------- --------
Notes payable, less current portion .............. -- 156
Deferred revenue,6,625 13,825
Capital lease obligation, less current portion ............ 102 146396 554
Other long-term liabilities 131 --
Deferred income tax ............................... 489 489taxes 13,323 2,393
-------- --------
Total liabilities ............................ 11,857 14,73559,530 44,844
-------- --------
Commitments and contingenciesRedeemable, convertible preferred stock -- 32,000
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized
30,000 shares; issued andvalue, 50,000 authorized,
32,590 outstanding 15,702
shares at September 30, 1999 and 15,457 sharesJuly 1, 2000, $.001 par value,
35,000 authorized, 7,969 outstanding at December 31, 1998 .......................... 157 155January 1, 2000 326 8
Additional paid-in capital ........................ 44,360 44,03990,831 4,777
Notes due from stockholders (927) (927)
Deferred compensation (1,407) (1,701)
Accumulated deficit ............................... (14,257) (8,719)(52,956) (47,845)
Accumulated other comprehensive income 160 289
-------- --------
Total stockholders' equity ................... 30,260 35,475(deficit) 36,027 (45,399)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 42,11795,557 $ 50,21031,445
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statementsstatements.
-3-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In(in thousands, except per share data)
(Unaudited)
ThreeFor the Second Quarter Ended For the Six Months Ended
Nine Months Ended
September 30, September 30,
--------------------- ----------------------July 1, 2000 July 3, 1999 1998July 1, 2000 July 3, 1999
1998
---- ---- ---- ---------------- ------------ ------------ ------------
Revenue:
Product licenses ..................................Software $ 4,87111,613 $ 8,7056,565 $ 13,47719,241 $ 25,480
Maintenance13,099
Services and services .......................... 2,983 2,518 8,376 6,929
Other ............................................. -- 91 -- 274other 9,947 6,683 16,704 14,133
-------- -------- -------- --------
Total revenue ................................... 7,854 11,314 21,853 32,683
Cost of revenue:
Product licenses .................................. 217 179 476 490
Maintenance and services .......................... 270 269 876 773
Amortization of purchased technologies ............ 140 165 472 49621,560 13,248 35,945 27,232
-------- -------- -------- --------
Total costCosts and expenses:
Cost of revenue ........................... 627 613 1,824 1,759
-------- -------- -------- --------
Gross profit ................................. 7,227 10,701 20,029 30,924
Operating expenses:software 1,956 1,371 3,472 2,737
Cost of services and other 2,050 1,608 3,612 3,157
Sales and marketing 8,486 5,651 14,937 11,229
Research and development .......................... 2,571 3,021 7,739 8,928
Sales and marketing ............................... 2,590 3,235 8,678 9,5415,743 2,788 9,271 5,478
General and administrative ........................ 1,465 1,122 4,004 3,2641,519 1,025 2,779 2,019
Amortization of goodwillintangibles and
other intangibles .... 529 698 1,924 2,093stock compensation 2,750 213 3,374 365
In process research and development -- -- 2,400 --
Non-recurring charges ............................. 2,665restructuring costs -- 4,005 227-- 2,243 --
-------- -------- -------- --------
Total operating expenses ........................ 9,820 8,076 26,350 24,053
Income22,504 12,656 42,088 24,985
Operating income (loss) from operations ........................ (2,593) 2,625 (6,321) 6,871(944) 592 (6,143) 2,247
Other income net .................................... 293 298 783 790(expense) 263 (286) (140) (626)
-------- -------- -------- --------
Income (loss) before provision for
income taxes .................... (2,300) 2,923 (5,538) 7,661
Income tax provision ................................. -- 1,162 -- 3,043(681) 306 (6,283) 1,621
Provision (benefit) for income taxes (12) 171 (1,172) 746
-------- -------- -------- --------
Net income (loss) ....................................($ 669) $ (2,300)135 ($ 5,111) $ 1,761 $ (5,538) $ 4,618875
======== ======== ======== ========
Earnings (loss) per share:
Basic ...........................................($ 0.02) $ (0.15)0.05 ($ 0.21) $ 0.12 $ ( 0.35) $ 0.310.30
======== ======== ======== ========
Diluted .........................................($ 0.02) $ (0.15)0.01 ($ 0.21) $ 0.11 $ ( 0.35) $ 0.280.06
======== ======== ======== ========
Number ofWeighted average shares used in computing earnings (loss) per
share:outstanding:
Basic ........................................... 15,694 15,245 15,646 15,07232,500 2,966 24,087 2,877
======== ======== ======== ========
Diluted ......................................... 15,694 16,100 15,646 16,20832,500 14,204 24,087 14,104
======== ======== ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statementsstatements.
-4-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In(in thousands)
(Unaudited)
NineFor the Six Months Ended
September 30,
-----------------------------July 1, 2000 July 3, 1999
1998
------------- ------------------------- ------------
Cash flows from operating activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................($ 5,111) $ (5,538) $ 4,618875
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization ................... 3,620 3,439
Amortization6,011 1,760
Compensation under stock option agreements 294 245
Write-off of future contingent share
liability.......................................in process research and development 2,400 --
1,650
Loss on asset disposition ....................... 34 --
Deferred taxes .................................. -- (81)
Equity in losses of and transactions with
unconsolidated joint venture ................... 255 420
Provision for impairment of note receivable ..... 2,665 --
ChangesChange in assets and liabilities:
Accounts receivable ........................ 2,635 (2,523)3,383 (325)
Prepaid expenses and other ................. (141) (249)
Other, net ................................. 184 98current assets 872 (95)
Deferred income taxes (1,875) (399)
Accounts payable ........................... (1,448) 536(1,217) (763)
Accrued liabilities ........................ (400) 1,303445 (288)
Deferred revenue ........................... (840) (641)(1,660) 347
-------- ---------------
Net cash provided by operating activities ......... 1,026 8,5703,542 1,357
-------- --------
Cash flows from investing activities:
Additions to furniture-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................. (891) (1,811)
Proceeds from sale(1,417) (338)
Capitalized software costs (1,146) (561)
(Increase) decrease in other assets -- (37)
Cash acquired in acquisition of assets ......................... 11 --
Notes receivable from related parties, net ........... (965) (855)
Loan to a joint venture .............................. -- (750)
-------- --------
Net cash used in investing activities ............. (1,845) (3,416)
-------- --------
Cash flows from financing activities:
Issuance of common stock,Summit Design, Inc.
net of issuancetransaction costs ...... 323 1,118
Tax benefit27,036 --
Purchase of option exercises ......................OmniView -- 875
Payments to acquire treasury stock ................... -- (2,329)
Principal payments of debt obligations ............... (154) (91)
Principal payments of capital lease obligations ...... (35) (38)(1,100)
-------- ---------------
Net cash provided by (used in) investing activities 24,473 (2,036)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (7,006) (1,000)
Proceeds from exercise of stock options 445 --
Repayments of capital lease obligations (194) (40)
-------- -------
Net cash used in financing activities 134 (465)(6,755) (1,040)
-------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (83) (122)
-------- Increase (decrease) in cash and cash equivalents .. (685) 4,689
Cash and cash equivalents, beginning of period ............ 27,693 19,973-------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,177 (1,841)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 531 4,487
-------- --------
Cash and cash equivalents, end of period ..................-------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,00821,708 $ 24,6622,646
======== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................ $ 2 $ 3612 655
======== =======
Income taxes .................................... 1,198 2,063
Supplemental disclosure of non-cash financing activities:
Retirement of treasury stock ......................... -- 11,55549 905
======== =======
The accompanying notes are an integral part of the condensed
consolidated financial statementsstatements.
-5-
SUMMIT DESIGN,INNOVEDA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Innoveda, Inc. ("Innoveda" or the "Company"), a publicly traded 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. The accompanying unaudited financial statements have been
prepared by Summit
Design, Inc. ("Summit" or "the Company") in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rulesfor interim
financial information and regulations.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, the accompanying unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments necessary to present
fairly the financial positioninformation set forth therein have been included. The business
combination of Summit with Viewlogic on March 23, 2000 was accounted for as a
reverse acquisition as former shareholders of Viewlogic owned a majority of the
Company,outstanding stock of Summit subsequent to the business combination. Therefore,
for accounting purposes, Viewlogic is deemed to have acquired Summit.
All fiscal 1999 financial information presented herein represents only the
financial results for Viewlogic. The fiscal 2000 financial information presented
in the Condensed Consolidated Statements of Operations, and itsthe Condensed
Consolidated Statements of Cash Flows represents the results of
operations and cash flows. These financial statements should be read in
conjunction with the audited financial statements and notes theretofor Viewlogic for
the years ended December 31, 1998, 1997periods stated and 1996 included inincludes the Company's Form 10-K
filedfinancial results for December 31, 1998.Summit from March 24,
2000. The operating results of operations for the ninequarter ended July 1, 2000 and for the six
months ended September 30, 1999July 1, 2000 are not necessarily indicative of the results that may
be expected for any future period. There has been no change to the yearestimated
fair value of assets acquired, liabilities assumed and resulting goodwill
relating to the Merger, reported in Innoveda's Quarterly Report on the Form 10-Q
for the period ended December 31,April 1, 2000. However, the estimated fair value of assets
may be subject to further refinement.
The accompanying financial statements should be read in conjunction with the
fiscal 1999 or any other future interim period,consolidated financial statements of Viewlogic and Summit,
Innoveda's Current Report on Form 8-K dated March 23, 2000, as amended, the
Innoveda Form S-4/A filed August 11, 2000, as amended, and footnote 8 on this
Form 10-Q entitled "PADS Merger".
2. MERGER OF VIEWLOGIC AND SUMMIT
On March 23, 2000 a change in control of the Registrant occurred at the
effective time (the "Effective Time") of the Merger contemplated by that certain
Agreement and Plan of Reorganization dated as of September 16, 1999 (the
"Reorganization Agreement") by and among Summit, Hood Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Summit ("Merger Sub"), and
Viewlogic. At the Effective Time, Merger Sub merged with and into Viewlogic with
Viewlogic surviving as a wholly owned subsidiary of Summit (the "Merger"). In
connection with the Merger, Summit changed its name to Innoveda, Inc. Pursuant
to the Reorganization Agreement, Summit issued 16,337,979 shares of its common
stock to Viewlogic shareholders in exchange for all the outstanding common stock
of Viewlogic (24,051,963 outstanding shares) at a .67928 to 1 exchange ratio.
Immediately after the Effective Time, the shareholders of Viewlogic immediately
prior to the Effective Time owned 50.6% of the outstanding common stock of
Innoveda, Inc., and the Company makes no
representationsshareholders of Summit immediately prior to the
Effective Time owned the remaining 49.4% of the outstanding shares of Innoveda
common stock.
-6-
The Merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition as the stockholders of Viewlogic received the
larger portion of the voting interests in the combined company. Viewlogic was
considered the acquirer for accounting purposes and recorded Summit's assets and
liabilities based upon their estimated fair values. The operating results of
Summit have been included in the accompanying consolidated financial statements
from the date of acquisition. Under the purchase method of accounting, the
acquired assets and assumed liabilities have been recorded at their estimated
fair values at the date of acquisition. On a preliminary basis, goodwill and
other intangibles in the amount of approximately $37,737,000 have been
capitalized. As a result of the Merger, $2,400,000 relating to in-process
research and development has been expensed. The goodwill and other intangibles
will be amortized over estimated useful lives of three to seven years.
Below is a table of the acquisition costs and the preliminary purchase price
allocation (in thousands):
- -------------------------------------------------------------------
Preliminary purchase price:
- -------------------------------------------------------------------
Common stock $ 49,020
- -------------------------------------------------------------------
Stock options 4,882
- -------------------------------------------------------------------
Acquisition costs 1,136
- -------------------------------------------------------------------
Total preliminary purchase price $55,038
- -------------------------------------------------------------------
Preliminary purchase price allocation:
- -------------------------------------------------------------------
Tangible net assets acquired $28,489
- -------------------------------------------------------------------
Assets impaired by Merger (750)
- -------------------------------------------------------------------
Deferred income taxes (11,492)
- -------------------------------------------------------------------
Intangible net assets acquired:
- -------------------------------------------------------------------
Purchased technology, assembled workforce, and
customer base 23,200
- -------------------------------------------------------------------
Goodwill 14,537
- -------------------------------------------------------------------
In-process research and development 2,400
- -------------------------------------------------------------------
Estimated Merger related thereto.
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)severance and shutdown
costs, net of tax benefits (1,346)
- -------------------------------------------------------------------
Total $55,038
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The unaudited consolidated results of operations on a pro forma basis as if the
Merger had occurred as of the beginning of the periods presented are as follows:
September 30,For the Second
Quarter Ended For the Six Months Ended
July 3, 1999 December 31, 1998
------------------ -----------------
(Unaudited)July 1, 2000 July 3, 1999
------------ ------------ ------------
Accounts receivable:
Trade receivables ..........................
Revenue $ 6,60920,430 $ 9,363
Less allowance for doubtful accounts ....... (392) (511)39,406 $ 41,230
Net income (loss)* (2,139) (11,978) (4,439)
Net income per share - basic ($ 0.07) ($ 0.37) ($ 0.14)
Net income per share - diluted ($ 0.07) ($ 0.37) ($ 0.14)
*Six months ended July 1, 2000 includes $5,437 of non-recurring charges and
write-off of $2,400 of in-process research and development.
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
-7-
3. RESTRUCTURING AND NON-RECURRING CHARGES
During the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges. This primarily included severance and
other costs relating to the consolidation of duplicative facilities as a result
of the merger between Summit and Viewlogic. Other costs relating to property and
equipment lease contracts (less any applicable sublease income) after the
properties were abandoned, lease buyout costs, restoration costs associated with
certain lease arrangements, and costs to maintain facilities during the period
after abandonment are also included. Further action was taken to restructure the
Innoveda sales and services business in Japan as a result of an exclusive
distributor agreement executed with Marubeni Solutions Corporation during the
first quarter of fiscal 2000. Charges associated with 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.
The following table presents the components of the non-recurring restructuring
charges accrued during the period ended April 1, 2000 and the charges against
the reserves through July 1, 2000. All significant amounts are expected to be
paid within one year from the merger date of March 23, 2000.
