SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 2001
OR
| | Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _________ to________
Commission file number: 000-20923
INNOVEDA, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 93-1137888
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
293 BOSTON POST ROAD WEST, MARLBORO, MASSACHUSETTS 01752-4615
-------------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (508) 480-0881
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
As of April 30, 2001, the Registrant had outstanding 39,102,159 shares of Common
Stock, $0.01 par value per share.
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 FINANCIAL INFORMATION PAGE
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 30, 2000 3
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 2001 (unaudited) and April 1, 2000
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2001 (unaudited) and April 1, 2000
(unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 25
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 26
Signature 27
Exhibit Index 28
2
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 30,
2001 2000
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,477 $ 20,799
Accounts receivable, net 21,712 27,260
Prepaid expenses and other 3,016 2,800
Deferred income taxes 5,813 6,626
---------- ----------
Total current assets 50,018 57,485
Equipment and furniture, net 7,860 7,642
Capitalized software costs, net 2,366 2,358
Purchased technology and other intangibles, net 58,008 62,198
Goodwill and other, net 12,516 12,941
---------- ----------
Total assets $ 130,768 $ 142,624
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 3,658 $ 3,550
Capital lease obligations, current portion 511 548
Accounts payable 4,096 3,652
Accrued liabilities 14,272 20,565
Deferred revenue 23,560 24,514
---------- ----------
Total current liabilities 46,097 52,829
Long-term debt 4,750 5,750
Capital lease obligations 145 250
Other long-term liabilities 1,523 1,553
Deferred tax liability 26,032 27,642
---------- ----------
Total liabilities 78,547 88,024
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 authorized,
39,625 oustanding at March 31, 2001, 39,347
oustanding at December 30, 2000 396 393
Additional paid-in-capital 116,821 116,047
Accumulated deficit (61,120) (59,013)
Accumulated other comprehensive income (loss) (314) 50
Notes from stockholders (932) (932)
Treasury stock, 551 and 341 shares at cost in
2001 and 2000, respectively (1,663) (832)
Deferred compensation (967) (1,113)
---------- ----------
Total stockholders' equity 52,221 54,600
---------- ----------
Total liabilities and stockholders' equity $ 130,768 $ 142,624
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
FOR THE QUARTER ENDED
-------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Revenue:
Software $ 15,381 $ 7,628
Services and other 11,877 6,757
---------- ----------
Total revenue 27,258 14,385
---------- ----------
Costs and expenses:
Cost of software 1,759 1,516
Cost of services and other 2,604 1,562
Sales and marketing 11,288 6,451
Research and development 7,652 3,528
General and administrative 2,166 1,260
Amortization of intangibles 4,702 477
Amortization of stock compensation 146 147
In-process research and development -- 2,400
Merger related restructuring costs -- 2,243
---------- ----------
Total operating expenses 30,317 19,584
---------- ----------
Operating loss (3,059) (5,199)
Other expense (18) (403)
---------- ----------
Loss before income tax benefit (3,077) (5,602)
Income tax benefit (970) (1,160)
---------- ----------
Net loss $ (2,107) $ (4,442)
========== ==========
Net loss per share:
Basic $ (0.05) $ (0.57)
========== ==========
Diluted $ (0.05) $ (0.57)
========== ==========
Weighted average shares outstanding:
Basic 39,036 7,837
========== ==========
Diluted 39,036 7,837
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE QUARTER ENDED
--------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,107) $ (4,442)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 5,920 1,480
Compensation under stock option agreements 146 147
Write-off of in-process research and development -- 2,400
Changes in assets and liabilities:
Accounts receivable 5,426 4,813
Prepaid and other current assets (307) 192
Deferred income taxes (797) (1,198)
Accounts payable (221) (205)
Accrued liabilities (5,832) 925
Tax benefit on stock option exercises 43 --
Deferred revenue (954) (1,130)
---------- ----------
Net cash provided by operating activities 1,317 2,982
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,179) (575)
Capitalized software costs (261) (321)
Cash acquired in acquisition of Summit, net of purchase costs -- 27,036
---------- ----------
Net cash provided by (used in) investing activities (1,440) 26,140
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (892) (1,950)
Proceeds from exercise of stock options and employee stock
purchase plan 734 28
Repayments of capital lease obligations (142) (94)
Purchase of treasury stock (831) --
---------- ----------
Net cash used in financing activities (1,131) (2,016)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (68) (5)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,322) 27,101
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,799 531
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,477 $ 27,632
========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
INNOVEDA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except per Share Data)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Innoveda, Inc. (the "Company"), a Delaware corporation, was created by
the business combination of Summit Design, Inc. ("Summit") and Viewlogic
Systems, Inc. ("Viewlogic"), which was consummated on March 23, 2000. In
addition, the Company subsequently acquired PADS Software, Inc. ("PADS")
on September 22, 2000. The business combination of Summit with Viewlogic
was effected by means of the merger of a wholly owned subsidiary of
Summit with and into Viewlogic, with Viewlogic surviving as a wholly
owned subsidiary of Summit. The business combination was accounted for as
a reverse acquisition, as former stockholders of Viewlogic owned the
majority of the outstanding stock of Summit subsequent to the business
combination. Therefore, for accounting purposes, Viewlogic is deemed to
have acquired Summit. The business combination of Innoveda and PADS was
accounted for as a purchase of PADS by Innoveda.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included.
