<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the quarterly period ended March 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the transition period from ________ to ________
Commission file number: 0-20923
SUMMIT DESIGN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1137888
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9305 S. W. GEMINI DRIVE,
BEAVERTON, OREGON 97008
(Address of principal executive office)
Registrant's Telephone number, including area code: (503) 643-9281
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of May 12, 1998, the Registrant had outstanding 14,819,310 shares of
Common Stock.
<PAGE>
3/31/98
SUMMIT DESIGN, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997. 3
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 1998 and 1997 (unaudited). 4
Condensed Consolidated Statements of Cash Flows for
the three month periods ended March 31, 1998 and 1997 (unaudited). 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
Items 1, 3, 4 and 5 Not Applicable
Signature
Exhibit Index
</TABLE>
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. 1 to the Registrant's Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998 for the purpose of
restating financial information and related disclosures for the three month
period ended March 31, 1998. See Note 1 to the Condensed Consolidated
Financial Statements.
-2-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Restated) (Restated)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,402 $ 19,973
Accounts receivable, net 5,399 5,131
Prepaid expenses and other 445 540
Deferred income taxes 1,214 1,209
--------- ---------
Total current assets 27,460 26,853
Furniture and equipment, net 2,897 2,698
Intangibles, net 4,896 5,571
Goodwill, net 3,305 3,493
Deposits and other assets 1,026 1,055
--------- ---------
Total assets $ 39,584 $ 39,670
--------- ---------
--------- ---------
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 134 $ 134
Capital lease obligation, current portion 46 49
Accounts payable 1,259 1,211
Accrued liabilities 4,921 5,182
Deferred revenue 5,312 5,674
--------- ---------
Total current liabilities 11,672 12,250
Long-term debt, less current portion 192 194
Capital lease obligations, less current portion 31 43
Deferred revenue, less current portion 190 -
Deferred taxes 941 987
--------- ---------
Total liabilities 13,026 13,474
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value. Authorized 30,000
shares; issued and outstanding 16,049 shares at
March 31, 1998 and 15,841 shares at
December 31, 1997 161 159
Additional paid-in capital 52,700 51,412
Treasury stock, at cost, 1,102 shares at
March 31, 1998 and 939 shares at December 31, 1997 (13,885) (11,555)
Accumulated deficit (12,418) (13,820)
--------- ---------
Total stockholders' equity 26,558 26,196
--------- ---------
Total liabilities and stockholders' equity $ 39,584 $ 39,670
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
-3-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
(Restated)
<S> <C> <C>
Revenue:
Product licenses $ 8,201 $ 4,896
Maintenance and services 2,064 1,482
Other 92 142
-------- --------
Total revenue 10,357 6,520
Cost of revenue:
Product licenses 193 185
Maintenance and services 225 110
Amortization of
purchased technologies 165 -
-------- --------
Total cost of revenue 583 295
-------- --------
Gross profit 9,774 6,225
-------- --------
-------- --------
Operating expenses:
Research and development 2,929 1,452
Sales and marketing 3,048 2,531
General and administrative 1,062 1,180
Amortization of
intangibles and goodwill 698 -
-------- --------
Total operating expenses 7,737 5,163
-------- --------
-------- --------
Income from operations 2,037 1,062
Interest expense (1) (7)
Other income, net 289 218
-------- --------
Income before income taxes 2,325 1,273
Income tax provision 923 80
-------- --------
Net income $ 1,402 $ 1,193
-------- --------
-------- --------
Earnings per share:
Basic $ 0.09 $ 0.09
-------- --------
-------- --------
Diluted $ 0.09 $ 0.08
-------- --------
-------- --------
Number of shares used computing earnings
per share:
Basic 14,910 13,902
-------- --------
-------- --------
Diluted 16,190 14,829
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
-4-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
-------- -------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,402 $ 1,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,117 207
Amortization of future contingent share liability 550 -
Loss on asset disposition - 1
Deferred taxes (51) -
Changes in assets and liabilities:
Accounts receivable (268) (322)
Prepaid expenses and other 95 (22)
Accounts payable 49 409
Accrued liabilities (261) (96)
Deferred revenue (172) (918)
Other, net 153 23
--------- --------
Net cash provided by operating activities 2,614 475
--------- --------
Cash flows from investing activities:
Additions to furniture and equipment (452) (252)
Notes receivable from related parties, net (125) (75)
--------- --------
Net cash used in investing activities (577) (327)
--------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs 288 14
Tax benefit of option exercises 450 -
Payments to acquire treasury stock (2,329) -
Principal payments of debt obligations (2) (77)
Principal payments of capital lease obligations (15) (35)
--------- --------
Net cash used in financing activities (1,608) (98)
--------- --------
Increase in cash and cash equivalents 429 50
Cash and cash equivalents, beginning of period 19,973 19,801
--------- --------
Cash and cash equivalents, end of period $ 20,402 $ 19,851
--------- --------
--------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1 $ 9
Income taxes 547 38
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
-5-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Summit
Design, Inc. ("Summit" or the Company) in accordance with the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in accordance with such rules and regulations. In the opinion of
management, the accompanying unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company, and its results of
operations and cash flows. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
years ended December 31, 1997 1996 and 1995 included in the Company's Form
10-K/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 March 31,
1998 and for the three months ended March 31, 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 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. 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 months ended March
31, 1998 is as follows (in thousands except per share amounts, unaudited):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
Statements of Operations: As Reported Restated
----------- --------
<S> <C> <C>
Cost of revenues $ 505 $ 583
Gross margin 9,852 9,774
Operating expenses 6,525 7,737
Income from operations 3,327 2,037
Net income 2,637 1,042
Net income per share
Basic $ 0.18 $ 0.09
Diluted $ 0.16 $ 0.09
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
Balance Sheets: As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Noncurrent assets $ 5,977 $ 12,124 $ 5,908 $ 12,817
Total assets 33,437 39,584 32,761 39,670
Deferred tax liability 0 941 0 987
Accumulated deficit (17,512) (9,202) (20,126) (13,820)
Total shareholders' equity 21,297 26,558 20,275 26,196
</TABLE>
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998 or any other future interim period, and the Company makes no
representations related thereto.