July 1, 2000
Total Non-cash Amounts Accrual
Charge Write-offs Paid Balance
------ ---------- ------- -------
$ 6,217 $ 8,852
======= =======
Furniture and equipment:
Office furniture equipment ................. $ 680 $ 1,201
Computer equipment ......................... 5,305 5,138
Leasehold improvements ..................... 940 491
------- -------
6,925 6,830
Less: accumulated depreciation and amortization (3,191) (2,717)
------- -------
$ 3,734 $ 4,113
======= =======
Accrued liabilities:
Payroll
Severance and related benefits ............... $ 2,871780 $ 3,051
Severance .................................. 1,136 -- Sales and marketing ........................ 360 332
Accounting and legal ....................... 433 310
Federal and state income taxes payable ..... 352 1,549
Sales taxes payable ........................ 39 160
Other ...................................... 96 285
------- -------
Total accrued liabilities ................ $ 5,287704 $ 5,687
======= =======76
Non-cancelable commitments 1,389 -- 399 990
Capitalized software 74 74 -- --
------ ----- ------ ------
Totals $2,243 $ 74 $1,103 $1,066
====== ==== ====== ======
-6-
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. RECONCILIATION OF4. EARNINGS PER SHARE
On January 1, 1998,Although Summit is the Company adopted Statementsurviving legal entity after the Merger and the legal
acquirer, for accounting purposes the Merger was treated as an acquisition of
Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." In accordance with SFAS No. 128,
basic earnings per share is computed using theSummit by Viewlogic. The weighted average number of common shares outstanding
duringhas been adjusted for all periods reported to reflect the period. Diluted earnings per share is computed
using the weighted average numberexchange ratio of
common and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares consist
of common stock issuable upon exercise of stock options using the treasury stock
method. The following provides a reconciliation of the numerators and
denominators of the basic and diluted per share computations:.67928.
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------For the Second Quarter Ended For the Six Months Ended
July 1, 2000 July 3, 1999 1998July 1, 2000 July 3, 1999 1998
------ ------- ---- ----
Numerator:
Net income (loss) ($ 669) $ (2,300)135 ($ 5,111) $ 1,761 $ (5,538) $ 4,618
==========875
======= ========= ============ ======== =====
Denominator:
Denominator for basic earnings (loss)
per share weightedWeighted average number of common shares
15,694 15,245 15,646 15,072
Effect- Basic 32,500 2,966 24,087 2,877
Dilutive effect of dilutive securities:
Employeeemployee stock options -- 855370 -- 1,136
---------- ------- --------- -------
Denominator for diluted earning (loss)
per share 15,694 16,100 15,646 16,208
==========359
Assumed conversion of preferred stock -- 10,868 -- 10,868
-- ------ -------- ------
Weighted average number of common shares
- Diluted 32,500 14,204 24,087 14,104
======= ========= ============= ====== ======
Net income (loss) per share - basic ($ 0.02) $ ( 0.15)0.05 ($ 0.21) $ 0.12 $ ( 0.35) $ 0.31
==========0.30
======= ========= ============= ======== ======
Net income (loss) per share - diluted ($ 0.02) $ (0.15)0.01 ($ 0.21) $ 0.11 $ ( 0.35) $ 0.28
==========0.06
======= ========= ============= ======== ======
4.-8-
5. BUSINESS SEGMENTS EXPORTS AND MAJOR CUSTOMERS:
The CompanyGEOGRAPHIC DATA
Innoveda operates in a single industry segment comprising the electronic design
automation industry. Net revenue by geographic region (in thousands) and as a
percentage of total revenue for each region outside North America is as follows:
Three months ended Nine months ended
September 30, September 30,For the Second Quarter Ended For the Six Months Ended
July 1, 2000 July 3, 1999 1998July 1, 2000 July 3, 1999
1998
---------------------- ---------------------------------- ------------ ------------ ------------
Revenue
North America $14,240 $9,218 $23,939 $18,210
Europe ...................... $ 1,378 $ 1,351 $ 4,300 $ 4,2103,189 1,910 4,741 4,386
Japan ...................... 1,678 1,831 5,076 5,6712,833 993 5,505 2,688
Other Asia Pacific .......... 344 1,185 704 1,9931,298 1,127 1,760 1,948
----- ----- ----- -----
Total Revenue $21,560 $13,248 $35,945 $27,232
======= ======= ======= =======
As a Percentage of Total Revenue:Revenue
North America 66% 70% 67% 67%
Europe ...................... 17.5% 11.9% 19.7% 12.9%15% 14% 13% 16%
Japan ...................... 21.4% 16.2% 23.2% 17.4%13% 7% 15% 10%
Other Asia Pacific .......... 4.4% 10.5% 3.2% 6.1%6% 9% 5% 7%
-- -- -- --
Total 100% 100% 100% 100%
==== ==== ==== ====
-7-
Sales through one distributor accounted for 21.4%, 16.2%, 23.2%, and 17.4%6. COMPREHENSIVE INCOME
The following table presents the components of the Company's total revenuecomprehensive income for the
three months ended September 30,periods indicated.
For the Second Quarter Ended For the Six Months Ended
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
Net income (loss) ($ 669) $ 135 ($ 5,111) $ 875
Foreign currency translation adjustments (103) (2) (129) 261
----- --- ----- ---
Comprehensive income (loss) ($ 772) $ 133 ($ 5,240) $ 1,136
======= ===== ========= =======
7. DEBT
Innoveda has an $18.0 million term loan with Fleet Bank, with approximately
$10.0 million outstanding as of July 1, 2000. The loan agreement was amended
as of July 31, 2000 to include Innoveda as a borrower. Borrowings under the
credit facility are secured by substantially all of Innoveda's assets. The
credit facility contains limitations on additional indebtedness and 1998,capital
expenditures, and for the nine months ended September 30, 1999 and 1998, respectively.
Sales to Credence Systems Corporation ("CSC") accounted for 22.1% and 25.2% of
the Company's total revenue for the three and nine months ended September 30,
1998. Such revenue included $2.5 million and $8.2 million, respectively of
Visual Testbench license and maintenance sales made pursuant to an OEM agreement
with CSC. As of December 31, 1998, CSC had fully satisfied its obligation to
purchase Visual Testbench Licenses pursuantincludes financial covenants, which include but are not
limited to the OEM agreementmaintenance of minimum levels of profits, interest and the Company
does not expect to receive any additional revenue from salesdebt
service coverage ratios and maximum leverage 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. Innoveda is in compliance with all of Visual Testbench
licenses. The Company did not receive any revenue from CSC for the nine months
ended September 30, 1999. Revenue generated pursuant to another OEM agreement
accounted for 13.8%, 12.2%, 13.0%, and 9.0%its debt
covenants as of the Company's total revenue for
the three months ended September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998, respectively. Foreign operations of Summit Design
(EDA) Ltd. accounted for less than 10% of total revenue of the Company for the
three and nine months ended September 30, 1999. Identifiable assets of the
Company's Israeli subsidiary were less than 10% of total assets at December 31,
1998. Additionally, one customer accounted for 10.2% of total revenue for the
three months ended September 30, 1999.
5. SUBSEQUENT EVENTSJuly 1, 2000.
-9-
8. PADS MERGER
On September 16, 1999, the CompanyJune 2, 2000 Innoveda, Inc. entered into a definitivemerger agreement towith PADS
Software, Inc. The merger agreement provides that a wholly owned subsidiary of
Innoveda will merge with Viewlogic Systems, Inc. ("Viewlogic")and into PADS, with PADS surviving as a privately held software
company headquarteredwholly owned
subsidiary of Innoveda following the merger. In the merger, Innoveda will issue
6,473,136 shares of its common stock and expects to pay approximately $1.9
million to the PADS stockholders. The number of shares of Innoveda common stock
and the cash consideration which each PADS stockholder will receive in Marlboro, Massachusetts under whichexchange
for their shares of PADS capital stock will be determined at the Company will
acquire Viewlogic. Eacheffective time
of the merger based on the number of shares and options of PADS capital stock
then outstanding. Based upon the outstanding PADS capital stock as of August 1,
2000, it is expected that each share of Viewlogic Preferred and Common StockPADS capital stock will be exchanged for
0.67928approximately 1.9 shares for Summit Common Stock upon closing of the
transaction.Innoveda common stock and $.51 in cash. In addition,
the Company will assume all optionseach outstanding under Viewlogic'soption to purchase shares of PADS common stock option plan. The Company intends to account for this
acquisition as a purchase. Although Summit will be
acquiring Viewlogic, after
such transaction, Viewlogic stockholders will hold a controlling interest in
Summit. Accordingly, for accounting purposes,converted into an option to purchase 2.0355 shares of Innoveda common stock,
with the acquisition willoption exercise price to be a
"reverse acquisition" and Viewlogic will be the "accounting acquirer". As
Viewlogic will be the accounting acquirer, its accounts will be recorded at
historical cost and the assets and liabilities of Summit will be recorded at
their estimated fair value as of the closing date.adjusted accordingly. The transaction is
subject to the approval of Viewlogic's and the Company'sPADS' stockholders and standardother customary closing
conditions.
6. NON-RECURRING CHARGES
Non-recurring charges9. SUBSEQUENT EVENT
On July 28, 2000 Innoveda entered into an agreement with Synopsys, Inc. in
which Synopsys agreed to acquire Innoveda's VirSim electronic design software
tool and related assets for a purchase price of $2.7 million$7.0 million. VirSim is used
as a debugging and analysis environment with hardware description language
simulators, including the Synopsys VCS Verilog simulator. The sale was
completed on August 1, 2000. Previously, Synopsys licensed VirSim from
Innoveda on an original equipment manufacturer basis. Innoveda has retained
rights to the product source code and plans to integrate the functionality of
VirSim with its suite of verification tools. Other VirSim original equipment
manufacturer agreements have been transferred to Synopsys. Innoveda customers
who purchased VirSim bundled with other products from Innoveda will have
continued support from Innoveda and will be transitioned to the integrated
version of the technology over time. The sale will reduce anticipated
revenues for the three months ended September
30, 1999 relatebalance of the year by approximately $1.2 million due to the
impairmentelimination of revenue from VirSim royalties.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
This SFAS establishes standards for derivative instruments and hedging
activities. SFAS 133 requires an entity to recognize all derivatives as either
an asset or liability in the statement of financial position and measure those
instruments at fair value. SFAS 133 requires that changes in the fair value of a
note receivable. Asderivative be recognized currently in earnings unless specific hedge accounting
criteria are met and that a company must formally document, designate and assess
the effectiveness of September 30,transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. Innoveda is planning
to adopt SFAS 133 in the first quarter of fiscal 2001. Innoveda is currently
evaluating this statement, but does not expect the adoption of SFAS 133 to have
a material effect on Innoveda's consolidated financial position or results of
operations.
In December 1999, the Company has loaned $2.7 million to an independent software company
pursuant to a secured loan agreement entered into July 1997. During the three
months ended September 30, 1999 the Company terminated its agreement with the
independent software company. This decision by the Company impaired the
viabilitySecurities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The SAB
summarizes certain of the independent software company as a going concern due to a
lackSEC's views in applying revenue recognition in
financial statements. The provisions of financial support. Based on this development,SAB No. 101 are effective in the Company recorded
$2.7 million in provision for the impairmentfirst
quarter of our current fiscal year beginning January 2, 2000. Innoveda has not
yet completed its evaluation of the note receivable.
Non-recurring chargeseffects of $4.0 million for the nine months ended September 30,
1999 relate to severance obligations of $1.3 million to certain management
personnel, which will be paid in future periods and a charge of $2.7 million
for the impairment of a note receivable. Non-recurring charges of $227,000
for the nine months ended September 30, 1998 relate to the acquisition of
ProSoft.
-8-SAB No. 101.
-10-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions identify such forward-looking
statements.statements, but not all forward-looking statements contain such words. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated in the
forward-looking statements. Factors which could cause actual results to differ
materially include 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." Unless
required by law, the CompanyInnoveda undertakes no obligation to update publicly any
forward-looking statements.
OVERVIEW
Summit Design, Inc. (Innoveda operates in the "Company") was foundedUnited States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in December 1993 to act as the holding company for Test Systems Strategies, Inc. ("TSSI")design of advanced electronic products and SEE Technologies,
(now Summit Design (EDA) Ltd.) collectively, the "Reorganization"). TSSI was
founded in 1979 to developsystems, and
market integrated circuit ("IC" or "chip")
manufacturing test products. In January 1993, TSSI retained a new Chief
Executive Officer and began to restructure its senior management team.
Thereafter, the Company broadened its strategy from focusing primarily on
manufacturing test products to include providing HLDA design creation and
verification tools and integrating these with its core technology. As part of
its strategy, in early 1994, TSSI acquired SEE Technologies, an Israeli company
that, through its predecessor, began operations in 1983 and had operated
primarily as a research and developmenttechnical support and consulting company focused on the
electronic design automation ("EDA") market. As a result of the Reorganization,
TSSIservices for those software tools. Innoveda
currently markets and SEE Technologies became wholly-owned subsidiaries of the Company in the
first quarter of 1994.
Prior to the Reorganization, the Company's TDS product and related maintenance
revenue accounted for all of the Company's revenue. After the Reorganization and
through June 30, 1997, the Company's revenue was predominantly derived from two
product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL for
Verilog, and TDS. As a result of the July 1997 sale of the TDS product line,
Design to Test products are no longer a source of revenue for the Company. With
the acquisition of TriQuest Design Automation, Inc. ("TriQuest") in February
1997, Simulation Technologies Corp ("SimTech"), in September 1997, and ProSoft
OY ("ProSoft") in June 1998, the Company has also derived revenue from
verification products which include hardware-software co-verification, code
coverage, and HDL debugging products as well as analysis, verification and RTL
optimization tools.
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer training. Product license revenue is derived
from the sale of software licenses to distributors and end-users. Revenue from
the sale of software licenses is recognized upon shipment of the product if
remaining vendor obligations are insignificant and collection of the resulting
receivable is probable, otherwise revenue from such software products is
deferred until such time as vendor obligations are met. Maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically 12 months. Revenue from customer training is recognized when
the service is performed. Revenue earned on software arrangements involving
multiple elements is allocated to each element based on vendor-specific
objective evidence (VSOE) of the fair value of the various elements within the
arrangement. The Company sells its products worldwide through multiple distribution
channels, including independent distributors, value-added resellers, a direct
sales forceorganization, telesales and strategic sales alliances with OEM partners.
Innoveda anticipates modest revenue growth as it continues to merge the
operations of Summit and Viewlogic, integrate distribution channels, and
establish a significant market presence under it's new name. Innoveda believes
that it has made significant progress in North America and selected European countries and through distributors inthose areas during the Company's other international markets. Revenue from product sales through
distributors is recognized netfirst half of
the associated distributor discounts. Fees
received for granting distribution rights are deferred and recognized ratably
over the term of the distribution agreement. Although the Company has not
adopted a formal return policy, the Company generally reimburses customers in
full for returned products. Estimated sales returns are recorded when the
related revenue is recognized.