The fiscal 2000 financial information presented in the consolidated
statements of operations, and the consolidated statements of cash flows
represents the results for Viewlogic for the periods stated and includes
the financial results for Summit commencing March 24, 2000, and the
financial results for PADS commencing September 23, 2000.
2. ACQUISITIONS
ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into
a merger agreement with PADS. The merger was consummated on September 22,
2000. The merger agreement provided that a wholly owned subsidiary of
Innoveda would merge with and into PADS, with PADS surviving as a wholly
owned subsidiary of Innoveda following the merger. For the merger,
Innoveda issued 6,473 shares of its common stock and paid approximately
$2.0 million to the PADS stockholders. PADS capital stock outstanding at
the merger date was exchanged for shares of Innoveda common stock at the
rate of approximately 1 to 1.9 per share, plus $.579 per share in cash.
In addition, each outstanding option to purchase shares of PADS common
stock was converted into an option to purchase 2.0355 shares of Innoveda
common stock, and the option exercise prices were adjusted accordingly.
The operating results of PADS have been included in the accompanying
consolidated financial statements from the date of acquisition. Under the
purchase method of accounting, the acquired assets and assumed
liabilities have been recorded at their estimated fair values at the date
of acquisition.
6
2. ACQUISITIONS (CONTINUED)
Innoveda recorded merger costs of approximately $0.5 million in
restructuring charges relating to the PADS merger. This was primarily
comprised of severance payments related to one employee and exit costs to
close Innoveda duplicative facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an
Agreement and Plan of Reorganization. Summit was a publicly held company
engaged in a business similar to that of Viewlogic. In connection with
the business combination contemplated by the Agreement and Plan of
Reorganization, (1) each share of Viewlogic common stock and preferred
stock issued and outstanding at the effective time of the business
combination was converted into 0.67928 (the "Exchange Ratio") of a share
of Summit common stock, and (2) each option to purchase shares of
Viewlogic common stock was converted into an option to purchase Summit
common stock based upon the Exchange Ratio.
The business combination was accounted for under the purchase method of
accounting and was treated as a reverse acquisition, as the stockholders
of Viewlogic received the larger portion of the voting interests in the
combined company. Viewlogic was considered the acquirer for accounting
purposes and recorded Summit's assets and liabilities based upon their
estimated fair values. The operating results of Summit have been included
in the accompanying consolidated financial statements from the date of
acquisition. Under the purchase method of accounting, the acquired assets
and assumed liabilities have been recorded at their estimated fair values
at the date of acquisition.
During the first quarter ended April 1, 2000, Innoveda recorded
approximately $2.2 million in merger costs relating to the Summit
business combination. This primarily included severance and other costs
relating to the consolidation of duplicative facilities as a result of
the business combination between Summit and Viewlogic. Other costs
relating to property and equipment lease contracts (less any applicable
sublease income) after the properties were abandoned, lease buyout costs,
restoration costs associated with certain lease arrangements, and costs
to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure the Innoveda sales and
services business in Japan as a result of an exclusive distributor
agreement executed with Marubeni Solutions Corporation during the first
quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for
approximately 14 employees, costs associated with office closings and
subsequent lease termination, and other facility and exit related costs.
7
2. ACQUISITIONS (CONTINUED)
The following table presents the components of the merger costs accrued
during the mergers with PADS and Summit and the charges against these
reserves through March 31, 2001. All significant amounts are expected to
be settled within the second quarter of fiscal 2001.
TOTAL NON-CASH AMOUNT MARCH 31, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------------------- ------------------- -------------------- -------------------
PADS MERGER COSTS $ 250 $ -- $ 218 $ 32
Severance 199 -- 63 136
Non-cancelable commitments 44 44 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software $ 493 $ 44 $ 281 $ 168
------------------- ------------------- -------------------- -------------------
SUMMIT MERGER COSTS $ 780 $ -- $ 775 $ 5
Severance 1,389 -- 805 584
Non-cancelable commitments 74 74 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software $ 2,243 $ 74 $ 1,580 $ 589
------------------- ------------------- -------------------- -------------------
TOTALS $ 2,736 $ 118 $ 1,861 $ 757
=================== =================== ==================== ===================
8
3. EARNINGS PER SHARE
Basic earnings per share is calculated using weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares plus the effect, if
dilutive, of outstanding stock options using the treasury stock method.
FOR THE QUARTER ENDED
-----------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Net Loss $ (2,107) $ (4,442)
========== ==========
Weighted average number of common shares - Basic 39,036 7,837
========== ==========
Weighted average number of common and potential common
shares - Diluted 39,036 7,837
========== ==========
Net loss per share:
Basic $ (0.05) $ (0.57)
========== ==========
Diluted $ (0.05) $ (0.57)
========== ==========
For the quarters ended March 31, 2001 and April 1, 2000, there were 8,363
and 4,940 anti-dilutive weighted average potential common shares,
respectively, not included in the table above.
