<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 September 30, 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: 000-20923
SUMMIT DESIGN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 93-1137888
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
</TABLE>
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 November 11, 1998, the Registrant had outstanding 15,393,609 shares of
Common Stock.
<PAGE>
SUMMIT DESIGN, INC.
INDEX
<TABLE>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997. 3
Condensed Consolidated Statements of Operations for the
three month periods ended September 30, 1998 and 1997 and for
the nine month periods ended September 30, 1998 and 1997 (unaudited). 4
Condensed Consolidated Statements of Cash Flows for
the nine month periods ended September 30, 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 9
PART II OTHER INFORMATION
Item 1 Not Applicable
Item 2 Not Applicable
Item 3 Not Applicable
Item 4 Not Applicable
Item 5 Not Applicable
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
Exhibit Index 30
</TABLE>
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SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 24,662 $ 19,973
Accounts receivable, net..................... 7,654 5,131
Prepaid expenses and other................... 789 540
Deferred income taxes........................ 1,268 1,209
--------- ---------
Total current assets....................... 34,373 26,853
Furniture and equipment, net.................... 3,659 2,698
Intangibles, net................................ 1,252 1,622
Deferred taxes.................................. 555 533
Notes receivable................................ 1,420 565
Deposits and other assets....................... 723 490
--------- ---------
Total assets............................ $ 41,982 $ 32,761
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Long-term debt, current portion.............. 81 $ 134
Capital lease obligation, current portion.... 46 49
Accounts payable............................. 1,746 1,210
Accrued liabilities.......................... 6,642 5,182
Deferred revenue............................. 4,872 5,674
--------- ---------
Total current liabilities.................. 13,387 12,249
Long-term debt, less current portion............ 156 194
Capital lease obligations, less current portion. 8 43
Deferred revenue, less current portion.......... 161 -
--------- ---------
Total liabilities.......................... 13,712 12,486
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized
5,000 shares; no shares issued and outstanding - -
Common stock, $.01 par value. Authorized 30,000
shares; issued and outstanding 15,330 shares at
September 30, 1998 and 15,841 shares
at December 31, 1997. .......................... 153 159
Additional paid-in capital...................... 39,911 51,797
Treasury stock , at cost, 939 shares at
December 31, 1997............................... - (11,555)
Accumulated deficit............................. (11,794) (20,126)
--------- ---------
Total stockholders' equity................. 28,270 20,275
--------- ---------
Total liabilities and stockholders'
equity ................................. $ 41,982 $ 32,761
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product licenses................................. $ 8,705 $ 6,444 $ 25,480 $ 16,951
Maintenance and services......................... 2,518 1,374 6,929 4,300
Other............................................ 91 91 274 358
-------- --------- -------- ---------
Total revenue.................................. 11,314 7,909 32,683 21,609
Cost of revenue:
Product licenses................................. 264 184 748 533
Maintenance and services......................... 268 171 773 423
-------- --------- -------- ---------
Total cost of revenue.......................... 532 355 1,521 956
-------- --------- -------- ---------
Gross profit................................ 10,782 7,554 31,162 20,653
Operating expenses:
Research and development......................... 2,471 1,634 7,278 4,761
Sales and marketing.............................. 3,235 2,705 9,540 7,820
General and administrative....................... 1,160 962 3,602 3,023
In-process technology............................ -- 19,937 -- 19,937
-------- --------- -------- ---------
Total operating expenses....................... 6,866 25,238 20,420 35,541
Income(loss) from operations........................ 3,916 (17,684) 10,742 (14,888)
Other income, net................................... 297 346 789 786
Gain on sale of product line........................ -- 5,569 -- 5,569
-------- --------- -------- ---------
Income(loss) before income taxes.................... 4,213 (11,769) 11,531 (8,533)
Income tax provision................................ 1,180 640 3,199 820
-------- --------- -------- ---------
Net income(loss) .................................. $ 3,033 $(12,409) $ 8,332 $ (9,353)
-------- --------- -------- ---------
-------- --------- -------- ---------
Earnings(loss) per share:
Basic ....................................... $ 0.20 $ (0.86) $ 0.55 $ (0.66)
-------- --------- -------- ---------
-------- --------- -------- ---------
Diluted ...................................... $ 0.19 $ (0.86) $ 0.51 $ (0.66)
-------- --------- -------- ---------
-------- --------- -------- ---------
Number of shares used in computing
Earnings(loss) per share:
Basic ....................................... 15,245 14,456 15,072 14,245
Diluted ....................................... 16,100 14,456 16,208 14,245
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss)..................................... $ 8,332 $(9,353)
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization................... 1,219 635
Loss on asset disposition....................... - (1)
Deferred taxes.................................. (81) (537)
Gain on sale of product line.................... - (5,569)
Write-off of in-process technology.............. - 19,937
Equity in losses and elimination of intercompany
profits of unconsolidated joint venture...... 420 -
Changes in assets and liabilities:
Accounts receivable........................ (2,523) 861
Prepaid expenses and other................. (249) (27)
Accounts payable........................... 536 436
Accrued liabilities........................ 1,460 1,743
Deferred revenue........................... (641) 1,294
Other, net................................. 97 (75)
-------- -------
Net cash provided by operating activities............ 8,570 9,344
-------- -------
Cash flows from investing activities:
Additions to furniture and equipment................. (1,810) (1,266)
Acquisitions, net of cash received................... - (3,819)
Proceeds from sale of product line, net.............. - 4,643
Proceeds from sale of assets......................... - 8
Loan to joint venture................................ (750) -
Notes receivable, net.................. (855) (490)
-------- -------
Net cash used in investing activities............. (3,415) (924)
-------- -------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs...... 1,118 700
Tax benefit of option exercises...................... 875 -
Payments to acquire treasury stock................... (2,330) (11,555)
Principal payments of debt obligations............... (91) (81)
Principal payments of capital lease obligations...... (38) (61)
-------- -------
Net cash used in financing activities............. (466) (10,997)
-------- -------
Increase(decrease) in cash and cash equivalents... 4,689 (2,577)
Cash and cash equivalents, beginning of period............ 19,973 19,801
-------- -------
Cash and cash equivalents, end of period.................. $ 24,662 $17,224
-------- -------
-------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................ $ 3 $ 10
Income taxes.................................... 2,063 104
Supplemental disclosure of non-cash financing activities:
Retirement of treasury stock......................... 11,555 -
Acquisition, net of cash acquired:
Net current assets other than cash acquired.......... - (1,600)
Furniture and equipment.............................. - 377
In-process technology................................ - 19,937
Purchased technology and intangibles................. - 1,772
Stock issued .................................... - (16,667)
Cash used, net of cash acquired...................... - (3,819)
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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<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 nine months ended September 30, 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. ACQUISITION OF PROSOFT OY
On June 30, 1998, the Company acquired ProSoft Oy ("ProSoft"), a Company
located in Finland. ProSoft develops software tools used to verify embedded
systems software prior to the availability of a hardware prototype. The
aggregate consideration for the acquisition (including shares of common stock
reserved for issuance upon exercise of ProSoft options which were exchanged
for options of the Company) was 248,334 shares of common stock. The
transaction was accounted for as a "pooling of interests" in accordance with
generally accepted accounting principles. In compliance with such principles,
the Company's financial statements have been restated to include the accounts
of ProSoft as if the acquisition had occurred at the beginning of the first
period presented. The effect of the combination did not have a material
impact on the net sales and net income of the combined entity.
