EXHIBIT 99.3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000 F-2
Consolidated Statements of Operations for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 29, 2001, December 30, 2000 and January 1, 2000 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Innoveda, Inc.:
We have audited the accompanying consolidated balance sheets of
Innoveda, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000,
and the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity (deficiency), and cash flows for each of the three
years in the period ended December 29, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Innoveda, Inc. and
subsidiaries as of December 29, 2001 and December 30, 2000, and the results of
their operations, their comprehensive income (loss) and their cash flows for
each of the three years in the period ended December 29, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 28, 2002
F-2
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 29, 2001 DECEMBER 30, 2000
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,704 $ 20,799
Accounts receivable (less allowances of $1,876 at 21,876 27,260
December 29, 2001 and $2,034 at December 30, 2000)
Prepaid expenses and other current assets 2,511 2,800
Income taxes receivable 1,233 --
Deferred income taxes 3,960 6,626
-------- --------
Total current assets 37,284 57,485
-------- --------
PROPERTY AND EQUIPMENT:
Equipment 19,703 18,887
Furniture and fixtures 1,359 1,394
-------- --------
Total property and equipment 21,062 20,281
Less accumulated depreciation 16,212 12,639
-------- --------
PROPERTY AND EQUIPMENT, NET 4,850 7,642
-------- --------
OTHER ASSETS:
Capitalized software costs, net 2,342 2,358
Purchased technology and other intangibles, net 25,404 62,198
Goodwill and other assets, net 2,412 12,941
-------- --------
Total other assets 30,158 77,497
-------- --------
TOTAL $ 72,292 $142,624
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - current portion $ 4,000 $ 3,550
Current portion of capital lease obligations 270 548
Accounts payable 3,648 3,652
Accrued compensation 6,048 8,296
Accrued expenses 12,074 12,269
Deferred revenue 20,776 24,514
-------- --------
Total current liabilities 46,816 52,829
-------- --------
LONG-TERM LIABILITIES:
Note payable - long-term portion 1,750 5,750
Deferred tax liability 10,013 27,642
Capital lease obligations -- 250
Other long term liabilities 1,322 1,553
-------- --------
Total long-term liabilities 13,085 35,195
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized 5,000 in 2001 -- --
and 2000, none issued or outstanding
Common stock, $0.01 par value, 100,000 authorized, 40,271 403 393
outstanding at December 29, 2001, 39,347 outstanding at
December 30, 2000
Additional paid-in capital 117,440 116,047
Accumulated deficit (101,650) (59,013)
Accumulated other comprehensive income (loss) (681) 50
Notes from stockholders (932) (932)
Treasury stock, at cost, 550 shares in 2001, 341 shares (1,663) (832)
in 2000
Deferred compensation (526) (1,113)
--------- ---------
Total stockholders' equity 12,391 54,600
--------- ---------
TOTAL $ 72,292 $ 142,624
========= =========
See notes to consolidated financial statements.
F-3
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
----------- ----------- ----------
REVENUE:
Software $ 44,466 $ 49,618 $ 23,853
Services and other 46,951 40,241 29,646
--------- --------- ---------
Total revenue 91,417 89,859 53,499
--------- --------- ---------
COSTS AND EXPENSES:
Cost of software(1) 6,753 7,816 5,986
Cost of services and other(1) 11,106 8,592 6,387
Selling and marketing(1) 41,118 33,689 22,479
Research and development(1) 26,661 22,588 11,322
General and administrative(1) 7,865 7,099 3,942
Amortization of intangibles 14,415 10,335 670
Amortization of stock compensation 587 588 531
In process research and development -- 5,453 --
Impairment of intangible assets 32,945 -- --
Restructuring and merger costs 5,865 2,736 --
--------- --------- ---------
Total operating expenses 147,315 98,896 51,317
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (55,898) (9,037) 2,182
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 413 1,051 101
Interest expense (531) (1,143) (1,339)
Other, net (320) (230) (404)
--------- --------- ---------
Other expense, net (438) (322) (1,642)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (56,336) (9,359) 540
PROVISION (BENEFIT) FOR INCOME TAXES (13,699) 1,809 281
--------- --------- ---------
NET INCOME (LOSS) $ (42,637) $ (11,168) $ 259
========= ========= =========
EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share -- basic $ (1.09) $ (0.40) $ 0.07
========= ========= =========
Net income (loss) per common share -- diluted $ (1.09) $ (0.40) $ 0.02
========= ========= =========
Weighted-average shares outstanding -- basic 39,224 28,252 3,938
========= ========= =========
Weighted-average shares outstanding -- diluted 39,224 28,252 15,586
========= ========= =========
(1) Excludes noncash amortization of stock-based
compensation as follows:
Cost of software $ 5 $ 5 $ 5
Cost of services and other 43 43 39
Selling and marketing 116 116 105
Research and development 212 212 191
General and administrative 211 212 191
--------- --------- ---------
$587 $588 $531
========= ========= =========
See notes to consolidated financial statements.
F-4
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
YEAR ENDED
------------------------------------------------------
DECEMBER 29, 2001 DECEMBER 30, 2000 JANUARY 1, 2000
----------------- ----------------- ---------------
Net Income (Loss) $(42,637) $(11,168) $ 259
Foreign Currency Translation Adjustments (572) (239) 151
Fair Value Adjustment of Interest Rate Swap (159) -- --
-------- -------- --------
Comprehensive Income (Loss) $(43,368) $(11,407) $ 410
======== ======== ========
See notes to consolidated financial statements.
