UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
|X|/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31,June 30, 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|/X/ No | |/ /
As of April 30,August 10, 2001, the Registrant had outstanding 39,102,15939,132,737 shares of
Common Stock, $0.01 par value per share.
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical fact
included in this Quarterly Report on Form 10-Q, regarding our strategy,
future operations, financial position, estimated revenues, projected costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this Quarterly Report on Form 10-Q, the words "will", "believe",
"anticipate", "intend", "estimate", "expect", "project", "plans", and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements and
you should not place undue reliance on our forward-looking statements. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, reorganizations, restructurings, joint
ventures or strategic alliances. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth in the following discussion, and,
in particular, the risks discussed below under the subheading "Additional
Risk Factors that Could Affect Operating Results and Market Price of Stock".
The forward-looking statements provided by Innoveda in this Quarterly Report
on Form 10-Q represent Innoveda's estimates as of the date this report is
filed with the SEC. Innoveda anticipates that subsequent events and
developments will cause its estimates to change. While Innoveda may elect to
update its forward-looking statements in the future, it specifically
disclaims any obligation to do so. Innoveda's forward-looking statements
should not be relied upon as representing its estimates as of any date
subsequent to the date this report is filed with the SEC.
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART 1 FINANCIAL INFORMATION PAGE
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31,June 30, 2001
(unaudited) and December 30, 2000 34
Condensed Consolidated Statements of Operations for the Quarters
and Six Months Ended March 31,June 30, 2001 (unaudited) and AprilJuly 1, 2000
(unaudited) 45
Condensed Consolidated Statements of Cash Flows for the Quarters
and Six Months Ended March 31,June 30, 2001 (unaudited) and AprilJuly 1, 2000
(unaudited) 56
Notes to Condensed Consolidated Financial Statements 67
ITEM 2 Management's Discussion and Analysis of Financial Condition and
12
Results of Operations 14
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 2530
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 31
ITEM 6 Exhibits and Reports on Form 8-K 2631
Signature 2732
Exhibit Index 2833
23
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)(IN THOUSANDS)
MARCH 31,JUNE 30, DECEMBER 30,
2001 2000
---------(unaudited)
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,47714,814 $ 20,799
Accounts receivable, net 21,71219,882 27,260
Prepaid expenses and other 3,0162,732 2,800
Deferred income taxes 5,8137,489 6,626
---------- ------------------- ---------
Total current assets 50,01844,917 57,485
Equipment and furniture, net 7,8607,435 7,642
Capitalized software costs, net 2,3662,396 2,358
Purchased technology and other intangibles, net 58,00853,532 62,198
Goodwill and other net 12,51612,007 12,941
---------- ------------------- ---------
Total assets $ 130,768120,287 $ 142,624
========== =================== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 3,6587,500 $ 3,550
Capital lease obligations, current portion 511452 548
Accounts payable 4,0963,807 3,652
Accrued liabilities 14,27214,562 20,565
Deferred revenue 23,56021,827 24,514
---------- ------------------- ---------
Total current liabilities 46,09748,148 52,829
Long-term debt 4,750-- 5,750
Capital lease obligations 14563 250
Other long-term liabilities 1,5231,500 1,553
Deferred tax liability 26,032income taxes 25,075 27,642
---------- ------------------- ---------
Total liabilities 78,54774,786 88,024
---------- ------------------- ---------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 authorized,
39,62539,657 oustanding at March 31,June 30, 2001, 39,347
oustandingoutstanding at December 30, 2000 396397 393
Treasury stock (1,663) (832)
Additional paid-in-capital 116,821116,854 116,047
Notes due from stockholders (932) (932)
Deferred compensation (820) (1,113)
Accumulated deficit (61,120)(67,857) (59,013)
Accumulated other comprehensive income (loss) (314)(expense) (478) 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 52,22145,501 54,600
---------- ------------------- ---------
Total liabilities and stockholders' equity $ 130,768120,287 $ 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)OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THESECOND QUARTER ENDED --------------------------------
