UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ------ -------------------------------------------------------------------------
X Quarterly report pursuant to Section/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities
Exchange Act ofOR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1999 or
- ------ -------------------------------------------------------------------------
- ------ -------------------------------------------------------------------------
Transition report pursuant to SectionFOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000 OR
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities
Exchange Act ofOR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to________
- ------ -------------------------------------------------------------------------
Commission file number:FOR
THE TRANSITION PERIOD FROM _________ TO________
COMMISSION FILE NUMBER: 000-20923
SUMMIT DESIGN,INNOVEDA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1137888
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
9305 S. W. GEMINI DRIVE,
BEAVERTON, OREGON 97008
(Address of principal executive office)
Registrant's Telephone number, including area code: (503) 643-9281(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1137888
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
293 BOSTON POST ROAD WEST
MARLBORO, MASSACHUSETTS 01752-4615
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 480-0881
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
As of November 11, 1999,May 8, 2000, the Registrant had outstanding 15,801,46532,446,270 shares of Common
Stock.
SUMMIT DESIGN,INNOVEDA, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited)April 1, 2000
and December 31, 1998.January 1, 2000 .............................................. 3
Condensed Consolidated Statements of Operations for the
three months ended September 30,First Quarter Ended April 1, 2000 and April 3, 1999 and 1998 and
for the nine months ended September 30, 1999 and 1998(unaudited)............... 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30,First Quarter Ended April 1, 2000 and April 3, 1999 and 1998 (unaudited)........... 5
Notes to Condensed Consolidated Financial Statements.Statements .............. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9............................... 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk ............. 23
PART II OTHER INFORMATION
Item 2. Changes in Securities ................................................. 25
Item 4 Submission of Matters to a vote of Security Holders ................... 25
Item 6 Exhibits and Reports on Form 8-K 41
Items 1, 2,3, 4 and 5 Not Applicable 41...................................... 26
Signature 42
Exhibit Index 43...................................................................... 27
-2-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)thousands, except per share amounts)
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)April 1, 2000 January 1, 2000
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ........................................................................ $ 27,00827,632 $ 27,693531
Accounts receivable, net ....................... 6,217 8,852................................................... 13,768 14,290
Prepaid expenses and other ..................... 1,003 862................................................. 3,354 2,722
Prepaid income taxes ....................................................... 1,228 1,228
Deferred income taxes .......................... 792 792
-------- --------...................................................... 6,406 1,342
------ ------
Total current assets ......................... 35,020 38,199
Furniture.................................................... 52,388 20,113
Equipment and equipment,furniture, net ...................... 3,734 4,113
Intangibles,.................................................. 7,052 4,477
Capitalized software costs, net .................................. 1,038 2,870............................................... 2,341 2,427
Purchased technology and other intangibles, net ............................... 26,302 3,508
Goodwill, net ..................................... 2,179 2,742................................................................. 14,482 -
Deposits and other assets ......................... 146 2,286..................................................... 1,065 920
-------- --------
Total assets ....................................................................................... $103,630 $ 42,117 $ 50,21031,445
======== ========
LIABILITIES
Current liabilities:
Long-term debt,Notes payable, current portion ............................................................. $ 563,306 $ 543,125
Capital lease obligations, current portion ................................. 391 372
Accounts payable ........................................................... 3,633 2,840
Accrued liabilities ........................................................ 14,450 7,140
Deferred revenue ........................................................... 19,156 14,595
------ ------
Total current liabilities ............................................... 40,936 28,072
------ ------
Notes payable, less current portion ........................................... 11,750 13,825
Capital lease obligation, current portion ...... 8 43
Accounts payable ............................... 1,072 2,520
Accrued liabilities ............................ 5,287 5,687
Deferred revenue ............................... 4,843 5,640
-------- --------
Total current liabilities .................... 11,266 13,944
Long-term debt, less current portion .............. -- 156................................ 495 554
Deferred revenue, less current portion ............ 102 146........................................ 69 -
Other long-term liabilities ................................................... 135 -
Deferred income tax ............................... 489 489
-------- --------taxes ......................................................... 14,010 2,393
------ -----
Total liabilities ............................ 11,857 14,735
-------- --------
Commitments and contingencies.................................................... 67,395 44,844
------ ------
Redeemable, convertible preferred stock ....................................... -- 32,000
------ ------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized
30,000 shares; issued andvalue, 50,000 authorized, 32,312 outstanding 15,702
shares at September 30, 1999 and 15,457 sharesApril 1,
2000, $.001 par value, 35,000 authorized, 7,969 outstanding at
December 31, 1998 .......................... 157 155January 1, 2000 .............................................................. 323 8
Additional paid-in capital ........................ 44,360 44,039.................................................... 90,417 4,777
Notes due from stockholders ................................................... (927) (927)
Deferred compensation ......................................................... (1,554) (1,701)
Accumulated deficit ............................... (14,257) (8,719)
-------- --------........................................................... (52,287) (47,845)
Accumulated other comprehensive income ........................................ 263 289
--- ---
Total stockholders' equity ................... 30,260 35,475
--------................................................. 36,235 (45,399)
------ --------
Total liabilities and stockholders' equity ........................... $ 42,117103,630 $ 50,210
========31,445
========= ========
The accompanying notes are an integral part of the condensed consolidated
financial statements
-3-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In(in thousands, except per share data)
(Unaudited)
Three MonthsFor the First Quarter Ended
Nine Months Ended
September 30, September 30,
--------------------- ----------------------April 1, 2000 April 3, 1999
1998 1999 1998
---- ---- ---- ----------------- -------------
Revenue:
Product licenses ..................................Software .................................................... $ 4,8717,628 $ 8,705 $ 13,477 $ 25,480
Maintenance6,534
Services and services .......................... 2,983 2,518 8,376 6,929
Other ............................................. -- 91 -- 274
-------- --------other .......................................... 6,757 7,450
-------- --------
Total revenue ................................... 7,854 11,314 21,853 32,683............................................ 14,385 13,984
-------- --------
Costs and expenses:
Cost of revenue:
Product licensessoftware ............................................ 1,516 1,366
Cost of services and other .................................. 217 179 476 490
Maintenance1,562 1,549
Sales and services .......................... 270 269 876 773
Amortization of purchased technologies ............ 140 165 472 496
-------- -------- -------- --------
Total cost of revenue ........................... 627 613 1,824 1,759
-------- -------- -------- --------
Gross profit ................................. 7,227 10,701 20,029 30,924
Operating expenses:marketing ......................................... 6,451 5,578
Research and development .......................... 2,571 3,021 7,739 8,928
Sales and marketing ............................... 2,590 3,235 8,678 9,541.................................... 3,528 2,690
General and administrative ........................ 1,465 1,122 4,004 3,264.................................. 1,260 994
Amortization of goodwillintangibles and other intangibles .... 529 698 1,924 2,093stock compensation .......... 624 152
In process research and development ......................... 2,400 --
Non-recurring charges ............................. 2,665restructuring costs ........................... 2,243 -- 4,005 227
-------- --------
-------- --------
Total operating expenses ........................ 9,820 8,076 26,350 24,053
Income................................. 19,584 12,329
Operating income (loss) from operations ........................ (2,593) 2,625 (6,321) 6,871............................... (5,199) 1,655
Other income net .................................... 293 298 783 790
-------- --------(expense) ......................................... (403) (340)
-------- --------
Income (loss) before provision for income taxes .................... (2,300) 2,923 (5,538) 7,661
Income tax provision ................................. -- 1,162 -- 3,043
-------- --------................ (5,602) 1,315
Provision (benefit) for income taxes ........................... (1,160) 575
-------- --------
Net income (loss) .................................................................................. ($ 4,442) $ (2,300) $ 1,761 $ (5,538) $ 4,618
======== ========740
======== ========
Earnings (loss) per share:
Basic .................................................................................................. ($ 0.57) $ (0.15) $ 0.12 $ ( 0.35) $ 0.31
======== ========0.27
======== ========
Diluted .............................................................................................. ($ 0.57) $ (0.15) $ 0.11 $ ( 0.35) $ 0.280.05
======== ========
Weighted average shares outstanding:
Basic ....................................................... 7,837 2,742
======== ========
Number of shares used in computing earnings (loss) per
share:
Basic ........................................... 15,694 15,245 15,646 15,072
Diluted ......................................... 15,694 16,100 15,646 16,208..................................................... 7,837 13,889
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements
-4-
SUMMIT DESIGN,INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In(in thousands)
(Unaudited)
Nine MonthsFor the First Quarter Ended
September 30,
-----------------------------April 1, 2000 April 3, 1999
1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash flows from operating activities:
Net income (loss) ..................................................................................................... ($ 4,442) $ (5,538) $ 4,618740
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization ................... 3,620 3,439
Amortization.................................................. 1,480 857
Compensation under stock option agreements ..................................... 147 123
Write-off of future contingent share
liability.......................................in process research and development ............................... 2,400 --
1,650
Loss on asset disposition ....................... 34 --
Deferred taxes .................................. -- (81)
Equity in losses of and transactions with
unconsolidated joint venture ................... 255 420
Provision for impairment of note receivable ..... 2,665 --
ChangesChange in assets and liabilities:
Accounts receivable ........................ 2,635 (2,523)............................................................ 4,813 (354)
Prepaid expenses and other ................. (141) (249)
Other, net ................................. 184 98current assets ............................................... 192 (595)
Deferred income taxes .......................................................... (1,198) 252
Accounts payable ........................... (1,448) 536............................................................... (205) (265)
Accrued liabilities ........................ (400) 1,303............................................................ 925 (1,130)
Deferred revenue ........................... (840) (641)............................................................... (1,130) 835
-------- --------
Net cash provided by operating activities ......... 1,026 8,570
-------- --------
Cash flows from investing activities:
Additions to furniture................................... 2,982 463
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................. (891) (1,811)
Proceeds from sale................................................ (575) (175)
Capitalized software costs ........................................................ (321) (275)
(Increase) decrease in other assets ............................................... -- (37)
Cash acquired in acquisition of assets ......................... 11 --
Notes receivable from related parties, net ........... (965) (855)
Loan to a joint venture .............................. -- (750)
-------- --------
Net cash used in investing activities ............. (1,845) (3,416)
-------- --------
Cash flows from financing activities:
Issuance of common stock,Summit Design, Inc.,
net of issuancetransaction costs ...... 323 1,118
Tax benefit................................................... 27,036 --
Purchase of option exercises ......................OmniView .............................................................. -- 875
Payments to acquire treasury stock ................... -- (2,329)
Principal payments of debt obligations ............... (154) (91)
Principal payments of capital lease obligations ...... (35) (38)(1,100)
-------- --------
Net cash provided by (used in) investing activities ......................... 26,140 (1,587)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt ..................................................... (1,950) (500)
Proceeds from exercise of stock options ........................................... 28 --
Repayments of capital lease obligations ........................................... (94) (10)
-------- --------
Net cash used in financing activities 134 (465)....................................... (2,016) (510)
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH ....................................... (5) (123)
-------- --------
Increase (decrease) in cash and cash equivalents .. (685) 4,689
Cash and cash equivalents, beginning of period ............ 27,693 19,973NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 27,101 (1,757)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................... 531 4,487
-------- --------
Cash and cash equivalents, end of period ..................CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................... $ 27,00827,632 $ 24,6622,730
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest ........................................ $ 2 $ 3.................................................................... 378 351
======== ========
Income taxes .................................... 1,198 2,063
Supplemental disclosure of non-cash financing activities:
Retirement of treasury stock ......................... -- 11,555................................................................ 2 882
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements
-5-
SUMMIT DESIGN,INNOVEDA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Innoveda, Inc. ("Innoveda" or the "Company"), a publicly traded Delaware
Corporation, was created by the Merger of Summit Design, Inc. ("Summit") and
Viewlogic Systems, Inc. ("Viewlogic") which was consummated on March 23, 2000
(the "Effective Date"). The accompanying unaudited financial statements have
been prepared by Summit
Design, Inc. ("Summit" or "the Company") in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rulesfor
interim financial information and regulations.the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial positioninformation set forth therein have been included. The Merger
of Summit with Viewlogic on March 23, 2000 (see Note 2, the "Merger") was
accounted for as a reverse acquisition as former shareholders of Viewlogic owned
a majority of the Company,outstanding stock of Summit subsequent to the Merger.
For accounting purposes, Viewlogic is deemed to have acquired Summit.
All fiscal 1999 financial information presented herein represents only the
financial results for Viewlogic. The fiscal 2000 financial information
presented in the Condensed Consolidated Statements of Operations, and itsthe
Condensed Consolidated Statements of Cash Flows represents the results of
operations and cash flows. These financial statements should be read in
conjunction with the audited financial statements and notes theretofor
Viewlogic for the years ended December 31, 1998, 1997periods stated and 1996 included inincludes the Company's Form 10-K
filedfinancial results for
December 31, 1998.
The results of operationsSummit for the nine monthspost-merger period extending from March 24, 2000 to April 1,
2000. The operating results for the quarter ended September 30, 1999April 1, 2000 are not
necessarily indicative of the results that may be expected for any future
period.
The accompanying financial statements should be read in conjunction with the
year ended
December 31,fiscal 1999 or any other future interim period,consolidated financial statements of Viewlogic and Summit, and the
Company makes no
representations related thereto.Innoveda form 8-K/A and 8K filings on May 15, 2000 and April 7, 2000,
respectively.
2. BALANCE SHEET COMPONENTS (IN THOUSANDS)MERGER OF VIEWLOGIC AND SUMMIT
On March 23, 2000 a change in control of the Registrant occurred at the
Effective Date of the Merger contemplated by that certain Agreement and Plan
of Reorganization dated as of September 16, 1999 (the "Reorganization
Agreement") by and among Summit, Hood Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Summit ("Merger Sub"), and
Viewlogic. At the Effective Time, Merger Sub merged with and into Viewlogic
with Viewlogic surviving as a wholly owned subsidiary of Summit (the
"Merger"). In connection with the Merger, Summit changed its name to
Innoveda, Inc. Pursuant to the Reorganization Agreement, Summit issued
16,337,979 shares of its common stock to Viewlogic shareholders in exchange
for all the outstanding common stock of Viewlogic (24,051,963 outstanding
shares) at a .67928 to 1 exchange ratio. After the transaction, Viewlogic
shareholders owned 50.6% of the outstanding common stock of Innoveda, Inc.,
and the former Summit shareholders owned the remaining 15,941,418 shares of
Innoveda common stock.
The Merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition as the stockholders of Viewlogic received
the larger portion of the voting interests in the combined company. Viewlogic
was considered the acquirer for accounting purposes and recorded Summit's
assets and liabilities based upon their estimated fair values. The operating
results of Summit have been included in the accompanying consolidated
financial statements from the date of acquisition. Under the purchase method
of accounting, the acquired assets and assumed liabilities have been recorded
at their estimated fair values at the date of acquisition. On a preliminary
basis, approximately $38.0 million have been allocated to goodwill and other
intangibles. As a result of the Merger, $2,400,000 relating to in-process
research and development has been expensed. The goodwill and other
intangibles will be amortized over estimated useful lives of three to seven
years.
-6-
Below is a table of the acquisition costs and the preliminary purchase price
allocation (in thousands):
Preliminary purchase price:
Common stock .......................................................... $ 49,020
Stock options ......................................................... 4,882
Acquisition costs ..................................................... 1,136
--------
Total preliminary purchase price ........................................ $ 55,038
========
Preliminary purchase price allocation:
Tangible net assets acquired .......................................... $ 28,489
Assets impaired by Merger ............................................. (750)
Deferred income taxes ................................................. (11,492)
Intangible net assets acquired:
Purchased technology, assembled workforce, and customer
base .............................................................. 23,200
Goodwill .............................................................. 14,537
In-process research and development ................................... 2,400
Estimated Merger related severance and shutdown costs, net
of tax benefits ..................................................... (1,346)
--------
Total ................................................................. $ 55,038
========
The unaudited consolidated results of operations on a pro forma basis as if the
Merger had occurred as of the beginning of the periods presented are as follows:
September 30,For the First Quarter Ended
April 1, 2000 April 3, 1999
December 31, 1998
------------------ -----------------
(Unaudited)-------------- --------------
Accounts receivable:
Trade receivables ..........................Revenue ............................................ $ 6,60917,846 $ 9,363
Less allowance for doubtful accounts ....... (392) (511)20,800
Net loss* .......................................... (11,309) (906)
Net income per share - basic ....................... ($0.35) ($0.03)
Net income per share - diluted ..................... ($0.35) ($0.03)
*Quarter ended April 1, 2000 includes $5,437 of non-recurring charges and
write-off of $2,400 of in-process research and development.
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
3. RESTRUCTURING AND NON-RECURRING CHARGES
For the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges. This included primarily severance and
other costs relating to the consolidation of duplicative facilities as a
result of the Merger between Summit and Viewlogic. Other costs relating to
property and equipment lease contracts (less any applicable sublease income)
after the properties were abandoned, lease buyout costs, restoration costs
associated with certain lease arrangements, and costs to maintain facilities
during the period after abandonment are also included. Further action was
taken to restructure the Innoveda sales and services business in Japan as a
result of an exclusive distributor agreement executed with Marubeni during
the first quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for approximately 14
employees, costs associated with office closings and subsequent lease
termination, and other facility and exit related costs.
The following table presents the components of the non-recurring restructuring
charges accrued during the
-7-
period ended April 1, 2000 and the charges against the reserves through April 1,
2000.
April 1, 2000
Total Non-cash Amounts Accrual
Charge Write-offs Paid Balance
------ ---------- ---- -------
-------
$ 6,217 $ 8,852
======= =======
Furniture and equipment:
Office furniture equipment ................. $ 680 $ 1,201
Computer equipment ......................... 5,305 5,138
Leasehold improvements ..................... 940 491
------- -------
6,925 6,830
Less: accumulated depreciation and amortization (3,191) (2,717)
------- -------
$ 3,734 $ 4,113
======= =======
Accrued liabilities:
Payroll
Severance and related benefits .................................. $ 2,871780 $ 3,051
Severance .................................. 1,136 -- Sales and marketing ........................ 360 332
Accounting and legal ....................... 433 310
Federal and state income taxes payable ..... 352 1,549
Sales taxes payable ........................ 39 160
Other ...................................... 96 285
------- -------
Total accrued liabilities ................ $ 5,287270 $ 5,687
======= =======510
Non-cancelable commitments............... 1,389 -- -- 1,389
Capitalized software..................... 74 74 -- --
------ ------ ------ ------
Totals ............................... $2,243 $ 74 $ 270 $1,899
====== ====== ====== ======
-6-
SUMMIT DESIGN, INC.
NotesAll significant amounts are expected to Condensed Consolidated Financial Statements
(Unaudited)
3. RECONCILIATION OFbe paid within one year from the Merger
date of March 23, 2000.
4. EARNINGS PER SHARE
On January 1, 1998,Although Summit is the Company adopted Statementsurviving legal entity after the Merger and the legal
acquirer for accounting purposes the Merger was treated as an acquisition of
Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." In accordance with SFAS No. 128,
basic earnings per share is computed using theSummit by Viewlogic. The weighted average number of common shares outstanding
duringhas been adjusted for all periods reported to reflect the period. Diluted earnings per share is computed
using the weighted average numberexchange ratio of
common and dilutive common equivalent
shares outstanding during the period. Dilutive common equivalent shares consist
of common stock issuable upon exercise of stock options using the treasury stock
method. The following provides a reconciliation of the numerators and
denominators of the basic and diluted per share computations:.67928.
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------For the First Quarter Ended
April 1, 2000 April 3, 1999
1998 1999 1998
------ ------- ---- ----------------- -------------
Numerator:
Net income (loss) ................................... ($ 4,442) $ (2,300) $ 1,761 $ (5,538) $ 4,618740
========== =======
========= =======
Denominator:
Denominator for basic earnings (loss)
per share weightedWeighted average number of common shares 15,694 15,245 15,646 15,072
Effect- Basic ...... 7,837 2,742
Dilutive effect of dilutive securities:
Employeeemployee stock options ........... -- 855 -- 1,136279
---------- -------
---------Assumed conversion of preferred stock ............... -- 10,868
---------- -------
Denominator for diluted earning (loss)
per share 15,694 16,100 15,646 16,208Weighted average number of common shares - Diluted .... 7,837 13,889
========== ======= ========= =======
Net income (loss) per share - basic .................... ($ 0.57) $ ( 0.15) $ 0.12 $ ( 0.35) $ 0.310.27
========== ======= ========= =======
Net income (loss) per share - diluted .................. ($ 0.57) $ (0.15) $ 0.11 $ ( 0.35) $ 0.280.05
========== ======= ========= =======
4.-8-
5. BUSINESS SEGMENTS EXPORTS AND MAJOR CUSTOMERS:GEOGRAPHIC DATA
The Company operates in a single industry segment comprising the electronic
design automation industry. Net revenue by geographic region (in thousands) and
as a percentage of total revenue for each region outside North America is as follows:
Three months ended Nine months ended
September 30, September 30,For the First Quarter Ended
April 1, 2000 April 3, 1999
1998 1999 1998
---------------------- ----------------------------------- -------------
Revenue
North America .......................... $ 9,699 $ 8,992
Europe ...................... $ 1,378 $ 1,351 $ 4,300 $ 4,210................................. 1,552 2,476
Japan ...................... 1,678 1,831 5,076 5,671.................................. 2,672 1,695
Other Asia Pacific .......... 344 1,185 704 1,993.................................. 462 821
------- -------
Total Revenue ....................... $14,385 $13,984
======= =======
As a Percentage of Total Revenue:Revenue
North America .......................... 67% 64%
Europe ...................... 17.5% 11.9% 19.7% 12.9%................................. 11% 18%
Japan ...................... 21.4% 16.2% 23.2% 17.4%.................................. 19% 12%
Other Asia Pacific .......... 4.4% 10.5% 3.2% 6.1%.................................. 3% 6%
------- -------
Total ............................... 100% 100%
======= =======
-7-
Sales through one distributor accounted6. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income for 21.4%, 16.2%, 23.2%,the
periods indicated.
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
Net income (loss) .............................. ($4,442) $ 740
Foreign currency translation adjustments ....... (26) (259)
------- -------
Comprehensive income (loss) .................... ($4,468) $ 481
======= =======
7. DEBT
Viewlogic has an $18.0 million term loan with Fleet Bank, with approximately
$14.5 million outstanding as of April 1, 2000. The term loan agreement
currently applies to Viewlogic only. The Company and 17.4%the lender are
discussing an amendment to the loan agreement as a result of the Company's total revenueMerger of
Viewlogic and Summit. Based on these discussions, the lender has given
Viewlogic a waiver on meeting the financial covenants of its credit facility
for the three months ended September 30, 1999 and
1998, and for the nine months ended September 30, 1999 and 1998, respectively.
Salesquarter ending April 1, 2000. The Company expects to Credence Systems Corporation ("CSC") accounted for 22.1% and 25.2% of
the Company's total revenue for the three and nine months ended September 30,
1998. Such revenue included $2.5 million and $8.2 million, respectively of
Visual Testbench license and maintenance sales made pursuant to an OEM agreement
with CSC. As of December 31, 1998, CSC had fully satisfied its obligation to
purchase Visual Testbench Licenses pursuantadd Innoveda as
a borrower to the OEM agreementcredit facility and add a financial covenant which will
require the Company doesto maintain minimum working capital and minimum quarterly
earnings, in which event it would not expectbe required to receive any additional revenue from sales of Visual Testbench
licenses. The Company did not receive any revenue from CSCmeet the existing
covenant for the nine months
ended September 30, 1999. Revenue generated pursuant to another OEM agreement
accounted for 13.8%, 12.2%, 13.0%, and 9.0% of the Company's total revenue for
the three months ended September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998, respectively. Foreign operations of Summit Design
(EDA) Ltd. accounted for less than 10% of total revenue ofdebt service. In connection with this amendment the Company for the
three and nine months ended Septemberalso
expects to reduce its term loan to approximately $10 Million by June 30, 1999. Identifiable assets of the
Company's Israeli subsidiary were less than 10% of total assets at December 31,
1998. Additionally, one customer accounted for 10.2% of total revenue for the
three months ended September 30, 1999.
5. SUBSEQUENT EVENTS
On September 16, 1999, the Company entered into a definitive agreement to
merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software
company headquartered in Marlboro, Massachusetts under which the Company will
acquire Viewlogic. Each share of Viewlogic Preferred and Common Stock will be
exchanged for 0.67928 shares for Summit Common Stock upon closing of the
transaction. In addition, the Company will assume all options outstanding
under Viewlogic's stock option plan. The Company intends to account for this
acquisition as a purchase. Although Summit will be acquiring Viewlogic, after
such transaction, Viewlogic stockholders will hold a controlling interest in
Summit. Accordingly, for accounting purposes, the acquisition will be a
"reverse acquisition" and Viewlogic will be the "accounting acquirer". As
Viewlogic will be the accounting acquirer, its accounts will be recorded at
historical cost and the assets and liabilities of Summit will be recorded at
their estimated fair value as of the closing date. The transaction is subject
to the approval of Viewlogic's and the Company's stockholders and standard
closing conditions.
6. NON-RECURRING CHARGES
Non-recurring charges of $2.7 million for the three months ended September
30, 1999 relate to the impairment of a note receivable. As of September 30,
1999, the Company has loaned $2.7 million to an independent software company
pursuant to a secured loan agreement entered into July 1997. During the three
months ended September 30, 1999 the Company terminated its agreement with the
independent software company. This decision by the Company impaired the
viability of the independent software company as a going concern due to a
lack of financial support. Based on this development, the Company recorded
$2.7 million in provision for the impairment of the note receivable.
Non-recurring charges of $4.0 million for the nine months ended September 30,
1999 relate to severance obligations of $1.3 million to certain management
personnel, which will be paid in future periods and a charge of $2.7 million
for the impairment of a note receivable. Non-recurring charges of $227,000
for the nine months ended September 30, 1998 relate to the acquisition of
ProSoft.
-8-2000.
-9-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions identify such forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Factors which could cause actual
results to differ materially include those set forth in the following
discussion, and, in particular, the risks discussed below under the subheading
"Additional Risk Factors that Could Affect Operating Results and Market Price of
Stock." Unless required by law, the Company undertakes no obligation to update
publicly any forward-looking statements.
OVERVIEW
Summit Design, Inc. (Innoveda operates in the "Company") was foundedUnited States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in December 1993 to act as the holding companydesign of advanced electronic products and systems, and
technical support and consulting services for Test Systems Strategies, Inc. ("TSSI")those software tools. Innoveda
currently markets and SEE Technologies,
(now Summit Design (EDA) Ltd.) collectively,sells its products worldwide through multiple distribution
channels, including independent distributors, value added resellers, a direct
sales organization, telesales and strategic sales alliances with OEM partners.
As previously disclosed, for the "Reorganization"). TSSI was
founded in 1979 to develop and market integrated circuit ("IC" or "chip")
manufacturing test products. In January 1993, TSSI retained a new Chief
Executive Officer and began to restructure its senior management team.
Thereafter,year, the Company broadened its strategy from focusingis planning for modest
revenue growth as compared to the pro forma combined revenue of Viewlogic and
Summit for the same period of the prior year. This is primarily on
manufacturing test productsdue to
include providing HLDA design creationuncertainties involved with the merging of the distribution channels of the
two companies and verification tools and integrating these with its core technology. As partthe establishment of its strategy, in early 1994, TSSI acquired SEE Technologies, an Israeli companya market presence for the newly named
company. However, by the fourth quarter of 2000, the Company expects to
achieve a revenue growth rate that through its predecessor, began operations in 1983 and had operated
primarilyis higher than the overall industry growth
rate.
-10-
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a research and development and consulting company focused onpercentage of total
revenue for the periods indicated:
For the First Quarter Ended
April 1, 2000 April 3, 1999
Revenue:
Software .............................................. 53% 47%
Services and other .................................... 47% 53%
--- ---
Total revenue ...................................... 100% 100%
Costs and expenses:
Cost of software ...................................... 10% 10%
Cost of services and other ............................ 11% 11%
Sales and marketing ................................... 45% 41%
Research and development .............................. 24% 19%
General and administrative ............................ 9% 7%
Amortization of intangibles and stock compensation .... 4% 1%
In process research and development ................... 17% --
Non-recurring restructuring costs ..................... 16% --
--- ---
Total operating expenses ........................... 136% 89%
Operating income (loss) ......................... -36% 12%
Other income (expense) ................................... -3% -2%
Income (loss) before provision for income taxes .......... -39% 9%
Provision (benefit) for income taxes ..................... -8% 4%
--- ---
Net income (loss) ........................................ -31% 5%
SOFTWARE REVENUE
The Company's software revenue is derived from license fees from the Company's
software products, licensed into the electronic design automation ("EDA") market.