3. 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. Revenue
from the sale of software licenses is recognized at the later of the time of
shipment or satisfaction of all acceptance terms. 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 three and nine month periods ending
September 30, 1998.
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SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Accounts receivable:
Trade receivables............................... $ 8,079 $ 5,723
Less allowance for doubtful accounts............ (425) (592)
------------------ -----------------
$ 7,654 $ 5,131
------------------ -----------------
------------------ -----------------
Furniture and equipment:
Office furniture equipment ..................... $ 941 $ 596
Computer equipment.............................. 4,999 3,679
Leasehold improvements.......................... 197 66
------------------ -----------------
6,137 4,341
Less: accumulated depreciation and amortization.... (2,478) (1,643)
------------------ -----------------
$ 3,659 $ 2,698
------------------ -----------------
------------------ -----------------
Accrued expenses:
Payroll and related benefits.................... $ 3,565 $ 2,887
Sales and marketing............................. 1,236 435
Accounting and legal............................ 238 260
Federal and state income taxes payable.......... 1,084 819
Sales taxes payable............................. 86 114
Other ......................................... 433 667
------------------ -----------------
Total accrued expenses........................ $ 6,642 $ 5,182
------------------ -----------------
------------------ -----------------
</TABLE>
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SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. RECONCILIATION OF EARNINGS PER SHARE
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>
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 3,033 $(12,409) $ 8,332 $ (9,353)
-------- --------- --------- ---------
-------- --------- --------- ---------
Denominator:
Denominator for basic earnings per share
weighted average shares 15,245 14,456 15,072 14,245
Effect of dilutive securities:
Employee stock options 855 - 1,136 -
-------- --------- --------- ---------
Denominator for diluted earnings per share 16,100 14,465 16,208 14,425
-------- --------- --------- ---------
-------- --------- --------- ---------
Net income per share - basic $ 0.20 $ (0.86) $ 0.55 $ (0.66)
-------- --------- --------- ---------
-------- --------- --------- ---------
Net income per share - diluted $ 0.19 $ (0.86) $ 0.51 $ (0.66)
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
Options to purchase 923,000 and 869,000 shares of common stock at various
prices were outstanding during the three and nine months periods ended
September 30, 1997, respectively, but were not included in the computation of
diluted EPS because their effect on EPS for the three and nine months ended
September 30, 1997, respectively, would have been antidilutive.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either as asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative instrument's fair
value be recognized currently in results of operations unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, The Company does not expect SFAS No. 133 to
have a material impact on its consolidated financial statements.
7. SUBSEQUENT EVENT
On September 20, 1998, the Company entered into a definitive agreement to
acquire OrCAD, Inc. ("OrCAD") a publicly traded software company
headquartered in Beaverton, Oregon. Pursuant to the agreement, each
outstanding share will be exchanged for 1.05 shares of Summit Common Stock
upon the closing of the transaction. In addition, the Company will assume all
options outstanding under OrCAD's stock option plans. The merger, which is
intended to be to accounted for as a pooling of interests, is subject to the
approval of OrCad's and the Company's stockholders and standard closing
conditions.
-8-
<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, Simulation
Technologies Corp. ("SimTech") in September 1997, and ProSoft Oy ("ProSoft")
in June of 1998, 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.
Summit generated net losses in 1993, 1994 and 1995, as a result of investing
heavily in research and development as well as developing a direct sales
channel for new products. In 1996, this investment generated increased
revenues, which resulted in net income. The net loss in 1997 was a result of
a $19.9 million charge for in-process technology related to the SimTech
acquisition. For the nine months ended September 30, 1998, Summit has
continued to increase revenues and operating margins and, as a result, has
generated net income for the period. Summit operates with high gross margins
and, as such, a downturn in revenue could have a significant impact on income
from operations and net income.
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 upon shipment of the product if remaining
vendor obligations are insignificant and collection of the resulting
receivable is probable, otherwise revenue from such vendor obligations is
deferred until such time as vendor obligations are met. 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
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<PAGE>
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 markets. Revenue from product sales through
distributors is recognized net of the associated distributor discounts when
sales to a third party or end user are completed. 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 when the related revenue is
recognized.
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. In April 1998, the joint venture corporation, Summit Asia, which is
headquartered in Korea, was renamed Asia Design Corporation ("ADC"). In May
1998, the Company exchanged a portion of its ownership in ADC for ownership
in another company located in Hong Kong, Summit Design Asia, Ltd. ("SDA").