9
4. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
Innoveda operates in a single industry segment comprising the electronic
design automation industry. Net revenue by geographic region (in
thousands) and as a percentage of total revenue for each region is as
follows:
FOR THE QUARTER ENDED
----------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Revenue
North America $ 18,422 $ 9,699
Europe 4,340 1,552
Japan 2,016 2,672
Other 2,480 462
----------- ----------
Total Revenue $ 27,258 $ 14,385
=========== ===========
As a percentage of Total Revenue
North America 68% 67%
Europe 16% 11%
Japan 7% 19%
Other 9% 3%
----------- ----------
Total 100% 100%
=========== ===========
5. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
FOR THE QUARTER ENDED
---------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Net loss $ (2,107) $ (4,442)
Foreign currency translation adjustments and other (364) (26)
---------- ----------
Comprehensive loss $ (2,471) $ (4,468)
========== ==========
10
6. DEBT
CREDIT FACILITY -The Company has a credit facility with a commercial bank
consisting of a $6.0 million revolving line of credit ("Line of Credit")
and an $8.4 million term loan (the "Term Loan") (together, the "Credit
Facility"). Interest terms on the Line of Credit and the Term Loan are
determined, at the option of the Company, for varying periods. The
Company may elect to have the interest rate based on the bank's prime
rate or based on the LIBOR rate at the time of the election, depending on
the Company's leverage financial ratio, as defined, in the Credit
Facility. The interest rate on the Line of Credit at March 31, 2001 and
December 30, 2000 were 8.5% and 10.0%, respectively. The interest rates
on the Term Loan at March 31, 2001 and December 30, 2000 were 6.9% and
9.5%, respectively. Payments of principal outstanding under either the
Line of Credit or the Term Loan may be made at any time and must be
repaid in full by September 30, 2003.
The Credit Facility contains certain limitations on additional
indebtedness, capital expenditures, and includes financial covenants,
which include, but are not limited to, the maintenance of certain minimum
levels of interest, and debt service coverage ratios and maximum leverage
ratios. Innoveda was in compliance with all of its debt covenants as of
March 31, 2001.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which established accounting and reporting
standards for derivative instruments. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective
portions of changes in fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. Adoption of SFAS
133 did not have a material effect on the Company's consolidated
financial position or results of operations.
11
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical facts
included in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospectus,
plans and objectives of management are forward-looking statements. When used in
this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate",
"intend", "estimate", "expect", "project", "plans", and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
future results, levels of activity, performance or achievements and you should
not place undue reliance on our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or strategic alliances. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in the
following discussion, and, in particular, the risks discussed below under the
subheading "Additional Risk Factors that Could Affect Operating Results and
Market Price of Stock." Unless required by law, Innoveda undertakes no
obligation to update publicly any forward-looking statements made in this
Quarterly Report on Form 10-Q.
OVERVIEW
Innoveda, Inc., a Delaware corporation, was created by the business combination
of Summit Design, Inc. and Viewlogic Systems, Inc., which was consummated on
March 23, 2000. The merger of Summit Design with Viewlogic was accounted for as
a reverse acquisition as former stockholders of Viewlogic owned a majority of
the outstanding stock of Summit subsequent to the business combination. For
accounting purposes, Viewlogic is deemed to have acquired Summit Design. On
September 22, 2000, Innoveda completed its acquisition of PADS Software, Inc.
Accordingly, all financial information presented herein includes the results for
Viewlogic for the entire period, the results of Summit from March 24, 2000 and
PADS from September 22, 2000.
Innoveda operates in the United States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
technical support and consulting services for those software tools. Innoveda
currently markets and sells its products worldwide through multiple distribution
channels, including independent distributors, value-added resellers, direct
sales and telesales.
12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenue of certain items in Innoveda's consolidated statements of operations:
FOR THE QUARTER ENDED
----------------------------------
MARCH 31, APRIL 1,
2001 2000
--------- --------
Revenue:
Software 56% 53%
Services and other 44 47
------ ------
Total Revenue 100 100
------ ------
Cost and expenses:
Cost of software 6 10
Cost of services and other 10 11
Sales and marketing 41 45
Research and development 28 24
General and administrative 8 9
Amortization of intangibles and stock compensation 18 4
In-process research and devleopment -- 17
Non-recurring charges -- 16
------ ------
Total operating expenses 111 136
------ ------
Loss from operations (11) (36)
Other expense, net -- (3)
------ ------
Loss before income taxes (11) (39)
------ ------
Income tax benefit (3) (8)
------ ------
Net loss (8)% (31)%
====== ======
QUARTERS ENDED MARCH 31, 2001 AND APRIL 1, 2000
REVENUE
For the quarter ended March 31, 2001, total revenue increased 89% to $27.3
million from $14.4 million for the quarter ended April 1, 2000. The increase
in revenue consisted of a 102% increase in software license revenue to $15.4
million from $7.6 million, and an increase of 76% in services and other
revenue to $11.9 million from $6.8 million. These increases were primarily
due to additional sales related to the System Level Design ("SLD") product
line acquired as part of the acquisition of Summit Design in March 2000, and
printed circuit board ("PCB") product sales acquired as part of the
acquisition of PADS Software in September 2000. Additionally, the Company
realized increased consulting revenue as a result of an increased focus in
this area during the first quarter of 2001 versus the same period in 2000.
