<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the quarterly period ended March 31, 1998 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 12, 1998, the Registrant had outstanding 14,819,310 shares of
Common Stock.
<PAGE>
SUMMIT DESIGN, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997. 3
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 1998 and 1997 (unaudited). 4
Condensed Consolidated Statements of Cash Flows for
the three month periods ended March 31, 1998 and 1997 (unaudited). 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
Items 1, 3, 4 and 5 Not Applicable
Signature
Exhibit Index
</TABLE>
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<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,364 $ 19,898
Accounts receivable, net 5,278 5,110
Prepaid expenses and other 426 520
Deferred income taxes 1,214 1,209
--------- ---------
Total current assets 27,282 26,737
Furniture and equipment, net 2,860 2,666
Intangibles, net 1,499 1,622
Deferred taxes 555 533
Deposits and other assets 1,026 1,055
--------- ---------
Total assets $ 33,222 $ 32,613
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 105 $ 105
Capital lease obligation, current portion 45 49
Accounts payable 1,248 1,182
Accrued liabilities 4,919 5,157
Deferred revenue 5,265 5,668
--------- ---------
Total current liabilities 11,582 12,161
Long-term debt, less current portion 156 156
Capital lease obligations, less current portion 32 43
Deferred revenue, less current portion 190 -
--------- ---------
Total liabilities 11,960 12,360
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized 30,000
shares; issued and outstanding 15,839 shares at
March 31, 1998 and 15,631 shares at
December 31, 1997 158 156
Additional paid-in capital 52,508 51,772
Treasury stock, at cost, 1,102 shares at
March 31, 1998 and 939 shares at December 31, 1997 (13,884) (11,555)
Accumulated deficit (17,520) (20,120)
--------- ---------
Total stockholders' equity 21,262 20,253
--------- ---------
Total liabilities and stockholders' equity $ 33,222 $ 32,613
--------- ---------
--------- ---------
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Product licenses $ 8,072 $ 4,878
Maintenance and services 2,042 1,481
Other 92 142
-------- --------
Total revenue 10,206 6,501
Cost of revenue:
Product licenses 278 185
Maintenance and services 211 109
-------- --------
Total cost of revenue 489 294
-------- --------
Gross profit 9,717 6,207
-------- --------
-------- --------
Operating expenses:
Research and development 2,343 1,431
Sales and marketing 3,024 2,517
General and administrative 1,093 1,177
-------- --------
Total operating expenses 6,460 5,125
-------- --------
-------- --------
Income from operations 3,257 1,082
Interest expense (1) (7)
Other income, net 289 218
-------- --------
Income before income taxes 3,545 1,293
Income tax provision 945 80
-------- --------
Net income $ 2,600 $ 1,213
-------- --------
-------- --------
Earnings per share:
Basic $ 0.18 $ 0.09
-------- --------
-------- --------
Diluted $ 0.16 $ 0.08
-------- --------
-------- --------
Number of shares used computing earnings
per share:
Basic 14,695 13,902
-------- --------
-------- --------
Diluted 15,953 14,829
-------- --------
-------- --------
</TABLE>
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,
------------------
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,600 $ 1,213
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 377 194
Loss on asset disposition - 1
Deferred taxes (27) -
Changes in assets and liabilities:
Accounts receivable (168) (321)
Prepaid expenses and other 94 (11)
Accounts payable 66 408
Accrued liabilities (238) (96)
Deferred revenue (213) (918)
Other, net 154 35
--------- --------
Net cash provided by operating activities 2,645 505
--------- --------
Cash flows from investing activities:
Additions to furniture and equipment (448) (251)
Notes receivable from related parties, net (125) (75)
--------- --------
Net cash used in investing activities (573) (326)
--------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs 288 14
Tax benefit of option exercises 450 -
Payments to acquire treasury stock (2,329) -
Principal payments of debt obligations - (71)
Principal payments of capital lease obligations (15) (35)
--------- --------
Net cash used in financing activities (1,606) (92)
--------- --------
Increase in cash and cash equivalents 466 87
Cash and cash equivalents, beginning of period 19,898 19,772
--------- --------
Cash and cash equivalents, end of period $ 20,364 $ 19,859
--------- --------
--------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1 $ 7
Income taxes 547 32
</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. ("Summit" or the Company) in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such 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, 1997 1996 and 1995 included in the Company's Form 10-K
filed for December 31, 1997.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998 or any other future interim period, and the Company makes no
representations related thereto.
2. SOFTWARE REVENUE RECOGNITION
During the first quarter of 1998, the Company adopted Statements of Position
(SOP) 97-2, "Software Revenue Recognition" and 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, "Software Revenue Recognition."
The provisions of SOP's 97-2 and 98-4 have been applied to transactions
entered into beginning January 1, 1998. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated
to each element based on vendor-specific objective evidence (VSOE) of the
fair value of the various elements in a multiple element arrangement. The
revenue allocated to product licenses generally is recognized upon delivery
of the license. The revenue allocated to maintenance is recognized ratably
over the term of the maintenance agreement and revenue allocated to services
is recognized as the services are performed.
SOP 98-4 defers for one year, the application of several paragraphs and
examples in SOP 97-2 that limit the definition of vendor specific objective
evidence (VSOE) of the fair value of various elements in a multiple element
arrangement.
The Company analyzed the elements included in its multiple element
arrangements and determined that the Company has sufficient evidence to
allocate revenue to the license and maintenance components of its product
licenses. The adoption of SOP's 97-2 and 98-4 did not have a significant
effect on revenue recognized for the period ending March 31, 1998.
3. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Accounts Receivable:
Trade receivables $ 5,870 $ 5,702
Less allowance for doubtful accounts (592) (592)
-------------- --------------
$ 5,278 $ 5,110
-------------- --------------
-------------- --------------
Furniture and equipment:
Office furniture equipment $ 627 $ 596
Computer equipment 3,967 3,553
Leasehold improvements 69 66
-------------- --------------
4,663 4,215
Less: accumulated depreciation and
amortization (1,803) (1,549)
-------------- --------------
$ 2,860 $ 2,666
-------------- --------------
-------------- --------------
Accrued expenses:
Payroll and related benefits $ 2,769 $ 2,862
Sales and marketing 547 435
Accounting and legal 286 260
Federal and state income taxes payable 795 819
Sales taxes payable 68 114
Other 454 667
-------------- --------------
Total accrued expenses $ 4,919 $ 5,157
-------------- --------------
-------------- --------------
</TABLE>
-6-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. RECONCILIATION OF EARNINGS PER SHARE
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." In accordance with SFAS No.
128, basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options using
the treasury stock method. The following provides a reconciliation of the
numerators and denominators of the basic and diluted per share computations:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1997
-------------------
<S> <C> <C>
Numerator:
Net income $ 2,600 $ 1,213
-------- --------
-------- --------
Denominator:
Denominator for basic earnings per share
weighted average shares 14,695 13,902
Effect of dilutive securities:
Employee stock options 1,258 927
-------- --------
Denominator for diluted earnings per share 15,953 14,829
-------- --------
-------- --------
Net income per share - basic $ 0.18 $ 0.09
-------- --------
-------- --------
Net income per share - diluted $ 0.16 $ 0.08
-------- --------
-------- --------
</TABLE>
-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, (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 high level design automation ("HLDA") design creation
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 HLDA market. As a
result of the Reorganization, TSSI and SEE Technologies became wholly-owned
subsidiaries of Summit in the first quarter of 1994.
