UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
quarterly period ended September 29, 2001
OR
/ / Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for
the transition period from _________ to________
Commission file number: 000-20923
INNOVEDA, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 93-1137888
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
293 BOSTON POST ROAD WEST, MARLBORO, MASSACHUSETTS 01752-4615
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (508) 480-0881
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
As of November 8, 2001, the Registrant had outstanding 40,265,125 shares of
Common Stock, $0.01 par value per share.
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical fact included
in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, the
availability of financial resources, prospects, plans and objectives of
management are forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words "will", "believe", "anticipate", "intend", "estimate",
"expect", "project", "plans", and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. We cannot guarantee future results, levels of activity,
performance or achievements and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions,
reorganizations, restructurings, joint ventures or strategic alliances. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in the following discussion, and, in particular, the risks discussed below
under the subheading "Additional Risk Factors that Could Affect Operating
Results and Market Price of Stock". The forward-looking statements provided by
Innoveda in this Quarterly Report on Form 10-Q represent Innoveda's estimates as
of the date this report is filed with the SEC. Innoveda anticipates that
subsequent events and developments will cause its estimates to change. While
Innoveda may elect to update its forward-looking statements in the future, it
specifically disclaims any obligation to do so. Innoveda's forward-looking
statements should not be relied upon as representing its estimates as of any
date subsequent to the date this report is filed with the SEC.
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART 1 FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements 4
Condensed Consolidated Balance Sheets as of September 29, 2001 4
(unaudited) and December 30, 2000
Condensed Consolidated Statements of Operations for the Quarters 5
and Nine Months Ended September 29, 2001 (unaudited) and
September 30, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Quarters 6
and Nine Months Ended September 29, 2001 (unaudited) and
September 30, 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 35
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 36
SIGNATURE 37
EXHIBIT INDEX 38
EXHIBITS 39
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 29, December 30,
2001 2000
(unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 7,585 $ 20,799
Accounts receivable, net ....................................................... 17,853 27,260
Prepaid expenses and other ..................................................... 1,996 2,800
Deferred income taxes .......................................................... 7,378 6,626
------------ ------------
Total current assets ......................................................... 34,812 57,485
Equipment and furniture, net ...................................................... 5,553 7,642
Capitalized software costs, net ................................................... 2,241 2,358
Purchased technology and other intangibles, net ................................... 27,664 62,198
Goodwill and other ................................................................ 2,249 12,941
------------ ------------
Total assets ................................................................. $ 72,519 $142,624
============ ============
LIABILITIES
Current liabilities:
Long-term debt, current portion ................................................ $ 3,875 $ 3,550
Capital lease obligations, current portion ..................................... 378 548
Accounts payable ............................................................... 2,333 3,652
Accrued liabilities ............................................................ 15,421 20,565
Deferred revenue ............................................................... 19,794 24,514
------------ ------------
Total current liabilities .................................................... 41,801 52,829
Long-term debt .................................................................... 2,750 5,750
Capital lease obligations ......................................................... 16 250
Other long-term liabilities ....................................................... 1,455 1,553
Deferred income taxes ............................................................. 15,284 27,642
------------ ------------
Total liabilities ............................................................ 61,306 88,024
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 authorized,
40,093 outstanding at September 29, 2001, 39,347
outstanding at December 30, 2000 .............................................. 402 393
Treasury stock .................................................................... (1,663) (832)
Additional paid-in-capital ........................................................ 117,367 116,047
Notes due from stockholders ....................................................... (932) (932)
Deferred compensation ............................................................. (673) (1,113)
Accumulated deficit ............................................................... (102,608) (59,013)
Accumulated other comprehensive income (loss) ..................................... (680) 50
------------ ------------
Total stockholders' equity ................................................... 11,213 54,600
------------ ------------
Total liabilities and stockholders' equity ................................... $ 72,519 $142,624
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Third Quarter Ended Nine Months Ended
----------------------------- ----------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenue:
Software ............................................... $ 8,447 $ 12,578 $ 33,821 $ 31,819
Services and other ..................................... 11,585 10,525 35,546 27,229
------------- ------------- ------------- -------------
Total revenue ........................................ 20,032 23,103 69,367 59,048
------------- ------------- ------------- -------------
Cost and expenses:
Cost of software ....................................... 1,595 1,994 5,169 5,466
Cost of services and other ............................. 2,767 2,214 8,203 5,826
Sales and marketing .................................... 10,240 8,046 32,793 22,983
Research and development ............................... 6,377 5,750 21,576 15,021
General and administrative ............................. 1,996 1,776 6,316 4,555
Amortization of intangibles ............................ 2,777 2,508 12,087 5,588
Amortization of stock compensation ..................... 147 147 440 441
In-process research and development .................... -- 3,053 -- 5,453
Impairment of intangible assets ........................ 32,945 -- 32,945 --
Restructuring costs .................................... 5,271 493 5,865 2,736
------------- ------------- ------------- -------------
Total operating expenses ............................. 64,115 25,981 125,394 68,069
------------- ------------- ------------- -------------
Operating loss ....................................... (44,083) (2,878) (56,027) (9,021)
Other expense, net ........................................ (165) (200) (334) (340)
------------- ------------- ------------- -------------
Loss before provision (benefit) for income taxes .......... (44,248) (3,078) (56,361) (9,361)
Provision (benefit) for income taxes ...................... (9,497) 1,736 (12,766) 564
------------- ------------- ------------- -------------
Net loss .................................................. $ (34,751) $ (4,814) $ (43,595) $ (9,925)
============= ============= ============= =============
Net loss per share:
Basic and diluted .................................... $ (0.89) $ (0.14) $ (1.12) $ (0.40)
============= ============= ============= =============
Weighted average shares outstanding:
Basic and diluted .................................... 39,108 33,336 39,080 24,590
============= ============= ============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended
-----------------------------
September 29, September 30,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(43,595) $ (9,925)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................................. 16,254 9,649
Non-cash portion of restructuring and impairment costs ..................... 34,445 --
Compensation under stock option agreements ................................. 440 440
Write-off of in-process research and development ........................... -- 5,453
Changes in assets and liabilities:
Accounts receivable ........................................................ 9,122 2,294
Prepaid and other current assets ........................................... 773 622
Deferred income taxes ...................................................... (13,110) (3,919)
Accounts payable ........................................................... (2,088) (1,427)
Accrued liabilities ........................................................ (5,199) 3,621
Tax benefit on stock option exercises ...................................... 43 --
Deferred revenue ........................................................... (4,720) (3,104)
------------- -------------
Net cash provided by (used in) operating activities ........................ (7,635) 3,704
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................................ (2,047) (2,168)
Capitalized software costs ................................................. (794) (1,353)
Proceeds from sale of VirSim product line .................................. -- 7,000
Cash acquired in acquisition of PADS Software, Inc, net of
purchase costs ........................................................... -- 2,857
Cash acquired in acquisition of Summit, net of purchase costs .............. -- 27,036
------------- -------------
Net cash provided by (used in) investing activities ........................ (2,841) 33,372
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt .............................................. (2,675) (14,320)
Proceeds from exercise of stock options and employee stock
purchase plan ............................................................ 1,286 872
Payments of capital lease obligations ...................................... (404) (300)
Purchase of treasury stock ................................................. (831) --
------------- -------------
Net cash used in financing activities ...................................... (2,624) (13,748)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ (114) (133)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (13,214) 23,195
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 20,799 531
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 7,585 $ 23,726
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
INNOVEDA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
Innoveda, Inc. (the "Company"), a Delaware corporation, was created by the
business combination of Summit Design, Inc. ("Summit") and Viewlogic Systems,
Inc. ("Viewlogic"), which was consummated on March 23, 2000. In addition, the
Company subsequently acquired PADS Software, Inc. ("PADS") on September 22,
2000. The business combination of Summit with Viewlogic was effected by means of
the merger of a wholly owned subsidiary of Summit with and into Viewlogic, with
Viewlogic surviving as a wholly owned subsidiary of Summit. The business
combination was accounted for as a reverse acquisition, as former stockholders
of Viewlogic owned the majority of the outstanding stock of Summit subsequent to
the business combination. Therefore, for accounting purposes, Viewlogic is
deemed to have acquired Summit. The business combination of Innoveda and PADS
was accounted for as a purchase of PADS by Innoveda.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments necessary to present fairly the information set
forth therein have been included.
