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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 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.)
Organization)
293 BOSTON POST ROAD WEST, MARLBORO, MASSACHUSETTS 01752
(Address, including zip code, of principal executive offices)
Registrant's Telephone number, including area code: (508) 480 0881
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant, based upon the closing per share sale price of the Common Stock
on February 28, 2002 as reported on the Nasdaq National Market ($2.35), was
approximately $46,977,560. Shares of Common Stock held by each named executive
officer and director and by each entity known to the Registrant to beneficially
own 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 28, 2002, Registrant had outstanding 39,874,760 shares of Common
Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders scheduled to be held on May 31, 2002 (the "2002 Proxy
Statement"), which will be filed with the Securities and Exchange Commission not
later than 120 days after December 29, 2001, are incorporated by reference into
Part III of this Annual Report on Form 10-K. With the exception of the portions
of the 2002 Proxy Statement expressly incorporated into this Annual Report on
Form 10-K by reference, such document shall not be deemed filed as part of this
Annual Report on Form 10-K.
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INNOVEDA, INC FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
TABLE OF CONTENTS
<Table>
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PAGE
NUMBER
PART I
Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Executive Officers of the Registrant 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 44
Signatures 46
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IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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 facts,
included in this Annual Report on Form 10-K, 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 Annual Report on
Form 10-K, the words "will", "believe", "anticipate", "intend", "estimate",
"expect", "project", "plans", "preliminary" 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 in particular, the risks discussed below under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Additional Risk Factors that Could Affect Operating Results and
Market Price of Stock". Unless required by law, the Registrant undertakes no
obligation to update any forward-looking statements it may make.
PART I
ITEM 1. BUSINESS
GENERAL
Innoveda, Inc. was incorporated in the State of Delaware on December 29, 1993.
The Company's principal executive offices are located at 293 Boston Post Road
West, Marlboro, Massachusetts 01752 and its telephone number is (508) 480-0881.
Unless the context otherwise requires, the terms "Corporation", "Company",
"Registrant" and "Innoveda" as used in this report refer to Innoveda, Inc. and
its wholly owned subsidiaries.
On March 23, 2000, the Company completed the business combination of Viewlogic
Systems, Inc. and Summit Design, Inc. and was renamed Innoveda, Inc. At the
effective time of the merger, the former holders of Viewlogic's capital stock
held approximately 51% of the shares of the Company's Common Stock and thus, for
accounting and tax purposes, Viewlogic is considered to be the acquirer in that
transaction. On September 22, 2000, the Company completed its acquisition of
PADS Software, Inc.
INNOVEDA'S BUSINESS
Innoveda is a leading provider of electronic design automation (EDA) software
and services for major markets, with a focus on critical-path solutions for
developers of electronic systems. Electronic systems are a combination of
multiple integrated circuits and other electronic components, often merged with
software to create an electronic end-product. Innoveda's products address the
needs of several of the largest electronics design markets, including consumer
electronics, computers, telecommunications, automotive and aerospace. Innoveda's
computer-aided design (CAD) solutions for electronics engineers help customers
around the world accelerate the design and development of their electronic
end-products. These end-products span a wide range and include such things as
cellular telephones, personal organizers, network equipment, personal computers
and laptop computers, consumer electronics, routers, satellites, wireless
products, automobiles and aircraft. Innoveda markets and supports its software
and services worldwide through direct and indirect distribution channels.
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INDUSTRY BACKGROUND
Electronic design automation software automates the design of electronic
products and their related components and systems. Its objective is to reduce
time-to-market and the costs associated with product design, analysis, testing
and optimization; and enable development of more high-speed, highly complex
product designs that can be manufactured reliably.
This software has played a critical role in accelerating the dramatic advances
in the electronics industry during the past two decades. For most of this
period, the need for more advanced electronic design automation tools has been
driven by a rapid increase in complexity and speed of integrated circuits, or
chips, which are found in virtually all electronic products. An integrated
circuit, or chip, is an electrical device consisting of various components,
connections and switches that can be designed to perform a specific function.
Integrated circuits have increased in complexity and speed; at the same time,
there is a serious shortage of engineers skilled in the design and testing of
these more complex chips. Development cycles lengthen as chips become more
complex. As a result, more engineering hours are required to design many of
today's more complex chips, leading to either longer development schedules or
the need for larger design teams. In addition, competitive pressures shorten the
life cycles of the electronic products that incorporate chips.
Innoveda believes the combination of chip design complexity, shrinking market
windows, and time-to-market pressures will cause electronic product
manufacturers to move towards differentiating their products at the system level
- - a design abstraction that involves the design of the entire electronic system
or subsystem - rather than at the chip level.
System-level design is based on the cooperative design of both hardware and
software for the completed electronic product. More and more electronic products
now include software as a major component. Therefore, system-level design
involves managing tradeoffs among system performance and features, system memory
requirements, processor selection, chip area and cost, product cost, system
power and battery life, effects of cables and connectors, system
programmability, and the project schedule.
During the system-level design stage of a project, decisions usually are made
about adopting new design partners, methodologies, policies and automation
tools. These decisions include choices regarding software development tools,
strategies needed for the co-design and testing of hardware and software
components, chip vendors, and electronic design automation tools and processes.
In addition, refinements to the processes and tools that help large design teams
work together efficiently also emerge during this phase of development.
Chip design has shifted away from highly customized but inflexible
application-specific integrated circuits to more flexible, application-specific
standard parts and multi-purpose processing chips. These integrated circuit
choices help to provide greater flexibility and faster time to market. They also
present new design automation challenges, including designing and testing
systems that contain significant embedded software programs. Fast-switching
signals in which an electrical signal changes voltage beyond a predetermined
amount are required to achieve the very fast processor speeds we now take for
granted. These fast signals can cause electrical signals to radiate from the
chip or printed circuit board on which the chips are placed, and cause
unintentional negative effects on other signals on the chip or printed circuit
board, including potential system failure. If analysis and testing are not
performed before the system is manufactured, these problems can affect the
quality of the final system in which the chips are embedded. This situation has
created the need for sophisticated software tools to design and test the wires
on the chip and those that connect the chips and other components within
electronic products.
These emerging design challenges driven by faster, more complex chips create
many new problems for the manufacturers of electronic products, and many new
opportunities for companies that provide technology for the design of electronic
products.
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INNOVEDA STRATEGY
Innoveda's strategy is threefold:
- To create and deliver solutions in key system design market segments,
including printed circuit board (PCB) design, system-level design
(SLD), and electromechanical design (EM);
- To provide point tools representing the greatest leverage in each
segment; and
- To help customers achieve product differentiation, problem discovery
and detection earlier in the design cycle.
INNOVEDA PRODUCTS
Innoveda's products enable electrical engineers to design state-of-the-art
electronic products and their components and systems more efficiently, reduce
development costs and shorten the time needed to get products to market. These
products are focused on PCB design, system-level design, and electromechanical
design.
PCB DESIGN
Innoveda offers a complete design solution for the design and verification
of high-speed printed circuit boards (PCBs). Offerings cover the design,
analysis, layout, routing (the placement and connection of components on a
PCB) and verification of printed circuit boards and programmable components
used with printed circuit boards. Collaborative design is enabled by
Internet-savvy tools for design data management, component information
management, component library development and maintenance, the re-use of
designs, and enterprise integration.
Within the printed circuit board market, Innoveda focuses on three key
areas: signal integrity/EMI (electromagnetic interference) analysis;
high-speed PCB design; and enterprise integration. It offers the following
solutions in these areas:
SIGNAL INTEGRITY/EMI ANALYSIS SOLUTIONS
XTK. Post-route investigation and analysis of signal integrity, delay and
crosstalk issues in complex PCBs, multi chip modules (MCMs), and other
systems.
QUIET. Simulation and analysis of EMI radiation from complex PCB/MCM
structures and systems with enclosure and cables.
QUIET EXPERT. Assessment of EMC (electromagnetic compatibility)/EMI
problems in complex PCBs; can incorporate proprietary design rule checks.
HYPERLYNX. Signal integrity analysis of high-speed boards.
BLAST. Advanced static timing verification for PCB designs; analysis for
manufacturing tolerances; pinpoints location of timing violations.
HIGH-SPEED PCB DESIGN SOLUTIONS
DXDESIGNER HSD. Design definition with high-speed PCB planning and
simulation (including constraint management, pre-placement prototyping, and
topology exploration); includes tools for library and data management,
design reuse, component selection from corporate databases, and schematic
documentation and Web-based schematic viewing. DxDesigner HSD also is
available with logic simulators and mixed-signal co-simulation. Modules
also are available individually under a variety of product names including
DxDataBook, DxVariantManager and ePlanner.
POWERPCB. Automatic and interactive routing and OLE (object linking and
embedding) automation functionality for the design of high-speed printed
circuit boards. Includes fabrication analysis tools.
BLAZEROUTER. Routing algorithms for multi-layer, high-density PCBs and
advanced packages.
XTK. See "Signal Integrity/EMI Analysis Solutions".
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ENTERPRISE INTEGRATION SOLUTIONS
DXENTERPRISE. Links the engineering world with purchasing and manufacturing
through integration with enterprise solutions from Agile Software and
MatrixOne.
DXPARTS. Web-based component search tool that provides automatic symbol
generation, details on life-cycle status, alternative part sourcing and
detailed specifications for over 14 million parts.
DXLIBRARYSTUDIO. A graphical environment for managing component and design
reuse data; open architecture accommodates third-party tool integration.
DXPDF. Distributes schematics and designs (including hierarchy) via
intelligent PDF files for easy viewing.
SYSTEM-LEVEL DESIGN
Innoveda's system-level design (SLD) offerings help engineers design and
analyze systems consisting of complex integrated circuits with embedded
software. These solutions enable customers to design their software and
hardware simultaneously, and verify that the product will work, well before
they prototype it. Innoveda's solutions cover the specification, design and
verification of complex field programmable gate arrays (FPGAs),
system-on-chip and multiple-board systems.
Innoveda offers the following system level design products:
VISUAL ELITE. An HDL (hardware description language) and system-level
design solution for high-level graphical and textual design, verification
and reuse. It provides virtual prototyping and system architect performance
analysis, and supports C/C++, VHDL and Verilog (the most common design
languages used by hardware engineers) language modeling with a
state-of-the-art graphical user interface (GUI) and multi-language textual
and graphical editors.
VISUAL IP. Encrypts, packages and distributes confidential design
simulation models to selected users, for reuse of this intellectual
property in subsequent versions or other designs.
HDL SCORE. Verifies quantitatively how well one or more tests have
exercised an entire design model or selected portions of the design.
E-SIM. A Native Software Simulation (NSS) environment for embedded software
development and testing.
V-CPU. A co-verification tool that allows the system designer to execute
software code by running it on a simulated model of a chip or system.
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ELECTROMECHANICAL DESIGN
Innoveda's electromechanical (EM) product family, called TransDesign,
focuses on the design and verification of wire harnesses for electronic
systems. It helps companies involved in transportation - automotive,
aerospace, shipping and rail - differentiate their products electronically.
TransDesign is intended to reduce costs, shorten development time and
accelerate time to market.
TRANSDESIGN technology includes:
TRANSCABLE. An intelligent schematic capture system for wire harness and
cable design.
TRANSDATABOOK. A parts library browser system.
TRANSLAYOUT. A topological system design environment for wire synthesis and
routing.
TRANSOVM. A complexity management system that captures and integrates
options and variants into the design process.
TRANSHARNESS. Technology for capturing harness-manufacturing diagrams.
Diagrams can be automatically generated from TransLayout.
TRANSACT. An automated physical schematic generator based on TransCable and
TransLayout designs.
UNIFIED BILL OF MATERIALS (UBOM). A single repository for electrical and
mechanical data, supported by a commercial database (Oracle).
INNOVEDA CUSTOMERS
Users of Innoveda's products range from small companies to some of the world's
largest manufacturing organizations. Industries represented include computers,
consumer electronics, semiconductors, telecommunications, military/defense,
automotive and aerospace, industrial, medical equipment and universities. In
2001, 2000 and 1999, no single customer accounted for more than 10% of total
revenue.
INNOVEDA BACKLOG AND SEASONALITY
Innoveda generally ships its products within 30 days after acceptance of a
customer order. Accordingly, Innoveda does not believe that its backlog at any
particular point in time is indicative of future sales levels.
Historically, the Company has observed a seasonal pattern in the EDA market
which reflects that the fourth quarter of the calendar year normally has the
highest amount of customer spending while the first quarter has the lowest.
Therefore the Company expects its revenue in a typical year will be lowest in
the first quarter and highest in the fourth quarter.
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INNOVEDA SALES
Innoveda has developed multiple distribution channels, including a direct sales
organization, telesales, independent distributors and value-added resellers.
DIRECT SALES ORGANIZATION. Innoveda markets its products in North America,
Europe and China primarily through a direct sales organization, which consisted
of 104 salespersons and application engineers as of February 28, 2002. Innoveda
currently has 22 sales offices located throughout North America, Europe and
China.
Direct sales teams, generally consisting of one salesperson and one application
engineer, focus on large accounts in assigned territories. Application engineers
specializing in certain products are assigned to each sales territory and
support individual sales teams. Each member of Innoveda's direct sales and
support teams is assigned sales quotas and has a significant portion of their
compensation based on sales performance. Approximately 50% and 30% of expected
compensation for salespersons and application engineers, respectively, are
typically based on sales performance.
TELESALES. The telesales channel consists of telesales representatives covering
assigned geographic territories in North America and Europe. These
representatives are an inside counterpart to the field, focusing on upgrading
and servicing the installed customer base, selling to smaller accounts and
selling renewal maintenance. Approximately 45% of expected compensation for a
telesales representative is based on sales performance.
DISTRIBUTORS. Innoveda appoints independent distributors to market its products
to customers not served by Innoveda's direct sales organization. Innoveda uses
distributors as its principal distribution channel in much of Asia, and
currently has distributors covering Japan, Israel, Taiwan, Korea, Australia,
Singapore, China and India. Distributors are also appointed in Europe to
supplement Innoveda's direct sales efforts by focusing on customers not served
by direct sales teams.
VALUE-ADDED RESELLER. Innoveda has established a broad-based value added
reseller distribution network. This group primarily focuses on selling
Innoveda's software tools to the small and medium size accounts in North
America.
INNOVEDA MARKETING
Innoveda's marketing organization performs the product marketing, technical
marketing, corporate communications and strategic marketing functions. As of
February 28, 2002, the group consisted of 28 marketing professionals. The
marketing organization develops strategy and identifies target markets; keeps
abreast of customer design methodologies; identifies customer requirements and
new product opportunities; establishes product vision and direction for both
existing products and new products; provides the sales channel with training,
competitive analyses, pricing, packaging, collateral materials, demonstrations
and reference accounts; and provides marketing communications support for
branding and lead generation through press relations, advertising, direct mail,
promotions, trade shows, seminars and web sites.
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INNOVEDA COMPETITION
The electronic design automation industry is highly competitive and Innoveda
expects competition to increase as other electronic design automation
companies continue to introduce new software tools used to design electronic
products. Innoveda competes with Cadence Design Systems, Mentor Graphics,
Zuken K.K., Altium, Inc., Intercept Technology, DDE, USA., and a number of
other firms. Certain of these companies have significantly greater financial,
technical, sales and marketing resources and larger installed customer bases
than Innoveda. They also have established relationships with many customers,
which can increase the complexity, difficulty and time required to compete
for business from these customers. Some of Innoveda's current and future
competitors offer or might offer a more complete range of electronic design
automation products and might distribute products that directly compete with
Innoveda's products.
Innoveda also competes with manufacturers of electronic devices that have
developed or have the capability to internally develop their own electronic
design automation products. Many manufacturers of electronic devices may be
reluctant to purchase services from independent vendors such as Innoveda
because they wish to promote their own internal design departments. In the
electronics design automation industry, Innoveda competes with numerous
electronic design and consulting companies as well as with the internal
design capabilities of electronics manufacturers. Other electronics companies
and management consulting firms continue to enter the electronics design
automation industry.
Innoveda's competitors offer or might offer products with functionality
sought by Innoveda's prospective customers and which differs from that
offered by Innoveda. In addition, some competitors might achieve a marketing
advantage by establishing formal alliances with other electronic design
automation vendors and chip manufacturers. 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 competes on the basis of various factors including product
capabilities, product performance and capacity, price, support of industry
standards; ease of use; distribution channel alignment with customers; and
customer technical support and service. Innoveda believes it competes favorably
overall with respect to these factors.
INNOVEDA PRODUCT DEVELOPMENT
Innoveda's product development efforts are focused on integrating products
acquired in recent acquisitions and enhancing and broadening Innoveda's current
line of products, including the development of new products and the release of
improved versions of existing products on a regular basis. As of February 28,
2002, Innoveda's product development and customer support staff consisted of 159
persons. Innoveda's product development staff receives support from both
Innoveda's consulting services personnel and its product marketing organization
to enable it to develop products that satisfy market requirements.
Innoveda has product development facilities in Marlboro, Massachusetts;
Camarillo, California; Redmond, Washington; Herzlia, Israel; and Oulu,
Finland. Innoveda also contracts for certain development work that is
conducted in Moscow, Russia.
Innoveda maintains cooperative relationships with most major hardware vendors on
which Innoveda's products operate, as well as with new hardware vendors who want
Innoveda to modify its products for operation on their computer systems.
Innoveda believes that these relationships allow it to design products that
respond to emerging trends in computing, graphics and networking technologies.
During the fiscal years ended December 29, 2001, December 30, 2000 and January
1, 2000, Innoveda's research and development expenses were approximately $26.7
million, $22.6 million and $11.3 million, respectively. Innoveda believes that
it must continue to commit substantial resources to enhance and extend its
product line to remain competitive. Innoveda intends to continue to devote
substantial resources to its internally-funded product development and, if
appropriate, to enter into development agreements with third parties.
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INNOVEDA SERVICE AND SUPPORT
A key part of Innoveda's strategy to help make its customers successful is to
provide a wide range of support services including on-site and hot-line support
for designers, in-house and on-site training on all products, and consulting
services for specialized tool development, tool and methodology training and
design work. Innoveda believes its focus on customer service has helped it
achieve a high degree of customer satisfaction.
Product support is provided pursuant to maintenance agreements that generally
extend for one year after the expiration of the product warranty, which is
generally thirty days, and are renewable annually thereafter. The standard
annual maintenance fee charged to customers is currently 15% of the then-current
list price for the product. Innoveda's distributors and strategic sales partners
charge their customers for maintenance and remit a negotiated portion to
Innoveda. Training and consulting services are generally not included in
Innoveda's software license or maintenance fees and are usually provided on a
separately negotiated basis.