SDA also acquired an equity investment in ADC. In June 1998, the Company and
Anam each loaned SDA $750,000, which is guaranteed by ADC. SDA acquired from
ADC the exclusive rights to sell, distribute and support the Company's
products in the Asia-Pacific region, excluding Japan. SDA granted
distribution rights to the Company's products to ADC for the Asia Pacific
region, excluding Japan. For the three months ended September 30, 1998 and
1997, sales through SDA and ADC combined accounted for 0.6% and 1.2% of the
Company's revenue, respectively. For the nine months ended September 30, 1998
and 1997, sales through SDA and ADC combined accounted for 2.2% and 2.9% of
the Company's revenue, respectively.
The Company accounts for its ownership interest in SDA and ADC on the equity
method of accounting and, as a result, the Company's pro rata share of the
earnings and losses of SDA and ADC are recognized as income or losses in the
Company's income statement in "Other income (expense), net." The Company does
not expect SDA or ADC to recognize a profit for the foreseeable future and
thus does not expect to recognize income from its investment in SDA or ADC
for the foreseeable future, if at all. There can be no assurance that the
restructuring will result in SDA or ADC becoming profitable or that revenue
attributable to sales in the Asia Pacific region, excluding Japan, will
increase.
Approximately 39%, 26%, 36% and 38% of the Company's total revenue for the
three months ended September 30, 1998 and 1997, and for the nine months ended
September 30, 1998 and 1997, respectively, were attributable to sales made
outside the United States, which includes the Asia Pacific region and Europe.
Approximately 27%, 18%, 23% and 26% of the Company's revenue for the three
months ended September 30, 1998 and 1997, and for the nine months ended
September 30, 1998 and 1997, respectively, were attributable to sales made in
the Asia Pacific region and approximately 12%, 8%, 13% and 12% of the
Company's revenue for the three months ended September 30, 1998 and 1997, and
for the nine months ended September 30, 1998 and 1997, respectively were
attributable to sales made in Europe. 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
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<PAGE>
with respect to the export of certain technologies, collectibility of
accounts receivable, changes in regulatory requirements, difficulties in
staffing and managing foreign operations and extended payment terms. In
addition, financial markets and economies in the Asia Pacific region have
been experiencing adverse economic conditions. While such diverse economic
conditions have not materially adversely affected Summit's sales in the Asia
Pacific region to date, there can be no assurance that the current economic
conditions will not worsen or that demand for Summit's products in such
region will not flatten or decrease in the future.(1)
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 interests" 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. Substantially all of the Company's Design to
Test product license revenue and related maintenance and services revenue for
the three and nine months ended September 30, 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 beginning July 1997, subject to specified
quarterly maximums and certain additional conditions, and $2,000,000 of
maintenance over an eighteen month period beginning July 1997. As of
September 30, 1998, the Company has sold $13.6 million of Visual Testbench
licenses pursuant to this agreement. At the completion of the thirty month
period, under certain conditions, CSC may obtain shared ownership to 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. The Company
subsequently reissued these shares through the exercise of stock options
during the three months ended June 30, 1998. On June 29, 1998, the Company
cancelled this stock repurchase plan.
On June 30, 1998 the Company completed its acquisition of ProSoft. ProSoft
develops software tools used to verify embedded systems software prior to the
availability of a hardware prototype.
- - --------
(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 19 for a
discussion of factors that could affect future performance.
-11-
<PAGE>
The aggregate consideration for the acquisition (including shares of common
stock reserved for issuance upon exercise of ProSoft options which were
exchanged for options of the Company) was 248,334 shares of common stock. The
transaction has been accounted for as a "pooling of interests" in accordance
with generally accepted accounting principles. In compliance with such
principles, the Company's financial statements have been restated to include
the accounts of ProSoft as if the acquisition had occurred at the beginning
of the first period presented.
RECENT DEVELOPMENTS
On September 20, 1998, the Company entered into a definitive agreement to
acquire OrCAD, Inc. ("OrCAD") a publicly traded software company
headquartered in Beaverton, Oregon. Pursuant to the agreement, each
outstanding share of OrCAD Common Stock will be exchanged for 1.05 shares of
Summit Common Stock upon the closing of the transaction. In addition, the
Company will assume all options outstanding under OrCAD's stock option plans.
The merger, which is intended to be accounted for as a pooling of interests
is subject to the approval of OrCAD's and the Company's stockholders and
standard closing conditions.
In addition to the risks stated below in "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock", if the Company's
proposed acquisition of OrCAD (the "Merger") is consummated, the Company's
operating results will be subject to the following additional risks:
UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS AND PRODUCT OFFERINGS.
The successful combination of Summit and OrCAD will require substantial
attention from management. The anticipated benefits of the Merger will not
be achieved unless the operations of OrCAD are successfully combined with
those of Summit in a timely manner. The difficulties of assimilation may be
increased by the need to retain and integrate personnel and to combine
different corporate cultures. The successful combination of the two
companies will also require integration of the companies' information systems
and other infrastructure, integration of the companies' product offerings and
the coordination of their research and development and sales and marketing
efforts. In addition, the process of combining the two organizations could
cause the interruption of, or a loss of momentum in, the activities of either
or both of the companies' businesses and certain customers may defer
purchasing decisions as they evaluate Summit's plans for integrating or
separately supporting the combined company's product offerings.. The
diversion of the attention of management from the day-to day operations of
the combined company or difficulties encountered in the transition and
integration process, could have a material adverse effect on the business,
financial condition and results of operations of the combined company.
Each of Summit and OrCAD has consummated several combinations in recent years
and the Merger, if approved, would be the largest such combination for either
company. The difficulties of integrating Summit's and OrCAD's businesses may
be exacerbated by the size and number of prior business combinations. There
can be no assurance that products, technologies, distribution channels, key
personnel and businesses of previously acquired companies will be effectively
integrated into the combined company's business or product offerings or that
such integration will not adversely affect the combined company's business,
financial condition or results of operations. The failure to integrate such
acquisitions successfully could have a material adverse effect on the
business, financial condition and results of operations of the combined
company.