2. SOFTWARE REVENUE RECOGNITION
During the first quarter of 1998, the Company adopted Statements of Position
(SOP) 97-2, "Software Revenue Recognition" and 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, "Software Revenue Recognition."
The provisions of SOP's 97-2 and 98-4 have been applied to transactions
entered into beginning January 1, 1998. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated
to each element based on vendor-specific objective evidence (VSOE) of the
fair value of the various elements in a multiple element arrangement. The
revenue allocated to product licenses generally is recognized upon delivery
of the license. The revenue allocated to maintenance is recognized ratably
over the term of the maintenance agreement and revenue allocated to services
is recognized as the services are performed.
SOP 98-4 defers for one year, the application of several paragraphs and
examples in SOP 97-2 that limit the definition of vendor specific objective
evidence (VSOE) of the fair value of various elements in a multiple element
arrangement.
The Company analyzed the elements included in its multiple element
arrangements and determined that the Company has sufficient evidence to
allocate revenue to the license and maintenance components of its product
licenses. The adoption of SOP's 97-2 and 98-4 did not have a significant
effect on revenue recognized for the period ending March 31, 1998.
3. BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Accounts Receivable:
Trade receivables $ 5,991 $ 5,723
Less allowance for doubtful accounts (592) (592)
-------------- --------------
$ 5,399 $ 5,131
-------------- --------------
-------------- --------------
Furniture and equipment:
Office furniture equipment $ 627 $ 596
Computer equipment 4,004 3,585
Leasehold improvements 69 66
-------------- --------------
4,700 4,247
Less: accumulated depreciation and
amortization (1,803) (1,549)
-------------- --------------
$ 2,897 $ 2,698
-------------- --------------
-------------- --------------
Accrued expenses:
Payroll and related benefits $ 2,769 $ 2,862
Sales and marketing 547 435
Accounting and legal 286 260
Federal and state income taxes payable 795 819
Sales taxes payable 68 114
Other 456 692
-------------- --------------
Total accrued expenses $ 4,921 $ 5,182
-------------- --------------
-------------- --------------
</TABLE>
-6-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. RECONCILIATION OF EARNINGS PER SHARE
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." In accordance with SFAS No.
128, basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options using
the treasury stock method. The following provides a reconciliation of the
numerators and denominators of the basic and diluted per share computations:
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
---------------------
(Restated)
<S> <C> <C>
Numerator:
Net income $ 1,402 $ 1,193
-------- --------
-------- --------
Denominator:
Denominator for basic earnings per share
weighted average shares 14,910 13,902
Effect of dilutive securities:
Employee stock options 1,280 927
-------- --------
Denominator for diluted earnings per share 16,190 14,829
-------- --------
-------- --------
Net income per share - basic $ 0.09 $ 0.09
-------- --------
-------- --------
Net income per share - diluted $ 0.09 $ 0.08
-------- --------
-------- --------
</TABLE>
5. SUBSEQUENT EVENT
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 herein. The effect of the combination did not have a
material impact on the net sales and net income of the combined entity.
-7-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
The following discussion contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Predictions of future events are inherently
uncertain. Actual events could differ materially from those predicted in the
forward looking statements as a result of the risks set forth in the
following discussion, and, in the particular, the risks discussed below under
the subheading "Additional Risk Factors that Could Affect Operating Results
and Market Price of Stock."
OVERVIEW
Summit 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 and Simulation
Technologies Corp. ("SimTech"), in September 1997, the Company has also
derived revenue from verification products which include hardware-software
co-verification, code coverage, and HDL debugging products, as well as
analysis, verification and Register Transfer Language ("RTL") optimization
tools.
Revenue consists primarily of fees for licenses of the Company's software
products, maintenance and customer training. Revenue from the sale of
software licenses is recognized at the later of the time of shipment or
satisfaction of all acceptance terms. Maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement, which is
typically 12 months. Revenue from customer training is recognized when the
service is performed. Revenue earned on software arrangements involving
multiple elements is allocated to each element based on vendor-specific
objective evidence (VSOE) of the fair value of the various elements within
the arrangement. The Company sells its products through a direct sales force
in North America and selected European countries and through distributors in
the Company's other international
-8-
<PAGE>
markets. Revenue from product sales through distributors is recognized net of
the associated distributor discounts. Fees received for granting distribution
rights are deferred and recognized ratably over the term of the distribution
agreement. Although the Company has not adopted a formal return policy, the
Company generally reimburses customers in full for returned products.
Estimated sales returns are recorded upon delivery of the product.
The Company's products have a range of prices which depend on platform, HDL
language, functionality and duration of license. In addition, the Company's
products perform a variety of functions, certain of which are, and in the
future may be, offered as separate products or discrete point solutions by
the Company's existing and future competitors. For example, certain companies
currently offer design entry products without simulators. There can be no
assurance that such competition will not cause the Company to offer point
solutions instead of, or in addition to, the Company's current software
products. Such point solutions would be priced lower than the Company's
current product offerings and could cause the Company's average selling
prices to decrease. Accordingly, based on these and other factors, the
Company expects that average selling prices for its products may continue to
fluctuate in the future.