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 HLDA and Design to Test products. To promote its products, the
Company added sales and marketing staff, increasing its sales and marketing
expenditures by 187% from 1993 to 1997, 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 through 1995. The Company
introduced its first HLDA Plus 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.
Prior to the Reorganization, the Company's Test Development Series ("TDS")
product and related maintenance revenue accounted for all of the Company's
revenue. After the Reorganization and through June 30, 1997, the Company's
revenue was predominantly derived from two product lines, Visual HDL, which
includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS. As the
result of the July 1997 sale of the TDS product line, Design to Test products
are no longer a source of revenue for the Company. With the acquisition of
TriQuest Design Automation, Inc. ("TriQuest") in February 1997 and Simulation
Technologies Corp. ("SimTech"), in September 1997, the Company has also
derived revenue from verification products which include hardware-software
co-verification, code coverage, and HDL debugging products, as well as
analysis, verification and Register Transfer Language ("RTL") optimization
tools.
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. Revenue earned on software arrangements involving
multiple elements is allocated to each element based on vendor-specific
objective evidence (VSOE) of the fair value of the various elements within
the arrangement. 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
-8-
<PAGE>
markets. Revenue from product sales through distributors is recognized net of
the associated distributor discounts. Fees received for granting distribution
rights are deferred and recognized ratably over the term of the distribution
agreement. Although the Company has not 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 and duration of license. 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 may continue to
fluctuate in the future.
The Company entered into a joint venture with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Design Asia Ltd.
("Summit Asia")) acquired exclusive rights to sell, distribute and support
all of Summit's products in the Asia-Pacific region, excluding Japan. Prior
to that date, Anam was an independent distributor of the Company's products
in Korea. 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. For the three months ended March
31, 1998 and 1997, Anam and Summit Asia together accounted for 3.9% and 4.5%
of the Company's revenue, respectively.
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 are 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. The Company is currently restructuring the
ownership and responsibilities of Summit Asia. There can be no assurance that
any restructuring would result in Summit Asia becoming profitable or that
revenue attributable to sales in the Asia Pacific region, excluding Japan,
would increase.
Approximately 32% and 53% of the Company's total revenue for the three months
ended March 31, 1998 and 1997, respectively, were attributable to sales made
outside the United States. The decline in the percentage of revenue from
sales made outside the United States in 1998 is primarily the result of (1)
domestic sales to one customer, (2) the loss of Design to Test product sales
in the last half of 1997 as a result of the sale of the product line, which
had a strong international market, and (3) the addition of revenue from
products acquired in the SimTech acquisition which had a principally domestic
market. 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)
- -------------------
(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>
On February 28, 1997, Summit completed its acquisition of TriQuest. TriQuest
develops HDL analysis, optimization, and verification tools for the design
of high performance, deep submicron integrated circuits. The transaction has
been accounted for as a "pooling of interest" in accordance with generally
accepted accounting principles.
Effective July 1, 1997 the Company sold substantially all of the assets used
in its business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to Credence Systems Corporation ("CSC"). The
increase in the Company's product licenses revenue during the last twelve
months has been primarily due to increased revenue associated with the
Company's HLDA Plus products. The Asset Sale will allow the Company to focus
on the development and marketing of these products.
Substantially all of the Company's Design to Test product license revenue and
related maintenance and services revenue for the three months ended March 31,
1997 were attributable to the TDS products. As of July 1, 1997, TDS products
ceased to be a source of such revenues. CSC assumed the Company's
obligations under TDS maintenance contracts entered into prior to the closing
and the Company has not recognized deferred revenue associated with such
contracts after June 30, 1997.
The Company maintained exclusive rights to its Visual Testbench technology
and CSC agreed to purchase a minimum of $16,000,000 of Visual Testbench
licenses over a thirty-month period subject to specified quarterly maximums
and certain additional conditions, and $2,000,000 of maintenance over an
eighteen month period beginning July 1997. 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.
On September 9, 1997, the Company acquired SimTech, a company that develops
and distributes hardware-software co-verification, code coverage and HDL
debugging software. The aggregate consideration for the acquisition
(including shares of common stock reserved for issuance upon exercise of
SimTech options assumed by the Company) was 1,980,000 shares of Summit common
stock and $3,875,000 in cash. The transaction was accounted for using the
purchase method of accounting. Accordingly, the results of operations for the
period from September 9, 1997 are included in the consolidated statements of
operations. The purchase price was allocated to the net assets acquired based
on their estimated fair market values at the date of acquisition. The fair
value of tangible assets acquired and liabilities assumed were $1.3 million
and $2.2 million, respectively. In addition, $19.9 million was allocated to
in-process technology which had not reached technological feasibility and had
no probable alternative uses, which the Company expensed as of the
acquisition date. The remainder of the purchase price was allocated to
purchased technology ($1,037,000) and identifiable intangibles ($735,000),
which are being amortized on a straight line basis over three and five years
respectively.
In connection with the acquisition of SimTech, the Company repurchased
939,000 shares of common stock in private transaction at an average price of
$12.30 per share for $11,555,000 in September 1997.
On December 23, 1997, the Company announced that the Board of Directors had
authorized the repurchase of up to 750,000 shares of the Company's Common
Stock. From January 1, 1998 to May 12, 1998, the Company repurchased 162,500
shares of its common stock at a cost of $2.3 million.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of revenue.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Product licenses 79.1% 75.0%
Maintenance and services 20.0 22.8
Other 0.9 2.2
-------- --------
Total revenue 100.0 100.0
Cost of revenue:
Product licenses 2.7 2.8
Maintenance and services 2.1 1.7
-------- --------
Total cost of revenue 4.8 4.5
-------- --------
Gross profit 95.2 95.5
Operating expenses:
Research and development 23.0 22.0
Sales and marketing 29.6 38.7
General and administrative (a) 10.7 18.1
-------- --------
Total operating expenses 63.3 78.8
-------- --------
-------- --------
Income from operations 31.9 16.7
Other income (expense), net 2.8 3.2
-------- --------
Income before income taxes 34.7 19.9
Income tax provision 9.3 1.2
-------- --------
Net income 25.4% 18.7%
-------- --------
-------- --------
</TABLE>
(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
Total revenue increased by 57.0% from $6.5 million for the three months ended
March 31, 1997 to $10.2 million for the three months ended March 31, 1998.
Sales through one distributor accounted for 17.3% and 15.8% of the Company's
total revenue for the three months ended March 31, 1998 and 1997,
respectively. Sales to CSC accounted for 31.2% of the Company's total revenue
for the three month period ended March 31, 1998. Such revenue included $2.9
million of Visual Testbench license sales made pursuant to the Company's
contract with CSC. See "Overview." No customer accounted for more than 10% of
the Company's total revenue for the three months ended March 31, 1997.
REVENUE
PRODUCT LICENSES
The Company's product licenses revenue is derived from license fees from the
Company's HLDA Plus products and additionally from Design to Test products
through June 30, 1997. Product licenses revenue increased by 65.5% from $4.9
million for the three months ended March 31, 1997 to $8.1 million for the
three months ended March 31, 1998. Due to the sale of the TDS product line
in July of 1997, revenue from HLDA Plus products accounted for 100% of
product licenses revenue for the three months ended March 31, 1998. During
the three months ended March 31, 1997, HLDA Plus and Design to Test revenues
accounted for 77.7% and 22.3% of product license revenue, respectively.