AsSoftware revenue increased by $1.1 million, or 16.7% from $6.5 million for the
first quarter ended April 3, 1999 to $7.6 million for the first quarter ended
April 1, 2000. This increase is primarily due to additional sales resulting from
an exclusive distribution agreement signed with a result of the Reorganization,
TSSI and SEE Technologies became wholly-owned subsidiaries of the CompanyJapanese distributor early in
the first quarter of 1994.
Prior2000.
SERVICES AND OTHER REVENUE
The Company's services revenue is derived from maintenance contracts related to
the Reorganization, the Company's TDS productsoftware products. The Company's other revenue is derived from
consulting services and related maintenance
revenue accounted for alltraining classes offered to purchasers of the Company's
products. Services and other revenue decreased by $0.7 million, or 9.3% from
$7.5 million for the first quarter ended April 3, 1999 to $6.8 million for the
first quarter ended April 1, 2000. The decrease was primarily due to the fact
that during 1999, several major customers did not renew their maintenance
contracts due to the fact they were using Viewlogic's products in applications
related to integrated circuit design, which is no longer fully supported by
Viewlogic, and to a lesser extent a number of customers migrated their products
from the version based on the Unix operating system to the version based on the
Microsoft Windows NT operating system, which has lower maintenance prices. This
was partially offset by a 52% increase in training and consulting revenue.
After-11-
COSTS AND EXPENSES
COST OF SOFTWARE REVENUE
Cost of software revenue includes royalties, amortization of purchased
technology, product packaging, labor and other costs associated with ordering,
handling, packaging and shipping products and other production related costs.
The cost of software revenue increased by $0.1 million, or 11.0% from $1.4
million for the Reorganizationfirst quarter ended April 3, 1999 to $1.5 million for the first
quarter ended April 1, 2000. The increase in the cost of software revenue is
consistent with the increase in software revenue for the period.
COST OF SERVICES AND OTHER REVENUE
Cost of services and through June 30, 1997,other revenue consists primarily of personnel costs and
facilities costs for customer support, consulting, and training classes offered
to purchasers of the Company's products. The cost of service revenue increased
by $0.1 million or 1.0% from $1.5 million for the first quarter ended April 3,
1999 to $1.6 million for the first quarter ended April 1, 2000. Although service
revenue decreased for the first quarter ended April 1, 2000 from the first
quarter ended April 3, 1999, the increase in the cost of service revenue is a
result of a higher percentage of consulting and training revenue in the first
quarter of 2000, compared to the same period in fiscal 1999, which yield lower
margins than maintenance revenue.
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions,
travel and advertising costs, increased by $0.9 million, or 15.7% from $5.6
million for the first quarter ended April 3, 1999 to $6.5 million for the first
quarter ended April 1, 2000. This increase was predominantly derivedprimarily attributable to
marketing costs relating to the corporate name change and expenses associated
with the integration of the Summit and Viewlogic sales forces. The first quarter
ended April 1, 2000 includes expenses of Summit for the period after the
consummation of the Merger on March 23, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and related costs
of developing new products and enhancements to existing products and performing
quality assurance activities. Research and development expenses increased by
$0.8 million, or 31.2% from two
product lines, Visual HDL, which includes Visual HDL$2.7 million for VHDLthe first quarter ended April 3,
1999 to $3.5 million for the first quarter ended April 1, 2000. This increase
was primarily due to additional headcount resulting from the acquisition of
Omniview Inc. and Visual HDLTranscendent Design Inc. during 1999, and to a lesser extent,
research and development expenses of Summit for Verilog,the period after the
consummation of the Merger on March 23, 2000.
GENERAL AND ADMINISTRATIVE
General and TDS. Asadministrative expenses consist primarily of the executive, finance,
human resource, information services, administrative, legal and accounting
expenses of the Company. General and administrative expenses increased by $0.3
million, or 26.8% from $1.0 million for the first quarter ended April 3, 1999,
to $1.3 million for the first quarter ended April 1, 2000. This increase was
primarily a result of the July 1997 saleCompany continuing the building of its management and
employee infrastructure to support the TDS product line,
DesignMerger of Viewlogic and Summit.
AMORTIZATION OF INTANGIBLES AND GOODWILL
Amortization expense increased from $0.2 million in the first quarter ended
April 3, 1999 to Test products are no longer a source of revenue for$0.6 million in the Company. Withfirst quarter ended April 1, 2000. The
Company held $1.1 million in intangibles at April 3, 1999, relating to purchased
technology from the acquisition of TriQuest Design Automation,OmniView, Inc. ("TriQuest")The Company expensed $0.2
million in February
1997, Simulation Technologies Corp ("SimTech"),intangibles and stock based compensation for the first quarter ended
April 3, 1999. The Company holds goodwill and other intangibles primarily due to
the Merger of Viewlogic and Summit, which are being amortized to expense on a
straight-line basis over periods ranging from three to seven years beginning
March 24, 2000. The Company expensed $0.6 million in September 1997,intangibles and ProSoft
OY ("ProSoft")stock based
compensation for the first quarter ended April 1, 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
Upon consummation of the Merger, Innoveda immediately charged to expense $2.4
million representing acquired in-process research and development that had not
yet reached technological feasibility and had no
-12-
alternative future use. See "Notes to Condensed Consolidated Financial
Statements". The value assigned to acquired in-process research and development
was determined by an independent appraiser, identifying research projects in
June 1998,areas for which technological feasibility has not been established.
RESTRUCTURING AND NON-RECURRING CHARGES
For the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges. This included primarily severance and
other costs relating to the consolidation of duplicative facilities as a
result of the Merger between Summit and Viewlogic. Other costs relating to
property and equipment lease contracts (less any applicable sublease income)
after the properties were abandoned, lease buyout costs, restoration costs
associated with certain lease arrangements, and costs to maintain facilities
during the period after abandonment are also included. Further action was
taken to restructure the Innoveda sales and services business in Japan as a
result of an exclusive distributor agreement executed with Marubeni during
the first quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for approximately 14
employees, costs associated with office closings and subsequent lease
termination, and other facility and exit related costs.
The following table presents the components of the non-recurring restructuring
charges accrued during the period ended April 1, 2000 and the charges against
the reserves through April 1, 2000.
April 1, 2000
Total Non-Cash Amounts Accrual
Charge Write-offs Paid Balance
------ ---------- ------- -------------
Severance and related ............... $ 780 $ -- $ 270 $ 510
Non-cancelable commitments .......... 1,389 -- -- 1,389
Capitalized software ................ 74 74 -- --
------ ------ ------ ------
Totals ........................... $2,243 $ 74 $ 270 $1,899
====== ====== ====== ======
All significant amounts are expected to be paid within one year from the Merger
date of March 23, 2000.
OTHER INCOME (EXPENSE)
Other income (expense) consists of the net of interest expense relating to the
Company's term loan and revolving credit line, interest income from cash and
cash equivalent balances, and currency exchange rate differences resulting from
foreign operations in local currencies. Other expense increased by $63,000, or
18.5% to $340,000 for the first quarter ended April 3, 1999 to $403,000 for the
first quarter ended April 1, 2000.
INCOME TAX PROVISION
The income tax provision decreased by $1.7 million, from a provision of $0.6
million for the first quarter ended April 3, 1999 to an income tax benefit of
$1.1 million for the first quarter ended April 1, 2000. Quarterly tax provisions
are based on the estimated effective tax rate for the full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash generated from
operations, supplemented by short-term borrowings from a revolving credit line.
The Company also acquired approximately $28.1 million in cash and cash
equivalents as a result of the Merger of Viewlogic and Summit on March 23, 2000.
As of April 1, 2000, the Company had approximately $27.6 million in cash and
cash equivalents. Viewlogic has also derived revenue from
verification products which include hardware-software co-verification, code
coverage,an available $6.0 million revolving line of
credit with Fleet Bank. As of April 1, 2000, there was approximately $500,000
outstanding under this line of credit.
Viewlogic has an $18.0 million term loan with Fleet Bank, with approximately
$14.5 million outstanding as of April 1, 2000. The term loan agreement
currently applies to Viewlogic only. The Company and HDL debugging productsthe lender are
discussing an amendment to the loan agreement as well as analysis, verification and RTL
optimization tools.
Revenue consists primarily of fees for licensesa result of the Company's software
products, maintenanceMerger of
Viewlogic and customer training. Product license revenue is derived
fromSummit. Based on these discussions, the sale of software licenses to distributors and end-users. Revenue fromlender has given
Viewlogic a waiver on meeting the sale of software licenses is recognized upon shipment offinancial covenants in its credit facility
for the product if
remaining vendor obligations are insignificant and collection of the resulting
receivable is probable, otherwise revenue from such software products is
deferred until such time as vendor obligations are met. Maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically 12 months. Revenue from customer training is recognized when
the service is performed. Revenue earned on software arrangements involving
multiple elements is allocated to each element based on vendor-specific
objective evidence (VSOE) of the fair value of the various elements within the
arrangement.quarter ending April 1, 2000. The Company sells its products throughexpects to add Innoveda as
a direct sales force in
North Americaborrower to the credit facility and selected European countries and through distributors in the
Company's other international markets. Revenue from product sales through
distributors is recognized net of the associated distributor discounts. Fees
received for granting distribution rights are deferred and recognized ratably
over the term of the distribution agreement. Although the Company has not
adoptedadd a formal return policy, the Company generally reimburses customers in
full for returned products. Estimated sales returns are recorded when the
related revenue is recognized.
-9-
The Company's products perform a variety of functions, certain offinancial covenant which are, and
in the future may be, offered as separate products or discrete point solutions
by the Company's existing and future competitors. For example, certain companies
currently offer design entry products without simulators. There can be no
assurance that such competition will
not causerequire the Company to offer point
solutions insteadmaintain minimum working capital and minimum quarterly
earnings, in which event it would not be required to meet the existing
covenant for debt service. In connection with this amendment the Company also
expects to reduce its term loan to approximately $10 million by June 30, 2000.
-13-
As of or in additionApril 1, 2000, the Company had working capital of approximately $11.5
million.
For the first quarter ended April 3, 1999, net cash provided by operating
activities was approximately $0.5 million, resulting primarily from net income
for the period of $0.7 million. For the first quarter ended April 1, 2000, net
cash provided by operating activities was approximately $3.0 million. This was
due primarily to the Company's current software
products. Such point solutions would be priced lower than the Company's current
product offerings and could cause the Company's average selling prices to
decrease. Accordingly, based on these and other factors, the Company expects
that average selling prices for its products may continue to fluctuate in the
future.
The Company entered into a joint venture with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Asia, Ltd. ("Summit
Asia")) acquired exclusive rights to sell, distribute and support allcollection of the
Company's products in the Asia-Pacific regions, excluding Japan. Prior to that
date, Anam was an independent distributor of the Company's products in Korea. In
April 1998, the joint venture corporation, Summit Asia, which is headquartered
in Korea, was renamed Asia Design Corporation ("ADC"). In May 1998, the Company
exchanged a portion of its ownership in ADC for ownership in another company
located in Hong Kong, Summit Design Asia, Ltd. ("SDA"). SDA also acquired an
equity investment in ADC. In June 1998, the Company and Anam each loaned SDA
$750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive rights
to sell, distribute and support the Company's products in Asia Pacific region,
excluding Japan. SDA granted distribution rights to the Company's products to
ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA
cancelled ADC's distribution rights in all areas except Korea and granted
non-exclusive distribution rights to Semiconductor Technologies Australia
("STA") for the Asia Pacific region, excluding Japan and Korea. For the nine
months ended September 30, 1999 and 1998, sales through SDA accounted for 2.3%
and 3.1% of the Company's revenue, respectively.
The Company accounts for its ownership interest in SDA and ADC on the equity
method of accounting and, as a result, the Company's share of the earnings and
losses of SDA and ADC are recognized as income or losses in the Company's income
statement in "Other income, net." The Company does not expect SDA or ADC to
recognize a profit for the foreseeable future and thus does not expect to
recognize income from its investment in SDA or ADC for the foreseeable future,
if at all. There can be no assurance that the restructuring will result in SDA
or ADC becoming profitable or that revenue attributable to sales in the Asia
Pacific region, excluding Japan, would increase.
Approximately 43.3%, 38.6%, 46.1%, and 36.3% of the Company's total revenue for
the three months ended September 30, 1999 and 1998, and for the nine months
ended September 30, 1999 and 1998, respectively, were attributable to sales made
outside the United States, which includes the Asia Pacific region and Europe.
Approximately, 25.8%, 26.7%, 26.5% and 23.4% of the Company's revenue for the
three months ended September 30, 1999 and 1998, and for the nine months ended
September 30, 1999 and 1998, respectively, were attributable to sales made in
the Asia Pacific region. Approximately 17.5%, 11.9%, 19.7%, and 12.9% of the
Company's revenue for the three months ended September 30, 1999 and 1998, and
for the nine months ended September 30, 1999 and 1998, respectively, were
attributable to sales made in Europe. The increase in the percentage of revenue
from sales made outside the United States in 1999 is primarily the result of a
decrease in domestic sales made to Credence Systems Corporation ("CSC") in 1998
pursuant to an OEM agreement. As of December 31, 1998, CSC had satisfied its
obligations under the OEM agreement and the Company will not receive any
additional revenue pursuant to the OEM agreement. The Company expects that
international revenue will continue to represent a significant portion of its
total revenue. The Company's international revenue is currently denominated in
U.S. dollars. As a result, increases in the value of the U.S. dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in those markets. The Company pays the
expenses of its international operations in local currencies and does not engage
in hedging transactions with respect to such obligations. International sales
and operations are subject to numerous risks, including tariff regulations and
other trade barriers, requirements for licenses, particularly with respect to
the export of certain technologies, collectability$4.8 million dollars of accounts receivable,
changesoffset by a net loss before non-cash charges.
Net cash used in regulatory requirements, difficulties in staffing and managing
foreign operations and extended payment terms. There can be no assurance that
such factors will not have a material adverse effect oninvesting activities was approximately $1.6 million for the
Company's future
international sales and operations and, consequently, onfirst quarter ended April 3, 1999, mainly from the -10-
Company's business, financial condition, resultspurchase of operations orOmniView. Net
cash flows. In
addition, financial markets and economies inprovided by investing activities for the Asia Pacific region have been
experiencing adverse economic conditions. Demand for and sales of the Company's
products in the Asia Pacific region have continued to decrease and there can be
no assurance that such adverse economic conditions will not worsen. In June
1999, the Company lowered Seiko's specified quotasfirst quarter ended April 1, 2000
was approximately $26.1 million, primarily due to the adverse economic
conditionsMerger of Viewlogic and
Summit.