The Company entered into a joint venture with Anam, effective April 1, 1996,
pursuant to which the joint venture corporation (Summit Design Asia Ltd.
("Summit Asia")) acquired exclusive rights to sell, distribute and support
all of Summit's products in the Asia-Pacific region, excluding Japan. Prior
to that date, Anam was an independent distributor of the Company's products
in Korea. The amount of revenue from sales through Summit Asia, which is
remitted to the Company, is fixed by the joint venture agreement at a
percentage which approximates the percentage applicable to sales through Anam
prior to the formation of the joint venture. For the three months ended March
31, 1998 and 1997, Anam and Summit Asia together accounted for 3.9% and 4.5%
of the Company's revenue, respectively.
The Company accounts for its ownership interest in Summit Asia on the equity
method of accounting and, as a result, the Company's pro rata share of the
earnings and losses of Summit Asia are recognized as income or losses in the
Company's income statement in "Other income, net." The Company does not
expect Summit Asia to recognize a profit for the foreseeable future and thus
does not expect to recognize income from its investment in Summit Asia for
the foreseeable future, if at all. The Company is currently restructuring the
ownership and responsibilities of Summit Asia. There can be no assurance that
any restructuring would result in Summit Asia becoming profitable or that
revenue attributable to sales in the Asia Pacific region, excluding Japan,
would increase.
Approximately 32% and 53% of the Company's total revenue for the three months
ended March 31, 1998 and 1997, respectively, were attributable to sales made
outside the United States. The decline in the percentage of revenue from
sales made outside the United States in 1998 is primarily the result of (1)
domestic sales to one customer, (2) the loss of Design to Test product sales
in the last half of 1997 as a result of the sale of the product line, which
had a strong international market, and (3) the addition of revenue from
products acquired in the SimTech acquisition which had a principally domestic
market. The Company expects that international revenue will continue to
represent a significant portion of its total revenue. The Company's
international revenue is currently denominated in U.S. dollars. As a result,
increases in the value of the U.S. dollar relative to foreign currencies
could make the Company's products more expensive and, therefore, potentially
less competitive in those markets. The Company pays the expenses of its
international operations in local currencies and does not engage in hedging
transactions with respect to such obligations. International sales and
operations are subject to numerous risks, including tariff regulations and
other trade barriers, requirements for licenses, particularly with respect to
the export of certain technologies, collectability of accounts receivable,
changes in regulatory requirements, difficulties in staffing and managing
foreign operations and extended payment terms.(1)
- -------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future
performance.
-9-
<PAGE>
On February 28, 1997, Summit completed its acquisition of TriQuest. TriQuest
develops HDL analysis, optimization, and verification tools for the design
of high performance, deep submicron integrated circuits. The transaction has
been accounted for as a "pooling of interest" in accordance with generally
accepted accounting principles.
Effective July 1, 1997 the Company sold substantially all of the assets used
in its business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to Credence Systems Corporation ("CSC"). The
increase in the Company's product licenses revenue during the last twelve
months has been primarily due to increased revenue associated with the
Company's HLDA Plus products. The Asset Sale will allow the Company to focus
on the development and marketing of these products.
Substantially all of the Company's Design to Test product license revenue and
related maintenance and services revenue for the three months ended March 31,
1997 were attributable to the TDS products. As of July 1, 1997, TDS products
ceased to be a source of such revenues. CSC assumed the Company's
obligations under TDS maintenance contracts entered into prior to the closing
and the Company has not recognized deferred revenue associated with such
contracts after June 30, 1997.
The Company maintained exclusive rights to its Visual Testbench technology
and CSC agreed to purchase a minimum of $16,000,000 of Visual Testbench
licenses over a thirty-month period subject to specified quarterly maximums
and certain additional conditions, and $2,000,000 of maintenance over an
eighteen month period beginning July 1997. At the completion of the thirty
month period, under certain conditions, CSC may obtain shared ownership to
the Visual Testbench for sales into the ATE marketplace.
On September 9, 1997, the Company acquired SimTech, a company that develops
and distributes hardware-software co-verification, code coverage and HDL
debugging software. The aggregate consideration for the acquisition 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 March 31,
1998 and for the three months ended March 31, 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 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 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.
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.
- -------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future
performance.
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of revenue.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
(Restated)
<S> <C> <C>
Revenue:
Product licenses 79.2% 75.1%
Maintenance and services 19.9 22.7
Other 0.9 2.2
-------- --------
Total revenue 100.0 100.0
Cost of revenue:
Product licenses 1.8 2.8
Maintenance and services 2.2 1.7
Amortization of
developed technologies 1.6 -
-------- --------
Total cost of revenue 5.6 4.5
-------- --------
Gross profit 94.4 95.5
Operating expenses:
Research and development 28.3 22.3
Sales and marketing 29.4 38.8
General and administrative (a) 10.3 18.1
Amortization of intangibles
and goodwill 6.7 -
-------- --------
Total operating expenses 74.7 79.2
-------- --------
-------- --------
Income from operations 19.7 16.3
Other income (expense), net 2.7 3.2
-------- --------
Income before income taxes 22.4 19.5
Income tax provision 8.9 1.2
-------- --------
Net income 13.5% 18.3%
-------- --------
-------- --------
</TABLE>
(a) General and administrative expenses for the three months ended March 31,
1997 include a one-time charge of $379,000 (5.8% of revenue) for costs
relating to the acquisition of TriQuest.
