<PAGE>
THE FOLLOWING ITEM WAS THE
SUBJECT OF A FORM 12b-25 AND
IS INCLUDED HEREIN:
PART I, ITEM 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997 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: 0-20923
SUMMIT DESIGN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1137888
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9305 S. W. GEMINI DRIVE,
BEAVERTON, OREGON 97008
(Address of principal executive office)
Registrant's Telephone number, including area code: (503) 643-9281
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-----
As of May 5,1997, the Registrant had outstanding 13,946,044 shares of Common
Stock.
<PAGE>
SUMMIT DESIGN, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of
March 31, 1997 (unaudited) and December 31, 1996. 3
Condensed Consolidated Statements of Operations
(unaudited)for the three month periods ended
March 31, 1997 and 1996. 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three month periods ended
March 31, 1997 and 1996. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Signature
EXPLANATORY NOTE
This Quarterly Report on Form 10Q/A ("Form 10Q/A") is being filed as Amendment
No. 1 to the Registrant's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1997 ("Form 10-Q") for the purpose
of amending Item 1 of Part I of the Registrant's 10-Q in its entirety and adding
Item 2 of Part I of the Registrant's 10-Q which was previously omitted.
-2-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ 19,859 $ 19,772
Accounts receivable. . . . . . . . . . . . . . 5,888 5,567
Prepaid expenses and other . . . . . . . . . . 498 487
---------- ----------
Total current assets . . . . . . . . . . . . 26,245 25,826
Furniture and equipment, net . . . . . . . . . 1,908 1,832
Deferred taxes . . . . . . . . . . . . . . . . 500 500
Deposits and other assets. . . . . . . . . . . 487 468
---------- ----------
Total assets. . . . . . . . . . . . . . . . $ 29,140 $ 28,626
---------- ----------
---------- ----------
LIABILITIES
Current liabilities:
Long-term debt, current portion. . . . . . . $ 391 $ 462
Capital lease obligation, current portion. . 34 65
Accounts payable . . . . . . . . . . . . . . 1,860 1,453
Accrued liabilities. . . . . . . . . . . . . 2,773 2,870
Deferred revenue . . . . . . . . . . . . . . 2,732 3,758
---------- ----------
Total current liabilities. . . . . . . . . . 7,790 8,608
Long-term debt, less current portion . . . . . . 675 675
Capital lease obligations, less current portion. 92 95
Deferred revenue, less current portion . . . . . 175 67
---------- ----------
Total liabilities. . . . . . . . . . . . . . 8,732 9,445
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized
30,000 shares; issued and outstanding
13,907 shares at March 31, 1997 and 13,873
shares at December 31, 1996. . . . . . . . . . . 139 139
Additional paid-in capital . . . . . . . . . . . 33,249 33,235
Accumulated deficit. . . . . . . . . . . . . . . (12,980) (14,193)
---------- ----------
Total stockholders' equity . . . . . . . . . . 20,408 19,181
---------- ----------
Total liabilities and stockholders' equity . $ 29,140 $ 28,626
---------- ----------
---------- ----------
The accompanying notes are an integral part of the condensed consolidated
financial statements
-3-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
--------------------------
1997 1996
---------- ---------
Revenue:
Product licenses . . . . . . . . . . . . . . . $ 4,878 $ 3,547
Maintenance and services . . . . . . . . . . . 1,481 918
Other. . . . . . . . . . . . . . . . . . . . . 142 142
---------- ---------
Total revenue. . . . . . . . . . . . . . . . 6,501 4,607
Cost of revenue:
Product licenses . . . . . . . . . . . . . . . 185 132
Maintenance and services . . . . . . . . . . . 109 102
---------- ---------
Total cost of revenue. . . . . . . . . . . . 294 234
---------- ---------
Gross profit . . . . . . . . . . . . . . . 6,207 4,373
Operating expenses:
Research and development . . . . . . . . . . . 1,431 1,412
Sales and marketing. . . . . . . . . . . . . . 2,517 2,225
General and administrative . . . . . . . . . . 1,177 714
---------- ---------
Total operating expenses . . . . . . . . . . 5,125 4,351
Income from operations . . . . . . . . . . . . . 1,082 22
Interest expense . . . . . . . . . . . . . . . . (7) (67)
Other income, net. . . . . . . . . . . . . . . . 218 15
---------- ---------
Income (loss) before income taxes. . . . . . . . 1,293 (30)
Income tax provision . . . . . . . . . . . . . . 80 176
---------- ---------
Net income (loss). . . . . . . . . . . . . . . . $ 1,213 $ (206)
---------- ---------
---------- ---------
Net income (loss) per share. . . . . . . . . . . $ 0.08 $ (0.02)
---------- ---------
---------- ---------
Number of shares used in per share calculation . 14,829 12,278
The accompanying notes are an integral part of the condensed consolidated
financial statements
-4-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 1,213 $ (206)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 194 245
Loss on asset disposition . . . . . . . . . . . . . . . 1
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (321) 1,196
Prepaid expenses and other . . . . . . . . . . . . (11) 10
Accounts payable . . . . . . . . . . . . . . . . . 408 (236)
Accrued liabilities. . . . . . . . . . . . . . . . (96) (131)
Deferred revenue . . . . . . . . . . . . . . . . . (918) 980
Other, net . . . . . . . . . . . . . . . . . . . . 35 (140)
--------- ---------
Net cash provided by operating activities . . . . . . . . 505 1,718
--------- ---------
Cash flows from investing activities:
Additions to furniture and equipment . . . . . . . . . . . . (251) (129)
Note receivable from employee. . . . . . . . . . . . . . . . (75) -
--------- ---------
Net cash used in investing activities . . . . . . . . . . (326) (129)
--------- ---------
Cash flows from financing activities:
Issuance of stock, net of issuance costs . . . . . . . . . . 14 893
Short term borrowings. . . . . . . . . . . . . . . . . . . . - (959)
Principal payments of debt obligations . . . . . . . . . . . (71) (164)
Principal payments of capital lease obligations. . . . . . . (35) (45)
--------- ---------
Net cash used in financing activities . . . . . . . . . . (92) (275)
--------- ---------
Increase in cash and cash equivalents . . . . . . . . . . 87 1,314
Cash and cash equivalents, beginning of period . . . . . . . . . 19,772 704
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . $ 19,859 $ 2,018
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . $ 7 $ 64
Income taxes. . . . . . . . . . . . . . . . . . . . . . 32 187
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
-5-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Summit
Design, Inc. ("the Company") in accordance with the rules and regulations of the
Securities and Exchange commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
accordance with such rules and regulations. In the opinion of management, the
accompanying unaudited financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position of the Company, and its results of operations and cash flows. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the years ended December 31, 1996, 1995, and
1994 included in the Company's Form 10-K filed for December 31, 1996.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997 or any other future interim period, and the Company makes no
representations related thereto.