-9-
The Company's products perform a variety of functions, certain of which are, and
in the future may be, offered as separate products or discrete point solutions
by the Company's existing and future competitors. For example, certain companies
currently offer design entry products without simulators. There can be no
assurance that such competition will not cause the Company to offer point
solutions instead of, or in addition to, the Company's current software
products. Such point solutions would be priced lower than the Company's current
product offerings and could cause the Company's average selling prices to
decrease. Accordingly, based on these and other factors, the Company expects
that average selling prices for its products may continue to fluctuate in the
future.
The Companyfiscal 2000.
PADS ACQUISITION
On June 2, 2000, Innoveda, Inc. entered into a joint venturemerger agreement with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Asia, Ltd. ("Summit
Asia")) acquired exclusive rights to sell, distributePADS
Software, Inc. The merger agreement provides that a wholly owned subsidiary
of Innoveda will merge with and support all of the
Company's products in the Asia-Pacific regions, excluding Japan. Prior to that
date, Anam was an independent distributor of the Company's products in Korea. In
April 1998, the joint venture corporation, Summit Asia, which is headquartered
in Korea, was renamed Asia Design Corporation ("ADC"). In May 1998, the Company
exchanged a portion of its ownership in ADC for ownership in another company
located in Hong Kong, Summit Design Asia, Ltd. ("SDA"). SDA also acquired an
equity investment in ADC. In June 1998, the Company and Anam each loaned SDA
$750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive rights
to sell, distribute and support the Company's products in Asia Pacific region,
excluding Japan. SDA granted distribution rights to the Company's products to
ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA
cancelled ADC's distribution rights in all areas except Korea and granted
non-exclusive distribution rights to Semiconductor Technologies Australia
("STA") for the Asia Pacific region, excluding Japan and Korea. For the nine
months ended September 30, 1999 and 1998, sales through SDA accounted for 2.3%
and 3.1% of the Company's revenue, respectively.
The Company accounts for its ownership interest in SDA and ADC on the equity
method of accounting and,into PADS, with PADS surviving as a result,wholly
owned subsidiary of Innoveda following the Company's share ofmerger. In the earnings and
losses of SDA and ADC are recognized as income or losses in the Company's income
statement in "Other income, net." The Company does not expect SDA or ADC to
recognize a profit for the foreseeable future and thus does not expect to
recognize income from its investment in SDA or ADC for the foreseeable future,
if at all. There can be no assurance that the restructuringmerger, Innoveda
will result in SDA
or ADC becoming profitable or that revenue attributable to sales in the Asia
Pacific region, excluding Japan, would increase.
Approximately 43.3%, 38.6%, 46.1%, and 36.3% of the Company's total revenue for
the three months ended September 30, 1999 and 1998, and for the nine months
ended September 30, 1999 and 1998, respectively, were attributable to sales made
outside the United States, which includes the Asia Pacific region and Europe.
Approximately, 25.8%, 26.7%, 26.5% and 23.4% of the Company's revenue for the
three months ended September 30, 1999 and 1998, and for the nine months ended
September 30, 1999 and 1998, respectively, were attributable to sales made in
the Asia Pacific region. Approximately 17.5%, 11.9%, 19.7%, and 12.9% of the
Company's revenue for the three months ended September 30, 1999 and 1998, and
for the nine months ended September 30, 1999 and 1998, respectively, were
attributable to sales made in Europe. The increase in the percentage of revenue
from sales made outside the United States in 1999 is primarily the result of a
decrease in domestic sales made to Credence Systems Corporation ("CSC") in 1998
pursuant to an OEM agreement. As of December 31, 1998, CSC had satisfied its
obligations under the OEM agreement and the Company will not receive any
additional revenue pursuant to the OEM agreement. The Company expects that
international revenue will continue to represent a significant portion of its
total revenue. The Company's international revenue is currently denominated in
U.S. dollars. As a result, increases in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in those markets. The Company pays the
expenses of its international operations in local currencies and does not engage
in hedging transactions with respect to such obligations. International sales
and operations are subject to numerous risks, including tariff regulations and
other trade barriers, requirements for licenses, particularly with respect to
the export of certain technologies, collectability of accounts receivable,
changes in regulatory requirements, difficulties in staffing and managing
foreign operations and extended payment terms. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and operations and, consequently, on the
-10-
Company's business, financial condition, results of operations or cash flows. In
addition, financial markets and economies in the Asia Pacific region have been
experiencing adverse economic conditions. Demand for and sales of the Company's
products in the Asia Pacific region have continued to decrease and there can be
no assurance that such adverse economic conditions will not worsen. In June
1999, the Company lowered Seiko's specified quotas due to the adverse economic
conditions in the Asia Pacific Region. As a result, Summit expects sales through
Seiko to decrease for at least the current and following two quarters.(1)
On February 28, 1997, the Company completed its acquisition of TriQuest.
TriQuest develops HDL analysis, optimization, and verification tools for the
design of high performance, deep submicron integrated circuits. The transaction
has been accounted for as a "pooling of interest" in accordance with generally
accepted accounting principles.
Effective July 1, 1997, the Company sold substantially all of the assets used in
its business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to CSC. As of July 1, 1997, TDS products ceased to
be a source of such revenues. CSC assumed the Company's obligations under TDS
maintenance contracts entered into prior to the closing and the Company has not
recognized deferred revenue associated with such contracts since June 30, 1997.
The Company maintained exclusive rights to its Visual Testbench technology and
CSC agreed to purchase a minimum of $16 million of Visual Testbench licenses
over a thirty-month period beginning July 1997, subject to specified quarterly
maximums and certain additional conditions, and $2 million of maintenance over
an eighteen month period beginning July 1997. In December 1998, the Company and
CSC agreed to amend the agreement and as of December 31, 1998, CSC had satisfied
its obligation to purchase $16 million of Visual Testbench licenses. CSC also
obtained shared ownership of the Visual Testbench source code in December 1998
and has the right to sell Visual Testbench licenses based on the source code
received from the Company.
On September 9, 1997, the Company acquired SimTech, a company that develops and
distributes hardware-software co-verification, code coverage and HDL debugging
software. The aggregate consideration for the acquisition was 1,256,800 shares
of the Company's common stock, 723,200 options to purchase the Company's common
stock and $3.9 million in cash. The transaction was accounted for using the
purchase method of accounting. Accordingly, SimTech's results of operations for
the period from September 9, 1997 are included in the consolidated statements of
operations. The purchase price was allocated to the net assets acquired based on
their estimated fair market values at the date of acquisition.
After discussion with the Staff of the Securities and Exchange Commission (the
"Staff") the Company restated the consolidated financial statements as of and
for the quarters ended September 30, 1997, March 31, 1998, June 30, 1998 and
September 30, 1998 and as of December 31, 1997 and for the year ended December
31, 1997 to reflect a change in the original accounting treatment to the
September 1997 acquisition of SimTech.
In connection with the acquisition of SimTech, the Company repurchased 939,000
shares of common stock in a private transaction at an average price of $12.30
per share for $11.6 million in September 1997.
On December 23, 1997, the Company announced that the Board of Directors had
authorized the repurchase of up to 750,000 shares of the Company's Common Stock.
From January 1, 1998 to May 12, 1998, the Company repurchased 162,500issue 6,473,136 shares of its common stock at a cost of $2.3 million. The Company subsequently issued
these shares through the exercise of stock options during the three months ended
June 30, 1998. On June 29, 1998, the Company cancelled this stock repurchase
plan.
- ----------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouragedand expects to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 22 for a
discussion of factors that could affect future performance.
-11-
On June 30, 1998, the Company completed its acquisition of ProSoft. ProSoft
develops software tools used to verify embedded systems software priorpay
approximately $1.9 million to the availability of a hardware prototype. The aggregate consideration for the
acquisition (including shares of common stock reserved for issuance upon
exercise of ProSoft options, which were exchanged for options of the Company)
was 248,334 shares of common stock. The transaction has been accounted for as a
pooling of interests in accordance with generally accepted accounting
principles. In compliance with such principles, the Company's financial
statements have been restated to include the accounts of ProSoft as if the
acquisition had occurred at the beginning of the first period presented.
In September 1998, the Company announced its proposed acquisition of OrCAD, Inc.
In February 1999, the Company announced that its planned acquisition of OrCAD,
Inc. had been terminated. During the quarter ended December 31, 1998, the
Company incurred approximately $1.0 million in costs related to the terminated
acquisition.
RECENT DEVELOPMENTS
On September 16, 1999, the Company entered into a definitive agreement to
merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software
company headquartered in Marlboro, Massachusetts under which the Company will
acquire Viewlogic. Each share of Viewlogic Preferred and Common Stock. In
addition, the Company will assume all options outstanding under Viewlogic's
stock option plan will be exchanged for 0.67928 shares for Summit Common
Stock upon closing of the transaction. The Company intends to account for
this acquisition as a purchase. Although Summit will be acquiring Viewlogic,
after such transaction, Viewlogic stockholders will hold a controlling
interest in Summit. Accordingly, for accounting purposes, the acquisition
will be a "reverse acquisition" and Viewlogic will be the "accounting
acquirer". As Viewlogic will be the accounting acquirer, its accounts will be
recorded at historical cost and the assets and liabilities of Summit will be
recorded at their estimated fair value as of the closing date.PADS stockholders. The transaction is
subject to the approval of Viewlogic's and the Company'sPADS' stockholders and standardother customary closing
conditions.
As of September 30, 1999, the Company has loaned $2.7 million to an
independent software company pursuant to a secured loan agreement entered
into during July 1997. Borrowings under the agreement bear interest at prime
plus 2%. During the three months ended September 30, 1999, the Company
terminated its relationship with the independent software company. This
decision by the Company impaired the viability of the independent software
company as a going concern due to a lack of financial support. Based on this
development, the Company recorded $2.7 million in provision for impairment of
the note receivable.
In addition to the risks stated below in "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock", if the Company's
proposed business combination with Viewlogic is completed, the combined
Company's operating results will be subject to the following additional risks:
-12-
THE EXCHANGE RATIO FOR SUMMIT COMMON STOCK TO BE RECEIVED BY VIEWLOGIC
STOCKHOLDERS IN THE BUSINESS COMBINATION IS FIXED AND WILL NOT BE ADJUSTED IN
THE EVENT OF ANY INCREASE OR DECREASE IN STOCK PRICE.
Under the merger agreement, each outstanding share of Viewlogic capital stock
will be converted into the right to receive 0.67928 of a share of Summit
common stock. The exchange ratio is fixed and will not be adjusted in the
event of any increase or decrease in the market price of Summit common stock.
Accordingly, the market value of the consideration to be received by the
stockholders of Viewlogic in the business combination will depend entirely on
the market price of Summit common stock upon the completion of the business
combination. The market price of Summit common stock at the completion of the
business combination may vary from its price on the date the merger agreement
was signed, the date of this joint proxy statement/prospectus and the date of
the special meetings. The market price may vary because of many factors,
including:
- changes in the business, operations or prospects of Summit;
- the timing of the completion of the business combination;
- the prospects of post-business combination operations of the combined
company; and
- general market conditions.
THE INHERENT UNCERTAINTY PRIOR TO COMPLETION OF THE BUSINESS COMBINATION MAY
CAUSE SUMMIT'S OR VIEWLOGIC'S CUSTOMERS TO DELAY PURCHASING DECISIONS AND MAY
REDUCE THE LIKELIHOOD OF SUMMIT MEETING THE EXPECTATIONS OF INVESTORS AND
ANALYSTS.
The business combination of two companies can be unsettling to customers.
Summit and Viewlogic believe that a number of their respective customers may
delay their purchase decisions until they have the opportunity to learn more
about the business plans of the combined company. As a result, the quarterly
results of one or both of the companies could fail to meet the expectations of
investors and analysts.
-13-
THE SHARES OF SUMMIT COMMON STOCK WHICH ARE ISSUABLE UNDER THE MERGER AGREEMENT
MAY DILUTE SUMMIT'S EARNINGS PER SHARE.
A number of shares equal to approximately 51% of Summit's outstanding common
stock after the business combination will be issued to the stockholders of
Viewlogic upon completion of the business combination. Additionally, shares
equal to approximately 7% of the outstanding Summit common stock after the
business combination will be reserved for issuance upon the exercise of
options to purchase Viewlogic common stock assumed by Summit under the merger
agreement. The issuance of Summit common stock in connection with the
business combination and upon the exercise of Viewlogic options assumed by
Summit may cause a dilution of earnings per share which may negatively impact
the price of Summit common stock.
IF SUMMIT AND VIEWLOGIC CANNOT BE SUCCESSFULLY INTEGRATED THE ANTICIPATED
SYNERGIES MAY NOT BE REALIZED, IN FULL, IF AT ALL.
The Summit board of directors and the Viewlogic board of directors have each
unanimously approved the merger agreement with the expectation that the
business combination will result in cost savings and beneficial product and
operating synergies. Following the business combination, in order to maintain
and increase profitability the combined company will need to successfully
integrate and streamline overlapping functions. For example, Summit's
operations in Beaverton, Oregon, will be relocated. The desired cost savings
may not be achieved and the integration of Summit's and Viewlogic's
operations may not be accomplished smoothly, expeditiously or successfully.
The difficulties of achieving these goals may be increased by the need to
combine two corporate cultures.
THE INTEGRATION OF SUMMIT'S AND VIEWLOGIC'S BUSINESSES MAY DISTRACT
MANAGEMENT FROM ACHIEVING ITS OPERATIONAL OBJECTIVES WHICH COULD LIMIT THE
COMBINED COMPANY'S ABILITY TO RETAIN ITS EMPLOYEES.
The integration of the companies' businesses following the business
combination will require the dedication of management resources, which may
distract management's attention from the day-to-day business of the combined
company. The business of the combined company may also be disrupted by
employee uncertainty and lack of focus during integration. The retention by
Viewlogic and Summit of key employees is critical to ensure continued
advancement, development and support of the companies' technologies as well
as on-going sales and marketing efforts. During the pre-merger and
integration phases, competitors may intensify their efforts to recruit key
employees. The combined company may not be able to retain key technical,
sales or marketing personnel after the business combination which would
adversely affect the combined company's business.
THE COMBINED COMPANY MAY NOT SUCCESSFULLY INTEGRATE RECENT BUSINESS ACQUISITIONS
OF SUMMIT AND VIEWLOGIC.
Each of Summit and Viewlogic has recently completed other business
acquisitions. This business combination, if approved, would be the largest
for either company. The difficulties of integrating Summit's and Viewlogic's
businesses may be exacerbated by the size and number of recent acquisitions.
Products, technologies, distribution channels, key personnel and businesses
of previously acquired companies may not effectively integrate into the
combined company's business or product offerings. Moreover, this integration
may adversely affect the combined company's business.
-14-
THE COMBINED COMPANY WILL BE MANAGED BY A NEW MANAGEMENT TEAM WHICH WILL HAVE
SIGNIFICANT CONTROL OVER ITS BUSINESS AND DIRECTION.
