<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 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)
DELAWARE 93-1137888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 August 11, 1998, the Registrant had outstanding 15,237,624 shares of
Common Stock.
<PAGE>
6/30/98
SUMMIT DESIGN, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997. 3
Consolidated Statements of Operations for the three month
periods ended June 30, 1998 and 1997 and for the six month
periods ended June 30, 1998 and 1997 (unaudited). 4
Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1998 and 1997 (unaudited). 5
Notes to 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 Changes in Securities and Use of Proceeds 28
Item 3 Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Not Applicable
Item 6 Exhibits and Reports on Form 8-K 29
Signature 30
Exhibit Index 31
Restatement of Financial Statements and Changes to Certain Information
The Registrant previously announced that it would revise the accounting
treatment of its September 1997 acquisition of Simulation Technologies Corp.
in response to comments received from the Securities and Exchange Commission.
Accordingly, this Quarterly Report on Form 10-Q/A is being filed as Amendment
No. 2 to the Registrant's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on August 14, 1998 for the purpose of
restating financial information and related disclosures for the three and six
month periods ended June 30, 1998. See Note 1 to the Condensed Consolidated
Financial Statements.
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<PAGE>
SUMMIT DESIGN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Restated) (Restated)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 24,768 $ 19,973
Accounts receivable, net........................ 5,672 5,131
Prepaid expenses and other...................... 323 540
Deferred income taxes........................... 1,268 1,209
------------- -----------------
Total current assets....................... 32,031 26,853
Furniture and equipment, net......................... 3,208 2,698
Intangibles, net..................................... 4,220 5,571
Goodwill, net........................................ 3,118 3,493
Deposits and other assets............................ 1,649 1,055
------------- -----------------
Total assets.......................... $ 44,226 $ 39,670
------------- -----------------
------------- -----------------
LIABILITIES
Current liabilities:
Note payable to bank............................ $ - $ -
Long-term debt, current portion................. 151 134
Capital lease obligation, current portion....... 42 49
Accounts payable................................ 1,307 1,211
Accrued liabilities............................. 6,248 5,182
Deferred revenue................................ 5,462 5,674
------------- -----------------
Total current liabilities.................. 13,210 12,250
Long-term debt, less current portion................. 156 194
Capital lease obligations, less current portion...... 24 43
Deferred revenue, less current portion............... 175 -
Deferred taxes....................................... 965 987
------------- -----------------
Total liabilities.......................... 14,530 13,474
------------- -----------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized 30,000 shares; issued and
outstanding 15,213 shares at June 30, 1998 and
15,841 shares at December 31, 1997.................. 152 159
Additional paid-in capital.......................... 40,507 51,412
Treasury stock, at cost, 939 shares at
December 31, 1997................................... - (11,555)
Accumulated deficit................................. (10,963) (13,820)
------------- -----------------
Total stockholders' equity................ 29,696 26,196
------------- -----------------
Total liabilities and stockholders'
equity............................ $ 44,226 $ 39,670
------------- -----------------
------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
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<PAGE>
SUMMIT DESIGN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
------------------------ -------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Product licenses................... $ 8,574 $ 5,611 $ 16,775 $ 10,507
Maintenance and services........... 2,347 1,444 4,411 2,926
Other.............................. 91 125 183 267
-------- -------- --------- ---------
Total revenue................. 11,012 7,180 21,369 13,700
Cost of revenue:
Product licenses................... 118 164 311 349
Maintenance and services........... 279 142 504 252
Amortization of purchased
technologies...................... 166 - 331 -
-------- -------- --------- ---------
Total cost of revenue......... 563 306 1,146 601
-------- -------- --------- ---------
Gross profit............. 10,449 6,874 20,223 13,099
Operating expenses:
Research and development........... 2,978 1,675 5,907 3,127
Sales and marketing................ 3,258 2,584 6,306 5,115
General and administrative......... 1,307 881 2,369 2,061
Amortization of intangibles
and goodwill...................... 697 1,395
-------- -------- --------- ---------
Total operating expenses...... 8,240 5,140 15,977 10,303
Income from operations.................. 2,209 1,734 4,246 2,796
Other income (expense), net............. 204 229 492 440
-------- -------- --------- ---------
Income before income taxes.............. 2,413 1,963 4,738 3,236
Income tax provision.................... 958 100 1,881 180
-------- -------- --------- ---------
Net income.............................. $ 1,455 $ 1,863 $ 2,857 $ 3,056
-------- -------- --------- ---------
-------- -------- --------- ---------
Earnings per share:
Basic......................... $ 0.10 $ 0.13 $ 0.19 $ 0.22
-------- -------- --------- ---------
-------- -------- --------- ---------
Diluted....................... $ 0.09 $ 0.12 $ 0.18 $ 0.20
-------- -------- --------- ---------
-------- -------- --------- ---------
Number of shares used in computing
earnings per share:
Basic......................... 15,058 14,167 14,984 14,137
Diluted....................... 16,285 14,965 16,240 15,000
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
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<PAGE>
SUMMIT DESIGN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997
-------- ---------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 2,857 $ 3,056
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 2,262 403
Amortization of future contingent share liability....... 1,100 -
Loss on asset disposition............................... - 1
Deferred taxes.......................................... (81) -
Equity in losses and elimination of intercompany
profits of unconsolidated joint venture.............. 350 -
Changes in assets and liabilities:
Accounts receivable..................................... (541) (354)
Prepaid expenses and other.............................. 216 47
Accounts payable........................................ 97 155
Accrued liabilities..................................... 1,066 165
Deferred revenue........................................ (37) (370)
Other, net.............................................. 131 104
-------- -------
Net cash provided by operating activities.................. 7,420 3,207
-------- -------
Cash flows from investing activities:
Additions to furniture and equipment....................... (1,045) (751)
Loan to joint venture...................................... (750) -
Notes receivable, net...................................... (325) (425)
-------- -------
Net cash used in investing activities................... (2,120) (1,176)
-------- -------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs............ 1,046 303
Tax benefit of option exercises............................ 825 -
Payments to acquire treasury stock......................... (2,329) -
Principal payments of debt obligations..................... (21) (81)
Principal payments of capital lease obligations............ (26) (49)
-------- -------
Net cash (used in) provided by financing activities..... (505) 173
-------- -------
Increase in cash and cash equivalents................... 4,795 2,204
Cash and cash equivalents, beginning of period.................. 19,973 19,801
-------- -------
Cash and cash equivalents, end of period........................ $ 24,768 $22,005
-------- -------
-------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3 $ 9
Income taxes 667 38
Supplemental disclosure of non-cash financing activities:
Retirement of treasury stock $ 11,555 $ -
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
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<PAGE>
SUMMIT DESIGN, INC.