Net cash used in financing activities was approximately $0.5 million and $2.0
million for the Asia Pacific Region. As a result, Summit expects sales through
Seikofirst quarter ended April 3, 1999 and April 1, 2000,
respectively, primarily due to decreasethe repayment of principal on debt.
The Company believes that its current cash and cash equivalents, combined with
amounts available under the revolving line of credit, will satisfy the Company's
anticipated working capital and other cash requirements for at least the current and following two quarters.(1)
On February 28, 1997, the Company completed its acquisition of TriQuest.
TriQuest develops HDL analysis, optimization, and verification tools for the
design of high performance, deep submicron integrated circuits. The transaction
has been accounted for as a "pooling of interest" in accordance with generally
accepted accounting principles.
Effective July 1, 1997, the Company sold substantially all of the assets used in
its business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to CSC. As of July 1, 1997, TDS products ceased to
be a source of such revenues. CSC assumed the Company's obligations under TDS
maintenance contracts entered into prior to the closing and the Company has not
recognized deferred revenue associated with such contracts since June 30, 1997.
The Company maintained exclusive rights to its Visual Testbench technology and
CSC agreed to purchase a minimum of $16 million of Visual Testbench licenses
over a thirty-month period beginning July 1997, subject to specified quarterly
maximums and certain additional conditions, and $2 million of maintenance over
an eighteen month period beginning July 1997. In December 1998, the Company and
CSC agreed to amend the agreement and as of December 31, 1998, CSC had satisfied
its obligation to purchase $16 million of Visual Testbench licenses. CSC also
obtained shared ownership of the Visual Testbench source code in December 1998
and has the right to sell Visual Testbench licenses based on the source code
received from the Company.
On September 9, 1997, the Company acquired SimTech, a company that develops and
distributes hardware-software co-verification, code coverage and HDL debugging
software. The aggregate consideration for the acquisition was 1,256,800 shares
of the Company's common stock, 723,200 options to purchase the Company's common
stock and $3.9 million in cash. The transaction was accounted for using the
purchase method of accounting. Accordingly, SimTech's results of operations for
the period from September 9, 1997 are included in the consolidated statements of
operations. The purchase price was allocated to the net assets acquired based on
their estimated fair market values at the date of acquisition.
After discussion with the Staff of the Securities and Exchange Commission (the
"Staff") the Company restated the consolidated financial statements as of and
for the quarters ended September 30, 1997, March 31, 1998, June 30, 1998 and
September 30, 1998 and as of December 31, 1997 and for the year ended December
31, 1997 to reflect a change in the original accounting treatment to the
September 1997 acquisition of SimTech.
In connection with the acquisition of SimTech, the Company repurchased 939,000
shares of common stock in a private transaction at an average price of $12.30
per share for $11.6 million in September 1997.
On December 23, 1997, the Company announced that the Board of Directors had
authorized the repurchase of up to 750,000 shares of the Company's Common Stock.
From January 1, 1998 to Maynext 12
1998, the Company repurchased 162,500 shares of
its common stock at a cost of $2.3 million. The Company subsequently issued
these shares through the exercise of stock options during the three months ended
June 30, 1998. On June 29, 1998, the Company cancelled this stock repurchase
plan.
- ----------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 22 for a
discussion of factors that could affect future performance.
-11-
On June 30, 1998, the Company completed its acquisition of ProSoft. ProSoft
develops software tools used to verify embedded systems software prior to the
availability of a hardware prototype. The aggregate consideration for the
acquisition (including shares of common stock reserved for issuance upon
exercise of ProSoft options, which were exchanged for options of the Company)
was 248,334 shares of common stock. The transaction has been accounted for as a
pooling of interests in accordance with generally accepted accounting
principles. In compliance with such principles, the Company's financial
statements have been restated to include the accounts of ProSoft as if the
acquisition had occurred at the beginning of the first period presented.
In September 1998, the Company announced its proposed acquisition of OrCAD, Inc.
In February 1999, the Company announced that its planned acquisition of OrCAD,
Inc. had been terminated. During the quarter ended December 31, 1998, the
Company incurred approximately $1.0 million in costs related to the terminated
acquisition.
RECENT DEVELOPMENTS
On September 16, 1999, the Company entered into a definitive agreement to
merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software
company headquartered in Marlboro, Massachusetts under which the Company will
acquire Viewlogic. Each share of Viewlogic Preferred and Common Stock. In
addition, the Company will assume all options outstanding under Viewlogic's
stock option plan will be exchanged for 0.67928 shares for Summit Common
Stock upon closing of the transaction. The Company intends to account for
this acquisition as a purchase. Although Summit will be acquiring Viewlogic,
after such transaction, Viewlogic stockholders will hold a controlling
interest in Summit. Accordingly, for accounting purposes, the acquisition
will be a "reverse acquisition" and Viewlogic will be the "accounting
acquirer". As Viewlogic will be the accounting acquirer, its accounts will be
recorded at historical cost and the assets and liabilities of Summit will be
recorded at their estimated fair value as of the closing date. The
transaction is subject to the approval of Viewlogic's and the Company's
stockholders and standard closing conditions.
As of September 30, 1999, the Company has loaned $2.7 million to an
independent software company pursuant to a secured loan agreement entered
into during July 1997. Borrowings under the agreement bear interest at prime
plus 2%. During the three months ended September 30, 1999, the Company
terminated its relationship with the independent software company. This
decision by the Company impaired the viability of the independent software
company as a going concern due to a lack of financial support. Based on this
development, the Company recorded $2.7 million in provision for impairment of
the note receivable.
In addition to the risks stated below in "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock", if the Company's
proposed business combination with Viewlogic is completed, the combined
Company's operating results will be subject to the following additional risks:
-12-
THE EXCHANGE RATIO FOR SUMMIT COMMONmonths.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
TO BE RECEIVED BY VIEWLOGIC
STOCKHOLDERS IN THE BUSINESS COMBINATION IS FIXED AND WILL NOT BE ADJUSTED IN
THE EVENT OF ANY INCREASE OR DECREASE IN STOCK PRICE.
Under the merger agreement, each outstanding share of Viewlogic capital stock
will be converted into the right to receive 0.67928 of a share of Summit
common stock. The exchange ratio is fixed and will not be adjusted in the
event of any increase or decrease in the market price of Summit common stock.
Accordingly, the market value of the consideration to be received by the
stockholders of Viewlogic in the business combination will depend entirely on
the market price of Summit common stock upon the completion of the business
combination. The market price of Summit common stock at the completion of the
business combination may vary from its price on the date the merger agreement
was signed, the date of this joint proxy statement/prospectus and the date of
the special meetings. The market price may vary because of many factors,
including:
- changes in the business, operations or prospects of Summit;
- the timing of the completion of the business combination;
- the prospects of post-business combination operations of the combined
company; and
- general market conditions.
THE INHERENT UNCERTAINTY PRIOR TO COMPLETION OF THE BUSINESS COMBINATION MAY
CAUSE SUMMIT'S OR VIEWLOGIC'S CUSTOMERS TO DELAY PURCHASING DECISIONS AND MAY
REDUCE THE LIKELIHOOD OF SUMMIT MEETING THE EXPECTATIONS OF INVESTORS AND
ANALYSTS.
The business combination of two companies can be unsettling to customers.
Summit and Viewlogic believe that a number of their respective customers may
delay their purchase decisions until they have the opportunity to learn more
about the business plans of the combined company. As a result, the quarterly
results of one or both of the companies could fail to meet the expectations of
investors and analysts.
-13-
THE SHARES OF SUMMIT COMMON STOCK WHICH ARE ISSUABLE UNDER THE MERGER AGREEMENT
MAY DILUTE SUMMIT'S EARNINGS PER SHARE.
A number of shares equal to approximately 51% of Summit's outstanding common
stock after the business combination will be issued to the stockholders of
Viewlogic upon completion of the business combination. Additionally, shares
equal to approximately 7% of the outstanding Summit common stock after the
business combination will be reserved for issuance upon the exercise of
options to purchase Viewlogic common stock assumed by Summit under the merger
agreement. The issuance of Summit common stock in connection with the
business combination and upon the exercise of Viewlogic options assumed by
Summit may cause a dilution of earnings per share which may negatively impact
the price of Summit common stock.
IF SUMMITINNOVEDA AND VIEWLOGIC CANNOT BE SUCCESSFULLY INTEGRATED, THE ANTICIPATED
SYNERGIESADVANTAGES OF THE RECENT MERGER OF INNOVEDA AND VIEWLOGIC MAY NOT BE REALIZED, IN FULL, IF AT ALL.
The Summit board of directors and the Viewlogic board of directors have each
unanimously approved the merger agreement with the expectation that the
business combination will result in cost savings and beneficial product and
operating synergies. Following the business combination, inREALIZED.
In order to maintain and increase profitability the combined companyInnoveda will need to
successfully integrate and streamline overlapping functions.functions of Viewlogic and
Innoveda. For example, Summit'sInnoveda's operations in Beaverton, Oregon, will be
relocated. The desired cost savings may not be achieved and the integration of
Summit'sInnoveda's and Viewlogic's operations may not be accomplished smoothly,
expeditiously or successfully. The difficultiesEach of achieving these goalsInnoveda and Viewlogic has recently
completed other business acquisitions. Integration of Innoveda and Viewlogic may
be increasedcomplicated by the need to integrate these acquisitions and combine twomultiple
corporate cultures.cultures, as well.
THE INTEGRATION OF SUMMIT'SINNOVEDA'S AND VIEWLOGIC'S BUSINESSES MAY DISTRACT MANAGEMENT
FROM ACHIEVING ITS OPERATIONAL OBJECTIVES WHICH COULD LIMIT THE
COMBINED COMPANY'SINNOVEDA'S ABILITY
TO RETAIN ITS EMPLOYEES.
The integration of the companies'Innoveda's and Viewlogic's businesses following the business
combination will require the
dedication of management resources, whichresources. This may distract management's attention
from the day-to-day business of the combined
company. The business of the combined company may also be disrupted by
employeeInnoveda. Employee uncertainty and lack of focus
during integration.integration may also disrupt the business of Innoveda. The retention by
Viewlogic and SummitInnoveda of key employees is critical to ensure continued advancement,
development and support of the companies'Innoveda's technologies as well as on-going sales and
marketing efforts. During the pre-merger and
integration phases,phase, competitors may intensify their
efforts to recruit key employees. The combined companyInnoveda may not be able to retain key
technical, sales or marketing personnel after the business combination which would adversely affect the combined company'sInnoveda's
business.
THE COMBINED COMPANY-14-
INNOVEDA MAY NOT SUCCESSFULLY INTEGRATE RECENT BUSINESS ACQUISITIONS OF SUMMITINNOVEDA
AND VIEWLOGIC.
Each of SummitInnoveda and Viewlogic has recently completed other business
acquisitions. This business combination, if approved, would be the largest
for either company. The difficulties of integrating Summit's and Viewlogic's
businesses may be exacerbated by the size and number of recent acquisitions.acquisitions may add to the
difficulties of integrating Innoveda's and Viewlogic's businesses. Products,
technologies, distribution channels, key personnel and businesses of previously
acquired companies may not effectively integrate into the
combined company'sInnoveda's business or
product offerings. Moreover, this integration may adversely affect the combined company'sInnoveda's
business.
-14-
THE COMBINED COMPANY WILL BEBECAUSE INNOVEDA IS BEING MANAGED BY A NEW MANAGEMENT TEAM, WHICH WILL HAVE
SIGNIFICANT CONTROL OVER ITSTHAT NEW MANAGEMENT
MAY MOVE INNOVEDA'S BUSINESS ANDIN A NEW DIRECTION.
After the business combination, the currentThe management of Viewlogic will beis now the management of Innoveda and is able to
exert significant control over the combined company,Innoveda, its business and direction, subject to
the oversight of the combined company'sInnoveda's board of directors. The manner in which the new
management team conducts the business of the combined company,Innoveda, and the direction in which
the new management team moves the business, may differ from the manner and
direction in which the currentprior management of SummitInnoveda would direct the combined company or Summit on a
stand-alone basis. Suchhave directed
Innoveda. This control by the new management team, together with the effects of
future market factors and business conditions, could ultimately evolve into an
integration and business strategy that, when implemented, differs from the prior
strategy and business direction currently recommended by
Summit's current management and board of directors.Innoveda. The new management team, and any
change in business or direction, may not improve, and could adversely impact,
the combined company'sInnoveda's financial condition and results of operations.
BOTH COMPANIES WILL INCUR SUBSTANTIAL EXPENSES RELATING TO THE BUSINESS
COMBINATION.
Summit andA SMALL NUMBER OF PRIOR STOCKHOLDERS OF VIEWLOGIC HAVE SIGNIFICANT VOTING
CONTROL OVER INNOVEDA.
The former stockholders of Viewlogic estimate that the negotiation and implementationhold approximately 50.6% of the business combinationcommon
stock of Innoveda. Moreover, the five largest former stockholders of Viewlogic
beneficially own approximately 45.5% of the common stock of Innoveda. Acting
together, former Viewlogic's stockholders are able to control, and the five
largest former stockholders will be able to substantially influence, all matters
submitted to the stockholders of Innoveda for approval, including the election
of directors and any merger, consolidation or sale of all or substantially all
of Innoveda's assets. This control could have the effect of delaying a change of
control of Innoveda that other stockholders may believe would result in aggregate costs of approximately $3.9
million, primarily relating to costs associated with combining the companies
and the fees of attorneys, accountants and Summit's financial advisor. This
estimate may be incorrect,a
premium or unanticipated events may substantially increase
the costs of combining the operations of the companies.better management. In addition, the
combined company expects to record a non-cash expense of approximately $2.1
million with respect to the write-off of acquired in-process research and
development. In any event, the companies anticipate that costs associated
with the business combination and the write-off of acquired in-process
research and development and goodwill amortization will negatively impact
results of operations in the quarter in which the business combination is
completed. In addition, Summit and Viewlogic expect to amortize approximately
$22.2 million of acquired intangible assets over a period of three to five
years, and this will negatively impact results of operations for the duration
of the period.