2. ACQUISITION OF TRIQUEST DESIGN AUTOMATION, INC.
On February 28, 1997, the Company acquired TriQuest Design Automation, Inc., a
California corporation (TriQuest"). TriQuest Develops hardware description
language analysis and optimization tools for the design of high performance,
deep submicron integrated circuits. The aggregate consideration for the
acquisition (including shares of common stock reserved for issuance upon
exercise of TriQuest options assumed by the Company) was 775,000 shares of
common stock. The transaction was accounted for as a "pooling of interests" in
accordance with generally accepted accounting principles. In compliance with
such principles, the Company's operating results have been restated to include
the results of TriQuest as if the acquisition had occurred at the beginning of
the first period presented.
3. BALANCE SHEET COMPONENTS, (IN THOUSANDS)
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
Accounts Receivable:
Trade. . . . . . . . . . . . . . . . . . . . $ 6,266 $ 6,000
Less allowance for doubtful accounts . . . . (378) (433)
--------- ---------
$ 5,888 $ 5,567
--------- ---------
--------- ---------
Furniture and equipment:
Office furniture equipment . . . . . . . . . $ 595 $ 513
Computer equipment . . . . . . . . . . . . . 3,106 3,124
Leasehold improvements . . . . . . . . . . . 44 41
--------- ---------
3,745 3,678
Less: accumulated depreciation . . . . . . . . (1,837) (1,846)
--------- ---------
$ 1,908 $ 1,832
--------- ---------
--------- ---------
-6-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accrued expenses:
Commissions payable. . . . . . . . . . . . . . . $ 103 $ 173
Payroll and related benefits . . . . . . . . . . 1,633 1,610
Accrued management relocation costs. . . . . . . 24
Accounting and legal . . . . . . . . . . . . . . 265 301
Sales and state income taxes payable . . . . . . 128 115
Other. . . . . . . . . . . . . . . . . . . . . . 644 647
---------- ----------
Total current liabilities $ 2,773 $ 2,870
---------- ----------
---------- ----------
Long-term debt::
Marketing grant payable to the Israeli government $ 364 $ 364
Chief Scientist grant payable to the Israeli
government. 702 773
---------- ----------
1,066 1,137
Less current portion . . . . . . . . . . . . . . . (391) (462)
---------- ----------
Non current portion. . . . . . . . . . . . . . . . $ 675 $ 675
---------- ----------
---------- ----------
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and
Statement of Financial Accounting Standards No. 129 "Disclosure of Information
about Capital Structure" ("SFAS 129"), which are effective for the Company's
1997 fiscal year. The Company's management has studied the implications of SFAS
128 and SFAS 129, and based on the initial evaluation, does not expect the
adoption to have a material impact on the Company's financial condition or
results of operations.
5. SUBSEQUENT EVENT
On May 19, 1997 the Company entered into a definitive agreement (the
"Purchase Agreement") to sell substantially all of the assets used in its
business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to Credence Systems Corporation ("CSC") for $5
million. CSC will also assume certain liabilities, including the Company's
obligations under TDS maintenance contracts entered into prior to the
closing. TDS product license, maintenance and services and other revenue for
the three months ended March 31, 1997 and 1996 was $1,858,000 and $1,852,000,
respectively, and $7,331,000 for the year ended December 31, 1996.
The Company and CSC also entered into a Software OEM License agreement ("OEM
Agreement") in which CSC agreed to purchase $16 million of Visual Testbench
licenses, and $2 million in interface licenses over a thirty-month period
subject to specified quarterly maximums and certain additional conditions.
Additionally CSC entered into an 18 month maintenance agreement for
$2 million associated with the Visual Testbench product.
-7-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
The following discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Predictions of future events are inherently uncertain.
Actual events could differ materially from those predicted in the forward
looking statements as a result of the risks set forth in the following
discussion, and, in the particular, the risks discussed below under the
subheading "Additional Risk Factors that Could Affect Operating Results and
Market Price of Stock."
OVERVIEW
Summit was founded in December 1993 to act as the holding company for Test
Systems Strategies, Inc. ("TSSI") and SEE Technologies Software Environment for
Engineers Ltd. ("SEE Technologies"), (now Summit Design (EDA) Ltd.)
(collectively , the "Reorganization"). TSSI was founded in 1979 to develop and
market integrated circuit ("IC" or "chip") manufacturing test products. In
January 1993, TSSI retained a new Chief Executive Officer and began to
restructure its senior management team. Thereafter, the Company broadened its
strategy from focusing primarily on manufacturing test products to include
providing graphical Systems Level Design Automation ("SLDA") design entry and
verification tools and integrating these with its core technology. As part of
its strategy, in early 1994, TSSI acquired SEE Technologies, an Israeli company
that, through its predecessor, began operations in 1983 and had operated
primarily as a research and development and consulting company focused on the
electronic design automation ("EDA") and SLDA market. As a result of the
Reorganization, TSSI and SEE Technologies became wholly-owned subsidiaries of
Summit in the first quarter of 1994. The results of operations of the Company
prior to January 1, 1994 are those of TSSI and as of and after January 1, 1994
are the combined results of TSSI and SEE Technologies.
The Company's ongoing implementation of its strategy has involved significant
expenditures. Following the Reorganization, the Company significantly
increased its research and development expenditures to support the continued
development of SLDA and Design to Test products. To promote its products, the
Company has added sales and marketing staff, increasing its sales and
marketing expenditures by 147% from 1993 to 1996, and has restructured its
key distributor relationships. This concurrent effort to develop products and
promote market awareness and acceptance of its products in a new and evolving
market contributed to the Company's annual losses. Such losses were mitigated
in part in each of the six quarters following the Reorganization by revenue
from initial stocking orders from distributors and one-time sales of
technology. The Company introduced its first SLDA product, Visual HDL for
VHDL 1.0, in the first quarter of 1994. This product lacked compiled
simulation and operated only on a PC platform. In the third quarter of 1994,
with the release of version 2.5, Summit expanded the simulation capability of
Visual HDL for VHDL and introduced its UNIX-based version of this product.
The Company has experienced increased sales of its SLDA products in each of
the eleven quarters in the period ended March 31, 1997. However, there can
be no assurance that the Company will experience continued growth in revenue
or be profitable in the future.
Prior to the Reorganization, the Company's TDS product and related maintenance
revenue accounted for all of the Company's revenue. Currently, the Company's
revenue is predominantly derived from two product lines, Visual HDL, which
includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS.
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer training. Revenue from the sale of software
licenses is recognized at the later of the time of shipment or satisfaction of
all acceptance terms. Maintenance revenue is deferred and recognized ratably
over the term of the maintenance agreement, which is typically 12 months.
Revenue from customer training is recognized when the service is performed. The
Company sells its products through a direct sales force in North America and
selected European countries and through distributors in the Company's other
international markets. Revenue from product sales through distributors is
recognized net of the associated distributor
-8-
<PAGE>
discounts. Fees received for granting distribution rights are deferred and
recognized ratably over the term of the distribution agreement. Although the
Company has not adopted a formal return policy, the Company generally reimburses
customers in full for returned products. Estimated sales returns are recorded
upon delivery of the product.
The Company's products have a range of prices which depend on platform, HDL
language, functionality, duration of license and distribution channel. In
addition, the Company's products perform a variety of functions, certain of
which are, and in the future may be, offered as separate products or discrete
point solutions by the Company's existing and future competitors. For example,
certain companies currently offer design entry products without simulators.