MARCH 31, APRILSIX MONTHS ENDED
-------------------- ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
---------- -------- --------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Revenue:
Software $ (2,107)9,993 $ (4,442)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation11,613 $ 25,374 $ 19,241
Services and amortization 5,920 1,480
Compensation underother 12,084 9,947 23,961 16,704
-------- -------- -------- --------
Total revenue 22,077 21,560 49,335 35,945
-------- -------- -------- --------
Cost and expenses:
Cost of software 1,815 1,956 3,574 3,472
Cost of services and other 2,832 2,050 5,436 3,612
Sales and marketing 11,265 8,486 22,553 14,937
Research and development 7,547 5,743 15,199 9,271
General and administrative 2,154 1,519 4,320 2,779
Amortization of intangibles 4,608 2,603 9,310 3,080
Amortization of stock option agreements 146compensation 147 Write-off of in-process147 293 294
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 purchaseMerger costs -- 27,036
---------- ------------ -- 2,243
Restructuring costs 594 -- 594 --
-------- -------- -------- --------
Total operating expenses 30,962 22,504 61,279 42,088
-------- -------- -------- --------
Operating loss (8,885) (944) (11,944) (6,143)
Other income (expense) (151) 263 (169) (140)
-------- -------- -------- --------
Loss before income tax benefit (9,036) (681) (12,113) (6,283)
Income tax benefit (2,299) (12) (3,269) (1,172)
-------- -------- -------- --------
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) --
---------- ----------loss $ (6,737) $ (669) $ (8,844) $ (5,111)
======== ======== ======== ========
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 PERIODloss per share:
Basic $ 19,477(0.17) $ 27,632
========== ==========(0.02) $ (0.23) $ (0.21)
======== ======== ======== ========
Diluted $ (0.17) $ (0.02) $ (0.23) $ (0.21)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 39,090 32,500 39,063 24,087
======== ======== ======== ========
Diluted 39,090 32,500 39,063 24,087
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, JULY 1,
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,844) $ (5,111)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 12,261 6,011
Compensation under stock option agreements 293 294
Write-off of in-process research and development -- 2,400
Changes in assets and liabilities:
Accounts receivable 7,184 3,383
Prepaid and other current assets (12) 872
Deferred income taxes (3,430) (1,875)
Accounts payable (448) (1,217)
Accrued liabilities (5,693) 445
Tax benefit on stock option exercises 43 --
Deferred revenue (2,687) (1,660)
-------- --------
Net cash provided by (used in) operating activities (1,333) 3,542
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,868) (1,417)
Capitalized software costs (544) (1,146)
Cash acquired in acquisition of Summit, net of purchase costs -- 27,036
-------- --------
Net cash provided by (used in) investing activities (2,412) 24,473
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (1,800) (7,006)
Proceeds from exercise of stock options and employee stock
purchase plan 768 445
Repayments of capital lease obligations (283) (194)
Purchase of treasury stock (831) --
-------- --------
Net cash used in financing activities (2,146) (6,755)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (94) (83)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,985) 21,177
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,799 531
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,814 $ 21,708
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
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$0.579 per share in cash.
In addition, each outstanding option to purchase shares of PADS common
stock was converted into an option to purchase 2.0355 shares of Innoveda
common stock, and the option exercise prices were adjusted accordingly.
The operating results of PADS have been included in the accompanying
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.
67
2. ACQUISITIONS (CONTINUED)
Innoveda recorded merger costs of approximately $0.5 million in restructuringmerger
related charges relating to the PADS merger. This was primarily comprised
of severance payments related to one employee and exit costs to close
Innoveda duplicative facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an
Agreement and Plan of Reorganization. Summit was a publicly held company
engaged in a business similar to that of Viewlogic. 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 largermajority 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.
78
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,June 30, 2001. All significant amounts are expected to
be settled within the secondthird quarter of fiscal 2001.