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER. The negotiation and
implementation of the Merger will result in significant pre-tax expenses to
Summit and OrCAD. Excluding costs associated with combining the operations of
the two companies (which are currently unknown), Summit's and OrCAD's pre-tax
expenses are estimated at approximately $4.5 million, primarily consisting of
financial advisors' fees, employee severance payments, attorney's fees and
accountant fees.(2) There can be no assurance as to the aggregate amount of
such expenses or that unanticipated contingencies will not occur that will
substantially increase the costs of combining the operations of the two
companies. In any event, costs associated with the Merger are expected to
negatively impact results of operations in the quarter in which the Merger
closes, which the Company currently expects will be the fourth quarter of
1998.(2) In addition, it is expected that after the Merger, the combined
company will incur additional significant expenses associated with
integrating the companies, which is not current estimable.
DEPENDENCE ON RETENTION AND INTEGRATION OF KEY EMPLOYEES. The success of the
combined company is dependent, in part, on the retention and integration of
key management, technical , marketing , sales and customer support personnel
of Summit and OrCAD. The success of the combined company will especially
depend on the retention of members of senior management during the
transitional period following the Merger. There can be no assurance that
such executives will remain with the combined company prior to or for any
specified period after the Merger. The loss of such services could adversely
affect the combined company's business and financial results.
- - --------
(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 19 for a discussion of factors that could affect future performance.
-12-
<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 Nine Months Ended
September 30, September 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product licenses.......................... 76.9% 81.5% 78.0% 78.4%
Maintenance and services.................. 22.3 17.4 21.2 19.9
Other .................................. 0.8 1.1 0.8 1.7
----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0
Cost of revenue:
Product licenses.......................... 2.3 2.3 2.3 2.5
Maintenance and services.................. 2.4 2.2 2.4 2.0
----- ----- ----- -----
Total cost of revenue................ 4.7 4.5 4.7 4.5
----- ----- ----- -----
Gross profit......................... 95.3 95.5 95.3 95.5
Operating expenses:
Research and development.................. 21.8 20.6 22.3 22.0
Sales and marketing....................... 28.6 34.2 29.2 36.2
General and administrative (a)(b)........ 10.3 12.2 11.0 14.0
In-process technology..................... - 252.1 - 92.3
----- ----- ----- -----
Total operating expenses............. 60.7 319.1 62.5 164.5
----- ----- ----- -----
Income(loss) from operations................... 34.6 (223.6) 32.8 (69.0)
Other income, net.............................. 2.6 4.4 2.3 3.6
Gain on sale of product line................... - 70.4 0.2 25.8
----- ----- ----- -----
Income(loss) before income taxes............... 37.2 (148.8) 35.3 (39.6)
Income tax provision........................... 10.4 8.1 9.8 3.8
----- ----- ----- -----
Net income(loss) .............................. 26.8% (156.9)% 25.5% (43.4)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
(a) General and administrative expenses for the nine months ended September 30,
1997 include a one-time charge of $379,000 (1.7% of revenue) for costs
relating to the acquisition of TriQuest.
(b) General and administrative expenses for the nine months ended September 30,
1998 include a one-time charge of $227,000 (0.7% of revenue), relating to
the acquisition of ProSoft.
TOTAL REVENUE
Total revenue increased by 43.1% from $7.9 million for the three months ended
September 30, 1997 to $11.3 million for the three months ended September 30,
1998 and total revenue increase by 51.2% from $21.6 million for the nine
months ended September 30, 1997 to $32.7 million for the nine months ended
September 30, 1998. Sales through one distributor accounted for 13.2% and
12.2% of the Company's total revenue for the three months ended September 30,
1998 and 1997, respectively. Sales through the same distributor accounted for
14.0% and 12.8% of the Company's total revenue for the nine months ended
September 30, 1998 and 1997, respectively. Sales to CSC accounted for 22.1%
and 25.2% of the Company's total revenue for the three and nine month periods
ended September 30, 1998, respectively. Such revenue included $2.5 million
and $8.2 million of Visual Testbench license sales made pursuant to the
Company's contract with CSC for the three and nine months ended September 30,
1998, respectively. See "Overview." Sales to CSC accounted for 41.1% of total
revenue for the three months ended September 30, 1997 and 24.9% of the total
revenue for the nine months ended September 30, 1997.
-13-
<PAGE>
REVENUE
PRODUCT LICENSES REVENUE
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 35.1% from $6.4
million for the three months ended September 30, 1997 to $8.7 million for the
three months ended September 30, 1998 and increased 50.3% from $17.0 million
for the nine months ended September 30, 1997 to $25.5 million for the nine
months ended September 30, 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 and nine months ended September 30, 1998.
During the three months ended September 30, 1997, HLDA Plus revenues also
accounted for 100% of product license revenue. During the nine months ended
September 30, 1997, HLDA Plus and Design to Test revenues accounted for 87.9%
and 12.1% of product and license revenue, respectively.
HLDA Plus product license revenue increased 71.0% from $14.9 million for the
nine months ended September 30, 1997 to $25.5 million for the nine months
ended September 30, 1998. The increase was primarily attributable to sales
of Visual Testbench and Visual to CSC, and, to a lesser extent, sales of the
VirSim and VeriCov products that were not shipping in the comparable period
in 1997, and growth in the installed base of HLDA Plus customers. Sales to
the single customer are expected to continue over the next five quarters
pursuant to contractual arrangements with the customer. (2)
MAINTENANCE AND SERVICES REVENUE
The Company's maintenance and services revenue is derived from maintenance
contracts related to the Company's HLDA products, consulting services, and
training classes offered to purchasers of the Company's software products.