After the business combination, the current management of Viewlogic will be
able to exert significant control over the combined company, its business and
direction, subject to the oversight of the combined company's board of
directors. The manner in which the new management team conducts the business
of the combined company, and the direction in which the new management team
moves the business, may differ from the manner and direction in which the
current management of Summit would direct the combined company or Summit on a
stand-alone basis. Such control by the new management team, together with the
effects of future market factors and business conditions, could ultimately
evolve into an integration and business strategy that, when implemented,
differs from the strategy and business direction currently recommended by
Summit's current management and board of directors. The new management team,
and any change in business or direction, may not improve, and could adversely
impact, the combined company's financial condition and results of operations.
BOTH COMPANIES WILL INCUR SUBSTANTIAL EXPENSES RELATING TO THE BUSINESS
COMBINATION.
Summit and Viewlogic estimate that the negotiation and implementation of the
business combination will result in aggregate costs of approximately $3.9
million, primarily relating to costs associated with combining the companies
and the fees of attorneys, accountants and Summit's financial advisor. This
estimate may be incorrect, or unanticipated events may substantially increase
the costs of combining the operations of the companies. In addition, the
combined company expects to record a non-cash expense of approximately $2.1
million with respect to the write-off of acquired in-process research and
development. In any event, the companies anticipate that costs associated
with the business combination and the write-off of acquired in-process
research and development and goodwill amortization will negatively impact
results of operations in the quarter in which the business combination is
completed. In addition, Summit and Viewlogic expect to amortize approximately
$22.2 million of acquired intangible assets over a period of three to five
years, and this will negatively impact results of operations for the duration
of the period.
THE PROPOSED BUSINESS COMBINATION WITH VIEWLOGIC MAY NOT BE CONSUMMATED.
The proposed business combination with Viewlogic is subject to stockholder
approval and other conditions. In addition, either Summit or Viewlogic may
terminate the transaction. If the business combination is not consummated, it
may adversely affect Summit's business and the market price of Summit's
common stock.
-15--11-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certainforth-certain financial data as a percentage of revenue.total
revenue for the periods indicated:
ThreeFor the Second Quarter Ended For the Six Months Ended
Nine Months Ended
September 30, September 30
---------------------- ---------------------July 1, July 3, July 1, July 3,
2000 1999 19982000 1999 1998
-------- -------- -------- -------
Revenue:
Product licenses ..................... 62.0% 76.9% 61.7% 78.0%
MaintenanceSoftware 54% 50% 54% 48%
Services and services ............. 38.0 22.3 38.3 21.2
Other ................................ -- 0.8 -- 0.8
----- ----- ----- ------other 46% 50% 46% 52%
--- --- --- ---
Total revenue ................... 100.0 100.0 100.0 100.0100% 100% 100% 100%
Costs and expenses:
Cost of revenue:
Product licenses ..................... 2.8 1.6 2.2 1.5
Amortizationsoftware 9% 10% 10% 10%
Cost of purchased technologies 3.4 2.3 4.0 2.4
Maintenanceservices and services ............. 1.8 1.5 2.1 1.5
----- ----- ----- ------
Total cost of revenue ........... 8.0 5.4 8.3 5.4
Gross profit .................... 92.0 94.6 91.7 94.6
Operating expenses:other 10% 12% 10% 12%
Sales and marketing 39% 43% 41% 41%
Research and development ............. 32.7 26.7 35.4 27.3
Sales and marketing .................. 33.0 28.6 39.7 29.226% 21% 26% 20%
General and administrative ........... 18.7 9.9 18.3 10.07% 8% 8% 8%
Amortization of goodwillintangibles and other
intangibles ....................... 6.7 6.2 8.8 6.4stock
compensation 13% 2% 9% 1%
In process research and development -- -- 7% --
Non-recurring charges (a) ............ 33.9restructuring costs -- 18.3 0.7
----- ----- ----- -------- 6% --
--- --- --- ---
Total operating expenses ........ 125.0 71.4 120.5 73.6
----- ----- ----- ------
Income from operations .................... (33.0) 23.2 (28.8) 21.0104% 96% 117% 92%
Operating income (loss) -4% 4% -17% 8%
Other income (expense), net ............... 3.7 2.6 3.6 2.4
----- ----- ----- ------ 1% -2% 0% -2%
--- --- --- ---
Income (loss) before provision for income taxes ................ (29.3) 25.8 (25.2) 23.4
Income tax provision ...................... -- 10.2 0.0 9.3
----- ----- ----- -------3% 2% -17% 6%
Provision (benefit) for income taxes 0% 1% -3% 3%
--- --- --- ---
Net income ................................ (29.3)% 15.6% (25.2)% 14.1%
====== ===== ====== =====(loss) -3% 1% -14% 3%
=== === === ===
(a) Non-recurring charges of $2.7 million for the three months ended September
30, 1999 relate to the impairment of a note receivable. Non-recurring charges of
$4.0 million for the nine months ended September 30, 1999 relate to severance
obligations of $1.3 million to certain management personnel, which will be paid
in future periods and a charge of $2.7 million for the impairment of a note
receivable. Non-recurring charges of $227,000 for the nine months ended
September 30, 1998 relate to the acquisition of ProSoft.
-16-
TOTALSOFTWARE REVENUE
Total revenue decreased by 30.6% from $11.3 million for the three months
ended September 30, 1998 to $7.9 million for the three months ended September
30, 1999. Total revenue decreased 33.1% from $32.7 million to $21.9 million
for the nine months ended September 30, 1999. Sales through one distributor
accounted for 21.4%, 16.2%, 23.2%, and 17.4% of the Company's total revenue
for the three months ended September 30, 1999 and 1998, and for the nine
months ended September 30, 1999 and 1998, respectively. Sales to CSC
accounted for 22.1% and 25.2% of the Company's total revenue for the three
and nine months ended September 30, 1998. Such revenue included $2.5 million
and $8.2 million, respectively of Visual Testbench license and maintenance
sales made pursuant to an OEM agreement with CSC. As of December 31, 1998,
CSC had fully satisfied its obligation to purchase Visual Testbench Licenses
pursuant to the OEM agreement. The Company did not receive any revenue from
CSC for the nine months ended September 30, 1999 and does not expect to
receive revenue in the future from CSC for the sale of Visual Testbench.
Revenue generated pursuant to another OEM agreement accounted for 13.8%,
12.2%, 13.0%, and 8.9% of the Company's total revenue for the three months
ended September 30, 1999 and 1998 and for the nine months ended September 30,
1999 and 1998, respectively. Additionally, one customer accounted for 10.2%
of total revenue for the three months ended September 30, 1999.
REVENUE
PRODUCT LICENSE REVENUE
The Company's product licensesInnoveda software revenue is derived from license fees from Innoveda's software
products, licensed into the Company's HLDA products. Product licenseselectronic design automation market. Software
revenue decreasedincreased by 44.0%$5.0 million, or 76.9% from $8.7$6.6 million for the three monthssecond
quarter ended September 30, 1998July 3, 1999 to $4.9$11.6 million for the three monthssecond quarter ended September 30, 1999. Product licensesJuly 1,
2000. Software revenue decreasedincreased by 47.1%$6.1 million, or 46.9% from $25.5$13.1 million
for the ninesix months ended September 30, 1998July 3, 1999 to $13.5$19.2 million for the ninesix months ended
September 30, 1999. The decreaseJuly 1, 2000. This increase is primarily due to additional sales resulting from
the acquisition of Summit Design in product
licenses revenue was primarily attributableMarch 2000, and to the Company ceasinga lesser extent due to
receive
revenueincreased sales of Innoveda's Enterprise and HSSD products resulting from
CSC pursuant to the OEM Agreement. The decrease was also
attributable to decreased sales as a result of the Company hiring fewer sales
and marketing personnel than planned in the fourth quarter of 1998 and the first
two quarters of 1999 and attrition in the existing sales force during the first
two quarters of 1999.
MAINTENANCEincreased customer demand for these technologies.
SERVICES AND SERVICESOTHER REVENUE
The Company's maintenance andInnoveda's services revenue is derived from maintenance contracts related to
the Company's HLDA productsInnoveda's software products. Innoveda's other revenue is derived from
consulting services and training classes offered to purchasers of the Company's softwareInnoveda's
products. MaintenanceServices and servicesother revenue increased 18.5%by $3.3 million, or 48.8% from
$2.5$6.7 million for the three monthssecond quarter ended September 30, 1998July 3, 1999 to $3.0$10.0 million for the
three monthssecond quarter ended September 30, 1999. MaintenanceJuly 1, 2000. Services and servicesother revenue increased 20.9%by $2.6
million, or 18.2% from $6.9$14.1 million for the ninesix months ended September 30, 1998July 3, 1999 to
$8.4$16.7 million for the ninesix months ended September 30, 1999.
This increase isJuly 1, 2000. These increases are
primarily attributabledue to additional maintenance contract renewals byrevenue in the installed basesecond quarter ended July
1, 2000 related to the acquisition of HLDA customers,Summit Design, Inc., and to a lesser
extent due to higher consulting revenue resulting from non-recurring
engineering services provided to one customer, which is not expected to reoccur.
OTHER REVENUE
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. Other revenue decreased 100% from
$91,000 forincreased consulting
capacity in the three monthssecond quarter ended September 30, 1998 to $0 forJuly 1, 2000 versus the three months
ended September 30,same period in
1999.
Other revenue decreased 100% from $274,000 for the
nine months ended September 30, 1998 to $0 for the nine months ended September
30, 1999. Although the Company renewed a significant distribution agreement the
renewal did not include additional fees. As a result, the distribution rights
fees paid at the inception of the agreement and amortized into revenue at
$91,000 each quarter over the agreement period were no longer a source of other
revenue as of December 31, 1998.
-17--12-
COSTS AND EXPENSES
COST OF REVENUE
COST OF PRODUCT LICENSESSOFTWARE REVENUE
Cost of product licensessoftware revenue includes royalties, product packaging, software
documentation, labor and
other costs associated with ordering, handling, packaging and shipping
productproducts and other production related costs. The cost of product
licensessoftware revenue
increased 21.2%by $0.6 million, or 42.7% from $179,000$1.4 million for the three monthssecond quarter
ended September 30, 1998July 3, 1999 to $217,000$2.0 million for the three monthssecond quarter ended September 30, 1999.
The increase is primarily due to increases in royalty expense and the provision
for impairment of certain inventory.July 1, 2000.
The cost of product licensessoftware revenue decreased 2.9%increased by $0.7 million, or 26.9% from $490,000$2.7
million for the ninesix months ended September 30, 1998July 3, 1999 to $476,000$3.4 million for the ninesix
months ended September 30, 1999. As a percentage of
product licenses revenue,July 1, 2000. These increases in the cost of product licensessoftware revenue
reflect increased from
2.1% of product license revenue forroyalty payments to distributors, and increased software
replication costs consistent with the three months ended September 30, 1998 to
4.5% of product license revenue for the three months ended September 30, 1999.
As a percentage of product licenses revenue, the cost of product licenses
revenue increased from 1.9% of product license revenue for the nine months ended
September 30, 1998 to 3.5% of product license revenue for the nine months ended
September 30, 1999. This increase as a percentage of product license revenue was
primarily due to fixed costs spread over decreased product licensein software revenue.
COST OF MAINTENANCESERVICES AND SERVICESOTHER REVENUE
Cost of maintenanceservices and servicesother revenue which consists primarily of personnel costs and
facilities costs for customer support, consulting, and training classes offered
to purchasers of the
Company's products,Innoveda's products. The cost of service revenue increased 0.4%by
$0.4 million or 27.5% from $269,000$1.6 million for the threesecond quarter ended July 3,
1999 to $2.0 million for the second quarter ended July 1, 2000. The cost of
service revenue increased by $0.5 million or 14.4% from $3.1 million for the six
months ended September 30, 1998July 3, 1999 to $270,000$3.6 million for the threesix months ended September 30, 1999.
Cost of maintenance and services revenue increased 13.3% from $773,000 for the
nine months ended September 30, 1998 to $876,000 for the nine months ended
September 30, 1999. As a percentage of maintenance and services revenue,July 1, 2000.
These increases in the cost of maintenanceservices and other revenue are due to increased
compensation, and higher facilities and equipment related costs needed to
support increased services revenue decreasedand other revenue.
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions,
travel, trade shows, advertising campaigns, and direct mail solicitations,
increased by $2.8 million, or 50.2% from 10.7%$5.7 million for the threesecond quarter
ended July 3, 1999 to $8.5 million for the second quarter ended July 1, 2000.
Sales and marketing expenses increased by $3.7 million, or 33.0% from $11.2
million for the six months ended September 30, 1998July 3, 1999 to 9.1%$14.9 million for the threesix
months ended September 30,
1999. As a percentageJuly 1, 2000. These increases were primarily attributable to the
costs associated with the additional sales and marketing headcount resulting
from the acquisition of maintenanceSummit Design, Inc., to increased commission and
services revenue, the cost of
maintenancetravel expenses relating to increased sales volume, and services revenue decreased from 11.2% for the nine months ended
September 30, 1998 to 10.5% for the nine months ended September 30, 1999.
AMORTIZATION OF PURCHASED TECHNOLOGIES
The Company recorded $2.4 million of purchased technologies (intangibles) as
part of the SimTech acquisition which are being amortized to cost of revenue on
a straight-line basis over periods ranging from two to five years beginning
September 9, 1997. The Company expensed approximately $140,000 and $165,000 for
the three months ended September 30, 1999 and 1998, respectively. The Company
expensed approximately $472,000 and $496,000 for the nine months ended September
30, 1999 and 1998, respectively.
OPERATING EXPENSESincreased
advertising efforts.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and operations
supportrelated costs
of developing new products and enhancements to existing products and performing
quality assurance activities. Research and development expenses decreased 14.9%increased by
$2.9 million, or 106.0% from $3.0$2.8 million for the three monthssecond quarter ended September 30, 1998July 3,
1999 to $2.6$5.7 million for the three monthssecond quarter ended September 30, 1999.July 1, 2000. Research and
development expenses decreased 13.3%increased by $3.8 million, or 69.2% from $8.9$5.5 million for
the ninesix months ended September 30, 1998July 3, 1999 to $7.7$9.3 million for the ninesix months ended September 30, 1999.
ResearchJuly
1, 2000. This increase was due to additional salary and related costs, as
research and development expenses for the three and nine months ended September
30, 1998 included $550,000 and $1,650,000, respectively, of compensation expense
recorded in connection with the Company's acquisition of SimTech in September
1997.