TOTAL NON-CASH AMOUNT MARCH 31,JUNE 30, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------------------- ------------------- -------------------- -------------------------- -------- ----- ---------------
PADS MERGER COSTS
Severance $ 250 $ --32 $ 218 $ 32
Severance--
Non-cancelable commitments 199 -- 63 136
Non-cancelable commitments199 --
Capitalized software 44 44 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software------ ------ ------ ------
$ 493 $ 4476 $ 281417 $ 168
------------------- ------------------- -------------------- ---------------------
------ ------ ------ ------
SUMMIT MERGER COSTS
Severance $ 780 $ --5 $ 775 $ 5
Severance--
Non-cancelable commitments 1,389 -- 805 584
Non-cancelable commitments939 450
Capitalized software 74 74 -- --
------------------- ------------------- -------------------- -------------------
Capitalized software------ ------ ------ ------
$2,243 $ 2,24379 $1,714 $ 74450
------ ------ ------ ------
TOTALS $2,736 $ 1,580155 $2,131 $ 589
------------------- ------------------- -------------------- -------------------
TOTALS $ 2,736 $ 118 $ 1,861 $ 757
=================== =================== ==================== ===================450
====== ====== ====== ======
89
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 THESECOND QUARTER ENDED -----------------------------------
MARCH 31, APRILSIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 ---------2001 2000
-------- ------- -------- -------
Net Loss $ (2,107)(6,737) $ (4,442)
========== ==========(669) $ (8,844) $ (5,111)
======== ======== ======== ========
Weighted average number of
common shares - Basic 39,036 7,837
========== ==========39,090 32,500 39,063 24,087
======== ======== ======== ========
Weighted average number of
common and potential common
shares - Diluted 39,036 7,837
========== ==========39,090 32,500 39,063 24,087
======== ======== ======== ========
Net loss per share:
Basic $ (0.05)(0.17) $ (0.57)
========== ==========(0.02) $ (0.23) $ (0.21)
======== ======== ======== ========
Diluted $ (0.05)(0.17) $ (0.57)
========== ==========(0.02) $ (0.23) $ (0.21)
======== ======== ======== ========
For the quarters ended March 31,June 30, 2001 and AprilJuly 1, 2000, there were 8,3638,460
and 4,9404,891 anti-dilutive weighted average potential common shares,
respectively, not included in the table above.
910
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 SECOND QUARTER ENDED ----------------------------------
MARCH 31, APRILFOR THE SIX MONTHS ENDED
---------------------------- ------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 --------- --------2001 2000
------------- ------------ ---------- -----------
Revenue
Revenue:
North America $ 18,422 $ 9,699$14,370 $14,240 $32,792 $23,939
Europe 4,340 1,5523,591 3,189 7,931 4,741
Japan 2,016 2,6722,863 2,833 4,879 5,505
Other 2,480 462
----------- ----------1,253 1,298 3,733 1,760
------- ------- ------- -------
Total Revenue $ 27,258 $ 14,385
=========== ===========$22,077 $21,560 $49,335 $35,945
======= ======= ======= =======
As a percentage of Total Revenue
North America 68%65% 66% 66% 67%
Europe 16% 11%15% 16% 13%
Japan 7% 19%13% 13% 10% 15%
Other 9% 3%
----------- ----------6% 6% 8% 5%
------- ------- ------- -------
Total 100% 100% =========== ===========100% 100%
======= ======= ======= =======
5. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
FOR THE SECOND QUARTER ENDED ---------------------------------
MARCH 31, APRILFOR THE SIX MONTHS ENDED
---------------------------- ------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
------------- ------------- ----------- --------- --------
Net lossincome (loss) $(6,737) $ (2,107) $ (4,442)(669) $(8,844) $(5,111)
Foreign currency translation adjustments and other (364) (26)
---------- ----------(164) (103) (528) (129)
------- ------- ------- -------
Comprehensive lossincome (loss) $(6,901) $ (2,471) $ (4,468)
========== ==========(772) $(9,372) $(5,240)
======= ======= ======= =======
1011
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 $8.4a $7.5 million term loan (the "Term Loan") (together, the "Credit
Facility")., secured by substantially all of the assets of the Company.
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 raterates on the Line of Credit at March 31,June 30, 2001 and December 30,
2000 were 8.5%7.25% and 10.0%10%, respectively. The interest rates on the Term
Loan at March 31,June 30, 2001 and December 30, 2000 were 6.9% and 9.5%9.2%,
respectively. Payments of principal outstanding under either the Line of
Credit or the Term Loan may be made at any time and must be repaid in
full by September 30, 2003.
The Credit Facility contains certain limitations on additional
indebtedness and capital expenditures, and includes financial covenants,
which include, but are not limited to, the maintenance of certain minimum
levels of profitability, interest and debt service coverage ratios and
maximum leverage ratios and minimum working capital ratios.
Innoveda was in compliance with allFor the quarter ended June 30, 2001, the Company did not meet certain of
its debtfinancial covenants, as required by its Credit Facility agreement.
Under the terms of March 31, 2001.the Credit Facility agreement, the lender may demand
immediate payment of all principal, interest and other amounts when
limitations and covenants are not met and therefore, the Term Loan has
been classified as current debt on the condensed consolidated balance
sheet. The Company is currently negotiating with the lender for a
revised Credit Facility agreement and expects to obtain a revised
agreement that will allow Innoveda to maintain its current Line of
Credit and to continue to repay its Term Loan as previously scheduled.
As of August 14th, 2001, the lender had not demanded payment and the
Company does not expect the lender to demand immediate payment.
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.
