<Page> UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 30, 2002 OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to________ Commission file number: 000-20923 INNOVEDA, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 93-1137888 - -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 293 Boston Post Road West, Marlboro, 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, 2002, the Registrant had outstanding 40,514,518 shares of Common Stock, $0.01 par value per share. <Page> IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are subject to a number of risks and uncertainties. All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues, projected costs, the availability of financial resources, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate", "intend", "estimate", "expect", "project", "plans", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, reorganizations, restructurings, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the following discussion, and, in particular, the risks discussed below under the subheading "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock". The forward-looking statements provided by Innoveda in this Quarterly Report on Form 10-Q represent Innoveda's estimates as of the date this report is filed with the SEC. Innoveda anticipates that subsequent events and developments will cause its estimates to change. While Innoveda may elect to update its forward-looking statements in the future, it specifically disclaims any obligation to do so. Innoveda's forward-looking statements should not be relied upon as representing its estimates as of any date subsequent to the date this report is filed with the SEC. <Page> INNOVEDA, INC. QUARTERLY REPORT ON FORM 10-Q INDEX <Table> <Caption> PAGE PART 1 FINANCIAL INFORMATION ITEM 1 Condensed Consolidated Financial Statements 4 Condensed Consolidated Balance Sheets as of March 30, 2002 4 (unaudited) and December 29, 2001 Condensed Consolidated Statements of Operations for the 5 Quarters Ended March 30, 2002 (unaudited) and March 31, 2001 (unaudited) Condensed Consolidated Statements of Cash Flows for the 6 Quarters Ended March 30, 2002 (unaudited) and March 31, 2001 (unaudited) Notes to Unaudited Condensed Consolidated Financial Statements 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and 14 Results of Operations ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 34 PART II OTHER INFORMATION ITEM 3 Defaults Upon Senior Securities 35 ITEM 6 Exhibits and Reports on Form 8-K 36 SIGNATURE 37 EXHIBIT INDEX 38 </Table> 3 <Page> PART 1: FINANCIAL INFORMATION ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INNOVEDA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <Table> <Caption> March 30, 2002 December 29, (unaudited) 2001 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 8,597 $ 7,704 Accounts receivable, net 16,087 21,876 Prepaid expenses and other 2,347 3,744 Deferred income taxes 3,962 3,960 --------- --------- Total current assets 30,993 37,284 Equipment and furniture, net 4,264 4,850 Capitalized software costs, net 2,415 2,342 Purchased technology and other intangibles, net 22,439 25,404 Goodwill and other 3,057 2,412 --------- --------- Total assets $ 63,168 $ 72,292 ========= ========= LIABILITIES Current liabilities: Long-term debt, current portion $ 4,875 $ 4,000 Capital lease obligations, current portion 158 270 Accounts payable 2,572 3,648 Accrued liabilities 14,960 18,122 Deferred revenue 20,160 20,776 --------- --------- Total current liabilities 42,725 46,816 Long-term debt -- 1,750 Other long-term liabilities 1,338 1,322 Deferred income taxes 9,299 10,013 --------- --------- Total liabilities 53,362 59,901 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; authorized 5,000, none issued or outstanding at March 30, 2002 and December 29, 2001 -- -- Common stock, $0.01 par value, 100,000 authorized, 40,567 outstanding at March 30, 2002, 40,271 outstanding at December 29, 2001 406 403 Treasury stock, at cost, 550 shares at March 30, 2002 and December 29, 2001 (1,663) (1,663) Additional paid-in-capital 117,663 117,440 Notes due from stockholders (932) (932) Deferred compensation (379) (526) Accumulated deficit (104,711) (101,650) Accumulated other comprehensive loss (578) (681) --------- --------- Total stockholders' equity 9,806 12,391 --------- --------- Total liabilities and stockholders' equity $ 63,168 $ 72,292 ========= ========= </Table> The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 <Page> INNOVEDA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) <Table> <Caption> First Quarter Ended ---------------------- March 30, March 31, 2002 2001 -------- -------- Revenue: Software $ 5,730 $ 15,381 Services and other 9,977 11,877 -------- -------- Total revenue 15,707 27,258 -------- -------- Cost and expenses: Cost of software 1,226 1,759 Cost of services and other 2,380 2,604 Sales and marketing 7,991 11,288 Research and development 4,920 7,652 General and administrative 1,359 2,166 Amortization of intangibles 1,890 4,702 Amortization of stock compensation 147 146 -------- -------- Total operating expenses 19,913 30,317 -------- -------- Operating loss (4,206) (3,059) Other expense, net (295) (18) -------- -------- Loss before income tax benefit (4,501) (3,077) Income tax benefit (1,440) (970) -------- -------- Net loss $ (3,061) $ (2,107) ======== ======== Net loss per share: Basic and diluted $ (0.08) $ (0.05) ======== ======== Weighted average shares outstanding: Basic and diluted 40,035 39,036 ======== ======== </Table> The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 <Page> INNOVEDA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <Table> <Caption> First Quarter Ended --------------------- March 30, March 31, 2002 2001 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,061) $ (2,107) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,792 5,920 Compensation under stock option agreements 147 146 Changes in assets and liabilities: Accounts receivable 5,760 5,426 Prepaid and other current assets 1,730 (307) Deferred income taxes (717) (797) Accounts payable (1,072) (221) Accrued liabilities (3,044) (5,832) Tax benefit of stock option exercises 91 43 Deferred revenue (585) (954) ------- -------- Net cash provided by operating activities 2,041 1,317 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (99) (1,179) Capitalized software costs (293) (261) ------- -------- Net cash used in investing activities (392) (1,440) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of principal on debt (875) (892) Proceeds from exercise of stock options and employee stock purchase plan 132 734 Payments of capital lease obligations (111) (142) Purchase of treasury stock -- (831) ------- -------- Net cash used in financing activities (854) (1,131) ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 98 (68) ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 893 (1,322) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,704 20,799 ------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,597 $ 19,477 ======= ======== </Table> The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 <Page> INNOVEDA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the information set forth therein have been included. ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS Effective December 30, 2001, Innoveda adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement requires that goodwill and certain other intangibles no longer be amortized, but instead be tested for impairment at least annually. As required by SFAS 142, on December 30, 2001 the Company reclassified approximately $1,089 of assembled workforce related intangible assets into goodwill. In connection with the SFAS No. 142, transitional goodwill impairment evaluation, the Company was required to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption, and has determined that no transitional loss exists. Effective December 30, 2001, Innoveda adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, and the accounting and reporting provisions of APB 30, for the disposal of a segment of a business. This statement applies to the Company's intangible assets that are being amortized. These intangible assets include purchased technology, patents and trademarks. There was no effect of adopting SFAS 144 on the Company's financial statements. Net loss and loss per share for the quarters ended March 30, 2002 and March 31, 2001 adjusted to exclude amortization expense is as follows: <Table> <Caption> First Quarter Ended ------------------------ March 30, 2002 March 31, 2001 --------- --------- Reported net loss $ (3,061) $ (2,107) Add back: goodwill amortization -- 512 Add back: intangible workforce amortization -- 268 --------- --------- Adjusted net loss $ (3,061) $ (1,327) ========= ========= Basic and diluted loss per share Reported net loss $ (0.08) $ (0.05) Goodwill amortization $ -- $ 0.01 Intangible workforce amortization $ -- $ 0.01 --------- --------- Adjusted net loss $ (0.08) $ (0.03) ========= ========= </Table> 7 <Page> 1. BASIS OF PRESENTATION (CONTINUED) All of the Company's other acquired intangible assets are subject to amortization. There were no material acquisitions of intangible assets during the first quarter of fiscal 2002. Intangible assets amortization expense was $2,116 for the first quarter ending March 30, 2002. The components of the intangible assets were as follows: <Table> <Caption> First Quarter Ended March 30, 2002 ------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Value ------- ------- ------- Amortized intangible assets Patents and trademarks $ 1,486 $ 452 $ 1,034 Purchased technology 59,430 38,025 21,405 ------- ------- ------- Total $60,916 $38,477 $22,439 ======= ======= ======= Goodwill $ 2,040 ------- Total intangible assets $24,479 ======= </Table> Amortization of intangible assets is expected to be approximately $7,450 in fiscal 2002, $6,613 in fiscal 2003, $5,861 in fiscal 2004 and $4,390 in fiscal 2005. 2. EARNINGS PER SHARE Basic earnings per share is calculated using weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares plus the effect, if dilutive, of outstanding stock options using the treasury stock method. <Table> <Caption> First Quarter Ended ------------------------- March 30, March 31, 2002 2001 -------- -------- Net Loss $ (3,061) $ (2,107) ======== ======== Weighted average number of common shares - Basic 40,035 39,036 ======== ======== Weighted average number of common and potential common shares - Diluted 40,035 39,036 ======== ======== Net loss per share: Basic $ (0.08) $ (0.05) ======== ======== Diluted $ (0.08) $ (0.05) ======== ======== </Table> For the three months ended March 30, 2002 and March 31, 2001, there were 4,586 and 8,363 anti-dilutive common shares, respectively, not included in the calculation. 8 <Page> 3. BUSINESS SEGMENTS AND GEOGRAPHIC DATA SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company's chief operating decision-makers, as defined under SFAS No. 131, is its executive management team. The Company views its operations and manages its business as principally one segment with three distinct product groups: Printed Circuit Board Design ("PCB"), System Level Design ("SLD"), and Electromechanical Design ("EM"). Revenues for each of the categories for the first quarters of 2002 and 2001 are as follows: <Table> <Caption> First Quarter Ended March 30, 2002 ------------------------------------------------------ Printed Electro- Circuit Board System Level Mechanical Design Design Design Consolidated ------- ------ ---- ------- Revenue: Software $ 4,260 $1,349 $120 $ 5,729 Services and other 6,916 2,494 568 9,978 ------- ------ ---- ------- Total revenue $11,176 $3,843 $688 $15,707 ======= ====== ==== ======= <Caption> First Quarter Ended March 30, 2001 ------------------------------------------------------ Printed Electro- Circuit Board System Level Mechanical Design Design Design Consolidated Revenue: Software $10,928 $3,898 $555 $15,381 Services and other 7,787 3,747 343 11,877 ------- ------ ---- ------- Total revenue $18,715 $7,645 $898 $27,258 ======= ====== ==== ======= </Table> 9 <Page> 3. BUSINESS SEGMENTS AND GEOGRAPHIC DATA (CONTINUED) Revenue consists of software sales, maintenance, and services. Net revenue by geographic region (in thousands) and as a percentage of total revenue for each region is as follows: <Table> <Caption> First Quarter Ended ------------------------- March 30, March 31, 2002 2001 ------- ------- Revenue: North America $10,835 $18,422 Europe 2,563 4,340 Japan 1,731 2,016 Other 578 2,480 ------- ------- Total Revenue $15,707 $27,258 ======= ======= As a percentage of Total Revenue North America 69% 68% Europe 16% 16% Japan 11% 7% Other 4% 9% ------- ------- Total 100% 100% ======= ======= </Table> 4. COMPREHENSIVE LOSS The following table presents the components of comprehensive loss for the periods indicated. <Table> <Caption> First Quarter Ended ------------------------- March 30, March 31, 2002 2001 ------- ------- Net loss $(3,061) $(2,107) Foreign currency translation adjustments 41 (364) Fair value adjustment of interest rate swap 62 -- ------- ------- Comprehensive loss $(2,958) $(2,471) ======= ======= </Table> 10 <Page> 5. DEBT Innoveda has a credit facility with a commercial bank consisting of a $0.3 million revolving line of credit ("Line of Credit") and a $4.9 million term loan as of March 30, 2002 (the "Term Loan") (together, the "Credit Facility"). For the fiscal quarter ended March 30, 2002, the Company did not meet certain financial covenants under the Credit Facility. The Company's failure to meet these financial covenants constitutes an event of default under the Credit Facility, allowing the commercial bank to declare all obligations of the Company under the Credit Facility due and payable in full. On April 23, 2002, the Company entered into a forbearance agreement with the commercial bank under which the commercial bank agreed to forbear from exercising its rights and remedies under the Credit Facility until at least May 21, 2002. The commercial bank's forbearance, as provided for in the forbearance agreement, is conditioned upon the absence of any additional events of default under the Credit Facility. The forbearance agreement provides that the interest rate under the Credit Facility be increased to be equal to the commercial bank's prime rate plus 3% and that all of the Company's obligations under the Credit Facility are due and payable in full on the earlier of August 15, 2002 or the closing of the transactions contemplated by the Agreement and Plan of Merger dated April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger Corporation and Innoveda, Inc. (See Note 7). Under the Credit Facility, the Company is required to make a principal payment on the Term Loan of $1,000 in the second quarter of fiscal 2002 and another Term Loan payment of $1,000 at the beginning of the third quarter of fiscal 2002. As amended by the forbearance agreement, the balance of the Term Loan is due on August 15, 2002. 6. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS In August 2001, Innoveda, in response to significant negative economic trends, implemented a restructuring and streamlining of Company operations. IMPAIRMENT OF LONG-LIVED ASSETS During the third quarter of 2001, the Company wrote down approximately $32,945 of impaired long-lived assets related to the goodwill, purchased technology, workforce and customer base associated with the Company's acquisitions of PADS Software and Summit Design. Based on the declining historical and forecasted operating results of such intangible assets as they relate to earlier estimates and the general economic trends of the EDA industry as a whole, their estimated value to the Company has decreased. Based on the Company's expectation of future undiscounted net cash flows, these assets have been written-down to their net realizable value. RESTRUCTURING COSTS As a result of the restructuring, the Company recorded charges of $5,271. The restructuring costs include workforce reductions, closing facilities, reducing space in other facilities and asset write-downs. The restructuring program resulted in the reduction in workforce of approximately one hundred forty employees across all business functions and geographic regions. The workforce reductions were substantially completed by the end of the third quarter of 2001. The Company recorded a workforce reduction charge of $2,267 relating primarily to severance, fringe benefits and outplacement services. 11 <Page> 6. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED) The Company also recorded a restructuring charge of $1,511 relating to lease terminations, non-cancelable lease costs, and excess facility space. These facility costs relate to business activities that have been exited or restructured. In addition, the restructuring charge includes an additional $408 in professional fees, travel expenses and other related costs incurred in connection with the restructuring activities and a $1,085 restructuring charge related to certain fixed assets that became impaired as a result of the decision to reduce the workforce and close facilities. The following table indicates payments made against the reserve during the fiscal quarter ended March 30, 2002. <Table> <Caption> December 29, 2001 Amount March 30, 2002 Accrual Balance Paid Accrual Balance ---------------- ------ ---------------- Severance and related expenses $ 115 $ 77 $ 38 Lease commitment and related fees 1,218 258 960 Other 207 6 201 ------- ------- ------ $ 1,540 $ 341 $1,199 ======= ======= ====== </Table> All remaining amounts are expected to be paid by the end of fiscal 2002. 7. SUBSEQUENT EVENTS PROPOSED MERGER On April 23, 2002, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Mentor Graphics Corporation ("Mentor") and a wholly-owned subsidiary of Mentor ("Merger Sub") providing for Mentor to acquire all the outstanding shares of Innoveda for $3.95 per share in cash, for a total purchase price of approximately $160 million. Pursuant to the terms of the merger agreement, on April 30, 2002, Merger Sub commenced a tender offer to purchase all outstanding shares of common stock of Innoveda subject to certain conditions. The conditions to the tender offer include the receipt of all necessary government approvals and the tender, without withdrawal prior to the expiration of the tender offer, of at least a majority of Innoveda's outstanding shares of common stock on a fully diluted basis. 12 <Page> 7. SUBSEQUENT EVENTS (CONTINUED) The merger agreement contemplates that the tender offer will be followed, subject to the satisfaction or waiver of certain conditions, by a second step merger in which those shares of Innoveda's common stock not tendered in the tender offer will be converted into the right to receive $3.95 per share in cash. Stockholders representing approximately 39% of the outstanding shares of Innoveda have entered into support agreements under which they have agreed, among other things, to tender their shares in the tender offer and if necessary, to vote their shares in favor of the proposed merger. SLD DIVESTITURE On April 23, 2002, the Company divested certain assets and liabilities related to its system-level design ("SLD") product group to Divestiture Growth Capital ("DivestCap"), a technology investment fund. The Company transferred to DivestCap certain assets related to the SLD product group, including certain accounts receivable, intellectual property, furniture and fixtures, contracts and other assets. DivestCap will also assume certain liabilities related to the SLD product group, including customer obligations relating to SLD customer contracts. The Company will record the transaction in the second quarter of fiscal 2002. The Company did not receive any cash proceeds in this transaction. As of the date of the filing, the Company had not finalized its accounting for the divestiture, but it does not believe any gain or loss will be significant. 13 <Page> ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock" commencing on page 25, as well as those otherwise discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. See "Important Note About Forward-Looking Statements" above. OVERVIEW Innoveda operates in the United States and international markets developing, marketing and providing a comprehensive family of software tools used by engineers in the design of advanced electronic products and systems, and technical support and consulting services for those software tools. Innoveda currently markets and sells its products worldwide through multiple distribution channels, including independent distributors, value-added resellers, direct sales and telesales. PROPOSED MERGER On April 23, 2002, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Mentor Graphics Corporation ("Mentor") and a wholly-owned subsidiary of Mentor ("Merger Sub") providing for Mentor to acquire all of the outstanding shares of Innoveda for $3.95 per share in cash, for a total purchase price of approximately $160 million. Pursuant to the terms of the merger agreement, on April 30, 2002, Merger Sub commenced a tender offer to purchase all outstanding shares of common stock of Innoveda subject to certain conditions. The conditions to the tender offer include the receipt of all necessary government approvals and the tender, without withdrawal prior to the expiration of the tender offer, of at least a majority of Innoveda's outstanding shares of common stock on a fully diluted basis. The merger agreement contemplates that the tender offer will be followed, subject to the satisfaction or waiver of certain condition, by a second step merger in which those shares of Innoveda's common stock not tendered in the tender offer will be converted into the right to receive $3.95 per share in cash. Stockholders representing approximately 39% of the outstanding shares of Innoveda have entered into support agreements under which they agreed, among other things, to tender their shares in the tender offer and if necessary, to vote their shares in favor of the proposed merger. 14 <Page> SLD DIVESTITURE On April 23, 2002, the Company divested certain assets and liabilities related to its system-level design ("SLD") product group to Divestiture Growth Capital ("DivestCap"), a technology investment fund. The Company transferred to DivestCap certain assets related to the SLD product group, including certain accounts receivable, intellectual property, furniture and fixtures, contracts and other assets. DivestCap will also assume certain liabilities related to the SLD product group, including customer obligations relating to SLD customer contracts. The Company will record the transaction in the second quarter of fiscal 2002. The Company did not receive any cash proceeds in this transaction. As of the date of the filing, the Company had not finalized its accounting for the divestiture, but it does not believe any gain or loss will be significant. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, intangible assets, income taxes, financing operations, restructuring, long-term service contracts, employee benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified below the accounting policies that we believe are most critical to our business operations and are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. 15 <Page> OUR CRITICAL ACCOUNTING POLICIES ARE AS FOLLOWS: o Revenue recognition o Allowance for doubtful accounts o Valuation of long-lived assets o Accounting for income taxes REVENUE RECOGNITION The Company's revenue recognition policies are in compliance with Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," as amended by SOP 98-9, and Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" Software revenue is recognized upon the shipment of the product provided that persuasive evidence of an arrangement exists, the arrangement fee is fixed and determinable and collection is probable. For arrangements involving multiple elements, the arrangement fee is allocated to each element based on vendor-specific objective evidence ("VSOE") of the fair value of the various elements. VSOE of fair value is determined based on the prices at which the elements are sold separately. If VSOE of fair value exists for all undelivered elements but not for the delivered element, the portion of the arrangement fee allocated to the delivered element is determined using the residual method. If VSOE of fair value does not exist for all of the undelivered elements, the arrangement fee is recognized ratably over the term of the arrangement. In determining VSOE, management considers several factors which include product and service price lists, historical transactions with similar terms and conditions, and interpretation of contracts and agreements. If any of these factors were to be misinterpreted, the result could be an error in determining which period revenue should be recognized. For term licenses of one year or less, which include post contract customer support, revenue is recognized ratably over the term of the agreement, unless the only support provided is telephone support, in which case the entire arrangement fee is recognized at the beginning of the term. Revenue from maintenance and support contracts is deferred and recognized ratably over the term of the service period. Revenue from training and consulting is recognized as the related services are provided. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains an allowance for doubtful accounts, which reflects our estimate of the amounts owed by customers that customers will be unable to pay. Management performs ongoing credit evaluations of its customers' financial condition and limits the amount of customer credit when deemed necessary. The Company bases its decision to extend credit to customers on a variety of factors including ratings from a credit reporting bureau, bank and financial statements provided by customers, and historical payment history of existing customers. 16 <Page> However, if the financial condition of our customers deteriorates and they are not able to make payments in excess of our estimates of our allowance, then we may need to increase our allowance for doubtful accounts which would adversely impact our ability to collect cash, which could adversely impact operations. We believe that the current estimate of the allowance for doubtful accounts recorded as of March 30, 2002, adequately covers any potential credit risks. VALUATION OF LONG-LIVED ASSETS Effective December 30, 2001, Innoveda adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, and the accounting and reporting provisions of APB 30, for the disposal of a segment of a business. This statement applies to the Company's intangible assets that are being amortized. These intangible assets include purchased technology, patents and trademarks. The Company would recognize an impairment loss if the carrying amount of these assets exceeds their fair value. The carrying amount of these assets is tested for impairment when events or circumstances indicate that the carrying amount may not be recoverable. The following are examples, but not limited to, such events or changes in circumstances: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; o significant negative industry or economic trends; o significant decline in our stock price for a sustained period; and o our market capitalization relative to net book value. If an impairment review is indicated, the review includes an analysis of the estimated future undiscounted net cash flows expected to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, we record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. Fair value is determined generally based on discounted cash flows. If the Company were to incorrectly estimate the carrying value and estimated useful life of its long-lived assets, it may incur an additional impairment charge that would impact net income. Effective December 30, 2001, Innoveda adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). This statement requires that goodwill and certain other intangibles no longer be amortized, but instead be tested for impairment at least annually. 17 <Page> The Company will test for goodwill impairment at least annually or more frequently if events or circumstances indicate that the asset may be impaired. If the fair value of the business segment, for which goodwill was recorded, is less than the recorded value, then the amount of the impairment loss will be recognized in accordance with this statement. There was no impairment of goodwill or other intangible assets upon adoption of SFAS 142 and SFAS 144. ACCOUNTING FOR INCOME TAXES The Company prepares estimates of income taxes in each of the jurisdictions in which the Company operates when preparing its consolidated financial statements. This includes estimating current tax exposure together with a review and assessment of temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the statement of operations for the period reported. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods we may need to establish an additional valuation allowance which could impact our financial position and results of operations. 18 <Page> RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenue of certain items in our condensed consolidated statements of operations: <Table> <Caption> First Quarter Ended ------------------- March 30, March 31, 2002 2001 --- --- Revenue: Software 36% 56% Services and other 64% 44% --- --- Total Revenue 100% 100% --- --- Costs and expenses: Cost of software 8% 6% Cost of services and other 15% 10% Sales and marketing 51% 41% Research and development 31% 28% General and administrative 9% 8% Amortization of intangibles and stock compensation 13% 18% --- --- Total operating expenses 127% 111% --- --- Loss from operations -27% -11% Other expense, net -2% -- --- --- Loss before benefit for income taxes -29% -11% --- --- Income tax benefit -9% -3% --- --- Net loss -20% -8% === === </Table> 19 <Page> QUARTERS ENDED MARCH 30, 2002 AND MARCH 31, 2001 SOFTWARE REVENUE For the quarter ended March 30, 2002, software license revenue decreased 62% to $5.7 million from $15.4 million for the quarter ended March 31, 2001. The decrease in software license revenue is primarily attributable to the impact of the global economic downturn, particularly in the telecommunications and computer industries. Beginning in the second quarter of fiscal 2001, software license revenue was negatively affected as discretionary spending by customers was reduced, causing delays and postponement of orders. Also, the Company's restructuring in August of 2001 has contributed to the decline, as the Company has fewer sales and marketing resources and is focused on selling a narrower set of products. The Company has also experienced significant declines in distributor sales in the Japan and Asia regions. During the quarter, the Company received no software revenue from one of its distributors in Japan. The Company recently terminated its distribution agreement with this distributor. If the transactions contemplated by the Merger Agreement are not consummated, the Company must seek distribution arrangements for the products that were previously sold by this distributor. Until such distribution arrangements are in place, the Company expects lower revenues in Japan. Our products have been organized into three distinct product groups: Printed Circuit Board Design ("PCB"), System Level Design ("SLD"), and Electromechanical Design ("EM"). For the quarter ended March 30, 2002, PCB, SLD, and EM accounted for $4.3 million or 74%, $1.3 million or 24% and $0.1 million or 2%, respectively, of software license revenue. In April 2002, we divested our SLD business unit to Divestiture Growth Capital, a technology investment fund. See "Overview" above. For the quarter ended March 31, 2001, PCB, SLD, and EM accounted for $10.9 million or 71%, $3.9 million or 25% and $0.6 million or 4%, respectively, of software license revenue. As a percentage of total revenue, software license revenue decreased to 36% for the quarter ended March 30, 2002 from 56% for the quarter ended March 31, 2001. SERVICES AND OTHER REVENUE For the quarter ended March 30, 2002, services and other revenue decreased 16% to $10.0 million from $11.9 million for the quarter ended March 31, 2001. The decrease is primarily due to a declining maintenance revenue stream related to the drop in software license revenue. In addition, maintenance revenue decreased relating to a decline in customers renewing maintenance contracts on existing software. Consulting and training revenue remained substantially constant quarter-to-quarter. As discussed above, our products have been organized into three distinct product groups: PCB, SLD, and EM. For the quarter ended March 30, 2002, PCB, SLD, and EM accounted for $6.9 million or 69%, $2.5 million or 25% and $0.6 million or 6%, respectively, of services and other revenue. In April 2002, we divested our SLD business unit to Divestiture Growth Capital, a technology investment fund. See "Overview" above. For the quarter ended March 31, 2001, PCB, SLD, and EM accounted for $7.8 million or 66%, $3.8 million or 32% and $0.3 million or 2%, respectively, of services and other revenue. As a percentage of total revenue, services and other revenue increased to 64% for the quarter ended March 30, 2002 from 44% for the quarter ended March 31, 2001. 