The fiscal 2000 financial information presented in the condensed consolidated
statements of operations and the condensed consolidated statements of cash flows
represents the results for Viewlogic for the periods stated and includes the
financial results for Summit commencing March 24, 2000 and the financial results
for PADS commencing September 23, 2000.
2. ACQUISITIONS
ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into a
merger agreement with PADS. The merger was consummated on September 22, 2000.
The merger agreement provided that a wholly owned subsidiary of Innoveda would
merge with and into PADS, with PADS surviving as a wholly owned subsidiary of
Innoveda following the merger. For the merger, Innoveda issued 6,473 shares of
its common stock and paid approximately $2.0 million to the PADS stockholders.
PADS capital stock outstanding at the merger date was exchanged for shares of
Innoveda common stock at the rate of approximately 1.0 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 operating results of PADS have been included in the accompanying condensed
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.
7
2. ACQUISITIONS (CONTINUED)
Innoveda recorded merger costs of approximately $0.5 million in merger related
charges relating to the PADS merger. This was primarily comprised of severance
payments related to one employee and exit costs to close Innoveda duplicative
facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an Agreement
and Plan of Reorganization. Summit was a publicly held company engaged in a
business similar to that of Viewlogic. In connection with the business
combination contemplated by the Agreement and Plan of Reorganization, (1) each
share of Viewlogic common stock and preferred stock issued and outstanding at
the effective time of the business combination was converted into 0.67928 (the
"Exchange Ratio") of a share of Summit common stock, and (2) each option to
purchase shares of Viewlogic common stock was converted into an option to
purchase Summit common stock based upon the Exchange Ratio.
The business combination was accounted for under the purchase method of
accounting and was treated as a reverse acquisition, as the stockholders of
Viewlogic received the majority 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 condensed consolidated financial statements from the date of
acquisition. Under the purchase method of accounting, the acquired assets and
assumed liabilities have been recorded at their estimated fair values at the
date of acquisition.
During the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in merger costs relating to the Summit business combination. This
primarily included severance and other costs relating to the consolidation of
duplicative facilities as a result of the business combination between Summit
and Viewlogic. Other costs relating to property and equipment lease contracts
(less any applicable sublease income) after the properties were abandoned, lease
buyout costs, restoration costs associated with certain lease arrangements, and
costs to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure the Innoveda sales and
services business in Japan as a result of an exclusive distributor agreement
executed with Marubeni Solutions Corporation during the first quarter of fiscal
2000. Charges associated with the Japanese reorganization include severance and
benefit continuance for approximately 14 employees, costs associated with office
closings and subsequent lease termination, and other facility and exit related
costs.
8
2. ACQUISITIONS (CONTINUED)
The following table presents the components of the merger costs accrued during
the mergers with PADS and Summit and the charges against these reserves through
September 29, 2001. All remaining amounts are expected to be settled within the
fourth quarter of fiscal 2001.
Total Non-Cash Amount September 29, 2001
Accrual Write-Off Paid Accrual Balance
------- --------- ------ -------------------
PADS MERGER COSTS
Severance ............................................ $ 250 $ 32 $ 218 $ --
Non-cancelable commitments ........................... 199 -- 199 --
Capitalized software ................................. 44 44 -- --
------ ------ ------ ------
$ 493 $ 76 $ 417 $ --
------ ------ ------ ------
SUMMIT MERGER COSTS
Severance ............................................ $ 780 $ 5 $ 775 $ --
Non-cancelable commitments ........................... 1,389 -- 1,300 89
Capitalized software ................................. 74 74 -- --
------ ------ ------ ------
$2,243 $ 79 $2,075 $ 89
------ ------ ------ ------
TOTALS ............................................... $2,736 $ 155 $2,492 $ 89
====== ====== ====== ======
9
3. EARNINGS PER SHARE
Basic earnings per share is calculated using weighted average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares plus the effect, if dilutive, of
outstanding stock options using the treasury stock method.
Third Quarter Ended Nine Months Ended
----------------------------- ----------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net Loss ............................... $(34,751) $ (4,814) $(43,595) $ (9,925)
============= ============ ============ =============
Weighted average number of
common shares - Basic .............. 39,108 33,336 39,080 24,590
============= ============ ============ =============
Weighted average number of
common and potential common
shares - Diluted ................... 39,108 33,336 39,080 24,590
============= ============ ============ =============
Net loss per share:
Basic .............................. $ (0.89) $ (0.14) $ (1.12) $ (0.40)
============= ============ ============ =============
Diluted ............................ $ (0.89) $ (0.14) $ (1.12) $ (0.40)
============= ============ ============ =============
For the three and nine months ended September 29, 2001 and September 30, 2000,
there were 10,320 and 5,449 anti-dilutive common shares, respectively, not
included in the table above.
10
4. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
Innoveda operates in a single industry segment comprising the electronic design
automation industry. Net revenue by geographic region (in thousands) and as a
percentage of total revenue for each region is as follows:
For the Third Quarter Ended For the Nine Months Ended
--------------------------- -------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------ ------------ ------------
Revenue:
North America ....................... $13,645 $14,017 $46,437 $37,956
Europe .............................. 3,164 2,584 11,095 7,325
Japan ............................... 2,499 4,094 7,378 9,599
Other ............................... 724 2,408 4,457 4,168
------- ------- ------- -------
Total Revenue ......................... $20,032 $23,103 $69,367 $59,048
======= ======= ======= =======
As a percentage of Total Revenue
North America ....................... 68% 61% 67% 64%
Europe .............................. 16% 11% 16% 13%
Japan ............................... 12% 18% 11% 16%
Other ............................... 4% 10% 6% 7%
------- ------- ------- -------
Total ................................. 100% 100% 100% 100%
======= ======= ======= =======
5. COMPREHENSIVE LOSS
The following table presents the components of comprehensive loss for the
periods indicated.