-18-
The Company recordedheadcount was doubled as a total of $4.4 million of compensation expense for shares
issued as partresult of the acquisition which were contingent upon continued
employmentof
Summit Design, Inc. in March 2000. In addition, the acquisition resulted in
increased facility and were being expensed as the employment obligation lapsed. This
expense was being recorded on a straight-line basis over the two year employment
obligation period. However, in December 1998, the employment agreements to which
this contingent compensationequipment related were amended to eliminate the continued
employment obligation and at that time, the remaining unrecorded compensation
was expensed. Excluding the $550,000 compensation expense recorded in the three
months ended September 30, 1998, research and development expense increased 4.0%
from $2.5 million for the three months ended September 30, 1998 to $2.6 million
for the same period in 1999. Excluding the $1,650,000 compensation expense
recorded in the nine months ended September 30, 1998, research and development
expense increased 6.3% from $7.3 million for the nine months ended September 30,
1998 to $7.7 million for the same period in 1999.
As a percentage of total revenue, research and development expenses increased
from 26.7% and 27.3% for the three and nine months ended September 30, 1998,
respectively, to 32.7% and 35.4% for the three and nine months ended September
30, 1999, respectively. The increase in research and development expenses as a
percent of revenue is the result of a decrease in total revenues for the three
and nine months ended September 30, 1999. The Company continues to believe that
significant investment in research and development is required to remain
competitive in its markets, and the Company therefore anticipates that research
and development expense will increase in absolute dollars in future periods, but
may vary as a percent of revenue.(2)
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions and
promotional costs, decreased 19.9% from $3.2 million for the three months ended
September 30, 1998 to $2.6 million for the three months ended September 30,
1999. Sales and marketing expenses decreased 9.1% from $9.5 million for the nine
months ended September 30, 1998 to $8.7 million for the nine months ended
September 30, 1999. This decrease was primarily attributable to the Company
hiring fewer sales and marketing personnel than planned in the fourth quarter of
1998 and the first two quarters of 1999 and attrition in the existing sales
force during the first quarter of 1999.
As a percentage of total revenue, sales and marketing expenses increased from
28.6% for the three months ended September 30, 1998 to 33.0% for the three
months ended September 30, 1999. As a percentage of total revenue, sales and
marketing expenses increased from 29.2% for the nine months ended September 30,
1998 to 39.7% for the nine months ended September 30, 1999. The increase as a
percentage of total revenue was primarily attributable to the decrease in total
revenue for 1999. In the future, the Company expects sales and marketing
expenses to continue to increase in absolute dollars, in part due to the hiring
of additional sales and marketing personnel.(2)costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate,executive, finance,
human resource, information services, administrative, and legal and accounting
expenses of the Company.Innoveda. General and administrative expenses increased 30.6%by $0.5
million, or 48.2% from $1.1$1.0 million for the three monthssecond quarter ended September 30, 1998,July 3, 1999,
to $1.5 million for the three monthssecond quarter ended September 30, 1999.July 1, 2000. General and
administrative expenses increased 22.7%by $0.8 million, or 37.6% from $3.3$2.0 million
for the ninesix months ended September
30, 1998,July 3, 1999, to $4.0$2.8 million for the ninesix months ended
September 30, 1999. As a
percentage of total revenue, general and administrative expenses increased from
9.9% for the three months ended September 30, 1998 to 18.7% for the three months
ended September 30, 1999. As a percentage of total revenue, general and
administrative expenses increased from 10.0% for the nine months ended September
30, 1998 to 18.3% for the nine months ended September 30, 1999. The
- -------------------------
(2)July 1, 2000. This sentence contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 19 for a
discussion of factors that could affect future performance.
-19-
increase in general and administrative expenses as a percentage of total
revenue and in actual dollars was primarily attributabledue to higher salary and related costs
for headcount increases, higher telecommunications costs, and increased
shareholder services costs needed for Innoveda to support its larger operations
after the additionacquisition of four positions, the cost of the CEO search, a legal reserve for a pending
settlement, and a decrease in total revenue for the three and nine months
ended September 30, 1999.Summit Design, Inc.
-13-
AMORTIZATION OF INTANGIBLES AND GOODWILL
The Company recorded $4.1Amortization expense increased from $0.2 million in the second quarter ended
July 3, 1999 to $2.7 million in the second quarter ended July 1, 2000.
Amortization expense increased from $0.4 million in the six months ended July 3,
1999 to $3.4 million in the six months ended July 1, 2000. Innoveda had $1.0
million in intangibles (excluding $2.4at July 3, 1999, relating to purchased technology and
workforce from its acquisition of OmniView, Inc. in March 1999. Innoveda
expensed $0.2 million in intangibles and stock based compensation for the second
quarter ended July 3, 1999, and expensed $0.4 million in intangibles and stock
based compensation for the six months ended July 3, 1999. Innoveda had $38.0
million in goodwill and intangibles at July 1, 2000 primarily due to the merger
of purchased technologies)Viewlogic and $3.8 million of goodwill as part of the SimTech
acquisitionSummit, which are being amortized to expense on a straight-line basis over periods
ranging from twothree to fiveseven years beginning September 9, 1997. The CompanyMarch 24, 2000. Innoveda expensed
approximately $529,000$2.7 million in intangibles and $698,000stock based compensation for the threesecond quarter
ended July 1, 2000, and expensed $3.4 million in intangibles and stock based
compensation for the six months ended September 30, 1999July 1, 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
Upon consummation of the business combination between Summit and 1998, respectively.Viewlogic in
March 2000, Innoveda immediately 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. The Company expensed approximately
$1.9 millionvalue assigned
to acquired in-process research and $2.1 milliondevelopment was determined by an independent
appraiser, identifying research projects in areas for the nine months ended September 30, 1999 and
1998, respectively.which technological
feasibility had not been established.
RESTRUCTURING AND NON-RECURRING CHARGES
During the nine monthsfirst quarter ended September 30, 1999, the CompanyApril 1, 2000, Innoveda recorded $1.3approximately
$2.2 million in non-recurring charges relatedrestructuring charges. This included primarily severance and
other costs relating to severance obligations for certain
management personnel. During the same period, the Company also recorded $2.7
million in provision for impairmentconsolidation of duplicative facilities as a
loan receivable. As of September 30,
1999, the Company has loaned $2.7 million to an independent software company
pursuant to a secured loan agreement entered into July 1997. During the three
months ended September 30, 1999 the Company terminated its agreement with the
independent software company. This decision by the Company impaired the
viabilityresult of the independent software company as a going concern duebusiness combination between Summit and Viewlogic. Other costs
relating to a
lack of financial support. Based on this development, the Company recorded
$2.7 million in provision for the impairment of the note receivable. For the
three months ended September 30, 1998 the Company incurred one-time charges
of $227,000 related to the acquisition of ProSoft.
OTHER INCOME, NET
Other income consists of interest income associated with available cash
balances, gains or losses from the sale of property and equipment lease contracts (less any applicable
sublease income) after the Company's
pro rata shareproperties were abandoned, lease buyout costs,
restoration costs associated with certain lease arrangements, and costs to
maintain facilities during the period after abandonment are also included.
Further action was taken to restructure the Innoveda sales and services
business in Japan as a result of an exclusive distributor agreement executed
with Marubeni Solutions Corporation during the first quarter of fiscal 2000.
Charges associated with the Japanese reorganization include severance and
benefit continuance for approximately 14 employees, costs associated with
office closings and subsequent lease termination, and other facility and exit
related costs.
The following table presents the components of the earningsnon-recurring
restructuring charges accrued during the period ended April 1, 2000 and lossesthe
charges against the reserves through July 1, 2000.
July 1, 2000
Total Non-cash Amounts Accrual
Charge Write-offs Paid Balance
Severance and related $ 780 $ - $ 704 $ 76
Non-cancelable commitments 1,389 - 399 990
Capitalized software 74 74 - -
------ ---- -------- -------
Totals $ 2,243 $ 74 $ 1,103 $ 1,066
======= ==== ======== =======
All significant amounts are expected to be paid within one year from the merger
date of SDAMarch 23, 2000.
-14-
OTHER INCOME (EXPENSE)
Other income (expense) consists of the net of interest expense relating to
Innoveda's term loan and ADCrevolving credit line, interest income from cash and
foreigncash equivalent balances, and currency exchange rate differences resulting from
paying operating expenses of foreign operations in the local currency.currencies. Other income was approximately $293,000, $298,000,
$783,000, and $790,000increased by $0.5 million
from other expense of $0.3 million for the threesecond quarter ended July 3, 1999 to
other income of $0.2 million for the second quarter ended July 1, 2000. Other
expense decreased by $0.5 million from other expense of $0.6 million for the six
months ended September 30,July 3, 1999 and 1998
andto other expense of $0.1 million for the ninesix months
ended September 30, 1999July 1, 2000. The increase in other income is due to the greater interest
income resulting from the infusion of approximately $28.1 million in cash from
the acquisition of Summit in March 2000, and 1998, respectively.also due to the decreased interest
expense resulting from the repayment of Innoveda's revolving credit line.
INCOME TAX PROVISION
The income tax provision decreased by $183,000 from $1.2 milliona provision of $171,000 for
the three monthssecond quarter ended September 30, 1998July 3, 1999 to $0an income tax benefit of $12,000 for
the three monthssecond quarter ended September 30, 1999.July 1, 2000. The income tax provision decreased by
$1.9 million from $3.0a provision of $0.7 million for the ninesix months ended September 30, 1998July 3,
1999 to $0an income tax benefit of $1.2 million for the ninesix months ended September 30, 1999. The 1998
incomeJuly 1,
2000. Quarterly tax provision reflectsprovisions are based on the Company's estimated consolidatedeffective tax rate for
federal, state and foreign taxes of approximately 40% of taxable income due to
the non-deductibility of amortization and compensation expense related to the
SimTech acquisition. The Company's estimated effective rate for the year ending
December 31, 1999 is 0%, as the Company does not expect to generate either
taxable income or net operating losses in 1999.
-20-
EFFECTIVE CORPORATE TAX RATES
Prior to 1996, the Company had experienced losses for income tax purposes in the
United States. As of December 31, 1998, the Company has recognized the benefit
of its U.S. net operating loss carryforwards and tax credit carryforwards in
their financial statements.
The Company's Israeli operations are performed entirely by Summit Design
(EDA) Ltd., which is a separate taxable Israeli entity. The Company's
existing Israeli production facility has been granted "Approved Enterprise"
status under the Israeli Investment Law, which entitles the Company to
reductions in the tax rate normally applicable to Israeli companies with
respect to the income generated by its "Approved Enterprise" programs. In
particular, the tax holiday covers the seven year period beginning the first
year in which Summit Design (EDA) Ltd. generates taxable income from its
"Approved Enterprise" (after using any available NOLs), provided that such
benefits will terminate in 2006 regardless of whether the seven year period
has expired. The tax holiday provides that, during such seven year periods, a
portion of the Company's taxable income from its Israeli operations will be
taxed at favorable tax rates. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to have favorable tax status in Israel.
Management of the Company intends to permanently reinvest earnings of the
Israeli subsidiary outside the U.S. If such earnings were remitted to the
U.S., additional U.S. federal and foreign taxes may be due.
The Company had foreign income tax net operating losses of approximately $5.6
million at December 31, 1998. These foreign losses were generated in Israel over
several years and have not yet received final assessment from the Israeli
government. Consequently, management is uncertain as to the availability of a
substantial portion of such foreign loss carryforwards.
The Company is also subject to risk that United States and foreign tax laws and
rates may change in a future period or periods, and that any such changes may
materially adversely affect the Company's tax rate. Any increase in the
Company's effective tax rate, or variations in the effective tax rate from
period to period, could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financedInnoveda finances its operations primarily through a public offering in
1996, the private placement of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from
operations.operations, supplemented by short-term borrowings from a revolving credit line.
As of September 30, 1999,
the CompanyJuly 1, 2000, Innoveda had approximately $27.0$21.7 million in cash and cash
equivalents. Innoveda has an available $6.0 million revolving line of credit
with Fleet Bank. As of September 30, 1999, the CompanyJuly 1, 2000, there was no balance outstanding under this
line of credit.
Innoveda has loaned $2.7an $18.0 million to an
independent software company pursuant to a securedterm loan with Fleet Bank, with approximately
$10.0 million outstanding as of July 1, 2000. The loan agreement entered
into duringwas amended
as of July 1997.31, 2000 to include Innoveda as a borrower. Borrowings under the
agreement bearcredit facility are secured by substantially all of Innoveda's assets. The
credit facility contains limitations on additional indebtedness and capital
expenditures, and includes financial covenants, which include but are not
limited to the maintenance of minimum levels of profits, interest at prime
plus 2%. During the three months ended September 30, 1999, the Company
terminatedand debt
service coverage ratios and maximum leverage 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. Innoveda is in compliance with all of its relationship with the independent software company. This
decision impaired the viabilitydebt
covenants as of the independent software company as a
going concern due to lack of financial support. The Company recorded $2.7
million in provision for impairment of the note receivable.July 1, 2000.
As of September 30, 1999, the CompanyJuly 1, 2000, Innoveda had working capital of approximately $23.8$8.2 million.
For the ninesix months ended September 30,July 3, 1999, net cash generatedprovided by operating activities
was approximately $1.0$1.4 million, resulting primarily from net income for the
period of $0.9 million. For the ninesix months ended September 30, 1998,July 1, 2000, net cash generatedprovided
by operating activities was approximately $8.6$3.5 million. Cash generated by operations forThis was due primarily
to the nine months
ended September 30, 1999 resulted primarily from a net loss offset by
depreciation, amortization, provision for loan impairment, decreases in
accounts payable and collectionscollection of $3.4 million of accounts receivable.receivable during the period.
Net cash used in investing activities was approximately $1.9 million and $3.4$2.0 million for the ninesix
months ended September 30,July 3, 1999, mainly due to the purchase of OmniView. Net cash
provided by investing activities for the six months ended July 1, 2000 was
approximately $24.5 million, primarily due to the cash acquired as a result of
the merger of Viewlogic and 1998, respectively.Summit in March 2000.
Net cash used in investing activities was related to the
-21-
acquisition of furniture and equipment and a loan to an independent software
company for the nine months ended September 30, 1999 and 1998. Net cash used in
investing activities also included loans to a joint venture for the nine months
ended September 30, 1998.
Net cash generated by financing activities was approximately $134,000$1.0 million and $6.8
million for the ninesix months ended SeptemberJuly 3, 1999 and July 1, 2000, respectively,
primarily due to the repayment of principal on debt.
As part of the PADS acquisition, Innoveda is required to repay approximately
$7.5 million of PADS' debt plus the cash payment of approximately $1.9
million to PADS shareholders. Innoveda expects to partially fund these
amounts using PADS' cash, which totaled approximately $3.8 million as of June
30, 1999. Net cash used by financing activities was
approximately $465,000 for2000, as well as the nine months ended September 30, 1998. For the
nine months ended September 30, 1999, financing activity cash was primarily
generated bynet proceeds from the issuance of common stock through stock options
plans, offset by payments of debt obligations and capital leases. For the nine
months ended September 30, 1998 the use of cash was primarily from repurchasing
162,500 sharessale of the Company's common stock, less proceeds from the issuance of
common stock and a tax benefit from option exercises.