Notes to 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/A filed for December 31, 1997.
After discussion with the staff of the Securities and Exchange Commission
(the "staff") the condensed consolidated financial statements as of June 30,
1998 and for the three and six months ended June 30, 1998 have been restated
to reflect a change in the original accounting treatment related to the
September 1997 acquisition of Simulation Technologies Corp. ("SimTech").
The Company allocated amounts to IPR&D and intangible assets in the third
quarter of 1997 in a manner consistent with widely recognized appraisal
practices and in consultation with their independent accountants
PricewaterhouseCoopers LLP at the date of the acquisition of SimTech.
Subsequent to the acquisition, the SEC staff expressed views that took issue
with certain appraisal practices generally employed in determining the fair
value of the IPR&D that was the basis for measurement of the Company's IPR&D
charge. The charge of $19.9 million, originally reported, was based upon the
work of an independent valuation firm that utilized methodologies the SEC has
since announced it does not consider appropriate.
As a result of computing IPR&D using the SEC preferred methodology, the
Company, in consultation with their independent accountants, has revised the
amount originally allocated to IPR&D. In addition, Summit adjusted the
discount on common shares paid to SimTech shareholders from 28% to 10% and
allocated $4.4 million of the purchase price, associated with certain shares,
to contingent compensation. The Company has reduced the amount originally
allocated to IPR&D from $19.9 million to $11.7 million and increased the
amounts allocated to purchased technology, identifiable intangibles, deferred
tax liability, and goodwill from $1.0 million to $2.4 million, $1.0 million
to $4.1 million, $0 to $1.3 million and $0 to $3.8 million, respectively.
These amounts are being amortized on a straight line basis over periods
ranging from two to five years. The $4.4 million allocated to compensation
will be recorded as expense as the employment obligation lapses.
The restatement does not affect previously reported net cash flows for the
periods. The effect of this reallocation on previously reported condensed
consolidated financial statements as of and for the three and six months
ended June 30, 1998 is as follows (in thousands except per share amounts,
unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Statements of Operations: As Reported Restated As Reported Restated
------------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Cost of revenues $ 484 $ 563 $ 989 $ 1,146
Gross margin 10,528 10,449 20,380 20,223
Operating expenses 7,029 8,240 13,554 15,977
Income from operations 3,499 2,209 6,826 4,246
Net income 2,662 1,455 5,299 2,857
Net income per share
Basic $0.18 $0.10 $0.35 $0.19
Diluted $0.16 $0.09 $0.33 $0.18
June 30, 1998 December 31, 1997
Balance Sheets: As Reported Restated As Reported Restated
------------- --------- ------------ ----------
Noncurrent assets $ 6,788 $ 12,195 $ 5,908 $ 12,817
Total assets 38,819 44,226 32,761 39,670
Deferred tax liability 0 965 0 987
Accumulated deficit (14,827) (10,963) (20,126) (13,820)
Total shareholders' equity 25,116 29,696 20,275 26,196
</TABLE>
The results of operations for the six months ended June 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 six month periods ending June
30, 1998.
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<PAGE>
SUMMIT DESIGN, INC.
Notes To Consolidated Financial Statements
(Unaudited)
4. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
Accounts receivable:
Trade receivables........................... $ 6,061 $ 5,723
Less allowance for doubtful accounts........ (389) (592)
--------- ----------
$ 5,672 $ 5,131
--------- ----------
--------- ----------
Furniture and equipment:
Office furniture equipment.................. $ 930 $ 596
Computer equipment.......................... 4,377 3,679
Leasehold improvements...................... 79 66
--------- ----------
5,386 4,341
Less: accumulated depreciation and amortization.. (2,178) (1,643)
--------- ----------
$ 3,208 $ 2,698
--------- ----------
--------- ----------
Accrued expenses:
Payroll and related benefits................ $ 3,369 $ 2,888
Sales and marketing......................... 985 435
Accounting and legal........................ 226 260
Federal and state income taxes payable...... 1,260 819
Sales taxes payable......................... 76 114
Other....................................... 332 666
--------- ----------
Total accrued expenses................. $ 6,248 $ 5,182
--------- ----------
--------- ----------
</TABLE>
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<PAGE>
SUMMIT DESIGN, INC.
Notes To 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 Six months ended
June 30, June 30,
------------------ --------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,455 $ 1,863 $ 2,857 $ 3,056
--------- --------- --------- --------
--------- --------- --------- --------
Denominator:
Denominator for basic earnings per share
weighted average shares 15,058 14,167 14,984 14,137
Effect of dilutive securities:
Employee stock options 1,227 798 1,256 863
--------- --------- --------- --------
Denominator for diluted earnings per share 16,285 14,965 16,240 15,000
--------- --------- --------- --------
--------- --------- --------- --------
Net income per share - basic $ 0.10 $ 0.13 $ 0.19 $ 0.22
--------- --------- --------- --------
--------- --------- --------- --------
Net income per share - diluted $ 0.09 $ 0.12 $ 0.18 $ 0.20
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivitive
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivitive instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivitive 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.
-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 previously announced it would revise the accounting treatment of its
September 1997 acquisition of SimTech in response to comments received from
the Securities and Exchange Commission. The following discussion includes all
changes that have been made related to the restatement.
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.
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer training. Revenue from the sale of
software licenses is recognized at the later of the time of shipment or
satisfaction of all acceptance terms. Maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement, which is
typically 12 months. Revenue from customer training
-9-
<PAGE>
is recognized when the service is performed. Revenue earned on software
arrangements involving multiple elements is allocated to each element based
on vendor-specific objective evidence (VSOE) of the fair value of the various
elements within the arrangement. The Company sells its products through a
direct sales force in North America and selected European countries and
through distributors in the Company's other international markets. Revenue
from product sales through distributors is recognized net of the associated
distributor discounts. Fees received for granting distribution rights are
deferred and recognized ratably over the term of the distribution agreement.
Although the Company has not adopted a formal return policy, the Company
generally reimburses customers in full for returned products. Estimated sales
returns are recorded upon delivery of the product.
The Company's products have a range of prices which depend on platform, HDL
language, functionality and duration of license. In addition, the Company's
products perform a variety of functions, certain of which are, and in the
future may be, offered as separate products or discrete point solutions by
the Company's existing and future competitors. For example, certain companies
currently offer design entry products without simulators. There can be no
assurance that such competition will not cause the Company to offer point
solutions instead of, or in addition to, the Company's current software
products. Such point solutions would be priced lower than the Company's
current product offerings and could cause the Company's average selling
prices to decrease. Accordingly, based on these and other factors, the
Company expects that average selling prices for its products may continue to
fluctuate in the future.
The Company entered into a joint venture with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Design Asia, Ltd.