For the Third Quarter Ended For the Nine Months Ended
---------------------------------- -------------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------ ------------
Net loss ........................................ $(34,751) $ (4,814) $(43,595) $ (9,925)
Foreign currency translation adjustments ........ (202) (88) (730) (217)
-------- -------- -------- --------
Comprehensive loss .............................. $(34,953) $ (4,902) $(44,325) $(10,142)
======== ======== ======== ========
11
6. DEBT
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 existing $6.6 million term loan (the "Term Loan") and its
revolving line of credit ("Line of Credit") (together, the "Credit Facility")
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 original repayment schedule, and the Line of Credit portion of the
Credit Facility has been reduced to approximately $0.4 million 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 rates on the Line of
Credit at September 29, 2001 and December 30, 2000 were 6% and 10%,
respectively. The interest rates on the Term Loan at September 29, 2001 and
December 30, 2000 were 5.6% and 9.2%, respectively. Payments of principal
outstanding under either the Line of Credit or the Term Loan may be made at
any time and must be repaid in full by September 30, 2003. A payment of $0.9
million is due in the fourth quarter of fiscal 2001. Successive payments of
$1.0 million are due each quarter through September 2002, and $1.4 million
and $0.4 million are due in the first and second quarters of fiscal 2003,
respectively.
7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), which established accounting and reporting standards for
derivative instruments. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes in the
fair value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings. Adoption of
SFAS 133 did not have a material effect on the Company's consolidated financial
position or results of operations.
12
8. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to current economic conditions and as part
of its revised strategic direction and technology focus, completed a
restructuring and streamlining of company operations.
RESTRUCTURING COSTS
As a result of the restructuring, the Company recorded charges of $5.3 million.
The restructuring costs include workforce reductions, closing or reducing space
in certain facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately 140 employees across all business functions and geographic
regions. The workforce reductions were substantially completed by the end of
the third quarter. The Company recorded a workforce reduction charge of $2.3
million relating primarily to severance, fringe benefits and outplacement
services.
The Company recorded a restructuring charge of $1.5 million 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 $0.4
million in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1.1 million restructuring
charge related to certain fixed assets that became impaired as a result of the
decision to reduce the workforce and close facilities.
IMPAIRMENT OF LONG-LIVED ASSETS
As part of our review of financial results during the quarter ended September
29, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with the acquisitions of PADS and Summit
Design. The assessment was performed as a result of the current economic
downturn and negative industry trends impacting our current operations and
expected future growth rates. The conclusion of that assessment was that the
decline in economic conditions within our industry was significant and other
than temporary. As a result, we recognized pre-tax charges of $32.9 million
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, discounted at a rate commensurate with the
risks involved.
The following table sets forth an analysis of the components of the fiscal 2001
third quarter restructuring and intangible asset impairment charges. The table
indicates payments made against the reserve through September 29, 2001.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles ........................... $32,945 $32,945 $ -- $ --
Disposal of fixed assets ............................ 1,085 1,085 --
Severance and related expenses ...................... 2,267 -- 1,330 937
Lease commitment and related fees ................... 1,511 -- 62 1,449
Other ............................................... 408 -- 116 292
------- --------- ------- ------------------
$38,216 $34,030 $ 1,508 $ 2,678
======= ========= ======= ==================
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0
million, with the remaining amounts to be paid in subsequent periods.
13
8. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
PITTSBURGH OFFICE CLOSURE
In May 2001, the Company closed an office located in Pittsburgh, Pennsylvania
and transferred the operations to other offices in the United States and
overseas. The total charge of $0.6 million consists of intangible asset and
fixed asset impairment charges of $0.4 million, $0.1 million of severance
related to the termination of 8 employees and $0.1 million of other costs
incurred due to the closure. All significant amounts are expected to be
settled within a year of the office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles
and fixed assets ................. $415 $415 $-- $--
Severance .......................... 64 -- 64 --
Lease commitment ................... 48 -- 20 28
Other .............................. 67 -- 20 47
------- --------- ------ ------------------
$594 $415 $104 $ 75
======= ========= ====== ==================
9. NEW ACCOUNTING PRONOUNCEMENTS
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 supercedes SFAS 121,
and the accounting and reporting provisions of APB 30, for the disposal of a
segment of a business. The provisions of SFAS 144 are required to be adopted by
the Company effective January 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 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 is currently evaluating the impact of adopting these statements.
14
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. This Item contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties.
Actual results may differ materially from those included in such forward-looking
statements. Factors which could cause actual results to differ materially
include those set forth under "Additional Risk Factors that Could Affect
Operating Results and Market Price of Stock" commencing on page 26, as well as
those otherwise discussed in this section and elsewhere in this Quarterly Report
on Form 10-Q. See "Important Note About Forward-Looking Statements" above.
OVERVIEW
Innoveda, Inc., a Delaware corporation, was created by the business combination
of Summit Design, Inc. and Viewlogic Systems, Inc., which was consummated on
March 23, 2000. The merger of Summit Design with Viewlogic was accounted for as
a reverse acquisition as former stockholders of Viewlogic owned a majority of
the outstanding stock of Summit subsequent to the business combination. For
accounting purposes, Viewlogic is deemed to have acquired Summit Design. On
September 22, 2000, Innoveda completed its acquisition of PADS Software, Inc.
Accordingly, all financial information presented herein includes the results for
Viewlogic for the entire period, the results of Summit from March 24, 2000 and
the results of PADS from September 22, 2000.
Innoveda operates in the United States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
technical support and consulting services for those software tools. Innoveda
currently markets and sells its products worldwide through multiple distribution
channels, including independent distributors, value-added resellers, direct
sales and telesales.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenue of certain items in our condensed consolidated statements of
operations:
For the Third Quarter Ended For the Nine Months Ended
--------------------------- ---------------------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- ------------
Revenue:
Software ......................................... 42% 54% 49% 54%
Services and other ............................... 58% 46% 51% 46%
------------- ------------- ------------- ------------
Total Revenue ...................................... 100% 100% 100% 100%
------------- ------------- ------------- ------------
Costs and expenses:
Cost of software ................................. 8% 9% 8% 9%
Cost of services and other ....................... 14% 10% 12% 10%
Sales and marketing .............................. 51% 35% 47% 39%
Research and development ......................... 32% 25% 31% 25%
General and administrative ....................... 10% 8% 9% 8%
Amortization of intangibles and stock
compensation ................................... 15% 11% 18% 10%
In-process research and development .............. -- 13% -- 9%
Impairment of intangible assets .................. 164% -- 47% --
Restructuring costs .............................. 26% 2% 8% 5%
------------- ------------- ------------- ------------
Total operating expenses ........................... 320% 113% 180% 115%
------------- ------------- ------------- ------------
Loss from operations ............................... -220% -13% -80% -15%
Other expense, net ................................. -1% -1% -1% -1%
------------- ------------- ------------- ------------
Loss before provision (benefit) for income taxes ... -221% -14% -81% -16%
------------- ------------- ------------- ------------
Provision (benefit) for income taxes ............... -47% 7% -18% 1%
------------- ------------- ------------- ------------
Net loss ........................................... -174% -21% -63% -17%
------------- ------------- ------------- ------------
16
QUARTERS ENDED AND NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000
REVENUE
For the quarter ended September 29, 2001, total revenue decreased 13% to $20.0
million from $23.1 million for the quarter ended September 30, 2000. The
decrease in revenue consisted of a 33% decrease in software license revenue to
$8.4 million from $12.6 million, offset by a 10% increase in services and other
revenue to $11.6 million from $10.5 million. For the nine months ended September
29, 2001, total revenue increased 17% to $69.4 million from $59.0 million for
the nine months ended September 30, 2000. The increase consisted of a 31%
increase in services and other revenue to $35.5 million from $27.2 million and a
6% increase in software license revenue to $33.8 million from $31.8 million. The
decrease in total revenue for the third quarter ended September 29, 2001 is
primarily attributable to the impact of the global economic downturn,
particularly with our target customers in the telecom and computer industries.