TOTAL REVENUE
Total revenue increased by 58.8% from $6.5 million for the three months ended
March 31, 1997 to $10.4 million for the three months ended March 31, 1998.
Sales through one distributor accounted for 17.3% and 15.8% of the Company's
total revenue for the three months ended March 31, 1998 and 1997,
respectively. Sales to CSC accounted for 31.2% of the Company's total revenue
for the three month period ended March 31, 1998. Such revenue included $2.9
million of Visual Testbench license sales made pursuant to the Company's
contract with CSC. See "Overview." No customer accounted for more than 10% of
the Company's total revenue for the three months ended March 31, 1997.
REVENUE
PRODUCT LICENSES
The Company's product licenses revenue is derived from license fees from the
Company's HLDA Plus products and additionally from Design to Test products
through June 30, 1997. Product licenses revenue increased by 67.5% from $4.9
million for the three months ended March 31, 1997 to $8.2 million for the
three months ended March 31, 1998. Due to the sale of the TDS product line
in July of 1997, revenue from HLDA Plus products accounted for 100% of
product licenses revenue for the three months ended March 31, 1998. During
the three months ended March 31, 1997, HLDA Plus and Design to Test revenues
accounted for 77.7% and 22.3% of product license revenue, respectively.
-11-
<PAGE>
HLDA license revenue increased 115.8% from $3.8 million for the three months
ended March 31, 1997 to $8.2 million for the three months ended March 31,
1998. The increase in HLDA license revenue over the same period in 1997 was
primarily attributable to sales to a single customer, revenue from the
Verification products portfolio that was not shipping in the comparable
period in 1997, and growth in the installed base of HLDA customers. Sales to
the single customer are expected to continue over the next seven quarters
pursuant to contractual arrangements with the customer.(2)
MAINTENANCE AND SERVICES
The Company's maintenance and services revenue is derived from maintenance
contracts related to the Company's HLDA products and training classes offered
to purchasers of the Company's software products. Maintenance and services
revenue increased 39.3% from $1.5 million for the three months ended March
31, 1997 to $2.1 million for the three months ended March 31, 1998. The
increase is primarily attributable to maintenance contracts for verification
products acquired in the SimTech acquisition, a maintenance contract with one
customer, an increase in the installed base of HLDA Plus customers over the
previous comparable period, less a decrease of Design to Test maintenance
revenue of $743,000, due to the sale of the TDS product line.
OTHER
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. Other revenue decreased 35.2% from
$142,000 for the three months ended March 31, 1997 to $92,000 for the three
months ended March 31, 1998. In May 1997 a distribution agreement expired;
and as a result the distribution rights fees paid at the inception of the
agreement and amortized into revenue at $50,000 each quarter over the
agreement period are no longer be a source of other revenue. No material
costs were associated with other revenue for the three months ended March
31, 1998 and 1997.
COST OF REVENUE
PRODUCT LICENSES
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs plus the amortization of
purchased technology acquired in the SimTech purchase. The cost of product
licenses revenue increased 4.3% from $185,000 for the three months ended
March 31, 1997 to $193,000 for the three months ended March 31, 1998. As a
percentage of product licenses revenue, the cost of product licenses revenue
decreased from 3.8% of product license revenue for the three months ended
March 31, 1997 to 2.4% of product license revenue for the three months ended
March 31, 1998. This decrease was primarily due to leveraging fixed costs
across increased product license revenue.
MAINTENANCE AND SERVICES
Cost of maintenance and services revenue, which consists primarily of
personnel costs for customer support and training classes offered to
purchasers of the Company's products, increased 104.5% from $110,000 for the
three months ended March 31, 1997 to $225,000 for the three months ended
March 31, 1998. As a percentage of maintenance and services revenue, the
cost of maintenance and services revenue increased from 7.4% for the three
months ended March 31, 1997 to 10.9% for the three months ended March 31,
1998. The 3.5% increase in the cost of maintenance and services revenue as a
percent of revenue for the three months ended March 31, 1998 over the same
period in 1997 was primarily the result of the Company operating below
forecasted staffing levels during the first half of 1997.
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 $165,000 for the three
months ended March 31, 1998.
- -----------------------
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk
Factors That Could Affect Operating Results and Market Price of Stock"
commencing on page 16 for a discussion of factors that could affect
future performance.
-12-
<PAGE>
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 101.7% from $1.5 million for the three months
ended March 31, 1997 to $2.9 million for the three months ended March 31,
1998. As a percentage of total revenue, research and development expenses
increased from 22.3% for the three months ended March 31, 1997 to 28.3% for
the three months ended March 31, 1998. A significant amount of the increase
was attributable to compensation expense in the amount of $550,000 for the
three months ended March 31, 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 61 for the three months ended March 31, 1997 to 93 for the
three months ended March 31, 1998. This increase is primarily attributable to
the addition of 28 engineers through the acquisition of Simtech in September
of 1997 and the hiring of 19 additional engineers, less a decrease of 15
engineers due to the sale of the TDS product line on in July of 1997. The
Company continues to believe that significant investment in research and
development is required to remain competitive in its markets, and the Company
therefore anticipates that research and development expense will increase in
absolute dollars in future periods, but may vary as a percent of revenue. (2)
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions
and promotional costs, increased 20.4% from $2.5 million for the three months
ended March 31, 1997 to $3.0 million for the three months ended March 31,
1998. The increase over 1997 was attributable to expenses related to the
marketing of new products acquired with the purchase of SimTech and
additional commissions directly related to the increase in gross sales over
the comparable period in 1997. As a percentage of total revenue, sales and
marketing expenses decreased from 38.8% for the three months ended March 31,
1997 to 29.4% for the three months ended March 31, 1998. The decrease as a
percentage of revenue was primarily attributable to the increase in total
revenue for 1998. In the future, the Company expects sales and marketing
expenses to continue to increase in absolute dollars.(2)
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate,
finance, human resource, information services, administrative, and legal and
accounting expenses of the Company. General and administrative expenses
decreased 10.0% from $1.2 million for the three months ended March 31, 1997
which includes a $379,000 one-time charge for costs associated with the
acquisition of TriQuest, to $1.1 million for the three months ended March 31,
1998. Excluding this one-time charge, expenses increased by $261,000 (22.1%)
for the three months ended March 31, 1998 as compared to the same period in
the prior year. As a percentage of total revenue, excluding the one time
charge for costs associated with the acquisition of TriQuest, general and
administrative expenses decreased from 12.3% for the three months ended March
31, 1997 to 10.3% for the three months ended March 31, 1998. The decrease as
a percentage of total revenue was attributable to the increase in total
revenue in 1998. The Company expects general and administrative expenses to
increase in absolute dollars to support future sales and operations.(2)
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 amortized to expense on a straight line basis over
periods ranging from two to five years beginning September 9, 1997. The
Company expensed $698,000 for the three months ended March 31, 1998.