There can be no assurance that such competition will not cause the Company to
offer point solutions instead of, or in addition to, the Company's current
software products. Such point solutions would be priced lower than the Company's
current product offerings and could cause the Company's average selling prices
to decrease. Accordingly, based on these and other factors, the Company expects
that average selling prices for its products will continue to fluctuate in the
future.
The Company has entered into a joint venture with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Asia) shall acquire
exclusive rights to sell, distribute and support all of Summit's products in the
Asia-Pacific region, excluding Japan, until June 1997. Summit Asia has acted in
such capacity since April 1, 1996. Prior to that date, Anam was an independent
distributor of the Company's products. The amount of revenue from sales through
Summit Asia which is remitted to the Company is fixed by the joint venture
agreement at a percentage which approximates the percentage applicable to sales
through Anam prior to the formation of the joint venture. Excluding one-time
sales of technology, sales through Anam accounted for 2.4% and 3.6% of the
Company's total revenue and for 21.7% and 33.8% of the Company's revenue
attributable to the Asia-Pacific region excluding Japan for the years ended
December 31, 1995 and 1994, respectively. For the year ended December 31, 1996,
Anam and Summit Asia together accounted for 3.8% of the Company's revenue and
31.0% of the Company's revenue attributable to the Asia-Pacific region excluding
Japan.
The Company accounts for its ownership interest in Summit Asia on the equity
method of accounting and, as a result, the Company's pro rata share of the
earnings and losses of Summit Asia will be recognized as income or losses in the
Company's income statement in "Other income, net." The Company does not expect
Summit Asia to recognize a profit for the foreseeable future and thus does not
expect to recognize income from its investment in Summit Asia for the
foreseeable future, if at all.
Approximately 53% and 61% of the Company's total revenue for the three months
ended March 31, 1997 and 1996, respectively, were attributable to sales made
outside the United States. The Company expects that international revenue will
continue to represent a significant portion of its total revenue. The Company's
international revenue is currently denominated in U.S. dollars. As a result,
increases in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets. The Company pays the expenses of its international
operations in local currencies and does not engage in hedging transactions with
respect to such obligations. International sales and operations are subject to
numerous risks, including tariff regulations and other trade barriers,
requirements for licenses, particularly with respect to the export of certain
technologies, collectability of accounts receivable, changes in regulatory
requirements, difficulties in staffing and managing foreign operations and
extended payment terms.(1)
On February 28, 1997, Summit completed its acquisition of TriQuest Design
Automation ("TriQuest"). TriQuest develops HDL analysis and optimization tools
for the design of high performance, deep submicron
- --------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors That
Could Affect Operating Results and Market Price of Stock" commencing on page 16
for a discussion of factors that could affect future performance.
-9-
<PAGE>
integrated circuits. The transaction is being accounted for as a "pooling of
interest" in accordance with generally accepted accounting principals.
On May 19, 1997 the Company entered into a definitive agreement (the
"Purchase Agreement") to sell substantially all of the assets used in its
business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to Credence Systems Corporation ("CSC"). The
increase in the Company's product licenses revenue during the last eight
quarters has been primarily due to increased revenue associated with the
Company's SLDA products, and the Asset Sale will allow the Company to focus
on the development and marketing of these products. The Asset Sale is subject
to standard closing conditions and is scheduled to close in early July,
1997.(1)
Substantially all of the Company's Design to Test product license revenue and
related maintenance and services revenue for the year ended December 31, 1996
and the quarter ended March 31, 1997 were attributable to the TDS products. If
the Asset Sale is consummated TDS products will cease to be a source of such
revenues. CSC will assume the Company's obligations under TDS maintenance
contracts entered into prior to the closing and the Company will not recognize
deferred revenue associated with such contracts. The Company believes that its
cost of revenue and operating expenses will decrease in absolute dollars in
the near term due to the absence of costs and expenses associated with the TDS
products and the related maintenance contracts.(1)
Summit maintained exclusive rights to its Visual Testbench technology and CSC
agrees to purchase a minimum of $20,000,000 of Visual Testbench licenses and
related interfaces and maintenance over a thirty-month period subject to
specified quarterly maximums and certain additional conditions. At the
completion of the thirty month period, under certain conditions, CSC may
obtain shared ownership to the Visual Testbench for sales into the ATE
marketplace.
The announcement and pendency of the Asset Sale may result in adverse effects
of the Company's Design to Test business, including the loss of Design to
Test customers, delays in customer orders, the resignation of employees
associated with the development and marketing and maintenance of TDS
products. Such adverse effects, if experienced, could have a material adverse
effect on the Company's results of operations, including results for the
quarter ending June 30, 1997. In addition, the Asset Sale is subject to
certain specified closing conditions, and there can be no assurance that the
Asset Sale will be consummated. If the Asset Sale is not consummated and the
Company experiences the foregoing adverse effects, such events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of revenue.
Three Months Ended December 31,
------------------------------
1997 1996
---------- ----------
Revenue:
Product licenses . . . . . . . . . . . . . . 75.0% 77.0%
Maintenance and services . . . . . . . . . . 22.8 20.0
Other. . . . . . . . . . . . . . . . . . . . 2.2 3.0
-------- --------
Total revenue . . . . . . . . . . . . . 100.0 100.0
Cost of revenue:
Product licenses . . . . . . . . . . . . . . 2.8 2.9
Maintenance and services . . . . . . . . . . 1.7 2.2
-------- --------
Total cost of revenue . . . . . . . . . 4.5 5.1
-------- --------
Gross profit. . . . . . . . . . . . . . 95.5 94.9
Operating expenses:
Research and development. . . . . . . . 22.0 30.7
Sales and marketing . . . . . . . . . . 38.7 48.3
General and administrative (a) . . . . 18.1 15.5
- -----------------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-10-
<PAGE>
-------- --------
Total operating expenses. . . . . . . . 78.8 94.5
-------- --------
Income from operations . . . . . . . . . . . . . 16.7 0.4
Other income (expense), net. . . . . . . . . . . 3.2 (1.1)
-------- --------
Income (loss) before income taxes. . . . . . . . 19.9 (0.7)
Income tax provision . . . . . . . . . . . . . . 1.2 3.8
-------- --------
Net income (loss). . . . . . . . . . . . . . . . 18.7% (4.5)%
-------- --------
-------- --------
(a) General and administrative expenses for the three months ended March 31,
1997 include a one-time charge of $379,000 (5.8% of revenue) for costs relating
to the acquisition of TriQuest.
TOTAL REVENUE
The Company's revenue is comprised of product licenses revenue, maintenance and
services revenue and other revenue. Total revenue increased by 41% from $4.6
million for the three months ended March 31, 1996 to $6.5 million for the three
months ended March 31, 1997. Sales through one distributor accounted for 15.8%
and 24.2% and sales through another distributor accounted for 4.8% and 13.5% of
the Company's total revenue for the three months ended March 31, 1997 and 1996,
respectively. No single customer accounted for more than 10% of the Company's
total revenue for the three months ended March 31, 1997 and 1996
PRODUCT LICENSES REVENUE
The Company's product licenses revenue is derived from license fees from the
Company's SLDA and Design to Test products. Product licenses revenue
increased by 37.5% from $3.5 million for the three months ended March 31,
1996 to $4.9 million for the three months ended March 31, 1997. Revenue from
SLDA and Design to Test products accounted for 77.7% and 22.3%, respectively,
of product licenses revenue for the three months ended March 31, 1997 and
70.7% and 29.3%, respectively, of product licenses revenue for the three
months ended March 31, 1996. Because of the addition of SLDA functionality to
Visual Testbench version 2.0, beginning with the release of version 2.0 in
December 1996, the Company recognizes revenue from Visual Testbench products
as SLDA revenue instead of Design to Test revenue.