("Summit Asia")) acquired exclusive rights to sell, distribute and support
all of Summit's products in the Asia-Pacific region, excluding Japan. Prior
to that date, Anam was an independent distributor of the Company's products
in Korea. 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 June 30, 1998 and 1997, sales through SDA
and ADC combined accounted for 3.1% and 3.9% of the Company's revenue,
respectively. For the six months ended June 30, 1998 and 1997, sales through
SDA and ADC combined accounted for 4.5% and 10.1% 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 38%, 38%, 35% and 45% of the Company's total revenue for the
three months ended June 30, 1998 and 1997, and for the six months ended June
30, 1998 and 1997, respectively, were attributable to sales made outside the
United States. The decline in the percentage of revenue from sales made
outside the United States in 1998 is primarily the result of (1) domestic
sales to one customer, (2) the loss of Design to Test product sales in the
last half of 1997 as a result of the sale of the product line, which had a
strong international market, and (3) the addition of revenue from products
acquired in the SimTech acquisition which had a principally domestic market.
The Company expects that international revenue will continue to represent a
significant portion of its total revenue. The Company's international
revenue is currently denominated in U.S. dollars. As a result, increases in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less
competitive in
-10-
<PAGE>
those markets. The Company pays the expenses of its international operations
in local currencies and does not engage in hedging transactions with respect
to such obligations. International sales and operations are subject to
numerous risks, including tariff regulations and other trade barriers,
requirements for licenses, particularly with respect to the export of certain
technologies, collectability of accounts receivable, changes in regulatory
requirements, difficulties in staffing and managing foreign operations and
extended payment terms.(1)
On February 28, 1997, Summit completed its acquisition of TriQuest. 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 six months ended June 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 June
30, 1998, the Company has sold $11.4 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 1,256,800 shares of Summit common
stock, 723,200 options to purchase 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.
After discussion with the staff of the Securities and Exchange Commission
(the "staff") the condensed consolidated financial statements as of June 30,
1998 and for the three and six months ended June 30, 1998 have been restated
to reflect a change in the original accounting treatment related to the
September 1997 acquisition of SimTech.
The Company allocated amounts to IPR&D and intangible assets in the third
quarter of 1997 in a manner consistent with widely recognized appraisal
practices and in consultation with their independent accountants
PricewaterhouseCoopers LLP at the date of the acquisition of SimTech.
Subsequent to the acquisition, the SEC staff expressed views that took issue
with certain appraisal practices generally employed in determining the fair
value of the IPR&D that was the basis for measurement of the Company's IPR&D
charge. The charge of $19.9 million, originally reported, was based upon the
work of an independent valuation firm that had utilized the methodologies the
SEC has since announced it does not consider appropriate.
As a result of computing IPR&D using the SEC preferred methodology, the
Company, in consultation with their independent accountants, has revised the
amount originally allocated to IPR&D from $19.9 million to $11.7 million. In
addition, Summit adjusted the discount on common shares paid to SimTech
shareholders from 28% to 10% and allocated $4.4 million of the purchase
price, associated with certain shares, to contingent compensation. The
Company has reduced the amount originally allocated to IPR&D and increased
the amounts allocated to purchased technology, identifiable intangibles,
deferred tax liability, and goodwill from $1.0 million to $2.4 million, $1.0
million to $4.1 million, $0 to $1.3 million and $0 to $3.8 million,
respectively. These amounts are being amortized on a straight line basis over
periods ranging from two to five years. The $4.4 million allocated to
compensation will be recorded as expense as the employment obligation lapses.
The restatement does not affect previously reported net cash flows for the
periods.
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 ($8.1 million) and HDL Score ($3.1 million). The value was
determined by estimating the 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 Company then estimated the stage of
completion of the products at the date of the acquisition based on the code
that had been completed at the date of acquisition as compared to total
estimated code at completion. The percentages derived from such calculation
were then applied to the net present value of future cash flows to determine
the in-process technology charge.
Summit released the commercial version of the V-CPU hardware/software
coverification product in the first quarter of 1998, consistent with
expectations at the time of the acquisition. 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 and has caused delays in initial sales of the product.
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. For 1998, the Company estimates that
revenues from the sales of the products acquired in connection with the
SimTech acquisition will fall short of forecast by 10%. (2) The Company's
forecast of revenues for 1999 reflects that the shortfall of revenues in 1998
related to HDL Score will be realized in 1999 and that V-CPU will have
revenues that are approximately 50% of those originally estimated due to the
delays in availability of BFM's and ISS's. (2) 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 realized 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)
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.
- ------------------
(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.
(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.
-11-
<PAGE>
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 Oy
("ProSoft"). 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
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.
-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 Six Months Ended
June 30, June 30,
--------------------- -------------------
1998 1997 1998 1997
------ ------ ------ -----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Product licenses . . . . . . . . . . . . 77.9% 78.1% 78.5% 76.7%
Maintenance and services . . . . . . . . 21.3 20.1 20.6 21.4
Other. . . . . . . . . . . . . . . . . . 0.8 1.8 0.9 1.9
----- ----- ----- -----
Total revenue . . . . . . . . . . . 100.0 100.0 100.0 100.0
Cost of revenue:
Product licenses . . . . . . . . . . . . 1.1 2.3 1.5 2.6
Maintenance and services . . . . . . . . 2.5 2.0 2.4 1.8
Amortization of developed technologies . 1.5 - 1.5 -
----- ----- ----- -----
Total cost of revenue . . . . . . . 5.1 4.3 5.4 4.4
----- ----- ----- -----
Gross profit. . . . . . . . . . . . 94.9 95.7 94.6 95.6
Operating expenses:
Research and development . . . . . . . . 27.0 23.3 27.6 22.8
Sales and marketing. . . . . . . . . . . 29.6 36.0 29.5 37.3
General and administrative (a)(b). . . . 11.9 12.3 11.1 15.1
Amortization of intangibles and
goodwill. . . . . . . . . . . . . . . . 6.3 6.5 -
----- ----- ----- -----
Total operating expenses. . . . . . 74.8 71.6 74.7 75.2
----- ----- ----- -----
Income from operations . . . . . . . . . . . . . . 20.1 24.1 19.9 20.4
Other income (expense), net. . . . . . . . . . . . 1.8 3.2 2.3 3.2
----- ----- ----- -----
Income before income taxes . . . . . . . . . . . . 21.9 27.3 22.2 23.6
Income tax provision . . . . . . . . . . . . . . . 8.7 1.4 8.8 1.3
----- ----- ----- -----
Net income . . . . . . . . . . . . . . . . . . . . 13.2% 25.9% 13.4% 22.3%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
(a) General and administrative expenses for the six months ended June 30, 1997
include a one-time charge of $379,000 (5.8% of revenue) for costs relating
to the acquisition of TriQuest.