PRODUCT REVISIONS AND UPGRADES. Customers with maintenance agreements receive
all product revisions without additional charge. Product upgrades, which add
significant new product functionality, are provided to customers for a fee that
is generally equal to the difference between the list price for the upgrade and
the license fee previously paid by the customer for the applicable product.
ON-SITE, WEB AND HOTLINE SUPPORT. Support is available to Innoveda's software
users on both a pre- and post-sale basis. The majority of Innoveda's customers
requiring support contact Innoveda through Innoveda's toll-free hotlines, which
allow users access to engineers who are knowledgeable in the use of the product.
Support is available from 8:30 a.m. to 8:00 p.m., Eastern Time, Monday through
Friday, excluding holidays. In addition to the hotline, questions or suggestions
can be submitted by fax, an electronic bulletin board or the Internet network
mail system. Innoveda also offers a free web-based streaming video service
called TecTips, that is available 24 hours per day and 7 days per week and that
answers the most commonly asked customer questions and shows customers how to
solve technical problems and use the Company's tools effectively.
In addition, post-sales product application support is provided to customers
through a series of automated support channels, including:
- a quarterly technical support newsletter providing answers to common
questions;
- an electronic bulletin board system (a web-based support system)
providing a forum for exchanging data and ideas; and
- a fax-on-demand system enabling customers to retrieve faxes of
technical application notes.
An automatic call distribution system connects North American support callers
with technical support personnel based in Marlboro, Massachusetts, San Jose,
California and Camarillo, California. Additionally, technical support personnel
based in California, Massachusetts, the United Kingdom, Israel and Japan have
immediate access to shared, problem-solving technical information via a
sophisticated on-line software support system.
CUSTOMER TRAINING. Innoveda offers a variety of training programs for users
ranging from introductory, broad-based courses to advanced and specialized
courses. Training is offered at Innoveda's facilities in Marlboro,
Massachusetts; San Jose, California; Reading, England; Paris, France; Munich,
Germany; and Tokyo, Japan. On-site training is also available.
INNOVEDA CONSULTING SERVICES. The Innoveda Consulting Services Group is a global
consulting organization staffed by experts in electronic design. The goal of the
Innoveda Consulting Services Group is to meet the diverse and demanding needs of
customers designing today's complex systems. The Innoveda Consulting Services
Group provides a complete line of consulting services including training,
product jumpstart programs and product design methodology assessment. Other
specialized services include systems integration, design database translation
and custom library development.
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INNOVEDA PROPRIETARY RIGHTS
Innoveda relies on a combination of contracts, patents, copyright and trade
secret laws to establish and protect proprietary rights in its technology.
Innoveda generally licenses and distributes its products under agreements
providing for non-exclusive licenses. Generally, the licensed software may be
used solely for internal operations on designated computers or networks. The
source code of Innoveda's products is protected both as a trade secret and as an
unpublished copyrighted work and is not generally made available to third
parties. Despite these precautions, third parties may unlawfully copy or
otherwise obtain and use Innoveda's products or technology.
Innoveda provides its products to end-users primarily under "shrink-wrap"
license agreements included within the software or as part of the packaging for
the software. In addition, Innoveda delivers certain of its products
electronically under an electronic version of a "shrink-wrap" license agreement.
These agreements are not negotiated with or signed by the licensee, and thus may
not be enforceable in certain jurisdictions. In addition, the laws of some
foreign countries do not protect Innoveda 's proprietary rights as fully as do
the laws of the United States. Innoveda's means of protecting its proprietary
rights in the United States or abroad may not be adequate, and competitors may
independently develop similar technology. Innoveda could be increasingly subject
to infringement claims as the number of products and competitors in Innoveda's
industry segment grows, the functionality of products in its industry segment
overlaps and an increasing number of software patents are granted by the United
States Patent and Trademark Office. Although Innoveda is not aware of any
threatened litigation or infringement claims, a third party may claim such
infringement by Innoveda with respect to current or future products. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product delays or require Innoveda to enter into royalty or
licensing agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to Innoveda or at all. Failure to protect its
proprietary rights or claims of infringement could have a material adverse
effect on Innoveda 's business, financial condition, results of operations or
cash flows.
INNOVEDA EMPLOYEES
As of February 28, 2002 Innoveda had 395 employees, including 132 in marketing
and sales, 128 in product research and development, 61 in customer support,
consulting and training, 21 in manufacturing and sales administration and 53 in
general and administrative activities. None of Innoveda's employees is
represented by a labor union or is subject to a collective bargaining agreement.
Innoveda has never experienced a work stoppage and believes that its employee
relations are excellent.
ITEM 2. PROPERTIES
Innoveda occupies 101,585 square feet of space at its headquarters in Marlboro,
Massachusetts under a lease expiring in October 2002, subject to Innoveda's
right to extend the lease for up to six additional years. Innoveda also leases
14,397 square feet of office space in Herzlia, Israel, 16,965 square feet of
office space in San Jose, California, 13,450 square feet of office space in
Camarillo, California, 15,934 square feet of office space in Europe and
additional space in small sales and support offices in locations in North
America, Europe and Asia.
ITEM 3. LEGAL PROCEEDINGS
Innoveda is not currently subject to any material legal proceedings. From time
to time, Innoveda is subject to various legal proceedings incidental to the
conduct of its business.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 29, 2001, there were
no matters submitted to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their respective ages and positions
with the Company as of February 28, 2002, are as follows:
<Table>
<Caption>
NAME AGE POSITION
- ---------------------- --- --------------------------------------------------
William J. Herman 42 Chairman of the Board and Chief Executive Officer
Richard G. Lucier 42 President and Chief Operating Officer
George M. ("Ken") Bado 47 Executive Vice President
Paula J. Cassidy 33 Vice President, Human Resources
Peter T. Johnson 54 Vice President, Business Development and Chief
Legal Officer, Secretary
Guy Moshe 44 Senior Vice President and General Manager - Israel
Kevin P. O'Brien 45 Vice President, Finance, Administration, Chief
Financial Officer and Treasurer
</Table>
WILLIAM J. HERMAN has served as the Company's Chief Executive Officer and as
Chairman of the Board since March 2000 and served as President of the Company
from March 2000 to February 2002. From October 1998 to March 2000, Mr. Herman
served as President and Chief Executive Officer and a director of Viewlogic
Systems, Inc, an electronic design automation company ("Viewlogic"). From
December 1997 to September 1998, Mr. Herman served as President of the Viewlogic
Systems Group of Synopsys, Inc., an electronic design automation company. From
1995 to November 1997, Mr. Herman served in various senior management
capacities, most recently as President and Chief Executive Officer, at Viewlogic
Systems, Inc., an electronic design automation company distinct from Viewlogic
(the "Prior Viewlogic"), that Mr. Herman co-founded in 1984.
RICHARD G. LUCIER has served as the Company's President since February 2002. Mr.
Lucier has served as Executive Vice President and Chief Operating Officer since
March 2000. Mr. Lucier served as the Executive Vice President and Chief
Operating Officer of Viewlogic from October 1998 to March 2000 and served as a
director of Viewlogic from October 1998 to December 1999. From December 1997 to
September 1998, Mr. Lucier served as Senior Vice President of Engineering and
Marketing of the Viewlogic Systems Group of Synopsys. From 1986 to November
1997, Mr. Lucier served in various capacities, most recently as Group Vice
President of the Systems Group, at the Prior Viewlogic.
GEORGE M. ("KEN") BADO has served as the Company's Executive Vice President,
responsible for worldwide sales and the consulting services group, since July
2001. From March 2000 to June 2001, Mr. Bado served as the Executive Vice
President of Operations at Centric Software Incorporated, a software company.
From 1988 to November 1999, Mr. Bado served in various senior management
positions, most recently as Senior Vice President of World Trade, at Mentor
Graphics Corporation, an electronic design automation software company.
PAULA J. CASSIDY has served as the Company's Vice President of Human Resources
since March 2000. Ms. Cassidy served as the Vice President of Human Resources of
Viewlogic from October 1998 to March 2000. From December 1997 to September 1998,
Ms. Cassidy served as Vice President of Human Resources of the Viewlogic Systems
Group of Synopsys. From 1989 to November 1997, Ms. Cassidy served in various
capacities, most recently as Manager, Human Resources, at the Prior Viewlogic.
13
<Page>
PETER T. JOHNSON has served as the Company's Vice President of Business
Development, Chief Legal Officer and Secretary since March 2000. Mr. Johnson
served as the Vice President of Business Development and Chief Legal Officer of
Viewlogic from October 1998 to March 2000 and as Secretary of Viewlogic from May
1999 to March 2000. From May 1998 to October 1998, Mr. Johnson served as Vice
President, Chief Legal Officer and Secretary of Avid Technology, Inc., a digital
media software developer. From December 1997 to April 1998, Mr. Johnson served
as Vice President and General Counsel of the Viewlogic Systems Group of
Synopsys. From 1995 to November 1997, Mr. Johnson served as Vice President,
General Counsel and Secretary of the Prior Viewlogic.
GUY MOSHE has served as the Company's Senior Vice President and General Manager
- - Israel since March 2000. Mr. Moshe served as Chief Technology Officer and
President of Summit Design (EDA), Ltd. from February 1999 to March 2000 and as
Vice President, General Manager and Chief Operating Officer of the Design
Solutions Division of the Company from September 1997 to March 2000. From 1996
to September 1997 Mr. Moshe served as General Manager of Summit Design (EDA)
Ltd. Mr. Moshe served as the Vice President of Product Marketing of the Company
from 1994 to 1996.
KEVIN P. O'BRIEN has served as the Company's Vice President, Finance,
Administration, Chief Financial Officer and Treasurer since March 2000. Mr.
O'Brien served as the Vice President, Finance and Chief Financial Officer of
Viewlogic from October 1998 to March 2000 and as Secretary of Viewlogic from
October 1998 to May 1999. From April 1998 to September 1998, Mr. O'Brien served
as Vice President of Finance of the Viewlogic Systems Group of Synopsys. From
September 1997 to March 1998, Mr. O'Brien served as an independent management
consultant. From October 1995 to August 1997, Mr. O'Brien served as Chief
Financial Officer at SmarTel Communications, Inc., a telecommunications company.
14
<Page>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market under
the trading symbol "SMMT" on October 18, 1996. Prior to that date, there was no
established trading market for the Common Stock. On March 24, 2000, in
connection with the change of the Company's name from Summit Design, Inc. to
Innoveda, Inc., the common stock began trading on the Nasdaq National Market
under the symbol "INOV". The closing sale price for the Common Stock on the
Nasdaq National Market as of the close of business on February 28, 2002 was
$2.35 per share. As of February 28, 2002, the Company had approximately 229
stockholders of record. This number does not include stockholders who hold their
sharers in "street name" or through broker or nominee accounts.
The following table sets forth the high and low sale prices per share of the
Company's Common Stock for the periods indicated, as quoted on the Nasdaq
National Market:
<Table>
<Caption>
HIGH LOW
FISCAL 2000
Quarter ended April 1, 2000 $ 9.38 $ 3.44
Quarter ended July 1, 2000 $ 5.75 $ 3.56
Quarter ended September 30, 2000 $ 4.81 $ 3.53
Quarter ended December 30, 2000 $ 3.50 $ 1.75
FISCAL 2001
Quarter ended March 31, 2001 $ 4.31 $ 2.06
Quarter ended June 30, 2001 $ 3.98 $ 2.38
Quarter ended September 29, 2001 $ 2.68 $ 0.67
Quarter ended December 29, 2001 $ 2.00 $ 0.65
FISCAL 2002
Quarter ended March 30, 2002 $ 2.75 $ 1.80
(through February 28, 2002)
</Table>
The Company did not pay any cash dividends on its Common Stock during the fiscal
years ended December 29, 2001 and December 30, 2000. The Company intends to
retain any earnings for use in its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. Innoveda's loan
agreement contains restrictions on Innoveda's ability to pay dividends without
the consent of its lender.
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the market
prices of the stocks of many companies which may not have been directly related
to the operating performance of those companies. Such broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, factors such as announcements of technological innovations or new
products by the Company or its competitors, market conditions in the computer
software or hardware industries and quarterly fluctuations in the Company's
operating results may have a significant adverse effect on the market price of
the Company's Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Additional Risk Factors That Could Affect Operating Results and
Market Price of Stock".
15
<Page>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data relating to the Company should be read in
conjunction with the Company's consolidated financial statements and the related
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included herein. The
selected balance sheet financial data set forth below for the Company as of
December 29, 2001 and December 30, 2000 and the selected statement of operations
financial data for each of the three years in the period ended December 29, 2001
are derived from the audited financial statements included elsewhere herein. All
other selected financial data set forth below for the Company is derived from
the financial statements not included elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEARS ENDED(1)
-----------------------------------------------------
2001 2000 (2) 1999 1998 (3) 1997 (3)
-----------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue $ 91,417 $ 89,859 $ 53,499 $ 55,237 $ 63,987
Restructuring and merger costs 5,865 2,736 - - 6,725
Impairment of intangible assets 32,945 - - - -
In-process research and development - 5,453 - - -
Total operating expenses 147,315 98,896 51,317 43,385 65,983
Income (loss) from operations (55,898) (9,037) 2,182 11,852 (1,996)
Net income (loss) (42,637) (11,168) 259 5,867 (1,199)
Net income (loss) per diluted share (1.09) (0.40) 0.02 1.08
Number of shares used in computing diluted
earnings (loss) per share 39,224 28,252 15,586 5,434
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (9,532) $ 4,656 $ (7,959) $ (6,509) $ (14,719)
Total assets $ 72,292 $ 142,624 $ 31,445 $ 24,892 $ 25,377
Long term debt, less current portion $ 1,750 $ 6,000 $ 14,379 $ 15,873 $ 130
Redeemable convertible preferred stock $ - $ - $ 32,000 $ 32,000 $ -
Stockholders' equity (deficit) $ 12,391 $ 54,600 $ (45,399) $ (47,845) $ (5,629)
</Table>
(1) Innoveda was created by the business combination of Summit Design, Inc.
and Viewlogic Systems, Inc., which was consummated on March 23, 2000. The
business combination was accounted for as a reverse acquisition as former
shareholders of Viewlogic owned a majority of the outstanding capital
stock of Summit Design subsequent to the business combination. Therefore,
for accounting purposes, Viewlogic is deemed to have acquired Summit
Design. All pre-merger financial information presented represents the
financial results for Viewlogic.
(2) Financial information for the fiscal year ended December 30, 2000,
includes the results of Summit Design, Inc. from March 24, 2000 and PADS
Software, Inc. from September 22, 2000.
(3) Financial information for 1997 and 1998 represent revenue and expenses
derived from the historical financial statements of an entity of which
the Viewlogic business was previously a part.
16
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS ANNUAL REPORT
ON FORM 10-K. THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
AND 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 THE HEADING "ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING
RESULTS AND MARKET PRICE OF STOCK" COMMENCING ON PAGE 41, AS WELL AS THOSE
OTHERWISE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K. SEE "IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS".
OVERVIEW
Innoveda,Inc., a Delaware corporation, was created by the business combination
of Summit Design, Inc. and Viewlogic Systems, Inc., which was consummated on
March 23, 2000. The merger of Summit Design with Viewlogic was accounted for as
a reverse acquisition as former stockholders of Viewlogic owned a majority of
the outstanding stock of Summit subsequent to the business combination. For
accounting purposes, Viewlogic is deemed to have acquired Summit Design. On
September 22, 2000, the Company completed its acquisition of PADS Software, Inc.
Accordingly, all fiscal 1999 financial information presented herein, with the
exception of pro forma results, represents only the financial results for
Viewlogic. The fiscal 2000 financial information presented in the consolidated
statements of operations, and the consolidated statements of cash flows
represents the results for Viewlogic for the periods stated and includes the
financial results for Summit commencing March 24, 2000, and the financial
results for PADS commencing September 23, 2000.
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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to bad debts, intangible assets, income taxes, financing
operations, restructuring, long-term service contracts, employee benefits, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified below the accounting policies that we believe are most
critical to our business operations and are discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results.
17
<Page>
Our critical accounting policies are as follows:
- Revenue recognition
- Allowance for doubtful accounts
- Valuation of long-lived assets
- Accounting for income taxes
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition," as amended by SOP 98-9,
and Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements"
Software revenue is recognized upon the shipment of the product provided that
persuasive evidence of an arrangement exists, the arrangement fee is fixed and
determinable and collection is probable. For arrangements involving multiple
elements, the arrangement fee is allocated to each element based on
vendor-specific objective evidence ("VSOE") of the fair value of the various
elements. VSOE of fair value is determined based on the prices at which the
elements are sold separately. If VSOE of fair value exists for all undelivered
elements but not for the delivered element, the portion of the arrangement fee
allocated to the delivered element is determined using the residual method. If
VSOE of fair value does not exist for all of the undelivered elements, the
arrangement fee is recognized ratably over the term of the arrangement. In
determining VSOE, management considers several factors which include product and
service price lists, historical transactions with similar terms and conditions,
and interpretation of contracts and agreements. If any of these factors were to
be misinterpreted, the result could be an error in determining which period
revenue should be recognized.
For term licenses of one year or less, which include post contract customer
support, revenue is recognized ratably over the term of the agreement, unless
the only support provided is telephone support, in which case the entire
arrangement fee is recognized at the beginning of the term.
Revenue from maintenance and support contracts is deferred and recognized
ratably over the term of the service period. Revenue from training and
consulting is recognized as the related services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts, which reflects our
estimate of the amounts owed by customers that customers will be unable to pay.
Management performs ongoing credit evaluations of its customers' financial
condition and limits the amount of customer credit when deemed necessary. The
Company bases its decision to extend credit to customers on a variety of factors
including ratings from a credit reporting bureau, bank and financial statements
provided by customers, and historical payment history of existing customers.
However, if the financial condition of our customers deteriorates and they
are not able to make payments in excess of our estimates of our allowance,
then we may need to increase our allowance for doubtful accounts which would
adversely impact our ability to collect cash, which could adversely impact
operations. We believe that the current estimate of the allowance for
doubtful accounts recorded as of December 29, 2001, adequately covers any
potential credit risks.