Discretionary spending by these customers has been reduced, causing delays and
postponement of orders. The decrease is also attributable to revenue no longer
being realized from our VirSim product line, which was sold during the third
quarter of 2000. The increase in services and other revenue in the third quarter
year over year is primarily related to the products acquired as part of the
acquisition of PADS.
Software revenue increased for the nine-month period ended September 29, 2001
over the same period of the prior year due primarily to additional product sales
in the first quarter related to products acquired as part of the acquisition of
Summit Design in March 2000 and products acquired as part of the acquisition of
PADS Software in September 2000. This has been offset by a decrease in orders,
as discussed above. Furthermore, we realized increased consulting revenue during
the first three quarters of 2001 versus the same periods in 2000 attributable to
an increased focus in this area.
As a percentage of total revenue, software license revenue decreased to 42% for
the quarter ended September 29, 2001 from 54% for the quarter ended September
30, 2000 and decreased to 49% for the nine months ended September 29, 2001 from
54% for the nine months ended September 30, 2000. As a percentage of total
revenue, services and other revenue increased to 58% for the quarter ended
September 29, 2001 from 46% for the quarter ended September 29, 2000, and
increased to 51% for the nine months ended September 29, 2001 from 46% for the
nine months ended September 30, 2000.
COST OF SOFTWARE
Cost of software revenue consists primarily of cost of product media,
documentation, duplication, packaging and royalties. Cost of software revenue
decreased 20% to $1.6 million for the quarter ended September 29, 2001 from $2.0
million for the quarter ended September 30, 2000. For the nine months ended
September 29, 2001, cost of software revenue decreased 5% to $5.2 million from
$5.5 million for the nine months ended September 30, 2000. The decrease in the
third quarter of 2001 versus the same period in 2000 was primarily due to the
decreased royalty costs consistent with the decrease in software license
revenue, the retirement of products with large royalty costs and economies of
scale resulting from the acquisition of Summit Design and PADS Software. The
decrease in the nine-month period ended September 29, 2001 also relates to the
decreasing royalty costs and economies of scale resulting from the acquisition
of Summit Design and PADS Software offset by increased salary and related costs
of additional headcount resulting from the acquisitions of Summit Design in
March 2000 and PADS Software in September 2000.
17
As a percentage of total revenue, cost of software decreased to 8% for the
quarter ended September 29, 2001 from 9% for the quarter ended September 30,
2000, and decreased to 8% for the nine months ended September 29, 2001 from 9%
for the nine months ended September 30, 2000.
COST OF SERVICES AND OTHER
Cost of services and other consists primarily of costs of providing technical
support, education and consulting services. Cost of services and other increased
25% to $2.8 million for the quarter ended September 29, 2001 from $2.2 million
for the quarter ended September 30, 2000. For the nine months ended September
29, 2001, cost of services and other increased 41% to $8.2 million from $5.8
million for the nine months ended September 30, 2000. These increases are
primarily due to increased salary and related costs of additional headcount
resulting from the acquisitions of Summit Design in March 2000 and PADS Software
in September 2000, as well as increased staffing and related costs in our
consulting organization necessary to build the infrastructure to support
expansion in that area of our business.
As a percentage of total revenue, cost of services and other increased to 14%
for the quarter ended September 29, 2001 from 10% for the quarter ended
September 30, 2000, and increased to 12% for the nine months ended September 29,
2001 from 10% for the nine months ended September 30, 2000.
SALES AND MARKETING
Sales and marketing expenses increased 27% to $10.2 million for the quarter
ended September 29, 2001 from $8.0 million for the quarter ended September 30,
2000. For the nine months ended September 29, 2001, sales and marketing expense
increased 43% to $32.8 million from $23.0 million for the nine months ended
September 30, 2000. These increases are primarily due to increased salary and
related costs of additional headcount resulting from the acquisition of Summit
Design in March 2000 and PADS Software in September 2000 as well as additional
new hires in the sales area. Additionally, discretionary marketing spending for
trade shows, direct mail solicitations and advertising campaigns designed to
increase awareness of the Innoveda name, and marketing of our product lines,
resulted in higher sales and marketing expenses.
As a percentage of total revenue, sales and marketing expenses increased to 51%
for the quarter ended September 29, 2001 from 35% for the quarter ended
September 30, 2000, and increased to 47% for the nine months ended September 29,
2001 from 39% for the nine months ended September 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs related to support
product development. Research and development expenses increased 11% to $6.4
million for the quarter ended September 29, 2001 from $5.8 million for the
quarter ended September 30, 2000. For the nine months ended September 29, 2001,
research and development expense increased 44% to $21.6 million from $15.0
million for the nine months ended September 30, 2000. These increases are
primarily due to increased salary and related costs of additional headcount
resulting from the acquisition of Summit Design in March 2000 and PADS Software
in September 2000.
18
As a percentage of total revenue, research and development expenses increased to
32% for the quarter ended September 29, 2001 from 25% for the quarter ended
September 30, 2000, and increased to 31% for the nine months ended September 29,
2001 from 25% for the nine months ended September 30, 2000.
The amount of software development costs capitalized for the quarter ended
September 29, 2001 was approximately $0.3 million or 4% of research and
development expense for that period, and for the quarter ended September 30,
2000 was $0.1 million or 3% of research and development expense for that
period. For the nine months ended September 29, 2001 capitalized software
development costs were $0.8 million, and for the nine months ended September
30, 2000, approximately $0.7 million was capitalized.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of the administrative,
finance, human resources, legal and information systems departments. General and
administrative expenses increased 12% to $2.0 million for the quarter ended
September 29, 2001 from $1.8 million for the quarter ended September 30, 2000.
For the nine months ended September 29, 2001, general and administrative
expenses increased 39% to $6.3 million from $4.6 million for the nine months
ended September 30, 2000. These increases are primarily a result of building our
general and administrative infrastructure to support the planned growth in
revenue of our products and services and related acquisitions. To a lesser
extent, the increase is due to expenses associated with becoming a publicly
traded company.
As a percentage of total revenue, general and administrative expenses
increased to 10% for the quarter ended September 29, 2001 from 8% for the
quarter ended September 30, 2000, and increased to 9% for the nine months
ended September 29, 2001 from 8% for the nine months ended September 30, 2000.
AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION
Amortization expense increased 10% to $2.9 million in the quarter ended
September 29, 2001 from $2.7 million for the quarter ended September 30, 2000,
and increased 108% for the nine months ended September 29, 2001 to $12.5 million
from $6.0 million for the nine months ended September 30, 2000. These increases
in amortization expense are mainly due to the increase in intangibles from the
acquisitions of Summit Design and PADS Software.