SLDA revenue increased 51.2 % from $2.5 million for the three months ended March
31, 1996 to $3.8 million for the three months ended March 31, 1997. A
significant portion of the increase in SLDA revenue for the three months ended
March 31, 1997 relates to revenue from the TriQuest product portfolio that was
not shipping in the comparable period in 1996. The revenue increase was also
attributable to several other factors including improved international
distribution and thereafter increased market acceptance of the Company's SLDA
products and increased account penetration at major targeted accounts.
Design to Test revenue increased slightly from $1.0 million for the three months
ended March 31, 1996 to $1.1 million for the three months ended March 31, 1997.
In March 1997, all obligations and contingencies on a contract being amortized
to revenue over a three year period beginning in February 1995 were satisfied.
As a result, the company recognized the unamortized balance of $92,000 as
revenue in March 1997.
MAINTENANCE AND SERVICES REVENUE
The Company's maintenance and services revenue is derived from maintenance
contracts related to the Company's SLDA and Design to Test products and training
classes offered to purchasers of the Company's software products. Maintenance
and services revenue increased 61.3% from $918,000 for the three months ended
March 31, 1996 to $1.5 million for the three months ended March 31, 1997. The
increase was primarily attributable to an increase in maintenance revenue
related to growth in the installed base of SLDA customers over the last year,
net of a slight decrease in Design to Test maintenance revenue. Design to Test
maintenance and services revenue was $743,000 and $786,000 for the three months
ended March 31, 1997 and 1996, respectively.
-11-
<PAGE>
OTHER REVENUE
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. For the three months ended March 31,
1997 and 1996, respectively, other revenue was comprised of $142,000 of
distribution rights fees. No material costs were associated with other revenue
for the three months ended March 31, 1997 and 1996.
COST OF REVENUE
COST OF PRODUCT LICENSES REVENUE
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs. The cost of product license
revenue increased from $132,000 for the three months ended March 31, 1996 to
$185,000 for the three months ended March 31, 1997. As a percentage of product
licenses revenue, the cost of product licenses revenue increased only slightly
from 3.7% of product license revenue to 3.8% of product license revenue for the
three months ended March 31, 1996 and 1997, respectively.
COST OF MAINTENANCE AND SERVICES REVENUE
Cost of maintenance and services revenue, which consists primarily of personnel
costs for customer support and training classes offered to purchasers of the
Company's products, increased 6.9% from $102,000 for the three months ended
March 31, 1996 to $109,000 for the three months ended March 31, 1997. As a
percentage of maintenance and services revenue, the cost of maintenance and
services revenue decreased from 11.1% for the three months ended March 31, 1996
to 7.4% for the three months ended March 31, 1996.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and operations
support costs of developing new products and enhancements to existing products
and performing quality assurance activities. Research and development expenses
remained relatively unchanged at approximately $1.4 million for the three months
ended March 31, 1997 and 1996. As a percentage of total revenue, research and
development expenses decreased from 30.7% for the three months ended March 31,
1995 to 22.0% for the three months ended March 31, 1996 due to the increase in
total revenue for 1997. The Company believes that significant investment in
research and development is required to remain competitive in its markets.(1)
- ------------------------
(1)This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-12-
<PAGE>
Software development costs are accounted for in accordance with Financial
Accounting Standards Board Statement No. 86, under which the Company is required
to capitalize software development costs after technological feasibility has
been established. To date, development costs have been expensed as incurred
since technological feasibility generally has not been established until shortly
before the release of a new product, and no material development costs have been
incurred after establishment of technological feasibility.
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions and
promotional costs, increased 13.1% from $2.2 million for the three months ended
March 31, 1996 to $2.5 million for the three months ended March 31, 1997. The
increase was attributable the addition of eight sales personnel and increased
commissions and travel expenses. As a percentage of total revenue, sales and
marketing expenses decreased from 48.3% for the three months ended March 31,
1996 to 38.7% for the three months ended March 31, 1997. The decrease was
primarily attributable to the increase in total revenue for 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate, finance,
human resource, information services, administrative, and legal and accounting
expenses of the Company. General and administrative expenses increased 64.8%
from $714,000 for the three months ended March 31, 1996 to $1.2 million for the
three months ended March 31, 1997 which includes a $379,000 one-time charge for
costs associated with the acquisition of TriQuest. Excluding this one-time
charge, expenses increased by $84,000 (11.8%) for the three months ended March
31, 1997 as compared to the prior year. As a percentage of total revenue,
excluding the one time charge for costs associated with the acquisition of
TriQuest, general and administrative expenses decreased from 15.5% for the three
months ended March 31, 1996 to 12.3% for the three months ended March 31, 1997.
The decrease as a percentage of total revenue was primarily attributable to the
increase in total revenue in 1997.
INTEREST EXPENSE
Interest expense decreased from $67,000 for the three months ended March 31,
1996 to $7,000 for the three months ended March 31, 1997 due to decreased
borrowings under the Company's bank line of credit, long term debt and capital
leases obligations.
OTHER INCOME, NET
Other income consists of interest income associated with available cash balances
and gains or losses from the sale of property and equipment. Other income was
$15,000 for the three months ended March 31, 1996 and $226,000 for the three
months ended March 31, 1997. The increase in other income was primarily due to
increased interest earned on the Company's cash holdings.
- -------------------------
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-13-
<PAGE>
INCOME TAX PROVISION
The income tax provision decreased from $176,000 for the three months ended
March 31, 1996 to $80,000 for the three months ended March 31, 1997. The
provision for the three months ended March 31, 1996 is comprised primarily of
a Japanese withholding tax of approximately 10% of Japanese sales. The
provision for the three months ended March 31, 1997 is comprised primarily of
Federal alternative minimum tax and Israeli income taxes. The Company's
regular Federal tax liability is fully offset by the utilization of net
operating loss carryforwards. The Federal alternative minimum tax results
from the limitation on the use of net operating loss carryforwards for
alternative minimum tax purposes.
VARIABILITY OF OPERATING RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and cash flows and it is likely that these fluctuations will continue in
future periods. These fluctuations have been, and may in the future be, caused
by a number of factors, including the rate of acceptance of new products,
corporate acquisitions and consolidations, product, customer and channel mix,
the size and timing of orders, lengthy sales cycles, the timing of new product
announcements and introductions by the Company and its competitors, seasonal
factors, rescheduling or cancellation of customer orders, the Company's ability
to continue to develop and introduce new products and product enhancements on a
timely basis, the level of competition, purchasing and payment patterns and
product enhancements on a timely basis, the level of competition, purchasing and
payment patterns, pricing policies of the Company and its competitors, product
quality issues, currency fluctuations and general economic conditions.