1112
8. RESTRUCTURING COSTS
On May 4, 2001, the Company decided to close an office located in
Pittsburgh, Pennsylvania and transfer the operations to other offices in
the United States and overseas. The total charge of $594 consists of
intangible asset and fixed asset impairment charges of $415, $64 of
severance related to the termination of 8 employees and $115 of other
costs incurred due to the closure. All significant amounts are expected
to be settled within a year of the office closure.
TOTAL NON-CASH AMOUNT JUNE 30, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ---------------
Impairment of intangibles
and fixed assets $415 $415 $-- $--
Severance 64 -- 64 --
Lease commitment 48 -- 10 38
Other 67 -- 12 55
---- ---- ---- ----
$594 $415 $ 86 $ 93
---- ---- ---- ----
9. SUBSEQUENT EVENT
Subsequent to June 30, 2001, the Company determined to restructure its
operations towards a return to future profitability and to be positioned
to operate effectively during the current economic downturn. The
restructuring includes an August 2001 global workforce reduction of
approximately 140 people. At the time of this filing the company has not
fully evaluated the effect of this restructuring, therefore, the amount
of any charge for the restructuring is not currently determinable.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that an entity account for
business combinations using the purchase method and eliminates the
pooling method. In addition, SFAS No. 141 provides guidance regarding the
initial recognition and measurement of goodwill and other intangible
assets. SFAS No.142 requires that goodwill no longer be amortized and
instead be tested annually for impairment. The provisions of SFAS No. 141
apply to all business combinations completed after June 30, 2001 and the
provisions of SFAS No. 142 are required to be applied starting with
fiscal years beginning after December 15, 2001. The Company is currently
evaluating the impact of adopting these statements.
13
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
ThisYou 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 includes10-Q. This Item contains forward-looking
statements within the meaning of sectionSection 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 that are subject to a number ofinvolve
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
futureActual 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
couldmay differ materially from those
anticipatedincluded in thesesuch forward-looking statements as a result of various factors, includingstatements. Factors which could cause
actual results to differ materially include those set forth in the
following discussion, and, in particular, the risks discussed below under the
subheading
"Additional Risk Factors that Could Affect Operating Results and Market
Price of Stock." Unless required by law, Innoveda undertakes no
obligation to update publicly any forward-looking statements madeStock" commencing on page 21, 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".
OVERVIEW
Innoveda, Inc., a Delaware corporation, was created by the business
combination of Summit Design, Inc. and Viewlogic Systems, Inc., which was
consummated on March 23, 2000. The merger of Summit Design with Viewlogic
was accounted for as a reverse acquisition as former stockholders of
Viewlogic owned a majority of the outstanding stock of Summit subsequent
to the business combination. For accounting purposes, Viewlogic is deemed
to have acquired Summit Design. On September 22, 2000, Innoveda completed
its acquisition of PADS Software, Inc. Accordingly, all financial
information presented herein includes the results for Viewlogic for the
entire period, the results of Summit from March 24, 2000 and the results
of PADS from September 22, 2000.
Innoveda operates in the United States and international markets
developing, marketing and providing a comprehensive family of software
tools used by engineers in the design of advanced electronic products and
systems, and technical support and consulting services for those software
tools. Innoveda currently markets and sells its products worldwide
through multiple distribution channels, including independent
distributors, value-added resellers, direct sales and telesales.