F-5
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
ACCUMULATED
RETAINED OTHER
STOCK ADDITIONAL EARNINGS COMPREHENSIVE
COMMON PAR PAID-IN (ACCUMULATED INCOME
SHARES VALUE CAPITAL DEFICIT) (LOSS)
------ --------- --------- ----------- --------------
BALANCE, JANUARY 2, 1999 3,966 $ 4 $ 1,918 $ (48,104) $ 138
Issuance of common stock 1,124 1 1,482 -- --
Compensation related to stock options -- -- 431 -- --
Amortization of stock compensation -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- 151
Exercise of stock options 2,879 3 946 -- --
Net income -- -- -- 259 --
-------- ------ --------- --------- -------
BALANCE, JANUARY 1, 2000 7,969 $ 8 $ 4,777 $ (47,845) $ 289
Exercise of stock options 545 5 737 -- --
Issuance of stock under ESPP 86 1 196 -- --
Amortization of stock compensation -- -- -- -- --
Conversion of preferred shares to common stock 16,000 160 -- -- --
Effect of adjustment to Summit acquisition
exchange ratio (7,715) (77) -- -- --
Shares issued in connection with merger of
Innoveda and Summit 15,989 231 80,734 -- --
Options granted for Summit merger -- -- 4,882 -- --
Options granted under PADS acquisition -- -- 366 -- --
Issuance of shares in PADS acquisition 6,473 65 24,355 -- --
Shareholder note receivable acquired through
PADS acquisition -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- (239)
Repurchase of common stock -- -- -- -- --
Net loss -- -- -- (11,168) --
-------- ------ --------- --------- -------
BALANCE, DECEMBER 30, 2000 39,347 $ 393 $ 116,047 $ (59,013) $ 50
Exercise of stock options 294 4 194 -- --
Issuance of stock under ESPP 630 6 1,199 -- --
Amortization of stock compensation -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- (731)
Repurchase of common stock -- -- -- -- --
Net loss -- -- -- (42,637) --
-------- ------ --------- --------- -------
BALANCE, DECEMBER 29, 2001 40,271 $ 403 $ 117,440 $(101,650) $ (681)
======== ====== ========= ========= =======
NOTES DUE
FROM TREASURY DEFERRED
STOCKHOLDERS STOCK COMPENSATION TOTAL
------------- -------- ------------ -----------
BALANCE, JANUARY 2, 1999 $ -- $ -- $ (1,801) $ (47,845)
Issuance of common stock -- -- -- 1,483
Compensation related to stock options -- -- (431) --
Amortization of stock compensation -- -- 531 531
Foreign currency translation adjustment -- -- -- 151
Exercise of stock options (927) -- -- 22
Net income -- -- -- 259
-------- ------ --------- ---------
BALANCE, JANUARY 1, 2000 $ (927) $ -- $ (1,701) $ (45,399)
Exercise of stock options -- -- -- $ 742
Issuance of stock under ESPP -- -- -- 197
Amortization of stock compensation -- -- 588 588
Conversion of preferred shares to common stock -- -- -- 160
Effect of adjustment to Summit acquisition
exchange ratio -- -- -- (77)
Shares issued in connection with merger of
Innoveda and Summit -- -- -- 80,965
Options granted for Summit merger -- -- -- 4,882
Options granted under PADS acquisition -- -- -- 366
Issuance of shares in PADS acquisition -- -- -- 24,420
Shareholder note receivable acquired through PADS
acquisition (5) -- -- (5)
Foreign currency translation adjustment -- -- -- (239)
Repurchase of common stock -- (832) -- (832)
Net loss -- -- -- (11,168)
-------- ------ --------- ---------
BALANCE, DECEMBER 30, 2000 $ (932) $ (832) $ (1,113) $ 54,600
Exercise of stock options -- -- -- 198
Issuance of stock under ESPP -- -- -- 1,205
Amortization of stock compensation -- -- 587 587
Foreign currency translation adjustment -- -- -- (731)
Repurchase of common stock -- (831) -- (831)
Net loss -- -- -- (42,637)
-------- -------- -------- --------
BALANCE, DECEMBER 29, 2001 $ (932) $ (1,663) $ (526 ) $ 12,391
======== ======== ======== ========
See notes to consolidated financial statements.
F-6
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
YEAR ENDED
-----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(42,637) $(11,168) $ 259
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 19,217 15,333 3,998
Non cash portion of restructuring and impairment costs 34,445 -- --
Compensation under stock option agreements 587 588 531
Write-off of in-process research and development -- 5,453 --
Tax benefit on stock option exercises 186 -- --
Changes in current assets and current liabilities:
Accounts receivable 5,179 (6,172) (4,500)
Prepaid and other assets (1,183) 1,788 (1,532)
Deferred income taxes (14,987) (4,660) 70
Accounts payable 9 (2,250) 1,081
Accrued compensation (2,217) 1,026 207
Accrued expenses (916) 3,969 (1,274)
Deferred revenue (3,557) (545) 1,598
-------- -------- --------
Net cash provided by (used in) operating activities (5,874) 3,362 438
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,187) (3,403) (1,000)
Capitalized software costs (1,103) (1,021) (1,068)
Purchase of OmniView -- -- (1,153)
Purchase of Transcendent, net of cash acquired -- -- 285
Proceeds from sale of VirSim product -- 7,000 --
Cash acquired in acquisition of PADS, net of purchase costs -- 2,857 --
Cash acquired in acquisition of Summit, net of purchase costs -- 27,036 --
Other -- -- (300)
-------- -------- --------
Net cash provided by (used in) investing activities (3,290) 32,469 (3,236)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt (3,550) (15,070) (2,250)
Proceeds from debt -- -- 1,200
Proceeds from exercise of stock options and stock purchase plan 1,216 944 22
Repayments of capital lease obligations (525) (460) (169)
Purchase of treasury stock (831) (832) --
-------- -------- --------
Net cash used in financing activities (3,690) (15,418) (1,197)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH (241) (145) 39
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (13,095) 20,268 (3,956)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 20,799 531 4,487
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
YEAR $ 7,704 $ 20,799 $ 531
======== ======== ========
See notes to consolidated financial statements.
F-7
INNOVEDA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES NATURE OF BUSINESS
NATURE OF BUSINESS - Innoveda, Inc. (the "Company") operates in the United
States and international markets developing, marketing and providing
technical support for a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
related services.
BASIS OF PRESENTATION - Innoveda, Inc., a Delaware corporation, was created
by the business combination of Summit Design, Inc. ("Summit") and Viewlogic
Systems, Inc. ("Viewlogic") which was consummated on March 23, 2000. In
addition, the Company subsequently acquired PADS Software, Inc. ("PADS") on
September 22, 2000. The business combination of Summit with Viewlogic was
effected by means of the merger of a wholly owned subsidiary of Summit with
and into Viewlogic, with Viewlogic surviving as a wholly owned subsidiary of
Summit. The business combination was accounted for as a reverse acquisition,
as the former shareholders of Viewlogic owned the majority of the
outstanding stock of Summit subsequent to the business combination.
Therefore, for accounting purposes, Viewlogic is deemed to have acquired
Summit. The business combination of Innoveda and PADS was accounted for as a
purchase of PADS by Innoveda.
All fiscal 1999 financial information presented herein, with the exception
of pro forma results in Note 2, represents only the financial results for
Viewlogic. The fiscal 2000 financial information presented in the
consolidated statements of operations and the consolidated statements of
cash flows represents the results for Viewlogic for the periods stated and
includes the financial results for Summit commencing March 24, 2000, and the
financial results for PADS commencing September 23, 2000.
FISCAL YEAR - The Company's fiscal year is a 52-53-week year ending on the
Saturday closest to December 31.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts and disclosures of certain
assets and liabilities at the balance sheet date. Actual results may differ
from such estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Innoveda, Inc. and its subsidiaries, all of which are wholly
owned. All significant intercompany balances and transactions have been
eliminated.
FOREIGN CURRENCY TRANSLATION - The functional currency of international
operations is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated into
United States dollars using current exchange rates at the balance sheet
date. Results of operations are translated at average exchange rates
prevailing during each period. Translation adjustments are included in other
comprehensive income. Transaction gains and losses are recorded in the
statement of operations.
REVENUE RECOGNITION - Software revenue is recognized upon the shipment of
the product provided that persuasive evidence of an arrangement exists, the
arrangement fee is fixed and determinable and collection is probable. For
arrangements involving multiple elements, the arrangement fee is allocated
to each element based on vendor-specific objective evidence ("VSOE") of the
fair value of the various elements. VSOE of fair value is determined based
on the prices at which the elements are sold separately. If VSOE of fair
value exists for all undelivered elements but not for the delivered element,
the portion of the arrangement fee allocated to the delivered element is
determined using the residual method. If VSOE of fair value does not exist
for all of the undelivered elements, the arrangement fee is recognized
ratably over the term of the arrangement. For term licenses of one year or
less, which include post contract customer support, revenue is recognized
ratably over the term of the agreement, unless the only support provided is
telephone support, in which case the entire arrangement fee is recognized at
the beginning of the term.