- -----------------
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-13-
<PAGE>
INTEREST EXPENSE
Interest expense decreased from $7,000 for the three months ended March 31,
1997 to $1,000 for the three months ended March 31, 1998 due to decreased
long term debt and capital leases obligations. The Company incurred no
interest expense associated with the Company's bank line of credit for the
three months ended March 31, 1998.
OTHER INCOME, NET
Other income consists of interest income associated with available cash
balances, gains or losses from the sale of property and equipment, the
Company's pro rata share of the earnings and losses of Summit Asia and
foreign exchange rate differences resulting from paying operating expenses of
foreign operations in the local currency. Other income was $218,000 for the
three months ended March 31, 1997 and $289,000 for the three months ended
March 31, 1998. The increase in other income was primarily due to increased
interest earned on the Company's cash holdings.
INCOME TAX PROVISION
The income tax provision increased from $80,000 for the three months ended
March 31, 1997 to $923,000 for the three months ended March 31, 1998. The
provision for the three months ended March 31, 1997 reflects an effective
rate of 6.5% of taxable income and is comprised of federal alternative
minimum tax and Israeli income taxes. In the first quarter of 1997, the
Company utilized net operating loss carryforwards to offset a considerable
portion of U.S. federal and state taxable income. The 1998 income tax
provision reflects the Company's estimated consolidated tax rate for federal,
state and foreign taxes of approximately 40% of taxable income. The
difference between the Company's estimated effective rate and the statutory
rate for the year ending December 31, 1998 is primarily due to 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, 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
- -----------------
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 16 for a discussion of factors that could affect future performance.
-14-
<PAGE>
marketing and other operating activities based primarily on its expectations
as to future revenue. As a result, if revenue in any quarter falls below
expectations, expenditure levels could be disproportionately high as a
percentage of revenue, and the Company's operating results for that quarter
would be adversely affected. Based upon the factors described above, the
Company believes that its quarterly revenue, expenses and operating results
are likely to vary significantly in the future, that period-to-period
comparisons of its results of operations are not necessarily meaningful and
that, as a result, such comparisons should not be relied upon as indications
of the Company's future performance. Moreover, although the Company's revenue
has increased in recent periods, there can be no assurance that the Company's
revenue will grow in future periods or that the Company will remain
profitable on a quarterly or annual basis. Due to the foregoing or other
factors, it is likely that the Company's results of operations may be below
investors' and market analysts' expectations in some future quarters, which
could have a severe adverse effect on the market price of the Company's
Common Stock.
EFFECTIVE CORPORATE TAX RATES
Prior to 1996, the Company had experienced losses for income tax purposes in
the United States. The Company is now profitable in the United States and
expects to pay income taxes at or near the statutory tax rate on its U.S.
taxable earnings. 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-deductible 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 has recognized the
benefit of its U.S. net operating loss carryforwards and tax credit
carryforwards in their financial statements.
The Company's Israeli operations are performed entirely by Summit Design
(EDA) Ltd., which is a separate taxable Israeli entity. The Company's
existing Israeli production facility has been granted "Approved Enterprise"
status under the Israeli Investment Law, which entitles the Company to
reductions in the tax rate normally applicable to Israeli companies with
respect to the income generated by its "Approved Enterprise" programs. In
particular, the tax holiday covers the seven year period beginning the first
year in which Summit Design (EDA) Ltd. generates taxable income from its
"Approved Enterprise" (after using any available NOLs), provided that such
benefits will terminate in 2006 regardless of whether the seven year period
has expired. The tax holiday provides that, during such seven year periods,
a portion of the Company's taxable income from its Israeli operations will be
taxed at favorable tax rates. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to have favorable tax status in Israel.
Management of the Company intends to permanently reinvest earnings of the
Israeli subsidiary outside the U.S. If such earnings were remitted to the
U.S., additional U.S. federal and foreign taxes may be due.
The Company has foreign income tax net operating losses of approximately $5.6
million at December 31, 1997. These foreign losses were generated in Israel
over several years and have not yet received final assessment from the
Israeli government. Consequently, management is uncertain as to the
availability of a substantial portion of such foreign loss carryforwards.