(b) General and administrative expenses for the three and six months ended June
30, 1998 include a one-time charge of $227,000 (2.1% of revenue and 1.1% of
revenue, respectively), relating to the acquisition of ProSoft.
TOTAL REVENUE
Total revenue increased by 53.4% from $7.2 million for the three months ended
June 30, 1997 to $11.0 million for the three months ended June 30, 1998 and
total revenue increase by 56.0% from $13.7 million for the six months ended
June 30, 1997 to $21.4 million for the six months ended June 30, 1998.
Although total revenue increased for the three and six months ended June 30,
1998 from the comparable periods in 1997, the Company experienced a softening
in sales order rates during the three months ended June 30, 1998. Sales
through one distributor accounted for 14.1% and 11.3% of the Company's total
revenue for the three months ended June 30, 1998 and 1997, respectively.
Sales through one distributor accounted for 13.7% and 13.4% of the Company's
total revenue for the six months ended June 30, 1998 and 1997, respectively.
Sales to CSC accounted for 23.2% and 27.0% of the Company's total revenue for
the three and six month periods ended June 30, 1998, respectively. Such
revenue included $2.3 million and $5.2 million of Visual Testbench license
sales made pursuant to the Company's contract with CSC for the three and six
months ended June 30, 1998, respectively. See "Overview." Sales to one
customer accounted for 28.1% of total revenue for the three months ended June
30, 1997 and 15.5% of the total revenue for the six months ended June 30,
1997.
-13-
<PAGE>
REVENUE
PRODUCT LICENSES
The Company's product licenses revenue is derived from license fees from the
Company's HLDA Plus products and additionally from Design to Test products
through June 30, 1997. Product licenses revenue increased by 52.8% from $5.6
million for the three months ended June 30, 1997 to $8.6 million for the
three months ended June 30, 1998 and increased 59.7% from $10.5 million for
the six months ended June 30, 1997 to $16.8 million for the six months ended
June 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 six months ended June 30, 1998. During the three
months ended June 30, 1997, HLDA Plus and Design to Test revenues accounted
for 82.9% and 17.1% of product license revenue, respectively. During the six
months ended June 30, 1997, HLDA Plus and Design to Test revenues accounted
for 80.4% and 19.6% of product and license revenue, respectively.
HLDA Plus license revenue increased 31.4% from $4.7 million for the three
months ended June 30, 1997 to $6.1 million for the three months ended June 30,
1998, and increased 49.8% from $8.5 million for the six months ended June 30,
1997 to $12.7 million for the six months ended June 30, 1998. The increase in
HLDA Plus license revenue over the same period in 1997 was primarily
attributable to sales to a single customer, revenue from the verification
products portfolio that was not shipping in the comparable period in 1997,
and growth in the installed base of HLDA Plus customers. Sales to the single
customer are expected to continue over the next six quarters pursuant to
contractual arrangements with the customer.(1)
MAINTENANCE AND SERVICES
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 62.5% from $1.4 million for the
three months ended June 30, 1997 to $2.3 million for the three months ended
June 30, 1998, and increased 50.8% from $2.9 million for the six months ended
June 30, 1997 to $4.4 million for the six months ended June 30, 1998. The
increase is primarily attributable to maintenance contracts for Verification
products acquired in the SimTech acquisition, a maintenance contract with one
customer, an increase in the installed base of HLDA Plus customers over the
previous comparable period, partially offset by a decrease of Design to Test
maintenance revenue of $695,000 and $1.4 million for the three and six months
ended June 30, 1998, respectively, due to the sale of the TDS product line.
OTHER
Other revenue consists of fees received for granting distribution rights.
Other revenue decreased 27.2% from $125,000 for the three months ended June
30, 1997 to $91,000 for the three months ended June 30, 1998 and decreased
31.5% from $267,000 for the six months ended June 30, 1997 to $183,000 for
the six months ended June 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 six months ended June
30, 1998 and 1997.
- ----------------------
(1) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing
on page 19 for a discussion of factors that could affect future performance.
-14-
<PAGE>
COST OF REVENUE
PRODUCT LICENSES
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs plus the amortization of
purchased technology acquired in the SimTech purchase. The cost of product
licenses revenue decreased 28.0% from $164,000 for the three months ended
June 30, 1997 to $118,000 for the three months ended June 30, 1998, and
decreased 10.9% from $349,000 for the six months ended June 30, 1997 to
$311,000 for the six months ended June 30, 1998. This decrease is primarily
attributable to amortization of purchased technology included in the three
and six months ended June 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 decreased from 2.9% of product licenses revenue for
the three months ended June 30, 1997 to 1.4% of product licenses revenue for
the three months ended June 30, 1998, and decreased from 3.3% of product
licenses revenue for the six months ended June 30, 1997 to 1.9% of product
licenses revenue for the six months ended June 30, 1998. This decrease was
primarily due to leveraging fixed costs across increased product licenses
revenue.
MAINTENANCE AND SERVICES
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 96.5% from $142,000 for
the three months ended June 30, 1997 to $279,000 for the three months ended
June 30, 1998, and increased 100.0% from $252,000 for the six months ended
June 30, 1997 to $504,000 for the six months ended June 30, 1998. As a
percentage of maintenance and services revenue, the cost of maintenance and
services revenue increased from 9.8% for the three months ended June 30, 1997
to 11.9% for the three months ended June 30, and increased from 8.6% for the
six months ended June 30, 1997 to 11.4% for the six months ended June 30,
1998. This increase as a percentage of maintenance and services revenue for
the three and six months ended June 30, 1998 is due to the Company operating
at below forecasted staffing levels during the first half of 1997.
AMORTIZATION OF PURCHASED TECHNOLOGIES
The Company recorded $2.4 million of purchased technologies (intangibles) as
part of the SimTech acquisition which are being amortized to cost of revenue
on a straight line basis over periods ranging from two to five years
beginning September 9, 1997. The Company expensed $166,000 and $331,000 for
the three and six months ended June 30, 1998.