The Company presentlyVirSim product
line discussed above.
-15-
Innoveda believes that its current cash and cash equivalents, combined with
amounts available under the revolving line of credit, will satisfy the Company'sInnoveda's
anticipated working capital and other cash requirements throughfor at least the Company's 2000next 12
months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
This SFAS establishes standards for derivative instruments and hedging
activities. SFAS 133 requires an entity to recognize all derivatives as either
an asset or liability in the statement of financial position and measure those
instruments at fair value. SFAS 133 requires that changes in the fair value of a
derivative be recognized currently in earnings unless specific hedge accounting
criteria are met and that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal year. (2)
YEAR 2000
The Year 2000 issue results from computer programs written using two, rather
than four, digitsyears beginning after June 15, 2000. Innoveda is planning
to defineadopt SFAS 133 in the applicable year. These computer programs may
recognize a date using "00" asfirst quarter of fiscal 2001. Innoveda is currently
evaluating this statement, but does not expect the year 1900 insteadadoption of 2000 and cause system
failures or miscalculations, material disruptions of business operations,
including, among other things, a temporary inabilitySFAS 133 to process transactions,
send invoices, or engage in similar normal business operations. If the Company,
its significant customers, suppliers, service providers and other related third
parties fail to take the necessary steps to correct or replace these problematic
computer programs, the Year 2000 issue could have
a material adverse effect on Innoveda's consolidated financial position or results of
operations.
In December 1999, the Company.Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The Company cannot, however, quantify the impact at this time.
The Company has upgraded or replaced the software packages underlying its
financial, production, communication, desktop and other systems, as
appropriate, to address the Year 2000 issue. It has also performed an
in-depth analysis of all of its products and has determined that all
significant products are Year 2000 compliant. Moreover, the Company has
contacted all major external third parties that provide products and services
to the Company to assess their readiness for the Year 2000.
Management believes it has completed the review and assessment phase of affected
systems within the Company and those which are external to the Company. This
assessment indicated that mostSAB
summarizes certain of the Company's significant internal information
systems could be affected bySEC's views in applying revenue recognition in
financial statements. The provisions of SAB No. 101 are effective in the Year 2000 issue, and thatfirst
quarter of our current fiscal year beginning January 2, 2000. Innoveda has not
yet completed its evaluation of the Company could be
negatively impacted by non-compliance of related third parties.
The Company's products are subject to periodic upgrades. These upgrades are
typically released to end-users once a year. Management believes its products
are Year 2000 compliant, and will continue to test upgrades for Year 2000
compliance.
The Company has queried its important suppliers and service providers and is
presently obtaining assurances and verification from those selected third
parties that they are or will be Year 2000 compliant. The inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company. The effects of non-compliance by third parties where no system
interface exists is not determinable.
The Company is currently in the process of creating contingency plans for its
internal information technology systems and products and in relation to third
parties with whom it has material relationships. These contingency plans are
expected to be in place during November 1999.
- --------------------
(2) This sentence contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 22 for a
discussion of factors that could affect future performance.
-22-
Concurrent with performing the above steps, the Company has made certain
investments in systems, applications and products to address Year 2000
issues. The Company has not tracked internal resources dedicated to the
resolution of the Year 2000 issue and, therefore, is unable to quantify
internal costs incurred to date that are associated with the Year 2000 issue.
The Company has, however, hired external consultants to resolve internal
information system issues related to the resolution of the Year 2000 issue.
Identifiable expenditures for these consultants were approximately $250,000
through September 30, 1999. Expenditures to resolve Year 2000 issues have not
been, nor are they expected to be, material.
The Company's plans to complete the Year 2000 modifications are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events including continued availability of certain resources, and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences included the availability and
cost of personnel trained in this area, and the ability to locate and correct
all relevant computer codes.SAB No. 101.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
SUMMIT'S QUARTERLY RESULTS WILL LIKELY FLUCTUATEIF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE SUMMIT AND AFFECTVIEWLOGIC AND/OR INNOVEDA
AND PADS, THE MARKET PRICEANTICIPATED ADVANTAGES OF SUMMIT'S COMMON STOCK.THE BUSINESS COMBINATION BETWEEN SUMMIT
AND VIEWLOGIC AND/OR INNOVEDA AND PADS MAY NOT BE REALIZED, IN FULL, IF AT ALL.
Innoveda was formed by the business combination of Viewlogic Systems, Inc.,
and Summit Design, Inc. in March 2000. Innoveda has entered into a merger
agreement with PADS Software, Inc. The merger agreement provides that a
wholly owned subsidiary of Innoveda will merge with and into PADS, with PADS
surviving as a wholly owned subsidiary of Innoveda following the merger. The
integration of Summit and Viewlogic requires the dedication of Innoveda
management resources. This may distract management's attention from the
effort to integrate PADS into Innoveda and 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 and the combined company of Innoveda and PADS has
been, and will remain, critical to ensure continued advancement, development
and support of the companies' technologies, and ongoing sales and marketing
efforts. During the integration phase, competitors may intensify their
efforts to recruit key employees. The inability to successfully integrate
Summit and Viewlogic and/or Innoveda and PADS and to retain key technical,
sales or marketing personnel after the Summit and Viewlogic combination and
the merger of Innoveda and PADS would adversely affect the combined company's
business.
INNOVEDA MAY NOT SUCCESSFULLY INTEGRATE RECENT BUSINESS ACQUISITIONS OF
SUMMIT DESIGN AND VIEWLOGIC.
Each of Summit Design and Viewlogic has recently completed other business
acquisitions. The size and number of recent acquisitions may add to the
difficulties of integrating Summit Design's and Viewlogic's businesses.
Products,
-16-
technologies, distribution channels, key personnel and businesses of previously
acquired companies may not effectively integrate into Innoveda's business or
product offerings. Moreover, this integration may adversely affect Innoveda's
business.
VARIOUS FACTORS WILL CAUSE SUMMIT'SINNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE.
Summit'sInnoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantly in certain quarters. These fluctuations
resulted from several factors, including, among others:
- - the size and timing of orders;
- -
large one-time charges incurred as a result of an acquisition or
consolidation;
- - seasonal factors;
- - the impairment of a note receivable
- -
the rate of acceptance of new products;
- - product, customer and channel mix;
- - lengthy sales cycles; and
- -
level of sales and marketing staff.
-23-
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
- - corporate acquisitions and consolidations and the integration of
acquired entities and any resulting large one-time charges;
- - the timing of new product announcements and introductions by SummitInnoveda
and Summit'sInnoveda's competitors;
- -
the rescheduling or cancellation of customer orders;
- -
the ability to continue to develop and introduce new products and
product enhancements on a timely basis;
- - the level of competition;
- -
purchasing and payment patterns, pricing policies of competitors;
- - product quality issues;
- - currency fluctuations; and
- - general economic conditions.
SUMMIT'SINNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.
Summit'sInnoveda's revenue is difficult to forecast for several reasons. SummitInnoveda
operates with little product backlog because SummitInnoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at
-17-
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, SummitInnoveda 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
Summit'sInnoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. To the extent thatIf
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 Summit'sInnoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, SummitInnoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
-24-
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
SummitInnoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Summit'sInnoveda's
expectations as to future revenue. Because a high percentage of Summit'sInnoveda'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 Summit'sInnoveda's operating
results.
SUMMIT'SINNOVEDA'S OPERATING RESULTS WILL LIKELY FLUCTUATE.
SummitFLUCTUATE, AND FLUCTUATION MAY
ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda believes that its quarterly revenue, expenses and operating results
will likely vary significantly from quarter to quarter,quarter. Innoveda also believes
that period-to-period comparisons of Summit'sInnoveda's operating results are not
necessarily meaningful and
that, asmeaningful. As a result, you should not rely on these comparisons as
indications of Summit'sInnoveda's future performance. Additionally, as of December 31, 1998, Credence
Systems Corporation, or CSC, one of Summit's larger customers, had satisfied
its obligation to purchase a minimum number of Visual Testbench licenses
pursuant to an OEM agreement entered into in July 1997, and Summit does not
expect to receive any additional revenue from sales of Visual Testbench to
CSC. Summit will need to replace this revenue, and the failure to replace
this revenue would have a material adverse affect on Summit's operating
results. In addition, SummitInnoveda operates
with high gross margins, and a downturn in revenue has had a significant impact
on income from operations and net income. Summit's results of operations fell
below investors' and market makers' expectations for the quarter ended September
30, 1999 and Innoveda's results of operations could be below investors' and
market makers' expectation in other quarters, which could have a material
adverse effect on the market price of Summit'sInnoveda's common stock.
SUMMIT DEPENDSIF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON
ITS HLDA PRODUCTS BECAUSE THESE PRODUCTS MAKE UP MOST OF ITS
REVENUE.
Summit's future success depends primarily uponWHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda intends to focus on the broad market acceptancefield programmable gate array, printed circuit
board and system-level design automation markets while most major competitors
focus their resources on the application-specific integrated circuits and
integrated circuit design automation markets. Innoveda has adopted this focus
because it believes that the increased complexity of Summit's existingapplication-specific
integrated circuits and future HLDA products. Summit commercially shipped its
first HLDAintegrated circuit designs, and the resulting increase
in design time, will cause electronic product Visual HDL for VHDL, inmanufacturers to differentiate
their products at the first quartersystem level. If the system design portion of 1994. For
the
years ended December 31, 1998, 1997 and 1996, revenue from HLDA products
and related maintenance contracts represented 100%, 88.8%, and 63.9%,
respectively, of Summit's total revenue. As a result, factors adversely
affecting sales of these products, including increased competition, inability
to successfully introduce enhanced or improved versions of these products,
product quality issues and technological change,electronic design automation industry does not grow, it could have a material
adverse effect on Summit's business, financial condition and results of
operations.
-25-
SUMMIT MAY NOT GAIN BROAD MARKET ACCEPTANCE OF HLDA PRODUCTS, AND FAILURE TO DO
SO WILL MATERIALLY ADVERSELY AFFECT SUMMIT'S BUSINESS.
Summit's HLDA products incorporate certain unique design methodologies and
thus represent a departure from industry standards for design creation and
verification. Summit believes that broad market acceptance of Summit's HLDA
products will depend on several factors, including, among others:
- - the ability to significantly enhance design productivity;
- - ease of use;
- - interoperability with existing electronic design automation tools;
- - price; and
- - the customer's assessment of Summit's financial results and Summit's
technical, managerial, service and support expertise.
-26-
Summit also depends on its distributors to assist it in gaining market
acceptance of its products. These distributors may not give sufficient
priority to marketing Summit's products. They may even discontinue offering
Summit's products. In addition, Summit's HLDA products may not achieve broad
market acceptance. A decline in the demand for, or the failure to achieve
broad market acceptance of, Summit's HLDA products will have a material
adverse effect on Summit'sInnoveda's business, financial condition, results of
operations or cash flows.
Although demand for HLDA products has increased in recent years, the market
for HLDA products is still emerging. The market may not continue to grow.
Even if it does grow, businesses may not continue to purchase Summit's HLDA
products. If the market for HLDA products fails to grow or grows more slowly
than Summit currently anticipates, it will materially adversely affect
Summit's business, financial condition, results of operations or cash flows.
Traditionally, electronic design automation customers have been risk averse
in accepting new design methodologies. Because many of Summit's tools use new
design methodologies, this risk aversion on the part of potential customers
presents an ongoing marketing and sales challenge and makes the introduction and
acceptance of new products unpredictable.
SUMMITINNOVEDA 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 SummitInnoveda
expects competition to increase as other electronic design automation companies
introduce HLDA products. In the HLDAelectronic design automation market, SummitInnoveda
principally competes with Mentor Graphics and Cadence and a number of smaller
firms. Indirectly, SummitInnoveda also competes with other firms that offer
alternatives to HLDA.alternative products. These other firms could
-18-
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 Summit.Innoveda. Some of Summit'sInnoveda's
current and future competitors offer a more complete range of electronic design
automation products.
They may also distribute products that directly compete with Summit's
HLDA products by selling such products together with their core product line. In
addition, Summit's products perform a variety of functions, and its existing and
future competitors are offering, or may offer in the future, some of the same
functions as separate products or discrete point solutions. For example, some
companies currently offer design entry products without simulators. Such
competition may cause Summit to offer point solutions instead of, or in addition
to, Summit's current software products. Summit would have to price such point
solutions lower than Summit's current product offerings, causing Summit's
average selling prices to decrease. This, in turn, could have a material adverse
effect on Summit's business, financial condition, results of operations, or cash
flows.
-27-
SummitInnoveda competes on the basis of various factors including, among others:
- - product capabilities;
- - product performance;
- - price;
- -
support of industry standards;
- - ease of use;
- -
first to market; and
- -
customer technical support and service.
SummitInnoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Summit'sInnoveda's competitors may offer
HLDA
products with functionality sought by Summit'sInnoveda's prospective customers and which
differs from those SummitInnoveda 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 Summit'sInnoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor.
SummitInnoveda may not compete successfully against current and future competitors,
and competitive pressures may have a material adverse effect on Summit'sInnoveda's
business, financial condition, results of operations, or cash flows. Summit'sInnoveda's
current and future competitors may develop products comparable or superior to
Summit'sInnoveda'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 Summit'sInnoveda's business, financial condition, results of
operations or cash flows.
-28-
SUMMIT DEPENDSINNOVEDA'S DEPENDENCE ON THE ELECTRONICSELECTRONIC INDUSTRY MARKETMAKES IT VULNERABLE TO GENERATE DEMAND FOR ITS
PRODUCTS.GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves
rapid technological change,change;
short product life cycles,cycles;
fluctuations in manufacturing capacitycapacity; and
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
often falls, and the number of design projects often decreases. Because
Summit'sInnoveda's sales depend upon capital spending trends and new design projects,
negative factors affecting the electronics
-19-
industry could have a material adverse effect on Summit'sInnoveda's business, financial
condition, results of operations, or cash flows.
A number of electronics
companies, including Summit's customers, have experienced a slowdown in their
businesses. Summit's future operating results may reflect substantial
fluctuations from period to period as a consequence of these industry
patterns, general economic conditions affecting the timing of orders from
customers and other factors.
SUMMITINNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND MUST GAIN
ACCESS TO THE PRODUCTS OFTHAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES FOR TIMELY DEVELOPMENT.REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Summit'sInnoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, particularly
simulation and synthesis products, SummitInnoveda must have timely access
to third party software to perform development and testing of products. Although
SummitInnoveda 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 Summit'sInnoveda's current or potential
future competitors, including Synopsys, Mentor Graphics and Cadence. If any of
these relationships terminate and SummitInnoveda were unable to obtain, in a timely
manner, information regarding modifications of third party products, SummitInnoveda
would not have the ability to modify its software products to interoperate with
these third party products. As a result, SummitInnoveda could experience a significant
increase in development costs, the development process would take longer,
product introductions would be delayed, and Summit'sInnoveda's business, financial
condition, results of operations or cash flows could be materially adversely
affected.
SUMMIT MUSTIF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS.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. Summit'sInnoveda'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 Summit'sInnoveda's customers. SummitInnoveda 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. Summit'sInnoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
If Summit 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 Summit has pre-announced the product
releases, its business, financial condition, results of operations or cash
flows will be materially adversely affected.
-29-
SUMMIT'SINNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Summit'sInnoveda's software products may contain errors that may not be detected until
late in the products' life cycles. SummitInnoveda 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
SummitInnoveda 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 Summit'sInnoveda'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.
-30-
SUMMITINNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING SUMMIT'S PRODUCTS.
SummitINNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
-20-
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors
fails, Innoveda's business may suffer. Innoveda relies on distributors for
licensing and support of Summit'sInnoveda's products, outside of North America. Approximately 42.8%, 23.4%, 23.1%, 28.7% and 45.6%
of Summit's revenue for the nine months ended September 30, 1999 and 1998 and
for the years ended December 31, 1998, 1997 and 1996, respectively, came from
sales made through distributors. Effective April 1, 1996, Summit entered into
a joint venture with Anam pursuant to which the joint venture corporation,
Summit Asia, acquired exclusive rights to sell, distribute and support all of
Summit's productsparticularly in the Asia Pacific region, excluding Japan. In April 1998,
the joint venture corporation, Summit Asia, which is headquartered in Korea,
was renamed Asia Design Corporation, or ADC. In May 1998, Summit exchanged a
portion of its ownership in ADC for ownership in another company located in
Hong Kong which was renamed Summit Design Asia, Ltd., or SDA. SDA also has an
equity investment in ADC. In June 1998, Summit and Anam each loaned SDA
$750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive
rights to sell, distribute and support Summit's products in the Asia Pacific
region, excluding Japan. SDA granted distribution rights to Summit's products
to ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA
canceled ADC's distribution rights in all areas except Korea. In April 1999,
SDA granted non-exclusive distribution rights to Semiconductor Technologies
Australia for the Asia Pacific region, excluding Japan and Korea. This
restructuring, however, may not result in SDA or ADC becoming profitable.
Revenue attributable to sales inother
parts of Asia. Innoveda depends on the Asia Pacific region, excluding Japan,
may not increase either. In addition, in the first quarter of 1996, Summit
entered into a three-year, exclusive distribution agreement for Summit's HLDA
products in Japan with Seiko. The agreement is renewable for successive
five-year terms by mutual agreement of Summit and Seiko and is terminable by
either party for breach. The agreement was renewed for an additional
five-year term which began in February 1999. If Seiko fails to meet specified
quotas for two or more quarterly periods, Summit can terminate the
exclusivity, subject to Seiko's right to pay a specified fee to maintain
exclusivity. Sales through Seiko accounted for 23.2%, 17.4%, 17.8%, 14.5%,
and 15.1%, of Summit's total revenue for the nine months ended September 30,
1999 and 1998 and for the years ended December 31, 1998, 1997, and 1996,
respectively. In June 1999, Summit lowered Seiko's specified quotas due to
the adverse economic conditions in the Asia Pacific Region. As a result,
Summit expects sales through Seiko to decrease for at least the current and
following two quarters.
Summit's relationships with Seiko, SDA and ADC may not effectivelyits distributors to
maintain or increase sales relative to the levels experienced prior to such
relationships. Summit also has independent distributors in Europe and depends
on the continued viability and financial stability of these distributors.sales. Since Summit'sInnoveda'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. In addition, Seiko, SDAAccordingly, Innoveda depends on the continued
viability and ADC, as well as Summit's otherfinancial stability of these distributors.
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's
distributors may offer products of several different companies, including
Summit'sInnoveda's competitors. Summit'sInnoveda's current distributors may not continue to
market or service and support Summit'sInnoveda's products effectively. Any distributor
may discontinue to sell Summit'sInnoveda's products or devote its resources to products
of other companies. The loss of, or a significant reduction in, revenue from
Summit'sInnoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
-31-
SUMMITJAPAN. Innoveda has exclusive distribution agreements with two
distributors in Japan, which collectively cover all of Innoveda's products in
Japan. If either 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.
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND THE ASIA PACIFIC REGION.
Approximately 46.1%, 36.3%, 35.8%, 33.2%,ASIA.
International revenue and 49.8% of Summit's revenue for
the nine months ended September 30, 1999 and 1998 and for the years ended
December 31, 1998, 1997 and 1996, respectively, were attributable to sales
made outside the United States, which includes the Asia Pacific region and
Europe. Approximately, 26.5%, 23.4%, 21.9%, 22.3%, and 34.3% of Summit's
revenue for the nine months ended September 30, 1999 and 1998 and for the
years ended December 31, 1998, 1997 and 1996, respectively, were attributable
to sales made in the Asia Pacific region and approximately 19.7%, 12.9%,
13.9%, 11.4% and 15.5% of Summit's revenue for the nine months ended
September 30, 1999 and 1998 and for the years ended December 31, 1998, 1997
and 1996, respectively, were attributable to sales made in Europe. Summit
expects that international revenue will continue toexpenses represent a significant portion of itsInnoveda's
total revenue. Summit's international revenue is currently
denominated in U.S. dollars. As a result, increases in the value of the U.S.
dollar relativeand expenses, and Innoveda expects this trend to foreign currencies could make its products more expensive
and, therefore, potentially less competitive in those markets. Summit pays
the expenses of its international operations in local currencies and does not
engage in hedging transactions with respect to such obligations.continue.
International sales and operations involve numerous risks, including, among
others:
- -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;
tariff regulations and other trade barriers;
- -
requirements for licenses, particularly with respect to the export of
certain technologies;
- - collectability of accounts receivable;
- -
changes in regulatory requirements; and
- -
difficulties in staffing and managing foreign operations and extended
payment terms.
-32-
These factors may have a material adverse effect on Summit'sInnoveda'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. Demand for and sales of Summit's products in
the Asia Pacific region have decreased,conditions, and these adverse economic conditions may worsen. Demand for and
sales of Summit'sInnoveda's products in this region may
further decrease.
In order to successfully expand international sales, SummitInnoveda 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 Summit'sInnoveda's
operating margins. In addition, to the extent that SummitInnoveda cannot effect these
additions in a timely manner, SummitInnoveda can
-21-
only generate limited growth in international sales, if any. SummitInnoveda 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.
SUMMITINNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Summit'sInnoveda'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. SummitInnoveda 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 Summit'sInnoveda's business, financial condition, results of operations or
cash flows.
Summit has completed a series of acquisitions, including the acquisition of
TriQuest in February 1997, SimTech in September 1997, and ProSoft in June
1998 andInnoveda regularly evaluates acquisition opportunities. Summit'sInnoveda's future
acquisitions 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 Summit'sInnoveda'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 SummitInnoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Summit'sInnoveda's management has
had limited experience in assimilating acquired organizations and products into
its operations. SummitInnoveda 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.
-33-
SUMMITINNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL AND CURRENCY FLUCTUATIONCOORDINATION RISKS.
Summit'sPOLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL products are located in Israel.
Economic, political and military conditions may affect Summit'sInnoveda's operations in
that country. Hostilities involving Israel, for example, could materially
adversely affect Summit'sInnoveda's business, financial condition and results of
operations. Restrictions on Summit'sInnoveda's ability to manufacture or transfer
outside of Israel any technology developed under research and development grants
from the government of Israel further heightens the impact.
See "Summit relies on Israeli research, development and
marketing grants for certain benefits." In addition, while all of Summit's
sales are denominated in U.S. dollars, a portion of its annual costs and
expenses in Israel are paid in Israeli currency. These costs and expenses
were approximately $5.2, $4.7 and $4.3 million in 1998, 1997 and 1996,
respectively. Payment in Israeli currency subjects Summit to foreign currency
fluctuations and to economic pressures resulting from Israel's generally high
rate of inflation, approximately 9%, 7% and 11% during 1998, 1997 and 1996,
respectively. Summit's primary expense in Israeli currency is employee
salaries for research and development activities. As a result, an increase in
the value of Israeli currency in comparison to the U.S. dollar could increase
the cost of research and development expenses and general and administrative
expenses. Currency fluctuations, changes in the rate of inflation in Israel
or any of the other aforementioned factors may have a material adverse effect
on Summit's business, financial condition, results of operations, or cash
flows.COORDINATION RISKS. In addition, coordination with and management of
the Israeli operations requires SummitInnoveda to address differences in culture,
regulations and time zones. Failure to successfully address these differences
could disrupt Summit'sInnoveda's operations.
-34-
SUMMIT CURRENTLY ENJOYS CERTAIN TAX BENEFITS UNDER AN ISRAELI "APPROVED
ENTERPRISE" STATUS WHICH IT MAY NOT ENJOY IN THE FUTURE AND WHICH IN TURN MAY
ADVERSELY AFFECT SUMMIT'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Israeli government has granted Summit's Israeli production facility the
status of an "Approved Enterprise" under the Israeli Investment Law for the
Encouragement of Capital Investments, 1959. Taxable income of a company
derived from an "Approved Enterprise" is eligible for certain tax benefits,
including significant income tax rate reductions for up to seven years
following the first year in which the "Approved Enterprise" has Israeli
taxable income (after using any available net operating losses). The period
of benefits cannot extend beyond 12 years from the year of commencement of
operations or 14 years from the year in which approval was granted, whichever
is earlier. The tax benefits derived from a certificate of approval for an
"Approved Enterprise" relate only to taxable income attributable to such
"Approved Enterprise" and are conditioned upon fulfillment of the conditions
stipulated by the Israeli Investment Law, the related regulations and the
criteria set forth in the certificate of approval. In the event of Summit's
failure to comply with these conditions, the tax benefits could be canceled,
in whole or in part, and Summit would have to refund the amount of the
canceled benefits, adjusted for inflation and interest. Summit has not
realized any "Approved Enterprise" tax benefits from Summit's Israeli
operations as of December 31, 1995, since the Israeli operations were still
incurring losses at that time. During 1996, Summit realized income of $1.4
million from Summit's Israeli operations and "Approved Enterprise" tax
benefits of $53,000. During 1997, Summit realized income of $2.7 million from
its Israeli operations and "Approved Enterprise" tax benefits of $702,000.
During 1998, Summit realized income of $4.3 million from its Israeli
operations and "Approved Enterprise" tax benefits of $1.9 million. Summit has
recently applied for "Approved Enterprise" status with respect to a new
project and intends to apply in the future with respect to additional
projects. Summit's Israeli production facility may not continue to operate or
qualify as an "Approved Enterprise". The benefits under the "Approved
Enterprise" regulations may not continue, or be applicable, in the future.
Summit intends to permanently reinvest earnings of the Israeli subsidiary
outside the United States. If these earnings are remitted to the United
States, Summit may have to pay additional U.S. federal and foreign taxes. The
loss of, or any material decrease in, these income tax benefits could have a
material adverse effect on Summit's business, financial condition, results of
operations or cash flows.
-35-
SUMMITINNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND ITS ABILITYFAILURE TO HIRE ADDITIONALOR RETAIN QUALIFIED
PERSONNEL.
Summit'sPERSONNEL 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.
Summit has entered into employment agreements with certain of its executive
officers. These agreements, however, do not guaranteeInnoveda's business could be seriously harmed if it lost the services of these
employeesits
President and do not contain noncompetition provisions. Summit recently
amended the employment agreement with Richard Davenport, Summit's President.
As amended, Mr. Davenport's employment agreement provides that he is entitledChief Executive Officer, William J. Herman, or if it fails to
certain guaranteed severance payments. Mr. Davenport may or may not
continue his employment with Summit.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. SummitInnoveda has in
the past experienced difficulty in recruiting qualified personnel. SummitInnoveda 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
-22-
additional qualified personnel may have a material adverse effect on Summit'sInnoveda'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 Summit'sInnoveda's business,
financial condition, results of operations or cash flows.
-36-
SUMMIT NEEDSIF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS.
Summit'sORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build and expand its sales and
marketing organizations. Summit hired fewer sales and marketing personnel
than planned in the fourth quarter of 1998 and the first two quarters of 1999
and experienced attrition in the existing sales force during the first
quarter of 1999. In part, as a result of the lack of sales people, Summit's
revenues for the fourth quarter of 1998 were lower than expected. In February
1998, Summit's Senior Vice President of Worldwide Marketing and Sales
resigned. Summit'sInnoveda'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 SummitInnoveda 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.
SUMMIT RELIES ON ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS FOR
CERTAIN BENEFITS. FAILUREINNOVEDA MUST CONTINUE TO OBTAIN SIMILAR GRANTS AND BENEFITS IN THE FUTUREADD VALUE TO ITS CURRENT PRODUCTS TO SERVE ITS
INSTALLED CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL
ADVERSELY AFFECT SUMMIT'S BUSINESS.
Summit's Israeli subsidiary obtained research and development grantsDECREASE.
A substantial portion of Innoveda's revenue is derived from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade
of approximately $232,000 and $608,000 in 1993 and 1995, respectively. As of
December 31, 1997, Summit has repaid all amounts. The terms of the grants
prohibit the manufacture ofmaintenance
agreements for existing products. In order to maintain that revenue, Innoveda
must continue to offer those customers updates for those products developed under these grants outside of
Israel and the transfer of the technology developed pursuantor convert
those customers to these grants
to any person, without the prior written consent of the Chief Scientist.
Summit has developed its Visual HDL for VHDL products under grants from the
Chief Scientist. They are, therefore, subject to these restrictions. If
Summit were unable to obtain the consent of the government of Israel, it
wouldnew products. Innoveda may not be unable to take advantage of potential economic benefits such as
lower taxes, lower labor and other manufacturing costs and advanced research
and development facilities that may be available if these technology and
manufacturing operations could be transferred to locations outside of Israel.
In addition, Summit would be unable to minimize risks particular to
operations in Israel, such as hostilities involving Israel. Although Summit
is eligible to apply for additional grants from the Chief Scientist, it has
no present plansable to do so. Summit receivedDuring 1999
several major customers did not renew their maintenance contracts due to the
fact they were using Viewlogic's products in applications related to integrated
circuit design, which is no longer fully supported by Viewlogic, and to a marketing fund grantlesser
extent a number of customers migrated their products from the Israeli Ministryversion based on
the Unix operating system to the version based on the Microsoft Windows NT
operating system, which have lower maintenance prices. Innoveda can give no
assurances that this trend will not continue.
INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT
INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE
ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE.
As of IndustryJuly 1, 2000, Innoveda had cash and Trade for an aggregatecash equivalents of $423,000. Summit
must repay$21.7 million and
had borrowings of approximately $10.0 million under its credit facility.
Borrowings under the grant atcredit 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 ratemaintenance of 3%minimum levels of profits,
interest and debt service coverage ratios and maximum leverage ratios.
Collectively, these limitations and covenants may substantially restrict the
flexibility of Innoveda's management in quickly adjusting its financial and
operational strategies to react to changing economic and business conditions and
may compromise Innoveda's ability to react to the rapidly evolving environment
of the increaseelectronic design automation industry. To avoid default under this credit
facility, Innoveda must remain in exports over the
1993 export level ofcompliance with these limitations and
covenants and make all Israeli products. As of September 30, 1999, Summit
still owes $92,000 under the grant.
SUMMIT DEPENDS ON ITS INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS BUT
PROTECTION OF THESE RIGHTS IS LIMITED.
Summit's success depends in part upon its proprietary technology. Summit
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures, licensing arrangements and technical means to
establish and protect its proprietary rights. As part of Summit's
confidentiality procedures, Summit generally enters into non-disclosure
agreements with employees, distributors and corporate partners, and limit
access to, and distribution of, its software, documentation and other
proprietary information. In addition, Summit protects its products with
hardware locks and software encryption techniques designed to deter
unauthorized use and copying. Despite these precautions, a third party may
still copyrequired repayments or otherwiseInnoveda must obtain and use Summit's products or technology
without authorization, or develop similar technology independently.
-37-
Summit provides its products to end-users primarily under "shrink-wrap"
license agreements included within the packaged software. In addition, Summit
delivers certain of its verification products electronically under an
electronic version of a "shrink wrap" license agreement. These agreements are
not negotiated with or signed by the licensee, and thusreplacement
financing. Innoveda may not be enforceable in certain jurisdictions. In addition, the laws of some foreign
countries do not protect Summit's proprietary rights as fully as do the laws
of the United States. Summit's means of protectingable to secure replacement financing on terms
acceptable to it or to its proprietary rights in
the United States or abroad may not be adequate, and competitors may also
independently develop similar technology.
SUMMIT MAY FACE INFRINGEMENT CLAIMS, AND INTELLECTUAL PROPERTY LITIGATION
WILL BE COSTLY FROM BOTH THE ECONOMIC AND BUSINESS PERSPECTIVES.
Summit could face an increasing number of infringement claims as the number
of products and competitors in Summit's industry segment grows, the
functionality of products in Summit's industry segment overlaps and an
increasing number of software patents are granted by the United States Patent
and Trademark Office. A third party may claim such infringement by Summit
with respect to current or future products. Any such claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
delays or require Summit to enter into royalty or licensing agreements. These
royalty or license agreements, if required, may not be available on
acceptable termsstockholders, or at all. Failure to protect Summit's proprietary rightsIn the event of a default by
Innoveda, Innoveda's lender may enforce its security interest and take
possession of substantially all or claimssome of infringement could have a material adverse effect on Summit's
business, financial condition, results of operations or cash flows.
-38-
SUMMIT'S STOCK PRICE MAY FLUCTUATE DRAMATICALLY.
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the
market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. These broad
market fluctuations may adversely affect the market price of Summit's common
stock. In addition, factors such as announcements of technological
innovations or new products by Summit or its competitors, market conditions
in the computer software or hardware industries and quarterly fluctuations in
Summit's operating results may have a significant adverse effect on the
market price of Summit's common stock.
SUMMIT MAY FACE YEAR 2000 COMPUTER PROBLEMS.
Summit is currently working to address the potential impact of the Year 2000
on the processing of information by its computerized systems, including
interfaces to significant business partners.
Summit has substantially completed its planned Year 2000 compliance
activities with respect to its products and internal systems, software,
equipment and facilities. Based solely on these activities, management
believes that all products and material internal systems, software, equipment
and facilities are substantially Year 2000 compliant. Summit does not
anticipate that potential Year 2000 issues will have a material adverse
impact on its financial position or operating results.
However, Summit could be adversely impacted if any of its critical business
partners were to experience a severe business interruption due to a failure
to address their internal Year 2000 issues in a timely manner. If a severe
disruption occurs and is not corrected in a timely manner, a revenue or
profit shortfall may result during calendar year 2000. Based solely on
responses received to date from its business partners, Summit has no reason
to believe that there will be such a material adverse impact. However, if the
responses received from its business partners are inaccurate or happen to
change, then there could be such a material adverse impact. Management is
evaluating Year 2000 business interruption scenarios and developing
appropriate contingency plans.
-39-Innoveda's assets.
-23-
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The CompanyRISK
Innoveda is exposed to market risk from interest rate changes and foreign
currency fluctuations, and changes in the market values of its investments.fluctuations.
INTEREST RATE RISK. The Company investsInnoveda is exposed to interest rate risk primarily
through its excess cash in debt instrumentscredit facility. Innoveda has available a $24.0 million credit
facility with Fleet National Bank consisting of a $6.0 million revolving line
of credit and an $18.0 million term loan. 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 the interest rate based on
Fleet's prime rate or based on the LIBOR rate at the time of the U.S. Government and its agencies, andelection,
depending on Innoveda's leverage financial rate as defined in high-quality corporate issuers and,
by policy, limits the amountcredit
facility. As of January 1, 2000 the interest rate on the line of credit exposure to any one issue. The Company
attempts to protectwas
7.3% 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 degreeon the term loan was 8.26%.As of July 1, 2000, the interest rate risk. Fixed rate securitieson
the line of credit was 7.3% and on the term loan was 9.03%. Payments of
principal outstanding under either the line of credit or the term loan may have their fair
market value adversely impacted duebe
made at any time and must be repaid in full by September 30, 2003. On October
3, 1998, as required under the credit facility, Innoveda entered into a
no-fee interest swap agreement with Fleet 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,reduce the Company's future investment income may fall
shortimpact of expectations due to changes in
interest rates andon its floating rate credit facility. This agreement
effectively converts a portion of the Company may
suffer lossesfloating-rate obligation into a
fixed-rate obligation of 7.2% for a period of 60 months, expiring on
September 30, 2003. The notional principal amount of the interest rate-swap
agreement was $7.8 million as of January 1, 2000. Innoveda is exposed to
credit loss in principal if forcedthe event of non-performance by the counter parties to sell securities whichthe
interest rate-swap agreement. Open interest rate contracts are reviewed
regularly by Innoveda to ensure that they remain effective as hedges of
interest rate exposure. Management believes that the rate-swap agreement
approximates fair value. After taking into consideration the interest-swap
agreement, a hypothetical 10% adverse movement in average interest rates
would not have declined in
market value due to changes in interest rates.a material effect on Innoveda's financial results.
FOREIGN CURRENCY RISK. The Company pays the expenses of its international
operations in local currencies. The Company's international operations are
subject to risks typical of an international business, including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors.
The CompanyRISK Innoveda is also exposed to foreign exchange rate fluctuations as they
relate to operating expenses as the financial resultsimpact of foreign subsidiaries
are translatedcurrency
fluctuations. Since Innoveda translates foreign currencies into U.S. dollars for
reporting purposes, weakened currencies in consolidation. Asits 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 six months ended July 1, 2000.
Realized and unrealized gains and losses on foreign exchange contracts for the
six months ended July 1, 2000 were insignificant. Based on a hypothetical 10%
adverse movement in foreign currency exchange rates, vary,
these results, when translated, may vary from expectations and adversely
impact overall expected profitability. The effectthe potential losses in
future earnings, fair value of foreign exchange rate
fluctuations on the Company in 1999 was not material.
INVESTMENT RISK. The Company has made equity investments in ADC and SDA and
has provided loans to ADC and a privately-held, independent software company
for business and strategic purposes. These investments are included in other
long-term assets and are accounted for under the equity method when ownership
is greater than 20% and the Company does not exert control. For these
investments in privately-held companies, the Company's policy is to regularly
review the assumptions underlying the operating performancerisk-sensitive instruments and cash flow
forecasts in assessingflows are
immaterial, although the carrying values. The Company identifies and
records impairment losses on long-lived assets when events and circumstances
indicate that such assets might be impaired.
-40-actual effects may differ materially from the
hypothetical analysis.
-24-
PART II Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicableOTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicableOn Thursday, July 13, 2000, Innoveda held its Annual Meeting of Stockholders.
William J. Herman was elected as a Class III director at the meeting. The term
of offices as a director of William V. Botts, Lorne J. Cooper, Steven P. Erwin,
and Keith B. Geeslin continued after the meeting. At the meeting, the votes cast
for each matter described below were as follows:
1. Election of one Class III director, William J. Herman, for the ensuing three
years and until his successor is duly elected and qualified.
For: 28,525,073
Withheld: 1,316,361
2. Approval of an amendment to Innoveda's Amended and Restated Certificate of
Incorporation, as amended, to increase the authorized number of shares of common
stock of Innoveda from 50,000,000 to 100,000,000.
For: 29,653,214
Against: 94,500
Abstain: 93,720
Broker Non-Votes: 0
3. Approval of Innoveda's 2000 Amended and Restated Stock Incentive Plan and the
authorization of an initial 4,500,000 shares of Innoveda's common stock for
issuance under such plan, plus an additional 2,000,000 shares of Innoveda's
common stock each year of the plan.
For: 19,247,251
Against: 1,895,134
Abstain: 120,766
Broker Non-Votes: 8,578,283
4. Approval of Innoveda's 2000 Employee Stock Purchase Plan and the
authorization of 700,000 shares of Innoveda's common stock for issuance under
such plan.
For: 21,038,503
Against: 107,340
Abstain: 117,308
Broker Non-Votes: 8,578,283
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 AmendmentThe exhibits filed as a part of this Quarterly Report on Form 10-Q are listed on
the Exhibit Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents
-25-
identified by footnotes are not being filed herewith, and, pursuant to employment agreement betweenRule
12b-32 under the RegistrantSecurities Exchange Act of 1934, reference is made to such
documents as previously filed with the Securities and Richard Davenport dated October 24, 1999.
27.1 Financial Data ScheduleExchange Commission.
Innoveda's file number under the Securities Exchange Act of 1934 is 000-20923.
(b) Reports on Form 8-K
On July 6, 1999, the CompanyApril 7, 2000, Innoveda filed a Current Report on Form 8-K dated July 6, 1999March 23,
2000. Innoveda amended its Current Report on Form 8-K dated March 23, 2000 on
May 15, 2000. As amended, the Current Report on form 8-K dated March 23, 2000
reports: (i) under Item 1, a change in control resulting from the business
combination between Viewlogic Systems, Inc. and Summit Design, Inc.; (ii) under
Item 2 the acquisition of assets in connection with the business combination
between Viewlogic and Summit; (iii) under Item 5, certain financial statements
of Viewlogic; (iv) under Item 7, certain other financial statements of Viewlogic
and pro forma financial information of Innoveda; and (v) under Item 8, the
adoption by Innoveda of Viewlogic's fiscal year due to the treatment of the
business combination between Viewlogic and Summit as a press release issued by"reverse acquisition".
Financial statements filed therewith include the Company announcing preliminary resultsfollowing:
A. Financial Statements of Viewlogic
1. Unaudited Statements of Revenues and Expenses and Consolidated
Statements of Operations for each of the three month periods ending
April 3, 1999, July 3, 1999, October 2, 1999 and January 1, 2000.
2. Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000.
3. Statement of Revenues and Expenses for the second quarteryear ended December 31,
1997 and Consolidated Statements of Operations for the years ended
January 2, 1999 and January 1, 2000.
4. Consolidated Statements of Comprehensive Income for the years ended
January 2, 1999 and January 1, 2000.
5. Consolidated Statements of Stockholders' Equity (Deficiency) for the
years ended January 2, 1999 and January 1, 2000.
6. Consolidated Statements of Cash Flows for the years ended January 2,
1999 and January 1, 2000.
B. Pro Forma Financial Information of Innoveda
1. Unaudited Pro Forma Combined Condensed Balance Sheet as of December
31, 1999.
2. Unaudited Pro Forma Combined Condensed Statements of Operations for
the year ended December 31, 1999.
-26-
On September 21, 1999, the CompanyJune 19, 2000, Innoveda filed a Current Report on Form 8-K dated September 16, 1999 in connection withJune 2, 2000
reporting under Item 5 a press release issued by the Company announcing the signing ofthat Innoveda had entered into
a definitive merger agreement to merge the Company with Viewlogic Systems,acquire PADS Software, Inc.
-41-, a privately held
company.
On June 30, 2000, Innoveda filed a Current Report on Form 8-K dated June 23,
2000 reporting under Item 4 its dismissal of PricewaterhouseCoopers LLP, and its
engagement of Deloitte & Touche LLP, as its independent auditors.
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT DESIGN,INNOVEDA, INC.
BY:By: /s/ C. Albert Koob
------------------------------------
C. Albert KoobKevin P. O' Brien
Vice President, - Finance and
Chief Financial Officer
and Secretary
Principal(Principal Financial and Accounting
Officer and Duly Authorized OfficerOfficer)
Date: November 11, 1999
-42-August 15, 2000
-28-
EXHIBIT INDEX
EXHIBIT 10.1Exhibit No. Description
2.1(1) Agreement and Plan of Merger and Reorganization dated
June 2, 2000 among Innoveda, Inc., Innovative Software, Inc.,
PADS Software, Inc., and Kyoden Company Ltd.
2.2(1) Form of Voting and Transfer Restriction Agreement dated as
of June 2, 2000.
2.3(1) Software Purchase Agreement and Source Code License
Grant-Back dated July 28, 2000 by and between Synopsys,
Inc., Synopsys International Ltd., Innoveda, Inc., and
Innoveda Minnesota Holdings, Inc.
3.1(2) Certificate of Amendment to employment agreement betweenof Amended and Restated
Certificate of Incorporation of Innoveda, Inc.
10.1(1) Amended and Restated 2000 Stock Incentive Plan.
10.2(1) 2000 Employee Stock Purchase Plan.
10.3(1) Amended and Restated Loan Agreement dated July 31, 2000
among Innoveda, Inc., Viewlogic Systems, Inc., Fleet National
Bank, as agent and a lender and, the Registrant and
Richard Davenport dated October 24, 1999.
EXHIBITother financial
institutions party thereto.
27.1 Financial Data Schedule
-43-Schedule.
- -------------------------------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-4 (File No. 333-42814), as amended.
(2) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (File No. 333-43582).