13
As a percentage of total revenue, software license revenue increased to 56% for
the quarter ended March 31, 2001 from 53% for the quarter ended April 1, 2000.
Services and other revenue decreased to 44% for the quarter ended March 31, 2001
from 47% for the quarter ended April 1, 2000.
COST OF SOFTWARE
Cost of software revenue consists primarily of cost of product media,
documentation, duplication, packaging, and royalties. Cost of software revenue
increased 16% to $1.8 million for the quarter ended March 31, 2001 from $1.5
million for the quarter ended April 1, 2000. This increase was primarily due to
increased salary and related costs of additional headcount resulting from the
acquisitions of Summit Design in March 2000 and PADS Software in September 2000,
and to a lesser extent increased royalty costs related to increased software
license revenue.
As a percentage of total revenue, cost of software decreased to 6% for the
quarter ended March 31, 2001 from 10% for the quarter ended April 1, 2000,
primarily due to economies of scale resulting from Innoveda's acquisitions of
Summit Design and PADS Software.
COST OF SERVICES AND OTHER
Cost of services and other consists primarily of costs of providing technical
support, education and consulting services. Cost of maintenance and services
increased 67% to $2.6 million for the quarter ended March 31, 2001 from $1.6
million for the quarter ended April 1, 2000. This was primarily due to increased
salary and related costs of additional headcount resulting from the acquisitions
of Summit Design in March 2000 and PADS Software in September 2000, as well as
increased staffing and related costs in our consulting organization necessary to
build the infrastructure to support expansion in that area of our business.
As a percentage of total revenue, cost of maintenance and services decreased to
10% for the quarter ended March 31, 2001 from 11% for the quarter ended April 1,
2000.
SALES AND MARKETING
Sales and marketing expenses increased 75% to $11.3 million for the quarter
ended March 31, 2001 from $6.5 million for the quarter ended April 1, 2000. This
was primarily due to increased salary and related costs of additional headcount
resulting from the acquisition of Summit Design in March 2000 and PADS Software
in September 2000. Innoveda also incurred increased costs associated with
variable compensation plans as a result of the increase in revenue.
Additionally, discretionary marketing spending for trade shows, direct mail
solicitations and advertising campaigns designed to increase awareness of the
Innoveda name, and marketing of our product lines resulted in higher sales and
marketing expenses.
As a percentage of total revenue, sales and marketing expenses decreased to 41%
for the quarter ended March 31, 2001 from 45% for the quarter ended April 1,
2000.
14
RESEARCH AND DEVELOPMENT
Research and development expenses increased 117% to $7.7 million for the quarter
ended March 31, 2001 from $3.5 million for the quarter ended April 1, 2000. This
was primarily due to increased salary and related costs of additional headcount
resulting from the acquisition of Summit Design in March 2000 and PADS Software
in September 2000. The increase was also attributable to the development of new
products, including Visual Elite, a new SLD product that provides added
functionality to existing SLD tools, FabFactory, a tool for PCB fabricators, and
TransOVM and TransBridge, for the design of complex wiring harnesses for large
electrical systems. The Company also released the latest version of the CAM350
PCB design tool, which further integrates the design and manufacturing tasks in
the PCB design flow.
As a percentage of total revenue, research and development expenses increased to
28% for the quarter ended March 31, 2001 from 24% for the quarter ended April 1,
2000.
The amount of software development costs capitalized for the quarter ended March
31, 2001 was approximately $0.3 million or 3% of research and development
expense for that period, and for the quarter ended April 1, 2000 was $0.3
million or 9% of research and development expense for that period.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of the administrative,
finance, human resources, legal, and information systems departments of
Innoveda. General and administrative expenses increased 72% to $2.2 million for
the quarter ended March 31, 2001 from $1.3 million for the quarter ended April
1, 2000. This increase was primarily a result of Innoveda building its general
and administrative infrastructure to support the growth in revenue of Innoveda's
products and services and related acquisitions. To a lesser extent, the increase
is due to expenses associated with becoming a publicly traded company.
As a percentage of total revenue, general and administrative expenses decreased
to 8% for the quarter ended March 31, 2001 from 9% for the quarter ended April
1, 2000.