Maintenance and services revenue increased 83.3% from $1.4 million for the
three months ended September 30, 1997 to $2.5 million for the three months
ended September 30, 1998, and increased 61.1% from $4.3 million for the nine
months ended September 30, 1997 to $6.9 million for the nine months ended
September 30, 1998. The increase is primarily attributable to maintenance
contracts for Verification products acquired in the SimTech acquisition, a
maintenance contract with one customer, and an increase in the installed base
of HLDA Plus customers over the previous comparable period. Additionally,
such revenue for the nine months ended September 30, 1997 included $1.4
million Design to Test maintenance revenue for which there was no comparable
revenue for the nine months ended September 30, 1998, due to the sale of the
TDS product line as of July 1, 1997.
OTHER REVENUE
Other revenue consists of fees received for granting distribution rights.
Other revenue remained constant at $91,000 for the three months ended
September 30, 1998 and 1997 and decreased 23.5% from $358,000 for the nine
months ended September 30, 1997 to $274,000 for the nine months ended
September 30, 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 a source of other revenue. No material costs were associated
with other revenue for the three and nine months ended September 30, 1998 and
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 19 for
a discussion of factors that could affect future performance.
-14-
<PAGE>
COST OF REVENUE
COST OF PRODUCT LICENSES REVENUE
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs plus the amortization of
purchased technology acquired in the SimTech purchase. The cost of product
licenses revenue increased 43.5% from $184,000 for the three months ended
September 30, 1997 to $264,000 for the three months ended September 30, 1998,
and increased 40.3% from $533,000 for the nine months ended September 30,
1997 to $748,000 for the nine months ended September 30, 1998. This increase
is primarily attributable to amortization of purchased technology included in
the three and nine months ended September 30, 1998 relating to the purchase
of SimTech in September of 1997. As a percentage of product licenses revenue,
the cost of product licenses revenue increased from 2.9% of product licenses
revenue for the three months ended September 30, 1997 to 3.0% of product
licenses revenue for the three months ended September 30, 1998, and decreased
from 3.1% of product licenses revenue for the nine months ended September 30,
1997 to 2.9% of product licenses revenue for the nine months ended September
30, 1998. The 0.1% to 0.2% fluctuation in the cost of product license revenue
as a percent of product license revenue is primarily the result of
incremental changes in fixed costs leveraged across increased product license
revenue.
COST OF MAINTENANCE AND SERVICES REVENUE
Cost of maintenance and services revenue, which consists primarily of
personnel costs for customer support consulting and training classes offered
to purchasers of the Company's products, increased 56.7% from $171,000 for
the three months ended September 30, 1997 to $268,000 for the three months
ended September 30, 1998, and increased 82.7% from $423,000 for the nine
months ended September 30, 1997 to $773,000 for the nine months ended
September 30, 1998. As a percentage of maintenance and services revenue, the
cost of maintenance and services revenue decreased from 12.4% for the three
months ended September 30, 1997 to 10.6% for the three months ended September
30, 1998 and increased from 9.8% for the nine months ended September 30, 1997
to 11.2% for the nine months ended September 30, 1998. The decrease as a
percentage of maintenance and services revenue for the three months ended
September 30, 1998, is due to fixed costs being leveraged over increased
revenue. The increase as a percentage of maintenance and services revenue for
the nine months ended September 30, 1998 is due to the Company operating at
below forecasted staffing levels during the first half of 1997.
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 51.2% from $1.6 million for the three months
ended September 30, 1997 to $2.5 million for the three months ended September
30, 1998 and increased 52.9% from $4.8 million for the nine months ended
September 30, 1997 to $7.3 million for the nine months ended September 30,
1998. As a percentage of total revenue, research and development expenses
increased from 20.7% for the three months ended September 30, 1997 to 21.8%
for the three months ended September 30, 1998, and increased from 22.0% for
the nine months ended September 30, 1997 to 22.3% for the nine months ended
September 30, 1998. The Company's research and development staff increased to
95 at September 30, 1998. This increase is primarily attributable to the
addition of engineers through the acquisition of SimTech in September of 1997
and the hiring of additional engineers, less a decrease of engineers due to
the sale of the TDS product line 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
-15-
<PAGE>
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 19.6% from $2.7 million for the three months
ended September 30, 1997 to $3.2 million for the three months ended September
30, 1998 and increased 22.0% from $7.8 million for the nine months ended
September 30, 1997 to $9.5 million for the nine months ended September 30,
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 34.2% for the three months ended September
30, 1997 to 28.6% for the three months ended September 30, 1998, and
decreased from 36.2% for the nine months ended September 30, 1997 to 29.2%
for the nine months ended September 30, 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
increased 20.6% from $962,000 for the three months ended September 30, 1997,
to $1.2 million for the three months ended September 30, 1998, and increased
19.2% from $3.0 million for the nine months ended September 30, 1997, which
includes $379,000 one-time charge for costs associated with the acquisition
of TriQuest, to $3.6 million for the nine months ended September 30, 1998,
which includes a $227,000 one-time charge for costs associated with the
acquisition of ProSoft. Excluding one-time charges, expenses increased by
$731,000 (27.6%) for the nine months ended September 30, 1998, as compared to
the same period in the prior year. As a percentage of total revenue,
excluding the one time charges, general and administrative expenses decreased
from 12.2% for the three months ended September 30, 1997 to 10.3% for the
three months ended September 30, 1998, and decreased from 12.2% for the nine
months ended September 30, 1997 to 10.3% for the nine months ended September
30, 1998. The decrease as a percentage of total revenue was attributable to
the 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)
ACQUIRED IN-PROCESS TECHNOLOGY
For the three months ended September 30, 1997, $19.9 million of the purchase
price for the acquisition of Simulation Technologies, Corp. ($20.9 million)
was allocated to in-process technology and accordingly, was expensed as of
the acquisition date (September 9, 1997). The amount allocated to the
in-process technology represented the purchased in-process technology that
had not yet reached technological feasibility and had no alternative future
use.