THE PROPOSED BUSINESS COMBINATION WITH VIEWLOGIC MAY NOT BE CONSUMMATED.
The proposed business combination with Viewlogic is subject to stockholder
approval and other conditions. In addition, either Summit or Viewlogic may
terminate the transaction. If the business combination is not consummated,control could decrease
Innoveda's stock price because it
may adversely affect Summit's business and the market price of Summit's
common stock.
-15-
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
as a percentage of revenue.
Three Months Ended Nine Months Ended
September 30, September 30
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- -------
Revenue:
Product licenses ..................... 62.0% 76.9% 61.7% 78.0%
Maintenance and services ............. 38.0 22.3 38.3 21.2
Other ................................ -- 0.8 -- 0.8
----- ----- ----- ------
Total revenue ................... 100.0 100.0 100.0 100.0
Cost of revenue:
Product licenses ..................... 2.8 1.6 2.2 1.5
Amortization of purchased technologies 3.4 2.3 4.0 2.4
Maintenance and services ............. 1.8 1.5 2.1 1.5
----- ----- ----- ------
Total cost of revenue ........... 8.0 5.4 8.3 5.4
Gross profit .................... 92.0 94.6 91.7 94.6
Operating expenses:
Research and development ............. 32.7 26.7 35.4 27.3
Sales and marketing .................. 33.0 28.6 39.7 29.2
General and administrative ........... 18.7 9.9 18.3 10.0
Amortization of goodwill and other
intangibles ....................... 6.7 6.2 8.8 6.4
Non-recurring charges (a) ............ 33.9 -- 18.3 0.7
----- ----- ----- ------
Total operating expenses ........ 125.0 71.4 120.5 73.6
----- ----- ----- ------
Income from operations .................... (33.0) 23.2 (28.8) 21.0
Other income (expense), net ............... 3.7 2.6 3.6 2.4
----- ----- ----- ------
Income before income taxes ................ (29.3) 25.8 (25.2) 23.4
Income tax provision ...................... -- 10.2 0.0 9.3
----- ----- ----- ------
Net income ................................ (29.3)% 15.6% (25.2)% 14.1%
====== ===== ====== =====
(a) Non-recurring charges of $2.7 million for the three months ended September
30, 1999 relate to the impairment of a note receivable. Non-recurring charges of
$4.0 million for the nine months ended September 30, 1999 relate to severance
obligations of $1.3 million to certain management personnel, which will be paidmore difficult to acquire a
controlling interest in future periods and a charge of $2.7 million for the impairment of a note
receivable. Non-recurring charges of $227,000 for the nine months ended
September 30, 1998 relate to the acquisition of ProSoft.
-16-
TOTAL REVENUE
Total revenue decreased by 30.6% from $11.3 million for the three months
ended September 30, 1998 to $7.9 million for the three months ended September
30, 1999. Total revenue decreased 33.1% from $32.7 million to $21.9 million
for the nine months ended September 30, 1999. Sales through one distributor
accounted for 21.4%, 16.2%, 23.2%, and 17.4% of the Company's total revenue
for the three months ended September 30, 1999 and 1998, and for the nine
months ended September 30, 1999 and 1998, respectively. Sales to CSC
accounted for 22.1% and 25.2% of the Company's total revenue for the three
and nine months ended September 30, 1998. Such revenue included $2.5 million
and $8.2 million, respectively of Visual Testbench license and maintenance
sales made pursuant to an OEM agreement with CSC. As of December 31, 1998,
CSC had fully satisfied its obligation to purchase Visual Testbench Licenses
pursuant to the OEM agreement. The Company did not receive any revenue from
CSC for the nine months ended September 30, 1999 and does not expect to
receive revenue in the future from CSC for the sale of Visual Testbench.
Revenue generated pursuant to another OEM agreement accounted for 13.8%,
12.2%, 13.0%, and 8.9% of the Company's total revenue for the three months
ended September 30, 1999 and 1998 and for the nine months ended September 30,
1999 and 1998, respectively. Additionally, one customer accounted for 10.2%
of total revenue for the three months ended September 30, 1999.
REVENUE
PRODUCT LICENSE REVENUE
The Company's product licenses revenue is derived from license fees from the
Company's HLDA products. Product licenses revenue decreased by 44.0% from $8.7
million for the three months ended September 30, 1998 to $4.9 million for the
three months ended September 30, 1999. Product licenses revenue decreased by
47.1% from $25.5 million for the nine months ended September 30, 1998 to $13.5
million for the nine months ended September 30, 1999. The decrease in product
licenses revenue was primarily attributable to the Company ceasing to receive
revenue from CSC pursuant to the OEM Agreement. The decrease was also
attributable to decreased sales as a result of the Company hiring fewer sales
and marketing personnel than planned in the fourth quarter of 1998 and the first
two quarters of 1999 and attrition in the existing sales force during the first
two quarters of 1999.
MAINTENANCE AND SERVICES REVENUE
The Company's maintenance and services revenue is derived from maintenance
contracts related to the Company's HLDA products and training classes offered to
purchasers of the Company's software products. Maintenance and services revenue
increased 18.5% from $2.5 million for the three months ended September 30, 1998
to $3.0 million for the three months ended September 30, 1999. Maintenance and
services revenue increased 20.9% from $6.9 million for the nine months ended
September 30, 1998 to $8.4 million for the nine months ended September 30, 1999.
This increase is primarily attributable to maintenance contract renewals by the
installed base of HLDA customers, and to a lesser extent from non-recurring
engineering services provided to one customer, which is not expected to reoccur.
OTHER REVENUE
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. Other revenue decreased 100% from
$91,000 for the three months ended September 30, 1998 to $0 for the three months
ended September 30, 1999. Other revenue decreased 100% from $274,000 for the
nine months ended September 30, 1998 to $0 for the nine months ended September
30, 1999. Although the Company renewed a significant distribution agreement the
renewal did not include additional fees. As a result, the distribution rights
fees paid at the inception of the agreement and amortized into revenue at
$91,000 each quarter over the agreement period were no longer a source of other
revenue as of December 31, 1998.
-17-
COST OF REVENUE
COST OF PRODUCT LICENSES REVENUE
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs. The cost of product
licenses revenue increased 21.2% from $179,000 for the three months ended
September 30, 1998 to $217,000 for the three months ended September 30, 1999.
The increase is primarily due to increases in royalty expense and the provision
for impairment of certain inventory. The cost of product licenses revenue
decreased 2.9% from $490,000 for the nine months ended September 30, 1998 to
$476,000 for the nine months ended September 30, 1999. As a percentage of
product licenses revenue, the cost of product licenses revenue increased from
2.1% of product license revenue for the three months ended September 30, 1998 to
4.5% of product license revenue for the three months ended September 30, 1999.
As a percentage of product licenses revenue, the cost of product licenses
revenue increased from 1.9% of product license revenue for the nine months ended
September 30, 1998 to 3.5% of product license revenue for the nine months ended
September 30, 1999. This increase as a percentage of product license revenue was
primarily due to fixed costs spread over decreased product license revenue.
COST OF MAINTENANCE AND SERVICES REVENUE
Cost of maintenance and services revenue, which consists primarily of personnel
costs for customer support and training classes offered to purchasers of the
Company's products, increased 0.4% from $269,000 for the three months ended
September 30, 1998 to $270,000 for the three months ended September 30, 1999.
Cost of maintenance and services revenue increased 13.3% from $773,000 for the
nine months ended September 30, 1998 to $876,000 for the nine months ended
September 30, 1999. As a percentage of maintenance and services revenue, the
cost of maintenance and services revenue decreased from 10.7% for the three
months ended September 30, 1998 to 9.1% for the three months ended September 30,
1999. As a percentage of maintenance and services revenue, the cost of
maintenance and services revenue decreased from 11.2% for the nine months ended
September 30, 1998 to 10.5% for the nine months ended September 30, 1999.
AMORTIZATION OF PURCHASED TECHNOLOGIES
The Company recorded $2.4 million of purchased technologies (intangibles) as
part of the SimTech acquisition which are being amortized to cost of revenue on
a straight-line basis over periods ranging from two to five years beginning
September 9, 1997. The Company expensed approximately $140,000 and $165,000 for
the three months ended September 30, 1999 and 1998, respectively. The Company
expensed approximately $472,000 and $496,000 for the nine months ended September
30, 1999 and 1998, respectively.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and operations
support costs of developing new products and enhancements to existing products
and performing quality assurance activities. Research and development expenses
decreased 14.9% from $3.0 million for the three months ended September 30, 1998
to $2.6 million for the three months ended September 30, 1999. Research and
development expenses decreased 13.3% from $8.9 million for the nine months ended
September 30, 1998 to $7.7 million for the nine months ended September 30, 1999.
Research and development expenses for the three and nine months ended September
30, 1998 included $550,000 and $1,650,000, respectively, of compensation expense
recorded in connection with the Company's acquisition of SimTech in September
1997.
-18-
The Company recorded a total of $4.4 million of compensation expense for shares
issued as part of the acquisition which were contingent upon continued
employment and were being expensed as the employment obligation lapsed. This
expense was being recorded on a straight-line basis over the two year employment
obligation period. However, in December 1998, the employment agreements to which
this contingent compensation related were amended to eliminate the continued
employment obligation and at that time, the remaining unrecorded compensation
was expensed. Excluding the $550,000 compensation expense recorded in the three
months ended September 30, 1998, research and development expense increased 4.0%
from $2.5 million for the three months ended September 30, 1998 to $2.6 million
for the same period in 1999. Excluding the $1,650,000 compensation expense
recorded in the nine months ended September 30, 1998, research and development
expense increased 6.3% from $7.3 million for the nine months ended September 30,
1998 to $7.7 million for the same period in 1999.
As a percentage of total revenue, research and development expenses increased
from 26.7% and 27.3% for the three and nine months ended September 30, 1998,
respectively, to 32.7% and 35.4% for the three and nine months ended September
30, 1999, respectively. The increase in research and development expenses as a
percent of revenue is the result of a decrease in total revenues for the three
and nine months ended September 30, 1999. The Company continues to believe that
significant investment in research and development is required to remain
competitive in its markets, and the Company therefore anticipates that research
and development expense will increase in absolute dollars in future periods, but
may vary as a percent of revenue.(2)
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions and
promotional costs, decreased 19.9% from $3.2 million for the three months ended
September 30, 1998 to $2.6 million for the three months ended September 30,
1999. Sales and marketing expenses decreased 9.1% from $9.5 million for the nine
months ended September 30, 1998 to $8.7 million for the nine months ended
September 30, 1999. This decrease was primarily attributable to the Company
hiring fewer sales and marketing personnel than planned in the fourth quarter of
1998 and the first two quarters of 1999 and attrition in the existing sales
force during the first quarter of 1999.
As a percentage of total revenue, sales and marketing expenses increased from
28.6% for the three months ended September 30, 1998 to 33.0% for the three
months ended September 30, 1999. As a percentage of total revenue, sales and
marketing expenses increased from 29.2% for the nine months ended September 30,
1998 to 39.7% for the nine months ended September 30, 1999. The increase as a
percentage of total revenue was primarily attributable to the decrease in total
revenue for 1999. In the future, the Company expects sales and marketing
expenses to continue to increase in absolute dollars, in part due to the hiring
of additional sales and marketing personnel.(2)
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate, finance,
human resource, information services, administrative, and legal and accounting
expenses of the Company. General and administrative expenses increased 30.6%
from $1.1 million for the three months ended September 30, 1998, to $1.5 million
for the three months ended September 30, 1999. General and administrative
expenses increased 22.7% from $3.3 million for the nine months ended September
30, 1998, to $4.0 million for the nine months ended September 30, 1999. As a
percentage of total revenue, general and administrative expenses increased from
9.9% for the three months ended September 30, 1998 to 18.7% for the three months
ended September 30, 1999. As a percentage of total revenue, general and
administrative expenses increased from 10.0% for the nine months ended September
30, 1998 to 18.3% for the nine months ended September 30, 1999. The
- -------------------------
(2) This sentence contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 19 for a
discussion of factors that could affect future performance.
-19-
increase in general and administrative expenses as a percentage of total
revenue and in actual dollars was primarily attributable to the addition of
four positions, the cost of the CEO search, a legal reserve for a pending
settlement, and a decrease in total revenue for the three and nine months
ended September 30, 1999.
AMORTIZATION OF INTANGIBLES AND GOODWILL
The Company recorded $4.1 million in intangibles (excluding $2.4 million of
purchased technologies) and $3.8 million of goodwill as part of the SimTech
acquisition which are being amortized to expense on a straight-line basis over
periods ranging from two to five years beginning September 9, 1997. The Company
expensed approximately $529,000 and $698,000 for the three months ended
September 30, 1999 and 1998, respectively. The Company expensed approximately
$1.9 million and $2.1 million for the nine months ended September 30, 1999 and
1998, respectively.
NON-RECURRING CHARGES
During the nine months ended September 30, 1999, the Company recorded $1.3
million in non-recurring charges related to severance obligations for certain
management personnel. During the same period, the Company also recorded $2.7
million in provision for impairment of a loan receivable. As of September 30,
1999, the Company has loaned $2.7 million to an independent software company
pursuant to a secured loan agreement entered into July 1997. During the three
months ended September 30, 1999 the Company terminated its agreement with the
independent software company. This decision by the Company impaired the
viability of the independent software company as a going concern due to a
lack of financial support. Based on this development, the Company recorded
$2.7 million in provision for the impairment of the note receivable. For the
three months ended September 30, 1998 the Company incurred one-time charges
of $227,000 related to the acquisition of ProSoft.
OTHER INCOME, NET
Other income consists of interest income associated with available cash
balances, gains or losses from the sale of property and equipment, the Company's
pro rata share of the earnings and losses of SDA and ADC and foreign exchange
rate differences resulting from paying operating expenses of foreign operations
in the local currency. Other income was approximately $293,000, $298,000,
$783,000, and $790,000 for the three months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1999 and 1998, respectively.
INCOME TAX PROVISION
The income tax provision decreased from $1.2 million for the three months ended
September 30, 1998 to $0 for the three months ended September 30, 1999. The
income tax provision decreased from $3.0 million for the nine months ended
September 30, 1998 to $0 for the nine months ended September 30, 1999. The 1998
income tax provision reflects the Company's estimated consolidated tax rate for
federal, state and foreign taxes of approximately 40% of taxable income due to
the non-deductibility of amortization and compensation expense related to the
SimTech acquisition. The Company's estimated effective rate for the year ending
December 31, 1999 is 0%, as the Company does not expect to generate either
taxable income or net operating losses in 1999.