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 77.8% from $1.7 million for the three months
ended June 30, 1997 to $3.0 million for the three months ended June 30, 1998
and increased 88.9% from $3.1 million for the six months ended June 30, 1997
to $5.9 million for the six months ended June 30, 1998. A significant amount
of the increase was attributable to compensation expense in the amount of
$550,000 and $1.1 million for the three and six months ended June 30, 1998
recorded in connection with the Company's acquisition of SimTech in September
1997. The Company is recording $4.4 million of compensation expense for
shares issued as part of the acquisition which are contingent upon continued
employment and are expensed as the employment obligation lapses. The
Company's research and development staff increased from 64 at June 30, 1997
to 95 at June 30, 1998. This increase is primarily attributable to the
addition of 28 engineers through the acquisition of SimTech in September of
1997 and the hiring of 18 additional engineers, less a decrease of 15
engineers due to the sale of the TDS product line in July of 1997. As a
percentage of total revenue, research and development expenses increased from
23.3% for the three months ended June 30, 1997 to 27.0% for the three months
ended June 30, 1998, and increased from 22.8% for the six months ended June
30, 1997 to 27.6% for the six months ended June 30, 1998. The Company
continues to believe that significant investment in research and development
is required to remain competitive in its
-15-
<PAGE>
markets, and the Company therefore anticipates that research and development
expense will increase in absolute dollars in future periods, but may vary as
a percent of revenue.(1)
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions
and promotional costs, increased 26.1% from $2.6 million for the three months
ended June 30, 1997 to $3.3 million for the three months ended June 30, 1998
and increased 23.3% from $5.1 million for the six months ended June 30, 1997
to $6.3 million for the six months ended June 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
36.0% for the three months ended June 30, 1997 to 29.6% for the three months
ended June 30, 1998, and decreased from 37.3% for the six months ended June
30, 1997 to 29.5% for the six months ended June 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.(1)
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 48.4% from $881,000 for the three months ended June 30, 1997, to
$1.3 million for the three months ended June 30, 1998, which includes a
$227,000 one-time charge for costs associated with the acquisition of
ProSoft, and increased 14.9% from $2.1 million for the six months ended June
30, 1997, which includes $379,000 one-time charge for costs associated with
the acquisition of TriQuest, to $2.4 million for the six months ended June
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 $199,000 (22.6%) for the three months ended June 30, 1998 and $460,000
(27.3%) for the six months ended June 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 12.3%
for the three months ended June 30, 1997 to 9.8% for the three months ended
June 30, 1998, and decreased from 12.3% for the six months ended June 30,
1997 to 10.0% for the six months ended June 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.(1)
AMORTIZATION OF INTANGIBLES AND GOODWILL
The Company recorded $4.1 million in intangibles (excluding $2.4 million of
purchased technologies) and $3.8 million of goodwill as part of the SimTech
acquisition which are being amortized to expense on a straight line basis
over periods ranging from two to five years beginning September 9, 1997. The
Company expensed $697,000 and $1.4 million for the three and six months ended
June 30, 1998.
OTHER INCOME (EXPENSE), 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
- ------------------------
(1) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 19 for a discussion of factors that could affect future performance.
-16-
<PAGE>
local currency. Other income was $229,000 for the three months ended June
30, 1997 and $204,000 for the three months ended June 30, 1998 and $440,000
for the six months ended June 30, 1997 and $492,000 for the six months ended
June 30, 1998. The increase in other income was primarily due to increased
interest earned on the Company's cash holdings which was partially offset by
a charge related to the reorganization of Summit Design Asia.
INCOME TAX PROVISION
The income tax provision increased from $100,000 for the three months ended
June 30, 1997 to $1.0 million for the three months ended June 30, 1998 and
from $180,000 for the six months ended June 30, 1997 to $1.9 million for the
six months ended June 30, 1998. The provision for the three and six months
ended June 30, 1997 reflects an effective rate of 6.5% of taxable income and
is comprised of federal alternative minimum tax and Israeli income taxes. In
the first and second quarters of 1997, the Company utilized net operating
loss carryforwards to offset a considerable portion of U.S. federal and state
taxable income. The 1998 income tax provision reflects the Company's
expected, annualized consolidated tax rate for federal, state and foreign
taxes of approximately 40% 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 an increased effective tax rate on U.S.
income arising from non-deductible amortization of goodwill and
non-deductible compensation expense associated with shares issued in
connection with the acquisition of SimTech offset by 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, 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.
-17-
<PAGE>
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. The Company expects its effective tax rate on U.S. earnings
to be in excess of the statutory rate for the foreseeable future due to
non-deductibe charges for goodwill and certain compensation charges
associated with stock issued to certain shareholders in connection with the
SimTech acquisition. 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, which entitles the Company to
reductions in the tax rate normally applicable to Israeli companies with
respect to the income generated by its "Approved Enterprise" programs. In
particular, the tax holiday covers the seven year period beginning the first
year in which Summit Design (EDA) Ltd. generates taxable income from its
"Approved Enterprise" (after using any available NOLs), provided that such
benefits will terminate in 2006 regardless of whether the seven year period
has expired. The tax holiday provides that, during such seven year periods,
a portion of the Company's taxable income from its Israeli operations will be
taxed at favorable tax rates. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to have favorable tax status in Israel.
Management of the Company intends to permanently reinvest earnings of the
Israeli subsidiary outside the U.S. If such earnings were remitted to the
U.S., additional U.S. federal and foreign taxes may be due.
The Company has foreign income tax net operating losses of approximately $5.6
million at December 31, 1997. These foreign losses were generated in Israel
over several years and have not yet received final assessment from the
Israeli government. Consequently, management is uncertain as to the
availability of a substantial portion of such foreign loss carryforwards.
The Company is also subject to risk that United States and foreign tax laws
and rates may change in a future period or periods, and that any such changes
may materially adversely affect the Company's tax rate. As a result of the
factors described above and other related factors, there can be no assurance
that the Company will maintain a favorable tax rate in future periods. Any
increase in the Company's effective tax rate, or variations in the effective
tax rate from period to period, could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
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 June 30, 1998,
the Company had approximately $24.8 million in cash and cash equivalents and
a $1.0 million bank line of credit with a major financial institution ("the
Bank"). The line of credit expires on April 30, 1999. Borrowings thereunder
accrue interest at specified percentages above the prime lending rate based
on the Company's ratio of debt to tangible net worth. Advances under the line
of credit are limited to a specified percentage of eligible accounts
receivable (as defined in the line of credit). Borrowings under the line of
credit are collateralized by the Company's accounts receivable, inventory and
general intangible assets, including its intellectual property rights. As of
June 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 June 30, 1998, the Company had working capital of approximately $18.8
million.
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Net cash generated by operating activities was approximately $7.4 million and
$3.2 million for the six months ended June 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 six months ended June 30, 1998 and
primarily from profitable operations for the six months ended June 30, 1997.
Net cash used in investing activities was approximately $2.1 million and $1.2
million for the six months ended June 30, 1998 and 1997, respectively. Net
cash used in investing activities was related to the acquisition of furniture
and equipment and loans to a joint venture for the six months ended June 30,
1998 and the acquisition of furniture and equipment and a loan to an employee
for the six months ended June 30, 1997.
Net cash used by financing activities was approximately $505,000 for the six
months ended June 30, 1998 and net cash provided by financing activities was
approximately $173,000 for the six months ended June 30 1997. For the six
months ended June 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 six months ended June 30, 1997, the cash provided
by financing activities was primarily from the issuance of common stock less
principal payments on debt and capital lease obligations.