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<Page>
VALUATION OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including goodwill, purchased
technology and other intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include,
but are not limited to the following:
- significant underperformance relative to expected historical or
projected future operating results;
- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained period; and
- our market capitalization relative to net book value.
If an impairment review is indicated, the review includes an analysis of the
estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted
net cash flows are insufficient to recover the carrying value of the assets over
their estimated useful lives, we record an impairment charge in the amount by
which the carrying value of the assets exceeds their fair value. Fair value is
determined generally based on discounted cash flows. In fiscal 2001, we
recognized an impairment charge of $32.9 million as a result of the application
of this accounting policy.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142,
"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. 142 are required to be applied starting with fiscal years
beginning after December 15, 2001.
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes SFAS 121,
and the accounting and reporting provisions of APB 30, for the disposal of a
segment of a business.
The Company is currently evaluating the impact of these statements and they will
be adopted effective fiscal 2002.
If the Company were to incorrectly estimate the carrying value and estimated
useful life of its long-lived assets, it may incur an additional impairment
charge that would impact net income.
19
<Page>
ACCOUNTING FOR INCOME TAXES
The Company prepares estimates of income taxes in each of the jurisdictions in
which the Company operates when preparing its consolidated financial statements.
This includes estimating current tax exposure together with a review and
assessment of temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the
Company's consolidated balance sheet. The Company then assesses the likelihood
that its deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we include an expense within the tax provision in the
statement of operations for the period reported.
Significant management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets.
In the event that actual results differ from these estimates or the Company
adjusts these estimates in future periods we may need to establish an additional
valuation allowance which could impact our financial position and results of
operations.
RESULTS OF OPERATIONS
The results of operations for the year ended December 31, 1997 represent the
results of the printed circuit board and complete system design tools business
derived from the historical financial statements of Viewlogic Systems, Inc., a
larger EDA company that was acquired by Synopsys, Inc. in 1997 (the "Prior
Viewlogic") and exclude the integrated circuit design tools business of the
Prior Viewlogic. During 1997, the Prior Viewlogic established separate
departments to capture product development, technical support and product
marketing expenses of both the printed circuit board and complete system design
tools business and the integrated circuit design tools business. The printed
circuit board and complete systems business was purchased from Synopsys, Inc. in
1998 and is now part of Innoveda. In addition, the Prior Viewlogic segregated
its revenue and product costs and created income statements for each business.
Prior to December 4, 1997, the Prior Viewlogic centralized many administrative,
marketing and other services. In addition, the Prior Viewlogic distributed both
its integrated circuit design tools and printed circuit board and complete
system design tools products primarily through one combined sales force.
Accordingly, the Prior Viewlogic made allocations of these expenses based on
revenue, personnel, space, estimates of time spent to provide services or other
appropriate bases. Innoveda's management believes that the Prior Viewlogic made
these allocations on a reasonable basis. However, they were not necessarily
indicative of the costs that would have been incurred on a stand-alone basis.
20
<Page>
The following table sets forth, for the periods indicated, the percentage of
revenue of certain items in the Company's consolidated statements of operations:
<Table>
<Caption>
Year Ended
------------------------------------------------------------------------
December 29, December 30, January 1, January 2, December 31,
2001 2000 2000 1999 1997
Revenue:
Software 49% 55% 45% 41% 45%
Services and other 51 45 55 59 55
------------- ------------- ------------- ------------- ------------
Total Revenue 100 100 100 100 100
------------- ------------- ------------- ------------- ------------
Cost and expenses:
Cost of software 7 9 11 9 5
Cost of services and other 12 10 12 9 12
Sales and marketing 45 37 42 34 39
Research and development 29 25 21 18 23
General and administrative 9 8 7 7 6
Amortization of intangibles 16 12 2 -- --
In-process research and development -- 6 -- -- --
Impairment of intangible assets 36 -- -- -- --
Restructuring and merger costs 7 3 -- -- 11
Transaction costs and litigation
settlement -- -- -- 1 7
------------- ------------- ------------- ------------- ------------
Total Operating Expenses 161 110 95 78 103
------------- ------------- ------------- ------------- ------------
Income (loss) from operations (61) (10) 5 22 (3)
Other expense, net -- -- (3) (3) --
Income (loss) before income taxes (61) (10) 2 19 (3)
Provision (benefit) for income taxes (15) 2 1 7 (1)
------------- ------------- ------------- ------------- ------------
Net income (loss) (46)% (12)% 1% 12% (2)%
============= ============= ============= ============= ============
</Table>
TWELVE MONTHS ENDED DECEMBER 29, 2001 AND DECEMBER 30, 2000
SOFTWARE REVENUE
For the year ended December 29, 2001, software license revenue decreased 10% to
$44.5 million from $49.6 million for the year ended December 30, 2000. The
decrease in software license revenue is primarily attributable to the impact of
the global economic downturn, particularly in the telecom and computer
industries. Discretionary spending by these customers has been reduced, causing
delays and postponement of orders. In addition, the decrease is also due to the
August 2000 sale of our VirSim product line, which accounted for $2.6 million in
software license revenue for the year ended December 30, 2000. This decrease was
partially offset by additional software sales related to products acquired as
part of the acquisition of PADS Software in September 2000.
21
<Page>
Our products have been organized into three distinct product groups: Printed
Circuit Board Design ("PCB"), System Level Design ("SLD"), and
Electromechanical Design ("EM"). For the year ended December 29, 2001, PCB,
SLD, and EM accounted for $32.9 million or 74%, $9.9 million or 22% and $1.7
million or 4%, respectively, of software license revenue. Recently the SLD
market has not been growing as fast as originally expected and revenue from
the Company's SLD products has been declining. As a result we do not expect
SLD software license revenue to grow in the near term. Due to mid-year
acquisitions during fiscal 2000, it is not practicable to present software
license revenue by these product categories for that period.
As a percentage of total revenue, software license revenue decreased to 49% for
the twelve months ended December 29, 2001 from 55% for the twelve months ended
December 30, 2000.
SERVICES AND OTHER REVENUE
For the year ended December 29, 2001, services and other revenue increased 17%
to $47.0 million from $40.2 million for the year ended December 30, 2000. This
increase is primarily related to the maintenance and services for products
acquired as part of the acquisition of PADS Software. In addition, we realized
increased consulting revenue during 2001 compared to 2000, attributable to an
increased focus in this area. This increase was partially offset by the August
2000 sale of our VirSim product line, which accounted for $1.6 million in
service and other revenue for the year ended December 30, 2000.
As discussed above, our products have been organized into three distinct product
groups: PCB, SLD, and EM. For the year ended December 29, 2001, PCB, SLD, and EM
accounted for $30.1 million or 64%, $14.1 million or 30% and $2.7 million or 6%,
respectively, of services and other revenue. Similar to SLD software we do not
expect SLD services and other revenue to grow in the near term. Due to mid-year
acquisitions during fiscal 2000, it is not practicable to present service and
other revenue by these product categories for that period.
As a percentage of total revenue, services and other revenue increased to 51%
for the twelve months ended December 29, 2001 from 45% for the twelve months
ended December 30, 2000.
COST OF SOFTWARE
Cost of software revenue consists primarily of the cost of manufacturing,
order processing, distributions and royalties. Cost of software revenue
decreased 14% to $6.8 million for the twelve months ended December 29, 2001
from $7.8 million for the twelve months ended December 30, 2000. The decrease
was primarily due to the decreased royalty costs consistent with the decrease
in software license revenue, along with the retirement of products with large
royalty costs as part of the restructuring. In addition, we realized cost
savings from economics of scale resulting from the acquisition of Summit
Design and PADS Software.
As a percentage of total revenue, cost of software decreased to 7% for the
twelve months ended December 29, 2001 from 9% for the twelve months ended
December 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
29% to $11.1 million for the twelve months ended December 29, 2001 from $8.6
million for the twelve months ended December 30, 2000. This increase was
primarily due to increased salary and related costs of additional headcount
resulting from the acquisitions of Summit Design in March 2000 and PADS Software
in September 2000, 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 12%
for the twelve months ended December 29, 2001 from 10% for the twelve months
ended December 30, 2000.
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<Page>
SALES AND MARKETING
Sales and marketing expenses increased 22% to $41.1 million for the twelve
months ended December 29, 2001 from $33.7 million for the twelve months ended
December 30, 2000. This increase was 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 45%
for the twelve months ended December 29, 2001 from 37% for the twelve months
ended December 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of costs related to product
development. Research and development expenses increased 18% to $26.7 million
for the twelve months ended December 29, 2001 from $22.6 million for the twelve
months ended December 30, 2000. This increase was 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 a percentage of total revenue, research and development expenses increased to
29% for the twelve months ended December 29, 2001 from 25% for the twelve months
ended December 30, 2000.
The amount of software development costs capitalized for the years ended
December 29, 2001 and December 30, 2000 was approximately $1.1 million or 4% of
research and development expense.
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 11% to $7.9 million for the twelve months
ended December 29, 2001 from $7.1 million for the twelve months ended December
30, 2000. This increase was primarily due to the personnel costs needed to build
the infrastructure to support planned growth combined with an increase in bad
debt expense and insurance premiums.
As a percentage of total revenue, general and administrative expenses increased
to 9% for the twelve months ended December 29, 2001 from 8% for the twelve
months ended December 30, 2000.
AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION
Amortization expense increased 37% to $15.0 million in the twelve months ended
December 29, 2001 from $10.9 million for the twelve months ended December 30,
2000. This increase in amortization expense was mainly due to the increase in
intangibles from the acquisitions of Summit Design in March 2000 and PADS
Software in September 2000.
There were $26.4 million and $73.9 million in intangible assets as of December
29, 2001 and December 30, 2000, respectively. Intangible assets as of December
29, 2001 consisted primarily of purchased technology, goodwill, workforce and
trademarks, resulting from the Summit Design acquisition in March 2000, the PADS
Software acquisition in September 2000, and the acquisition of Transcendent
Design Technology, Inc. in 1999. As of December 30, 2000, intangible assets
consisted of purchased technology, goodwill, workforce and customer base
resulting primarily from the Summit Design acquisition, the PADS Software
acquisition, assets acquired from OmniView, Inc. in March 1999, and the
Transcendent acquisition. See "Impairment of Intangible Assets, Restructuring
and Merger Costs" below.
23
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Amortization of stock compensation remained constant at $0.6 million for the
fiscal years ending December 29, 2001 and December 30, 2000. Amortization of
stock compensation is being amortized using the straight-line method over 4
years.
IN-PROCESS RESEARCH AND DEVELOPMENT
For the twelve months ended December 30, 2000, Innoveda charged approximately
$5.5 million to expense, related to the acquisition of PADS Software and the
business combination of Summit Design.
In conjunction with the acquisition of PADS Software in the third quarter of
2000, the Company 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. The value assigned to in-process technology relates
primarily to three research projects, Power PCB Next Generation, BlazeDRE and
ACT Manufacturing. During the first quarter of 2001, ACT Manufacturing was
commercially released. BlazeDRE is expected to be commercially released during
the second quarter of fiscal 2002 and Power PCB Next Generation has yet to reach
technological feasibility. The nature of the efforts required to develop the
in-process technologies into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the products can be produced to
meet their design specifications, including function, features and technical
performance requirements.
Similarly, in conjunction with the business combination of Summit Design and
Viewlogic Systems in the first quarter 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 an independent appraiser. The value assigned to in-process
technology related to two research projects, Visual HDL 2000 and Visual SLD. The
nature of the effort required in the development of the in-process technologies
into commercially viable products principally related to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the products can be produced to meet their design
specifications, including function, features and technical requirements. Visual
HDL 2000 represented a major rearchitecture of the two existing Visual HDL
products. The new generation product integrates these two existing products
along with a newly developed compiler. The Visual SLD research project
represented the development of an entirely new product targeted at a customer
base not previously approached for the Visual product line. These technologies
were combined and commercially released during the fourth quarter of 2000 under
the product name Visual Elite.
There were no in-process research and development costs incurred in fiscal 2001.
24
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IMPAIRMENT OF INTANGIBLE ASSETS, RESTRUCTURING AND MERGER COSTS
In August 2001, Innoveda, in response to current economic conditions and as part
of our revised technology focus, implemented a restructuring and streamlining of
company operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews carrying value of intangible assets for impairment
whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable or that the useful
lives of these assets are no longer appropriate. If an impairment is
indicated, the asset is written down to its estimated fair value. During the
third quarter of 2001, the Company wrote down approximately $32.9 million of
impaired long-lived assets related to the goodwill, purchased technology,
workforce and customer base associated with the acquisitions of PADS Software
and Summit Design. Based on the declining historical and forecasted operating
results of such intangible assets as they relate to earlier estimates and the
general economic trends of the EDA industry as a whole, their estimated value
to the Company has decreased. Based on the Company's expectation of future
discounted net cash flows, these assets have been written-down to their net
realizable value.
RESTRUCTURING COSTS
As a result of the restructuring, we recorded charges of $5.3 million. The
restructuring costs include workforce reductions, closing facilities, reducing
space in other facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately 140 employees across all business functions and geographic
regions. The workforce reductions were substantially completed by the end of the
third quarter of 2001. We recorded a workforce reduction charge of $2.3 million
relating primarily to severance, fringe benefits and outplacement services.
We also 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.
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 December 29, 2001.
<Table>
<Caption>
TOTAL NON-CASH AMOUNT DECEMBER 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 - 2,152 115
Lease commitment and related fees 1,511 - 293 1,218
Other 408 - 201 207
-------------- -------------- -------------- ----------------------
$ 38,216 $ 34,030 $ 2,646 $ 1,540
============== ============== ============== ======================
</Table>
All remaining amounts are expected to be settled by the end of fiscal 2002.
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PITTSBURGH OFFICE CLOSURE
In May 2001, we closed an office in Pittsburgh, Pennsylvania and transferred the
operations to other offices in the United States and overseas. The total charge
of $594 consists of intangible asset and fixed asset impairment charges of $415,
$64 of severance related to the termination of six employees and $115 of other
costs incurred due to the closure. All remaining amounts are expected to be
settled by the end of fiscal 2002.
<Table>
<Caption>
Total Non-cash Amount December 29, 2001
Accrual Write-off Paid Accrual Balance
------------- ------------ ------------ ------------------------
Impairment of intangibles
and fixed assets $ 415 $ 415 $ - $ -
Severance 64 - 64 -
Lease commitment 48 - 48 -
Other 67 - 33 34
------------- ------------ ------------ ------------------------
$ 594 $ 415 $ 145 $ 34
============= ============ ============ ========================
</Table>
MERGER RELATED COSTS
For the twelve months ended December 29, 2001, Innoveda did not incur any merger
related charges. For the twelve months ended December 30, 2000, Innoveda charged
approximately $2.7 million to expense for merger related charges.
During the third quarter of 2000, we recorded approximately $0.5 million in
restructuring charges relating to the PADS Software 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 Design 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
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.
OTHER INCOME (EXPENSE), NET
Other income (expense) consists of the net of interest expense relating to our
term loan and revolving credit line, interest income from cash and cash
equivalent balances, and gains and losses from foreign currency transactions
resulting from foreign operations conducted in local currencies. Other expense
increased 36% to $0.4 million in the twelve months ended December 29, 2001 from
$0.3 million for the twelve months ended December 30, 2000. Other expense
increased primarily as a result of a decrease in interest income due to the
reduction of cash and cash equivalents, partially offset by the decrease in
interest expense due to the pay down of debt obligations.
PROVISION (BENEFIT) FOR INCOME TAXES
We recorded a benefit for income taxes of $13.7 million for the twelve months
ended December 29, 2001 and a $1.8 million provision for the twelve months
ended December 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 approximately $1.5 million resulting from the sale of the
VirSim product line in August 2000.
26
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TWELVE MONTHS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
SOFTWARE REVENUE
For the year ended December 30, 2000, software license revenue increased 108% to
$49.6 million from $23.9 million for the year ended January 1, 2000. This
increase was primarily due to additional sales related to the System Level
Design ("SLD") product line acquired as part of the acquisition of Summit Design
in March 2000, and Printed Circuit Board ("PCB") product sales acquired as part
of the acquisition of PADS Software in September 2000. Additionally, the Company
realized increased revenue from sales of our Enterprise and High Speed System
Design product lines as a result of additional customer demand for these
technologies.
As a percentage of total revenue, software license revenue increased to 55% for
the twelve months ended December 30, 2000 from 45% for the twelve months ended
January 1, 2000.
SERVICES AND OTHER REVENUE
For the year ended December 30, 2000, services and other revenue increased 36%
to $40.2 million from $29.6 million for the year ended January 1, 2000. This
increase was primarily related to the maintenance and services revenue for
products acquired as part of the acquisitions of Summit Design and PADS
Software.
As a percentage of total revenue, services and other revenue decreased to 45%
for the twelve months ended December 30, 2000 from 55% for the twelve months
ended January 1, 2000.
COST OF SOFTWARE
Cost of software revenue consists primarily of the cost of manufacturing, order
processing, distributions, royalties documentation and purchasing. Cost of
software revenue increased 31% to $7.8 million for the twelve months ended
December 30, 2000 from $6.0 million for the twelve months ended January 1, 2000.
This increase was primarily due to increased salary and related costs of
additional headcount resulting from the acquisitions of Summit Design in March
2000 and PADS Software in September 2000, and to a lesser extent increased
royalty costs related to increased software license revenue.
As a percentage of total revenue, cost of software decreased to 9% for the
twelve months ended December 30, 2000 from 11% for the twelve months ended
January 1, 2000, primarily due to economies of scale resulting from the
Company's acquisitions of Summit Design and PADS Software.
COST OF SERVICES AND OTHER
Cost of services and other consists primarily of costs of providing technical
support, education and consulting services. Cost of maintenance and services
increased 35% to $8.6 million for the twelve months ended December 30, 2000 from
$6.4 million for the twelve months ended January 1, 2000. This was primarily due
to increased salary and related costs of additional headcount resulting from the
acquisitions of Summit Design in March 2000 and PADS Software in September 2000,
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 decreased to 10%
for the twelve months ended December 30, 2000 from 12% for the twelve months
ended January 1, 2000.