Revenue from maintenance and support contracts is deferred and recognized
ratably over the term of the service period. Revenue from training and
consulting is recognized as the related services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for
doubtful accounts, which reflects our estimate of the amounts owed by
customers that customers will be unable to pay. Management performs ongoing
credit evaluations of its customers' financial condition and limits the
amount of customer credit when deemed necessary.
F-8
CONCENTRATION OF CREDIT RISK - The Company's trade receivables and
investments do not represent a significant concentration of credit risk at
December 29, 2001 due to the wide variety of customers and markets into
which the Company's products are sold and their dispersion across many
geographic areas.
CASH EQUIVALENTS - The Company considers all short-term, highly liquid
investments purchased with a remaining maturity of three months or less to
be cash equivalents.
Supplemental cash flow information is as follows (in thousands):
YEAR ENDED
---------------------------------------
December 29, December 30, January 1,
2001 2000 2000
----------- ------------ ----------
Cash paid for interest $ 449 $ 1,131 $ 1,645
Cash paid for (received from) income taxes (545) 2,576 1,543
Assets acquired under capital leases -- -- 898
Issuance of stock in OmniView acquisition -- -- 280
Acquisition of Transcendent:
Fair value of assets acquired (including intangibles) -- -- 3,373
Fair value of common stock issued -- -- (1,159)
Fair value of Transcendent options assumed -- -- (44)
Transaction costs -- -- (354)
Liabilities assumed -- -- 1,816
Acquisition of Summit Design: --
Fair value of assets acquired (including intangibles) -- 49,842 --
Fair value of common stock issued -- (49,020) --
Fair value of Summit Design options assumed -- (4,882) --
Transaction costs -- (1,136) --
Liabilities assumed -- 25,350 --
Acquisition of PADS Software --
Fair value of assets acquired (including intangibles) -- 54,306 --
Fair value of common stock issued -- (23,870) --
Fair value of PADS options assumed -- (366) --
Transaction costs -- (550) --
Liabilities assumed -- 35,438 --
Exercise of stock options through issuance of stockholders' notes -- -- 927
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets (three to five years). Equipment leased
under capital leases is amortized over the lesser of its useful life or the
lease term.
CAPITALIZED SOFTWARE COSTS AND PURCHASED TECHNOLOGY - Certain software costs
for products and product enhancements are capitalized after technological
feasibility has been established. Amortization is provided over estimated
lives of four years on a straight-line basis or based on the ratio of
current revenues to the total expected revenues in a product's life, if
greater. Accumulated amortization was $4,961 and $4,125 at December 29, 2001
and December 30, 2000, respectively. Amortization expense for the fiscal
years ended December 29, 2001, December 30, 2000 and January 1, 2000 was
$965, $1,013 and $966, respectively. Research and development costs and
software development costs incurred before technological feasibility has
been established are expensed as incurred.
PURCHASED TECHNOLOGY AND OTHER INTANGIBLES - Purchased technology is being
amortized over estimated lives ranging from three to four years. Accumulated
amortization was $36,224 and $7,320 at December 29, 2001 and December 30,
2000, respectively. Amortization expense for the fiscal years ended December
29, 2001, December 30, 2000 and January 1, 2000 was $11,052, $7,031 and
$656, respectively.
GOODWILL AND OTHER ASSETS - Goodwill and other assets consist primarily of
goodwill, which represents the excess of the purchase price over
identifiable net assets acquired and is being amortized over seven years.
Accumulated amortization at December 29, 2001 and December 30, 2000 was
$20,503 and $3,085, respectively. Amortization expense for the fiscal years
ended December 29, 2001, December 30, 2000 and January 1, 2000 was $3,362,
$3,304 and $55, respectively.
F-9
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived assets,
including goodwill, purchased technology and other intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
As part of the Company's review of financial results during the third
quarter of 2001, the Company performed an assessment of the carrying values
of intangible assets recorded in connection with the acquisitions of PADS
Software and Summit Design. This assessment was performed as a result of the
current economic downturn and industry trends impacting the Company's
current operations and expected future growth rates. The conclusion of that
assessment was that the decline in economic conditions within the Company's
industry was significant and other than temporary. As a result, the Company
recognized pre-tax charges of $32,945 representing write downs to record
intangible assets at their estimated fair values. The impaired intangible
assets include goodwill, purchased technology, workforce and customer base.
The estimated fair value was based on expected future cash flows to be
generated, discounted at a rate commensurate with the risks involved.
INCOME TAXES - The Company provides for deferred income taxes based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted rates in effect in the years in which the
differences are expected to reverse. The Company establishes valuation
allowances to offset temporary deductible differences, net operating loss
carryforwards, and tax credits, which are not likely to be realized.
FOREIGN EXCHANGE CONTRACTS - The Company enters into foreign exchange
contracts as a hedge against certain accounts receivable denominated in
foreign currencies. Market value gains and losses are recognized, and the
resulting credit or debit offsets foreign exchange gains or losses on those
receivables. Realized and unrealized gains and losses on foreign exchange
contracts for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000 were insignificant. There were no outstanding foreign
exchange contracts outstanding as of December 29, 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments held or used by
the Company include cash and cash equivalents, accounts receivable, accounts
payable, capital lease obligations, notes and line of credit payables,
foreign exchange contracts, if any, and interest rate swap agreements. The
fair values of these instruments, which could change if market conditions
change, are based on management's estimates. Management believes that the
carrying values of these instruments approximates their fair values.
INTEREST RATE SWAP AGREEMENT - The net differential to be paid or received
under the Company's interest rate swap agreement is accrued as interest
rates change and is recognized over the life of the agreement. The Company's
interest-rate swap agreement has been recorded at fair value. Changes in the
fair value are either recognized periodically in earnings or in
stockholders' equity as a component of comprehensive income, depending on
whether the derivative financial instrument qualifies for hedge accounting.
Changes in fair values that do not qualify for hedge accounting are reported
in earnings.
STOCK-BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance
with provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Stock-based compensation expense is amortized, using the multiple option
method prescribed by Financial Accounting Standards Board Interpretation
("FIN") No. 28 over the option's vesting period.
NEW ACCOUNTING PRONOUNCEMENTS - On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which established
accounting and reporting standards for derivative instruments. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in fair value of the
derivative are recorded in other comprehensive income and are recognized in
the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. Adoption of SFAS 133 did not have a material effect on the
Company's consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of"
("SFAS 121") and the accounting and reporting provisions of APB 30, for the
disposal of a segment of a business. The Company will adopt SFAS No. 144 in
the first quarter of fiscal 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that an entity account for
business combinations using the purchase method and eliminates the pooling
method. In addition, SFAS No. 141
F-10
provides guidance regarding the initial recognition and measurement of
goodwill and other intangible assets. SFAS No.142 requires that goodwill no
longer be amortized and instead be tested annually for impairment. The
provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001 and the provisions of SFAS No. 142 are required to be
applied starting with fiscal years beginning after December 15, 2001. The
Company will adopt SFAS No. 142 in the first quarter of fiscal 2002 and
estimates that the effect of the adoption will be to reduce annual
amortization expense by approximately $0.2 million.
RECLASSIFICATION - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the current year
presentation.