There were $28.7 million and $74 million in intangible assets as of September
29, 2001 and December 30, 2000, respectively. Intangible assets as of September
29, 2001 consisted primarily of purchased technology, goodwill, workforce and
trademarks, resulting from the Summit Design acquisition in March 2000, the PADS
acquisition in September 2000, and the acquisition of Transcendent Design
Technology, Inc. in 1999. As of December 30, 2000, there was $74 million in
intangible assets consisting of purchased technology, goodwill, workforce and
customer base resulting primarily from the Summit Design acquisition, assets
acquired from OmniView, Inc. in March 1999, and the acquisition of Transcendent
Design Technology, Inc. in August 1999. Intangible assets are being amortized
over periods ranging from three to seven years. See "Impairment of Long-Lived
Assets" below.
19
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In conjunction with the acquisition of PADS in the third quarter ended September
30, 2000, Innoveda charged to expense $3.1 million representing the write-off of
acquired in-process research and development that had not yet reached
technological feasibility and had no alternative future use, as determined by an
independent appraiser. Similarly, in conjunction with the business combination
of Summit and Viewlogic in the first quarter ended April 1, 2000, we charged to
expense $2.4 million representing acquired in-process research and development
that had not yet reached technological feasibility and had no alternative future
use, as determined by another independent appraiser. For the nine months ended
September 30, 2000, Innoveda charged approximately $5.5 million to expense.
RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to current economic conditions and as part
of our revised strategic direction and technology focus, implemented a
restructuring and streamlining of company operations.
RESTRUCTURING COSTS
As a result of the restructuring, we recorded charges of $5.3 million. The
restructuring costs include workforce reductions, closing or reducing space in
certain facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately 140 employees across all business functions and geographic
regions. The workforce reductions were substantially completed by the end of
the third quarter. We recorded a workforce reduction charge of $2.3 million
relating primarily to severance, fringe benefits and outplacement services.
We recorded a restructuring charge of $1.5 million 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 $0.4
million in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1.1 million restructuring
charge related to certain fixed assets that became impaired as a result of the
decision to reduce the workforce and close facilities.
20
IMPAIRMENT OF LONG-LIVED ASSETS
As part of our review of financial results during the quarter ended September
29, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with the acquisitions of PADS and Summit
Design. The assessment was performed as a result of the current economic
downturn and negative industry trends impacting our current operations and
expected future growth rates. The conclusion of that assessment was that the
decline in economic conditions within our industry was significant and other
than temporary. As a result, we recognized pre-tax charges of $32.9 million
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.
The following table sets forth an analysis of the components of the fiscal 2001
third quarter restructuring and intangible asset impairment charges. The table
indicates payments made against the reserve through September 29, 2001.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles ............... $32,945 $32,945 $ -- $ --
Disposal of fixed assets ................ 1,085 1,085 -- --
Severance and related expenses .......... 2,267 -- 1,330 937
Lease commitment and related fees ....... 1,511 -- 62 1,449
Other ................................... 408 -- 116 292
------- ------- ------- -------
$38,216 $34,030 $ 1,508 $ 2,678
======= ======= ======= =======
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0
million, with the remaining amounts to be paid in subsequent periods.
21
PITTSBURGH OFFICE CLOSURE
In May 2001, we closed an office located in Pittsburgh, Pennsylvania and
transferred the operations to other offices in the United States and overseas.
The total charge of $0.6 million consists of intangible asset and fixed asset
impairment charges of $0.4 million, $0.1 million of severance related to the
termination of 8 employees and $0.1 million of other costs incurred due to the
closure. All significant amounts are expected to be settled within a year of the
office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
------- --------- ------ ------------------
Impairment of intangibles
and fixed assets .................. $415 $415 $ -- $ --
Severance ........................... 64 -- 64 --
Lease commitment .................... 48 -- 20 28
Other ............................... 67 -- 20 47
----- ------- ---- --------
$594 $415 $104 $ 75
===== ======= ==== ========
22
MERGER RELATED RESTRUCTURING CHARGES
During the third quarter ended September 30, 2000, we recorded approximately
$0.5 million in restructuring charges relating to the PADS merger. This was
primarily comprised of severance and exit costs to close duplicative facilities.
During the first quarter ended April 1, 2000, we recorded approximately $2.2
million in merger related charges relating to the Summit merger. This primarily
included severance and other costs relating to the consolidation of duplicative
facilities. Other costs relating to property and equipment lease contracts (less
any applicable sublease income) after the properties were abandoned, lease
buyout costs, restoration costs associated with certain lease arrangements and
costs to maintain facilities during the period after abandonment are also
included. Further action was taken to restructure our sales and services
business in Japan as a result of an exclusive distributor agreement executed
with Marubeni Solutions Corporation during the first quarter of fiscal 2000.
Charges associated with the Japanese reorganization include severance and
benefit continuance for approximately 14 employees, costs associated with office
closings and subsequent lease termination and other facility and exit related
costs.
For the nine months ended September 30, 2000, Innoveda charged approximately
$2.7 million to expense for merger related charges.
OTHER EXPENSE
Other expense consists of the net of interest expense relating to our term
loan and revolving credit line, interest income from cash and cash equivalent
balances, and gains and losses from foreign currency transactions resulting
from foreign operations conducted in local currencies. Other expense remained
flat at $0.2 million expense for the third quarter ended September 29, 2001
and for the third quarter ended September 30, 2000. For the nine months ended
September 29, 2001, other expense also remained flat as compared to the nine
months ended September 30, 2000. Other expense remained essentially the same
primarily as a result of a decrease in interest income due to the reduction
of cash and cash equivalents, offset by the decrease in interest expense due
to the pay down of debt obligations.
INCOME TAX BENEFIT
The benefit for income taxes increased to $9.5 million for the quarter ended
September 29, 2001 from a $1.7 million provision for the quarter ended
September 30, 2000. For the nine months ended September 29, 2001, the benefit
for income taxes increased to $12.8 million from a $0.6 million provision for
the nine months ended September 30, 2000. The benefit for income taxes in
2001 is primarily due to the reversal of deferred taxes related to the
impaired intangible assets and the tax benefit of the loss in 2001. The
income tax provision for 2000 includes an estimated $1.5 million resulting
from the sale of the VirSim product line on August 2, 2000. Quarterly tax
provisions are based on the estimated effective tax rates for the respective
fiscal year.
23
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
We have a Credit Facility with a commercial bank, which includes a Term Loan
and a Line of Credit. The Term Loan had $6.6 million outstanding as of
September 29, 2001. Borrowings under the Credit Facility are secured by
substantially all of our assets. The Credit Facility contains limitations on
additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to the maintenance of minimum
levels of profitability and deferred revenue, and minimum working capital and
debt service coverage ratios.
For the fiscal quarter ended June 30, 2001, we did not meet certain financial
covenants under our Credit Facility. The Company and the lender have amended
the Credit Facility to revise certain of the covenants and provide a waiver
for past violations. See Exhibit 10.6. Under this amendment, the Term Loan
portion of the Credit Facility remains in place with the original repayment
schedule and the Line of Credit portion of the Credit Facility has been
reduced from $6.0 million to approximately $0.4 million and may be used only
to cover existing letters of credit issued by the lender at our request.