AMORTIZATION OF INTANGIBLES
Amortization expense increased to $4.8 million in the quarter ended March 31,
2001 from $0.6 million for the quarter ended April 1, 2000, mainly as a result
of the increase in intangibles from acquisitions. Innoveda had $69.3 million in
intangible assets as of March 31, 2001, consisting primarily of purchased
technology, goodwill, workforce, customer base and trademarks, resulting from
the Summit Design business combination in March 2000 and the PADS acquisition in
September 2000, and the remaining intangible assets from the OmniView and
Transcendent transactions described below. Innoveda had $40.8 million in
intangible assets as of April 1, 2000, consisting of purchased technology,
goodwill, workforce and customer base from the Summit Design acquisition along
with certain assets acquired from OmniView, Inc. in March 1999, and purchased
technology related to the acquisition of Transcendent Design Technology, Inc. in
August 1999. Innoveda's intangible assets are being amortized to expense over
periods ranging from three to seven years.
15
RESTRUCTURING CHARGES RELATED TO SUMMIT MERGER
During the quarter ended April 1, 2000, Innoveda recorded approximately $2.2
million in restructuring charges relating to the Summit merger. This primarily
included severance and other costs relating to the consolidation of duplicative
facilities. Other costs relating to property and equipment lease contracts (less
any applicable sublease income) after the properties were abandoned, lease
buyout costs, restoration costs associated with certain lease arrangements, and
costs to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure the Innoveda sales and
services business in Japan as a result of an exclusive distributor agreement
executed with Marubeni Solutions Corporation during the first quarter of fiscal
2000. Charges associated with the Japanese reorganization include severance and
benefit continuance for approximately 14 employees, costs associated with office
closings and subsequent lease termination, and other facility and exit related
costs.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In conjunction with the business combination of Summit and Viewlogic in the
quarter ended April 1, 2000 Innoveda charged to expense $2.4 million
representing acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use, as
determined by an independent appraiser.
OTHER EXPENSE
Other expense consists of the net of interest expense relating to Innoveda's
term loan and revolving credit line, interest income from cash and cash
equivalent balances, and currency exchange rate differences resulting from
foreign operations in local currencies. Other expense decreased by $0.4 million,
to $0.02 million for the first quarter ended March 31, 2001 from $0.4 million
for the first quarter ended April 1, 2000. This decrease is primarily a result
of an increase in interest income from cash acquired as part of the Summit
Design business combination, offset partially by a decrease in interest expense
as Innoveda paid down a portion of its long term debt obligations.
INCOME TAX BENEFIT
The benefit for income taxes decreased by $0.2 million, to $1.0 million for the
quarter ended March 31, 2001 from $1.2 million for the quarter ended April 1,
2000 . Quarterly tax provisions are based on the estimated effective tax rates
for the fiscal years.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Innoveda finances its operations primarily through cash generated from
operations and short-term borrowings available from a revolving credit line. As
of March 31, 2001, Innoveda had approximately $19.5 million in cash and cash
equivalents and working capital of approximately $3.9 million. Innoveda has a
$6.0 million revolving line of credit with Fleet Bank. As of April 30, 2001,
there was no balance outstanding under this line of credit. Innoveda has a term
loan with Fleet Bank, with approximately $7.5 million outstanding as of April
30, 2001. Borrowings under the credit facility are secured by substantially all
of Innoveda's assets. The credit facility contains limitations on additional
indebtedness and capital expenditures, and includes financial covenants, which
include but are not limited to the maintenance of minimum levels of
profitability, interest and debt service coverage ratios and maximum leverage
ratios and minimum working capital 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 was in compliance with all of its debt covenants as of March
31, 2001.
16
For the three months ended March 31, 2001, net cash provided by operating
activities was approximately $1.3 million. This was primarily due to a net loss
of $2.1 million, offset by non-cash depreciation and amortization of
approximately $5.9 million, a decrease in accounts receivable of $5.4 million,
an $0.8 million increase in deferred income taxes and a decrease in accounts
payable of approximately $0.2 million and a decrease in accrued liabilities of
$5.8 million.
Net cash used by investing activities for the three months ended March 31, 2001
was approximately $1.4 million, primarily due to the purchase of property and
equipment.
Innoveda considers all highly liquid debt instruments with a remaining maturity
of three months or less when purchased to be cash equivalents. At March 31, 2001
and April 1, 2000, substantially all of Innoveda's cash and cash equivalents
were invested in interest-bearing deposits and other short-term investments with
an original maturity of three months or less as of the date of purchase. By
policy of Innoveda's board of directors, all debt instruments must have quality
ratings no lower than A rating.
Net cash used in financing activities was approximately $1.1 million for the
three months ended March 31, 2001, primarily due to the repayment of principal
on debt and the repurchase of common stock as discussed below.
On October 19, 2000, Innoveda's board of directors authorized Innoveda to
repurchase up to 2 million shares of its common stock during the period ending
October 31, 2001. The repurchased shares will be held as treasury shares and
used in company stock option plans, employee stock purchase plans and for
general corporate purposes. As of April 30, 2001, Innoveda had purchased 550,606
shares of common stock at an aggregate cost of $1,663,371 under its stock
re-purchase program.