2. ACQUISITIONS
ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into a
merger agreement with PADS. The merger was consummated on September 22,
2000. The merger agreement provided that a wholly owned subsidiary of
Innoveda would merge with and into PADS, with PADS surviving as a wholly
owned subsidiary of Innoveda following the merger. For the merger, Innoveda
issued 6,473 shares of its common stock and paid approximately $1,976 to the
PADS stockholders. PADS capital stock outstanding at the merger date was
exchanged for shares of Innoveda common stock at the rate of approximately
1.0 to 1.9 per share, plus $0.579 per share in cash. In addition, each
outstanding option to purchase shares of PADS common stock was converted
into an option to purchase 2.0355 shares of Innoveda common stock, and the
option exercise prices were adjusted accordingly.
The acquisition was accounted for under the purchase method of accounting.
The operating results of PADS have been included in the accompanying
consolidated financial statements from the date of acquisition. Under the
purchase method of accounting, the acquired assets and assumed liabilities
have been recorded at their estimated fair values at the date of
acquisition. Goodwill and other intangibles in the amount of approximately
$49,069 were capitalized. As a result of the acquisition, $3,053 relating to
in-process research and development has been expensed. The goodwill and
other intangibles are being amortized over estimated useful lives of three
to seven years. In fiscal 2001, the Company recorded an impairment charge
related to certain of the assets acquired (see Note 4).
The valuation of the existing technology and in-process research and
development was determined using the income method. Revenue and expense
projections as well as technology assumptions were prepared through 2009.
The projected cash flows were discounted using a 17% rate. The valuation of
the in-process research and development was determined separately from all
other acquired assets using the percentage of completion method. The
percentage of completion ratio was calculated by dividing the total
expenditures for each project by the total estimated expenditures.
The value assigned to in-process technology relates primarily to three
research projects, Power PCB Next Generation, BlazeDRE and ACT
Manufacturing. During the first quarter of 2000, ACT Manufacturing was
commercially released. BlazeDRE is expected to be commercially released
during the second quarter of fiscal 2002 and Power PCB Next Generation has
yet to reach technological feasibility. The nature of the efforts required
to develop the in-process technologies into commercially viable products
principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the products can be produced to meet their design
specifications, including function, features and technical performance
requirements.
Below is a table of the PADS acquisition costs and the purchase price
allocation:
Purchase price:
Common stock $ 23,870
Stock Options 366
Cash payment to PADS stockholders 1,976
Acquisition costs 550
--------
Total purchase price $ 26,762
========
Purchase price allocation:
Tangible net assets acquired $ 657
Assumed debt (7,381)
Deferred income taxes (18,208)
Intangible net assets acquired:
Purchased technology, assembled workforce,customer base, and trademarks 47,293
Goodwill 1,776
In-process research and development 3,053
Estimated PADS related severance and shutdown cost (428)
--------
Total $ 26,762
========
F-11
Pursuant to the PADS merger agreement, Innoveda paid all of the assumed debt
after the closing.
The $428 accrued as estimated severance and shutdown costs included
involuntary employee separations costs and facilities consolidations. The
separation benefits related to one employee, in an administrative function
at PADS' corporate headquarters. The facilities consolidation amount related
primarily to sales offices to be closed as a result of the acquisition. All
such costs have been paid.
Innoveda recorded merger costs of approximately $493 in restructuring
charges relating to the PADS merger. This was primarily comprised of
severance payments related to one employee and exit costs to close Innoveda
duplicative facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an
Agreement and Plan of Reorganization. Summit was a publicly held company
engaged in a business similar to that of Viewlogic. In connection with the
business combination contemplated by the Agreement and Plan of
Reorganization, (1) each share of Viewlogic common stock and preferred stock
issued and outstanding at the effective time of the business combination was
converted into 0.67928 (the "Exchange Ratio") of a share of Summit common
stock, and (2) each option to purchase shares of Viewlogic Common Stock was
converted into an option to purchase Summit common stock based on the
Exchange Ratio. The name of the combined company was changed to Innoveda,
Inc.
The business combination was accounted for under the purchase method of
accounting and was treated as a reverse acquisition, as the stockholders of
Viewlogic received the larger portion of the voting interests in the
combined company. Viewlogic was considered the acquirer for accounting
purposes and recorded Summit's assets and liabilities based on 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. Goodwill and other intangibles in the amount of
approximately $38,137 were capitalized. As a result of the business
combination, $2,400 relating to in-process research and development has been
expensed. The goodwill and other intangibles are being amortized over
estimated useful lives of three to seven years. In fiscal 2001, the Company
recorded an impairment charge related to certain of the assets acquired (see
Note 4).
The valuation of the existing technology and in-process research and
development was determined using the income method. Revenue and expense
projections as well as technology assumptions were prepared through 2009.
The projected cash flows were discounted using a 25% to 30% rate. The
valuation of the in-process research and development was determined
separately from all other acquired assets using the percentage of completion
method. The percentage of completion ratio was calculated by dividing the
total expected expenditures for each project by the total estimated
expenditures to achieve technological feasibility.
The value assigned to in-process technology related to two research
projects, Visual HDL 2000 and Visual SLD. The nature of the effort required
in the development of the in-process technologies into commercially viable
products principally related to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the products can be produced to meet their design
specifications, including function, features and technical requirements.
Visual HDL 2000 represented a major rearchitecture of the two existing
Visual HDL products. The new generation product integrates these two
existing products along with a newly developed compiler. The Visual SLD
research project represented the development of an entirely new product
targeted at a customer base not previously approached for the Visual product
line. These technologies were combined and commercially released during the
fourth quarter of 2000 under the product name Visual Elite.
Below is a table of Summit acquisition costs and the purchase price
allocation (in thousands):
Purchase price:
Common stock $49,020
Stock options 4,882
Acquisition costs 1,136
-------
Total purchase price $55,038
=======
Purchase price allocation:
Tangible net assets acquired $28,089
F-12
Assets impaired by the Merger (750)
Deferred income taxes (11,492)
Intangible net assets acquired:
Purchased technology, assembled workforce,and customer base 23,200
Goodwill 14,937
In-process research and development 2,400
Estimated Summit related severance and shutdown costs (1,346)
--------
Total $ 55,038
========
The $1,346 accrued as estimated severance and shutdown costs include
involuntary employee separations costs and facilities consolidations. The
separation benefits related to approximately thirty employees, concentrated
in administrative functions at Summit's corporate headquarters. The
facilities consolidation amount related primarily to Summit's corporate
headquarters facility in Beaverton and other sales offices closed as a
result of the acquisition. All such costs have been paid.
Innoveda recorded approximately $2,243 in merger costs relating to the
Summit business combination. This primarily included severance and other
costs relating to the consolidation of duplicative facilities as a result of
the business combination between Summit and Viewlogic. Other costs relating
to property and equipment lease contracts (less any applicable sublease
income) after the properties were abandoned, lease buyout costs, restoration
costs associated with certain lease arrangements, and costs to maintain
facilities during the period after abandonment are also included. Further
action was taken to restructure the Innoveda sales and services business in
Japan as a result of an exclusive distributor agreement during the first
quarter of fiscal 2000. Charges associated with Japanese reorganization
include severance and benefit continuance for approximately fourteen
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 merger costs accrued
during the mergers with PADS and Summit and the charges against these
reserves through December 29, 2001. All significant amounts have been paid.