The Company is also subject to risk that United States and foreign tax laws
and rates may change in a future period or periods, and that any such changes
may materially adversely affect the Company's tax rate. As a result of the
factors described above and other related factors, there can be no assurance
that the Company will maintain a favorable tax rate in future periods. Any
increase in the Company's effective tax rate, or variations in the effective
tax rate from period to period, could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through a public offering
in 1996 the private placement of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from operations. As of March 31, 1998,
the Company had approximately $20.4 million in cash and cash equivalents and
a $1.0 million bank line of credit with a major financial institution (the
"Bank"). The line of credit expires on April 30, 1999. Borrowings thereunder
accrue interest at specified percentages above the prime lending rate based
on the Company's ratio of debt to tangible net worth. Advances under the line
of credit are limited to a specified percentage of eligible accounts
receivable (as defined in the line of credit). Borrowings under the line of
credit are collateralized by the Company's accounts receivable, inventory and
general intangible assets, including its intellectual property rights. As of
March 31, 1998, the Company had no borrowings outstanding under this line of
credit.
As of March 31, 1998, the Company had working capital of approximately $15.8
million.
Net cash generated by operating activities was approximately $2.6 million and
$475,000 for the three months ended March 31, 1998 and 1997, respectively.
Cash generated by operating activities resulted primarily from profitable
operations and improved cash collections less the decrease in deferred
revenue and accrued liabilities for the three months ended March 31, 1998 and
primarily from profitable operations less a decrease in deferred revenue for
the three months ended March 31, 1997.
Net cash used in investing activities was approximately $577,000 and $327,000
for the three months ended March 31, 1998 and 1997, respectively. Net cash
used in investing activities was related to the acquisition of furniture and
equipment and a loan to an independent software company for the three months
ended March 31, 1998 and the acquisition of furniture and equipment and a
loan to an employee for the three months ended March 31, 1997.
Net cash used by financing activities was approximately $1.6 million and
$98,000 for the three months ended March 31, 1998 and 1997, respectively.
For the three months ended March 31, 1998 the use of cash was primarily from
repurchasing 162,500 shares of the Company's common stock, less proceeds from
the issuance of common stock and a tax benefit from option exercises. For
the three months ended March 31, 1997, the use of cash was primarily for
repayment of debt and capital lease obligations.
The Company presently believes that its current cash and cash equivalent,
together with funds expected to be generated from operations, will satisfy
the Company's anticipated working capital and other cash requirements for at
least the next 12 months.(2)
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
HISTORY OF OPERATING LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS
While the Company generated net income in the first quarter of 1998,there can
be no assurance that the Company will be profitable in the future. In
addition, the Company has experienced significant quarterly fluctuations in
operating results and cash flows and it is likely that these fluctuations
will continue in future periods. These fluctuations have been, and may in the
future be, caused by a number of factors, including the rate of acceptance of
new products, corporate acquisitions and consolidations, product, customer
and channel mix, the size and timing of orders, lengthy sales cycles, the
timing of new product announcements and
- -------------------
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
this page for a discussion of factors that could affect future
performance.
-16-
<PAGE>
introductions by the Company and its competitors, seasonal factors,
rescheduling or cancellation of customer orders, the Company's ability to
continue to develop and introduce new products and product enhancements on a
timely basis, the level of competition, purchasing and payment patterns,
pricing policies of the Company and its competitors, product quality issues,
currency fluctuations and general economic conditions.
The Company has generally recognized a substantial portion of its revenue in
the last month of each quarter, with this revenue concentrated in the latter
part of the month. Any significant deferral of purchases of the Company's
products could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows in any particular
quarter, and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely
affected. The Company's revenue is difficult to forecast for several reasons.
The market for certain of the Company's software products is evolving. The
Company's sales cycle is typically six to nine months and varies
substantially from customer to customer. The Company operates with little
product backlog because its products are typically shipped shortly after
orders are received. In addition, a significant portion of the Company's
sales are made through indirect channels and can be harder to predict. The
Company establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on its expectations
as to future revenue. As a result, if revenue in any quarter falls below
expectations, expenditure levels could be disproportionately high as a
percentage of revenue, and the Company's operating results for that quarter
would be adversely affected. Based upon the factors described above, the
Company believes that its quarterly revenue, expenses and operating results
are likely to vary significantly in the future, that period-to-period
comparisons of its results of operations are not necessarily meaningful and
that, as a result, such comparisons should not be relied upon as indications
of the Company's future performance. Moreover, although the Company's revenue
has increased in recent periods, there can be no assurance that the Company's
revenue will grow in future periods or that the Company will remain
profitable on a quarterly or annual basis. Due to the foregoing or other
factors, it is likely that the Company's results of operations may be below
investors' and market analysts' expectations in some future quarters, which
could have a severe adverse effect on the market price of the Company's
Common Stock.
PRODUCT CONCENTRATION; UNCERTAINTY OF MARKET ACCEPTANCE OF HLDA
Prior to July 1997, the Company's revenue was predominantly derived from two
product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL
for Verilog, and TDS. Effective July 1, 1997, as a result of the Asset Sale,
TDS products ceased to be a source of revenue. With the acquisition of
TriQuest in February 1997 and SimTech in September 1997, the Company also
derives revenue from verification products which include hardware-software
co-verification, code coverage, and HDL debugging products as well as
analysis, verification and RTL optimization tools.