1214
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 SECOND QUARTER ENDED ----------------------------------
MARCH 31, APRILFOR THE SIX MONTHS ENDED
---------------------------- ------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2001 2000 2001 2000
------------ ----------- ---------- ---------
--------
Revenue:
Software 56% 53%45% 54% 51% 54%
Services and other 44 47
------ ------55% 46% 49% 46%
---- ---- ---- ----
Total Revenue 100 100
------ ------
Cost100% 100% 100% 100%
---- ---- ---- ----
Costs and expenses:
Cost of software 6 108% 9% 7% 10%
Cost of services and other 10 1113% 10% 11% 10%
Sales and marketing 41 4551% 39% 46% 41%
Research and development 28 2434% 26% 31% 26%
General and administrative 8 910% 7% 9% 8%
Amortization of intangibles and stock
compensation 18 421% 13% 19% 9%
In-process research and devleopment -- 17
Non-recurring charges -- 16
------ ------development 0% 0% 0% 7%
Merger and restructuring costs 3% 0% 1% 6%
---- ---- ---- ----
Total operating expenses 111 136
------ ------140% 104% 124% 117%
---- ---- ---- ----
Loss from operations (11) (36)-40% -4% -24% -17%
Other expense, net -- (3)
------ -------1% 1% 0% 0%
---- ---- ---- ----
Loss before income taxes (11) (39)
------ -------41% -3% -24% -17%
---- ---- ---- ----
Income tax benefit (3) (8)
------ -------10% 0% -6% -3%
---- ---- ---- ----
Net loss (8)% (31)%
====== ======-31% -3% -18% -14%
==== ==== ==== ====
QUARTERS ENDED MARCH 31,AND SIX MONTHS ENDED JUNE 30, 2001 AND APRILJULY 1, 2000
REVENUE
For the quarter ended March 31,June 30, 2001, total revenue increased 89%2% to $27.3$22.1
million from $14.4$21.6 million for the quarter ended AprilJuly 1, 2000. The
increase in revenue consisted of a 102%21% increase in services and other
revenue to $12.1 million from $9.9 million, offset by a 14% decrease in
software license revenue to $10.0 million from $11.6 million. For the six
months ended June 30, 2001, total revenue increased 37% to $49.3 million
from $35.9 million for the six months ended July 1, 2000. The increase
consisted of a 43% increase in services and other revenue to $24.0
million from $16.7 million and a 32% increase in software license
revenue to $15.4$25.4 million from $7.6 million,$19.2 million. The increase in total
revenue for the second quarter ended June 30, 2001 is primarily
attributable to the products acquired as part of the acquisition of
PADS. The decrease in
15
software revenue in the second quarter year over year is primarily
related to delays or postponements in several large orders from major
electronics companies associated with generally slowing economic
conditions particularly in the telecommunications and an increaseequipment
manufacturing industries. The decrease is also attributable to the
Company no longer realizing revenue from its VirSim product line,
which was sold in the third quarter of 76% in services and other2000. Software revenue to $11.9 million from $6.8 million. These increases wereincreased
for the six-month period ended June 30, 2001 over the same period of
the prior year due primarily
due to additional product sales in the first
quarter related to the System Level Design ("SLD") product
lineVisual products acquired as part of the acquisition
of Summit Design in March 2000 and printed circuit board ("PCB") product salesproducts acquired as part of the
acquisition of PADS Software in September 2000. Additionally,Furthermore, the
Company realized increased consulting revenue as a resultduring the first and
second quarters of 2001 versus the same periods in 2000 attributable
to an increased focus in this area during the first quarter of 2001 versus the same period in 2000.
13
area.
As a percentage of total revenue, software license revenue increaseddecreased to
56%45% for the quarter ended March 31,June 30, 2001 from 53%54% for the quarter ended
AprilJuly 1, 2000 and decreased to 51% for the six months ended June 30, 2001
from 54% for the six months ended July 1, 2000. ServicesAs a percentage of total
revenue, services and other revenue decreasedincreased to 44%55% for the quarter
ended March 31,June 30, 2001 from 47%46% for the quarter ended AprilJuly 1, 2000, and
increased to 49% for the six months ended June 30, 2001 from 46% for the
six months ended July 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%decreased 7% to $1.8 million for the quarter ended March 31,June 30, 2001
from $1.5$2.0 million for the quarter ended AprilJuly 1, 2000. ThisFor the six months
ended June 30, 2001, cost of software revenue increased 3% to $3.6
million from $3.5 million for the six months ended July 1, 2000. The
decrease in the second quarter of 2001 versus the same period in 2000 was
due primarily to decreased royalty costs consistent with the decrease in
software license revenue for the same period. The increase in the
six-month period ended June 30, 2001 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.2000.
As a percentage of total revenue, cost of software decreased to 6%8% for
the quarter ended March 31,June 30, 2001 from 9% for the quarter ended July 1,
2000, and decreased to 7% for the six months ended June 30, 2001 from 10%
for the quartersix months ended AprilJuly 1, 2000,2000. The decrease was primarily due to
the 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 maintenanceservices
and servicesother increased 67%38% to $2.6$2.8 million for the quarter ended March 31,June 30,
2001 from $1.6$2.1 million for the quarter ended AprilJuly 1, 2000. This wasFor the six
months ended June 30, 2001, cost of services and other increased 50% to
$5.4 million from $3.6 million for the six months ended July 1, 2000.
These increases are 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 ourthe Company's consulting organization
necessary to build the infrastructure to support expansion in that area
of our business.