Innoveda is currently in negotiations with a commercial lender to replace the
Credit Facility.
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 rates on the Line of
Credit at September 29, 2001 and December 30, 2000 were 6% and 10%,
respectively. The interest rates on the Term Loan at September 29, 2001 and
December 30, 2000 were 5.6% and 9.2%, respectively. Payments of principal
outstanding under either the Line of Credit or the Term Loan may be made at
any time and must be repaid in full by September 30, 2003. A payment of $0.9
million is due in the fourth quarter of fiscal 2001. Successive payments of
$1.0 million are due each quarter through September 2002, and $1.4 million
and $0.4 million are due in the first and second quarters of fiscal 2003,
respectively.
For the nine months ended September 29, 2001, net cash used in operating
activities was approximately $7.6 million primarily due to net operating
losses, net of non-cash items including amortization, impairment of
intangible assets, portions of the restructuring charge, deferred revenue and
deferred taxes. Net cash used in investing activities for the nine months
ended September 29, 2001 was approximately $2.8 million, primarily due to the
purchase of property and equipment. Net cash used in financing activities was
approximately $2.6 million for the nine months ended September 29, 2001,
primarily due to the repayment of principal on debt and the repurchase of our
common stock, partially offset by proceeds from exercises of employee stock
options.
We consider all highly liquid debt instruments with a remaining maturity of
three months or less when purchased to be cash equivalents. At September 29,
2001 and September 30, 2000, substantially all cash and cash equivalents were
invested in interest-bearing deposits and other short-term investments with
an original maturity of three months or less as of the date of purchase.
Pursuant to the Company's investment policy, all debt instruments must have
quality ratings no lower than an A rating.
24
On October 19, 2000, our board of directors authorized the repurchase of up to 2
million shares of common stock during the period ending October 31, 2001. The
repurchased shares will be held as treasury shares and used in company stock
option plans, employee stock purchase plans and for general corporate purposes.
As of October 31, there were 550,606 shares of common stock purchased at an
aggregate cost of $1.7 million under the stock re-purchase program.
We believe that our current cash and cash equivalents, combined with cash
expected to be generated from operations, will satisfy anticipated working
capital and other cash requirements for at least the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
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 supercedes
SFAS 121, and the accounting and reporting provisions of APB 30, for the
disposal of a segment of a business. The provisions of SFAS 144 are required
to be adopted by the Company effective January 1, 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 provides guidance regarding the initial recognition and measurement of
goodwill and other intangible assets. SFAS No.142 requires that goodwill no
longer be amortized and instead be tested annually for impairment. The
provisions of SFAS No. 141 and SFAS No. 142 apply to all business combinations
initiated after June 30, 2001.
The Company is evaluating the impact of adopting these statements.
25
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves:
o rapid technological change;
o short product life cycles;
o fluctuations in manufacturing capacity; and
o pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
and research and development budgets often fall, and the number of design
projects often decreases. Because Innoveda's sales depend upon capital spending
trends, research and development budgets and new design projects, negative
factors affecting the electronics industry could have a material adverse effect
on Innoveda's business, financial condition, results of operations, or cash
flows.
IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the emergence
of new industry standards can render existing products obsolete and
unmarketable. In addition, customers in the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Innoveda's future success will depend upon its ability to
enhance its current products, develop and introduce new products that keep pace
with technological developments and emerging industry standards and address the
increasingly sophisticated needs of Innoveda's customers. Innoveda may not
succeed in developing and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products. Innoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
26
VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE AND
FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantly in certain quarters. These fluctuations
resulted from several factors, including, among others:
o the size and timing of orders;
o large one-time charges incurred as a result of restructurings,
acquisitions or consolidations;
o seasonal factors;
o the rate of acceptance of new products;
o product, customer and channel mix;
o lengthy sales cycles; and
o level of sales and marketing staff.
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
o the timing of new product announcements and introductions by Innoveda
and Innoveda's competitors;
o the rescheduling or cancellation of customer orders;
o the ability to continue to develop and introduce new products and
product enhancements on a timely basis;
o the level of competition;
o purchasing and payment patterns, pricing policies of competitors;
o product quality issues;
o currency fluctuations; and
o general economic conditions.
27
Innoveda believes that period-to-period comparisons of Innoveda's operating
results are not necessarily meaningful. As a result, you should not rely on
these comparisons as indications of Innoveda's future performance. In addition,
Innoveda operates with high gross margins, and a downturn in revenue could have
a significant impact on income from operations and net income. Innoveda's
results of operations could be below investors' and market makers' expectations
in future quarters, which could have a material adverse effect on the market
price of Innoveda's common stock.
INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.
Innoveda's revenue is difficult to forecast for several reasons. Innoveda
operates with little product backlog because Innoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, Innoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Innoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. If
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Innoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, Innoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
Innoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Innoveda's
expectations as to future revenue. Because a high percentage of Innoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Innoveda's operating
results.
INNOVEDA HAS SUBSTANTIAL TERM DEBT, AND ITS CREDIT LINE HAS BEEN SUBSTANTIALLY
REDUCED, AND INNOVEDA MAY NOT BE ABLE TO REPLACE ITS CREDIT LINE OR TERM DEBT.
For the fiscal quarter ended June 30, 2001, Innoveda did not meet certain
financial covenants under its Credit Facility (see Management's Discussion
and Analysis of Financial Condition and Results of Operations). Innoveda and
its lender have amended the Credit Facility to revise certain of the
covenants and provide a waiver for past violations. See Exhibit 10.6. Under
this amendment, the Term Loan portion of the Credit Facility remains in place
with the original repayment schedule. However, the Line of Credit portion of
the Credit Facility has been reduced from approximately $6.0 million to
approximately $0.4 million and may be used only to cover existing letters of
credit issued by the lender at the request of the Company. Innoveda is
currently in negotiations with a commercial lender to replace the Credit
Facility but there can be no guaranty that Innoveda will be able to secure a
replacement for the Credit Facility.
28
COVENANTS AND RESTRICTIONS INCLUDED IN INNOVEDA'S CREDIT FACILITY LIMIT
MANAGEMENT'S FLEXIBILITY TO ADJUST INNOVEDA'S BUSINESS AND STRATEGIES TO CURRENT
MARKET AND ECONOMIC CONDITIONS.
As of September 29, 2001, Innoveda had borrowings of approximately $6.6 million
under its Credit Facility. Borrowings under the Credit Facility are secured by
substantially all of Innoveda's assets. The Credit Facility contains limitations
on additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to the maintenance of minimum
levels of profitability and deferred revenue, and minimum working capital and
debt service coverage ratios. To avoid default under this Credit Facility,
Innoveda must remain in compliance with these limitations and covenants and make
all required repayments or Innoveda must obtain replacement financing.
Collectively, these limitations and covenants substantially restrict the
flexibility of Innoveda's management in quickly adjusting its financial and
operational strategies to react to changing economic and business conditions and
may compromise Innoveda's ability to react to the rapidly evolving environment
of the electronic design automation industry.