-11-
<PAGE>
HLDA license revenue increased 113% from $3.8 million for the three months
ended March 31, 1997 to $8.1 million for the three months ended March 31,
1998. The increase in HLDA license revenue over the same period in 1997 was
primarily attributable to sales to a single customer, revenue from the
Verification products portfolio that was not shipping in the comparable
period in 1997, and growth in the installed base of HLDA customers. Sales to
the single customer are expected to continue over the next seven quarters
pursuant to contractual arrangements with the customer.(2)
MAINTENANCE AND SERVICES
The Company's maintenance and services revenue is derived from maintenance
contracts related to the Company's HLDA products and training classes offered
to purchasers of the Company's software products. Maintenance and services
revenue increased 37.9% from $1.5 million for the three months ended March
31, 1997 to $2.0 million for the three months ended March 31, 1998. The
increase is primarily attributable to maintenance contracts for verification
products acquired in the SimTech acquisition, a maintenance contract with one
customer, an increase in the installed base of HLDA Plus customers over the
previous comparable period, less a decrease of Design to Test maintenance
revenue of $743,000, due to the sale of the TDS product line.
OTHER
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. Other revenue decreased 35.2% from
$142,000 for the three months ended March 31, 1997 to $92,000 for the three
months ended March 31, 1998. In May 1997 a distribution agreement expired;
and as a result the distribution rights fees paid at the inception of the
agreement and amortized into revenue at $50,000 each quarter over the
agreement period are no longer be a source of other revenue. No material
costs were associated with other revenue for the three months ended March
31, 1998 and 1997.
COST OF REVENUE
PRODUCT LICENSES
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 plus the amortization of
purchased technology acquired in the SimTech purchase. The cost of product
licenses revenue increased 50.3% from $185,000 for the three months ended
March 31, 1997 to $278,000 for the three months ended March 31, 1998. This
increase is primarily attributable to approximately $86,000 in amortization
of purchased technology included in the three months ended March 31, 1998
relating to the purchase of SimTech in September of 1997. As a percentage of
product licenses revenue, the cost of product licenses revenue decreased from
3.8% of product license revenue for the three months ended March 31, 1997 to
3.4% of product license revenue for the three months ended March 31, 1998.
This decrease was primarily due to leveraging fixed costs across increased
product license revenue.
MAINTENANCE AND SERVICES
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 93.6% from $109,000 for the
three months ended March 31, 1997 to $211,000 for the three months ended
March 31, 1998. As a percentage of maintenance and services revenue, the
cost of maintenance and services revenue increased from 7.4% for the three
months ended March 31, 1997 to 10.3% for the three months ended March 31,
1998. The 2.9% increase in the cost of maintenance and services revenue as a
percent of revenue for the three months ended March 31, 1998 over the same
period in 1997 was primarily the result of the Company operating below
forecasted staffing levels during the first half of 1997.
- -----------------------
(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.
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<PAGE>
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 increased 63.7% from $1.4 million for the three months
ended March 31, 1997 to $2.3 million for the three months ended March 31,
1998. As a percentage of total revenue, research and development expenses
increased from 22.0% for the three months ended March 31, 1997 to 23.0% for
the three months ended March 31, 1998. The Company's research and development
staff increased from 61 for the three months ended March 31, 1997 to 93 for
the three months ended March 31, 1998. This increase is primarily
attributable to the addition of 28 engineers through the acquisition of
Simtech in September of 1997 and the hiring of 19 additional engineers, less
a decrease of 15 engineers due to the sale of the TDS product line on in July
of 1997. The Company continues to believe that significant investment in
research and development is required to remain competitive in its markets,
and the Company therefore anticipates that research and development expense
will increase in absolute dollars in future periods, but may vary as a
percent of revenue. (2)
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions
and promotional costs, increased 20.1% from $2.5 million for the three months
ended March 31, 1997 to $3.0 million for the three months ended March 31,
1998. The increase over 1997 was attributable to expenses related to the
marketing of new products acquired with the purchase of SimTech and
additional commissions directly related to the increase in gross sales over
the comparable period in 1997. As a percentage of total revenue, sales and
marketing expenses decreased from 38.7% for the three months ended March 31,
1997 to 29.6% for the three months ended March 31, 1998. The decrease as a
percentage of revenue was primarily attributable to the increase in total
revenue for 1998. In the future, the Company expects sales and marketing
expenses to continue to increase in absolute dollars.(2)
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate,
finance, human resource, information services, administrative, and legal and
accounting expenses of the Company. General and administrative expenses
decreased 7.1% from $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, to $1.1 million for the three months ended March 31,
1998. Excluding this one-time charge, expenses increased by $295,000 (36.9%)
for the three months ended March 31, 1998 as compared to the same period in
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 12.3% for the three months ended March
31, 1997 to 10.7% for the three months ended March 31, 1998. The decrease as
a percentage of total revenue was attributable to the
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(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.
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<PAGE>
increase in total revenue in 1998. The Company expects general and
administrative expenses to increase in absolute dollars to support future
sales and operations.(2)
INTEREST EXPENSE
Interest expense decreased from $7,000 for the three months ended March 31,
1997 to $1,000 for the three months ended March 31, 1998 due to decreased
long term debt and capital leases obligations. The Company incurred no
interest expense associated with the Company's bank line of credit for the
three months ended March 31, 1998.
OTHER INCOME, NET
Other income consists of interest income associated with available cash
balances, gains or losses from the sale of property and equipment, the
Company's pro rata share of the earnings and losses of Summit Asia and
foreign exchange rate differences resulting from paying operating expenses of
foreign operations in the local currency. Other income was $218,000 for the
three months ended March 31, 1997 and $289,000 for the three months ended
March 31, 1998. The increase in other income was primarily due to increased
interest earned on the Company's cash holdings.
INCOME TAX PROVISION
The income tax provision increased from $80,000 for the three months ended
March 31, 1997 to $945,000 for the three months ended March 31, 1998. The
provision for the three months ended March 31, 1997 reflects an effective
rate of 6.5% of taxable income and is comprised of federal alternative
minimum tax and Israeli income taxes. In the first quarter of 1997, the
Company utilized net operating loss carryforwards to offset a considerable
portion of U.S. federal and state taxable income. The 1998 income tax
provision reflects the Company's estimated consolidated tax rate for federal,
state and foreign taxes of approximately 28% of taxable income. The
difference between the Company's estimated effective rate and the statutory
rate for the year ending December 31, 1998 is primarily due to reduced tax
rates on the Company's income generated from operations in Israel.
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, 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. 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
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(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.
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<PAGE>
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
Prior to 1996, the Company had experienced losses for income tax purposes in
the United States. The Company is now profitable in the United States and
expects to pay income taxes at or near the statutory tax rate on its U.S.
taxable earnings. As of December 31, 1997, the Company has recognized the
benefit of its U.S. net operating loss carryforwards and tax credit
carryforwards in their financial statements.
The Company's Israeli operations are performed entirely by Summit Design
(EDA) Ltd., which is a separate taxable Israeli entity. The Company's
existing Israeli production facility has been granted "Approved Enterprise"
status under the Israeli Investment Law, which entitles the Company to
reductions in the tax rate normally applicable to Israeli companies with
respect to the income generated by its "Approved Enterprise" programs. In
particular, the tax holiday covers the seven year period beginning the first
year in which Summit Design (EDA) Ltd. generates taxable income from its
"Approved Enterprise" (after using any available NOLs), provided that such
benefits will terminate in 2006 regardless of whether the seven year period
has expired. The tax holiday provides that, during such seven year periods,
a portion of the Company's taxable income from its Israeli operations will be
taxed at favorable tax rates. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to have favorable tax status in Israel.