As a percentage of total revenue, cost of maintenanceservices and services decreasedother increased to
13% for the quarter ended June 30, 2001 from 10% for the quarter ended
March 31, 2001 fromJuly 1, 2000, and increased to 11% for the quartersix months ended AprilJune 30, 2001
from 10% for the six months ended July 1, 2000.
16
SALES AND MARKETING
Sales and marketing expenses increased 75%33% to $11.3 million for the
quarter ended March 31,June 30, 2001 from $6.5$8.5 million for the quarter ended AprilJuly
1, 2000. This
wasFor the six months ended June 30, 2001, sales and marketing
expense increased 51% to $22.6 million from $14.9 million for the six
months ended July 1, 2000. These increases are 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
2000.2000 as well as additional new hires in the sales area. Innoveda also
incurred increased costs associated with variable compensation plans as a
result of theits increase in revenue.revenue during the second quarter and six
months ended June 30, 2001. 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 decreasedincreased
to 41%51% for the quarter ended March 31,June 30, 2001 from 45%39% for the quarter ended
AprilJuly 1, 2000, and increased to 46% for the six months ended June 30, 2001
from 41% for the six months ended July 1, 2000.
14
RESEARCH AND DEVELOPMENT
Research and development expenses increased 117%31% to $7.7$7.5 million for the
quarter ended March 31,June 30, 2001 from $3.5$5.7 million for the quarter ended AprilJuly
1, 2000. This
wasFor the six months ended June 30, 2001, research and development
expense increased 64% to $15.2 million from $9.3 million for the six
months ended July 1, 2000. These increases are 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 wasThese increases are 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
PCBprinted circuit board (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 PCBprinted circuit board design flow.
As a percentage of total revenue, research and development expenses
increased to 28%34% for the quarter ended March 31,June 30, 2001 from 24%26% for the
quarter ended AprilJuly 1, 2000, and increased to 31% for the six months ended
June 30, 2001 from 26% for the six months ended July 1, 2000.
The amount of software development costs capitalized for the quarter
ended March
31,June 30, 2001 was approximately $0.3 million or 3%4% of research and
development expense for that period, and for the quarter ended AprilJuly 1,
2000 was $0.3 million or 9%5% of research and development expense for that
period. For the six months ended June 30, 2001, approximately $0.5
million was capitalized versus $0.6 million in 2000 for the same period,
or 4% versus 6% of research and development costs for the same six-month
period of 2001 and 2000, respectively.
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%42% to $2.2 million for the quarter ended March 31,June 30, 2001 from $1.3$1.5
million for the quarter ended AprilJuly 1, 2000. This increase wasFor the six months ended
June 30, 2001, general and administrative expenses increased 55% to
$4.3 million from $2.8 million for the six months ended July 1, 2000.
These increases are primarily a result of Innoveda building its
general and administrative infrastructure to support the planned
17
growth in revenue of Innoveda's products and services and related
acquisitions. This increase was also due to increased salary and
related costs of additional headcount resulting from the
acquisition of PADS Software. 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
decreasedincreased to 8%10% for the quarter ended March 31,June 30, 2001 from 9%7% for the
quarter ended AprilJuly 1, 2000, and increased to 9% for the six months ended
June 30, 2001 from 8% for the six months ended July 1, 2000.
AMORTIZATION OF INTANGIBLES
Amortization expense increased 77% to $4.8$4.6 million in the quarter ended
March 31,June 30, 2001 from $0.6$2.6 million for the quarter ended AprilJuly 1, 2000, and
increased 202% for the six months ended June 30, 2001 to $9.3 million
from $3.1 million for the six months ended July 1, 2000. These increases
in amortization expense are mainly as a result
ofdue to the increase in intangibles
from acquisitions.the acquisitions of Summit and PADS. Innoveda had $69.3$64.3 million in
intangible assets as of March 31,June 30, 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 acquisition of Transcendent Design Technology, Inc. and certain
assets from OmniView, and
Transcendent transactions described below.Inc., both in 1999. As of July 1, 2000, Innoveda
had $40.8$38.1 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 SUMMITCLOSING THE PITTSBURGH OFFICE
On May 4, 2001, the Company decided to close an office located in
Pittsburgh, Pennsylvania and transfer the operations to other offices in
the United States and overseas. This office was used primarily to support
the Company's e-Architect product. The total charge of $594 consists of
intangible asset and fixed asset impairment charges of $415, $64 of
severance related to the termination of 8 employees and $115 of other
costs incurred due to the closure. All significant amounts are expected
to be settled within a year of the office closure.