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 and other cash requirements for at
least the next 12 months.(2)
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE
OF STOCK
HISTORY OF OPERATING LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS
While the Company generated net income in the first two quarters of 1998,
there can be no assurance that the Company will be profitable in the future.
In addition, the Company has experienced significant quarterly fluctuations
in operating results and cash flows and it is likely that these fluctuations
will continue in future periods. These fluctuations have been, and may in the
future be, caused by a number of factors, including the rate of acceptance of
new products, corporate acquisitions and consolidations, product 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.
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
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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>
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 years ended December 31, 1997, 1996 and 1995, respectively,
revenue from HLDA products and related maintenance contracts represented
76.5%, 63.5%, and 43.6%, respectively, of the Company's total revenue. The
Company's HLDA Plus 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.
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.
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<PAGE>
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 June 30, 1998 the Company had sold $11.4
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.
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
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<PAGE>
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 25%, 42%, 29%, 46% and 42% of the
Company's revenue for the six months ended June 30, 1998 and 1997 and 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 Summit exchanged a portion of its ownership in ADC
for ownership in another company located in Hong Kong which was renamed
Summit Design Asia, Ltd. "SDA." SDA also has an equity investment in ADC. In
June 1998, the Summit and Anam each loaned SDA $750,000, which is guaranteed
by ADC. SDA acquired from ADC the exclusive rights to sell, distribute and
support Summits products in the Asia-Pacific region, excluding Japan. SDA
granted distribution rights to Summit'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 October 1998, subject to the Company's ability to
terminate the relationship if ATE fails to meet quarterly sales objectives.
The agreement may also be terminated by either party for breach. In addition,
in the first quarter of 1996, the Company entered into a three-year,
exclusive distribution agreement for its HLDA products in Japan with Seiko.
In the event Seiko fails to meet specified quotas for two or more quarterly
periods, exclusivity can be terminated by Summit, subject to Seiko's right to
pay a specified fee to maintain exclusivity. The agreement is renewable for
successive five-year terms by mutual agreement of the Company and Seiko and
is terminable by either party for breach. In March 1997, the Company entered
into a three-year distribution agreement with Kanematsu USA Inc. pursuant to
which Kanematsu was granted exclusive distribution rights to sell, distribute
and support certain verification products in Japan. For the six months ended
June 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,
ATE and Kanematsu.
There can be no assurance the relationships with Seiko, SDA, ADC, ATE and
Kanematsu will be effective in maintaining or increasing sales relative to
the levels experienced prior to such relationships. The Company also has
independent distributors in Europe and is dependent on the continued
viability and financial stability of its distributors. Since the Company's
products are used by skilled design engineers, distributors must possess
sufficient technical, marketing and sales resources and must devote these
resources to a lengthy sales cycle, customer training and product service and
support. Only a limited number of distributors possess these resources. In
addition, Seiko, SDA, ADC, ATE and Kanematsu, as well as the Company's
other distributors, may offer products of several different companies,
including competitors of the Company. There can be no assurance that the
Company's current distributors will continue to market or service and support
the Company's products effectively, that any distributor will continue to
sell the Company's products or that the distributors will not devote greater
resources to products of other companies. The loss of, or a significant
reduction in, revenue from the Company's distributors could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
INTERNATIONAL SALES AND OPERATIONS
Approximately 35%, 45%, 34%, 50% and 52% of the Company's revenue for the six
months ended June 30, 1998 and 1997 and the years ended December 31, 1997,
1996 and 1995, respectively, were attributable to sales made outside the
United States. The Company expects that international revenue will continue
to represent a significant portion of its total revenue. The Company's
international revenue is currently denominated in U.S. dollars. As a result,
increases in the value of the U.S. dollar relative to foreign
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<PAGE>
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those markets. The Company pays the expenses
of its international operations in local currencies and does not engage in
hedging transactions with respect to such obligations. International sales
and operations are subject to numerous risks, including tariff regulations
and other trade barriers, requirements for licenses, particularly with
respect to the export of certain technologies, collectability of accounts
receivable, changes in regulatory requirements, difficulties in staffing and
managing foreign operations and extended payment terms. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international sales and operations and, consequently, on the
Company's business, financial condition, results of operations or cash flows.
In addition, financial markets and economics in the Asia Pacific Region have
been experiencing adverse conditions which could adversely affect demand for
the Company's products in such region.
In order to successfully expand international sales, the Company may need to
establish additional foreign operations, hire additional personnel and
recruit additional international distributors. This will require significant
management attention and financial resources and could adversely affect the
Company's operating margins. In addition, to the extent that the Company is
unable to effect these additions in a timely manner, the Company's growth, if
any, in international sales will be limited. There can be no assurance that
the Company will be able to maintain or increase international sales of the
Company's products, and failure to do so could have a material adverse effect
on the Company's business, financial condition, results of operations or cash
flows.
MANAGEMENT OF GROWTH AND ACQUISITIONS
Summit's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit
additional employees and train and manage current and future employees.
Summit expects any such growth will place a significant strain on its
operational resources and systems. Failure effectively to manage any such
growth would have a material adverse effect on Summit's business, financial
condition, results of operations or cash flows.
On February 28, 1997, Summit completed its acquisition of TriQuest, on
September 9, 1997, Summit completed its acquisition of SimTech, and on June
30, 1998 Summit completed its acquisition of ProSoft. 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 issuance's of equity securities, the incurrence of debt
and contingent liabilities and amortization expenses related to goodwill and
other intangible assets, which could materially adversely affect Summit's
results of operations. Product and technology acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concern, risks of entering markets in which Summit has no or limited
prior experience and potential loss of key employees of acquired companies.
Summit's management has had limited experience in assimilating acquired
organizations and products into Summit's operations. No assurance can be
given as to the ability of Summit to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in
the future, and the failure of Summit to do so could have a material adverse
effect on Summit's results of operations.