20 <Page> COST OF SOFTWARE Cost of software consists primarily of the cost of manufacturing, order processing, distributions and royalties. Cost of software revenue decreased 30% to $1.2 million for the quarter ended March 30, 2002 from $1.8 million for the quarter ended March 31, 2001. The decrease was primarily due to the decreased royalty costs consistent with the decrease in software license revenue, along with the retirement of products with large royalty costs as part of the Company's restructuring announced in August 2001. To a lesser extent, the decrease relates to the cost savings realized from the August 2001 restructuring and other cost reduction activities. As a percentage of total revenue, cost of software increased to 8% for the quarter ended March 30, 2002 from 6% for the quarter ended March 31, 2001. COST OF SERVICES AND OTHER Cost of services and other consists primarily of costs of providing technical support, education and consulting services. Cost of services and other decreased 9% to $2.4 million for the quarter ended March 30, 2002 from $2.6 million for the quarter ended March 31, 2001. The decrease was primarily due to the cost savings realized from the August 2001 restructuring and other cost reduction activities. As a percentage of total revenue, cost of services and other increased to 15% for the quarter ended March 30, 2002 from 10% for the quarter ended March 31, 2001. SALES AND MARKETING Sales and marketing expenses decreased 29% to $8.0 million for the quarter ended March 30, 2002 from $11.3 million for the quarter ended March 31, 2001. The decrease was primarily due to the cost savings realized from the August 2001 restructuring, including workforce reductions and facility shutdowns. The decrease also relates to limiting discretionary spending on marketing programs, travel, and sales meetings. As a percentage of total revenue, sales and marketing expenses increased to 51% for the quarter ended March 30, 2002 from 41% for the quarter ended March 31, 2001. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of costs related to product development. Research and development expenses decreased 36% to $4.9 million for the quarter ended March 30, 2002 from $7.7 million for the quarter ended March 31, 2001. The decrease was primarily due to the cost savings realized from the August 2001 restructuring, including workforce reductions and facility shutdowns. In addition, the decrease also relates to limiting discretionary spending on outside consulting, travel, and temporary help. As a percentage of total revenue, research and development expenses increased to 31% for the quarter ended March 30, 2002 from 28% for the quarter ended March 31, 2001. The amount of software development costs capitalized for the quarters ended March 30, 2002 and March 31, 2001 was approximately $0.3 million or 6% and $0.3 million or 4% of research and development expense, respectively. 21 <Page> GENERAL AND ADMINISTRATIVE General and administrative expenses include the costs of the administrative, finance, human resources, legal and information systems departments. General and administrative expenses decreased 37% to $1.4 million for the quarter ended March 30, 2002 from $2.2 million for the quarter ended March 31, 2001. The decrease was primarily due to the cost savings realized from the August 2001 restructuring, including workforce reductions and facility shutdowns. In addition, the decrease also relates to limiting discretionary spending on outside consulting and temporary help, recruiting costs, telephone, and office expenses. As a percentage of total revenue, general and administrative expenses increased to 9% for the quarter ended March 30, 2002 from 8% for the quarter ended March 31, 2001. AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION Amortization expense decreased 58% to $2.0 million in the quarter ended March 30, 2002 from $4.8 million for the quarter ended March 31, 2001. This decrease in amortization expense was mainly due to the impairment in intangibles recorded during the third quarter of 2001. The Company wrote down approximately $32.9 million of impaired long-lived assets related to the goodwill, purchased technology, workforce and customer base primarily associated with the acquisition of Summit Design and to a lesser extent the acquisition of PADS Software. Based on the declining historical and forecasted operating results of such intangible assets as they relate to earlier estimates and the general economic trends of the EDA industry as a whole, their estimated value to the Company had decreased. Based on the Company's expectation of future discounted net cash flows, these assets were written-down to their net realizable value. Additionally, during the quarter ended March 30, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). This statement requires that goodwill and certain other intangibles no longer be amortized, but instead be tested for impairment at least annually. As such, there was no amortization recorded for goodwill during the quarter ended March 30, 2002, compared to $0.5 million of goodwill amortization that was recorded during the quarter ended March 31, 2001. There were $24.5 million and $69.3 million in intangible assets as of March 30, 2002 and March 31, 2001, respectively. Intangible assets as of March 30, 2002 consisted primarily of purchased technology, goodwill and trademarks, resulting from the Summit Design acquisition in March 2000, the PADS Software acquisition in September 2000, and the acquisition of Transcendent Design Technology, Inc. in 1999. As of March 31, 2001, intangible assets consisted of purchased technology, goodwill and customer base resulting primarily from the Summit Design acquisition, the PADS Software acquisition, assets acquired from OmniView, Inc. in March 1999, and the Transcendent acquisition. Amortization of stock compensation remained constant at $0.1 million for the quarters ended March 30, 2002 and March 31, 2001. Amortization of stock compensation is being amortized using the straight-line method over 4 years. 22 <Page> OTHER INCOME (EXPENSE), NET Other income (expense) consists of the net of interest expense relating to our term loan and revolving credit line, interest income from cash and cash equivalent balances, and gains and losses from foreign currency transactions resulting from foreign operations conducted in local currencies. Other expense increased to $0.3 million in the quarter ended March 30, 2002 from $0.02 million for the quarter ended March 31, 2001. Other expense increased primarily as a result of a sharp decrease in interest income due to the reduction of cash and cash equivalents, partially offset by the decrease in interest expense due to the pay down of debt obligations. BENEFIT FOR INCOME TAXES We recorded a benefit for income taxes of $1.4 million and $1.0 million for the quarters ended March 30, 2002 and March 31, 2001, respectively. Quarterly tax benefits are based on the estimated effective tax rate of 37.5% and 36% for fiscal years 2002 and 2001, respectively. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION Innoveda finances its operations primarily through its cash balance and cash generated from operations. At March 30, 2002, we had $8.6 million in cash and cash equivalents. We have a Credit Facility with a commercial bank, which includes a Term Loan and a Line of Credit. The Term Loan had $4.9 million outstanding as of March 30, 2002. Borrowings under the Credit Facility are secured by substantially all of our assets. The Credit Facility contains limitations on additional indebtedness and capital expenditures, and includes financial covenants, which include but are not limited to the maintenance of minimum levels of profitability and deferred revenue, and minimum working capital and debt service coverage ratios. For the fiscal quarter ended March 30, 2002, the Company did not meet certain financial covenants under the Credit Facility. The Company's failure to meet these financial covenants constitutes an event of default under the Credit Facility, allowing the commercial bank to declare all obligations of the Company under the Credit Facility due and payable in full. On April 23, 2002, the Company entered into a forbearance agreement with the commercial bank under which the commercial bank agreed to forbear from exercising its rights and remedies under the Credit Facility until at least May 21, 2002. The commercial bank's forbearance, as provided for in the forbearance agreement, is conditioned upon the absence of any additional events of default under the Credit Facility. The forbearance agreement provides that the interest rate under the Credit Facility be increased to be equal to the commercial bank's prime rate plus 3% and that all of the Company's obligations under the Credit Facility are due and payable in full on the earlier of August 15, 2002 or the closing of the transactions contemplated by the Agreement and Plan of Merger dated April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger Corporation and Innoveda, Inc. 23 <Page> As of April 29, 2002, the Company had approximately $3.7 million in cash. The Company's outstanding obligations under the Credit Facility