-20-
EFFECTIVE CORPORATE TAX RATES
Prior to 1996, the Company had experienced losses for income tax purposes in the
United States. As of December 31, 1998, the Company has recognized the benefit
of its U.S. net operating loss carryforwards and tax credit carryforwards in
their financial statements.
The Company's Israeli operations are performed entirely by Summit Design
(EDA) Ltd., which is a separate taxable Israeli entity. The Company's
existing Israeli production facility has been granted "Approved Enterprise"
status under the Israeli Investment Law, which entitles the Company to
reductions in the tax rate normally applicable to Israeli companies with
respect to the income generated by its "Approved Enterprise" programs. In
particular, the tax holiday covers the seven year period beginning the first
year in which Summit Design (EDA) Ltd. generates taxable income from its
"Approved Enterprise" (after using any available NOLs), provided that such
benefits will terminate in 2006 regardless of whether the seven year period
has expired. The tax holiday provides that, during such seven year periods, a
portion of the Company's taxable income from its Israeli operations will be
taxed at favorable tax rates. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to have favorable tax status in Israel.
Management of the Company intends to permanently reinvest earnings of the
Israeli subsidiary outside the U.S. If such earnings were remitted to the
U.S., additional U.S. federal and foreign taxes may be due.
The Company had foreign income tax net operating losses of approximately $5.6
million at December 31, 1998. These foreign losses were generated in Israel over
several years and have not yet received final assessment from the Israeli
government. Consequently, management is uncertain as to the availability of a
substantial portion of such foreign loss carryforwards.
The Company is also subject to risk that United States and foreign tax laws and
rates may change in a future period or periods, and that any such changes may
materially adversely affect the Company's tax rate. Any increase in the
Company's effective tax rate, or variations in the effective tax rate from
period to period, could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through a public offering in
1996, the private placement of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from operations. As of September 30, 1999,
the Company had approximately $27.0 million in cash and cash equivalents.
As of September 30, 1999, the Company has loaned $2.7 million to an
independent software company pursuant to a secured loan agreement entered
into during July 1997. Borrowings under the agreement bear interest at prime
plus 2%. During the three months ended September 30, 1999, the Company
terminated its relationship with the independent software company. This
decision impaired the viability of the independent software company as a
going concern due to lack of financial support. The Company recorded $2.7
million in provision for impairment of the note receivable.
As of September 30, 1999, the Company had working capital of approximately $23.8
million.
For the nine months ended September 30, 1999, net cash generated by operating
activities was approximately $1.0 million. For the nine months ended
September 30, 1998, net cash generated by operating activities was
approximately $8.6 million. Cash generated by operations for the nine months
ended September 30, 1999 resulted primarily from a net loss offset by
depreciation, amortization, provision for loan impairment, decreases in
accounts payable and collections of accounts receivable.
Net cash used in investing activities was approximately $1.9 million and $3.4
million for the nine months ended September 30, 1999 and 1998, respectively. Net
cash used in investing activities was related to the
-21-
acquisition of furniture and equipment and a loan to an independent software
company for the nine months ended September 30, 1999 and 1998. Net cash used in
investing activities also included loans to a joint venture for the nine months
ended September 30, 1998.
Net cash generated by financing activities was approximately $134,000 for the
nine months ended September 30, 1999. Net cash used by financing activities was
approximately $465,000 for the nine months ended September 30, 1998. For the
nine months ended September 30, 1999, financing activity cash was primarily
generated by proceeds from the issuance of common stock through stock options
plans, offset by payments of debt obligations and capital leases. For the nine
months ended September 30, 1998 the use of cash was primarily from repurchasing
162,500 shares of the Company's common stock, less proceeds from the issuance of
common stock and a tax benefit from option exercises.
The Company presently believes that its current cash and cash equivalents will
satisfy the Company's anticipated working capital and other cash requirements
through the Company's 2000 fiscal year. (2)
YEAR 2000
The Year 2000 issue results from computer programs written using two, rather
than four, digits to define the applicable year. These computer programs may
recognize a date using "00" as the year 1900 instead of 2000 and cause system
failures or miscalculations, material disruptions of business operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business operations. If the Company,
its significant customers, suppliers, service providers and other related third
parties fail to take the necessary steps to correct or replace these problematic
computer programs, the Year 2000 issue could have a material adverse effect on
the Company. The Company cannot, however, quantify the impact at this time.
The Company has upgraded or replaced the software packages underlying its
financial, production, communication, desktop and other systems, as
appropriate, to address the Year 2000 issue. It has also performed an
in-depth analysis of all of its products and has determined that all
significant products are Year 2000 compliant. Moreover, the Company has
contacted all major external third parties that provide products and services
to the Company to assess their readiness for the Year 2000.
Management believes it has completed the review and assessment phase of affected
systems within the Company and those which are external to the Company. This
assessment indicated that most of the Company's significant internal information
systems could be affected by the Year 2000 issue, and that the Company could be
negatively impacted by non-compliance of related third parties.
The Company's products are subject to periodic upgrades. These upgrades are
typically released to end-users once a year. Management believes its products
are Year 2000 compliant, and will continue to test upgrades for Year 2000
compliance.
The Company has queried its important suppliers and service providers and is
presently obtaining assurances and verification from those selected third
parties that they are or will be Year 2000 compliant. The inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company. The effects of non-compliance by third parties where no system
interface exists is not determinable.
The Company is currently in the process of creating contingency plans for its
internal information technology systems and products and in relation to third
parties with whom it has material relationships. These contingency plans are
expected to be in place during November 1999.
- --------------------
(2) This sentence contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 22 for a
discussion of factors that could affect future performance.
-22-
Concurrent with performing the above steps, the Company has made certain
investments in systems, applications and products to address Year 2000
issues. The Company has not tracked internal resources dedicated to the
resolution of the Year 2000 issue and, therefore, is unable to quantify
internal costs incurred to date that are associated with the Year 2000 issue.
The Company has, however, hired external consultants to resolve internal
information system issues related to the resolution of the Year 2000 issue.
Identifiable expenditures for these consultants were approximately $250,000
through September 30, 1999. Expenditures to resolve Year 2000 issues have not
been, nor are they expected to be, material.
The Company's plans to complete the Year 2000 modifications are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events including continued availability of certain resources, and
other factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences included the availability and
cost of personnel trained in this area, and the ability to locate and correct
all relevant computer codes.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
SUMMIT'SInnoveda.
INNOVEDA'S QUARTERLY RESULTS WILL LIKELY FLUCTUATE AND AFFECT THE MARKET PRICE
OF SUMMIT'SINNOVEDA'S COMMON STOCK.
VARIOUS FACTORS WILL CAUSE SUMMIT'SINNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE.
Summit'sInnoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantly in certain quarters. These fluctuations
resulted from several factors, including, among others:
- - the size and timing of orders;
- -
large one-time charges incurred as a result of an acquisition or
consolidation;
- - seasonal factors;
- - the impairment of a note receivable
- -
the rate of acceptance of new products;
- - product, customer and channel mix;
- - lengthy sales cycles; and
- --15-
level of sales and marketing staff.
-23-
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
- - corporate acquisitions and consolidations and the integration of
acquired entities and any resulting large one-time charges;
- - the timing of new product announcements and introductions by SummitInnoveda
and Summit'sInnoveda's competitors;
- -
the rescheduling or cancellation of customer orders;
- -
the ability to continue to develop and introduce new products and
product enhancements on a timely basis;
- - the level of competition;
- -
purchasing and payment patterns, pricing policies of competitors;
- - product quality issues;
- - currency fluctuations; and
- - general economic conditions.
SUMMIT'SINNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.
Summit'sInnoveda's revenue is difficult to forecast for several reasons. SummitInnoveda
operates with little product backlog because SummitInnoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, SummitInnoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Summit'sInnoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. To the extent thatIf
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Summit'sInnoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, SummitInnoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
-24-
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
SummitInnoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Summit'sInnoveda's
expectations as to future revenue. Because a high percentage of Summit'sInnoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Summit'sInnoveda's operating
results.
SUMMIT'S-16-
INNOVEDA'S OPERATING RESULTS WILL LIKELY FLUCTUATE.
SummitFLUCTUATE, AND FLUCTUATION MAY
ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda believes that its quarterly revenue, expenses and operating results
will likely vary significantly from quarter to quarter,quarter. Innoveda also believes
that period-to-period comparisons of Summit'sInnoveda's operating results are not
necessarily meaningful and
that, asmeaningful. As a result, you should not rely on these comparisons as
indications of Summit'sInnoveda's future performance. Additionally, as of December 31, 1998, Credence
Systems Corporation, or CSC, one of Summit's larger customers, had satisfied
its obligation to purchase a minimum number of Visual Testbench licenses
pursuant to an OEM agreement entered into in July 1997, and Summit does not
expect to receive any additional revenue from sales of Visual Testbench to
CSC. Summit will need to replace this revenue, and the failure to replace
this revenue would have a material adverse affect on Summit's operating
results. In addition, SummitInnoveda operates
with high gross margins, and a downturn in revenue has had a significant impact
on income from operations and net income. Summit's results of operations fell
below investors' and market makers' expectations for the quarter ended September
30, 1999 and Innoveda's results of operations could be below investors' and
market makers' expectation in other quarters, which could have a material
adverse effect on the market price of Summit'sInnoveda's common stock.
SUMMIT DEPENDSIF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON
ITS HLDA PRODUCTS BECAUSE THESE PRODUCTS MAKE UP MOST OF ITS
REVENUE.
Summit's future success depends primarily uponWHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda intends to focus on the broad market acceptancefield programmable gate array, printed circuit
board and system-level design automation markets while most major competitors
focus their resources on the application-specific integrated circuits and
integrated circuit design automation markets. Innoveda has adopted this focus
because it believes that the increased complexity of Summit's existingapplication-specific
integrated circuits and future HLDA products. Summit commercially shipped its
first HLDAintegrated circuit designs, and the resulting increase
in design time, will cause electronic product Visual HDL for VHDL, inmanufacturers to differentiate
their products at the first quartersystem level. If the system design portion of 1994. For
the
years ended December 31, 1998, 1997 and 1996, revenue from HLDA products
and related maintenance contracts represented 100%, 88.8%, and 63.9%,
respectively, of Summit's total revenue. As a result, factors adversely
affecting sales of these products, including increased competition, inability
to successfully introduce enhanced or improved versions of these products,
product quality issues and technological change,electronic design automation industry does not grow, it could have a material
adverse effect on Summit's business, financial condition and results of
operations.
-25-
SUMMIT MAY NOT GAIN BROAD MARKET ACCEPTANCE OF HLDA PRODUCTS, AND FAILURE TO DO
SO WILL MATERIALLY ADVERSELY AFFECT SUMMIT'S BUSINESS.
Summit's HLDA products incorporate certain unique design methodologies and
thus represent a departure from industry standards for design creation and
verification. Summit believes that broad market acceptance of Summit's HLDA
products will depend on several factors, including, among others:
- - the ability to significantly enhance design productivity;
- - ease of use;
- - interoperability with existing electronic design automation tools;
- - price; and
- - the customer's assessment of Summit's financial results and Summit's
technical, managerial, service and support expertise.
-26-
Summit also depends on its distributors to assist it in gaining market
acceptance of its products. These distributors may not give sufficient
priority to marketing Summit's products. They may even discontinue offering
Summit's products. In addition, Summit's HLDA products may not achieve broad
market acceptance. A decline in the demand for, or the failure to achieve
broad market acceptance of, Summit's HLDA products will have a material
adverse effect on Summit'sInnoveda's business, financial condition, results of
operations or cash flows.
Although demand for HLDA products has increased in recent years, the market
for HLDA products is still emerging. The market may not continue to grow.
Even if it does grow, businesses may not continue to purchase Summit's HLDA
products. If the market for HLDA products fails to grow or grows more slowly
than Summit currently anticipates, it will materially adversely affect
Summit's business, financial condition, results of operations or cash flows.
Traditionally, electronic design automation customers have been risk averse
in accepting new design methodologies. Because many of Summit's tools use new
design methodologies, this risk aversion on the part of potential customers
presents an ongoing marketing and sales challenge and makes the introduction and
acceptance of new products unpredictable.
SUMMITINNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and SummitInnoveda
expects competition to increase as other electronic design automation companies
introduce HLDA products. In the HLDAelectronic design automation market, SummitInnoveda
principally competes with Mentor Graphics and Cadence and a number of smaller
firms. Indirectly, SummitInnoveda also competes with other firms that offer
alternatives to HLDA.alternative products. These other firms could also offer more directly
competitive products in the future. Some of these companies have significantly
greater financial, technical and marketing resources and larger installed
customer bases than Summit.Innoveda. Some of Summit'sInnoveda's current and future competitors
offer a more complete range of electronic design automation products. They may
also distribute products that directly compete with Summit's
HLDAInnoveda's products by
selling such products together with their core product line. In addition,
Summit'sInnoveda's products perform a variety of functions, and its existing and future
competitors are offering, or may offer in the future, some of the same functions
as separate products or discrete point solutions. For example, some companies
currently offer design entry products without simulators. Such
competitionCompetition may cause
SummitInnoveda to offer point solutions instead of, or in addition to, Summit'sInnoveda's
current software products. SummitInnoveda would have to price such point solutions
lower than Summit'sInnoveda's current product offerings, causing Summit'sInnoveda's average
selling prices to decrease. This, in turn, could have a material adverse effect
on Summit'sInnoveda's business, financial condition, results of operations, or cash
flows.
-27-
SummitInnoveda competes on the basis of various factors including, among others:
- - product capabilities;
- - product performance;
- - price;
- --17-
support of industry standards;
- - ease of use;
- -
first to market; and
- -
customer technical support and service.
SummitInnoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Summit'sInnoveda's competitors may offer
HLDA
products with functionality sought by Summit'sInnoveda's prospective customers and which
differs from those SummitInnoveda offers. In addition, some competitors may achieve a
marketing advantage by establishing formal alliances with other electronic
design automation vendors. Further, the electronic design automation industry in
general has experienced significant consolidation in recent years, and the
acquisition of one of Summit'sInnoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor.