YEAR ENDED
----------------------------------------------------------------------
DECEMBER 30, 2000 DECEMBER 29, 2001
---------------------------------------- ---------------------------
Total Non-Cash Amount Accrual Non-Cash Amount Accrual
Charge Write-Off Paid Balance Write-Off Paid Balance
------ --------- -------- ------- --------- ------ -------
PADS MERGER COSTS
Severance $ 250 $ -- $ 218 $ 32 $ 32 $ -- $ --
Non-cancelable commitments 199 -- 29 170 -- 170 --
Capitalized software 44 44 -- -- -- -- --
------ ------ -------- ------ ------ ------ -----
$ 493 $ 44 $ 247 $ 202 $ 32 $ 170 --
====== ====== ====== ====== ====== ====== =====
SUMMIT MERGER COSTS
Severance $ 780 $ -- $ 775 $ 5 $ 5 $ -- $ --
Non-cancelable commitments 1,389 -- 707 682 -- 682 --
Capitalized software 74 74 -- -- -- -- --
------ ------ -------- ------ ------ ------ -----
$2,243 $ 74 $1,482 $ 687 $ 5 $ 682 $ --
====== ====== ====== ====== ====== ====== =====
Totals $2,736 $ 118 $1,729 $ 889 $ 37 $ 852 $ --
====== ====== ====== ====== ====== ====== =====
The unaudited consolidated results of operations shown below are presented
on a pro forma basis and represent the results of Viewlogic, Summit and PADS
had the business combinations of these entities occurred at the beginning of
the periods presented. This schedule includes all amortization and
non-recurring charges for all entities for the periods shown.
YEAR ENDED
-------------------------------
DECEMBER 30, JANUARY 1,
2000 2000
----------- -----------
Revenue $ 115,404 $ 109,434
=========== ===========
Net loss $ (19,312) $ (13,010)
=========== ===========
Net loss per share
Basic $ (0.50) $ (0.34)
Diluted $ (0.50) $ (0.34)
F-13
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 mergers been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
On March 1, 1999, the Company purchased certain assets and intellectual
property of OmniView, Inc. ("OmniView"). The purchase price consisted of
$1,100 in cash, 272 shares of the Company's common stock and acquisition
expenses. The purchase price was allocated to the assets acquired based on
their fair values with $1,200 to purchased technologies and other
intangibles.
On August 9, 1999, the Company acquired Transcendent Design Technologies
("Transcendent"). Transcendent develops, markets and distributes
electro-mechanical design and analysis software. The acquisition was
accounted for under the purchase method. The purchase price for the
acquisition was 492 shares of Viewlogic common stock, options to purchase 53
shares of Viewlogic common stock and $354 in direct acquisition costs. The
purchase price was allocated to the acquired assets and liabilities based on
their fair values with $2,700 to purchased technologies and other
intangibles.
3. DEBT
CREDIT FACILITY - The Company had a $16,000 credit facility with a
commercial bank consisting of a $6,000 revolving line of credit ("Line of
Credit") and a $10,000 term loan ("Term Loan") (together, the "Credit
Facility"). For the fiscal quarter ended June 30, 2001, the Company did not
meet certain financial covenants under its Credit Facility. Effective
September 29, 2001, the Company and the lender have amended the terms and
conditions of its Term Loan and its Line of Credit to revise certain
covenants and provide a waiver for past violations. Under this amendment,
the Term Loan portion of the Credit Facility remains in place with the
repayment schedule unchanged, and the Line of Credit portion of the Credit
Facility has been reduced to approximately $431 to cover only existing
letters of credit issued by the lender at the request of the Company.
Borrowings under the Credit Facility are secured by substantially all of
Innoveda's assets. The amended Credit Facility contains limitations on
additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to maintaining certain levels
of profitability, deferred revenue, working capital ratio and debt service
coverage ratio.
Interest rates on the Line of Credit and the Term Loan are determined, at
the option of the Company, for varying periods. The Company may elect to
have the interest rate based on the bank's prime rate or based on the LIBOR
rate at the time of the election, depending on the Company's leverage
financial ratio, as defined, in the Credit Facility. The interest rate on
the Line of Credit at December 30, 2000 was 10%. The interest rates on the
Term Loan at December 29, 2001 and December 30, 2000 were 4.7% and 9.2%,
respectively. Payments of principal outstanding under either the Line of
Credit or the Term Loan expire by September 30, 2003. A payment of $1,000 is
due in the first quarter of fiscal 2002. Successive payments of $1,000 are
due each quarter through the fourth quarter of 2002, and $1,375 and $375 are
due in the first and third quarters of fiscal 2003, respectively.
As required under the Credit Facility, the Company entered into a no fee
interest rate-swap agreement with a bank to reduce the impact of changes in
interest rates on its floating rate Credit Facility. This agreement
effectively converts the whole floating-rate obligation into a fixed-rate
obligation of 7.4% for a period of 60 months, expiring on March 31, 2003.
The notional principal amount of the interest rate-swap agreement is $5,750
as of December 29, 2001. The Company is exposed to credit loss in the event
of nonperformance by the counterparties to the interest rate-swap agreement.
Certain information with respect to line-of-credit borrowings is as follows:
WEIGHTED AVERAGE MAXIMUM AMOUNT AVERAGE AMOUNT
INTEREST RATE OUTSTANDING OUTSTANDING
---------------- -------------- --------------
Period December 31, 2000 to December 29, 2001 -- -- --
Period January 2, 2000 to December 30, 2000 9.2% $3,500 $407
Under all debt agreements, minimum repayments are due as follows as of
December 29, 2001:
FISCAL YEARS
2002 $4,000
2003 1,750
------
F-14
Total $5,750
======
The Credit Facility also calls for other mandatory repayments: (a) after the
end of each fiscal year in the case that cash flow leverage, as defined in
the Credit Facility, is greater than two times, 50% of the excess cash flow
as defined in the Credit Facility, (b) upon availability of cash from the
net proceeds of any sale of certain of the Company's assets, and (c)
proceeds from settlements for casualty insurance policies greater than $250.
Open interest rate contracts are reviewed regularly by the Company to ensure
that they remain effective as hedges of interest rate exposure. The fair
value obligation of the interest rate-swap agreement was approximately $159
as of December 29, 2001 and has been recorded as a liability.
CAPITAL LEASES - The Company is obligated under capital leases for its phone
system, computer equipment and software that will expire during fiscal 2002.
The recorded value of the assets was $1,173 and $1,232 as of December 29,
2001 and December 30, 2000, respectively. The related accumulated
amortization on these assets was $985 and $636 as of December 29, 2001 and
December 30, 2000, respectively.
Future aggregate minimum annual lease payments under capital leases at
December 29, 2001 was $303 of which $33 represented interest and $270
represented principal to be paid by December 28, 2002.
4. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to significant negative economic
trends, implemented a restructuring and streamlining of company operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of intangible assets for impairment
whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. If an impairment is
indicated, the asset is written down to its estimated fair value. During the
third quarter of 2001, the Company wrote down approximately $32,945 of
impaired long-lived assets related to the goodwill, purchased technology,
workforce and customer base associated with the acquisitions of PADS
Software and Summit Design. Based on the declining historical and forecasted
operating results of such intangible assets as they relate to earlier
estimates and the general economic trends of the EDA industry as a whole,
their estimated value to the Company has decreased. Based on the Company's
expectation of future undiscounted net cash flows, these assets have been
written-down to their net realizable value.