TOTAL NON-CASH AMOUNT JUNE 30, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ---------------
Impairment of intangibles
and fixed assets $415 $415 $-- $--
Severance 64 -- 64 --
Lease commitment 48 -- 10 38
Other 67 -- 12 55
---- ---- ---- ----
$594 $415 $ 86 $ 93
---- ---- ---- ----
18
MERGER RELATED CHARGES
During the quartersix months ended AprilJuly 1, 2000, Innoveda recorded approximately
$2.2 million in restructuringmerger related 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 quartersix months ended AprilJuly 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 INCOME/EXPENSE
Other income/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 conducted in local currencies. Other
income/expense decreasedincreased by $0.4 million, to $0.02a $0.2 million expense for
the firstsecond quarter ended March 31,June 30, 2001 from $0.4$0.3 million of income for
the firstsecond quarter ended AprilJuly 1, 2000. This decreaseFor the six months ended June 30,
2001, other expense increased less than $0.1 million. The net increase in
expense 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 expenseincome due to the
reduction of cash and cash equivalents to $14.8 million as Innoveda paid down a portion of its long term debt obligations.June 30,
2001 from $21.7 million as of July 1, 2000.
INCOME TAX BENEFIT
The benefit for income taxes decreased by $0.2 million,increased to $1.0$2.3 million for the
quarter ended March 31,June 30, 2001 from less than $0.1 million for the
quarter ended July 1, 2000. For the six months ended June 30, 2001,
the benefit for income taxes increased by $2.1 million to $3.3 million
from $1.2 million for the quartersix months ended AprilJuly 1, 2000 .2000. Quarterly tax
provisions are based on the estimated effective tax rates for the
respective fiscal years.year.
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,June 30, 2001, Innoveda had approximately $19.5$14.8 million in
cash and cash equivalents and working capital of approximately $3.9 million.equivalents. Innoveda has a $6.0 million revolving lineLine
of creditCredit with Fleet Bank. As of AprilJune 30, 2001, there was no balance was
outstanding under this lineLine of credit.Credit. Innoveda has a term
loanTerm Loan with
Fleet Bank, with approximately $7.5 million outstanding as of April
30,August 13, 2001.
Borrowings under the credit facilityCredit Facility are secured by substantially all
of Innoveda's assets. The credit facilityCredit Facility contains limitations on
additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to the maintenance of
minimum levels of profitability, 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 these19
For the quarter ended June 30, 2001, the Company did not meet certain
of its financial covenants, as required by its Credit Facility
agreement. Under the terms of the Credit Facility agreement, the
lender may demand immediate payment of all principal, interest and
other amounts when limitations and covenants are not met and make all required repayments ortherefore,
the Term Loan has been classified as current debt on the condensed
consolidated balance sheet. The Company is currently negotiating with
the lender for a revised Credit Facility agreement and expects to obtain
a revised agreement that will allow Innoveda must obtain replacement
financing. Innoveda was in compliance with allto maintain its current
Line of Credit and to continue to repay its debt covenantsTerm Loan as previously
scheduled. As of March
31, 2001.
16
August 14th, 2001, the lender had not demanded payment
and the Company does not expect the lender to demand immediate payment.
For the threesix months ended March 31,June 30, 2001, net cash provided byused in operating
activities was approximately $1.3 million. This was primarily due
to a net loss of $2.1$8.8 million, a decrease in accounts payable of
approximately $0.5 million, a decrease in accrued liabilities of
$5.7 million, a $2.7 million decrease in deferred revenue and a
$3.4 million increase in deferred income taxes offset by non-cash
depreciation and amortization of approximately $5.9$12.3 million and 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$7.2 million.
Net cash used byin investing activities for the threesix months ended March 31,June 30,
2001 was approximately $1.4$2.4 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,June 30, 2001 and AprilJuly 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 an A rating.
Net cash used in financing activities was approximately $1.1$2.1 million for
the threesix months ended March 31,June 30, 2001, primarily due to the repayment of
principal on debt and the repurchase of Innoveda common stock as discussed below.stock.
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,August 13, 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.