INNOVEDA HAS A LIMITED AMOUNT OF CASH AND UNEXPECTED SHORTFALLS IN CASH FLOW
COULD RESTRICT THE COMPANY'S OPERATING ABILITY
As of September 29, 2001, Innoveda had approximately $7.6 million in cash and
cash equivalents. While Innoveda expects that its current cash and cash
equivalents, combined with cash expected to be generated from operations,
will be sufficient to fund its operations for at least the next 12 months, if
Innoveda does not meet its financial projections it may not have sufficient
cash to fund its operations. Innoveda is currently in negotiations with a
commercial lender to obtain a line of credit, but there can be no assurance
that Innoveda will be able to do so.
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE THE ACQUISITION BY INNOVEDA OF PADS,
THE ANTICIPATED ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN INNOVEDA AND PADS
MAY NOT BE REALIZED, IN FULL, IF AT ALL.
Innoveda acquired PADS Software, Inc. in September 2000. The integration of
Innoveda and PADS requires the dedication of Innoveda management resources. This
may distract management's attention from the management of the day-to-day
business of Innoveda. Employee uncertainty and lack of focus during integration
may also disrupt the business of Innoveda. Retention of key employees by
Innoveda has been, and will remain, critical to ensure continued advancement,
development and support of Innoveda's technologies and ongoing sales and
marketing efforts. During the integration phase, competitors may intensify their
efforts to recruit key employees. The inability to successfully integrate
Innoveda and PADS and to retain key technical, sales or marketing personnel
would adversely affect the combined company's business.
29
IF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON
WHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda focuses on the electro-mechanical, printed circuit board and
system-level design automation markets while most major competitors focus their
resources on the application-specific integrated circuit and integrated circuit
design automation markets. Innoveda has adopted this focus because it believes
that the increased complexity of application-specific integrated circuits and
integrated circuit designs, and the resulting increase in design time, will
cause electronic product manufacturers to differentiate their products at the
system level. If the system design portion of the electronic design automation
industry does not grow, it could have a material adverse effect on Innoveda's
business, financial condition, results of operations or cash flows.
INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and Innoveda
expects competition to increase as other electronic design automation companies
introduce products. In the electronic design automation market, Innoveda
principally competes with Mentor Graphics and Cadence and a number of smaller
firms. Indirectly, Innoveda also competes with other firms that offer
alternative products. These other firms could also offer more directly
competitive products in the future. Some of these companies have significantly
greater financial, technical and marketing resources and larger installed
customer bases than Innoveda. Some of Innoveda's current and future competitors
offer a more complete range of electronic design automation products.
Innoveda competes on the basis of various factors including, among others:
o product capabilities;
o product performance;
o price;
o support of industry standards;
o ease of use;
o first to market; and
o customer technical support and service.
30
Innoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Innoveda's competitors may offer
products with functionality sought by Innoveda's prospective customers and which
differs from those Innoveda offers. In addition, some competitors may achieve a
marketing advantage by establishing formal alliances with other electronic
design automation vendors. Further, the electronic design automation industry in
general has experienced significant consolidation in recent years, and the
acquisition of one of Innoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor.
Innoveda may not compete successfully against current and future competitors,
and competitive pressures may have a material adverse effect on Innoveda's
business, financial condition, results of operations, or cash flows. Innoveda's
current and future competitors may develop products comparable or superior to
Innoveda's or more quickly adapt new technologies, evolving industry trends or
customer requirements. Increased competition could result in price reductions,
reduced margins and loss of market share, all of which could have a material
adverse effect on Innoveda's business, financial condition, results of
operations or cash flows.
INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Innoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, Innoveda must have timely access
to third party software to perform development and testing of products. Although
Innoveda has established relationships with a variety of electronic design
automation vendors to gain early access to new product information, any of these
parties may terminate these relationships with limited notice. In addition,
these relationships are with companies that are Innoveda's current or potential
future competitors, including Synopsys, Mentor Graphics and Cadence. If any of
these relationships terminate and Innoveda were unable to obtain, in a timely
manner, information regarding modifications of third party products, Innoveda
would not have the ability to modify its software products to interoperate with
these third party products. As a result, Innoveda could experience a significant
increase in development costs, the development process would take longer,
product introductions would be delayed, and Innoveda's business, financial
condition, results of operations or cash flows could be materially adversely
affected.
INNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Innoveda's software products may contain errors that may not be detected until
late in the products' life cycles. Innoveda has in the past discovered software
errors in certain of its products and has experienced delays in shipment of
products during the period required to correct these errors. Despite testing by
Innoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Innoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
31
INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors fails,
Innoveda's business may suffer. Innoveda relies on distributors for licensing
and support of Innoveda's products, particularly in Japan and other parts of
Asia. Innoveda depends on the relationships with its distributors to maintain or
increase sales. Since Innoveda's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. Accordingly, Innoveda depends on the continued viability and
financial stability of these distributors.
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's distributors
may offer products of several different companies, including Innoveda's
competitors. Innoveda's current distributors may not continue to market or
service and support Innoveda's products effectively. Any distributor may
discontinue to sell Innoveda's products or devote its resources to products of
other companies. The loss of, or a significant reduction in, revenue from
Innoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
JAPAN. Innoveda has exclusive distribution agreements with two distributors in
Japan, which collectively cover a significant portion of Innoveda's products in
Japan. If either of these distributors terminates its relationship with
Innoveda, it could have a material adverse affect on Innoveda's business,
financial condition, results of operations or cash flows.
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND ASIA.
International revenue and expenses represent a significant portion of Innoveda's
total revenue and expenses, and Innoveda expects this trend to continue.
International sales and operations involve numerous risks, including, among
others:
o fluctuations in the value of the dollar relative to foreign currencies
can make Innoveda's products and services more expensive in foreign
markets or increase Innoveda's expenses;
o tariff regulations and other trade barriers;
o requirements for licenses, particularly with respect to the export of
certain technologies;
o collectibility of accounts receivable;
o changes in regulatory requirements; and
o difficulties in staffing and managing foreign operations and extended
payment terms.
32
These factors may have a material adverse effect on Innoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions, and these adverse economic conditions may worsen. Demand for and
sales of Innoveda's products in this region may decrease.
In order to successfully expand international sales, Innoveda may need to
establish additional foreign operations, hire additional personnel and recruit
additional international distributors. This will require significant management
attention and financial resources and could adversely affect Innoveda's
operating margins. In addition, to the extent that Innoveda cannot effect these
additions in a timely manner, Innoveda can only generate limited growth in
international sales, if any. Innoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Innoveda's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit additional
employees and train and manage current and future employees. Innoveda expects
any growth to place a significant strain on its operational resources and
systems. Failure to effectively manage any growth would have a material adverse
effect on Innoveda's business, financial condition, results of operations or
cash flows. Innoveda regularly evaluates acquisition opportunities. Innoveda's
future acquisitions, if any, could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, and large
one-time charges which could materially adversely affect Innoveda's results of
operations. Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern, risks
of entering markets in which Innoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Innoveda may not
integrate successfully the operations, personnel or products that have been
acquired or that might be acquired in the future, and the failure to do so could
have a material adverse affect on its results of operations.
INNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL AND COORDINATION RISKS.
POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL and Visual Elite products are
located in Israel. Economic, political and military conditions may affect
Innoveda's operations in that country. Hostilities involving Israel, for
example, could materially adversely affect Innoveda's business, financial
condition and results of operations. Innoveda's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants from the government of Israel is subject to Israeli
government restrictions which may limit Innoveda's ability to extract the full
benefit of that technology.
COORDINATION RISKS. In addition, coordination with and management of the Israeli
operations requires Innoveda to address differences in culture, regulations and
time zones. Failure to successfully address these differences could disrupt
Innoveda's operations.
33
INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED
PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain highly
skilled technical, sales and marketing and management personnel. Innoveda's
business could be seriously harmed if it lost the services of its President and
Chief Executive Officer, William J. Herman, or if it fails to attract and retain
other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. Innoveda has in
the past experienced difficulty in retaining and recruiting qualified personnel.
Innoveda may fail to retain its key personnel or attract and retain other
qualified technical, sales and marketing and management personnel in the future.
The loss of any key employees or the inability to attract and retain additional
qualified personnel may have a material adverse effect on Innoveda's business,
financial condition, results of operations or cash flows. Additions of new
personnel and departures of existing personnel, particularly in key positions,
can be disruptive and can result in departures of additional personnel, which
could have a material adverse effect on Innoveda's business, financial
condition, results of operations or cash flows.
IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build its sales and marketing
organizations. Innoveda's future success will depend in part on its ability to
hire, train and retain qualified sales and marketing personnel and the ability
of these new persons to rapidly and effectively transition into their new
positions. Competition for qualified sales and marketing personnel is intense,
and Innoveda may not be able to hire, train and retain the number of sales and
marketing personnel needed, which would have a material adverse effect on its
business, financial condition, results of operations or cash flows.
INNOVEDA MUST CONTINUE TO ADD VALUE TO ITS CURRENT PRODUCTS TO SERVE ITS
INSTALLED CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL
DECREASE.
A substantial portion of Innoveda's revenue is derived from maintenance
agreements for existing products. In order to maintain that revenue, Innoveda
must continue to offer those customers updates for those products or convert
those customers to new products. Innoveda may not be able to do so.
34
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Innoveda is exposed to interest rate risk primarily through its credit facility.
Innoveda has a credit facility with a commercial bank consisting of a $0.4
million revolving line of credit ("Line of Credit") and a $6.6 million term loan
as of September 29, 2001 (the "Term Loan") (together, the "Credit Facility").
Interest terms on the Line of Credit and the Term Loan are determined, at the
option of Innoveda, for varying periods. Innoveda may elect to have the interest
rate based on the bank's prime rate or based on the LIBOR rate at the time of
the election, depending on Innoveda's leverage financial ratio, as defined, in
the Credit Facility. The interest rates on the Line of Credit and the Term Loan
at September 29, 2001 was 6.0% and 5.6%, respectively.
Payments of principal outstanding under either the Line of Credit or the Term
Loan may be made at any time and must be repaid in full by September 30, 2003.
As required under the Credit Facility, Innoveda entered into a no fee
interest rate-swap agreement with a bank to reduce the impact of changes in
interest rates on its floating rate Credit Facility. This agreement
effectively converts a portion of the floating-rate obligation into a
fixed-rate obligation of 7.4% for a period of 60 months, expiring on March
31, 2003. The notional principal amount of the interest rate-swap agreement
was $6.6 million as of September 29, 2001. The interest rate-swap agreement
exposes Innoveda to losses in the event Innoveda repays its Term Loan that is
different than currently scheduled. Open interest rate contracts are reviewed
regularly by Innoveda to evaluate their effectiveness as hedges of interest
rate exposure. Management of Innoveda believes that the rate-swap agreement
approximates fair value.
Innoveda invests its excess cash in debt instruments of the U.S. Government and
its agencies, and in high-quality corporate issuers and, by policy, limits the
amount of credit exposure to any one issue. Innoveda attempts to protect and
preserve its invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, Innoveda's future investment income may fall short
of expectations due to changes in interest rates and Innoveda may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Innoveda considers all highly liquid debt instruments with a remaining
maturity of three months or less when purchased to be cash equivalents. At
September 29, 2001 and December 30, 2000, substantially all of the Company's
cash and cash equivalents were invested in interest-bearing deposits and
other short-term investments with an original maturity of three months or
less as of the date of purchase. Pursuant to the Company's investment policy,
all debt instruments must have quality ratings no lower than A rating.
35
FOREIGN CURRENCY EXCHANGE RATE RISK
Innoveda is also exposed to the impact of foreign currency fluctuations.
Since Innoveda translates foreign currencies into U.S. dollars for reporting
purposes, weakened currencies in its subsidiaries have a negative, though
immaterial, impact on its results. Innoveda also believes that the exposure
to currency exchange fluctuation risk is insignificant because its
international subsidiaries sell to customers, and satisfy their financial
obligations, almost exclusively in their local currencies. Innoveda entered
into foreign exchange contracts as a hedge against certain accounts
receivable denominated in foreign currencies during the nine months ended
September 29, 2001. Realized and unrealized gains and losses on foreign
exchange contracts for the nine months ended September 29, 2001 were
insignificant. There were no outstanding foreign exchange contracts as of
September 29, 2001.
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
10.1 Amendment dated September 25, 2001 to Secured Promissory Note by
Paula Cassidy and John Cassidy in favor of Viewlogic dated August
11, 1999.
10.2 Amendment dated September 25, 2001 to Secured Promissory Note by
William J. Herman in favor of Viewlogic dated August 11, 1999.
10.3 Amendment dated September 25, 2001 to Secured Promissory Note by
Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic
dated August 11, 1999.
10.4 Amendment dated September 25, 2001 to Secured Promissory Note by
Richard G. Lucier in favor of Viewlogic dated August 12, 1999.
10.5 Amendment dated September 25, 2001 to Secured Promissory Note by
Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999.
10.6 Second Amendment and Waiver effective September 29, 2001 by and
Between Innoveda, Inc. and Fleet National Bank.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during the fiscal
quarter ended September 29, 2001.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEDA, INC.
By: /s/ Kevin P. O'Brien
------------------------------------------
Kevin P. O'Brien
Vice President, Finance and Chief
Financial Officer (Principal Financial
Officer and Chief Accounting Officer)
Date: November 13, 2001
37
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Amendment dated September 25, 2001 to Secured Promissory Note by
Paula Cassidy and John Cassidy in favor of Viewlogic dated August
11, 1999.
10.2 Amendment dated September 25, 2001 to secured Promissory Note by
William J. Herman in favor of Viewlogic dated August 11, 1999.
10.3 Amendment dated September 25, 2001 to Secured Promissory Note by
Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic
dated August 11, 1999.
10.4 Amendment dated September 25, 2001 to Secured Promissory Note by
Richard G. Lucier in favor of Viewlogic dated August 12, 1999.
10.5 Amendment dated September 25, 2001 to secured Promissory Note by
Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999.
10.6 Second Amendment and Waiver effective September 29, 2001 by
and between Innoveda, Inc. and Fleet National Bank.
38