as of April 29, 2002 were $3.8 million. The commercial bank may not extend its forbearance from exercising its rights and remedies under the Credit Facility beyond May 21, 2002. In addition, the Company has a principal payment on the Term Loan of $1.0 million due at the beginning of the third fiscal quarter and the remaining balance of $2.7 million is now due and payable on August 15, 2002. The Company must secure alternative financing to pay its outstanding obligations under the Credit Facility in the event the acquisition of the Company by Mentor does not close prior to those obligations becoming due and payable. The expiration date of the tender offer commenced by Merger Sub on April 30, 2002 is 12:00 Midnight, New York City time, on Tuesday, May 28, 2002, subject to extension under certain circumstances. As noted above, the tender offer is subject to certain conditions, including the receipt of all necessary government approvals and the tender, without withdrawal prior to the expiration of the tender offer, of at least a majority of Innoveda's outstanding shares of common stock on a fully diluted basis. For the three months ended March 30, 2002, net cash provided by operating activities was approximately $2.0 million. This was primarily due to non-cash depreciation and amortization, decreases in accounts receivable, prepaid and other current assets and a federal tax refund of approximately $1.2 million, partially offset by the net loss and decreases in accounts payable, other accrued liabilities and deferred revenue. Net cash used in investing activities for the three months ended March 30, 2002 was approximately $0.4 million, primarily due to the capitalization of software costs. Net cash used in financing activities was approximately $0.8 million for the three months ended March 30, 2002, primarily due to the repayment of principal on debt, repayment of capital lease obligations, partially offset by proceeds from exercises of employee stock options. We consider all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At March 30, 2002 and March 31, 2001, substantially all cash and cash equivalents were invested in interest-bearing deposits and other short-term investments with an original maturity of three months or less as of the date of purchase. Pursuant to the Company's investment policy, all debt instruments must have quality ratings no lower than an A rating. On April 23, 2002, the Company entered into the Merger Agreement providing for the acquisition of the Company by Mentor. If the transactions contemplated by the Merger Agreement are not consummated, the Company will need to secure additional financing to repay its outstanding debt obligations, and to provide working capital. Prior to entering into the Merger Agreement, the Company had been evaluating proposals for both a new credit facility and other financing alternatives and believes it could secure new financing if required. We believe that our current cash and cash equivalents, when combined with the net proceeds of prospective additional financing and cash generated from operations will satisfy anticipated cash requirements for at least the next 12 months. However, our liquidity and capital requirements will depend upon numerous factors, including, the availability of additional financing on terms acceptable to us or at all, the availability of additional financing within the required time constraints, market acceptance of our products, the size and timing of customer orders, product development costs and competitive and economic forces in the electronic design automation industry. The effects of these factors may cause our liquidity and capital requirements to vary. 24 <Page> ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF STOCK INNOVEDA IS CURRENTLY IN DEFAULT UNDER ITS CREDIT FACILITY , AND INNOVEDA MAY NOT BE ABLE TO REPLACE ITS CREDIT LINE OR TERM DEBT. For the fiscal quarter ended March 30, 2002, the Company did not meet certain financial covenants under the Credit Facility. The Company's failure to meet these financial covenants constitutes an event of default under the Credit Facility, allowing the commercial bank to declare all obligations of the Company under the Credit Facility due and payable in full. On April 23, 2002, the Company entered into a forbearance agreement with the commercial bank under which the commercial bank agreed to forbear from exercising its rights and remedies under the Credit Facility until at least May 21, 2002. The commercial bank's forbearance, as provided for in the forbearance agreement, is conditioned upon the absence of any additional events of default under the Credit Facility. The Company's outstanding obligations under the Credit Facility as of April 29, 2002 were $3.8 million. The commercial bank may not extend its forbearance from exercising its rights and remedies under the Credit Facility beyond May 21, 2002. If the commercial bank extends its forbearance, the Company is required to make a term loan payment of $1.0 million at the beginning of the third quarter of fiscal 2002 and the balance is due on August 15, 2002. The Company must secure alternative financing to pay its outstanding obligations under the Credit Facility in the event the acquisition of the Company by Mentor does not close prior to those obligations becoming due and payable. The expiration date of the tender offer commenced by Merger Sub on April 30, 2002 is 12:00 Midnight, New York City time, on Tuesday, May 28, 2002, subject to extension under certain circumstances. As noted above, the tender offer is subject to certain conditions, including the receipt of all necessary government approvals and the tender, without withdrawal prior to the expiration of the tender offer, of at least a majority of Innoveda's outstanding shares of common stock on a fully diluted basis. If the transactions contemplated by the Merger Agreement entered into by the Company on April 23, 2002 are not consummated, in addition to requiring additional financing to pay its outstanding debt obligations, the Company will require additional financing for working capital. We may not be able to secure additional financing on terms acceptable to us or at all or within the time constraints we require. In addition, any future financing could result in substantial dilution to our stockholders. INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL INDUSTRY-WIDE DOWNTURNS. Innoveda's future operating results may reflect substantial fluctuations from period to period as a consequence of industry patterns, general economic conditions affecting the timing of orders from customers and other factors. The electronics industry involves: o rapid technological change; o short product life cycles; o fluctuations in manufacturing capacity; and o pricing and margin pressures. Correspondingly, certain segments, including the computer, semiconductor, semiconductor test equipment and telecommunications industries, have experienced sudden and unexpected economic downturns. During these periods, capital spending and research and development budgets often fall, and the number of design projects often decreases. Because Innoveda's sales depend upon capital spending trends, research and development budgets and new design projects, negative factors affecting the electronics industry could have a material adverse effect on Innoveda's business, financial condition, results of operations, or cash flows. 25 <Page> IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER. If Innoveda cannot, for technological or other reasons, develop and introduce products in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if Innoveda has pre-announced the product releases, its business, financial condition, results of operations or cash flows will be materially adversely affected. The electronic design automation industry is characterized by extremely rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products with new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. In addition, customers in the electronic design automation industry require software products that allow them to reduce time to market, differentiate their products, improve their engineering productivity and reduce their design errors. Innoveda's future success will depend upon its ability to enhance its current products, develop and introduce new products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of Innoveda's customers. Innoveda may not succeed in developing and marketing product enhancements or new products that respond to technological change or emerging industry standards. It may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products. Innoveda's products may not adequately meet the requirements of the marketplace and achieve market acceptance. 