OPERATIONS IN ISRAEL
The Company's research and development operations related to its HLDA
products are located in Israel and may be affected by economic, political and
military conditions in that country. Accordingly, the Company's
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business, financial condition and results of operations could be materially
adversely affected if hostilities involving Israel should occur. This risk is
heightened due to the restrictions on the Company's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants from the government of Israel as described in "--Israeli
Research, Development and Marketing Grants." In addition, while all of the
Company's sales are denominated in U.S. dollars, a portion of the Company's
annual costs and expenses in Israel are paid in Israeli currency. These costs
and expenses were approximately $4.7, $4.3 and $4.3 million in 1997, 1996 and
1995, respectively. Payment in Israeli currency subjects the Company to
foreign currency fluctuations and to economic pressures resulting from
Israel's generally high rate of inflation, which has been approximately 7%,
11% and 8% during 1997, 1996, and 1995, respectively. The Company's primary
expense which is paid in Israeli currency is employee salaries for research
and development activities. As a result, an increase in the value of Israeli
currency in comparison to the U.S. dollar could increase the cost of research
and development expenses and general and administrative expenses. There can
be no assurance that currency fluctuations, changes in the rate of inflation
in Israel or any of the other aforementioned factors will not have a material
adverse effect on the Company's business, financial condition, results of
operations, or cash flows. In addition, coordination with and management of
the Israeli operations requires the Company to address differences in
culture, regulations and time zones. Failure to successfully address these
differences could be disruptive to the Company's operations.
The Company's Israeli production facility has been granted the status of an
"Approved Enterprise" under the Israeli Investment Law for the Encouragement
of Capital Investments, 1959 (the "Investment Law"). Taxable income of a
company derived from an "Approved Enterprise" is eligible for certain tax
benefits, including significant income tax rate reductions for up to seven
years following the first year in which the "Approved Enterprise" has Israeli
taxable income (after using any available net operating losses). The period
of benefits cannot extend beyond 12 years from the year of commencement of
operations or 14 years from the year in which approval was granted, whichever
is earlier. The tax benefits derived from a certificate of approval for an
"Approved Enterprise" relate only to taxable income attributable to such
"Approved Enterprise" and are conditioned upon fulfillment of the conditions
stipulated by the Investment Law, the regulations promulgated thereunder and
the criteria set forth in the certificate of approval. In the event of a
failure by the Company to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and the Company would be required to
refund the amount of the canceled benefits, adjusted for inflation and
interest. There can be no assurance that the Company's Israeli production
facility will continue to operate or qualify as an "Approved Enterprise" or
that the benefits under the "Approved Enterprise" regulations will continue,
or be applicable, in the future. The loss of, or any material decrease in,
these income tax benefits could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical and management personnel and its ability to continue to
attract and retain highly-skilled technical, sales and marketing and
management personnel. The Company has entered into employment agreements with
certain of its executive officers, however, such agreements do not guarantee
the services of these employees and do not contain non-competition
provisions. Competition for personnel in the software industry in general,
and the EDA industry in particular, is intense, and the Company has at times
in the past experienced difficulty in recruiting qualified personnel. There
can be no assurance that the Company will retain its key personnel or that it
will be successful in attracting and retaining other qualified technical,
sales and marketing and management personnel in the future. The loss of any
key employees or the inability to attract and retain additional qualified
personnel may have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. The Company has
obtained a $1 million "key person" life insurance policy on its
President/Chief Executive Officer. 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.
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<PAGE>
ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS
Summit's Israeli subsidiary obtained research and development grants from the
Office of the Chief Scientist (the "Chief Scientist") in the Israeli Ministry
of Industry and Trade of approximately $232,000 and $608,000 in 1993 and
1995, respectively. As of December 31, 1997, all amounts had been repaid. The
terms of the grants prohibit the manufacture of products developed under
these grants outside of Israel and the transfer of the technology developed
pursuant to these grants to any person, without the prior written consent of
the Chief Scientist. The Company's Visual HDL for VHDL products have been
developed under grants from the Chief Scientist and thus are subject to these
restrictions. If the Company is unable to obtain the consent of the
government of Israel, the Company would be unable to take advantage of
potential economic benefits such as lower taxes, lower labor and other
manufacturing costs and advanced research and development facilities that may
be available if such technology and manufacturing operations could be
transferred to locations outside of Israel. In addition, the Company would be
unable to minimize risks particular to operations in Israel, such as
hostilities involving Israel. Although the Company is eligible to apply for
additional grants from the Chief Scientist, it has no present plans to do so.
The Company received a Marketing Fund Grant from the Israeli Ministry of
Industry and Trade for an aggregate of $423,000. The grant must be repaid at
the rate of 3% of the increase in exports over the 1993 export level of all
Israeli products, until repaid. As of June 30, 1998, approximately $261,000
was outstanding under the grant.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures, licensing arrangements and technical means
to establish and protect its proprietary rights. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
limits access to, and distribution of, its software, documentation and other
proprietary information. In addition, the Company's products are protected by
hardware locks and software encryption techniques designed to deter
unauthorized use and copying. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently.
The Company provides its HLDA Plus products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software. In
addition, the Company delivers certain of its verification products
electronically under an electronic version of a "shrink wrap" license
agreement. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad will be adequate or that competitors will not
independently develop similar technology.
The Company could be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows,
the functionality of products in its industry segment overlaps and an
increasing number of software patents are granted by the United States Patent
and Trademark Office. There can be no assurance that a third party will not
claim such infringement by the Company with respect to current or future
products. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product delays or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. Failure to protect its proprietary rights or claims of
infringement could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
POSSIBLE VOLATILITY OF STOCK PRICE
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<PAGE>
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.
YEAR 2000
The Company is currently reviewing its products, internal systems and
infrastructure in order to identify and modify those products and systems
that are not Year 2000 compliant. The Company expects any required
modification to be made on a timely basis and does not believe that the cost
of any such modification will have a material adverse affect on the Company's
operating results. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, implementation of any such
modifications and the Company's inability to implement such modifications
could have an adverse effect on the Company's future operating results.
-27-
<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
In June 1998, in connection with the Company's acquisition of
ProSoft Oy ("ProSoft"), the Company issued 225,386 shares of the
Company's Common Stock to the existing shareholders of ProSoft in
exchange for all of the outstanding shares of capital stock of
ProSoft. Such shares were not registered under the securities act
of 1933, as amended (the "Securities Act"), and such issuance was
deemed to be exempt from registration in reliance under Section
4(2) of the Securities Act as a transaction by an issuer not
involving a public offering. The recipients of the securities
represented their intentions to acquire the securities for
investment only and had access to all relevant information regarding
the Company necessary to evaluate the investment.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to the stockholders at the
Company's Annual Meeting of Stockholders held May 14, 1998. Each of
these matters was approved by a majority of the shares present at
the meeting.
1. The election of one Class I director to serve for a term of three
years:
VOTES FOR VOTES WITHHELD
--------- --------------
CLASS I DIRECTOR
Steven P. Erwin 12,140,472 8,242
2. The amendment of the Company's 1994 Stock Plan to increase the number
of shares reserved for issuance thereunder by 500,000 shares and to
approve the material terms of the 1994 Stock Plan solely for purposes
of Section 162(m) of the Internal Revenue Code of 1986, as amended:
VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
9,001,008 3,130,298 17,408
3. The amendment of the Company's 1996 Employee Stock Purchase Plan to
increase the number of shares reserved for issuance thereunder by
235,000 shares:
VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
12,050,001 82,185 16,528
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<PAGE>
4. The ratification of the appointment of Coopers & Lybrand L.L.P. as the
independent accountants for the Company for the fiscal year ending
December 31, 1998:
VOTES FOR VOTES AGAINST VOTES WITHHELD
--------- ------------- --------------
12,139,009 3,516 6,189
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.27 Shareholders Agreement between the Registrant and
Summit Design Asia, Ltd. dated May 12, 1998.