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SALES AND MARKETING
Sales and marketing expenses increased 50% to $33.7 million for the twelve
months ended December 30, 2000 from $22.5 million for the twelve months ended
January 1, 2000. This was primarily due to increased salary and related costs of
additional headcount resulting from the acquisition of Summit Design in March
2000 and PADS Software in September 2000. The Company also incurred increased
costs associated with variable compensation plans as a result of the increase in
revenue year over year. 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 decreased to 37%
for the twelve months ended December 30, 2000 from 42% for the twelve months
ended January 1, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 100% to $22.6 million for the twelve
months ended December 30, 2000 from $11.3 million for the twelve months ended
January 1, 2000. This was primarily due to increased salary and related costs of
additional headcount resulting from the acquisition of Summit Design in March
2000 and PADS Software in September 2000. The increase was also attributable to
the development of new products, including Visual Elite, a new SLD product that
provides added functionality to existing SLD tools, and Innovate FPGA, a design
environment for high-density field programmable gate arrays.
As a percentage of total revenue, research and development expenses increased to
25% for the twelve months ended December 30, 2000 from 21% for the twelve months
ended January 1, 2000.
The amount of software development costs capitalized for the twelve months ended
December 30, 2000 was approximately $1.0 million or 4% of research and
development for that period. The amount of software development costs
capitalized for the twelve months ended January 1, 2000 was approximately $1.0
million or 9% of research and development costs for that period.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of the administrative,
finance, human resources, legal, and information systems departments of the
Company. General and administrative expenses increased 80% to $7.1 million for
the twelve months ended December 30, 2000 from $3.9 million for the twelve
months ended January 1, 2000. This increase was primarily a result of Innoveda
building its general and administrative infrastructure to support the growth in
revenue of the Company's 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 8% for the twelve months ended December 30, 2000 from 7% for the twelve
months ended January 1, 2000.
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AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION
Amortization expense increased to $10.9 million in the twelve months ended
December 30, 2000 from $1.2 million for the twelve months ended January 1, 2000.
Innoveda had $73.9 million in intangible assets as of December 30, 2000,
consisting primarily of purchased technology, goodwill, and purchased workforce
and customer base, resulting from the Summit Design business combination in
March 2000 and the PADS acquisition in September 2000, and the remaining
intangible assets from the OmniView and Transcendent transactions described
below. Innoveda had $3.5 million in intangible assets as of January 1, 2000,
consisting of purchased technology and workforce from its acquisition of certain
assets from OmniView, Inc. in March 1999, and purchased technology related to
the acquisition of Transcendent Design Technology, Inc. in August 1999.
Innoveda's intangible assets are being amortized to expense over periods ranging
from three to seven years.
Amortization of stock compensation remained constant at $0.6 million for the
fiscal years ending December 30, 2000 and January 1, 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
In conjunction with the acquisition of PADS Software in the third quarter of
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 Design and Viewlogic in the first quarter 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 an independent appraiser. For the twelve months ended December 30,
2000, Innoveda charged approximately $5.5 million to expense.
MERGER COSTS
During the third quarter of 2000, we recorded approximately $0.5 million in
restructuring charges relating to the PADS Software 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 Design 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
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 twelve months ended December 30, 2000, Innoveda charged approximately
$2.7 million to expense for merger related charges.
29
<Page>
OTHER INCOME (EXPENSE), NET
Other expense, net consists of foreign currency gains and losses and
amortization of professional fees incurred in connection with Innoveda's credit
facility and the disposal of property and equipment. Other expense decreased 80%
to $0.3 million for the twelve months ended December 30, 2000 from $1.6 million
for the twelve months ended January 1, 2000. The decrease in other expense was
primarily due to a decrease in interest expense, net of interest income.
Interest expense, net of interest income, decreased to $0.1 million for the
twelve months ended December 30, 2000 from $1.2 million for the twelve months
ended January 1, 2000. This decrease is primarily a result of an increase in
interest income from cash acquired as part of the Summit Design business
combination. Interest income increased for the twelve months ended December 30,
2000 as compared to the twelve months ended January 1, 2000 due to a higher
average cash balance and higher interest rates. Interest expense decreased for
the twelve months ended December 30, 2000 as compared to the twelve months ended
January 1, 2000 primarily because the Company paid down a portion of its
long-term debt obligations.
INCOME TAXES
The provision for income taxes increased to $1.8 million for the twelve months
ended December 30, 2000 from $0.3 million for the twelve months ended January 1,
2000. Although the company has a pre-tax loss for reporting purposes for fiscal
2000, a significant amount of this loss is due to non-deductible expenses. The
most significant of these are amortization of goodwill from the Company's
acquisitions and as part of the sale of the VirSim product line to Synopsys,
in-process research and development charges and amortization of stock
compensation.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
Innoveda finances its operations primarily through its cash balance and cash
generated from operations. At December 29, 2001, we had $7.7 million in cash and
cash equivalents. We have a Credit Facility with a commercial bank, which
includes a Term Loan and a Line of Credit. The Term Loan had $5.8 million
outstanding as of December 29, 2001. Payments of principal outstanding under
either the Line of Credit or the Term Loan expire by September 30, 2003. A
payment of $1.0 million is due in the first quarter of fiscal 2002. Successive
payments of $1.0 million are due each quarter through the fourth quarter of
2002, and $1.4 million and $0.4 million are due in the first and third quarters
of fiscal 2003, respectively. 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. If Innoveda defaults on its Credit Facility and a
waiver is not obtained, the Company may be required to re-pay its Term Loan
earlier than scheduled thereby substantially decreasing its cash balance.
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
non-compliance. Under this amendment, the Term Loan portion of the Credit
Facility remains in place with the repayment schedule unchanged and the Line of
Credit portion of the Credit Facility has been reduced 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 evaluating
proposals for both a new credit facility and other financing alternatives.
Although the lender has in the past waived non-compliance under the Credit
Facility, there can be no assurance that the lender will do so in the future.
30
<Page>
Interest rates on the Line of Credit and the Term Loan are determined, at the
option of the Company, for varying periods. The Company may elect to have the
interest rate based on the bank's prime rate or based on the LIBOR rate at the
time of the election, depending on the Company's leverage financial ratio, as
defined, in the Credit Facility. The interest rate on the Line of Credit at
December 30, 2000 was 10%. The interest rates on the Term Loan at December 29,
2001 and December 30, 2000 were 4.7% and 9.2%, respectively. This agreement
effectively converts the whole floating-rate obligation into a fixed-rate
obligation of 7.4% for a period of 60 months, expiring on March 31, 2003.
Payments of principal outstanding under either the Line of Credit or the Term
Loan expire by September 30, 2003. A payment of $1.0 million is due in the first
quarter of fiscal 2002. Successive payments of $1.0 million are due each quarter
through the fourth quarter of 2002, and $1.4 million and $0.4 million are due in
the first and third quarters of fiscal 2003, respectively.
For the twelve months ended December 29, 2001, net cash used in operating
activities was approximately $5.9 million. This was 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 twelve months
ended December 29, 2001 was approximately $3.3 million, primarily due to the
purchase of property and equipment. Net cash used in financing activities was
approximately $3.7 million for the twelve months ended December 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 December 29, 2001
and December 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.
On October 19, 2000, our board of directors authorized the repurchase of up to
2.0 million shares of common stock through the period ending October 31, 2001.
The repurchased shares are being held as treasury shares and may be used in
company stock option plans, employee stock purchase plans and for general
corporate purposes. We purchased an aggregate of 550,606 shares of common stock
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. However,
our liquidity and capital requirements will depend upon numerous factors,
including market acceptance of our products, the size and timing of customer
orders, product development costs and competitive and economic forces in the
electronic design automation industry. The effects of these factors may cause
our liquidity and capital requirements to vary and may require us to obtain
additional debt or equity financing, which may not be available on terms
acceptable to us, if at all.
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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 supersedes SFAS No.
121, and the accounting and reporting provisions of APB 30, for the disposal of
a segment of a business. We plan to adopt SFAS No. 144 in the first quarter of
fiscal 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that an entity account for business combinations
using the purchase method and eliminates the pooling method. In addition, SFAS
No. 141 provides guidance regarding the initial recognition and measurement of
goodwill and other intangible assets. SFAS No.142 requires that goodwill no
longer be amortized and instead be tested annually for impairment. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001 and the provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The Company will
adopt SFAS No. 142 in the first quarter of fiscal 2002 and estimates that the
effect of the adoption will be to reduce annual amortization expense by
approximately $0.2 million.
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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:
- rapid technological change;
- short product life cycles;
- fluctuations in manufacturing capacity; and
- pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have
experienced sudden and unexpected economic downturns. During these periods,
capital spending 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.
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VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE AND
FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda's quarterly operating results and cash flows have fluctuated in the
past and will likely continue to fluctuate in the future. These fluctuations may
result from several factors, including, among others:
- - the size and timing of orders;
- - large one-time charges incurred as a result of restructurings, acquisitions
or consolidations;
- - seasonal factors;
- - the rate of acceptance of new products;
- - product, customer and channel mix;
- - lengthy sales cycles;
- - level of sales and marketing staff;
- - the timing of new product announcements and introductions by Innoveda and
Innoveda's competitors;
- - the rescheduling or cancellation of customer orders;
- - the ability to continue to develop and introduce new products and product
enhancements on a timely basis;
- - the level of competition;
- - purchasing and payment patterns, pricing policies of competitors;
- - product quality issues;
- - currency fluctuations; and
- - general economic conditions.
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.
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INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST.
Innoveda's revenue is difficult to forecast for several reasons. Innoveda
operates with little product backlog because Innoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, Innoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Innoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. If
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Innoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, Innoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
Innoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Innoveda's
expectations as to future revenue. Because a high percentage of Innoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Innoveda's operating
results.
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 - Liquidity and
Capital Resources"). Innoveda and its lender have amended the Credit Facility to
revise certain of the covenants and provide a waiver for past non-compliance.
See Exhibit 10.42 hereto. Under this amendment, the Term Loan portion of the
Credit Facility remains in place with the repayment schedule unchanged. 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. As of February 28, 2002, Innoveda had borrowings of approximately $4.9
million under its Credit Facility. Innoveda is currently evaluating proposals
for both a new credit facility and other financing alternatives but there can be
no guaranty that Innoveda will be able to secure a replacement for the Credit
Facility or alternative financing.
35
<Page>
COVENANTS AND RESTRICTIONS INCLUDED IN INNOVEDA'S CREDIT FACILITY ENHANCE THE
RISK OF DEFAULT AND LIMIT MANAGEMENT'S FLEXIBILITY TO ADJUST INNOVEDA'S BUSINESS
AND STRATEGIES TO CURRENT MARKET AND ECONOMIC CONDITIONS.
As of February 28, 2002, Innoveda had borrowings of approximately $4.9 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. Otherwise
Innoveda's lender may declare a default and exercise its security interest in
Innoveda's assets. 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. While
Innoveda's lender has in the past waived non-compliance with specific breaches
of these limitations and covenants, there can be no assurance that it will do so
again in the future.
INNOVEDA HAS A LIMITED AMOUNT OF CASH AND UNEXPECTED SHORTFALLS IN CASH FLOW
COULD RESTRICT THE COMPANY'S OPERATING ABILITY.
As of February 28, 2002, Innoveda had approximately $7.8 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 or is required to re-pay
it's term loan earlier than scheduled, it may not have sufficient cash to
fund its operations. As of February 28, 2002, Innoveda had borrowings of
approximately $4.9 million under its Credit Facility. If Innoveda were to
default under the Credit Facility due to Innoveda's failure to comply with
the limitations and covenants contained in the Credit Facility, then Innoveda
would be required to re-pay all amounts outstanding under the Credit
Facility, including the Term Loan, earlier than scheduled. Innoveda is
currently evaluating proposals for both a new credit facility and other
financing alternatives but there can be no assurance that Innoveda will be
able to secure a placement for the Credit Facility or alternative financing.
See "Liquidity and Capital Resources".
IF THE MARKET SEGMENTS OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON WHICH
INNOVEDA FOCUSES DO NOT GROW OR IF INNOVEDA CANNOT INCREASE ITS MARKET SHARE IN
THOSE SEGMENTS, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda focuses on the electro-mechanical, printed circuit board (PCB) and
system-level design (SLD) automation markets, while most major electronic design
automation software providers focus their resources on the application-specific
integrated circuit and integrated circuit design automation markets. Innoveda
has adopted this focus because it believes that the increased complexity of
application-specific integrated circuits and integrated circuit designs, and the
resulting increase in design time, will cause electronic product manufacturers
to differentiate their products at the system and PCB level. If the system, PCB
and electro-mechanical design portions of the electronic design automation
industry do not grow, it could have a material adverse effect on Innoveda's
business, financial condition, results of operations or cash flows. Recently the
SLD market has not been growing as fast as originally expected and revenue from
Innoveda's SLD products has been declining. Innoveda plans to reduce expenses in
the SLD business to be more closely aligned with revenue in the business. Such
action may adversely affect future growth in Innoveda's SLD business.
36
<Page>
INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and Innoveda
expects competition to increase as other electronic design automation
companies introduce products. In the electronic design automation market,
Innoveda competes with Mentor Graphics, Cadence Design Systems, Zuken K.K.,
Altium, Inc., Intercept Technology, DDE, USA., and a number of other firms.
Indirectly, Innoveda also competes with other firms that offer alternative
products. These other firms could also offer more directly competitive
products in the future. Some of these companies have significantly greater
financial, technical and marketing resources and larger installed customer
bases than Innoveda. Some of Innoveda's current and future competitors offer
a more complete range of electronic design automation products.
Innoveda also competes with manufacturers of electronic devices that have
developed or have the capability to internally develop their own electronic
design automation products. Many manufacturers of electronic devices may be
reluctant to purchase services from independent vendors such as Innoveda
because they wish to promote their own internal design departments. In the
electronics design automation industry, Innoveda competes with numerous
electronic design and consulting companies as well as with the internal
design capabilities of electronics manufacturers. Other electronics companies
and management consulting firms continue to enter the electronics design
automation industry.
Innoveda competes on the basis of various factors including, among others:
- - product capabilities;
- - product performance;
- - price;
- - support of industry standards;
- - ease of use;
- - helping customers get their products to market first; and
- - customer technical support and service.
Innoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Innoveda's competitors may offer
products with functionality sought by Innoveda's prospective customers and
which differs from those Innoveda offers. In addition, some competitors may
achieve a marketing advantage by establishing formal alliances with other
electronic design automation vendors. Innoveda may not compete successfully
against current and future competitors, and competitive pressures may have a
material adverse effect on Innoveda's business, financial condition, results
of operations, or cash flows. Innoveda's current and future competitors may
develop products comparable or superior to Innoveda's or more quickly adapt
new technologies, evolving industry trends or customer requirements.
Increased competition could result in price reductions, reduced margins and
loss of market share, all of which could have a material adverse effect on
Innoveda's business, financial condition, results of operations or cash flows.
37
<Page>
INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Innoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, Innoveda must have timely access
to third party software to perform development and testing of products. Although
Innoveda has established relationships with a variety of electronic design
automation vendors to gain early access to new product information, any of these
parties may terminate these relationships with limited notice. In addition,
these relationships are with companies that are Innoveda's current or potential
future competitors, including Synopsys, Mentor Graphics and Cadence. If Innoveda
were unable to obtain, in a timely manner, information regarding modifications
of third party products, Innoveda would not have the ability to modify its
software products to interoperate with these third party products. As a result,
Innoveda could experience a significant increase in development costs, the
development process would take longer, product introductions would be delayed,
and Innoveda's business, financial condition, results of operations or cash
flows could be materially adversely affected.
INNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Innoveda's software products may contain errors that may not be detected until
late in the products' life cycles. Innoveda has in the past discovered software
errors in certain of its products and has experienced delays in shipment of
products during the period required to correct these errors. Despite testing by
Innoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Innoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors fails,
Innoveda's business may suffer. Innoveda relies on distributors for licensing
and support of Innoveda's products, particularly in Japan and other parts of
Asia. Innoveda depends on the relationships with its distributors to maintain or
increase sales. Since Innoveda's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. Accordingly, Innoveda depends on the continued viability and
financial stability of these distributors.
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's distributors
may offer products of several different companies, including Innoveda's
competitors. Innoveda's current distributors may not continue to market or
service and support Innoveda's products effectively. Any distributor may
discontinue to sell Innoveda's products or devote its resources to products of
other companies. The loss of, or a significant reduction in, revenue from
Innoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
JAPAN DISTRIBUTION. Innoveda has exclusive distribution agreements with three
distributors in Japan, which collectively cover a significant portion of
Innoveda's products in Japan. If any of these distributors terminates its
relationship with Innoveda, it could have a material adverse affect on
Innoveda's business, financial condition, results of operations or cash flows.
38
<Page>
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:
- - 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;
- - tariff regulations and other trade barriers;
- - requirements for licenses, particularly with respect to the export of
certain technologies;
- - collectibility of accounts receivable;
- - changes in regulatory requirements; and
- - difficulties in staffing and managing foreign operations and extended
payment terms.
These factors may have a material adverse effect on Innoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions, and these adverse economic conditions may worsen. Demand for and
sales of Innoveda's products in this region may decrease.
In order to successfully expand international sales, Innoveda may need to
establish additional foreign operations, hire additional personnel and recruit
additional international distributors. This will require significant management
attention and financial resources and could adversely affect Innoveda's
operating margins. In addition, to the extent that Innoveda cannot effect these
additions in a timely manner, Innoveda can only generate limited growth in
international sales, if any. Innoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Innoveda's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit additional
employees and train and manage current and future employees. Innoveda expects
any growth to place a significant strain on its operational resources and
systems. Failure to effectively manage any growth would have a material adverse
effect on Innoveda's business, financial condition, results of operations or
cash flows. Innoveda regularly evaluates acquisition opportunities. Innoveda's
future acquisitions, if any, could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to intangible assets, and large one-time charges
which could materially adversely affect Innoveda's results of operations.
Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern, risks
of entering markets in which Innoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Innoveda may not
integrate successfully the operations, personnel or products that have been
acquired or that might be acquired in the future, and the failure to do so could
have a material adverse affect on its results of operations.
39
<Page>
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 most of its SLD products are located in
Israel. Economic, political and military conditions may affect Innoveda's
operations in that country. Hostilities involving Israel could materially
adversely affect Innoveda's business, financial condition and results of
operations. Innoveda's ability to manufacture or transfer outside of Israel any
technology developed under research and development grants from the government
of Israel is subject to Israeli government restrictions which may limit
Innoveda's ability to extract the full benefit of that technology.
COORDINATION RISKS. In addition, coordination with and management of the Israeli
operations requires Innoveda to address differences in culture, regulations and
time zones. Failure to successfully address these differences could disrupt
Innoveda's operations.
INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED
PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain highly
skilled technical, sales and marketing and management personnel. Innoveda's
business could be seriously harmed if it lost the services of its Chairman of
the Board and Chief Executive Officer, William J. Herman and its President,
Richard G. Lucier, or if it fails to attract and retain other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. Innoveda has in
the past experienced difficulty in retaining and recruiting qualified personnel.
Innoveda may fail to retain its key personnel or attract and retain other
qualified technical, sales and marketing and management personnel in the future.
The loss of any key employees or the inability to attract and retain additional
qualified personnel may have a material adverse effect on Innoveda's business,
financial condition, results of operations or cash flows. Additions of new
personnel and departures of existing personnel, particularly in key positions,
can be disruptive and can result in departures of additional personnel, which
could have a material adverse effect on Innoveda's business, financial
condition, results of operations or cash flows.
IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build its sales and marketing
organizations. Innoveda's future success will depend in part on its ability to
hire, train and retain qualified sales and marketing personnel and the ability
of these new persons to rapidly and effectively transition into their new
positions. Competition for qualified sales and marketing personnel is intense,
and Innoveda may not be able to hire, train and retain the number of sales and
marketing personnel needed, which would have a material adverse effect on its
business, financial condition, results of operations or cash flows.
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.
40
<Page>
ITEM 7A. 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 revolving
line of credit ("Line of Credit") and a term loan (the "Term Loan") (together,
the "Credit Facility"). See Management's Discussion and Analysis of Financial
Condition and Results of Operations. 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 rate
on the Line of Credit at December 30, 2000 was 10%. The interest rates on the
Term Loan at December 29, 2001 and December 30, 2000 were 4.7% and 9.2%,
respectively.
Payments of principal outstanding under either the Line of Credit or the Term
Loan expire by September 30, 2003. A payment of $1.0 million is due in the first
quarter of fiscal 2002. Successive payments of $1.0 million are due each quarter
through the fourth quarter of 2002, and $1.4 million and $0.4 million are due in
the first and third quarters of fiscal 2003, respectively.
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
the whole floating-rate obligation into a fixed-rate obligation of 7.4% for a
period of 60 months, expiring on March 31, 2003. The notional principal amount
of the interest rate-swap agreement was $5.8 million as of December 29, 2001.
The interest-rate swap agreement exposes Innoveda to losses in the event
Innoveda repays its Term Loan earlier than is currently scheduled. Open interest
rate contracts are reviewed regularly by Innoveda to evaluate their
effectiveness as hedges of interest rate exposure. The fair value obligation of
the interest rate-swap agreement was approximately $159 as of December 29, 2001.
As of December 29, 2001, a 100 basis point change in interest rates would not
result in a material change in the fair value of the interest-rate swap
agreement.
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 December 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.
41
<Page>
FOREIGN CURRENCY EXCHANGE RATE RISK
Innoveda is also exposed to the impact of foreign currency fluctuations. Since
Innoveda translates foreign currencies into U.S. dollars for reporting purposes,
weakened currencies in its subsidiaries have a negative, though immaterial,
impact on its results. Innoveda also believes that the exposure to currency
exchange fluctuation risk is insignificant because its international
subsidiaries sell to customers, and satisfy their financial obligations, almost
exclusively in their local currencies. Innoveda entered into foreign exchange
contracts as a hedge against certain accounts receivable denominated in foreign
currencies during the twelve months ended December 29, 2001. Realized and
unrealized gains and losses on foreign exchange contracts for the twelve months
ended December 29, 2001 were insignificant. There were no outstanding foreign
exchange contracts as of December 29, 2001.
42
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000 F-2
Consolidated Statements of Operations for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 29, 2001, December 30, 2000 and January 1, 2000 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended December 29, 2001,
December 30, 2000 and January 1, 2000 F-6
Notes to Consolidated Financial Statements F-7
</Table>
43
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Innoveda, Inc.:
We have audited the accompanying consolidated balance sheets of Innoveda, Inc.
and subsidiaries as of December 29, 2001 and December 30, 2000, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity (deficiency), and cash flows for each of the three years in
the period ended December 29, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Innoveda, Inc. and subsidiaries as
of December 29, 2001 and December 30, 2000, and the results of their operations,
their comprehensive income (loss) and their cash flows for each of the three
years in the period ended December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 28, 2002
F-1
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 2001 AND DECEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
DECEMBER 29, DECEMBER 30,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,704 $ 20,799
Accounts receivable (less allowances of $1,876 at
December 29, 2001 and $2,034 at December 30, 2000) 21,876 27,260
Prepaid expenses and other current assets 2,511 2,800
Income taxes receivable 1,233 -
Deferred income taxes 3,960 6,626
------------- ------------
Total current assets 37,284 57,485
------------- -----------
PROPERTY AND EQUIPMENT:
Equipment 19,703 18,887
Furniture and fixtures 1,359 1,394
------------- ------------
Total property and equipment 21,062 20,281
Less accumulated depreciation 16,212 12,639
------------- ------------
PROPERTY AND EQUIPMENT, NET 4,850 7,642
------------- ------------
OTHER ASSETS:
Capitalized software costs, net 2,342 2,358
Purchased technology and other intangibles, net 25,404 62,198
Goodwill and other assets, net 2,412 12,941
------------- ------------
Total other assets 30,158 77,497
------------- ------------
TOTAL $ 72,292 $ 142,624
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - current portion $ 4,000 $ 3,550
Current portion of capital lease obligations 270 548
Accounts payable 3,648 3,652
Accrued compensation 6,048 8,296
Accrued expenses 12,074 12,269
Deferred revenue 20,776 24,514
------------- ------------
Total current liabilities 46,816 52,829
------------- ------------
LONG-TERM LIABILITIES:
Note payable - long-term portion 1,750 5,750
Deferred tax liability 10,013 27,642
Capital lease obligations - 250
Other long term liabilities 1,322 1,553
------------- ------------
Total long-term liabilities 13,085 35,195
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized 5,000 in 2001 and 2000,
none issued or outstanding - -
Common stock, $0.01 par value, 100,000 authorized,
40,271 outstanding at December 29, 2001, 39,347 outstanding
at December 30, 2000 403 393
Additional paid-in capital 117,440 116,047
Accumulated deficit (101,650) (59,013)
Accumulated other comprehensive income (loss) (681) 50
Notes from stockholders (932) (932)
Treasury stock, at cost, 550 shares in 2001, 341 shares in 2000 (1,663) (832)
Deferred compensation (526) (1,113)
------------- ------------
Total stockholders' equity 12,391 54,600
------------- ------------
TOTAL $ 72,292 $ 142,624
============= ============
</Table>
See notes to consolidated financial statements.
F-2
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED
----------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ -----------
REVENUE:
Software $ 44,466 $ 49,618 $ 23,853
Services and other 46,951 40,241 29,646
------------ ------------ -----------
Total revenue 91,417 89,859 53,499
------------ ------------ -----------
COSTS AND EXPENSES:
Cost of software (1) 6,753 7,816 5,986
Cost of services and other (1) 11,106 8,592 6,387
Selling and marketing (1) 41,118 33,689 22,479
Research and development (1) 26,661 22,588 11,322
General and administrative (1) 7,865 7,099 3,942
Amortization of intangibles 14,415 10,335 670
Amortization of stock compensation 587 588 531
In process research and development - 5,453 -
Impairment of intangible assets 32,945 - -
Restructuring and merger costs 5,865 2,736 -
------------ ------------ -----------
Total operating expenses 147,315 98,896 51,317
------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (55,898) (9,037) 2,182
------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest income 413 1,051 101
Interest expense (531) (1,143) (1,339)
Other, net (320) (230) (404)
------------ ------------ -----------
Other expense, net (438) (322) (1,642)
------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (56,336) (9,359) 540
PROVISION (BENEFIT) FOR INCOME TAXES (13,699) 1,809 281
------------ ------------ -----------
NET INCOME (LOSS) $ (42,637) $ (11,168) $ 259
============ ============ ===========
EARNINGS (LOSS) PER SHARE:
Net income (loss) per common share - basic $ (1.09) $ (0.40) $ 0.07
============ ============ ===========
Net income (loss) per common share - diluted $ (1.09) $ (0.40) $ 0.02
============ ============ ===========
Weighted-average shares outstanding - basic 39,224 28,252 3,938
============ ============ ===========
Weighted-average shares outstanding - diluted 39,224 28,252 15,586
============ ============ ===========
(1) Excludes noncash amortization of stock-based compensation as follows:
Cost of software $ 5 $ 5 $ 5
Cost of services and other 43 43 39
Selling and marketing 116 116 105
Research and development 212 212 191
General and administrative 211 212 191
------------ ------------ -----------
$ 587 $ 588 $ 531
============ ============ ===========
</Table>
See notes to consolidated financial statements.
F-3
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED
----------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ -----------
Net Income (Loss) $ (42,637) $ (11,168) $ 259
Foreign Currency Translation Adjustments (572) (239) 151
Fair Value Adjustment of Interest Rate Swap (159) - -
------------ ------------ -----------
Comprehensive Income (Loss) $ (43,368) $ (11,407) $ 410
============ ============ ===========
</Table>
See notes to consolidated financial statements.
F-4
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
<Table>
<Caption>
RETAINED ACCUMULATED
STOCK ADDITIONAL EARNINGS OTHER
COMMON PAR PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES VALUE CAPITAL DEFICIT) INCOME(LOSS)
---------- -------- ----------- ---------------- ------------------
BALANCE, JANUARY 2, 1999 3,966 $ 4 $ 1,918 $ (48,104) $ 138
Issuance of common stock 1,124 1 1,482 - -
Compensation related to stock options - - 431 - -
Amortization of stock compensation - - - - -
Foreign currency translation adjustment - - - - 151
Exercise of stock options 2,879 3 946 - -
Net income - - - 259 -
---------- -------- ----------- ---------------- ------------------
BALANCE, JANUARY 1, 2000 7,969 $ 8 $ 4,777 $ (47,845) $ 289
Exercise of stock options 545 5 737 - -
Issuance of stock under ESPP 86 1 196 - -
Amortization of stock compensation - - - - -
Conversion of preferred shares to common stock 16,000 160 - - -
Effect of adjustment to Summit acquisition
exchange ratio (7,715) (77) - - -
Shares issued in connection with merger
of Innoveda and Summit 15,989 231 80,734 - -
Options granted for Summit merger - - 4,882 - -
Options granted under PADS acquisition - - 366 - -
Issuance of shares in PADS acquisition 6,473 65 24,355 - -
Shareholder note receivable acquired through
PADS acquisition - - - - -
Foreign currency translation adjustment - - - - (239)
Repurchase of common stock - - - - -
Net loss - - - (11,168) -
----------- -------- ----------- ---------------- ------------------
BALANCE, DECEMBER 30, 2000 39,347 $ 393 $ 116,047 $ (59,013) $ 50
Exercise of stock options 294 4 194 - -
Issuance of stock under ESPP 630 6 1,199 - -
Amortization of stock compensation - - - - -
Foreign currency translation adjustment - - - - (731)
Repurchase of common stock - - - - -
Net loss - - - (42,637) -
----------- -------- ------------ ---------------- ------------------
BALANCE, DECEMBER 29, 2001 40,271 $ 403 $ 117,440 $ (101,650) $ (681)
=========== ======== ============ ================ ==================
</Table>
<Table>
<Caption>
NOTES DUE FROM TREASURY DEFERRED
STOCKHOLDERS STOCK COMPENSATION TOTAL
---------------- ---------- -------------- ---------------
BALANCE, JANUARY 2, 1999 $ - $ - $ (1,801) $ (47,845)
Issuance of common stock - - - 1,483
Compensation related to stock options - - (431) -
Amortization of stock compensation - - 531 531
Foreign currency translation adjustment - - - 151
Exercise of stock options (927) - - 22
Net income - - - 259
---------------- ---------- -------------- ---------------
BALANCE, JANUARY 1, 2000 $ (927) $ - $ (1,701) $ (45,399)
Exercise of stock options - - - $ 742
Issuance of stock under ESPP - - - 197
Amortization of stock compensation - - 588 588
Conversion of preferred shares to common stock - - - 160
Effect of adjustment to Summit acquisition
exchange ratio - - - (77)
Shares issued in connection with merger
of Innoveda and Summit - - - 80,965
Options granted for Summit merger - - - 4,882
Options granted under PADS acquisition - - - 366
Issuance of shares in PADS acquisition - - - 24,420
Shareholder note receivable acquired through
PADS acquisition (5) - - (5)
Foreign currency translation adjustment - - - (239)
Repurchase of common stock - (832) - (832)
Net loss - - - (11,168)
---------------- ---------- -------------- ---------------
BALANCE, DECEMBER 30, 2000 $ (932) $ (832) $ (1,113) $ 54,600
Exercise of stock options - - - $ 198
Issuance of stock under ESPP - - - 1,205
Amortization of stock compensation - - 587 587
Foreign currency translation adjustment - - - (731)
Repurchase of common stock - (831) - (831)
Net loss - - - (42,637)
---------------- ---------- -------------- ---------------
BALANCE, DECEMBER 29, 2001 $ (932) $ (1,663) $ (526) $ 12,391
================ ========== ============== ===============
</Table>
See notes to consolidated financial statements.
F-5
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED
------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(42,637) $(11,168) $ 259
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 19,217 15,333 3,998
Non cash portion of restructuring and impairment costs 34,445 - -
Compensation under stock option agreements 587 588 531
Write-off of in-process research and development - 5,453 -
Tax benefit on stock option exercises 186 - -
Changes in current assets and current liabilities:
Accounts receivable 5,179 (6,172) (4,500)
Prepaid and other assets (1,183) 1,788 (1,532)
Deferred income taxes (14,987) (4,660) 70
Accounts payable 9 (2,250) 1,081
Accrued compensation (2,217) 1,026 207
Accrued expenses (916) 3,969 (1,274)
Deferred revenue (3,557) (545) 1,598
--------- --------- ---------
Net cash provided by (used in) operating activities (5,874) 3,362 438
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,187) (3,403) (1,000)
Capitalized software costs (1,103) (1,021) (1,068)
Purchase of OmniView - - (1,153)
Purchase of Transcendent, net of cash acquired - - 285
Proceeds from sale of VirSim product - 7,000 -
Cash acquired in acquisition of PADS, net of purchase costs - 2,857 -
Cash acquired in acquisition of Summit, net of purchase costs - 27,036 -
Other - - (300)
--------- --------- ---------
Net cash provided by (used in) investing activities (3,290) 32,469 (3,236)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt (3,550) (15,070) (2,250)
Proceeds from debt - - 1,200
Proceeds from exercise of stock options and stock purchase plan 1,216 944 22
Repayments of capital lease obligations (525) (460) (169)
Purchase of treasury stock (831) (832) -
--------- --------- ---------
Net cash used in financing activities (3,690) (15,418) (1,197)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (241) (145) 39
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,095) 20,268 (3,956)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,799 531 4,487
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,704 $ 20,799 $ 531
========= ========= =========
</Table>
See notes to consolidated financial statements.
F-6
<Page>
INNOVEDA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS - Innoveda, Inc. (the "Company") operates in the United
States and international markets developing, marketing and providing
technical support for a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
related services.
BASIS OF PRESENTATION - Innoveda, Inc., a Delaware corporation, was created
by the business combination of Summit Design, Inc. ("Summit") and Viewlogic
Systems, Inc. ("Viewlogic") which was consummated on March 23, 2000. In
addition, the Company subsequently acquired PADS Software, Inc. ("PADS") on
September 22, 2000. The business combination of Summit with Viewlogic was
effected by means of the merger of a wholly owned subsidiary of Summit with
and into Viewlogic, with Viewlogic surviving as a wholly owned subsidiary
of Summit. The business combination was accounted for as a reverse
acquisition, as the former shareholders of Viewlogic owned the majority of
the outstanding stock of Summit subsequent to the business combination.
Therefore, for accounting purposes, Viewlogic is deemed to have acquired
Summit. The business combination of Innoveda and PADS was accounted for as
a purchase of PADS by Innoveda.
All fiscal 1999 financial information presented herein, with the exception
of pro forma results in Note 2, represents only the financial results for
Viewlogic. The fiscal 2000 financial information presented in the
consolidated statements of operations and the consolidated statements of
cash flows represents the results for Viewlogic for the periods stated and
includes the financial results for Summit commencing March 24, 2000, and
the financial results for PADS commencing September 23, 2000.
FISCAL YEAR - The Company's fiscal year is a 52-53-week year ending on the
Saturday closest to December 31.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts and disclosures of certain
assets and liabilities at the balance sheet date. Actual results may differ
from such estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Innoveda, Inc. and its subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions have
been eliminated.
FOREIGN CURRENCY TRANSLATION - The functional currency of international
operations is deemed to be the local country's currency. Assets and
liabilities of operations outside the United States are translated into
United States dollars using current exchange rates at the balance sheet
date. Results of operations are translated at average exchange rates
prevailing during each period. Translation adjustments are included in
other comprehensive income. Transaction gains and losses are recorded in
the statement of operations.
F-7
<Page>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION Software revenue is recognized upon the shipment of
the product provided that persuasive evidence of an arrangement exists, the
arrangement fee is fixed and determinable and collection is probable. For
arrangements involving multiple elements, the arrangement fee is allocated
to each element based on vendor-specific objective evidence ("VSOE") of the
fair value of the various elements. VSOE of fair value is determined based
on the prices at which the elements are sold separately. If VSOE of fair
value exists for all undelivered elements but not for the delivered
element, the portion of the arrangement fee allocated to the delivered
element is determined using the residual method. If VSOE of fair value does
not exist for all of the undelivered elements, the arrangement fee is
recognized ratably over the term of the arrangement. For term licenses of
one year or less, which include post contract customer support, revenue is
recognized ratably over the term of the agreement, unless the only support
provided is telephone support, in which case the entire arrangement fee is
recognized at the beginning of the term.
Revenue from maintenance and support contracts is deferred and recognized
ratably over the term of the service period. Revenue from training and
consulting is recognized as the related services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance for
doubtful accounts, which reflects our estimate of the amounts owed by
customers that customers will be unable to pay. Management performs ongoing
credit evaluations of its customers' financial condition and limits the
amount of customer credit when deemed necessary.
CONCENTRATION OF CREDIT RISK - The Company's trade receivables and
investments do not represent a significant concentration of credit risk at
December 29, 2001 due to the wide variety of customers and markets into
which the Company's products are sold and their dispersion across many
geographic areas.