26 <Page> 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 will likely continue to fluctuate in the future. These fluctuations may result from several factors, including, among others: o the size and timing of orders; o large one-time charges incurred as a result of restructurings, acquisitions or consolidations; o seasonal factors; o the rate of acceptance of new products; o product, customer and channel mix; o lengthy sales cycles; o level of sales and marketing staff; o the timing of new product announcements and introductions by Innoveda and Innoveda's competitors; o the rescheduling or cancellation of customer orders; o the ability to continue to develop and introduce new products and product enhancements on a timely basis; o the level of competition; o purchasing and payment patterns, pricing policies of competitors; o product quality issues; o currency fluctuations; and o general economic conditions. Innoveda believes that period-to-period comparisons of Innoveda's operating results are not necessarily meaningful. As a result, you should not rely on these comparisons as indications of Innoveda's future performance. In addition, Innoveda operates with high gross margins, and a downturn in revenue could have a significant impact on income from operations and net income. Innoveda's results of operations could be below investors' and market makers' expectations in future quarters, which could have a material adverse effect on the market price of Innoveda's common stock. 27 <Page> INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST. Innoveda's revenue is difficult to forecast for several reasons. Innoveda operates with little product backlog because Innoveda typically ships its products shortly after it receives orders. Consequently, license backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's expected revenue. Correspondingly, license fee revenue in any quarter is difficult to forecast because it is substantially dependent on orders booked and shipped in that quarter. Moreover, Innoveda generally recognizes a substantial portion of its revenue in the last month of a quarter, frequently in the latter part of the month. Any significant deferral of purchases of Innoveda's products could have a material adverse affect on its business, financial condition and results of operations in any particular quarter. If significant sales occur earlier than expected, operating results for subsequent quarters may also be adversely affected. Quarterly license fee revenue is difficult to forecast also because Innoveda's typical sales cycle ranges from six to nine months and varies substantially from customer to customer. In addition, Innoveda makes a portion of its sales through indirect channels, and these sales can be difficult to predict. SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS. Innoveda establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on Innoveda's expectations as to future revenue. Because a high percentage of Innoveda's expenses are relatively fixed in the near term, if revenue in any quarter falls below expectations, expenditure levels could be disproportionately high as a percentage of revenue and materially adversely affect Innoveda's operating results. 28 <Page> IF THE MARKET SEGMENTS OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON WHICH INNOVEDA FOCUSES DO NOT GROW OR IF INNOVEDA CANNOT INCREASE ITS MARKET SHARE IN THOSE SEGMENTS, INNOVEDA'S BUSINESS MAY SUFFER. Innoveda focuses on the electro-mechanical and printed circuit board (PCB) markets, while most major electronic design automation software providers focus their resources on the application-specific integrated circuit and integrated circuit design automation markets. Innoveda has adopted this focus because it believes that the increased complexity of application-specific integrated circuits and integrated circuit designs, and the resulting increase in design time, will cause electronic product manufacturers to differentiate their products at the system and PCB level. If the PCB and electro-mechanical design portions of the electronic design automation industry do not grow, it could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER. The electronic design automation industry is highly competitive, and Innoveda expects competition to increase as other electronic design automation companies introduce products. In the electronic design automation market, Innoveda competes with Mentor Graphics, Cadence Design Systems, Zuken K.K., Altium, Inc., Intercept Technology, DDE, USA., and a number of other firms. Indirectly, Innoveda also competes with other firms that offer alternative products. These other firms could also offer more directly competitive products in the future. Some of these companies have significantly greater financial, technical and marketing resources and larger installed customer bases than Innoveda. Some of Innoveda's current and future competitors offer a more complete range of electronic design automation products. Innoveda also competes with manufacturers of electronic devices that have developed or have the capability to internally develop their own electronic design automation products. Many manufacturers of electronic devices may be reluctant to purchase services from independent vendors such as Innoveda because they wish to promote their own internal design departments. In the electronics design automation industry, Innoveda competes with numerous electronic design and consulting companies as well as with the internal design capabilities of electronics manufacturers. Other electronics companies and management consulting firms continue to enter the electronics design automation industry. 29 <Page> 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 helping customers get their products to market first; and o customer technical support and service. Innoveda believes that its products are competitive overall with respect to these factors. However, in particular cases, Innoveda's competitors may offer products with functionality sought by Innoveda's prospective customers and which differs from those Innoveda offers. In addition, some competitors may achieve a marketing advantage by establishing formal alliances with other electronic design automation vendors. Innoveda may not compete successfully against current and future competitors, and competitive pressures may have a material adverse effect on Innoveda's business, financial condition, results of operations, or cash flows. Innoveda's current and future competitors may develop products comparable or superior to Innoveda's or more quickly adapt new technologies, evolving industry trends or customer requirements. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON ECONOMICALLY FEASIBLE TERMS. Because Innoveda's products must interoperate, or be compatible, with electronic design automation products of other companies, Innoveda must have timely access to third party software to perform development and testing of products. Although Innoveda has established relationships with a variety of electronic design automation vendors to gain early access to new product information, any of these parties may terminate these relationships with limited notice. In addition, these relationships are with companies that are Innoveda's current or potential future competitors, including Synopsys, Mentor Graphics and Cadence. If Innoveda were unable to obtain, in a timely manner, information regarding modifications of third party products, Innoveda would not have the ability to modify its software products to interoperate with these third party products. As a result, Innoveda could experience a significant increase in development costs, the development process would take longer, product introductions would be delayed, and Innoveda's business, financial condition, results of operations or cash flows could be materially adversely affected. 30 <Page> 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 DISTRIBUTION. Innoveda has exclusive distribution agreements with three distributors in Japan, which collectively cover a significant portion of Innoveda's products in Japan. If any of these distributors terminates its relationship with Innoveda, it could have a material adverse affect on Innoveda's business, financial condition, results of operations or cash flows. The Company recently terminated its distribution agreement with one of its distributors in Japan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". 