Management of the Company intends to permanently reinvest earnings of the
Israeli subsidiary outside the U.S. If such earnings were remitted to the
U.S., additional U.S. federal and foreign taxes may be due.
The Company has foreign income tax net operating losses of approximately $5.6
million at December 31, 1997. These foreign losses were generated in Israel
over several years and have not yet received final assessment from the
Israeli government. Consequently, management is uncertain as to the
availability of a substantial portion of such foreign loss carryforwards.
The Company is also subject to risk that United States and foreign tax laws
and rates may change in a future period or periods, and that any such changes
may materially adversely affect the Company's tax rate. 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, results of operations and cash flows.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through a public offering
in 1996 the private placement of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from operations. As of March 31, 1998,
the Company had approximately $20.4 million in cash and cash equivalents and
a $1.0 million bank line of credit with a major financial institution (the
"Bank"). The line of credit expires on April 30, 1999. 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, 1998, the Company had no borrowings outstanding under this line of
credit.
As of March 31, 1998, the Company had working capital of approximately $15.7
million.
Net cash generated by operating activities was approximately $2.6 million and
$505,000 for the three months ended March 31, 1998 and 1997, respectively.
Cash generated by operating activities resulted primarily from profitable
operations and improved cash collections less the decrease in deferred
revenue and accrued liabilities for the three months ended March 31, 1998 and
primarily from profitable operations less a decrease in deferred revenue for
the three months ended March 31, 1997.
Net cash used in investing activities was approximately $573,000 and $326,000
for the three months ended March 31, 1998 and 1997, respectively. Net cash
used in investing activities was related to the acquisition of furniture and
equipment and a loan to an independent software company for the three months
ended March 31, 1998 and the acquisition of furniture and equipment and a
loan to an employee for the three months ended March 31, 1997.
Net cash used by financing activities was approximately $1.6 million and
$92,000 for the three months ended March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998 the use of cash was primarily from
repurchasing 162,500 shares of the Company's common stock, less proceeds from
the issuance of common stock and a tax benefit from option exercises. For
the three months ended March 31, 1997, the use of cash was primarily for
repayment of debt and capital lease obligations.
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 generated net income in the first quarter of 1998,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
- -------------------
(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>
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,
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, results of operations or cash flows 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 HLDA
Prior to July 1997, the Company's revenue was predominantly derived from two
product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL
for Verilog, and TDS. Effective July 1, 1997, as a result of the Asset Sale,
TDS products ceased to be a source of revenue. With the acquisition of
TriQuest in February 1997 and SimTech in September 1997, the Company also
derives revenue from verification products which include hardware-software
co-verification, code coverage, and HDL debugging products as well as
analysis, verification and RTL optimization tools.
The Company believes that HLDA products will continue to account for
substantially all 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 HLDA products. The Company commercially shipped its
first HLDA product, Visual HDL for VHDL, in the first quarter of 1994. For
the years ended December 31, 1997, 1996 and 1995, respectively, revenue from
HLDA products and related maintenance contracts represented 76.5%, 63.5%, and
43.6%, respectively, of the Company's total revenue. The Company's HLDA
products incorporate certain unique design methodologies and thus represent a
departure from industry standards for design creation and verification. The
Company believes that broad market acceptance of its HLDA 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
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<PAGE>
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 HLDA products will achieve broad market
acceptance. A decline in the demand for, or the failure to achieve broad
market acceptance of, the Company's HLDA products will have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
Although demand for HLDA products has increased in recent years, the market
for HLDA products is still emerging 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 HLDA products. If the market for HLDA
products fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, financial condition, results of
operations or cash flows 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
Visual Testbench product, 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, to which it will realize revenue from Visual Testbench in
excess of the revenue expected to be received pursuant to an OEM agreement
entered into in July 1997. As part of this agreement, CSC must purchase a
minimum of $16.0 million of Visual Testbench licenses over a thirty month
period beginning in July 1997. As of March 31, 1998 the Company had sold $9.1
million of Visual Testbench licenses pursuant to this agreement. The Company
will need to replace this revenue when the $16.0 million purchase obligation
is satisfied and the failure of the Company to replace this revenue would
have a material adverse affect on the Company's operating results.
COMPETITION
The EDA industry is highly competitive and the Company expects competition to
increase as other EDA companies introduce HLDA products. In the HLDA 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 HLDA 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 HLDA 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, results of operations, or cash flows.
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
HLDA 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, results of
operations, or cash flows.
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<PAGE>
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, results of operations or cash flows.
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, results of operations, or cash
flows. 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. 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, results of operations or cash flows 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, results of operations or cash
flows will be materially adversely affected.
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
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<PAGE>
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, results of
operations or cash flows.
DEPENDENCE ON DISTRIBUTORS
The Company relies on distributors for licensing and support of its products
outside of North America. Approximately 24%, 56%, 29%, 46% and 42% of the
Company's revenue for the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, 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 Asia
acquired exclusive rights to sell, distribute and support all of the
Company's products in the Asia-Pacific region, excluding Japan. 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 Company is
currently restructuring the ownership and responsibilities of Summit Asia.
There can be no assurance that any restructuring would result in Summit Asia
becoming profitable or that revenue attributable to sales in the Asia Pacific
region, excluding Japan, would increase. During the first quarter of 1997,
the Company entered into a distribution agreement with ATE pursuant to which
ATE was granted exclusive rights to sell, distribute and support Summit's
Visual Testbench 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 HLDA
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. In March 1997, the Company entered into a three-year distribution
agreement with Kanematsu USA Inc. pursuant to which Kanematsu was granted
exclusive distribution rights to sell, distribute and support certain
verification products in Japan. For the three months ended March 31, 1998
and the year ended December 31, 1997, all sales of the Company's products in
the Asia-Pacific region were through Seiko, Summit Asia, ATE and Kanematsu.
There can be no assurance the relationships with Seiko, Summit Asia, ATE and
Kanematsu 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, Seiko, Summit Asia, ATE and Kanematsu, 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, results of
operations or cash flows.
INTERNATIONAL SALES AND OPERATIONS
Approximately 32%, 53%, 33%, 50% and 52% of the Company's revenue for the
three months ended March 31, 1998 and 1997 and the years ended December 31,
1997, 1996 and 1995, 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
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<PAGE>
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. 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, results of operations or cash flows. In addition, financial
markets and economics in the Asia Pacific Region have been experiencing
adverse conditions which could adversely affect demand for the Company's
products in such region.
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, results of operations or cash
flows.
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 on Summit's business, financial
condition, results of operations or cash flows.
On February 28, 1997, Summit completed its acquisition of TriQuest and on
September 9, 1997, Summit completed its acquisition of SimTech. As a result
of these acquisitions, Summit's operating expenses are expected to increase.
There can be no assurance that the integration of TriQuest's and SimTech's
business can be successfully completed in a timely fashion, or at all, or
that the revenues from TriQuest and SimTech will be sufficient to support the
costs associated with the acquired businesses, 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,
financial condition, results of operations or cash flows. In addition,
Summit regularly evaluates acquisition opportunities. Future acquisitions by
Summit could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, 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 HLDA
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
-21-
<PAGE>
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 $4.7, $4.3 and $4.3 million in 1997, 1996 and
1995, respectively. Payment in Israeli currency subjects the Company to
foreign currency fluctuations and to economic pressures resulting from
Israel's generally high rate of inflation, which has been approximately 7%,
11% and 8% during 1997, 1996, and 1995, 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, results of
operations, or cash flows. 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, results of operations or cash flows.