*10.28 Shareholders Agreement between the Registrant and
Asia Design Corporation, Ltd. dated May 12, 1998.
*10.29++ Distributor Agreement between the Registrant and
Summit Design Asia, Ltd. dated May 12, 1998.
*10.30 Loan Agreement between the Registrant and Summit Design
Asia, Ltd. dated June 2, 1998.
*10.31 Joint Escrow Agreement between the Registrant Perkins
Coie (Hong Kong) Limited, Summit Design Asia, Ltd. and
Asia Design Corporation, Ltd.
*10.32 Guarantee Agreement between the Registrant and Asia
Design Corporation, Ltd. dated May 12, 1998.
*10.33 Security Agreement between the Registrant and Asia
Design Corporation, Ltd. dated May 12, 1998.
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedules
27.3 Restated Financial Data Schedules
++ Document for which confidential treatment has been
requested.
--------------------
* Previously filed.
(b) Reports on Form 8-K
On July 13, 1998, the Company filed a report on Form 8-K dated
June 30, 1998 in conjunction with the acquisition of ProSoft Oy.
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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: March 15, 1999
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<PAGE>
EXHIBIT INDEX
*EXHIBIT 10.27 Shareholders Agreement between the Registrant and
Summit Design Asia, Ltd. dated May 12, 1998.
*EXHIBIT 10.28 Shareholders Agreement between the Registrant and
Asia Design Corporation, Ltd. dated May 12, 1998.
*EXHIBIT 10.29++ Distributor Agreement between the Registrant and
Summit Design Asia, Ltd. dated May 12, 1998.
*EXHIBIT 10.30 Loan Agreement between the Registrant and Summit Design
Asia, Ltd. dated June 2, 1998.
*EXHIBIT 10.31 Joint Escrow Agreement between the Registrant Perkins
Coie (Hong Kong) Limited, Summit Design Asia, Ltd. and
Asia Design Corporation, Ltd.
*EXHIBIT 10.32 Guarantee Agreement between the Registrant and Asia
Design Corporation, Ltd. dated May 12, 1998.
*EXHIBIT 10.33 Security Agreement between the Registrant and Asia
Design Corporation, Ltd. dated May 12, 1998.
EXHIBIT 27.1 Financial Data Schedule
EXHIBIT 27.2 Restated Financial Data Schedules
EXHIBIT 27.3 Restated Financial Data Schedules
++ Document for which confidential treatment has been
requested.
* Previously filed.
-31-
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<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,768
<SECURITIES> 0
<RECEIVABLES> 6,061
<ALLOWANCES> 389
<INVENTORY> 0
<CURRENT-ASSETS> 32,031
<PP&E> 5,386
<DEPRECIATION> (2,178)
<TOTAL-ASSETS> 44,226
<CURRENT-LIABILITIES> 13,210
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 29,544
<TOTAL-LIABILITY-AND-EQUITY> 44,226
<SALES> 0
<TOTAL-REVENUES> 21,369
<CGS> 0
<TOTAL-COSTS> 1,146
<OTHER-EXPENSES> 15,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 4,738
<INCOME-TAX> 1,881
<INCOME-CONTINUING> 2,857
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,857
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE RESPECTIVE BALANCE SHEETS AS OF DEC-31-1996, MAR-31-1997, JUN-30-1997,
SEP-30-1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 19,801 19,851 22,005 17,224
<SECURITIES> 0 0 0 0
<RECEIVABLES> 6,011 6,278 6,371 5,672
<ALLOWANCES> 433 378 439 449
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 25,869 26,263 28,380 23,001
<PP&E> 3,805 3,869 4,365 5,130
<DEPRECIATION> 1,943 1,930 2,122 2,522
<TOTAL-ASSETS> 28,700 29,191 31,879 36,523
<CURRENT-LIABILITIES> 8,633 7,817 8,458 12,105
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 141 141 143 148
<OTHER-SE> 19,010 20,217 22,371 22,428
<TOTAL-LIABILITY-AND-EQUITY> 28,700 29,191 31,879 36,523
<SALES> 0 0 0 0
<TOTAL-REVENUES> 20,314 6,520 13,700 21,609
<CGS> 0 0 0 0
<TOTAL-COSTS> 1,039 295 601 991
<OTHER-EXPENSES> 18,374 5,163 10,303 27,712
<LOSS-PROVISION> 3 0 60 120
<INTEREST-EXPENSE> 101 7 9 10
<INCOME-PRETAX> 1,018 1,273 3,236 (739)
<INCOME-TAX> (245) 80 180 713
<INCOME-CONTINUING> 1,263 1,193 3,056 (1,452)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,263 1,193 3,056 (1,452)
<EPS-PRIMARY> 0.10 0.09 0.22 (0.10)
<EPS-DILUTED> 0.10 0.08 0.20 (0.10)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE RESPECTIVE BALANCE SHEET AS OF DEC-31-1997 MAR-31-1998 AND THE RELATED
STATEMENT OF INCOME AND CASH FLOW FOR THE RESPECTIVE PERIOD THEN ENDED.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 19,973 20,402
<SECURITIES> 0 0
<RECEIVABLES> 5,723 5,991
<ALLOWANCES> 592 592
<INVENTORY> 0 0
<CURRENT-ASSETS> 26,853 27,460
<PP&E> 4,341 4,700
<DEPRECIATION> 1,643 1,803
<TOTAL-ASSETS> 39,670 39,584
<CURRENT-LIABILITIES> 12,250 11,672
<BONDS> 0 0
0 0
0 0
<COMMON> 159 161
<OTHER-SE> 26,037 26,397
<TOTAL-LIABILITY-AND-EQUITY> 39,670 39,584
<SALES> 0 0
<TOTAL-REVENUES> 31,439 10,357
<CGS> 0 0
<TOTAL-COSTS> 1,552 583
<OTHER-EXPENSES> 35,135 7,737
<LOSS-PROVISION> 270 0
<INTEREST-EXPENSE> 12 1
<INCOME-PRETAX> 1,371 2,325
<INCOME-TAX> 940 923
<INCOME-CONTINUING> 431 1,402
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 431 1,402
<EPS-PRIMARY> 0.03 0.09
<EPS-DILUTED> 0.03 0.09
</TABLE>