The value assigned to purchased in-process technology was related primarily
to two research projects for which technological feasibility had not been
established, V-CPU ($12.6 million) and HDL Score ($6.6 million). The value
was determined by estimating the costs to develop the purchased in-process
technology into commercially viable products; estimating the resulting net
cash flows from the sale of products resulting from the completion of such
projects; and discounting the net cash flows back to their present value.
The nature of the efforts to develop the purchased in-process technology into
commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the product can be produced to meet its
design specification including function, features and technical performance
requirements. The originally estimated costs to be incurred to develop the
purchased in-process technology into commercially viable products was
approximately $1.8 million. The estimated resulting net cash flows from such
products were based on Summit management's estimates of revenues, cost of
sales, research and development costs, selling, general and administrative
costs, and income taxes from such projects.
The estimated revenues are based on Summit management's estimates of market
size and growth (which are supported by independent market data), expected
trends in technology and the nature and expected timing of new product
introductions by Summit.
Estimated cost of sales are expected to be consistent with Summit's current
cost of sales and future expectations for cost of sales. Sales, marketing and
general administrative costs are expected to be higher than Summit's average
costs in the introduction phase and then stabilize upon introduction at
levels that are expected to be consistent with Summit's expected overall
costs in these areas in future periods. Reserach and development costs are
expected to be higher than Summit's average costs in the introduction and
early phases of product sales and then decline below Summit's average costs
as sales of the products begin to decline. This research and development cost
pattern is consistent with Summit's historical experience through product
life cycles. Income taxes estimates are consistent with Summit's anticipated
tax rate for the foreseeable future. (1)
Discounting the net cash flows back to their present value is based on the
weighted average cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas
of that enterprise. The WACC assumed for SimTech as a corporate enterprise is
23%. The discount rate used in discounting the net cash flows from purchased
in-process technology for V-CPU and HDL Score was 30%. This discount rate
used was higher than the WACC due to the inherent uncertainties in the
estimates described above including the uncertainty surrounding the
successful development of the purchased in-process technology, the useful
life of such technology, the profitability levels of such technology and the
uncertainty of technological advances unknown at the time.
Summit introduced the V-CPU 2.0 hardware/software co-verification product in
the second quarter of 1998, approximately five months later than originally
anticipated. A market requirement for extensive embedded system component
interfaces called bus functional models ("BFM") and instruction set
simulators ("ISS") was underestimated in the introduction schedule resulting
in the aforementioned delay. Summit introduced the HDL Score product in the
second quarter of 1998 approximately four months later than originally
anticipated due to delays in completing the control logic support
functionality that was essential for product introduction to take place.
Although these delays affected the timing of the realization of revenue from
these products as originally estimated by Summit. Summit believes the
aggregate revenue streams originally anticipated from these products will be
realised and that there has been no material change in expected return on
investment related to these products.(2) However, there can be no assurance
that Summit will realize revenue for V-CPU and HDL Score in the amounts
estimated, and actual revenue realized from either or both of these products
may be significantly lower than expected.
- - -----
(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 19 for a discussion of factorsthat could affect future performance.
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are strongly
encouraged to review the section entitled "Additional Risk Factors That Could
Affect Operating Results and Market Price of Stock" commencing on page 19 for
a discussion of factors that could affect future performance.
-16-
<PAGE>
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 SDA and ADC and
foreign exchange rate differences resulting from paying operating expenses of
foreign operations in the local currency. Other income was $346,000 for the
three months ended September 30, 1997 and $297,000 for the three months ended
September 30, 1998 and $786,000 for the nine months ended September 30, 1997
and $789,000 for the nine months ended September 30, 1998. The decrease in
other income was primarily due to declining interest rates on the Company's
cash holdings and a charge for the Company's share of the losses of the Asian
joint venture.
GAIN ON SALE OF TDS PRODUCT LINE
On July 11, 1997 the Company sold substantially all of the assets used in its
business of developing and marketing its Test Development Series "TDS"
Products to Credence Systems Corporation ("CSC") for $5 million. CSC assumed
certain liabilities, including the Company's obligations under TDS
maintenance contracts entered into prior to the closing. The Company has
recorded a gain on the sale of $5,569,000 for the three and nine months ended
September 30, 1997.
INCOME TAX PROVISION
The income tax provision increased from $640,000 for the three months ended
September 30, 1997 to $1.2 million for the three months ended September 30,
1998 and from $820,000 for the nine months ended September 30, 1997 to $3.2
million for the nine months ended September 30, 1998. The provision for the
three and nine months ended September 30, 1997 reflects an effective rate of
5.6% of taxable income and is comprised of federal alternative minimum tax
and Israeli income taxes. In 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 expected
annualized consolidated tax rate for federal, state and foreign taxes of
approximately 28% of taxable income. The difference between the Company's
expected 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 quality issues,
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
marketing and other operating activities based primarily on its expectations
as to future revenue. As a result,
-17-
<PAGE>
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 had recognized the
benefit of its U.S. net operating loss carryforwards and tax credit
carryforwards in its 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, 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. No "Approved
Enterprise" tax benefits had been realized by Summit from its Israeli
operations as of December 31, 1995 since the Israeli operations were still
incurring losses at that time. During 1996, Summit realized income of $1.4
million from its Israeli operations and "Approved Enterprise" tax benefits of
$53,000. During 1997, Summit realized income of $2.7 million from its Israeli
operations and "Approved Enterprise" tax benefits of $702,000. 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. However, 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. 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.
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 September 30,
1998, the Company had approximately $24.7 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
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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
September 30, 1998 the Company had no borrowings outstanding under this line
of credit.
The Company is obligated to lend up to $2.5 million to an independent
software development company pursuant to a secured loan agreement entered
into during July 1997. Borrowings under the agreement bear interest at prime
plus 2%.
As of September 30, 1998, the Company had working capital of approximately
$21.0 million.
Net cash generated by operating activities was approximately $8.6 million and
$9.3 million for the nine months ended September 30, 1998 and 1997,
respectively. Cash generated by operating activities resulted primarily from
profitable operations, and an increase in accrued liabilities partially
offset by an increase in accounts receivable for the nine months ended
September 30, 1998 and primarily from profitable operations plus an increase
in accounts payable, accrued liabilities, deferred revenue and a decrease in
accounts receivable for the nine months ended September 30, 1997.