The Company has generally recognized a substantial portion of its revenue in
the last month of each quarter, with this revenue concentrated in the latter
part of the month. Any significant deferral of purchases of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations in any particular quarter, and
to the extent that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected. The Company's
revenue is difficult to forecast for several reasons. The market for certain
of the Company's software products is evolving. The Company's sales cycle is
typically six to nine months and varies substantially from customer to
customer. The Company operates with little product backlog because its
products are typically shipped shortly after orders are received. In
addition, a significant portion of the Company's sales are made through
indirect channels and can be harder to predict. The Company establishes its
expenditure levels for product development, sales and marketing and other
operating activities based primarily on its expectations as to future
revenue. As a result, if revenue in any quarter falls below expectations,
expenditure levels could be disproportionately high as a percentage of
revenue, and the Company's operating results for that quarter would be
adversely affected. Based upon the factors described above, the Company
believes that its quarterly revenue, expenses and operating results are
likely to vary significantly in the future, that period-to-period comparisons
of its results of operations are not necessarily meaningful and that, as a
result, such comparisons should not be relied upon as indications of the
Company's future performance. Moreover, although the Company's revenue has
increased in recent periods, there can be no assurance that the Company's
revenue will grow in future periods or that the Company will remain
profitable on a quarterly or annual basis. Due to the foregoing or other
factors, it is likely that the Company's results of operations may be below
investors' and market analysts' expectations in some future quarters, which
could have a severe adverse effect on the market price of the Company's
Common Stock.
EFFECTIVE CORPORATE TAX RATES
The Company is taxed in its jurisdictions of operations based on the extent of
taxable income generated in each jurisdiction. For income tax purposes, revenue
is attributed to the taxable jurisdiction where the sales transactions
generating the revenue were initiated. All sales transactions by Summit Design
(EDA) Ltd., the Company's Israeli subsidiary, to the Company were recorded as
arm's length transactions based on an intercompany pricing agreement. All sales
transactions by the Company are to unrelated parties and are based
-14-
<PAGE>
upon prevailing market prices. There is no offset of taxes between the United
States and Israel. The Israeli operations are performed entirely by Summit
Design (EDA) Ltd., which is a separate taxable Israeli entity.
The Company's future effective tax rate depends in part on the availability of
United States and Israeli net operating loss ("NOLs") and credit carryforwards.
As of December 31, 1996, the Company had recorded U.S. federal and state NOLs of
approximately $9.0 million and $5.6 million, respectively and Israeli NOLs of
approximately $4.7 million. Neither the United States nor the Israeli taxing
authorities have verified the accuracy or availability of the Company's NOLs and
credit carryforward amounts. In addition, such amounts are subject to limitation
in certain circumstances, including as a result of certain changes of ownership
or operations. Thus, due to a change in ownership resulting from the
Reorganization and a subsequent preferred stock financing, a portion of the
federal and state NOLs are limited as to the timing of their availability for
use. The portion of affected NOL that is available for use each year is
approximately $1.7 million for federal purposes and $1.2 million for state
purposes. The remaining portion of the NOLs (including all Israeli NOLs) is not
subject to this limitation and is generally available for use against future
taxable income, if any. There can be no assurance as to the amount of such NOLs
or carryforwards that will be available to the Company, if any, or that the
Company will be able to avail itself of such benefits.(1)
In addition to its NOLs and credit carryforwards, the Company is currently
scheduled to receive tax benefits over the next several years under a tax
holiday in Israel. The Company's existing Israeli production facility has been
granted "Approved Enterprise" status under the Israeli Investment Law, which
entitles the Company to reductions in the tax rate normally applicable to
Israeli companies with respect to the income generated by its "Approved
Enterprise" programs. In particular, the tax holiday covers the seven-year
period beginning the first year in which Summit Design (EDA) Ltd. generates
taxable income from its "Approved Enterprise" (after using any available NOLs),
provided that such benefits will terminate in 2006 regardless of whether the
seven-year period has expired. The tax holiday provides that, during such
seven-year period, a portion of the Company's taxable income from its Israeli
operations will be taxed at favorable tax rates. The termination or reduction of
the Company's Israeli tax benefits would have a material adverse effect on the
Company's overall actual effective tax rate. The Company has recently applied
for "Approved Enterprise" status with respect to a new project and intends to
apply in the future with respect to additional projects. There can be no
assurance that the Company will be granted any approvals and therefore there can
be no assurance the Company will continue to receive favorable tax status, if at
all.
The Company has concluded that a valuation allowance is required to reduce the
net deferred tax asset to $500,000 after taking into consideration the Company's
cumulative losses and the fact that the Company has a limited history of
generating net income on an annual basis and also the fact that the generation
of future taxable income is dependent on many uncertain factors, including
market acceptance of its existing and future SLDA products.
The Company is also subject to the risk that United States and foreign tax laws
and rates may change in a future period or periods, and that any such changes
may materially adversely affect the Company's tax rate. As a result of the
factors described above and other related factors, there can be no assurance
that the Company will maintain a favorable tax rate in future periods. Any
increase in the Company's effective tax rate, or variations in the effective tax
rate from period to period, could have a material adverse effect on the
Company's business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its initial public offering in October 1996, raising $16.2
million, net of offering expenses. Prior to the IPO, the Company had financed
its operations primarily through the private placement
- --------------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors That
Could Affect Operating Results and Market Price of Stock" commencing on page 16
for a discussion of factors that could affect future performance.
-15-
<PAGE>
of approximately $15.4 million of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from operations. As of March 31, 1997,
the Company had approximately $19.9 million in cash and cash equivalents and a
$1.0 million bank line of credit with United States National Bank of Oregon
("the Bank"). The line of credit expired on April 30, 1997 but the Bank has
approved the Company's request to renew the existing line of credit, without
interruption, through April 30, 1998. Borrowings thereunder accrue interest at
specified percentages above the prime lending rate based on the Company's ratio
of debt to tangible net worth. Advances under the line of credit are limited to
a specified percentage of eligible accounts receivable (as defined in the line
of credit). Borrowings under the line of credit are collateralized by the
Company's accounts receivable, inventory and general intangible assets,
including its intellectual property rights. As of March 31, 1997, the Company
had no borrowings outstanding under this line of credit.
As of March 31, 1997, the Company had working capital of approximately $18.5
million.
Net cash generated by operating activities was approximately $505,000 and
$1.7 million for the three months ended March 31, 1997 and 1996,
respectively. Cash generated by operating activities resulted primarily from
profitable operations less the decrease in deferred revenue for the three
months ended March 31, 1997, and from the significantly improved collection
of accounts receivable and an increase in deferred revenues for the three
months ended March 31, 1996.
Net cash used in investing activities was approximately $326,000 and $129,000
for the three months ended March 31, 1997 and 1996, respectively. Net cash used
in investing activities was related to the acquisition of furniture and
equipment in 1997 and 1996 and a loan to an employee in March 1997.
Net cash used by financing activities was approximately $92,000 and $275,000 for
the three months ended March 31, 1997 and 1996, respectively. For the three
months ended March 31, 1997 the use of cash was primarily for repayment of debt
and capital lease obligations. For the three months ended March 31, 1996,
approximately $1.2 million of cash was used for repayment of short term
borrowings, long-term debt and capital lease obligations, while approximately
$900,000 of cash was provided from the issuance of Summit common and TriQuest
preferred stock.