SummitInnoveda may not compete successfully against current and future competitors,
and competitive pressures may have a material adverse effect on Summit'sInnoveda's
business, financial condition, results of operations, or cash flows. Summit'sInnoveda's
current and future competitors may develop products comparable or superior to
Summit'sInnoveda's or more quickly adapt new technologies, evolving industry trends or
customer requirements. Increased competition could result in price reductions,
reduced margins and loss of market share, all of which could have a material
adverse effect on Summit'sInnoveda's business, financial condition, results of
operations or cash flows.
-28-
SUMMIT DEPENDSINNOVEDA'S DEPENDENCE ON THE ELECTRONICSELECTRONIC INDUSTRY MARKETMAKES IT VULNERABLE TO GENERATE DEMAND FOR ITS
PRODUCTS.GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves
rapid technological change,change;
short product life cycles,cycles;
fluctuations in manufacturing capacitycapacity; and
pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
often falls, and the number of design projects often decreases. Because
Summit'sInnoveda's sales depend upon capital spending trends and new design projects,
negative factors affecting the electronics industry could have a material
adverse effect on Summit'sInnoveda's business, financial condition, results of
operations, or cash flows. A number of electronics companies, including
Summit'sInnoveda's customers, have experienced a slowdown in their businesses.
Summit's future operating results may reflect substantial
fluctuations from period to period as a consequence of these industry
patterns, general economic conditions affecting the timing of orders from
customers and other factors.
SUMMITINNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND MUST GAIN
ACCESS TO THE PRODUCTS OFTHAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES FOR TIMELY DEVELOPMENT.PARTIES' REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Summit'sInnoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, particularly
simulation and synthesis products, SummitInnoveda must have timely access
to third party software to perform development and testing of products. Although
SummitInnoveda has established relationships with a variety of
-18-
electronic design automation vendors to gain early access to new product
information, any of these parties may terminate these relationships with limited
notice. In addition, these relationships are with companies that are Summit'sInnoveda's
current or potential future competitors, including Synopsys, Mentor Graphics and
Cadence. If any of these relationships terminate and SummitInnoveda were unable to
obtain, in a timely manner, information regarding modifications of third party
products, SummitInnoveda would not have the ability to modify its software products to
interoperate with these third party products. As a result, SummitInnoveda could
experience a significant increase in development costs, the development process
would take longer, product introductions would be delayed, and Summit'sInnoveda's
business, financial condition, results of operations or cash flows could be
materially adversely affected.
SUMMIT MUSTIF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS.STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the emergence
of new industry standards can render existing products obsolete and
unmarketable. In addition, customers in the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Summit'sInnoveda's future success will depend upon its ability to
enhance its current products, develop and introduce new products that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of Summit'sInnoveda's customers. SummitInnoveda may not
succeed in developing and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products. Summit'sInnoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
If Summit cannot, for
technological or other reasons, develop and introduce products in a timely
manner in response to changing market conditions, industry standards or other
customer requirements, particularly if Summit has pre-announced the product
releases, its business, financial condition, results of operations or cash
flows will be materially adversely affected.
-29-
SUMMIT'SINNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Summit'sInnoveda's software products may contain errors that may not be detected until
late in the products' life cycles. SummitInnoveda has in the past discovered software
errors in certain of its products and has experienced delays in shipment of
products during the period required to correct these errors. Despite testing by
SummitInnoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Summit'sInnoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
-30-
SUMMITINNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING SUMMIT'S PRODUCTS.
SummitINNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors
fails, Innoveda's business may suffer. Innoveda relies on distributors for
licensing and support of Summit'sInnoveda's products outside of North America. Approximately 42.8%, 23.4%, 23.1%, 28.7% and 45.6%
of Summit's revenue forInnoveda
depends on the nine months ended September 30, 1999 and 1998 and
for the years ended December 31, 1998, 1997 and 1996, respectively, came from
sales made through distributors. Effective April 1, 1996, Summit entered into
a joint venture with Anam pursuant to which the joint venture corporation,
Summit Asia, acquired exclusive rights to sell, distribute and support all of
Summit's products in the Asia Pacific region, excluding Japan. In April 1998,
the joint venture corporation, Summit Asia, which is headquartered in Korea,
was renamed Asia Design Corporation, or ADC. In May 1998, Summit exchanged a
portion of its ownership in ADC for ownership in another company located in
Hong Kong which was renamed Summit Design Asia, Ltd., or SDA. SDA also has an
equity investment in ADC. In June 1998, Summit and Anam each loaned SDA
$750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive
rights to sell, distribute and support Summit's products in the Asia Pacific
region, excluding Japan. SDA granted distribution rights to Summit's products
to ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA
canceled ADC's distribution rights in all areas except Korea. In April 1999,
SDA granted non-exclusive distribution rights to Semiconductor Technologies
Australia for the Asia Pacific region, excluding Japan and Korea. This
restructuring, however, may not result in SDA or ADC becoming profitable.
Revenue attributable to sales in the Asia Pacific region, excluding Japan,
may not increase either. In addition, in the first quarter of 1996, Summit
entered into a three-year, exclusive distribution agreement for Summit's HLDA
products in Japan with Seiko. The agreement is renewable for successive
five-year terms by mutual agreement of Summit and Seiko and is terminable by
either party for breach. The agreement was renewed for an additional
five-year term which began in February 1999. If Seiko fails to meet specified
quotas for two or more quarterly periods, Summit can terminate the
exclusivity, subject to Seiko's right to pay a specified fee to maintain
exclusivity. Sales through Seiko accounted for 23.2%, 17.4%, 17.8%, 14.5%,
and 15.1%, of Summit's total revenue for the nine months ended September 30,
1999 and 1998 and for the years ended December 31, 1998, 1997, and 1996,
respectively. In June 1999, Summit lowered Seiko's specified quotas due to
the adverse economic conditions in the Asia Pacific Region. As a result,
Summit expects sales through Seiko to decrease for at least the current and
following two quarters.
Summit's relationships with Seiko, SDA and ADC may not effectivelyits distributors to maintain or increase
sales relative to the levels experienced prior to such
relationships. Summit also has independent distributors in Europe and depends
on the continued viability and financial stability of these distributors.sales. Since Summit'sInnoveda's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. In addition, Seiko, SDAAccordingly, Innoveda depends on the continued viability and
ADC, as well as Summit's otherfinancial stability of these distributors.
-19-
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's
distributors may offer products of several different companies, including
Summit'sInnoveda's competitors. Summit'sInnoveda's current distributors may not continue to
market or service and support Summit'sInnoveda's products effectively. Any distributor
may discontinue to sell Summit'sInnoveda's products or devote its resources to products
of other companies. The loss of, or a significant reduction in, revenue from
Summit'sInnoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
-31-
SUMMITSEIKO. Seiko, a distributor in Asia, accounted for about 23% of
Summit's revenue during the third quarter of 1999. In June 1999, Summit lowered
Seiko's first quarter 2000 product quota in recognition of the adverse economic
conditions in the Asia Pacific Region. In December 1999, Summit agreed to waive
Seiko's first quarter 2000 product quota requirements to maintain distribution
exclusivity. As a result, Innoveda expects sales through Seiko to decrease for
at least the current and following two quarters and revenue attributable to
sales in the Asia Pacific region to decrease.
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN EUROPE AND THE ASIA PACIFIC REGION.
Approximately 46.1%, 36.3%, 35.8%, 33.2%, and 49.8% of Summit'sInternational revenue for
the nine months ended September 30, 1999 and 1998 and for the years ended
December 31, 1998, 1997 and 1996, respectively, were attributable to sales
made outside the United States, which includes the Asia Pacific region and
Europe. Approximately, 26.5%, 23.4%, 21.9%, 22.3%, and 34.3% of Summit's
revenue for the nine months ended September 30, 1999 and 1998 and for the
years ended December 31, 1998, 1997 and 1996, respectively, were attributable
to sales made in the Asia Pacific region and approximately 19.7%, 12.9%,
13.9%, 11.4% and 15.5% of Summit's revenue for the nine months ended
September 30, 1999 and 1998 and for the years ended December 31, 1998, 1997
and 1996, respectively, were attributable to sales made in Europe. Summit
expects that international revenue will continue to representrepresents a significant portion of itsInnoveda's total
revenue. Summit'srevenue and Innoveda expects this trend to continue. Innoveda's international
revenue is currently denominated in U.S. dollars. As a result, increases in the
value of the U.S. dollar relative to foreign currencies could make its products
more expensive and, therefore, potentially less competitive in those markets.
SummitInnoveda pays the expenses of its international operations in local currencies
and does not engage in hedging transactions with respect to such obligations.
International sales and operations involve numerous risks, including, among
others:
- - tariff regulations and other trade barriers;
- -
requirements for licenses, particularly with respect to the export of
certain technologies;
- - collectability of accounts receivable;
- -
changes in regulatory requirements; and
- -
difficulties in staffing and managing foreign operations and extended
payment terms.
-32-
These factors may have a material adverse effect on Summit'sInnoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions. Demand for and sales of Summit'sInnoveda's products in the Asia Pacific
region have decreased, and these adverse economic conditions may worsen. Demand
for and sales of Summit'sInnoveda's products in this region may further decrease.
In order to successfully expand international sales, SummitInnoveda may need to
establish additional foreign operations, hire additional personnel and recruit
additional international distributors. This will require significant management
attention and financial resources and could adversely affect Summit'sInnoveda's
operating margins. In addition, to the extent that SummitInnoveda cannot effect these
additions in a timely manner, SummitInnoveda can only generate limited growth in
international sales, if any. SummitInnoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
SUMMITINNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Summit'sInnoveda's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit additional
employees and train and manage current and future employees. SummitInnoveda expects
any growth to place a significant strain on its operational resources and
-20-
systems. Failure to effectively manage any growth would have a material adverse
effect on Summit'sInnoveda's business, financial condition, results of operations or
cash flows.
Summit has completed a series of acquisitions, including the acquisition of
TriQuest in February 1997, SimTech in September 1997, and ProSoft in June
1998 andInnoveda regularly evaluates acquisition opportunities. Summit'sInnoveda's future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, and large one-time
charges which could materially adversely affect Summit'sInnoveda's results of
operations. Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern, risks
of entering markets in which SummitInnoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Summit'sInnoveda's management has
had limited experience in assimilating acquired organizations and products into
its operations. SummitInnoveda may not integrate successfully the operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure to do so could have a material adverse affect on its
results of operations.
-33-
SUMMITINNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL, AND CURRENCY FLUCTUATION AND COORDINATION RISKS.
Summit'sPOLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL products are located in Israel.
Economic, political and military conditions may affect Summit'sInnoveda's operations in
that country. Hostilities involving Israel, for example, could materially
adversely affect Summit'sInnoveda's business, financial condition and results of
operations. Restrictions on Summit'sInnoveda's ability to manufacture or transfer
outside of Israel any technology developed under research and development grants
from the government of Israel further heightens the impact. See "Summit"Innoveda relies
on Israeli research, development and marketing grants for certain benefits."
CURRENCY RISKS. In addition, while all of Summit'sInnoveda's sales are
denominated in U.S. dollars, a portion of its annual costs and expenses in
Israel are paid in Israeli currency. These costs and expenses
were approximately $5.2, $4.7 and $4.3 million in 1998, 1997 and 1996,
respectively. Payment in Israeli currency subjects
SummitInnoveda to foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation of, for example, approximately 9%, 7% and 11% during 1998, 1997 and 1996,
respectively. Summit's primary expense
in Israeli currency is employee
salaries for research and development activities.1998. As a result, an increase in the value of Israeli currency in comparison
to the U.S. dollar could increase the cost of research and development expenses
and general and administrative expenses.
Currency fluctuations, changes in the rate of inflation in Israel
or any of the other aforementioned factors may have a material adverse effect
on Summit's business, financial condition, results of operations, or cash
flows.COORDINATION RISKS. In addition, coordination with and management of
the Israeli operations requires SummitInnoveda to address differences in culture,
regulations and time zones. Failure to successfully address these differences
could disrupt Summit'sInnoveda's operations.
-34-
SUMMITINNOVEDA CURRENTLY ENJOYS CERTAIN TAX BENEFITS UNDER AN ISRAELI "APPROVED
ENTERPRISE" STATUS WHICH IT MAY NOT ENJOY IN THE FUTURE AND WHICH IN TURN MAY
ADVERSELY AFFECT SUMMIT'SINNOVEDA'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Israeli government has granted Summit'sInnoveda's Israeli production facility the
status of an "Approved Enterprise" under the Israeli Investment Law for the
Encouragement of Capital Investments, 1959. Taxable income of a company derived
from an "Approved Enterprise" is eligible for certain tax benefits, including
significant income tax rate reductions for up to seven years following the first
year in which the "Approved Enterprise" has Israeli taxable income (after using
any available net operating losses). The period
of benefits cannot extend beyond 12 years from the year of commencement of
operations or 14 years from the year in which approval was granted, whichever
is earlier. The tax benefits derived from a certificate of approval for an
"Approved Enterprise" relate only subject to taxable income attributable to such
"Approved Enterprise" and are conditioned upon fulfillment of the conditions
stipulated by the Israeli Investment Law, the related regulations and the
criteria set forth in the certificate of approval.specified conditions. In the
event of Summit'sInnoveda's failure to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and SummitInnoveda would have to refund the
amount of the canceled benefits, adjusted for inflation and interest. Summit has not
realized any "Approved Enterprise" tax benefits from Summit's Israeli
operations as of December 31, 1995, since the Israeli operations were still
incurring losses at that time. During 1996, Summit realized income of $1.4
million from Summit's Israeli operations and "Approved Enterprise" tax
benefits of $53,000. During 1997, Summit realized income of $2.7 million from
its Israeli operations and "Approved Enterprise" tax benefits of $702,000. During
1998, Summit realized income of $4.3 million from its Israeli operations and
"Approved Enterprise" tax benefits of $1.9 million. Summit hashad recently applied
for "Approved Enterprise" status with respect to a new project and intends to
apply in the future with respect to additional projects. Summit'sInnoveda's Israeli
production facility may not continue to operate or qualify as an "Approved
Enterprise". The benefits under the "Approved Enterprise" regulations may not
continue, or be
-21-
applicable, in the future.
Summit intends to permanently reinvest earnings of the Israeli subsidiary
outside the United States. If these earnings are remitted to the United States,
SummitInnoveda may have to pay additional U.S. federal and foreign taxes. The loss of,
or any material decrease in, these income tax benefits could have a material
adverse effect on Summit'sInnoveda's business, financial condition, results of
operations or cash flows.