The Company believes that HLDA products will continue to account for
substantially all of its revenue in the future. As a result, factors
adversely affecting sales of these products, including increased competition,
inability to successfully introduce enhanced or improved versions of these
products, product quality issues and technological change, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's future success depends primarily upon the market acceptance of
its existing and future HLDA products. The Company commercially shipped its
first HLDA product, Visual HDL for VHDL, in the first quarter of 1994. For
the years ended December 31, 1997, 1996 and 1995, respectively, revenue from
HLDA products and related maintenance contracts represented 76.5%, 63.5%, and
43.6%, respectively, of the Company's total revenue. The Company's HLDA
products incorporate certain unique design methodologies and thus represent a
departure from industry standards for design creation and verification. The
Company believes that broad market acceptance of its HLDA products will
depend on several factors, including the ability to significantly enhance
design productivity, ease of use, interoperability with existing EDA tools,
price and the customer's assessment of the Company's financial resources and
its technical, managerial, service and support expertise. The Company also
depends on its distributors to assist the Company in gaining market
acceptance of its products. There can be no assurance that sufficient
priority will be given by the
-17-
<PAGE>
Company's distributors to marketing the Company's products or whether such
distributors will continue to offer the Company's products. There can be no
assurance that the Company's HLDA products will achieve broad market
acceptance. A decline in the demand for, or the failure to achieve broad
market acceptance of, the Company's HLDA products will have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
Although demand for HLDA products has increased in recent years, the market
for HLDA products is still emerging and there can be no assurance that it
will continue to grow or that, even if the market does grow, businesses will
continue to purchase the Company's HLDA products. If the market for HLDA
products fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, financial condition, results of
operations or cash flows would be materially adversely affected.
Traditionally, EDA customers have been risk averse in accepting new design
methodologies. Because many of Summit's tools embody new design
methodologies, this risk aversion on the part of potential customers presents
an ongoing marketing and sales challenge to the Company and makes the
introduction and acceptance of new products unpredictable. The Company's
Visual Testbench product, introduced in the fourth quarter of 1995, provides
a new methodology and requires a change in the traditional design flow for
creating IC test programs. The Company anticipates a lengthy period of test
marketing for the Visual Testbench product. Accordingly, the Company cannot
predict the extent, to which it will realize revenue from Visual Testbench in
excess of the revenue expected to be received pursuant to an OEM agreement
entered into in July 1997. As part of this agreement, CSC must purchase a
minimum of $16.0 million of Visual Testbench licenses over a thirty month
period beginning in July 1997. As of March 31, 1998 the Company had sold $9.1
million of Visual Testbench licenses pursuant to this agreement. The Company
will need to replace this revenue when the $16.0 million purchase obligation
is satisfied and the failure of the Company to replace this revenue would
have a material adverse affect on the Company's operating results.
COMPETITION
The EDA industry is highly competitive and the Company expects competition to
increase as other EDA companies introduce HLDA products. In the HLDA market,
the Company principally competes with Mentor Graphics and a number of smaller
firms. Indirectly, the Company also competes with other firms that offer
alternatives to HLDA and could potentially offer more directly competitive
products in the future. Certain of these companies have significantly greater
financial, technical and marketing resources and larger installed customer
bases than the Company. Some of the Company's current and future competitors
offer a more complete range of EDA products and may distribute products that
directly compete with the Company's HLDA products by bundling such products
with their core product line. In addition, the Company's products perform a
variety of functions, certain of which are, and in the future may be, offered
as separate products or discrete point solutions by the Company's existing
and future competitors. For example, certain companies currently offer design
entry products without simulators. There can be no assurance that such
competition will not cause the Company to offer point solutions instead of,
or in addition to, the Company's current software products. Such point
solutions would be priced lower than the Company's current product offerings
and could cause the Company's average selling prices to decrease, which could
have a material adverse effect on the Company's business, financial
condition, results of operations, or cash flows.
The Company competes on the basis of certain factors including product
capabilities, product performance, price, support of industry standards, ease
of use, first to market and customer technical support and service. The
Company believes that it competes favorably overall with respect to these
factors. However, in particular cases, the Company's competitors may offer
HLDA products with functionality which is sought by the Company's prospective
customers and which differs from that offered by the Company. In addition,
certain competitors may achieve a marketing advantage by establishing formal
alliances with other EDA vendors. Further, the EDA industry in general has
experienced significant consolidation in recent years, and the acquisition of
one of the Company's competitors by a larger, more established EDA vendor
could create a more significant competitor. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have
a material adverse effect on its business, financial condition, results of
operations, or cash flows.
-18-
<PAGE>
There can be no assurance that the Company's current and future competitors
will not be able to develop products comparable or superior to those
developed by the Company or to adapt more quickly than the Company to new
technologies, evolving industry trends or customer requirements. Increased
competition could result in price reductions, reduced margins and loss of
market share, all of which could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
DEPENDENCE ON ELECTRONICS INDUSTRY MARKET
Because the electronics industry is characterized by rapid technological
change, short product life cycles, fluctuations in manufacturing capacity and
pricing and margin pressures, certain segments, including the computer,
semiconductor, semiconductor test equipment and telecommunications
industries, have experienced sudden and unexpected economic downturns. During
these periods, capital spending is commonly curtailed and the number of
design projects often decreases. Because the Company's sales are dependent
upon capital spending trends and new design projects, negative factors
affecting the electronics industry could have a material adverse effect on
the Company's business, financial condition, results of operations, or cash
flows. A number of electronics companies, including customers of the Company,
have recently experienced a slowdown in their businesses. The Company's
future operating results may reflect substantial fluctuations from period to
period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from customers and other factors.