CASH EQUIVALENTS - The Company considers all short-term, highly liquid
investments purchased with a remaining maturity of three months or less to
be cash equivalents.
F-8
<Page>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Supplemental cash flow information is as follows (in thousands):
<Table>
<Caption>
YEAR ENDED
------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
----------- ----------- ----------
Cash paid for interest $ 449 $ 1,131 $ 1,645
Cash paid for (received from) income taxes (545) 2,576 1,543
Assets acquired under capital leases - - 898
Issuance of stock in OmniView acquisition - - 280
Acquisition of Transcendent:
Fair value of assets acquired (including intangibles) - - 3,373
Fair value of common stock issued - - (1,159)
Fair value of Transcendent options assumed - - (44)
Transaction costs - - (354)
Liabilities assumed - - 1,816
Acquisition of Summit Design:
Fair value of assets acquired (including intangibles) - 49,842 -
Fair value of common stock issued - (49,020) -
Fair value of Summit Design options assumed - (4,882) -
Transaction costs - (1,136) -
Liabilities assumed - 25,350 -
Acquisition of PADS Software
Fair value of assets acquired (including intangibles) - 54,306 -
Fair value of common stock issued - (23,870) -
Fair value of PADS options assumed - (366) -
Transaction costs - (550) -
Liabilities assumed - 35,438 -
Exercise of stock options through issuance of
stockholders' notes - - 927
</Table>
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets (three to five years). Equipment leased
under capital leases is amortized over the lesser of its useful life or the
lease term.
CAPITALIZED SOFTWARE COSTS AND PURCHASED TECHNOLOGY - Certain software
costs for products and product enhancements are capitalized after
technological feasibility has been established. Amortization is provided
over estimated lives of four years on a straight-line basis or based on the
ratio of current revenues to the total expected revenues in a product's
life, if greater. Accumulated amortization was $4,961 and $4,125 at
December 29, 2001 and December 30, 2000, respectively. Amortization expense
for the fiscal years ended December 29, 2001, December 30, 2000 and January
1, 2000 was $965, $1,013 and $966, respectively. Research and development
costs and software development costs incurred before technological
feasibility has been established are expensed as incurred.
F-9
<Page>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PURCHASED TECHNOLOGY AND OTHER INTANGIBLES - Purchased technology is being
amortized over estimated lives ranging from three to four years.
Accumulated amortization was $36,224 and $7,320 at December 29, 2001 and
December 30, 2000, respectively. Amortization expense for the fiscal years
ended December 29, 2001, December 30, 2000 and January 1, 2000 was $11,052,
$7,031 and $656, respectively.
GOODWILL AND OTHER ASSETS - Goodwill and other assets consist primarily of
goodwill, which represents the excess of the purchase price over
identifiable net assets acquired and is being amortized over seven years.
Accumulated amortization at December 29, 2001 and December 30, 2000 was
$20,503 and $3,085, respectively. Amortization expense for the fiscal years
ended December 29, 2001, December 30, 2000 and January 1, 2000 was $3,362,
$3,304 and $55, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived
assets, including goodwill, purchased technology and other intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable.
As part of the Company's review of financial results during the third
quarter of 2001, the Company performed an assessment of the carrying values
of intangible assets recorded in connection with the acquisitions of PADS
Software and Summit Design. This assessment was performed as a result of
the current economic downturn and industry trends impacting the Company's
current operations and expected future growth rates. The conclusion of that
assessment was that the decline in economic conditions within the Company's
industry was significant and other than temporary. As a result, the Company
recognized pre-tax charges of $32,945 representing write downs to record
intangible assets at their estimated fair values. The impaired intangible
assets include goodwill, purchased technology, workforce and customer base.
The estimated fair value was based on expected future cash flows to be
generated, discounted at a rate commensurate with the risks involved.
INCOME TAXES - The Company provides for deferred income taxes based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted rates in effect in the years in which the
differences are expected to reverse. The Company establishes valuation
allowances to offset temporary deductible differences, net operating loss
carryforwards, and tax credits, which are not likely to be realized.
FOREIGN EXCHANGE CONTRACTS - The Company enters into foreign exchange
contracts as a hedge against certain accounts receivable denominated in
foreign currencies. Market value gains and losses are recognized, and the
resulting credit or debit offsets foreign exchange gains or losses on those
receivables. Realized and unrealized gains and losses on foreign exchange
contracts for the years ended December 29, 2001, December 30, 2000 and
January 1, 2000 were insignificant. There were no outstanding foreign
exchange contracts outstanding as of December 29, 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments held or used by
the Company include cash and cash equivalents, accounts receivable,
accounts payable, capital lease obligations, notes and line of credit
payables, foreign exchange contracts, if any, and interest rate swap
agreements. The fair values of these instruments, which could change if
market conditions change, are based on management's estimates. Management
believes that the carrying values of these instruments approximates their
fair values.
INTEREST RATE SWAP AGREEMENT - The net differential to be paid or received
under the Company's interest rate swap agreement is accrued as interest
rates change and is recognized over the life of the agreement. The
Company's interest-rate swap agreement has been recorded at fair value.
Changes in the fair value are either recognized periodically in earnings
or in stockholders' equity as a component of comprehensive income,
depending on whether the derivative financial instrument qualifies for
hedge accounting. Changes in fair values that do not qualify for hedge
accounting are reported in earnings.
F-10
<Page>
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance
with provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Stock-based compensation expense is amortized, using the multiple option
method prescribed by Financial Accounting Standards Board Interpretation
("FIN") No. 28 over the option's vesting period.
NEW ACCOUNTING PRONOUNCEMENTS - On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which
established accounting and reporting standards for derivative instruments.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in fair value of the
derivative are recorded in other comprehensive income and are recognized in
the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. Adoption of SFAS 133 did not have a material effect on the
Company's consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This
statement supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived
Assets to be Disposed of" ("SFAS 121") and the accounting and reporting
provisions of APB 30, for the disposal of a segment of a business. The
Company will adopt SFAS No. 144 in the first quarter of fiscal 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that an entity account for
business combinations using the purchase method and eliminates the pooling
method. In addition, SFAS No. 141 provides guidance regarding the initial
recognition and measurement of goodwill and other intangible assets. SFAS
No.142 requires that goodwill no longer be amortized and instead be tested
annually for impairment. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001 and the provisions of
SFAS No. 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 142 in
the first quarter of fiscal 2002 and estimates that the effect of the
adoption will be to reduce annual amortization expense by approximately
$0.2 million.
RECLASSIFICATION - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the current year
presentation.
F-11
<Page>
2. ACQUISITIONS
ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into a
merger agreement with PADS. The merger was consummated on
September 22, 2000. The merger agreement provided that a wholly owned
subsidiary of Innoveda would merge with and into PADS, with PADS surviving
as a wholly owned subsidiary of Innoveda following the merger. For the
merger, Innoveda issued 6,473 shares of its common stock and paid
approximately $1,976 to the PADS stockholders. PADS capital stock
outstanding at the merger date was exchanged for shares of Innoveda common
stock at the rate of approximately 1.0 to 1.9 per share, plus $0.579 per
share in cash. In addition, each outstanding option to purchase shares of
PADS common stock was converted into an option to purchase 2.0355 shares of
Innoveda common stock, and the option exercise prices were adjusted
accordingly.
The acquisition was accounted for under the purchase method of accounting.
The operating results of PADS have been included in the accompanying
consolidated financial statements from the date of acquisition. Under the
purchase method of accounting, the acquired assets and assumed liabilities
have been recorded at their estimated fair values at the date of
acquisition. Goodwill and other intangibles in the amount of approximately
$49,069 were capitalized. As a result of the acquisition, $3,053
relating to in-process research and development has been expensed. The
goodwill and other intangibles are being amortized over estimated useful
lives of three to seven years. In fiscal 2001, the Company recorded an
impairment charge related to certain of the assets acquired (see Note 4).
The valuation of the existing technology and in-process research and
development was determined using the income method. Revenue and expense
projections as well as technology assumptions were prepared through 2009.
The projected cash flows were discounted using a 17% rate. The valuation of
the in-process research and development was determined separately from all
other acquired assets using the percentage of completion method. The
percentage of completion ratio was calculated by dividing the total
expenditures for each project by the total estimated expenditures.
The value assigned to in-process technology relates primarily to three
research projects, Power PCB Next Generation, BlazeDRE and ACT
Manufacturing. During the first quarter of 2000, ACT Manufacturing was
commercially released. BlazeDRE is expected to be commercially released
during the second quarter of fiscal 2002 and Power PCB Next Generation has
yet to reach technological feasibility. The nature of the efforts required
to develop the in-process technologies into commercially viable products
principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the products can be produced to meet their design
specifications, including function, features and technical performance
requirements.
F-12
<Page>
2. ACQUISITIONS (CONTINUED)
Below is a table of the PADS acquisition costs and the purchase price
allocation:
<Table>
Purchase price:
Common stock $ 23,870
Stock options 366
Cash payment to PADS stockholders 1,976
Acquisition costs 550
-------------
Total purchase price $ 26,762
=============
Purchase price allocation:
Tangible net assets acquired $ 657
Assumed debt (7,381)
Deferred income taxes (18,208)
Intangible net assets acquired:
Purchased technology, assembled workforce,
customer base, and trademarks 47,293
Goodwill 1,776
In-process research and development 3,053
Estimated PADS related severance and shutdown costs (428)
-------------
Total $ 26,762
=============
</Table>
Pursuant to the PADS merger agreement, Innoveda paid all of the assumed
debt after the closing.
The $428 accrued as estimated severance and shutdown costs included
involuntary employee separations costs and facilities consolidations. The
separation benefits related to one employee, in an administrative function
at PADS' corporate headquarters. The facilities consolidation amount
related primarily to sales offices to be closed as a result of the
acquisition. All such costs have been paid.
Innoveda recorded merger costs of approximately $493 in restructuring
charges relating to the PADS merger. This was primarily comprised of
severance payments related to one employee and exit costs to close
Innoveda duplicative facilities as a result of the merger.
BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the
stockholders of Viewlogic and the stockholders of Summit approved an
Agreement and Plan of Reorganization. Summit was a publicly held company
engaged in a business similar to that of Viewlogic. In connection with the
business combination contemplated by the Agreement and Plan of
Reorganization, (1) each share of Viewlogic common stock and preferred
stock issued and outstanding at the effective time of the business
combination was converted into 0.67928 (the "Exchange Ratio") of a share
of Summit common stock, and (2) each option to purchase shares of
Viewlogic Common Stock was converted into an option to purchase Summit
common stock based on the Exchange Ratio. The name of the combined company
was changed to Innoveda, Inc.
F-13
<Page>
2. ACQUISITIONS (CONTINUED)
The business combination was accounted for under the purchase method of
accounting and was treated as a reverse acquisition, as the stockholders
of Viewlogic received the larger portion of the voting interests in the
combined company. Viewlogic was considered the acquirer for accounting
purposes and recorded Summit's assets and liabilities based on their
estimated fair values. The operating results of Summit have been included
in the accompanying consolidated financial statements from the date of
acquisition. Under the purchase method of accounting, the acquired assets
and assumed liabilities have been recorded at their estimated fair values
at the date of acquisition. Goodwill and other intangibles in the amount
of approximately $38,137 were capitalized. As a result of the business
combination, $2,400 relating to in-process research and development has
been expensed. The goodwill and other intangibles are being amortized over
estimated useful lives of three to seven years. In fiscal 2001, the
Company recorded an impairment charge related to certain of the assets
acquired (see Note 4).
The valuation of the existing technology and in-process research and
development was determined using the income method. Revenue and expense
projections as well as technology assumptions were prepared through 2009.
The projected cash flows were discounted using a 25% to 30% rate. The
valuation of the in-process research and development was determined
separately from all other acquired assets using the percentage of
completion method. The percentage of completion ratio was calculated by
dividing the total expected expenditures for each project by the total
estimated expenditures to achieve technological feasibility.
The value assigned to in-process technology related to two research
projects, Visual HDL 2000 and Visual SLD. The nature of the effort
required in the development of the in-process technologies into
commercially viable products principally related to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to meet their
design specifications, including function, features and technical
requirements. Visual HDL 2000 represented a major rearchitecture of the
two existing Visual HDL products. The new generation product integrates
these two existing products along with a newly developed compiler. The
Visual SLD research project represented the development of an entirely new
product targeted at a customer base not previously approached for the
Visual product line. These technologies were combined and commercially
released during the fourth quarter of 2000 under the product name Visual
Elite.
Below is a table of Summit acquisition costs and the purchase price
allocation (in thousands):
<Table>
Purchase price:
Common stock $ 49,020
Stock options 4,882
Acquisition costs 1,136
-------------
Total purchase price $ 55,038
=============
Purchase price allocation:
Tangible net assets acquired $ 28,089
Assets impaired by the Merger (750)
Deferred income taxes (11,492)
Intangible net assets acquired:
Purchased technology, assembled workforce,
and customer base 23,200
Goodwill 14,937
In-process research and development 2,400
Estimated Summit related severance and shutdown costs (1,346)
-------------
Total $ 55,038
=============
</Table>
F-14
<Page>
2. ACQUISITIONS (CONTINUED)
The $1,346 accrued as estimated severance and shutdown costs include
involuntary employee separations costs and facilities consolidations. The
separation benefits related to approximately thirty employees,
concentrated in administrative functions at Summit's corporate
headquarters. The facilities consolidation amount related primarily to
Summit's corporate headquarters facility in Beaverton and other sales
offices closed as a result of the acquisition. All such costs have been
paid.
Innoveda recorded approximately $2,243 in merger costs relating to the
Summit business combination. This primarily included severance and other
costs relating to the consolidation of duplicative facilities as a result
of the business combination between Summit and Viewlogic. Other costs
relating to property and equipment lease contracts (less any applicable
sublease income) after the properties were abandoned, lease buyout costs,
restoration costs associated with certain lease arrangements, and costs to
maintain facilities during the period after abandonment are also included.
Further action was taken to restructure the Innoveda sales and services
business in Japan as a result of an exclusive distributor agreement during
the first quarter of fiscal 2000. Charges associated with Japanese
reorganization include severance and benefit continuance for approximately
fourteen employees, costs associated with office closings and subsequent
lease termination, and other facility and exit related costs.
The following table presents the components of the merger costs accrued
during the mergers with PADS and Summit and the charges against these
reserves through December 29, 2001. All significant amounts have been
paid.
<Table>
<Caption>
YEAR ENDED
--------------------------------------------------------------------------------------
DECEMBER 30, 2000 DECEMBER 29, 2001
--------------------------------------------------------------------------------------
Total Non-Cash Amount Accrual Non-cash Amount Accrual
Charge Write-Off Paid Balance Write-off Paid Balance
---------- --------- --------- --------- ---------- -------- --------
PADS MERGER COSTS
Severance $ 250 $ - $ 218 $ 32 $ 32 $ - $ -
Non-cancelable
commitments 199 - 29 170 - 170 -
Capitalized software 44 44 - - - - -
---------- -------- --------- --------- ---------- -------- --------
$ 493 $ 44 $ 247 $ 202 $ 32 $ 170 $ -
========== ======== ========= ========= ========== ======== ========
SUMMIT MERGER COSTS
Severance $ 780 $ - $ 775 $ 5 $ 5 $ - $ -
Non-cancelable
commitments 1,389 - 707 682 - 682 -
Capitalized software 74 74 - - - - -
---------- -------- --------- --------- ---------- -------- --------
$ 2,243 $ 74 $ 1,482 $ 687 $ 5 $ 682 $ -
========== ======== ========= ========= ========== ======== ========
Totals $ 2,736 $ 118 $ 1,729 $ 889 $ 37 $ 852 $ -
========== ======== ========= ========= ========== ======== ========
</Table>
The unaudited consolidated results of operations shown below are presented
on a pro forma basis and represent the results of Viewlogic, Summit and
PADS had the business combinations of these entities occurred at the
beginning of the periods presented. This schedule includes all
amortization and non-recurring charges for all entities for the periods
shown.
F-15
<Page>
2. ACQUISITIONS (CONTINUED)
<Table>
<Caption>
YEAR ENDED
--------------------------------
DECEMBER 30, JANUARY 1,
2000 2000
------------ ------------
Revenue $ 115,404 $ 109,434
============ ============
Net loss $ (19,312) $ (13,010)
============ ============
Net loss per share
Basic $ (0.50) $ (0.34)
Diluted $ (0.50) $ (0.34)
</Table>
The pro forma financial information is presented for informational purposes
only and is not indicative of the operating results that would have
occurred had the mergers been consummated as of the above dates, nor are
they necessarily indicative of future operating results.
On March 1, 1999, the Company purchased certain assets and intellectual
property of OmniView, Inc. ("OmniView"). The purchase price consisted of
$1,100 in cash, 272 shares of the Company's common stock and acquisition
expenses. The purchase price was allocated to the assets acquired based on
their fair values with $1,200 to purchased technologies and other
intangibles.
On August 9, 1999, the Company acquired Transcendent Design Technologies
("Transcendent"). Transcendent develops, markets and distributes
electro-mechanical design and analysis software. The acquisition was
accounted for under the purchase method. The purchase price for the
acquisition was 492 shares of Viewlogic common stock, options to purchase
53 shares of Viewlogic common stock and $354 in direct acquisition costs.
The purchase price was allocated to the acquired assets and liabilities
based on their fair values with $2,700 to purchased technologies and other
intangibles.
3. DEBT
CREDIT FACILITY - The Company had a $16,000 credit facility with a
commercial bank consisting of a $6,000 revolving line of credit ("Line of
Credit") and a $10,000 term loan ("Term Loan") (together, the "Credit
Facility"). For the fiscal quarter ended June 30, 2001, the Company did not
meet certain financial covenants under its Credit Facility. Effective
September 29, 2001, the Company and the lender have amended the terms and
conditions of its Term Loan and its Line of Credit to revise certain
covenants and provide a waiver for past violations. Under this amendment,
the Term Loan portion of the Credit Facility remains in place with the
repayment schedule unchanged, and the Line of Credit portion of the Credit
Facility has been reduced to approximately $431 to cover only existing
letters of credit issued by the lender at the request of the Company.
Borrowings under the Credit Facility are secured by substantially all of
Innoveda's assets. The amended Credit Facility contains limitations on
additional indebtedness and capital expenditures, and includes financial
covenants, which include but are not limited to maintaining certain levels
of profitability, deferred revenue, working capital ratio and debt service
coverage ratio.