Net cash used in investing activities was approximately $3.4 million and
$924,000 for the nine months ended September 30, 1998 and 1997, respectively.
Net cash used in investing activities was related to the acquisition of
furniture and equipment and loans to an unconsolidated joint venture and the
software development company pursuant to the July 1997 loan agreement for the
nine months ended September 30, 1998 and was primarily due to the acquisition
of SimTech in September 1997 and the purchase of furniture and equipment less
the cash provided from the sale of the TDS product line for the nine months
ended September 30, 1997.
Net cash used by financing activities was approximately $466,000 and $11.0
million for the nine months ended September 30, 1998 and 1997. For the nine
months ended September 30, 1998 the use of cash was primarily from the
repurchase of common stock, less the issuance of common stock and a tax
benefit from option exercises. For the nine months ended September 30, 1997,
the cash used in financing activities was primarily due to the purchase of
treasury stock less the issuance of common stock.
The Company presently believes that its current cash and cash equivalents,
together with funds expected to be generated from operations, will satisfy
the Company's anticipated working capital, debt service 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
FLUCTUATIONS IN QUARTERLY RESULTS
Summit 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 and the integration of
acquired entities and the incurrence of any large one-time charges as a
result of any acquisitions, product quality, 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.
Summit generated net losses in 1993, 1994 and 1995, as a result of investing
heavily in research and development as well as developing a direct sales
channel for new products. The net loss in 1997 was a result of a $19.9
million charge for in-process technology related to the acquisition of
Simulation Technologies Corp. ("SimTech"). For the nine months ended
September 30, 1998, Summit has continued to increase revenues and operating
margins and, as a result, has generated net income for the period. Summit
operates with high gross margins, and as such, a downturn in revenue could
have a significant impact on income from operations and net income, and could
potentially generate a net loss.
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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 this page for
a discussion of factors that could affect future performance.
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<PAGE>
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, SimTech in September 1997, and ProSoft in June
1998, 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 Plus 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 Plus products. The Company commercially shipped
its first HLDA Plus product, Visual HDL for VHDL, in the first quarter of
1994. For the nine months ended September 30, 1998 and 1997 and the years
ended December 31, 1997, 1996 and 1995, respectively, revenue from HLDA Plus
products and related maintenance contracts represented 100%, 83.7%, 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 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.
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<PAGE>
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 September 30, 1998 the Company had sold
$13.6 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. 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.
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<PAGE>
DEPENDENCE ON ELECTRONICS INDUSTRY MARKET
Because the electronics industry is characterized by rapid technological
change, short product life cycles, fluctuations in manufacturing capacity and
pricing and margin pressures, certain segments, including the computer,
semiconductor, semiconductor test equipment and telecommunications
industries, have experienced sudden and unexpected economic downturns. During
these periods, capital spending is commonly curtailed and the number of
design projects often decreases. Because the Company's sales are dependent
upon capital spending trends and new design projects, negative factors
affecting the electronics industry could have a material adverse effect on
the Company's business, financial condition, 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 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.
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<PAGE>
DEPENDENCE ON DISTRIBUTORS
The Company relies on distributors for licensing and support of its products
outside of North America. Approximately 18%, 34%, 29%, 46% and 42% of the
Company's revenue for the nine months ended September 30, 1998 and 1997and the
years ended December 31, 1997, 1996 and 1995, respectively, were attributable
to sales made through distributors. Effective April 1, 1996 the Company
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. Prior to that date, Anam was an independent distributor of the
Company's products. In April 1998, the joint venture corporation, Summit Asia,
which is headquartered in Korea, was renamed Asia Design Corporation "ADC." In
May 1998, the Company exchanged a portion of its ownership in ADC for
ownership in another company located in Hong Kong, Summit Design Asia, Ltd.
"SDA." SDA also has an equity investment in ADC. In June 1998, the Company and
Anam each loaned SDA $750,000, which is guaranteed by ADC. SDA acquired from
ADC the exclusive rights to sell, distribute and support the Company's
products in the Asia-Pacific region, excluding Japan. SDA granted distribution
rights to the Company's products to ADC for the Asia Pacific region, excluding
Japan. There can be no assurance that this restructuring will result in Summit
Asia or ADC 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 March 1999, 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. Sales through Seiko accounted for 13%, 12%, 14% and 13% of the
Company's total revenue for the three months ended September 30, 1998 and 1997
and for the nine months ended September 30, 1998 and 1997. For the nine months
ended September 30, 1998 and the year ended December 31, 1997, all sales of
the Company's products in the Asia-Pacific region were through Seiko, SDA, ADC
and ATE.
There can be no assurance the relationships with Seiko, SDA, ADC and ATE 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,
SDA, ADC and ATE, 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 36%, 38%, 34%, 50% and 52% of the Company's revenue for the
nine months ended September 30, 1998 and 1997 and the years ended December
31, 1997, 1996 and 1995, respectively, were attributable to sales made
outside the United States, which includes the Asia Pacific region and Europe.
Approximately 27%, 18%, 23% and 26% of the Company's revenue for the three
month ended September 30, 1998 and 1997, and for the nine months ended
September 30, 1998 and 1997, respectively, were attributable to sales made in
the Asia Pacific region and approximately 12%, 8%, 13% and 12% of the
Company's revenue for the three months ended September 30, 1998 and 1997, and
for the nine months ended September 30, 1998 and 1997, respectively, were
attributable to sales made in Europe. 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
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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,
collectibility 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 economies in the
Asia Pacific Region have been experiencing adverse conditions. While such
adverse economic conditions have not materially affected Summit's sales in
the Asia Pacific region to date, there can be no assurance that such adverse
economic conditions will not worsen or that demand for Summit's products in
such region will not flatten or decrease in the future.