RESTRUCTURING COSTS
As a result of the restructuring, the Company recorded charges of $5,271.
The restructuring costs include workforce reductions, closing facilities,
reducing space in other facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately one hundred forty employees across all business functions and
geographic regions. The workforce reductions were substantially completed by
the end of the third quarter of 2001. The Company recorded a workforce
reduction charge of $2,267 relating primarily to severance, fringe benefits
and outplacement services.
The Company also recorded a restructuring charge of $1,511 relating to lease
terminations, non-cancelable lease costs, and excess facility space. These
facility costs relate to business activities that have been exited or
restructured. In addition, the restructuring charge includes an additional
$408 in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1,085 restructuring
charge related to certain fixed assets that became impaired as a result of
the decision to reduce the workforce and close facilities.
The following table sets forth an analysis of the components of the
restructuring and intangible asset impairment charges. The table indicates
payments made against the reserve through December 29, 2001.
TOTAL NON-CASH AMOUNT DECEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ -----------------
Impairment of intangibles $32,945 $32,945 $-- $--
F-15
Disposal of fixed assets 1,085 1,085 -- --
Severance and related expenses 2,267 -- 2,152 115
Lease commitment and related fees 1,511 -- 293 1,218
Other 408 -- 201 207
------- ------- ------- -------
$38,216 $34,030 $ 2,646 $ 1,540
======= ======= ======= =======
All remaining amounts are expected to be paid by the end of fiscal 2002.
PITTSBURGH OFFICE CLOSURE
In May 2001, the Company closed an office in Pittsburgh, Pennsylvania and
transferred the operations to other offices in the United States and
overseas. The total charge of $594 consists of intangible asset and fixed
asset impairment charges of $415, $64 of severance related to the
termination of six employees and $115 of other costs incurred due to the
closure. All remaining amounts are expected to be settled by the end of
fiscal 2002.
TOTAL NON-CASH AMOUNT DECEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ----- ------------------
Impairment of intangibles and fixed assets $415 $415 $-- $--
Severance 64 -- 64 --
Lease commitment 48 -- 48 --
Other 67 -- 33 34
---- ---- ---- ----
$594 $415 $145 $ 34
==== ==== ==== ====
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company has 5,000 shares of Preferred Stock
authorized, of which there are no shares outstanding. The Board of Directors
has the authority to issue these shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued and undesignated shares of Preferred
Stock and to fix the number of shares constituting any series and the
designations of such series, without any future vote or action by the
stockholders.
REDEEMABLE, CONVERTIBLE PREFERRED STOCK - Viewlogic had authorized 22,000
shares of $.001 par value, redeemable, convertible preferred stock
("Preferred Stock") of which 17,000 were designated as Series A Voting
Preferred Stock ("Series A") and 5,000 were designated as non-voting Series
A-1 Preferred Stock ("Series A-1"). At January 1, 2000, 11,382 shares of
Series A and 4,618 shares of Series A-1 were issued and outstanding.
Effective with the business combination of Viewlogic and Summit, all Series
A and Series A-1 shares were converted into shares of the Company's common
stock.
STOCK REPURCHASE PROGRAM - Under a stock repurchase program announced in
October 2000, the Company was authorized to purchase up to 2,000 shares of
its common stock from time to time on the open market or pursuant to
negotiated and block transactions. The repurchased shares are being held as
treasury shares and are authorized for use in the Company's stock option
plans, employee stock purchase plans and for general corporate purposes. The
authorization expired in October 31, 2001. The Company purchased 209 shares
of common stock in 2001 at an aggregate cost of $831 and 341 shares of
common stock in 2000 at an aggregate cost of $832.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
2000 STOCK INCENTIVE PLAN - On May 31, 2000 the Board of Directors adopted
the Amended and Restated 2000 Stock Incentive Plan (the "2000 Plan"). On
July 13, 2000, the stockholders approved the 2000 Plan. Under the 2000 Plan
either shares of the Company's common stock or options to purchase shares of
the Company's stock may be issued at the discretion of the Company's Board
of Directors. The initial 4,500 shares authorized to be issued under the
2000 Plan increase automatically by 2,000 shares annually during the 2000
Plan's existence. In addition, up to 2,400 shares which were previously
available for issuance under the Summit Design 1994 Stock Plan, the Summit
Design 1997 Non-Statutory Stock Plan and the Viewlogic Systems, Inc. 1998
Stock Incentive Plan (collectively, the "Prior Plans") may be issued under
the 2000 Plan. No more than 500 shares of stock can be awarded to a single
employee in any calendar year. Options generally vest over a period of four
years and expire after ten years. Options granted to certain officers are
exercisable when granted;
F-16
however, the shares are subject to repurchase rights by the Company at the
exercise price. The Company's right to repurchase the shares generally
lapses ratably over four years.
1998 STOCK INCENTIVE PLAN - The Company has the Viewlogic Systems, Inc. 1998
Stock Incentive Plan (the "1998 Plan"). Under the 1998 Plan, the Company may
issue stock or options to purchase shares at the discretion of the Company's
Board of Directors. The initial 4,521 shares authorized to be issued under
the 1998 Plan increase automatically by five percent of the original shares
authorized annually during the 1998 Plan's existence. No more than 883
shares of stock can be awarded to a single employee in any calendar year.
Options generally vest over a period of four years and expire after ten
years. Options granted to certain officers are exercisable when granted;
however, the shares are subject to repurchase rights by the Company at the
exercise price. The Company's right to repurchase the shares generally
lapses ratably over four years.
OTHER STOCK OPTION PLANS - The Company has the Incentive Stock Option Plan
("1994 Plan"), 1996 Director Option Plan (the "Director Plan") and the 1997
Non-statutory Stock Option Plan ("Non-statutory Plan") pursuant to which the
Company may grant options to employees and consultants. Under the terms of
the 1994 Plan, the option price is determined as the fair value of the
Company's common stock at the time the option is granted. Under the 1994
Plan, 3,447 shares of common stock are authorized for issuance. Options
generally vest 25% twelve months after the date of grant and the remainder
at 1/48th of the grant amount in each successive month thereafter. Options
expire no later than 10 years after the date of grant. Options granted under
the Non-statutory Plan will be non-statutory stock options and are not
intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code. Non-statutory options generally vest 25%
twelve months after the date of grant and the remainder at 1/48th of the
grant amount in each successive month thereafter. Options expire no later
than 10 years after the grant date.
There were 1,519 shares of common stock reserved for the grant of stock
options under all Plans at December 29, 2001, subject to certain limitations
as discussed above.
The following is a summary of option activity under all plans:
Weighted-
Number Average
of Exercise
Shares Price
------ --------
Outstanding at January 2, 1999 3,674 $ 0.49
Granted 469 1.00
Exercised (1,955) 0.49
Assumed Transcendent options 57 2.25
Forfeited (225) 0.60
------
Outstanding at January 1, 2000 2,020 0.65
Granted 3,753 3.42
Exercised (504) 1.35
Assumed options from acquisitions 2,715 4.42
Forfeited (1,286) 3.36
------
Outstanding at December 30, 2000 6,698 3.17
Granted 5,320 1.63
Exercised (292) .57
Forfeited (1,678) 3.11
------
Outstanding at December 29, 2001 10,048 $ 2.46
======
The following are the shares exercisable at the corresponding weighted
average exercise price at December 29, 2001, December 30, 2000 and January
1, 2000, respectively: 3,412 at $3.20, 1,807 at $3.37 and 479 at $0.68. The
weighted-average grant date fair value for options granted for the years
ended December 29, 2001, December 30, 2000 and January 1, 2000 was $1.46,
$2.28 and $1.31, respectively.