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 non-competition
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, results of operations or cash flows. The Company has
obtained a $1 million key person life insurance policy on its
President/Chief Executive Officer. The Company recently hired a new Vice
President of Worldwide Marketing and Sales and several new sales persons. The
Company's future success will depend in part on the ability of these new
persons to rapidly and effectively transition into their new positions.
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, results of operations or cash flows.
-22-
<PAGE>
ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS
Summit's Israeli subsidiary 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 December 31, 1997, all amounts had been repaid. 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 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 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, 1998, approximately $261,000
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 HLDA Plus products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software In
addition, the Company delivers certain of its verification products
electronically under an electronic version of a "shrink wrap" license
agreement. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in certain jurisdictions. 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, results of operations or cash flows.
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
-23-
<PAGE>
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.
YEAR 2000
The Company is currently reviewing its products, internal systems and
infrastructure in order to identify and modify those products and systems
that are not Year 2000 compliant. The Company expects any required
modification to be made on a timely basis and does not believe that the cost
of any such modification will have a material adverse affect on the Company's
operating results. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, implementation of any such
modifications and the Company's inability to implement such modifications
could have an adverse effect on the Company's future operating results.
-24-
<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
From January 1, 1998 to March 31, 1998 the Company issued and sold
22,142 shares of Common Stock that were not registered under the
Securities Act of 1933 at prices ranging from $0.08 to $1.17 per
share upon exercise of stock options. Such issuances were made in
reliance upon the exemption from registration set forth in Rule 701
promulgated under the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.15 Bank line of credit agreement between the Registrant
and U.S. National Bank of Oregon dated April 30, 1998
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
</TABLE>
(b) Reports on Form 8-K
Not applicable
-25-
<PAGE>
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: /s/ C. Albert Koob
-----------------------
C. Albert Koob
Vice President - Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Date: May 13, 1998
-26-
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
EXHIBIT 10.15 Bank line of credit agreement between the Registrant
and U.S. National Bank of Oregon dated April 30, 1998
EXHIBIT 27.1 Financial Data Schedule
EXHIBIT 27.2 Restated Financial Data Schedules
</TABLE>
-27-
<PAGE>
[LOGO]
ROSS A. BEATON
VICE PRESIDENT
OREGON CORPORATE BANKING
111 S.W. Fifth Avenue, Suite 400
Portland, OR 97204
503-275-6350
503-273-5795 Fax
April 30, 1998
Art Fletcher
Treasurer and Director of Financial Planning
Summit Design, Inc.
9305 S.W. Gemini Drive
Beaverton, OR 97005-7158
Gentlemen:
I am pleased to advise you that United States National Bank of Oregon ("Bank")
has approved the request of Summit Design, Inc. ("Summit"), for the following
credit facilities, subject to the following terms and conditions:
OPERATING LINE OF CREDIT
BORROWER: Summit Design, Inc.
PURPOSE: General Corporate Purposes.
BORROWING LIMIT: $1,000,000.00
GUARANTORS: None
EXPIRY: April 30, 1999.
RATE: Pricing will be based on United States National Bank
of Oregon's Prime(l), or London Interbank Offering Rate
("LIBOR"), at the Borrower's option. Rate will be fully
floating and computed on a 360-day year. The spread over
the base rates will be determined quarterly by the
Borrower's Total Liabilities/Tangible Net Worth "D/TNW"),
as expressed in the chart below.
- ------------------------
1 The interest rate charged to Borrower is tied to the Prime Rate of United
States National Bank of Oregon, Borrower is advised that United States
National Bank's Prime Rate is the rate of interest which the Bank from
time to time identifies and publicly announces as its Prime Rate, and is
not necessarily, for example the lowest rate of interest which the Bank
collects from any borrower or group of borrowers.
<PAGE>
Summit Design, Inc.
4/30/1998
Page 2
DEBT TO TANGIBLE NET WORTH IS DEFINED AS (TOTAL
LIABILITIES MINUS UNEARNED REVENUE)/(SHAREHOLDERS'
EQUITY MINUS INTANGIBLES).
<TABLE>
<CAPTION>
-----------------------------------------------------------
DEBT/WORTH PRIME PRICING LIBOR PRICING
-----------------------------------------------------------
<S> <C> <C>
Greater than 0.50 Prime + 0% LIBOR + 225 bps
.26 to .050 Prime + 0%* LIBOR + 200 bps
Less than 0.26 Prime + 0% LIBOR + 150 bps.
-----------------------------------------------------------
</TABLE>
* At 12/31/97 the D/TNW was 0.66:1.00.
(Overall LIBOR spreads have been reduced by
75 basis points, and Prime spreads have been
eliminated from the existing facility.)
LIBOR Terms:
A) Minimum Amount of $500,000, increments of $100,000
thereafter.
B) Maturity and availability: Up to three months; may not
exceed Expiry.
C) Prepayment of LIBOR Borrowings not permitted.
D) Notification: Two day notification prior to 12:00 noon on
the day of notification.
E) Irrevocability: Acceptance of a pricing commitment from
the Bank will constitute an irrevocable agreement to borrow
under the revolving line of credit.
F) Interest computed on the basis of a 360 day year and the
number of days elapsed.
REPAYMENT TERMS: Interest shall be payable monthly on the 1st day of each
month. Principal shall be payable on the earlier of April
30, 1999, or demand by the Bank. Repayment of each advance
received by Borrower under the line of credit is subject to
the terms of the promissory note evidencing that advance, as
well as all terms and conditions of this letter. In the
event of any conflict between the two, the terms and
conditions of the promissory note shall control.
FEES: UP-FRONT FEE: Initial up-front fee of 1/8 of 1% of the
amount of the line of credit, due upon acceptance ($1,250).
COMMITMENT FEE: A 1/8 of 1% fee, annualized, on the unused
portion of the line of credit, payable quarterly in arrears.
<PAGE>
Summit Design, Inc.
4/30/1998
Page 3
COLLATERAL: The revolving line of credit provides for a flexible
collateral position according to the following matrix. The
assets of the Borrower which are referenced below include a
first lien position in all accounts, contract rights,
chattel paper, general intangibles and inventory.
QUICK RATIO* COLLATERAL
GREATER THAN
1.75:1.00 Unsecured with negative pledge agreement.
LESS THAN OR =
1.75:1.00 UNSECURED WITH NEGATIVE PLEDGE, IF NOT BORROWING. If borrowing
and the ratio falls in this category, the line of credit will
be secured.
LESS THAN OR =
1.25:1.00 UNSECURED WITH NEGATIVE PLEDGE, IF NOT BORROWING. If
borrowing, line is secured and advances are margined at 75%
of eligible A/R up to 120 days after date of invoice.
* QUICK RATIO IS DEFINED AS ((CASH + NET TRADE ACCOUNTS)/
(CURRENT LIABILITIES - CURRENT PORTION OF UNEARNED REVENUE)).
DOCUMENTATION: Execution of Notes, Loan Agreements, Security Agreements,
UCC Financing Statements and all other documentation
required by the Bank in a form satisfactory to the Bank.