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 to effectively manage any such
growth would have a material adverse effect on Summit's business, financial
condition, results of operations or cash flows.
Summit has consummated a series of acquisitions since 1997, including the
acquisition of TriQuest in February 1997, SimTech in September 1997, and
ProSoft in June 1998. As a result of these acquisitions, Summit's operating
expenses have increased and are expected to continue to increase. There can
be no assurance that the integration of TriQuest's, SimTech's, or ProSoft's
business can be successfully completed in a timely fashion, or at all, or
that the revenues from TriQuest, SimTech, and ProSoft 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,
amortization expenses related to goodwill and other intangible assets, and
large one-time charges, which could materially adversely affect the Company'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
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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. No "Approved Enterprise" tax benefits had been realized by Summit
from its Israeli operations as of December 31, 1995 since the Israeli
operations were still incurring losses at that time. During 1996, Summit
realized income of $1.4 million from its Israeli operations and "Approved
Enterprise" tax benefits of $53,000. During 1997, Summit realized income of
$2.7 million from its Israeli operations and "Approved Enterprise" tax
benefits of $702,000. 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. However, 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. 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 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. 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.
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
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<PAGE>
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 September 30, 1998, approximately
$187,000 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 adversely affect the market price of the Common
Stock. In addition, factors such as announcements of technological
innovations or new products by the Company or its competitors, market
conditions in the computer software or hardware industries and quarterly
fluctuations in the Company's operating results may have a significant
adverse effect on the market price of the Company's Common Stock.
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<PAGE>
YEAR 2000
The Year 2000 issue results from computer programs written using two, rather
than four, digits to define the applicable year. These computer programs may
recognize a date using "00" as the year 1900 instead of 2000 and cause system
failures or miscalculations causing material disruptions of business
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business operations.
If Summit, its significant customers, suppliers, service providers and other
related third parties fail to take the necessary steps to correct or replace
these problematic computer programs, the Year 2000 issue could have a
material adverse effect on Summit. Summit cannot, however, quantify the
impact at this time.
Summit has begun upgrading or replacing the software packages underlying
its financial, production, communication, desktop and other systems, as
appropriate, to address the Year 2000 issues. It has also performed an
in-depth analysis of all of its products and begun to modify those that are
not Year 2000 compliant. Moreover, Summit has begun to contact all major
external third parties that provide products and services to Summit to assess
their readiness for the Year 2000.
Management believes it has completed the review and assessment phase of
affected systems within Summit and those which are external to Summit. This
assessment indicated that most of Summit's significant internal information
systems could be affected by the Year 2000 issue, and that Summit could be
negatively impacted by non-compliance of related third parties. In addition,
this assessment concluded that certain of Summit's products were also at risk.
Summit has begun the remediation phase of Summit's internal information
technology systems and has set July 1999 as the target for Year 2000
compliance of all of Summit's internal information technology systems.
Summit's internal information technology systems include Summit's finance
systems and those systems used in the research and development of Summit's
products.
Summit's products are subject to periodic upgrades. These upgrades are
typically released to end-users once a year. Summit intends to modify its
products, as required, in order to make such products Year 2000 compliant by
July 1999.
Summit is currently in the process of creating contingency plans for its
internal information technology systems and products. These contingency plans
are expected to be in place by July 31, 1999. In the event Summit's
information technology systems and/or products are not Year 2000 compliant by
July 31, 1999, Summit will decide at that time whether to implement the
necessary contingency plan(s).
Summit has queried its important suppliers and service providers and is
presently obtaining assurances and verification from those selected third
parties that they are or will be Year 2000 compliant. The inability of those
parties to complete their Year 2000 resolution process could materially
impact Summit. The effects of non-compliance by third parties where no system
interface exists is not determinable.
Summit will determine whether a contingency plan is necessary in relation
to third parties with whom Summit has material relationships once the
assessment of these third parties' Year 2000 compliance is complete. It is
anticipated that third party assessment will be complete by July 31, 1999.
Subsequent to performing the above steps, Summit will make certain
investments in systems, applications and products to address Year 2000
issues. Summit has not tracked internal resources dedicated to the resolution
of the Year 2000 issue and, therefore, is unable to quantify internal costs
incurred to date that are associated with the Year 2000 issue. Summit has,
however, hired external consultants to resolve internal information system
issues related to the resolution of the Year 2000 issue. Identifiable
expenditures for these investments were approximately $170,000 through June
30,1998. These expenditures are not expected to be material in the future.
Investments to address the Year 2000 issue have been, and are expected to be,
funded through cash generated from operations.
Summit's plans to complete the Year 2000 modifications are based upon
management's best estimates, which were derived utilizing numerous
assumptions of future events including continued availability of certain
resources, and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include the availability and cost of personnel trained in this area, and the
ability to locate and correct all relevant computer codes.
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<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On September 30, 1998, the Company filed a report on Form 8-K
dated September 20, 1998 in conjunction with the execution of a
definitive Agreement to acquire OrCAD.
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<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: November 13, 1998
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<PAGE>
EXHIBIT INDEX
EXHIBIT 27.1 Financial Data Schedule
-30-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND THE RELATED STATEMENTS OF
INCOME AND CASH FLOWS FOR THE RESPECTIVE PERIOD THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,662
<SECURITIES> 0
<RECEIVABLES> 8,079
<ALLOWANCES> 425
<INVENTORY> 0
<CURRENT-ASSETS> 34,373
<PP&E> 6,137
<DEPRECIATION> 2,478
<TOTAL-ASSETS> 41,982
<CURRENT-LIABILITIES> 13,387
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 28,117
<TOTAL-LIABILITY-AND-EQUITY> 41,982
<SALES> 0
<TOTAL-REVENUES> 32,683
<CGS> 0
<TOTAL-COSTS> 1,521
<OTHER-EXPENSES> 20,420
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 11,531
<INCOME-TAX> 3,199
<INCOME-CONTINUING> 8,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,332
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.51
</TABLE>