Innoveda believes that its current cash and cash equivalents, combined with cash
generated from operations and amounts available under the revolving line of
credit, will satisfy Innoveda's anticipated working capital and other cash
requirements for at least the next 12 months.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE SUMMIT AND VIEWLOGIC AND/OR THE
ACQUISITION BY INNOVEDA OF PADS, THE ANTICIPATED ADVANTAGES OF 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 also acquired PADS Software, Inc. in
September 2000. The integration of Summit Design 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 has been, and will remain, critical to ensure
continued advancement, development and support of the Company's technologies and
ongoing sales and marketing efforts. During the integration phase, competitors
may intensify their efforts to recruit key employees. The inability to
successfully integrate Summit Design and Viewlogic and/or Innoveda and PADS and
to retain key technical, sales or marketing personnel after the Summit Design
and Viewlogic combination and the merger of Innoveda and PADS would adversely
affect the combined company's business.
17
VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE AND
FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantly in certain quarters. These fluctuations
resulted from several factors, including, among others:
o the size and timing of orders;
o large one-time charges incurred as a result of an acquisition or
consolidation;
o seasonal factors;
o the rate of acceptance of new products;
o product, customer and channel mix;
o lengthy sales cycles; and
o level of sales and marketing staff.
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
o corporate acquisitions and consolidations and the integration of acquired
entities and any resulting large one-time charges;
o the timing of new product announcements and introductions by Innoveda and
Innoveda's competitors;
o the rescheduling or cancellation of customer orders;
o the ability to continue to develop and introduce new products and product
enhancements on a timely basis;
o the level of competition;
o purchasing and payment patterns, pricing policies of competitors;
o product quality issues;
o currency fluctuations; and
o general economic conditions.
18
Innoveda believes that period-to-period comparisons of Innoveda's operating
results are not necessarily meaningful. As a result, you should not rely on
these comparisons as indications of Innoveda's future performance. In addition,
Innoveda operates with high gross margins, and a downturn in revenue could have
a significant impact on income from operations and net income. Innoveda's
results of operations could be below investors' and market makers' expectations
in future quarters, which could have a material adverse effect on the market
price of Innoveda's common stock.
INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.
Innoveda's revenue is difficult to forecast for several reasons. Innoveda
operates with little product backlog because Innoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, Innoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Innoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. If
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Innoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, Innoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
Innoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Innoveda's
expectations as to future revenue. Because a high percentage of Innoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Innoveda's operating
results.
IF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON
WHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda focuses on the electro-mechanical, printed circuit board and
system-level design automation markets while most major competitors focus their
resources on the application-specific integrated circuit and integrated circuit
design automation markets. Innoveda has adopted this focus because it believes
that the increased complexity of application-specific integrated circuits and
integrated circuit designs, and the resulting increase in design time, will
cause electronic product manufacturers to differentiate their products at the
system level. If the system design portion of the electronic design automation
industry does not grow, it could have a material adverse effect on Innoveda's
business, financial condition, results of operations or cash flows.
19
INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and Innoveda
expects competition to increase as other electronic design automation companies
introduce products. In the electronic design automation market, Innoveda
principally competes with Mentor Graphics and Cadence and a number of smaller
firms. Indirectly, Innoveda also competes with other firms that offer
alternative products. These other firms could also offer more directly
competitive products in the future. Some of these companies have significantly
greater financial, technical and marketing resources and larger installed
customer bases than Innoveda. Some of Innoveda's current and future competitors
offer a more complete range of electronic design automation products.
Innoveda competes on the basis of various factors including, among others:
o product capabilities;
o product performance;
o price;
o support of industry standards;
o ease of use;
o first to market; and
o customer technical support and service.
Innoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Innoveda's competitors may offer
products with functionality sought by Innoveda's prospective customers and which
differs from those Innoveda offers. In addition, some competitors may achieve a
marketing advantage by establishing formal alliances with other electronic
design automation vendors. Further, the electronic design automation industry in
general has experienced significant consolidation in recent years, and the
acquisition of one of Innoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor.
Innoveda may not compete successfully against current and future competitors,
and competitive pressures may have a material adverse effect on Innoveda's
business, financial condition, results of operations, or cash flows. Innoveda's
current and future competitors may develop products comparable or superior to
Innoveda's or more quickly adapt new technologies, evolving industry trends or
customer requirements. Increased competition could result in price reductions,
reduced margins and loss of market share, all of which could have a material
adverse effect on Innoveda's business, financial condition, results of
operations or cash flows.
20
INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves:
o rapid technological change;
o short product life cycles;
o fluctuations in manufacturing capacity; and
o pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
and research and development budgets often fall, and the number of design
projects often decreases. Because Innoveda's sales depend upon capital spending
trends, research and development budgets and new design projects, negative
factors affecting the electronics industry could have a material adverse effect
on Innoveda's business, financial condition, results of operations, or cash
flows.
INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Innoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, Innoveda must have timely access
to third party software to perform development and testing of products. Although
Innoveda has established relationships with a variety of electronic design
automation vendors to gain early access to new product information, any of these
parties may terminate these relationships with limited notice. In addition,
these relationships are with companies that are Innoveda's current or potential
future competitors, including Synopsys, Mentor Graphics and Cadence. If any of
these relationships terminate and Innoveda were unable to obtain, in a timely
manner, information regarding modifications of third party products, Innoveda
would not have the ability to modify its software products to interoperate with
these third party products. As a result, Innoveda could experience a significant
increase in development costs, the development process would take longer,
product introductions would be delayed, and Innoveda's business, financial
condition, results of operations or cash flows could be materially adversely
affected.
IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the emergence
21
of new industry standards can render existing products obsolete and
unmarketable. In addition, customers in the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Innoveda's future success will depend upon its ability to
enhance its current products, develop and introduce new products that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of Innoveda's customers. Innoveda may not
succeed in developing and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products. Innoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
INNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Innoveda's software products may contain errors that may not be detected until
late in the products' life cycles. Innoveda has in the past discovered software
errors in certain of its products and has experienced delays in shipment of
products during the period required to correct these errors. Despite testing by
Innoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Innoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors fails,
Innoveda's business may suffer. Innoveda relies on distributors for licensing
and support of Innoveda's products, particularly in Japan and other parts of
Asia. Innoveda depends on the relationships with its distributors to maintain or
increase sales. Since Innoveda's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. Accordingly, Innoveda depends on the continued viability and
financial stability of these distributors.
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's distributors
may offer products of several different companies, including Innoveda's
competitors. Innoveda's current distributors may not continue to market or
service and support Innoveda's products effectively. Any distributor may
discontinue to sell Innoveda's products or devote its resources to products of
other companies. The loss of, or a significant reduction in, revenue from
Innoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
JAPAN. Innoveda has exclusive distribution agreements with two distributors in
Japan, which collectively cover a significant portion 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.
22
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND ASIA.
International revenue and expenses represent a significant portion of Innoveda's
total revenue and expenses, and Innoveda expects this trend to continue.
International sales and operations involve numerous risks, including, among
others:
o fluctuations in the value of the dollar relative to foreign currencies
can make Innoveda's products and services more expensive in foreign
markets or increase Innoveda's expenses;
o tariff regulations and other trade barriers;
o requirements for licenses, particularly with respect to the export of
certain technologies;
o collectibility of accounts receivable;
o changes in regulatory requirements; and
o difficulties in staffing and managing foreign operations and extended
payment terms.
These factors may have a material adverse effect on Innoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions, and these adverse economic conditions may worsen. Demand for and
sales of Innoveda's products in this region may decrease.
In order to successfully expand international sales, Innoveda may need to
establish additional foreign operations, hire additional personnel and recruit
additional international distributors. This will require significant management
attention and financial resources and could adversely affect Innoveda's
operating margins. In addition, to the extent that Innoveda cannot effect these
additions in a timely manner, Innoveda can only generate limited growth in
international sales, if any. Innoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Innoveda's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit additional
employees and train and manage current and future employees. Innoveda expects
any growth to place a significant strain on its operational resources and
systems. Failure to effectively manage any growth would have a material adverse
effect on Innoveda's business, financial condition, results of operations or
cash flows. Innoveda regularly evaluates acquisition opportunities. Innoveda's
future acquisitions, if any, could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, and large
one-time charges which could materially adversely affect Innoveda's results of
operations. Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern, risks
of entering markets in which Innoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Innoveda may not
integrate successfully the operations, personnel or products that have been
acquired or that might be acquired in the future, and the failure to do so could
have a material adverse affect on its results of operations.
23
INNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL AND COORDINATION RISKS.
POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL and Visual Elite products are
located in Israel. Economic, political and military conditions may affect
Innoveda's operations in that country. Hostilities involving Israel, for
example, could materially adversely affect Innoveda's business, financial
condition and results of operations. Innoveda's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants from the government of Israel is subject to Israeli
government restrictions which may limit Innoveda's ability to extract the full
benefit of that technology.
COORDINATION RISKS. In addition, coordination with and management of the Israeli
operations requires Innoveda to address differences in culture, regulations and
time zones. Failure to successfully address these differences could disrupt
Innoveda's operations.
INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED
PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain highly
skilled technical, sales and marketing and management personnel. Innoveda's
business could be seriously harmed if it lost the services of its President and
Chief Executive Officer, William J. Herman, or if it fails to attract and retain
other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. Innoveda has in
the past experienced difficulty in retaining and recruiting qualified personnel.
Innoveda may fail to retain its key personnel or attract and retain other
qualified technical, sales and marketing and management personnel in the future.
The loss of any key employees or the inability to attract and retain additional
qualified personnel may have a material adverse effect on Innoveda's business,
financial condition, results of operations or cash flows. Additions of new
personnel and departures of existing personnel, particularly in key positions,
can be disruptive and can result in departures of additional personnel, which
could have a material adverse effect on Innoveda's business, financial
condition, results of operations or cash flows.
IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build and expand its sales and
marketing organizations. Innoveda's future success will depend in part on its
ability to hire, train and retain qualified sales and marketing personnel and
the ability of these new persons to rapidly and effectively transition into
their new positions. Competition for qualified sales and marketing personnel is
intense, and Innoveda may not be able to hire, train and retain the number of
sales and marketing personnel needed, which would have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA MUST CONTINUE TO ADD VALUE TO ITS CURRENT PRODUCTS TO SERVE ITS
INSTALLED CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL
DECREASE.
A substantial portion of Innoveda's revenue is derived from maintenance
agreements for existing products. In order to maintain that revenue, Innoveda
must continue to offer those customers updates for those products or convert
those customers to new products. Innoveda may not be able to do so.
24
INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT
INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE
ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE.
As of April 30, 2001, Innoveda had borrowings of approximately $7.5 million
under its credit facility. Borrowings under the credit facility are secured by
substantially all of Innoveda's assets. The credit facility contains limitations
on additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to the maintenance of minimum
levels of profits, interest and debt service coverage ratios and maximum
leverage ratios. Collectively, these limitations and covenants may substantially
restrict the flexibility of Innoveda's management in quickly adjusting its
financial and operational strategies to react to changing economic and business
conditions and may compromise Innoveda's ability to react to the rapidly
evolving environment of the electronic design automation industry. To avoid
default under this credit facility, Innoveda must remain in compliance with
these limitations and covenants and make all required repayments or Innoveda
must obtain replacement financing. Innoveda may not be able to secure
replacement financing on terms acceptable to it or to its stockholders, or at
all. In the event of a default by Innoveda, Innoveda's lender may enforce its
security interest and take possession of substantially all or some of Innoveda's
assets.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Innoveda is exposed to interest rate risk primarily through its credit facility.
Innoveda has a credit facility with a commercial bank consisting of a $6.0
million revolving line of credit ("Line of Credit") and an $8.4 million term
loan as of March 31, 2001 (the "Term Loan") (together, the "Credit Facility").
Interest terms on the Line of Credit and the Term Loan are determined, at the
option of Innoveda, for varying periods. Innoveda may elect to have the interest
rate based on the bank's prime rate or based on the LIBOR rate at the time of
the election, depending on Innoveda's leverage financial ratio, as defined, in
the Credit Facility. The interest rates on the Line of Credit and the Term Loan
at March 31, 2001 was 8.5% and 6.9%, respectively.
Payments of principal outstanding under either the Line of Credit or the Term
Loan may be made at any time and must be repaid in full by September 30, 2003.
As required under the Credit Facility, Innoveda entered into a no fee interest
rate-swap agreement with a bank to reduce the impact of changes in interest
rates on its floating rate Credit Facility. This agreement effectively converts
a portion of the floating-rate obligation into a fixed-rate obligation of 7.4%
for a period of 60 months, expiring on March 31, 2003. The notional principal
amount of the interest rate-swap agreement was $8.4 million as of March 31,
2001. The counter parties to the interest rate-swap agreement expose Innoveda to
credit loss in the event of nonperformance. Open interest rate contracts are
reviewed regularly by Innoveda to ensure that they remain effective as hedges of
interest rate exposure. Management of Innoveda believes that the rate-swap
agreement approximates fair value.
25
Innoveda invests its excess cash in debt instruments of the U.S. Government and
its agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issue. Innoveda attempts to protect and
preserve its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, Innoveda's future investment income may fall short
of expectations due to changes in interest rates and Innoveda may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Innoveda considers all highly liquid debt instruments with a remaining maturity
of three months or less when purchased to be cash equivalents. At March 31, 2001
and December 30, 2000, substantially all of the Company's cash and cash
equivalents were invested in interest-bearing deposits and other short-term
investments with an original maturity of three months or less as of the date of
purchase. By policy of Innoveda's board of directors, all debt instruments must
have quality ratings no lower than A rating.
FOREIGN CURRENCY EXCHANGE RATE RISK
Innoveda is also exposed to the impact of foreign currency fluctuations. Since
Innoveda translates foreign currencies into U.S. dollars for reporting purposes,
weakened currencies in its subsidiaries have a negative, though immaterial,
impact on its results. Innoveda also believes that the exposure to currency
exchange fluctuation risk is insignificant because its international
subsidiaries sell to customers, and satisfy their financial obligations, almost
exclusively in their local currencies. Innoveda entered into foreign exchange
contracts as a hedge against certain accounts receivable denominated in foreign
currencies during the twelve months ended March 31, 2001. Realized and
unrealized gains and losses on foreign exchange contracts for the three months
ended March 31, 2001 were insignificant. There were no outstanding foreign
exchange contracts as of March 31, 2001.
PART II OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during the fiscal
quarter ended March 31, 2001.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEDA, INC.
By: /s/ Kevin P. O'Brien
------------------------------------
Kevin P. O'Brien
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
Date: May 15, 2001
27
EXHIBIT INDEX
None.
28