BORROWER WILL COMPLY WITH THE FOLLOWING QUARTERLY FINANCIAL COVENANTS:
1. TANGIBLE NET WORTH shall not be less then $10,000,000.
TANGIBLE NET WORTH IS DEFINED AS (SHAREHOLDER'S EQUITY -
INTANGIBLES). NOTE: INTANGIBLES INCLUDE ALL CAPITALIZED
SOFTWARE.
2. TOTAL LIABILITIES TO TANGIBLE NET WORTH shall not exceed
.75 to 1.00. TOTAL LIABILITIES TO TANGIBLE NET WORTH IS
DEFINED AS (TOTAL LIABILITIES MINUS DEFERRED
REVENUE)/(TANGIBLE NET WORTH).
Failure to maintain these covenants will be considered an
event of default under the loan documents.
<PAGE>
Summit Design, Inc.
4/30/1998
Page 4
REPORTING REQUIREMENTS:
- Quarterly financial statements to be submitted within 45
days of quarter end.
- Annual CPA audited financial statements to be submitted
within 90 days of fiscal year end.
- If the Quick Ratio falls to 1.25:1.00 or below: A
Borrower's Certificate will be submitted with each advance,
and a Borrower's Certificate will accompany the monthly AR
and AP agings.
ADVANCE
STRUCTURE: Advances will be limited to the Borrowing Limit when the
Quick Ratio is greater than 1.25:1.00. When the quick ratio
is less than or equal to 1.25:1.00, advances will be
limited to 75% of eligible accounts receivable to 120 days
after the date of invoice.
Disbursements under the line of credit shall terminate on the
earlier occurrence of the date indicated above as the Expiry
Date or the date on which this Bank, in its sole discretion,
determines that there has been a material adverse change in
the financial condition or management of the Borrower, or
determines that there has been any non-compliance with any
term or condition stated herein. Non-compliance with the
conditions and terms of this letter and all other loan
documents will be considered as an event of default,
entitling the Bank to all the default provisions as provided
for in documents evidencing this line of credit.
If the above terms and conditions to extend this credit facility to Summit
Design, Inc. are acceptable to you, please sign and return the Acknowledgment
Copy of this letter on or before May 15, 1998.
<PAGE>
Summit Design, Inc.
4/30/1998
Page 5
We are pleased to provide you this borrowing accommodation and look forward to
serving your banking needs in the future.
Sincerely,
/s/ Ross A. Beaton
Ross A. Beaton
Vice President
BY OREGON STATUTE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED: UNDER
OREGON LAW MOST AGREEMENTS PROMISES AND COMMITMENTS MADE BY LENDERS AFTER
OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY, OR HOUSEHOLD PURPOSE OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER
TO BE ENFORCEABLE.
THE UNDERSIGNED HEREBY ACKNOWLEDGES AND ACCEPTS THIS OFFER TO EXTEND CREDIT
SUBJECT TO THE TERMS AND CONDITIONS STATED ABOVE.
SUMMIT DESIGN, INC.
BY: /s/ C. Albert Koob CFO 4/30/98
----------------------------- -------------------------
Title Date
<PAGE>
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$1,000,000.00 Dated as of: 5/1/98
Summit Design, Inc. ("Borrower")
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
(Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
/X/ revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ('Principal Balance") at one time shall not
exceed $1,000,000.00 .
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender
or order at COMMERCIAL LOAN SERVICING the Principal Balance of this note, with
interest thereon at the rate(s) specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding
may vary from time to time pursuant to the provisions of this note. Subject
to the provisions of this note, Borrower shall have the option from time to
time of choosing to pay interest at the rate or rates and for the applicable
periods of time based on the rate options provided herein; PROVIDED, however,
that once Borrower notifies Lender of the rate option chosen in accordance
with the provisions of this note, such notice shall be irrevocable. The rate
options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as
defined herein.
(a) Definitions. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close; provided, however that when used in
connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period such term
shall also exclude any day on which dealings in U.S. dollar deposits are not
carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR
Interest Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period of
ONE, TWO OR THREE months commencing on the date the LIBOR Borrowing Rate
becomes applicable thereto; PROVIDED, however, that: (i) the first day of
each LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest
Period shall be selected which would extend beyond EXPIRY; (iii) no LIBOR
Interest Period shall extend beyond the date of any principal payment
required under Section 6 of this note, unless the sum of the Prime Rate
Amount, plus LIBOR Amounts with LIBOR Interest Periods ending on or before
the scheduled date of such principal payment, plus principal amounts
remaining unborrowed under a line of credit, equals or exceeds the amount of
such principal payment; (iv) any LIBOR Interest Period which would otherwise
expire on a day which is not a Business Day, shall be extended to the next
succeeding Business Day, unless the result of such extension would be to
extend such LIBOR Interest Period into another calendar month, in which event
the LIBOR Interest Period shall end on the immediately preceding Business
Day; and (v) any LIBOR Interest Period that begins on the last Business Day of
a calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such LIBOR Interest Period) shall end
on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1 %) established by Lender
as its LIBOR Rate, based on Lenders determination, on the basis of such
factors as Lender deems relevant, of the rate of interest at which U.S.
dollar deposits would be offered to U.S. Bank National Association in the
London interbank market at approximately 11 a.m. London time on the date
which is two Business Days prior to the first day of such LIBOR Interest
Period for delivery on the first day of such LIBOR Interest Period for the
number of months therein; provided, however, that the LIBOR Rate shall be
adjusted to take into account the maximum reserves required to be maintained
for Eurocurrency liabilities by banks during each such LIBOR Interest Period
as specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time to
time establishes as its prime rate and is not, for example, the lowest rate
of interest which Lender collects from any borrower or class of borrowers.
When the Prime Rate is applicable under Section 4(b) or 11(b), the interest
rate hereunder shall be adjusted without notice effective on the day the
Prime Rate changes, but in no event shall the rate of interest be higher than
allowed by law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) THE PRIME BORROWING RATE.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime
Rate plus SEE ATTACHED EXHIBIT "A"% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested effective
date (which must be a Business Day) and principal amount of the Advance or
increase in the Prime Rate Amount, and whether Borrower is requesting a new
Advance under a line of credit or conversion of a LIBOR Amount to the Prime
Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the LIBOR Borrowing Rate is in effect.
(c) THE LIBOR BORROWING RATE.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus SEE ATTACHED
EXHIBIT "A"% per annum.
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day.
Borrower may request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR
Amount, at such rate only by giving Lender notice in accordance with Section
4 (c)(iii) before 10:00 a.m. (Portland, Oregon time) on such day.
Page 1 of 4
<PAGE>
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally
and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by, and any written notice
or confirmation of an oral notice shall be signed by, the person(s) authorized
in Section 15 of this note, and shall specify the requested effective date of
the rate, LIBOR Interest Period and LIBOR Amount, and whether Borrower is
requesting a new Advance at the LIBOR Borrowing Rate under a line of credit,
conversion of all or any portion of the Prime Rate Amount to a LIBOR Amount,
or a new LIBOR Interest Period for an outstanding LIBOR Amount.