The Company presently believes that its current cash and cash equivalent,
together with funds expected to be generated from operations, will satisfy the
Company's anticipated working capital and other cash requirements for at least
the next 12 months.(2)
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
HISTORY OF OPERATING LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS
While the Company has generated net income on an annual basis in 1996 AND THE
FIRST QUARTER OF 1997, there can be no assurance that the Company will be
profitable in the future. In addition, the Company has experienced significant
quarterly fluctuations in operating results and cash flows and it is likely that
these fluctuations will continue in future periods. These fluctuations have
been, and may in the future be, caused by a number of factors, including the
rate of acceptance of new products, corporate acquisitions and consolidations,
product, customer and channel mix, the size and timing of orders, lengthy sales
cycles, the timing of new product announcements and introductions by the Company
and its competitors, seasonal
- --------------------------
(2)This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors That
Could Affect Operating Results and Market Price of Stock" commencing on this
page for a discussion of factors that could affect future performance.
-16-
<PAGE>
factors, rescheduling or cancellation of customer orders, the Company's 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 the Company and its competitors, product quality issues, currency
fluctuations and general economic conditions.
The Company has generally recognized a substantial portion of its revenue in the
last month of each quarter, with this revenue concentrated in the latter part of
the month. Any significant deferral of purchases of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations in any particular quarter, and to the extent
that significant sales occur earlier than expected, operating results for
subsequent quarters may be adversely affected. The Company's revenue is
difficult to forecast for several reasons. The market for certain of the
Company's software products is evolving. The Company's sales cycle is typically
six to nine months and varies substantially from customer to customer. The
Company operates with little product backlog because its products are typically
shipped shortly after orders are received. In addition, a significant portion of
the Company's sales are made through indirect channels and can be harder to
predict. The Company establishes its expenditure levels for product development,
sales and marketing and other operating activities based primarily on its
expectations as to future revenue. As a result, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue, and the Company's operating results for that quarter
would be adversely affected. Based upon the factors described above, the Company
believes that its quarterly revenue, expenses and operating results are likely
to vary significantly in the future, that period-to-period comparisons of its
results of operations are not necessarily meaningful and that, as a result, such
comparisons should not be relied upon as indications of the Company's future
performance. Moreover, although the Company's revenue has increased in recent
periods, there can be no assurance that the Company's revenue will grow in
future periods or that the Company will remain profitable on a quarterly or
annual basis. Due to the foregoing or other factors, it is likely that the
Company's results of operations may be below investors' and market analysts'
expectations in some future quarters, which could have a severe adverse effect
on the market price of the Company's Common Stock.
PRODUCT CONCENTRATION; UNCERTAINTY OF MARKET ACCEPTANCE OF SLDA AND DESIGN TO
TEST PRODUCTS
The Company's revenue is predominantly derived from two product lines, Visual
HDL, which includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS. The
Company believes that these products will continue to account for a substantial
portion of its revenue in the future. As a result, factors adversely affecting
sales of these products, including increased competition, inability to
successfully introduce enhanced or improved versions of these products, product
quality issues and technological change, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's future success depends primarily upon the market acceptance of its
existing and future SLDA products. The Company commercially shipped its first
SLDA product, Visual HDL for VHDL, in the first quarter of 1994. For the years
ended December 31, 1996, 1995 and 1994 revenue from SLDA products and related
maintenance contracts represented 60.9%, 43.6% and 34.8%, respectively, of the
Company's total revenue. The Company's SLDA products incorporate certain unique
design methodologies and thus represent a departure from industry standards for
design entry and verification. The Company believes that broad market acceptance
of its SLDA products will depend on several factors, including the ability to
significantly enhance design productivity, ease of use, interoperability with
existing EDA tools, price and the customer's assessment of the Company's
financial resources and its technical, managerial, service and support
expertise. The Company also depends on its distributors to assist the Company in
gaining market acceptance of its products. There can be no assurance that
sufficient priority will be given by the Company's distributors to marketing the
Company's products or whether such distributors will continue to offer the
Company's products. There can be no assurance that the Company's SLDA products
will achieve broad market acceptance. A decline in the demand for, or the
failure to achieve broad market acceptance of, the Company's SLDA products will
have a material adverse effect on the Company's business, financial condition
and results of operations.
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<PAGE>
Although demand for SLDA products has increased in recent years, the market for
SLDA products is still emerging and there can be no assurance that it will
continue to grow or that, even if the market does grow, businesses will continue
to purchase the Company's SLDA products. If the market for SLDA products fails
to grow or grows more slowly than the Company currently anticipates, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Traditionally, EDA customers have been risk averse in accepting new design
methodologies. Because many of Summit's tools embody new design methodologies,
this risk aversion on the part of potential customers presents an ongoing
marketing and sales challenge to the Company and makes the introduction and
acceptance of new products unpredictable. The Company's newest Design to Test
product, Visual Testbench, introduced in the fourth quarter of 1995, provides a
new methodology and requires a change in the traditional design flow for
creating IC test programs. The Company anticipates a lengthy period of test
marketing for the Visual Testbench product. Accordingly, the Company cannot
predict the extent, if any, to which it will realize revenue from Visual
Testbench. The failure of Visual Testbench or any other future Design to Test
product to achieve market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The EDA industry is highly competitive and the Company expects competition to
increase as other EDA companies introduce SLDA and Design to Test products. The
Company faces different competitive dynamics in the markets for its SLDA and
Design to Test products. In the SLDA market, the Company principally competes
with Mentor Graphics and a number of smaller firms. Indirectly, the Company also
competes with other firms that offer alternatives to SLDA and could potentially
offer more directly competitive products in the future. Certain of these
companies have significantly greater financial, technical and marketing
resources and larger installed customer bases than the Company. Some of the
Company's current and future competitors offer a more complete range of EDA
products and may distribute products that directly compete with the Company's
SLDA products by bundling such products with their core product line. In
addition, the Company's products perform a variety of functions, certain of
which are, and in the future may be, offered as separate products or discrete
point solutions by the Company's existing and future competitors. For example,
certain companies currently offer design entry products without simulators.
There can be no assurance that such competition will not cause the Company to
offer point solutions instead of, or in addition to, the Company's current
software products. Such point solutions would be priced lower than the Company's
current product offerings and could cause the Company's average selling prices
to decrease, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the Design to Test
market, the Company competes primarily with the internal design groups of its
existing and potential customers, many of which to date have designed and
developed customized Design to Test tools for their particular needs, as well as
smaller emerging companies.
The Company competes on the basis of certain factors including product
capabilities, product performance, price, support of industry standards, ease of
use, first to market and customer technical support and service. The Company
believes that it competes favorably overall with respect to these factors.
However, in particular cases, the Company's competitors may offer SLDA or Design
to Test products with functionality which is sought by the Company's prospective
customers and which differs from that offered by the Company. In addition,
certain competitors may achieve a marketing advantage by establishing formal
alliances with other EDA vendors. Further, the EDA industry in general has
experienced significant consolidation in recent years, and the acquisition of
one of the Company's competitors by a larger, more established EDA vendor could
create a more significant competitor. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not have a material adverse
effect on its business, financial condition and results of operations. There can
be no assurance that the Company's current and future competitors will not be
able to develop products comparable or superior to those developed by the
Company or to adapt more quickly than the Company to 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 the Company's business, financial condition
and results of operations.