F-16
<Page>
3. DEBT (CONTINUED)
Interest rates on the Line of Credit and the Term Loan are determined, at
the option of the Company, for varying periods. The Company may elect to
have the interest rate based on the bank's prime rate or based on the LIBOR
rate at the time of the election, depending on the Company's leverage
financial ratio, as defined, in the Credit Facility. The interest rate on
the Line of Credit at December 30, 2000 was 10%. The interest rates on the
Term Loan at December 29, 2001 and December 30, 2000 were 4.7% and 9.2%,
respectively. Payments of principal outstanding under either the Line of
Credit or the Term Loan expire by September 30, 2003. A payment of $1,000
is due in the first quarter of fiscal 2002. Successive payments of $1,000
are due each quarter through the fourth quarter of 2002, and $1,375 and
$375 are due in the first and third quarters of fiscal 2003, respectively.
As required under the Credit Facility, the Company entered into a no fee
interest rate-swap agreement with a bank to reduce the impact of changes in
interest rates on its floating rate Credit Facility. This agreement
effectively converts the whole floating-rate obligation into a fixed-rate
obligation of 7.4% for a period of 60 months, expiring on March 31, 2003.
The notional principal amount of the interest rate-swap agreement is $5,750
as of December 29, 2001. The Company is exposed to credit loss in the event
of nonperformance by the counterparties to the interest rate-swap
agreement.
Certain information with respect to line-of-credit borrowings is as
follows:
<Table>
<Caption>
WEIGHTED-
AVERAGE MAXIMUM AVERAGE
INTEREST AMOUNT AMOUNT
RATE OUTSTANDING OUTSTANDING
------------ ------------- ---------------
Period December 31, 2000 to December 29, 2001 - - -
Period January 2, 2000 to December 30, 2000 9.2% $ 3,500 $ 407
</Table>
Under all debt agreements, minimum repayments are due as follows as of
December 29, 2001:
<Table>
<Caption>
FISCAL YEARS
2002 $ 4,000
2003 1,750
-------
Total $ 5,750
=======
</Table>
The Credit Facility also calls for other mandatory repayments: (a) after
the end of each fiscal year in the case that cash flow leverage, as defined
in the Credit Facility, is greater than two times, 50% of the excess cash
flow as defined in the Credit Facility, (b) upon availability of cash from
the net proceeds of any sale of certain of the Company's assets, and (c)
proceeds from settlements for casualty insurance policies greater than
$250.
Open interest rate contracts are reviewed regularly by the Company to
ensure that they remain effective as hedges of interest rate exposure. The
fair value obligation of the interest rate-swap agreement was approximately
$159 as of December 29, 2001 and has been recorded as a liability.
F-17
<Page>
3. DEBT (CONTINUED)
CAPITAL LEASES - The Company is obligated under capital leases for its
phone system, computer equipment and software that will expire during
fiscal 2002. The recorded value of the assets was $1,173 and $1,232 as of
December 29, 2001 and December 30, 2000, respectively. The related
accumulated amortization on these assets was $985 and $636 as of December
29, 2001 and December 30, 2000, respectively.
Future aggregate minimum annual lease payments under capital leases at
December 29, 2001 was $303 of which $33 represented interest and $270
represented principal to be paid by December 28, 2002.
4. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
In August 2001, Innoveda, in response to significant negative economic
trends, implemented a restructuring and streamlining of company operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of intangible assets for impairment
whenever events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. If an impairment is
indicated, the asset is written down to its estimated fair value. During
the third quarter of 2001, the Company wrote down approximately $32,945 of
impaired long-lived assets related to the goodwill, purchased technology,
workforce and customer base associated with the acquisitions of PADS
Software and Summit Design. Based on the declining historical and
forecasted operating results of such intangible assets as they relate to
earlier estimates and the general economic trends of the EDA industry as a
whole, their estimated value to the Company has decreased. Based on the
Company's expectation of future undiscounted net cash flows, these assets
have been written-down to their net realizable value.
RESTRUCTURING COSTS
As a result of the restructuring, the Company recorded charges of $5,271.
The restructuring costs include workforce reductions, closing facilities,
reducing space in other facilities and asset write-downs.
The restructuring program resulted in the reduction in workforce of
approximately one hundred forty employees across all business functions and
geographic regions. The workforce reductions were substantially completed
by the end of the third quarter of 2001. The Company recorded a workforce
reduction charge of $2,267 relating primarily to severance, fringe benefits
and outplacement services.
The Company also recorded a restructuring charge of $1,511 relating to
lease terminations, non-cancelable lease costs, and excess facility space.
These facility costs relate to business activities that have been exited or
restructured. In addition, the restructuring charge includes an additional
$408 in professional fees, travel expenses and other related costs incurred
in connection with the restructuring activities and a $1,085 restructuring
charge related to certain fixed assets that became impaired as a result of
the decision to reduce the workforce and close facilities.
F-18
<Page>
4. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
The following table sets forth an analysis of the components of the
restructuring and intangible asset impairment charges. The table indicates
payments made against the reserve through December 29, 2001.
<Table>
<Caption>
TOTAL NON-CASH AMOUNT DECEMBER 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 - 2,152 115
Lease commitment and related fees 1,511 - 293 1,218
Other 408 - 201 207
------------ ------------ ---------- --------------------
$ 38,216 $ 34,030 $ 2,646 $ 1,540
============ ============ ========== ====================
</Table>
All remaining amounts are expected to be paid by the end of fiscal 2002.
PITTSBURGH OFFICE CLOSURE
In May 2001, the Company closed an office in Pittsburgh, Pennsylvania and
transferred the operations to other offices in the United States and
overseas. The total charge of $594 consists of intangible asset and fixed
asset impairment charges of $415, $64 of severance related to the
termination of six employees and $115 of other costs incurred due to the
closure. All remaining amounts are expected to be settled by the end of
fiscal 2002.
<Table>
<Caption>
TOTAL NON-CASH AMOUNT DECEMBER 29, 2001
ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE
---------- ------------ --------- --------------------
Impairment of intangibles
and fixed assets $ 415 $ 415 $ - $ -
Severance 64 - 64 -
Lease commitment 48 - 48 -
Other 67 - 33 34
---------- ------------ --------- --------------------
$ 594 $ 415 $ 145 $ 34
========== ============ ========= ====================
</Table>
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company has 5,000 shares of Preferred Stock
authorized, of which there are no shares outstanding. The Board of
Directors has the authority to issue these shares of Preferred Stock in one
or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any unissued and undesignated
shares of Preferred Stock and to fix the number of shares constituting any
series and the designations of such series, without any future vote or
action by the stockholders.
F-19
<Page>
5. STOCKHOLDERS' EQUITY (CONTINUED)
REDEEMABLE, CONVERTIBLE PREFERRED STOCK -Viewlogic had authorized 22,000
shares of $.001 par value, redeemable, convertible preferred stock
("Preferred Stock") of which 17,000 were designated as Series A Voting
Preferred Stock ("Series A") and 5,000 were designated as non-voting Series
A-1 Preferred Stock ("Series A-1"). At January 1, 2000, 11,382 shares of
Series A and 4,618 shares of Series A-1 were issued and outstanding.
Effective with the business combination of Viewlogic and Summit, all Series
A and Series A-1 shares were converted into shares of the Company's common
stock.
STOCK REPURCHASE PROGRAM - Under a stock repurchase program announced in
October 2000, the Company was authorized to purchase up to 2,000 shares of
its common stock from time to time on the open market or pursuant to
negotiated and block transactions. The repurchased shares are being held as
treasury shares and are authorized for use in the Company's stock option
plans, employee stock purchase plans and for general corporate purposes.
The authorization expired in October 31, 2001. The Company purchased 209
shares of common stock in 2001 at an aggregate cost of $831 and 341 shares
of common stock in 2000 at an aggregate cost of $832.
STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
2000 STOCK INCENTIVE PLAN - On May 31, 2000 the Board of Directors adopted
the Amended and Restated 2000 Stock Incentive Plan (the "2000 Plan"). On
July 13, 2000, the stockholders approved the 2000 Plan. Under the 2000 Plan
either shares of the Company's common stock or options to purchase shares
of the Company's stock may be issued at the discretion of the Company's
Board of Directors. The initial 4,500 shares authorized to be issued under
the 2000 Plan increase automatically by 2,000 shares annually during the
2000 Plan's existence. In addition, up to 2,400 shares which were
previously available for issuance under the Summit Design 1994 Stock Plan,
the Summit Design 1997 Non-Statutory Stock Plan and the Viewlogic Systems,
Inc. 1998 Stock Incentive Plan (collectively, the "Prior Plans") may be
issued under the 2000 Plan. No more than 500 shares of stock can be awarded
to a single employee in any calendar year. Options generally vest over a
period of four years and expire after ten years. Options granted to certain
officers are exercisable when granted; however, the shares are subject to
repurchase rights by the Company at the exercise price. The Company's right
to repurchase the shares generally lapses ratably over four years.
1998 STOCK INCENTIVE PLAN - The Company has the Viewlogic Systems, Inc.
1998 Stock Incentive Plan (the "1998 Plan"). Under the 1998 Plan, the
Company may issue stock or options to purchase shares at the discretion of
the Company's Board of Directors. The initial 4,521 shares authorized to be
issued under the 1998 Plan increase automatically by five percent of the
original shares authorized annually during the 1998 Plan's existence. No
more than 883 shares of stock can be awarded to a single employee in any
calendar year. Options generally vest over a period of four years and
expire after ten years. Options granted to certain officers are exercisable
when granted; however, the shares are subject to repurchase rights by the
Company at the exercise price. The Company's right to repurchase the shares
generally lapses ratably over four years.
F-20
<Page>
5. STOCKHOLDERS' EQUITY (CONTINUED)
OTHER STOCK OPTION PLANS - The Company has the Incentive Stock Option Plan
("1994 Plan"), 1996 Director Option Plan (the "Director Plan") and the 1997
Non-statutory Stock Option Plan ("Non-statutory Plan") pursuant to which
the Company may grant options to employees and consultants. Under the terms
of the 1994 Plan, the option price is determined as the fair value of the
Company's common stock at the time the option is granted. Under the 1994
Plan, 3,447 shares of common stock are authorized for issuance. Options
generally vest 25% twelve months after the date of grant and the remainder
at 1/48th of the grant amount in each successive month thereafter. Options
expire no later than 10 years after the date of grant. Options granted
under the Non-statutory Plan will be non-statutory stock options and are
not intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. Non-statutory options generally
vest 25% twelve months after the date of grant and the remainder at 1/48th
of the grant amount in each successive month thereafter. Options expire no
later than 10 years after the grant date.
There were 1,519 shares of common stock reserved for the grant of stock
options under all Plans at December 29, 2001, subject to certain
limitations as discussed above.
The following is a summary of option activity under all plans:
<Table>
<Caption>
Weighted-
Number Average
of Exercise
Shares Price
----------- ----------
Outstanding at January 2, 1999 3,674 $ 0.49
Granted 469 1.00
Exercised (1,955) 0.49
Assumed Transcendent options 57 2.25
Forfeited (225) 0.60
-----------
Outstanding at January 1, 2000 2,020 0.65
Granted 3,753 3.42
Exercised (504) 1.35
Assumed options from acquisitions 2,715 4.42
Forfeited (1,286) 3.36
-----------
Outstanding at December 30, 2000 6,698 3.17
Granted 5,320 1.63
Exercised (292) 0.57
Forfeited (1,678) 3.11
-----------
Outstanding at December 29, 2001 10,048 $ 2.46
===========
</Table>
The following are the shares exercisable at the corresponding weighted
average exercise price at December 29, 2001, December 30, 2000 and January
1, 2000, respectively: 3,412 at $3.20, 1,807 at $3.37 and 479 at $0.68. The
weighted-average grant date fair value for options granted for the years
ended December 29, 2001, December 30, 2000 and January 1, 2000 was $1.46,
$2.28 and $1.31, respectively.
F-21
<Page>
5. STOCKHOLDERS' EQUITY (CONTINUED)
At December 29, 2001, 2,809 shares issued upon the exercise of options by
certain officers of the Company were subject to repurchase by the Company
at the exercise price.
The following table sets forth information regarding options outstanding as
of December 29, 2001:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------
WEIGHTED - -
AVERAGE WEIGHTED - WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PERIODS IN EXERCISE EXERCISE
PRICES SHARES YEARS PRICE SHARES PRICE
---------------- -------- ----------- ----------- --------- ------------
0.31 - 0.67 808 7.02 0.50 551 0.49
0.80 - 1.99 3,223 9.54 1.13 349 0.99
2.06 - 2.95 2,936 8.84 2.39 880 2.44
3.00 - 3.98 2,213 8.21 3.51 1,077 3.50
4.00 - 5.57 513 8.28 4.78 222 4.92
6.50 - 7.45 49 7.39 6.77 33 6.74
8.13 - 8.44 71 5.92 8.16 66 8.14
9.00 - 17.00 235 5.71 10.84 234 10.84
-------- --------
10,048 3,412
-------- --------
</Table>
For financial reporting purposes, the deemed fair value of the common stock
at the dates of grants resulted in deferred compensation expense of $431
for the year ended January 1, 2000 and $1,918 for the year ended January 2,
1999. These charges are being recognized ratably over the vesting period.
Compensation expense recognized amounted to $587, $588 and $531 for the
years ended December 29, 2001, December 30, 2000 and January 1, 2000,
respectively.
2000 EMPLOYEE STOCK PURCHASE PLAN - On May 16, 2000, the Company adopted
the 2000 Employee Stock Purchase Plan ("2000 Purchase Plan"). The 2000
Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue code, permits eligible employees of the Company to
purchase common stock through payroll deductions of up to 10% of their base
salary up to a maximum of $25 of common stock for all purchase periods
ending within any calendar year. The price of common stock purchased under
the 2000 Purchase Plan will be 85% of the lower of the fair market value of
the common stock on the first day of each 24-month offering period or the
last day of the applicable six-month purchase period. The Company reserved
700 shares of common stock for issuance under the 2000 Purchase Plan, all
of which are expected to have been purchased by March 1, 2002. The Company
plans to seek in 2002 Board of Director and shareholder approval for an
additional 1,100 shares to be reserved for issuance under the plan.
F-22
<Page>
5. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES - As described in Note 1, the Company applies the
intrinsic value method of APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost been
determined based on the fair value at the grant dates consistent with the
method required by FASB Statement 123, the Company's net income (loss) and
net income (loss) per share would have been:
<Table>
<Caption>
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Net income (loss) $ (44,415) $ (11,948) $ 197
Net income (loss) per
common share:
Basic (1.13) (0.42) 0.05
Diluted (1.13) (0.42) 0.01
</Table>
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans was estimated on the date of
grant using the Black-Scholes option pricing model.
Key assumptions used to apply this pricing model are as follows for the
periods presented:
<Table>
<Caption>
YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ------------
Risk-free interest rate 5.2% - 6.7% 5.2% - 6.7% 5.3% - 6.3%
Expected life of option grants 4 years 4 years 4 years
Expected volatility of underlying stock 97% 90% 59%
Expected dividend payment rate - - -
</Table>
6. INCOME TAXES
The components of income (loss) before income taxes consisted of the
following:
<Table>
<Caption>
YEAR ENDED
----------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------ ------------ ----------
Domestic $ (52,084) $ (8,483) $ 124
Foreign (4,252) (876) 416
------------ ------------ ----------
Total Income (Loss) Before Taxes $ (56,336) $ (9,359) $ 540
============ ============ ==========
</Table>
F-23
<Page>
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consisted of the following:
<Table>
<Caption>
YEAR ENDED
-------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
-------------- ------------ -----------
Current:
Federal $ 977 $ 6,717 $ --
State 331 -- --
Foreign (543) 472 250
-------------- ------------ -----------
Total 765 7,189 250
Deferred:
Federal (12,570) (5,380) 51
State (2,038) -- --
Foreign 144 -- (20)
-------------- ------------ -----------
Total (14,464) (5,380) 31
Total provision (benefit) for income taxes $ (13,699) $ 1,809 $ 281
============== ============ ===========
</Table>
A reconciliation between the statutory U.S. federal income tax and the
Company's effective tax rate for the respective years is as follows:
<Table>
<Caption>
YEAR ENDED
-------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
-------------- ------------ -----------
U.S. federal statutory rate% (35.0)% (35.0)% 35.0
State taxes - net of federal tax benefit (1.0) (4.0) -
Foreign taxes 2.1 5.0 15.6
Goodwill amortization 7.4 21.6 -
In-process research and development - 22.7 -
Amortization of stock compensation 0.4 2.4 -
Other items 1.8 6.6 1.4
-------------- ------------ -----------
Total% (24.3)% 19.3 52.0
============== ============ ===========
</Table>
F-24
<Page>
6. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consisted of the following:
<Table>
<Caption>
YEAR ENDED
--------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
------------- -------------- --------------
Current assets:
Accounts receivable $ 764 $ 1,871 $ 537
Deferred compensation 427 1,561 504
Foreign net operating loss carryforwards 1,050 1,123 301
Depreciation and amortization 1,044 1,061 -
In-process research and development - 949 -
Deferred revenue 408 - -
Other items 267 61 -
------------- -------------- -------------
Total current assets $ 3,960 $ 6,626 $ 1,342
------------- -------------- -------------
Noncurrent liabilities:
Purchased technology $ 8,749 $ 24,516 $ 993
Capitalized software costs 901 2,233 822
Depreciation and amortization - 230 530
Deferred revenues - 212 -
Other 363 451 48
-------------- -------------- -------------
Total liabilities $ 10,013 $ 27,642 $ 2,393
-------------- -------------- -------------
Total net tax deferred liability $ (6,053) $ (21,016) $ (1,051)
============= ============== =============
</Table>
No valuation allowance is required as the deferred tax assets are expected
to be fully realized.
7. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases its principal office facilities and certain
computer equipment under non-cancelable operating leases expiring on
various dates through 2006. The Company's headquarters office lease is
through 2002. The lease includes three two-year renewal options to extend
the lease through 2008. The lease contains a three-month rental abatement
and a rental escalation clause, the effects of which are being recognized
ratably over the lease term. At December 29, 2001, future minimum lease
payments under these non-cancelable leases were approximately as follows:
2002, $4,732; 2003, $2,836; 2004, $1,852; 2005, $1,456; and 2006, $272. The
Company leases other office facilities under operating lease agreements for
which lease terms are one year or less. Total rent expense was
approximately $4,569, $3,572 and $2,232 for the years ended December 29,
2001, December 30, 2000 and January 1, 2000, respectively.