Notwithstanding any other term of this note, Borrower may elect the LIBOR
Borrowing Rate in the minimum principal amount of $500,000.00 and in
multiples of $100,000.00 above such amount; PROVIDED, however, that no more
than N/A separate LIBOR Interest Periods may be in effect at any one time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable
to Lender or if LIBOR Rate loans become unlawful, the option to select the
LIBOR Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate
is then in effect, (A) it shall terminate automatically with respect to all
LIBOR Amounts (i) on the last day of each then applicable LIBOR Interest
Period, if Lender may lawfully continue to maintain such loans, or (ii)
immediately if Lender may not lawfully continue to maintain such loans
through such day, and (B) subject to Section 11, the Prime Borrowing Rate
automatically shall become effective as to such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation
or administration thereof (i) shall subject Lender or its Eurodollar lending
office to any tax, duty, or other charge, or change the basis of taxation of
payments to Lender with respect to any loans bearing interest based on the
LIBOR Rate, or (ii) shall impose or modify any reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
impose on Lender or its Eurodollar lending office any other condition
affecting any such loans, and (B) the result of any of the foregoing is (i)
to increase the cost to Lender of making or maintaining any such loans or
(ii) to reduce the amount of any sum receivable under this note by Lender or
its Eurodollar lending office, Borrower shall pay Lender within 15 days after
such demand by Lender such additional amount as will compensate Lender for
such increased cost or reduction. The determination hereunder by Lender of
such additional amount shall be conclusive in the absence of manifest error.
If Lender demands compensation under this Section 4(c)(v), Borrower may upon
three (3) Business Days' notice to Lender pay the accrued interest on all
LIBOR Amounts, together with any additional amounts payable under Section
4(c)(vi). Subject to Section 11, upon Borrower's paying such accrued interest
and additional costs, the Prime Borrowing Rate immediately shall be effective
with respect to the unpaid principal balance of such LIBOR Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR
Amount had been funded in the London interbank market) is necessary to
compensate Lender for any direct or indirect losses, expenses, liabilities,
costs, expenses or reductions in yield to Lender, whether incurred in
connection with liquidation or re-employment of funds or otherwise, incurred
or sustained by Lender as a result of: (A) Any payment or prepayment of a
LIBOR Amount, termination of the LIBOR Borrowing Rate or conversion of a
LIBOR Amount to the Prime Borrowing Rate on a day other than the last day of
the applicable LIBOR Interest Period (including as a result of acceleration
or a notice pursuant to Section 4(c)(v)); or (B) Any failure of Borrower to
borrow, continue or prepay any LIBOR Amount or to convert any portion of the
Prime Rate Amount to a LIBOR Amount after Borrower has given a notice thereof
to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London Interbank market. Lender's determination of
the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive
in the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11
will be computed at the applicable rate based on a 360-day year and applied
to the actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) PRINCIPAL. Principal shall be paid:
/x/ on demand.
/ / on demand, or if no demand, on ______.
/ / on ______.
/ / subject to Section 8, in installments of
/ / _____ each, plus accrued interest, beginning on ______
and on the same day of each ______ thereafter until
_______ when the entire Principal Balance plus interest
thereon shall be due and payable.
/ / _____ each, including accrued interest, beginning on ______
and on the same day of each ______ thereafter until
_______ when the entire Principal Balance plus interest
thereon shall be due and payable.
/ / ______.
(b) INTEREST.
(i) Interest on the Prime Rate Amount shall be paid:
/x/ on the 1ST day of JUNE and on the same day of each MONTH.
thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / ______.
(ii) Interest on all LIBOR Amounts shall be paid:
/x/ on the last day of the applicable LIBOR Interest Period,
and if such LIBOR Interest Period is longer than three
months, on the last day of each three month period occurring
during such LIBOR Interest Period, and at maturity.
/ / on the _____ day of _____ and on the same day of each
_____ thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at
maturity.
/ / ______.
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR
Borrowing Rate, except on the last day of the applicable LIBOR Interest
Period.
Page 2 of 4
<PAGE>
(c) Principal prepayments will not postpone the date of or change the
amount of any regularly scheduled payment. At the time of any principal
prepayment, all accrued interest, fees, costs and expenses shall also
be paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note
changes the holder of this note may, from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of such change in rate to an amount holder in
its sole discretion deems necessary to continue amortizing the Principal
Balance at the same rate established by the installment amounts specified in
Section 6(a), whether or not a "balloon" payment may also be due upon
maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under
this Section 8, Borrower understands that, as a result of increases in the
rate of interest the final payment due, whether or not a "balloon" payment,
shall include the entire Principal Balance and interest thereon then
outstanding, and may be substantially more than the installment specified in
Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of
that month.
10. PAYMENT BY AUTOMATIC DEBIT.
/ / Borrower hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments from account number 139-0008-934 at
WASHINGTON SQUARE. If there are insufficient funds in the account to pay the
automatic deduction in full, Lender may allow the account to become
overdrawn, or Lender may reverse the automatic deduction. Borrower will pay
all the fees in the account which result from the automatic deductions,
including any overdraft and non-sufficient funds charges. If for any reason
Lender does not charge the account for a payment, or if an automatic payment
is reversed, the payment is still due according to this note. If the account
is a Money Market Account, the number of withdrawals from that account is
limited as set out in the account agreement. Lender may cancel the automatic
deduction at any time in its discretion.
Provided, however, if no account number is entered above, Borrower does not
want to make payments by automatic debit.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due, (ii)
Borrower fails to perform or comply with any term, covenant or obligation in
this note or any agreement related to this note, or in any other agreement or
loan Borrower has with Lender, (iii) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this note or
perform Borrower's obligations under this note or any related documents, (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished, (v) Borrower dies, becomes insolvent,
liquidates or dissolves, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws, (vi) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender, (vii)
Any of the events described in this default section occurs with respect to
any general partner in Borrower or any guarantor of this note, or any
guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted
not to be, in full force and effect, (viii) There is any material adverse
change in the financial condition or management of Borrower or Lender in good
faith deems itself insecure with respect to the payment or performance of
Borrower's obligations to Lender. If this note is payable on demand, the
inclusion of specific events of default shall not prejudice Lender's right
to require payment on demand or to decline to make any requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire
unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted
under applicable law, increase the interest rate on this note to a rate equal
to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the
maximum rate permitted by applicable law. In addition, if any payment of
principal or interest is 19 or more days past due, Borrower will be charged a
late charge of 5% of the delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records
shall, at any time, be conclusive evidence of the unpaid Principal Balance
and interest owing on this note. Notwithstanding any other provisions of
this note, in the event holder makes Advances hereunder which result in an
unpaid Principal Balance on this note which at any time exceeds the maximum
amount specified in Section 2, Borrower agrees that all such Advances, with
interest, shall be payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1
is a revolving line of credit or a non-revolving line of credit, Borrower
agrees that Lender is under no obligation and has not committed to make any
Advances hereunder. Each Advance hereunder shall be made at the sole option
of the Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges
and agrees that (a) Lender is entitled to demand Borrower's immediate payment
in full of all amount owing hereunder and (b) neither anything to the
contrary contained herein or in any other loan documents (including but not
limited to, provisions relating to defaults, rights of cure, default rate of
interest, installment payments, late charges, periodic review of Borrower's
financial condition, and covenants) nor any act of Lender pursuant to any
such provisions shall limit or impair Lender's right or ability to require
Borrower's payment in full of all amounts owing hereunder immediately upon
Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the
request of Borrower (if an individual), any of the undersigned (if Borrower
consists of more than one individual), any person or persons authorized in
subsection (b) of this Section 15, and any person or persons otherwise
authorized to execute and deliver promissory notes to Lender on behalf of
Borrower.