F-17
At December 29, 2001, 2,809 shares issued upon the exercise of options by
certain officers of the Company were subject to repurchase by the Company at
the exercise price.
The following table sets forth information regarding options outstanding as
of December 29, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- --------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF PERIODS IN EXERCISE EXERCISE
EXERCISE PRICES SHARES YEARS PRICE SHARES PRICE
--------------- ---------- ----------- -------- ------- ----------
0.31 - 0.67 808 7.02 0.50 551 0.49
0.80 - 1.99 3,223 9.54 1.13 3.49 0.99
2.06 - 2.95 2,936 8.84 2.39 880 2.44
3.00 - 3.98 2,213 8.21 3.51 1,077 3.50
4.00 - 5.57 513 8.28 4.78 222 4.92
6.50 - 7.45 49 7.39 6.77 33 6.74
8.13 - 8.44 71 5.92 8.16 66 8.14
9.00 - 17.00 235 5.71 10.84 234 10.84
-------- ------
10,048 3,412
-------- ------
For financial reporting purposes, the deemed fair value of the common stock
at the dates of grants resulted in deferred compensation expense of $431 for
the year ended January 1, 2000 and $1,918 for the year ended January 2,
1999. These charges are being recognized ratably over the vesting period.
Compensation expense recognized amounted to $587, $588 and $531 for the
years ended December 29, 2001, December 30, 2000 and January 1, 2000,
respectively.
2000 EMPLOYEE STOCK PURCHASE PLAN - On May 16, 2000, the Company adopted the
2000 Employee Stock Purchase Plan ("2000 Purchase Plan"). The 2000 Purchase
Plan, which is intended to qualify under Section 423 of the Internal Revenue
code, permits eligible employees of the Company to purchase common stock
through payroll deductions of up to 10% of their base salary up to a maximum
of $25 of common stock for all purchase periods ending within any calendar
year. The price of common stock purchased under the 2000 Purchase Plan will
be 85% of the lower of the fair market value of the common stock on the
first day of each 24-month offering period or the last day of the applicable
six-month purchase period. The Company reserved 700 shares of common stock
for issuance under the 2000 Purchase Plan, all of which are expected to have
been purchased by March 1, 2002. The Company plans to seek in 2002 Board of
Director and shareholder approval for an additional 1,100 shares to be
reserved for issuance under the plan.
PRO FORMA DISCLOSURES - As described in Note 1, the Company applies the
intrinsic value method of APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost been determined
based on the fair value at the grant dates consistent with the method
required by FASB Statement 123, the Company's net income (loss) and net
income (loss) per share would have been:
YEAR ENDED
--------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---------- ----------- ----------
Net income (loss) $ (44,415) $ (11,948) $ 197
Net income (loss) per
common share
Basic (1.13) (0.42) 0.05
F-18
Diluted (1.13) (0.42) 0.01
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans was estimated on the date of
grant using the Black-Scholes option pricing model.
Key assumptions used to apply this pricing model are as follows for the
periods presented:
YEAR ENDED
-------------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------- -------------
Risk-free interest rate 5.2% - 6.7% 5.2% - 6.7% 5.3% - 6.3%
Expected life of option grants 4 years 4 years 4 years
Expected volatility of underlying stock 97% 90% 59%
Expected dividend payment rate -- -- --
6. INCOME TAXES
The components of income (loss) before income taxes consisted of the
following:
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
-------- -------- --------
Domestic $(52,084) $ (8,483) $ 124
Foreign (4,252) (876) 416
-------- -------- --------
Total Income (Loss) Before Taxes $(56,336) $ (9,359) $ 540
======== ======== ========
The provision (benefit) for income taxes consisted of the following:
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
-------- -------- --------
Current:
Federal $ 977 $ 6,717 $ --
State 331 -- --
Foreign (543) 472 250
-------- -------- --------
Total 765 7,189 250
Deferred:
Federal (12,570) (5,380) 51
State (2,038) -- --
Foreign 144 -- (20)
-------- -------- --------
Total (14,464) (5,380) 31
Total provision (benefit) for income taxes $(13,699) $ 1,809 $ 281
======== ======== ========
F-19
A reconciliation between the statutory U.S. federal income tax and the
Company's effective tax rate for the respective years is as follows:
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
----------- ----------- ----------
U.S. federal statutory rate% (35.0)% (35.0)% 35.0%
State taxes -- net of federal tax benefit (1.0) (4.0) --
Foreign taxes 2.1 5.0 15.6
Goodwill amortization 7.4 21.6 --
In-process research and development -- 22.7 --
Amortization of stock compensation 0.4 2.4 --
Other items 1.8 6.6 1.4
----- ---- ----
Total% (24.3)% 19.3% 52.0%
===== ==== ====
Deferred tax assets and liabilities consisted of the following:
YEAR ENDED
--------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
--------- ----------- ---------
Current assets:
Accounts receivable $ 764 $ 1,871 $ 537
Deferred compensation 427 1,561 504
Foreign net operating loss carryforwards 1,050 1,123 301
Depreciation and amortization 1,044 1,061 --
In-process research and development -- 949 --
Deferred revenue 408 -- --
Other items 267 61 --
-------- -------- --------
Total current assets $ 3,960 $ 6,626 $ 1,342
-------- -------- --------
Noncurrent liabilities:
Purchased technology $ 8,749 $ 24,516 $ 993
Capitalized software costs 901 2,233 822
Depreciation and amortization -- 230 530
Deferred revenues -- 212 --
Other 363 451 48
-------- -------- --------
Total liabilities $ 10,013 $ 27,642 $ 2,393
-------- -------- --------
Total net tax deferred liability $ (6,053) $(21,016) $ (1,051)
======== ======== ========
No valuation allowance is required as the deferred tax assets are expected
to be fully realized.
7. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases its principal office facilities and certain
computer equipment under non-cancelable operating leases expiring on various
dates through 2006. The Company's headquarters office lease is through 2002.
The lease includes three two-year renewal options to extend the lease
through 2008. The lease contains a three-month rental abatement and a
F-20
rental escalation clause, the effects of which are being recognized ratably
over the lease term. At December 29, 2001, future minimum lease payments
under these non-cancelable leases were approximately as follows: 2002,
$4,732; 2003, $2,836; 2004, $1,852; 2005, $1,456; and 2006, $272. The
Company leases other office facilities under operating lease agreements for
which lease terms are one year or less. Total rent expense was approximately
$4,569, $3,572 and $2,232 for the years ended December 29, 2001, December
30, 2000 and January 1, 2000, respectively.
CONTINGENCIES - The Company is involved in certain legal proceedings which
have arisen in the ordinary course of business. Management believes the
outcome of these proceedings will not have a material adverse impact on the
Company's consolidated financial condition or operating results.