31 <Page> INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS, INCLUDING ITS BUSINESS ACTIVITIES IN EUROPE AND ASIA. International revenue and expenses represent a significant portion of Innoveda's total revenue and expenses, and Innoveda expects this trend to continue. International sales and operations involve numerous risks, including, among others: o fluctuations in the value of the dollar relative to foreign currencies can make Innoveda's products and services more expensive in foreign markets or increase Innoveda's expenses; o tariff regulations and other trade barriers; o requirements for licenses, particularly with respect to the export of certain technologies; o collectibility of accounts receivable; o changes in regulatory requirements; and o difficulties in staffing and managing foreign operations and extended payment terms. These factors may have a material adverse effect on Innoveda's future international sales and operations and, consequently, on its business, financial condition, results of operations or cash flows. In addition, financial markets and economies in the Asia Pacific region have been experiencing adverse conditions, and these adverse economic conditions may worsen. Demand for and sales of Innoveda's products in this region may decrease. In order to successfully expand international sales, Innoveda may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors. This will require significant management attention and financial resources and could adversely affect Innoveda's operating margins. In addition, to the extent that Innoveda cannot effect these additions in a timely manner, Innoveda can only generate limited growth in international sales, if any. Innoveda may not maintain or increase international sales of its products, and failure to do so could have a material adverse effect on its business, financial condition, results of operations or cash flows. 32 <Page> 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 intangible assets, and large one-time charges which could materially adversely affect Innoveda's results of operations. Product and technology acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concern, risks of entering markets in which Innoveda has no or limited prior experience and potential loss of key employees of acquired companies. Innoveda may not integrate successfully the operations, personnel or products that have been acquired or that might be acquired in the future, and the failure to do so could have a material adverse affect on its results of operations. INNOVEDA 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 Chairman of the Board and Chief Executive Officer, William J. Herman and its President, Richard G. Lucier, or if it fails to attract and retain other key personnel. Competition for personnel in the software industry in general, and the electronic design automation industry in particular, is intense. Innoveda has in the past experienced difficulty in retaining and recruiting qualified personnel. Innoveda may fail to retain its key personnel or attract and retain other qualified technical, sales and marketing and management personnel in the future. The loss of any key employees or the inability to attract and retain additional qualified personnel may have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. Additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive and can result in departures of additional personnel, which could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS BUSINESS MAY SUFFER. Innoveda's success will depend on its ability to build its sales and marketing organizations. Innoveda's future success will depend in part on its ability to hire, train and retain qualified sales and marketing personnel and the ability of these new persons to rapidly and effectively transition into their new positions. Competition for qualified sales and marketing personnel is intense, and Innoveda may not be able to hire, train and retain the number of sales and marketing personnel needed, which would have a material adverse effect on its business, financial condition, results of operations or cash flows. 33 <Page> 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. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Innoveda has a credit facility with a commercial bank consisting of a $0.3 million revolving line of credit ("Line of Credit") and a $4.9 million term loan as of March 30, 2002 (the "Term Loan") (together, the "Credit Facility"). The current interest rate under the Credit Facility has been increased to be equal to the commercial bank's prime plus 3%. Prior to the forbearance agreement, Innoveda had been required under the Credit Facility to enter 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. In connection with the termination of this interest-rate swap agreement on April 24, 2002, the Company agreed to pay $0.1 million. Innoveda invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issue. Innoveda attempts to protect and preserve its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, Innoveda's future investment income may fall short of expectations due to changes in interest rates and Innoveda may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. 34 <Page> Innoveda considers all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At March 30, 2002 and March 31, 2001, substantially all of the Company's cash and cash equivalents were invested in interest-bearing deposits and other short-term investments with an original maturity of three months or less as of the date of purchase. Pursuant to the Company's investment policy, all debt instruments must have quality ratings no lower than A rating. 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 three months ended March 30, 2002. Realized and unrealized gains and losses on foreign exchange contracts for the three months ended March 30, 2002 were insignificant. There were no outstanding foreign exchange contracts as of March 30, 2002. PART II: OTHER INFORMATION ITEM 3: DEFAULTS UPON SENIOR SECURITIES Innoveda has a credit facility with a commercial bank consisting of a $0.3 million revolving line of credit ("Line of Credit") and a $4.9 million term loan as of March 30, 2002 (the "Term Loan") (together, the "Credit Facility"). As of March 30, 2002 and April 29, 2002, the Company had an aggregate of $4.9 million and $3.8 million, respectively, in outstanding obligations under the Credit Facility. For the fiscal quarter ended March 30, 2002, the Company did not meet certain financial covenants under the Credit Facility. The Company's failure to meet these financial covenants constitutes an event of default under the Credit Facility, allowing the commercial bank to declare all obligations of the Company under the Credit Facility due and payable in full. On April 23, 2002, the Company entered into a forbearance agreement with the commercial bank under which the commercial bank agreed to forbear from exercising its rights and remedies under the Credit Facility until at least May 21, 2002. The commercial bank's forbearance, as provided for in the forbearance agreement, is conditioned upon the absence of any additional events of default under the Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" above. 35 <Page> ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit No. Description - ----------- ----------- 2.1(1) Agreement and Plan of Merger dated as of April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger Corporation and Innoveda, Inc. - ----------------------- (1.) Incorporated herein by reference to the Current Report on Form 8-K dated April 23, 2002 of Mentor Graphics Corporation, as filed with the Securities and Exchange Commission on April 24, 2002. (b) REPORTS ON FORM 8-K The Company did not file any current reports on Form 8-K during the fiscal quarter ended March 30, 2002. 36 <Page> 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 14, 2002 37 <Page> EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 2.1(1) Agreement and Plan of Merger dated as of April 23, 2002 by and among Mentor Graphics Corporation, Indiana Merger Corporation and Innoveda, Inc. - ----------------------- (1.) Incorporated herein by reference to the Current Report on Form 8-K dated April 23, 2002 of Mentor Graphics Corporation, as filed with the Securities and Exchange Commission on April 24, 2002. 38