-35-
SUMMITINNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND ITS ABILITYFAILURE TO HIRE ADDITIONALOR RETAIN QUALIFIED
PERSONNEL.
Summit'sPERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain
highly-skilled technical, sales and marketing and management personnel.
Summit has entered into employment agreements with certain of its executive
officers. These agreements, however, do not guaranteeInnoveda's business could be seriously harmed if it lost the services of these
employeesits
President and do not contain noncompetition provisions. Summit recently
amended the employment agreement with Richard Davenport, Summit's President.
As amended, Mr. Davenport's employment agreement provides that he is entitledChief Executive Officer, William J. Herman, or if it fails to
certain guaranteed severance payments. Mr. Davenport may or may not
continue his employment with Summit.attract and retain other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. SummitInnoveda has in
the past experienced difficulty in recruiting qualified personnel. SummitInnoveda may
fail to retain its key personnel or attract and retain other qualified
technical, sales and marketing and management personnel in the future. The loss
of any key employees or the inability to attract and retain additional qualified
personnel may have a material adverse effect on Summit'sInnoveda's business, financial
condition, results of operations or cash flows. Additions of new personnel and
departures of existing personnel, particularly in key positions, can be
disruptive and can result in departures of additional personnel, which could
have a material adverse effect on Summit'sInnoveda's business, financial condition,
results of operations or cash flows.
-36-
SUMMIT NEEDSIF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS.
Summit'sORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build and expand its sales and
marketing organizations. Summit hired fewer sales and marketing personnel
than planned in the fourth quarter of 1998 and the first two quarters of 1999
and experienced attrition in the existing sales force during the first
quarter of 1999. In part, as a result of the lack of sales people, Summit's
revenues for the fourth quarter of 1998 were lower than expected. In February
1998, Summit's Senior Vice President of Worldwide Marketing and Sales
resigned. Summit'sInnoveda's future success will depend in part on its
ability to hire, train and retain qualified sales and marketing personnel and
the ability of these new persons to rapidly and effectively transition into
their new positions. Competition for qualified sales and marketing personnel is
intense, and SummitInnoveda may not be able to hire, train and retain the number of
sales and marketing personnel needed, which would have a material adverse effect
on its business, financial condition, results of operations or cash flows.
SUMMITINNOVEDA RELIES ON ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS FOR
CERTAIN BENEFITS. FAILURE TO OBTAIN SIMILAR GRANTS AND BENEFITS IN THE FUTURE
WILLMAY ADVERSELY AFFECT SUMMIT'SINNOVEDA'S BUSINESS.
Summit's Israeli subsidiary obtained research and developmentSummit had developed its Visual HDL for VHDL products under grants from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade
of approximately $232,000 and $608,000 in 1993 and 1995, respectively. As of
December 31, 1997, Summit has repaid all amounts.Trade. The
terms of the grants prohibit the manufacture of products developed under these
grants outside of Israel and the transfer of the technology developed pursuant tounder
these grants to any person, without the prior written consent of the Chief
Scientist. Summit has developed its Visual HDL for VHDL products under grants from the
Chief Scientist. They are, therefore, subject to these restrictions. If SummitInnoveda were unable to obtain the consent of the government of
Israel, it would be unable to take advantage of potential economic benefits such
as lower taxes, lower labor and other manufacturing costs and advanced research
and development facilities that may be available if these technology and
manufacturing operations could be transferred to locations outside of Israel. In
addition, SummitInnoveda would be unable to minimize risks particular to operations in
Israel, such as hostilities involving Israel.
Although SummitINNOVEDA MUST CONTINUE TO UPDATE 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 eligiblederived from maintenance
agreements for existing products. In order to applymaintain that revenue, Innoveda
must continue to offer those customers updates for additional grants from the Chief Scientist, it has
no present plansthose products or convert
those customers to new products. Innoveda may not be able to do so. Summit receivedDuring 1999
-22-
several major customers did not renew their maintenance contracts due to the
fact they were using Viewlogic's products in applications related to integrated
circuit design, which is no longer fully supported by Viewlogic, and to a marketing fund grantlesser
extent a number of customers migrated their products from the Israeli Ministryversion based on
the Unix operating system to the version based on the Microsoft Windows NT
operating system, which have lower maintenance prices. Innoveda can give no
assurances that this trend will not continue.
INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT
INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE
ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE.
As of IndustryApril 1, 2000 Viewlogic had borrowings of approximately $14.5 million
under its credit facility. Borrowings under the credit facility are secured by
substantially all of Viewlogic's assets. The credit facility contains
limitations on additional indebtedness and Trade for an aggregatecapital expenditures, and includes
financial covenants, which include but are not limited to the maintenance of
$423,000. Summit
must repayminimum levels of interest and debt service coverage ratios and maximum leverage
ratios. Collectively, these limitations and covenants may substantially restrict
the grant atflexibility 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 rate of 3%rapidly evolving environment
of the increaseelectronic design automation industry. To avoid default under this credit
facility, Innoveda must remain in exports over the
1993 export level ofcompliance with these limitations and
covenants and make all Israeli products. As of September 30, 1999, Summit
still owes $92,000 under the grant.
SUMMIT DEPENDS ON ITS INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS BUT
PROTECTION OF THESE RIGHTS IS LIMITED.
Summit's success depends in part upon its proprietary technology. Summit
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures, licensing arrangements and technical means to
establish and protect its proprietary rights. As part of Summit's
confidentiality procedures, Summit generally enters into non-disclosure
agreements with employees, distributors and corporate partners, and limit
access to, and distribution of, its software, documentation and other
proprietary information. In addition, Summit protects its products with
hardware locks and software encryption techniques designed to deter
unauthorized use and copying. Despite these precautions, a third party may
still copyrequired repayments or otherwiseInnoveda must obtain and use Summit's products or technology
without authorization, or develop similar technology independently.
-37-
Summit provides its products to end-users primarily under "shrink-wrap"
license agreements included within the packaged software. In addition, Summit
delivers certain of its verification products electronically under an
electronic version of a "shrink wrap" license agreement. These agreements are
not negotiated with or signed by the licensee, and thusreplacement
financing. Innoveda may not be enforceable in certain jurisdictions. In addition, the laws of some foreign
countries do not protect Summit's proprietary rights as fully as do the laws
of the United States. Summit's means of protectingable to secure replacement financing on terms
acceptable to it or to its proprietary rights in
the United States or abroad may not be adequate, and competitors may also
independently develop similar technology.
SUMMIT MAY FACE INFRINGEMENT CLAIMS, AND INTELLECTUAL PROPERTY LITIGATION
WILL BE COSTLY FROM BOTH THE ECONOMIC AND BUSINESS PERSPECTIVES.
Summit could face an increasing number of infringement claims as the number
of products and competitors in Summit's industry segment grows, the
functionality of products in Summit's industry segment overlaps and an
increasing number of software patents are granted by the United States Patent
and Trademark Office. A third party may claim such infringement by Summit
with respect to current or future products. Any such claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
delays or require Summit to enter into royalty or licensing agreements. These
royalty or license agreements, if required, may not be available on
acceptable termsstockholders, or at all. FailureIn 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. As of April 1,
2000, Innoveda had cash and cash equivalents of $27.6 million. See Note 7 to
protect Summit's proprietary rights or
claims of infringement could have a material adverse effect on Summit's
business, financial condition, results of operations or cash flows.
-38-
SUMMIT'S STOCK PRICE MAY FLUCTUATE DRAMATICALLY.
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the
market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. These broad
market fluctuations may adversely affect the market price of Summit's common
stock. In addition, factors such as announcements of technological
innovations or new products by Summit or its competitors, market conditions
in the computer software or hardware industries and quarterly fluctuations in
Summit's operating results may have a significant adverse effect on the
market price of Summit's common stock.
SUMMIT MAY FACE YEAR 2000 COMPUTER PROBLEMS.
Summit is currently working to address the potential impact of the Year 2000
on the processing of information by its computerized systems, including
interfaces to significant business partners.
Summit has substantially completed its planned Year 2000 compliance
activities with respect to its products and internal systems, software,
equipment and facilities. Based solely on these activities, management
believes that all products and material internal systems, software, equipment
and facilities are substantially Year 2000 compliant. Summit does not
anticipate that potential Year 2000 issues will have a material adverse
impact on its financial position or operating results.
However, Summit could be adversely impacted if any of its critical business
partners were to experience a severe business interruption due to a failure
to address their internal Year 2000 issues in a timely manner. If a severe
disruption occurs and is not corrected in a timely manner, a revenue or
profit shortfall may result during calendar year 2000. Based solely on
responses received to date from its business partners, Summit has no reason
to believe that there will be such a material adverse impact. However, if the
responses received from its business partners are inaccurate or happen to
change, then there could be such a material adverse impact. Management is
evaluating Year 2000 business interruption scenarios and developing
appropriate contingency plans.
-39-
Condensed Consolidated Financial Statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSRISK
The Company is exposed to market risk from interest rate changes,
foreign currency fluctuations, and changes in the market values of its
investments.
INTEREST RATE RISK. The Company invests its excess cash in debt instruments of
the U.S. Government and its agencies,municipal bonds, and
in high-quality corporate issuers and, by policy, limits the amount of credit
exposure to any one issue.issuer. The Company 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, the Company's future investment income may fall
short of expectations due to changes in interest rates and the Company may
suffer losses in principal if forced to sell securities which have declined in
market value due to changes in interest rates.
FOREIGN CURRENCY RISK. The Company pays the expenses of its international
operations in local currencies. The Company's international operations are
subject to risks typical of an international business, including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors.
The Company is also exposed to foreign exchange rate fluctuations as they relate
to operating expenses as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The effect of foreign exchange rate fluctuations
on the Company in 1999for the first quarter ended April 1, 2000 was not material.
-23-
INVESTMENT RISK. The Company has made equity investments in ADCAsia Design
Corporation "ADC" and SDA and
has provided loans to ADC and a privately-held, independent software companySummit Design Asia "SDA" for business and strategic
purposes. These investments are included in other long-term assets and are
accounted for under the equity method when ownership is greater than 20% and the
Company does not exert control. For these investments in privately-held
companies, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. -40-The Company is currently in the process of negotiating to divest
this investment.
-24-
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicableOn March 24, 2000, Summit completed its acquisition of Viewlogic. Pursuant to
the Reorganization Agreement, Summit issued 16,337,979 shares of its common
stock to Viewlogic shareholders in exchange for all the outstanding common
stock of Viewlogic (24,051,963 outstanding shares) at a .67928 to 1 exchange
ratio. After the transaction, Viewlogic shareholders owned 50.6% of the
outstanding common stock of Innoveda and Summit shareholders owned the
remaining 15,941,418 shares of Innoveda common stock.
In March 2000, the Innoveda granted an aggregate of 72,785 shares of Innoveda
common stock to employees in connection with employee retention arrangements.
These shares were offered and sold in transactions which were exempt from
Securities Act registration under Section 4(2) of the Securities Act,
relating to sales by an issuer not involving a public offering. No
underwriters were involved in the sale of these shares.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicableOn March 20, 2000, a meeting of stockholders of the Company was held. At the
meeting, the following actions were taken by the stockholders.
A proposal to issue shares of common stock to the stockholders of Viewlogic
pursuant to the Agreement and Plan of Reorganization among Summit, Viewlogic and
Hood Acquisition Corp., a wholly owned subsidiary of Summit, dated as of
September 16, 1999. The results of the voting were as follows:
For: ........ 8,315,439
Against: .... 346,713
Abstain: .... 18,057
A proposal to amend the Amended and Restated Certificate of Incorporation
increasing the number of shares of the Company's common stock authorized for
issuance by 20 million shares to 50 million shares, contingent upon approval of
the above stock issuance proposal. The results of the voting were as follows:
For: ........ 8,251,421
Against: .... 409,271
Abstain: .... 19,517
A proposal to amend the Amended and Restated Certificate of Incorporation
changing the Company's name to "Innoveda, Inc.," contingent and effective upon
completion of the business combination with Viewlogic. The results of the voting
were as follows:
For: ........ 8,239,743
Against: .... 396,124
Abstain: .... 44,342
-25-
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment to employment agreement between3.1 Amended and Restated Certificate of Incorporation. (1)
10.01 Agreement and Plan of Reorganization dated as of September 16, 1999
(the "Reorganization Agreement") by and among the Registrant, Hood
Acquisition Corp., a Delaware corporation and Richard Davenport dated October 24, 1999.a wholly owned
subsidiary of the Registrant ("Merger Sub"), and Viewlogic Systems,
Inc., a Delaware corporation ("Viewlogic"). (2)
27.1 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K
On July 6, 1999,February 24, 2000, the Company filed a Current Report on Form 8-K dated July 6, 1999 in
connection with a press release issued by
the Company announcing preliminaryfinancial results for the secondfourth quarter ofand year ended
December 31, 1999.
On September 21, 1999,March 9, 2000, the Company filed a Current Report on Form 8-K dated September 16, 1999in connection
with the resignation of Richard Davenport effective February 2000, the former
President and Chief Operating Officer of the Company.
On April 7, 2000, the Company filed a Current Report on Form 8-K in connection
with a press release
issuedchange in control of the Registrant at the effective time of the Merger
contemplated by that certain Agreement and Plan of Reorganization dated as of
September 16, 1999 by and among the Registrant, Hood Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of the Registrant, and
Viewlogic Systems, Inc., a Delaware corporation.
On May 15, 2000 the Company filed a Current Report on Form 8-K/A in connection
with pro forma financial information for the transaction described in Item 2 of
the Report on Form 8-K filed on April 7, 2000.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated April 7, 2000.
(2) Incorporated by reference to the Registration Statement on Form S-4 (File
No. 333-89491) as declared effective by the Company announcing the signing of a definitive
agreement to merge the Company with Viewlogic Systems, Inc.
-41-Securities and Exchange
Commission February 14, 2000.
-26-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT DESIGN,INNOVEDA, INC.
BY:By: /s/ C. Albert Koob
------------------------------------
C. Albert KoobKevin P. O' Brien
Vice President, - Finance and
Chief Financial Officer
and Secretary
Principal(Principal Financial and Accounting
Officer and Duly Authorized OfficerOfficer)
Date: November 11, 1999
-42-
EXHIBIT INDEX
EXHIBIT 10.1 Amendment to employment agreement between the Registrant and
Richard Davenport dated October 24, 1999.
EXHIBIT 27.1 Financial Data Schedule
-43-May 16, 2000
-27-