8. RELATED PARTY TRANSACTIONS
SALE OF VIRSIM PRODUCT LINE - On July 28, 2000, the Company entered into an
agreement with Synopsys, Inc. By virtue of its ownership interest in the
Company, Synopsys may be deemed to be affiliated with Innoveda. Synopsys
agreed to acquire Innoveda's VirSim electronic design software tool and
certain related assets for a purchase price of $7,000. The sale was
completed on August 2, 2000. There was no gain or loss on the sale as the
proceeds were offset by the related write-off of the goodwill and other
intangible assets that were recorded from the business combination of Summit
and Viewlogic in March 2000. This transaction resulted in an additional tax
provision of approximately $1,500 in 2000.
ROYALTY AGREEMENTS - On October 2, 1998, the Company entered into two OEM
agreements with Synopsys pursuant to which the Company has the right to
resell certain Synopsys software. The agreements are for two and three years
and are automatically renewed on a year-to-year basis thereafter. Under
these agreements, the Company paid royalties to Synopsys of $1,315, $2,279,
and $1,890 for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000, respectively. In fiscal 2001, the two year agreement with
Synopsys was renewed. The three year agreement with Synopsys was terminated
in fiscal 2001.
MINORITY STOCKHOLDERS - The minority stockholder in PADS Asia, a subsidiary
of the Company, is entitled to receive annually a performance bonus based on
PADS Asia's operations. The bonus amounted to $72 for the year ended
December 30, 2000. At December 29, 2001 and December 30, 2000, total amounts
payable to minority stockholders amounted to $57 and $66, respectively.
Additionally, PADS Asia had sales to the minority stockholder of $67 for the
year ended December 30, 2000.
OTHER RELATED PARTY TRANSACTIONS - Expensed fees for contract software
development paid to an employee-owned company amounted to $1,913 and $429
for years ended December 29, 2001 and December 30, 2000, respectively.
In connection with the exercise of certain stock options, the Company became
the holder of a promissory note made by each of the executive officers
listed below. The notes bear no interest and are secured by a pledge of the
restricted shares issued upon the exercise of those stock options. Each note
must be repaid prior to the sale of the shares securing that note, and in
any event within three months after termination of the executive's
employment with the Company. In the event of default under the promissory
note, if the value of the restricted shares is not sufficient to insure full
payment of the promissory note, the maximum liability of each individual is
limited to the lesser of one-half of the original principal amount of their
promissory note and the then current balance under the promissory note.
Throughout fiscal 2001 and 2000, the principal balance of each promissory
note was $418 for Mr. Herman, Chief Executive Officer; $330 for Mr. Lucier,
President; $22 for Ms. Cassidy, Vice-President of Human Resources; $69 for
Mr. Johnson, Vice-President of Business Development and Chief Legal Officer
and $88 for Mr. O'Brien, Vice-President and Chief Financial Officer.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables sets forth selected quarterly financial information:
QUARTERS ENDED
---------------------------------------------------------
December 29, September 29, June 30, March 31,
2001 2001 2001 2001
------------ ------------ ----------- ----------
Revenue $ 22,050 $ 20,032 $ 22,077 $ 27,258
Operating income (loss) 129 (44,083) (8,885) (3,059)
F-21
Net income (loss) 958 (34,751) (6,737) (2,107)
Net income (loss) per share -- Basic 0.02 (0.89) (0.17) (0.05)
Net income (loss) per share -- Diluted 0.02 (0.89) (0.17) ((0.05)
QUARTERS ENDED
---------------------------------------------------------
December 30, September 30, July 1, April 1,
2000 2000 2000 2000
------------ ------------ ----------- ----------
Revenue $ 30,811 $ 23,103 $ 21,560 $ 14,385
Operating income (loss) (16) (2,878) (944) (5,199)
Net income (loss) (1,243) (4,814) (669) (4,442)
Net income (loss) per share -- Basic (0.03) (0.14) (0.02) (0.57)
Net income (loss) per share -- Diluted (0.03) (0.14) (0.02) (0.57)
10. SEGMENT INFORMATION
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision-maker, or decision-making group, in making decisions on
how to allocate resources and assess performance. The Company's chief
operating decision-makers, as defined under SFAS No. 131, is its executive
management team.
The Company views its operations and manages its business as principally one
segment with three distinct product groups: Printed Circuit Board Design
("PCB"), System Level Design ("SLD"), and Electromechanical Design ("EM").
Due to mid-year acquisitions in 2000 which, in part, created the distinct
product groups, it is not practicable to present periods prior to the year
ended December 29, 2001, for the current product lines on this basis.
Revenues for each of the categories for the fiscal year ended December 29,
2001 are as follows:
PRINTED SYSTEM ELECTRO-
CIRCUIT BOARD LEVEL MECHANICAL
DESIGN DESIGN DESIGN CONSOLIDATED
------------- ------- ---------- ------------
REVENUE:
Software $32,882 $ 9,913 $ 1,671 $44,466
Services and other 30,080 14,144 2,727 46,951
------- ------- ------- -------
Total revenue $62,962 $24,057 $ 4,398 $91,417
Revenue consists of software sales, maintenance, and services. Summarized
information about the Company's operations by geographic area for the
periods stated are as follows:
NORTH
AMERICA EUROPE JAPAN CONSOLIDATED
------- ------- ------- ------------
December 29, 2001:
Revenue $60,520 $21,299 $ 9,598 $91,417
Long-lived assets $33,135 $ 1,842 $ 31 $35,008
December 30, 2000:
Revenue $65,979 $11,740 $12,140 $89,859
Long-lived assets $83,123 $ 1,966 $ 50 $85,139
F-22
January 1, 2000:
Revenue $40,225 $ 8,820 $ 4,454 $53,499
Long-lived assets $10,455 $ 284 $ 593 $11,332
No customer accounted for more than 10% of revenue for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000.
11. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan under which domestic
employees are allowed to contribute a certain percentage of their pay. The
Company matches 50% of employee elected pretax contributions, up to an
annual maximum. In addition, as part of the PADS and Summit mergers, the
Company acquired the former 401(k) retirement plans from those companies. No
further employee contributions were accepted after the respective merger
dates. Employer contributions for all plans amounted to $643, $235 and $286,
respectively, for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000.
12. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect, if dilutive, of outstanding stock options using the treasury stock
method and the assumed conversion of preferred stock. Although Summit Design
is the surviving legal entity after the March 2000 business combination and
the legal acquirer, for accounting purposes the Summit Design business
combination was treated as an acquisition of Summit Design by Viewlogic. The
weighted average number of common shares outstanding has been adjusted for
all periods reported in the table below to reflect the Summit Design
exchange ratio of 0.67928.
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ---------- ----------
Net Income (loss) $(42,637) $(11,168) $ 259
======== ======== ========
Weighted-average number of shares- basic 39,224 28,252 3,938
Assumed number of shares issued from:
Dilutive effects of stock options -- -- 780
Assumed conversion of Preferred Stock -- -- 10,868
-------- -------- --------
Weighted-average number of shares - diluted 39,224 28,252 15,586
======== ======== ========
Net income (loss) per share -- (basic) $ (1.09) $ (0.40) $ 0.07
======== ======== ========
Net income (loss) per share - diluted $ (1.09) $ (0.40) $ 0.02
======== ======== ========
For the years ended December 29, 2001, December 30, 2000 and January 1,
2000, there were 6,056, 6,698 and 1,239 anti-dilutive weighted average
potential common shares, respectively, not included in the table above.
F-23