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<PAGE>
DEPENDENCE ON ELECTRONICS INDUSTRY MARKET
Because the electronics industry is characterized by rapid technological change,
short product life cycles, fluctuations in manufacturing capacity and pricing
and margin pressures, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
is commonly curtailed and the number of design projects often decreases. Because
the Company's sales are dependent upon capital spending trends and new design
projects, negative factors affecting the electronics industry could have a
material adverse effect on the Company's business, financial condition and
results of operations. A number of electronics companies, including customers of
the Company, have recently experienced a slowdown in their businesses. The
Company's future operating results may reflect substantial fluctuations from
period to period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from customers and other factors.
DEPENDENCE ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY
Because the Company's products must interoperate with EDA products of other
companies, particularly simulation and synthesis products, the Company must have
timely access to third party software to perform development and testing of its
products. Although the Company has established relationships with a variety of
EDA vendors to gain early access to new product information, these relationships
may be terminated by either party with limited notice. In addition, such
relationships are with companies that are current or potential future
competitors of the Company, including Synopsys, Mentor Graphics and Cadence. For
example, the Company's Visual HDL for Verilog product is currently designed to
work exclusively with the Verilog XL simulator product sold by Cadence. If any
of these relationships were terminated and the Company was unable to obtain, in
a timely manner, information regarding modifications of third party products
necessary for modifying its software products to interoperate with these third
party products, the Company could experience a significant increase in
development costs, the development process would take longer, product
introductions would be delayed and the Company's business, financial condition
and results of operations could be materially adversely affected.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The EDA industry is characterized by extremely rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. In
addition, customers in the EDA industry require software products that allow
them to reduce time to market, differentiate their products, improve their
engineering productivity and reduce their design errors. The Company'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
its customers. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change or emerging industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce products in a timely manner in response to changing market
conditions, industry standards or other customer requirements, particularly if
such product releases have been pre-announced, the Company's business, financial
condition and results of operations will be materially adversely affected.
The Company's Design to Test products employ the Company's WGL format. The
Company permits others to use this format without charge, and the Company
believes that it has been widely adopted in the industry. An industry group in
which the Company currently participates is formulating a new format, STIL, that
it plans to present as a new industry standard. If this standard is adopted
commercially, the Company would be required to provide products that operate
with the STIL format. Development of such products would take significant
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<PAGE>
effort and expense. Moreover, any delay in the availability of such products
could materially adversely affect the Company's business, financial condition
and results of operations.
Software products as complex as those offered by the Company may contain errors
that may be detected at any point in the products' life cycles. The Company 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. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found, resulting in loss
of, or delay in, market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON DISTRIBUTORS
The Company relies on distributors for licensing and support of its products
outside of North America. Approximately 56%, 62%, 46%, 42% and 38% of the
Company's revenue for the three months ended March 31, 1997 and 1996 and for the
years ended December 31, 1996, 1995 and 1994, respectively, were attributable to
sales made through distributors. The Company has also entered into a joint
venture with Anam pursuant to which the joint venture corporation (Summit Design
Korea, Inc. ("Summit Asia")) shall acquire exclusive rights to sell, distribute
and support all of the Company's products in the Asia-Pacific region, excluding
Japan, until June 1997. Summit Asia has acted in such capacity since April 1,
1996. Prior to that date, Anam was an independent distributor of the Company's
products. During the fourth quarter of 1995, the Company entered into a
distribution agreement with ATE pursuant to which ATE was granted exclusive
rights to sell, distribute and support all of Summit's Design to Test products
within Japan until October 1998, subject to the Company's ability to terminate
the relationship if ATE fails to meet quarterly sales objectives. The agreement
may also be terminated by either party for breach. In addition, in the first
quarter of 1996, the Company entered into a three-year, exclusive distribution
agreement for its SLDA products in Japan with Seiko. In the event Seiko fails
to meet specified quotas for two or more quarterly periods, exclusivity can be
terminated by Summit, subject to Seiko's right to pay a specified fee to
maintain exclusivity. The agreement is renewable for successive five-year terms
by mutual agreement of the Company and Seiko and is terminable by either party
for breach. For the year ended December 31, 1996 and three months ended March
31, 1997, all sales of the Company's products in the Asia-Pacific region were
through Summit Asia, ATE and Seiko. There can be no assurance the new
relationships with Summit Asia, ATE and Seiko will be effective in maintaining
or increasing sales relative to the levels experienced prior to such
relationships. The Company also has independent distributors in Europe and is
dependent on the continued viability and financial stability of its
distributors. Since the Company's products are used by skilled design engineers,
distributors must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Only a limited number of distributors possess these
resources. In addition, Summit Asia, ATE and Seiko, as well as the Company's
other distributors, may offer products of several different companies, including
competitors of the Company. There can be no assurance that the Company's current
distributors will continue to market or service and support the Company's
products effectively, that any distributor will continue to sell the Company's
products or that the distributors will not devote greater resources to products
of other companies. The loss of, or a significant reduction in, revenue from the
Company's distributors could have a material adverse effect on the Company's
business, financial condition and results of operations.
INTERNATIONAL SALES AND OPERATIONS
Approximately 50%, 52% and 39% of the Company's revenue for the years ended
December 31, 1996, 1995 and 1994, respectively, were attributable to sales made
outside the United States. The Company expects that international revenue will
continue to represent a significant portion of its total revenue. The Company's
international revenue is currently denominated in U.S. dollars. As a result,
increases in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets. The Company pays the expenses of its international
operations in local currencies and does not engage in hedging transactions with
respect to such obligations. International
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sales and operations are subject to numerous risks, including tariff regulations
and other trade barriers, requirements for licenses, particularly with respect
to the export of certain technologies, collectability of accounts receivable,
changes in regulatory requirements, difficulties in staffing and managing
foreign operations and extended payment terms. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and operations and, consequently, on the Company's business,
financial condition and results of operations.
In order to successfully expand international sales, the Company 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 the Company's
operating margins. In addition, to the extent that the Company is unable to
effect these additions in a timely manner, the Company's growth, if any, in
international sales will be limited. There can be no assurance that the Company
will be able to maintain or increase international sales of the Company's
products, and failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH AND ACQUISITIONS
Summit'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. Summit expects any
such growth will place a significant strain on its operational resources and
systems. Failure effectively to manage any such growth would have a material
adverse effect of Summit's business, financial condition and results of
operations.
On February 28, 1997, Summit completed its acquisition of TriQuest. As a result
of the acquisition, Summit's operating expenses are expected to increase. There
can be no assurance that the integration of TriQuest's business can be
successfully completed in a timely fashion, or at all, or that the revenues from
TriQuest will be sufficient to support the costs associated with TriQuest's
business, without adversely affecting Summit's operating margins. Any failure
to successfully complete the integration in a timely fashion or to generate
sufficient revenues from the acquired business could have a material adverse
effect on Summit's business and results of operations. In addition, Summit
regularly evaluates acquisition opportunities. Future acquisitions by Summit
could result in potentially dilutive issuance's of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
Summit'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 Summit has no or
limited prior experience and potential loss of key employees of acquired
companies. Summit's management has had limited experience in assimilating
acquired organizations and products into Summit's operations. No assurance can
be given as to the ability of Summit to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure of Summit to do so could have a material adverse effect
on Summit's results of operations.