(b) Borrower hereby authorizes any ________ of the following individuals to
request Advances and to select interest rate options: ________ unless Lender
is otherwise instructed in writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's
account number ________ at ________ branch of Lender, or by cashier's check
issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such
requests. In consideration of Lender agreeing, at its sole discretion, to
make Advances upon such requests, Borrower promises to pay holder, in
accordance with the provisions of this note, the Principal Balance together
with interest thereon and other sums due hereunder, although any Advances may
have been requested by a person or persons not authorized to do so.
16. PERIODIC VIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with
any additional information regarding Borrower's financial condition and
business operations that Lender requests. This information may include but is
not limited to, financial statements, tax returns, lists of assets and
liabilities, agings of receivables and payables, inventory schedules, budgets
and forecasts. If upon review, Lender, in its sole discretion, determines
that there has been a material adverse change in Borrower's financial
condition, Borrower will be in default. Upon default, Lender shall have all
rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage
paid and addressed to Borrower at the last known address of Borrower as shown
on holder's records. If Borrower consists of more than one person,
notification of any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney
regarding the enforcement of any of its rights under this note or any
document securing the same, or if this note is placed in the hands of an
attorney for collection or if suit or litigation is brought to enforce this
note or any document
Page 3 of 4
<PAGE>
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as
attorney fees, including without limitation, costs and attorney fees
incurred in any appellate court, in any proceeding under the bankruptcy code,
or in any receivership and post-judgment attorney fees incurred in enforcing
any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor
or otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and
without diminishing or affecting Lender's rights or Borrower's obligations
hereunder, Lender may deal in any manner with any person who at any time is
liable for, or provides any real or personal property collateral for, any
indebtedness of Borrower to Lender, including the indebtedness evidenced by
this note. Without limiting the foregoing, Lender may, in its sole
discretion: (a) make secured or unsecured loans to Borrower and agree to any
number of waivers, modifications, extensions and renewals of any length of
such loans, including the loan evidenced by this note; (b) impair, release
(with or without substitution of new collateral), fail to perfect a security
interest in, fail to preserve the value of, fail to dispose of in accordance
with applicable law, any collateral provided by any person; (c) sue, fail to
sue, agree not to sue, release, and settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a
court of competent jurisdiction to be illegal, invalid or unenforceable for
any reason whatsoever, such illegality, invalidity or unenforceability shall
not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable, and this note shall be
construed as if such illegal, invalid or unenforceable provision had not been
contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this note or any transaction
of which this note is a part (the "Loan"), be settled by binding arbitration
in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the U.S. Code. All Claims will be
subject to the statutes of limitation applicable if they were litigated.
This provision is void if the Loan, at the time of the proposed submission
to arbitration, is secured by real property located outside of Oregon or
Washington, or if the effect of the arbitration procedure (as opposed to any
Claims of Borrower) would be to materially impair Lender's ability to realize
on any collateral securing the Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000
or more, three neutral arbitrators will decide all issues. All arbitrators
will be active Oregon State Bar members in good standing. All arbitration
hearings will be held in Portland, Oregon. In addition to all other powers,
the arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and
(iv) provisional remedies, including injunction, appointment of receiver,
attachment, claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and enforced
in accordance with the laws of the State of Oregon without regard to
conflicts of law principles; PROVIDED, however, that to the extent that
Lender has greater rights or remedies under Federal law, this provision shall
not be deemed to deprive Lender of such rights and remedies as may be
available under Federal law.
24. DISCLOSURE.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE
NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE
BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED
BY THE LENDER TO BE ENFORCEABLE.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF
THIS DOCUMENT.
SUMMIT DESIGN, INC.
- ------------------------------------ ------------------------------------
Borrower Name (Corporation, Partnership Signature of Individual Borrower
or other Entity)
/s/ C. Albert Koob CFO
- ------------------------------------ ------------------------------------
By Title Signature of Individual Borrower
- ------------------------------------ ------------------------------------
By Title Signature of Individual Borrower
- -------------------------------------------------------------------------------
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. BANK NATIONAL ASSOCIATION
-------------------------------
By:
------------------------------------
Title:
------------------------------------
Date:
------------------------------------
Page 4 of 4
<PAGE>
SUMMIT DESIGN, INC.
"EXHIBIT A"
TO PROMISSORY NOTE DATED MAY 1, 1998
Borrower's interest rate shall be tied to a Pricing Matrix based upon
Borrower's Debt to Tangible Net Worth Ratio.
The Debt to Tangible Net Worth Ratio is defined as: Total Liabilities
minus unearned Revenue DIVIDED BY Shareholders' Equity minus Intangibles.
The interest rate option shall be adjusted quarterly based upon the
following Pricing Matrix:
<TABLE>
<CAPTION>
----------------------------------------------------------------
DEBT TO TANGIBLE NET WORTH PRIME + SPREAD LIBOR + SPREAD
RATIO
----------------------------------------------------------------
<S> <C> <C>
GREATER THAN .50 0 bps 225 bps
0.26 TO 0.50 0 bps 200 bps
LESS THAN 0.26 0 bps 150 bps
----------------------------------------------------------------
</TABLE>
Summit Design, Inc.
/s/ C. Albert Koob CFO 4/30/98
- ---------------------------------------------
signature/title Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,364
<SECURITIES> 0
<RECEIVABLES> 5,870
<ALLOWANCES> 592
<INVENTORY> 0
<CURRENT-ASSETS> 27,282
<PP&E> 4,663
<DEPRECIATION> 1,803
<TOTAL-ASSETS> 33,222
<CURRENT-LIABILITIES> 11,582
<BONDS> 0
0
0
<COMMON> 158
<OTHER-SE> 21,104
<TOTAL-LIABILITY-AND-EQUITY> 33,222
<SALES> 0
<TOTAL-REVENUES> 10,206
<CGS> 0
<TOTAL-COSTS> 489
<OTHER-EXPENSES> 6,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 3,545
<INCOME-TAX> 945
<INCOME-CONTINUING> 2,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,600
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE CONSOLIDATED BALANCE SHEETS AS OF SEP-30-1997, JUN-30-1997 AND
MAR-31-1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 19,859 21,992 17,224
<SECURITIES> 0 0 0
<RECEIVABLES> 6,266 6,364 5,667
<ALLOWANCES> 378 439 449
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 26,245 28,335 22,961
<PP&E> 3,745 4,244 5,099
<DEPRECIATION> 1,837 2,030 2,522
<TOTAL-ASSETS> 29,140 31,805 29,306
<CURRENT-LIABILITIES> 7,790 8,439 12,605
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 139 140 146
<OTHER-SE> 20,269 22,397 15,488
<TOTAL-LIABILITY-AND-EQUITY> 29,140 31,805 29,306
<SALES> 0 0 0
<TOTAL-REVENUES> 6,501 13,620 21,486
<CGS> 0 0 0
<TOTAL-COSTS> 294 599 954
<OTHER-EXPENSES> 5,125 10,230 35,427
<LOSS-PROVISION> 0 60 120
<INTEREST-EXPENSE> 7 9 10
<INCOME-PRETAX> 1,293 3,231 (8,539)
<INCOME-TAX> 80 180 820
<INCOME-CONTINUING> 1,213 3,051 (9,359)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,213 3,051 (9,359)
<EPS-PRIMARY> 0.09 0.22 (0.67)
<EPS-DILUTED> 0.08 0.21 (0.67)
</TABLE>