20
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that an entity account for
business combinations using the purchase method and eliminates the
pooling method. In addition, SFAS No. 141 provides guidance regarding the
initial recognition and measurement of goodwill and other intangible
assets. SFAS No.142 requires that goodwill no longer be amortized and
instead be tested annually for impairment. The provisions of SFAS No. 141
and SFAS No. 142 apply to all business combinations completed prior to
June 30, 2001. The Company is evaluating the impact of adopting these
statements.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET
PRICE OF STOCK
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE SUMMIT AND VIEWLOGIC AND/ORINNOVEDA'S DEPENDENCE ON 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 byELECTRONIC 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 business combinationtiming of Viewlogic Systems, Inc.,orders from customers and
Summit Design, Inc.other factors. The electronics industry involves:
o rapid technological change;
o short product life cycles;
o fluctuations in March 2000. Innoveda also acquired PADS Software, Inc. in
September 2000. The integration of Summit Designmanufacturing capacity; and
Viewlogic requireso pricing and margin pressures.
Correspondingly, certain segments, including the dedication of Innoveda management resources. This may distract management's
attention from the effort to integrate PADS into Innovedacomputer, semiconductor,
semiconductor test equipment and from the
management of the day-to-day business of Innoveda. Employee uncertaintytelecommunications industries, have
experienced sudden and lack
of focus during integration may also disrupt the business of Innoveda. Retention
of key employees by Innoveda has been,unexpected economic downturns. During these
periods, capital spending and will remain, critical to ensure
continued advancement,research and 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 combinationbudgets often
fall, and the mergernumber of Innovedadesign projects often decreases. Because
Innoveda's sales depend upon capital spending trends, research and
PADS would adversely
affectdevelopment budgets and new design projects, negative factors affecting
the combined company's business.
17electronics industry could have a material adverse effect on
Innoveda's business, financial condition, results of operations, or cash
flows.
21
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 acquisitionrestructurings,
acquisitions or consolidation;consolidations;
o seasonal factors;
o the rate of acceptance of new products;
o product, customer and channel mix;
o lengthy sales cycles; and
o level of sales and marketing staff.
These fluctuations will likely continue in future periods because of the
above factors. Additional factors potentially causing fluctuations
include, among others:
o corporate acquisitions and consolidations and the integration of acquired
entities and any resulting large one-time charges;
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.
1822
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.
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE THE ACQUISITION BY INNOVEDA OF
PADS, THE ANTICIPATED ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN
INNOVEDA AND PADS MAY NOT BE REALIZED, IN FULL, IF AT ALL.
Innoveda acquired PADS Software, Inc. in September 2000. The integration
of Innoveda and PADS requires the dedication of Innoveda management
resources. This may distract management's attention from the management
of the day-to-day business of Innoveda. Employee uncertainty and lack
of focus during integration may also disrupt the business of Innoveda.
Retention of key employees by Innoveda has been, and will remain,
critical to ensure continued advancement, development and support of
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 Innoveda
and PADS and to retain key technical, sales or marketing personnel after
the merger of Innoveda and PADS would adversely affect the combined
company's business.
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.
23
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 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 June 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 profitability, interest
and debt service coverage ratios and maximum leverage ratios and
minimum working capital 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.
The Company is currently not in compliance with certain financial
covenants under its Credit Facility. See Note 6 to the Company's
Condensed Consolidated Financial Statements contained herein and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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.
24
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.
25
IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL
CHANGE AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and
introduce products in a timely manner in response to changing market
conditions, industry standards or other customer requirements,
particularly if Innoveda has pre-announced the product releases, its
business, financial condition, results of operations or cash flows will
be materially adversely affected. The electronic design automation
industry is characterized by extremely rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products with new technologies and the emergence
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.
26
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.
27
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.
28
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.
2429
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 $8.4a $7.5 million term loan as of March 31,June 30, 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,June 30, 2001 was 8.5%7.25% and 6.9%6.90%, 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$7.5 million as of March 31,June 30, 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,June 30, 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.
30
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,June 30, 2001. Realized and
unrealized gains and losses on foreign exchange contracts for the threesix
months ended March 31,June 30, 2001 were insignificant. There were no outstanding
foreign exchange contracts as of March 31,June 30, 2001.
PART II OTHER INFORMATION
ITEM 4:
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 2001, Innoveda held its Annual Meeting of Stockholders. At
the meeting, the votes cast for the sole matter presented to Innoveda's
stockholders were as follows:
Election of two Class I directors, for the ensuing three years and
until their successors are duly elected and qualified.
FOR WITHHELD
---------- --------
(i) Lorne J. Cooper 35,688,883 712,498
(ii) Steven P. Erwin 36,255,272 146,109
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.No exhibits are filed with this Current Report on Form 10-Q.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during the
fiscal quarter ended MarchJune 30, 2001.
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,August 14, 2001
2732
EXHIBIT INDEX
None.
28No exhibits are filed with this Current Report on Form 10-Q.
33