CONTINGENCIES - The Company is involved in certain legal proceedings which
have arisen in the ordinary course of business. Management believes the
outcome of these proceedings will not have a material adverse impact on the
Company's consolidated financial condition or operating results.
F-25
<Page>
8. RELATED PARTY TRANSACTIONS
SALE OF VIRSIM PRODUCT LINE - On July 28, 2000, the Company entered into an
agreement with Synopsys, Inc. By virtue of its ownership interest in the
Company, Synopsys may be deemed to be affiliated with Innoveda. Synopsys
agreed to acquire Innoveda's VirSim electronic design software tool and
certain related assets for a purchase price of $7,000. The sale was
completed on August 2, 2000. There was no gain or loss on the sale as the
proceeds were offset by the related write-off of the goodwill and other
intangible assets that were recorded from the business combination of
Summit and Viewlogic in March 2000. This transaction resulted in an
additional tax provision of approximately $1,500 in 2000.
ROYALTY AGREEMENTS - On October 2, 1998, the Company entered into two OEM
agreements with Synopsys pursuant to which the Company has the right to
resell certain Synopsys software. The agreements are for two and three
years and are automatically renewed on a year-to-year basis thereafter.
Under these agreements, the Company paid royalties to Synopsys of $1,315,
$2,279, and $1,890 for the years ended December 29, 2001, December 30,
2000 and January 1, 2000, respectively. In fiscal 2001, the two year
agreement with Synopsys was renewed. The three year agreement with
Synopsys was terminated in fiscal 2001.
MINORITY STOCKHOLDERS - The minority stockholder in PADS Asia, a subsidiary
of the Company, is entitled to receive annually a performance bonus based
on PADS Asia's operations. The bonus amounted to $72 for the year ended
December 30, 2000. At December 29, 2001 and December 30, 2000, total
amounts payable to minority stockholders amounted to $57 and $66,
respectively. Additionally, PADS Asia had sales to the minority stockholder
of $67 for the year ended December 30, 2000.
OTHER RELATED PARTY TRANSACTIONS - Expensed fees for contract software
development paid to an employee-owned company amounted to $1,913 and $429
for years ended December 29, 2001 and December 30, 2000, respectively.
In connection with the exercise of certain stock options, the Company
became the holder of a promissory note made by each of the executive
officers listed below. The notes bear no interest and are secured by a
pledge of the restricted shares issued upon the exercise of those stock
options. Each note must be repaid prior to the sale of the shares
securing that note, and in any event within three months after
termination of the executive's employment with the Company. In the
event of default under the promissory note, if the value of the restricted
shares is not sufficient to insure full payment of the promissory note,
the maximum liability of each individual is limited to the lesser of
one-half of the original principal amount of their promissory note and
the then current balance under the promissory note. Throughout fiscal
2001 and 2000, the principal balance of each promissory note was $418
for Mr. Herman, Chief Executive Officer; $330 for Mr. Lucier,
President; $22 for Ms. Cassidy, Vice-President of Human Resources; $69
for Mr. Johnson, Vice-President of Business Development and Chief Legal
Officer and $88 for Mr. O'Brien, Vice-President and Chief Financial
Officer.
F-26
<Page>
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables sets forth selected quarterly financial information:
<Table>
<Caption>
QUARTERS ENDED
--------------------------------------------------------------
DECEMBER 29, SEPTEMBER 29, JUNE 30, MARCH 31,
2001 2001 2001 2001
--------------------------------------------------------------
Revenue $ 22,050 $ 20,032 $22,077 $ 27,258
Operating income (loss) 129 (44,083) (8,885) (3,059)
Net income (loss) 958 (34,751) (6,737) (2,107)
Net income (loss) per share - Basic 0.02 (0.89) (0.17) (0.05)
Net income (loss) per share - Diluted 0.02 (0.89) (0.17) (0.05)
</Table>
<Table>
<Caption>
QUARTERS ENDED
--------------------------------------------------------------
DECEMBER 30, SEPTEMBER 30, JULY 1, APRIL 1,
2000 2000 2000 2000
--------------------------------------------------------------
Revenue $ 30,811 $ 23,103 $21,560 $ 14,385
Operating loss (16) (2,878) (944) (5,199)
Net loss (1,243) (4,814) (669) (4,442)
Net loss per share - Basic (0.03) (0.14) (0.02) (0.57)
Net loss per share - Diluted (0.03) (0.14) (0.02) (0.57)
</Table>
10. SEGMENT INFORMATION
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision-maker, or decision-making group, in making decisions on
how to allocate resources and assess performance. The Company's chief
operating decision-makers, as defined under SFAS No. 131, is its executive
management team.
The Company views its operations and manages its business as principally
one segment with three distinct product groups: Printed Circuit Board
Design ("PCB"), System Level Design ("SLD"), and Electromechanical Design
("EM"). Due to mid-year acquisitions in 2000 which, in part, created the
distinct product groups, it is not practicable to present periods prior to
the year ended December 29, 2001.for the current product lines on this
basis. Revenues for each of the categories for the fiscal year ended
December 29, 2001 are as follows:
<Table>
<Caption>
PRINTED SYSTEM ELECTRO-
CIRCUIT BOARD LEVEL MECHANICAL
DESIGN DESIGN DESIGN CONSOLIDATED
----------------- ------------- ------------- ---------------
REVENUE:
Software $ 32,882 $ 9,913 $ 1,671 $ 44,466
Services and other 30,080 14,144 2,727 46,951
----------------- ------------- ------------- ---------------
Total revenue $ 62,962 $ 24,057 $ 4,398 $ 91,417
</Table>
F-27
<Page>
10. SEGMENT INFORMATION (CONTINUED)
Revenue consists of software sales, maintenance, and services. Summarized
information about the Company's operations by geographic area for the
periods stated are as follows:
<Table>
<Caption>
NORTH
AMERICA EUROPE JAPAN CONSOLIDATED
------------ ------------- -------------- -------------
December 29, 2001:
Revenue $ 60,520 $ 21,299 $ 9,598 $ 91,417
Long-lived assets $ 33,135 $ 1,842 $ 31 $ 35,008
December 30, 2000:
Revenue $ 65,979 $ 11,740 $ 12,140 $ 89,859
Long-lived assets $ 83,123 $ 1,966 $ 50 $ 85,139
January 1, 2000:
Revenue $ 40,225 $ 8,820 $ 4,454 $ 53,499
Long-lived assets $ 10,455 $ 284 $ 593 $ 11,332
</Table>
No customer accounted for more than 10% of revenue for the years ended
December 29, 2001, December 30, 2000 and January 1, 2000.
11. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan under which domestic
employees are allowed to contribute a certain percentage of their pay. The
Company matches 50% of employee elected pretax contributions, up to an
annual maximum. In addition, as part of the PADS and Summit mergers, the
Company acquired the former 401(k) retirement plans from those companies.
No further employee contributions were accepted after the respective merger
dates. Employer contributions for all plans amounted to $643, $235 and
$286, respectively, for the years ended December 29, 2001, December 30,
2000 and January 1, 2000.
12. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect, if dilutive, of outstanding stock options using the treasury stock
method and the assumed conversion of preferred stock. Although Summit
Design is the surviving legal entity after the March 2000 business
combination and the legal acquirer, for accounting purposes the Summit
Design business combination was treated as an acquisition of Summit Design
by Viewlogic. The weighted average number of common shares outstanding has
been adjusted for all periods reported in the table below to reflect the
Summit Design exchange ratio of 0.67928.
F-28
<Page>
12. EARNINGS PER SHARE (CONTINUED)
<Table>
<Caption>
YEAR ENDED
----------------------------------------------------
DECEMBER 29, DECEMBER 30, JANUARY 1,
2001 2000 2000
---------------- ---------------- ------------
Net income (loss) $ (42,637) $ (11,168) $ 259
================ ================ ============
Weighted-average number of shares - basic 39,224 28,252 3,938
Assumed number of shares issued from:
Dilutive effects of stock options - - 780
Assumed conversion of Preferred Stock - - 10,868
---------------- ---------------- ------------
Weighted-average number of shares - diluted 39,224 28,252 15,586
================ ================ ============
Net income (loss) per share - basic $ (1.09) $ (0.40) $ 0.07
================ ================ ============
Net income (loss) per share - diluted $ (1.09) $ (0.40) $ 0.02
================ ================ ============
</Table>
For the years ended December 29, 2001, December 30, 2000 and January 1,
2000, there were 6,056, 6,698 and 1,239 anti-dilutive weighted
average potential common shares, respectively, not included in the table
above.
F-29
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Executive Officers of the Registrant" in Part I of this Annual Report on
Form 10-K. The information required by Items 401 and 405 of Regulation S-K and
appearing in our definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 31, 2002, and which will be filed with the
Securities and Exchange Commission not later than 120 days after December 29,
2001, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 31, 2002, and which will be filed with the Securities and Exchange
Commission not later than 120 days after December 29, 2001, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 31, 2002, and which will be filed with the Securities and Exchange
Commission not later than 120 days after December 29, 2001, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K and appearing in our
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 31, 2002, and which will be filed with the Securities and Exchange
Commission not later than 120 days after December 29, 2001, is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Accountants
therein are filed as part of this Form 10-K:
The consolidated financial statements filed as part of this Annual Report on
Form 10-K are listed on the Index to Consolidated Financial Statements under
Item 8, which Index to Consolidated Financial Statements is incorporated herein
by reference.
44
<Page>
(a)(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule for the years ended December 29,
2001, December 30, 2000 and January 1, 2000, filed as part of this Form 10-K
should be read in conjunction with the consolidated financial statements and
related notes thereto and report of independent accountants filed herewith:
Page No.
Schedule II Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because the information required to
be set forth therein is not required, not applicable or the information is
otherwise included elsewhere in this Form 10-K.
(a)(3) EXHIBITS
The exhibits filed as a part of this Annual Report on Form 10-K are listed on
the Exhibit Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents identified by footnotes are not being filed herewith, and, pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such
documents as previously filed with the Securities and Exchange Commission.
Innoveda's file number under the Securities Exchange Act of 1934 is 000-20923.
(b) REPORTS ON FORM 8-K
Innoveda did not file any current reports on Form 8-K during the fourth quarter
of the fiscal year ended December 29, 2001.
45
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 29th day
of March 2002.
INNOVEDA, INC.
By: /s/ Kevin P. O'Brien
Kevin P. O'Brien
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<Table>
<Caption>
Signature Title Date
/s/ William J. Herman Chairman of the Board and Chief Executive March 29, 2002
- --------------------- Officer (Principal Executive Officer)
William J. Herman
/s/ Kevin P. O'Brien Vice President of Finance and Chief March 29, 2002
- -------------------- Financial Officer, Finance and Administration
Kevin P. O'Brien (Principal Financial Officer and Principal
Accounting Officer)
/s/ William V. Botts Director March 29, 2002
- --------------------
William V. Botts
/s/ Lorne J. Cooper Director March 29, 2002
- -------------------
Lorne J. Cooper
/s/ Steven P. Erwin Director March 29, 2002
- -------------------
Steven P. Erwin
/s/ Keith B. Geeslin Director March 29, 2002
- --------------------
Keith B. Geeslin
/s/ Hiroshi Hashimoto Director March 29, 2002
- ---------------------
Hiroshi Hashimoto
</Table>
46
<Page>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
Balance at Additions Deductions Balance at
Beginning from End of
of Period Reserves Period
------------ ----------- ------------ ------------
For the fiscal year ended December 29, 2001 $ 2,034 $ 455 $ 613 $ 1,876
Allowance for doubtful accounts ============ =========== ============ ============
For the fiscal year ended December 30, 2000
Allowance for doubtful accounts $ 1,465 $ 831(1) $ 262 $ 2,034
============ =========== ============ ============
For the fiscal year ended January 1, 2000
Allowance for doubtful accounts $ 1,357 $ 747 $ 639 $ 1,465
============ =========== ============ ============
</Table>
(1) Amounts represent allowances of $379 and $452 obtained through the
acquisition of Summit Design and the merger with PADS Software.
S-1
<Page>
EXHIBIT INDEX
Exhibit No Description
2.1(1) Agreement and Plan of Merger and Reorganization, dated as of June 2,
2000, by and among the Registrant, Innovative Software, Inc., PADS
Software, Inc. and Kyoden Company, Ltd.
2.2(9) Agreement and Plan of Reorganization dated as of September 16, 1999
by and between the Registrant, Hood Acquisition Corp. and Viewlogic
Systems Inc.
3.1(2) Amended and Restated Certificate of Incorporation of the Registrant,
as amended.
3.2(3) Amended and Restated By-laws of the Registrant.
4.1(7) Specimen stock certificate representing common stock, $.01 par value
per share, of the Registrant.
10.1(4) Form of Indemnification Agreement between the Registrant each of
William V. Botts and Steven P. Erwin.
10.2(4)* 1994 Stock Plan, as amended.
10.3(4)* 1996 Director Option Plan.
10.4(5)* Amended and Restated 2000 Stock Incentive Plan.
10.5(5)* 2000 Employee Stock Purchase Plan.
10.6(11)* Employment Agreement between the Registrant and Guy Moshe dated May
28, 2000.
10.7(4)+ Distributor Agreement between the Registrant and Seiko Instruments,
Inc., dated February 1, 1996.
10.12(10)* TriQuest Design Automation, Inc. 1995 Stock Option Plan.
10.8(10)* Simulation Technologies Corp. 1994 Stock Option Plan and form of
agreement thereto.
10.9(8)* 1997 Non-Statutory Stock Option Plan and form of agreement thereto.
10.10(6)+ Term Sheet Agreement between the Registrant and Seiko Instruments,
Inc.
10.11(1) Software Purchase Agreement and Source Code License Grant-Back
between the Registrant, Innoveda Minnesota Holdings, Inc., Synopsys,
Inc. and Synopsys International Limited dated July 28, 2000.
10.12(9)* Viewlogic 1998 Stock Incentive Plan, as amended, and form of
agreements thereto.
10.13(9)* Transcendent Design Technology, Inc. Restricted Stock Plan and form
of agreements thereto.
10.14(9)* Transcendent Design Technology, Inc. Stock Option Plan and form of
agreements thereto.
10.15(9)* Employment Agreement between Viewlogic and Richard G. Lucier dated
October 2, 1998.
10.16(9)* Employment Agreement between Viewlogic and William J. Herman dated
October 2, 1998.
10.17(9) VCS OEM Agreement between Viewlogic and Synopsys dated October 2,
1998.
10.18(9) FPGA OEM Agreement between Viewlogic and Synopsys dated October 2,
1998.
10.19(9) Software Assignment and License Agreement between Viewlogic and
Synopsys dated October 2, 1998.
47
<Page>
EXHIBIT INDEX (CONTINUED)
10.20(9) Patent Assignment and Cross-License Agreement between Viewlogic and
Synopsys dated October 2, 1998.
10.21(9) Blast Software License and Assignment Agreement between Viewlogic and
Synopsys dated October 2,1998.
10.22(1) Amended and Restated Loan Agreement among the Registrant, Viewlogic,
Fleet National Bank, as Agent and a Lender and the other financial
institutions now or hereafter parties hereto, dated July 31, 2000
10.23(9) Office Lease Agreement between Viewlogic and Rosewood III Associates
Limited Partnership, as amended, dated November 16, 1989
10.24(9)* Secured Promissory Note by Paula J. Cassidy and John F. Cassidy in
favor of Viewlogic dated August 11, 1999.
10.25(9)* Secured Promissory Note by Peter T. Johnson and Andrea R. Johnson in
favor of Viewlogic dated August 11, 1999.
10.26(9)* Secured Promissory Note by William J. Herman in favor of Viewlogic
dated August 11, 1999.
10.27(9)* Secured Promissory Note by Richard G. Lucier in favor of Viewlogic
dated August 12, 1999.
10.28(9)* Secured Promissory Note by Kevin P. O'Brien in favor of Viewlogic
dated August 11, 1999.
10.29(12)* Amendment dated September 25, 2001 to Secured Promissory Note by
Paula Cassidy and John Cassidy in favor of Viewlogic dated August 11,
1999
10.30(12)* Amendment dated September 25, 2001 to Secured Promissory Note by
William J. Herman in favor of Viewlogic dated August 11, 1999
10.31(12)* 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
10.32(12)* Amendment dated September 25, 2001 to Secured Promissory Note by
Richard G. Lucier in favor of Viewlogic dated August 12, 1999
10.33(12)* Amendment dated September 25, 2001 to Secured Promissory Note by
Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999
10.34(16) Second Amendment and Waiver effective September 29, 2001 by and
Between Innoveda, Inc. and Fleet National Bank.
10.35 Form of Executive Stock Option Agreement
10.36 Severance Agreement with Gary Kiaski
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included in the signature page of this
Registration Statement).
48
<Page>
- ----------
(1.) Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (File No. 333-42814) as declared effective by the
Securities and Exchange Commission (the "Commission") on August 11,
2000
(2.) Incorporated by reference to (i) the Registrant's Registration
Statement on Form S-1 (File No. 333-06445) as declared effective by
the Commission on October 17, 1996, (ii) the Registrant's Current
Report on Form 8-K dated March 23, 2000 as filed with the Commission
on April 7, 2000 and (iii) the Registrant's Registration Statement on
Form S-8 (File No. 333-43582) as filed with the Commission on August
11, 2000
(3.) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 as filed with the Commission
on August 14, 1997
(4.) Incorporated by reference to the Registration Statement on Form S-1
(File No. 333-06445) as declared effective by the Securities and
Exchange Commission on October 17, 1996
(5.) Incorporated by reference to the Registrant's Definitive Proxy
Statement on Schedule 14A as filed with the Commission on June 9, 2000
(6.) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 as filed with the
Commission on March 31, 1998
(7.) Incorporated by reference to the Registrant's Current Report on Form
8-K dated March 23, 2000 as filed with the Commission on April 7, 2000
(8.) Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-47545) as filed with the Commission on March 9, 1998
(9.) Incorporated by reference to the Registrant's Registration Statement
on Form S-4 (Commission File No. 333-89491) as declared effective by
the Commission on February 14, 2000
(10.) Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-47481) as filed with the Commission on March 6, 1998
(11.) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 30, 2000 as filed with the
Commission on March 30, 2001
(12.) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 29, 2001 as filed with the
Commission on November 13, 2001
+ Documents for which confidential treatment has been granted.
* Indicates management compensatory plan, contract or arrangement
49