OPERATIONS IN ISRAEL
The Company's research and development operations related to its SLDA products
are located in Israel and may be affected by economic, political and military
conditions in that country. Accordingly, the Company's business, financial
condition and results of operations could be materially adversely affected if
hostilities involving Israel should occur. This risk is heightened due to the
restrictions on the Company's ability to manufacture or transfer outside of
Israel any technology developed under research and development grants from the
government of Israel as described in "--Israeli Research, Development and
Marketing Grants." In addition, while all of the Company's sales are denominated
in U.S. dollars, a portion of the Company's annual costs and expenses in Israel
are paid in Israeli currency. These costs and expenses were approximately $4.3,
$4.3 and $2.9 million in 1996, 1995 and 1994, respectively. Payment in Israeli
currency subjects the Company to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high
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rate of inflation, which has been approximately 11%, 8% and 15% during 1996,
1995, and 1994, respectively. The Company's primary expense which is paid in
Israeli currency is employee salaries for research and development activities.
As a result, an increase in the value of Israeli currency in comparison to the
U.S. dollar could increase the cost of research and development expenses and
general and administrative expenses. There can be no assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
aforementioned factors will not have a material adverse effect on the Company's
business, financial condition or results of operations. In addition,
coordination with and management of the Israeli operations requires the Company
to address differences in culture, regulations and time zones. Failure to
successfully address these differences could be disruptive to the Company's
operations.
The Company's Israeli production facility has been granted the status of an
"Approved Enterprise" under the Israeli Investment Law for the Encouragement of
Capital Investments, 1959 (the "Investment Law"). Taxable income of a company
derived from an "Approved Enterprise" is eligible for certain tax benefits,
including significant income tax rate reductions for up to seven years following
the first year in which the "Approved Enterprise" has Israeli taxable income
(after using any available net operating losses). The period of benefits cannot
extend beyond 12 years from the year of commencement of operations or 14 years
from the year in which approval was granted, whichever is earlier. The tax
benefits derived from a certificate of approval for an "Approved Enterprise"
relate only to taxable income attributable to such "Approved Enterprise" and are
conditioned upon fulfillment of the conditions stipulated by the Investment Law,
the regulations promulgated thereunder and the criteria set forth in the
certificate of approval. In the event of a failure by the Company to comply with
these conditions, the tax benefits could be canceled, in whole or in part, and
the Company would be required to refund the amount of the canceled benefits,
adjusted for inflation and interest. There can be no assurance that the
Company's Israeli production facility will continue to operate or qualify as an
"Approved Enterprise" or that the benefits under the "Approved Enterprise"
regulations will continue, or be applicable, in the future. The loss of, or any
material decrease in, these income tax benefits could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service of
its key technical and management personnel and its ability to continue to
attract and retain highly-skilled technical, sales and marketing and management
personnel. The Company has entered into employment agreements with certain of
its executive officers, however, such agreements do not guarantee the services
of these employees and do not contain noncompetition provisions. Competition for
personnel in the software industry in general, and the EDA industry in
particular, is intense, and the Company has at times in the past experienced
difficulty in recruiting qualified personnel. There can be no assurance that the
Company will retain its key personnel or that it will be successful in
attracting and retaining 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 the Company's business, financial condition and
results of operations. The Company does not carry "key person" life insurance on
any of its key personnel. 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 the Company's business, financial condition and results of operations.
ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS
Summit's Israeli subsidiary has obtained research and development grants from
the Office of the Chief Scientist (the "Chief Scientist") in the Israeli
Ministry of Industry and Trade of approximately $232,000 and $608,000 in 1993
and 1995, respectively. As of March 31, 1997, the Company was obligated to pay
back approximately $232,000 and $470,000 for the 1993 and 1995 grants,
respectively. Such obligations are collateralized by all tangible and intangible
assets of the Israeli subsidiary. The terms of the grants prohibit the
manufacture of products developed under these grants outside of Israel and the
transfer of the technology developed pursuant to these grants to any person,
without the prior written consent of the Chief Scientist. The
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Company's Visual HDL for VHDL products have been developed under grants from the
Chief Scientist and thus are subject to these restrictions. If the Company is
unable to obtain the consent of the government of Israel, the Company would be
unable to take advantage of potential economic benefits such as lower taxes,
lower labor and other manufacturing costs and advanced research and development
facilities that may be available if such technology and manufacturing operations
could be transferred to locations outside of Israel. In addition, the Company
would be unable to minimize risks particular to operations in Israel, such as
hostilities involving Israel. Although the Company is eligible to apply for
additional grants from the Chief Scientist, it has no present plans to do so.
The Company also received a Marketing Fund Grant from the Israeli Ministry of
Industry and Trade for an aggregate of $423,000. The grant must be repaid at the
rate of 3% of the increase in exports over the 1993 export level of all Israeli
products, until repaid. As of March 31, 1997, approximately $364,000 was
outstanding under the grant.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures, licensing arrangements and technical means to
establish and protect its proprietary rights. As part of its confidentiality
procedures, the Company generally enters into non-disclosure agreements with its
employees, distributors and corporate partners, and limits access to, and
distribution of, its software, documentation and other proprietary information.
In addition, the Company's products are protected by hardware locks and software
encryption techniques designed to deter unauthorized use and copying. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products or technology without authorization, or to
develop similar technology independently.
The Company provides its SLDA products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software. These
agreements are not negotiated with or signed by the licensee, and thus may not
be enforceable in certain jurisdictions. The Company provides its Design to Test
products to end-users under written license agreements, signed by each licensee
at the time of purchase of a license. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights as fully as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competitors will not independently develop similar technology.
The Company could be increasingly subject to infringement claims as the number
of products and competitors in the Company'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. There can be no assurance that a third party will not claim such
infringement by the Company 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 the Company to enter into royalty or
licensing agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company or at all. Failure to protect
its proprietary rights or claims of infringement could have a material adverse
effect on the Company's business, financial condition and results of operations.
CONTROL BY CURRENT STOCKHOLDERS
As of March 20, 1997, Summit's officers, directors and their affiliates, in the
aggregate, beneficially owned approximately 40.4% of Summit's outstanding shares
of Common Stock. As a result, these stockholders, if acting together, would be
able effectively to control most matters requiring approval by the stockholders
of Summit, including, in most cases, the election of all of the directors.
Summit has entered into agreements with its officers and directors indemnifying
them against losses they may incur in legal proceedings arising from their
service to Summit.
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POSSIBLE VOLATILITY OF STOCK PRICE
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 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT DESIGN, INC.
By:_________________________________
C. Albert Koob
Vice President - Finance,
Chief Financial Officer and
Secretary (Principal Financial and
Accounting Officer and Duly
Authorized Officer)
Date: May 20, 1997
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