DEPENDENCE ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY
Because the Company's products must interoperate with EDA products of other
companies, particularly simulation and synthesis products, the Company must
have timely access to third party software to perform development and testing
of its products. Although the Company has established relationships with a
variety of EDA vendors to gain early access to new product information, these
relationships may be terminated by either party with limited notice. In
addition, such relationships are with companies that are current or potential
future competitors of the Company, including Synopsys, Mentor Graphics and
Cadence. If any of these relationships were terminated and the Company was
unable to obtain, in a timely manner, information regarding modifications of
third party products necessary for modifying its software products to
interoperate with these third party products, the Company could experience a
significant increase in development costs, the development process would take
longer, product introductions would be delayed and the Company's business,
financial condition, results of operations or cash flows could be materially
adversely affected.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The EDA industry is characterized by extremely rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. In
addition, customers in the EDA industry require software products that allow
them to reduce time to market, differentiate their products, improve their
engineering productivity and reduce their design errors. The Company's future
success will depend upon its ability to enhance its current products, develop
and introduce new products that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products
that respond to technological change or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products, or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce products in a timely manner in
response to changing market conditions, industry standards or other customer
requirements, particularly if such product releases have been pre-announced,
the Company's business, financial condition, results of operations or cash
flows will be materially adversely affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has in the past discovered software errors in certain of its
-19-
<PAGE>
products and has experienced delays in shipment of products during the period
required to correct these errors. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will
not be found, resulting in loss of, or delay in, market acceptance and sales,
diversion of development resources, injury to the Company's reputation or
increased service and warranty costs, any of which could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
DEPENDENCE ON DISTRIBUTORS
The Company relies on distributors for licensing and support of its products
outside of North America. Approximately 24%, 55%, 29%, 46% and 42% of the
Company's revenue for the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995, respectively, were attributable
to sales made through distributors. The Company has also entered into a joint
venture with Anam pursuant to which the joint venture corporation Summit Asia
acquired exclusive rights to sell, distribute and support all of the
Company's products in the Asia-Pacific region, excluding Japan. Summit Asia
has acted in such capacity since April 1, 1996. Prior to that date, Anam was
an independent distributor of the Company's products. The Company is
currently restructuring the ownership and responsibilities of Summit Asia.
There can be no assurance that any restructuring would result in Summit Asia
becoming profitable or that revenue attributable to sales in the Asia Pacific
region, excluding Japan, would increase. During the first quarter of 1997,
the Company entered into a distribution agreement with ATE pursuant to which
ATE was granted exclusive rights to sell, distribute and support Summit's
Visual Testbench products within Japan until October 1998, subject to the
Company's ability to terminate the relationship if ATE fails to meet
quarterly sales objectives. The agreement may also be terminated by either
party for breach. In addition, in the first quarter of 1996, the Company
entered into a three-year, exclusive distribution agreement for its HLDA
products in Japan with Seiko. In the event Seiko fails to meet specified
quotas for two or more quarterly periods, exclusivity can be terminated by
Summit, subject to Seiko's right to pay a specified fee to maintain
exclusivity. The agreement is renewable for successive five-year terms by
mutual agreement of the Company and Seiko and is terminable by either party
for breach. In March 1997, the Company entered into a three-year distribution
agreement with Kanematsu USA Inc. pursuant to which Kanematsu was granted
exclusive distribution rights to sell, distribute and support certain
verification products in Japan. For the three months ended March 31, 1998
and the year ended December 31, 1997, all sales of the Company's products in
the Asia-Pacific region were through Seiko, Summit Asia, ATE and Kanematsu.
There can be no assurance the relationships with Seiko, Summit Asia, ATE and
Kanematsu will be effective in maintaining or increasing sales relative to
the levels experienced prior to such relationships. The Company also has
independent distributors in Europe and is dependent on the continued
viability and financial stability of its distributors. Since the Company's
products are used by skilled design engineers, distributors must possess
sufficient technical, marketing and sales resources and must devote these
resources to a lengthy sales cycle, customer training and product service and
support. Only a limited number of distributors possess these resources. In
addition, Seiko, Summit Asia, ATE and Kanematsu, as well as the Company's
other distributors, may offer products of several different companies,
including competitors of the Company. There can be no assurance that the
Company's current distributors will continue to market or service and support
the Company's products effectively, that any distributor will continue to
sell the Company's products or that the distributors will not devote greater
resources to products of other companies. The loss of, or a significant
reduction in, revenue from the Company's distributors could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
INTERNATIONAL SALES AND OPERATIONS
Approximately 32%, 53%, 34%, 50% and 52% of the Company's revenue for the
three months ended March 31, 1998 and 1997 and the years ended December 31,
1997, 1996 and 1995, respectively, were attributable to sales made outside
the United States. The Company expects that international revenue will
continue to represent a significant portion of its total revenue. The
Company's international revenue is currently denominated in U.S. dollars. As
a result, increases in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in those
-20-
<PAGE>
markets. The Company pays the expenses of its international operations in
local currencies and does not engage in hedging transactions with respect to
such obligations. International sales and operations are subject to numerous
risks, including tariff regulations and other trade barriers, requirements
for licenses, particularly with respect to the export of certain
technologies, collectability of accounts receivable, changes in regulatory
requirements, difficulties in staffing and managing foreign operations and
extended payment terms. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales
and operations and, consequently, on the Company's business, financial
condition, results of operations or cash flows. In addition, financial
markets and economics in the Asia Pacific Region have been experiencing
adverse conditions which could adversely affect demand for the Company's
products in such region.
In order to successfully expand international sales, the Company may need to
establish additional foreign operations, hire additional personnel and
recruit additional international distributors. This will require significant
management attention and financial resources and could adversely affect the
Company's operating margins. In addition, to the extent that the Company is
unable to effect these additions in a timely manner, the Company's growth, if
any, in international sales will be limited. There can be no assurance that
the Company will be able to maintain or increase international sales of the
Company's products, and failure to do so could have a material adverse effect
on the Company's business, financial condition, results of operations or cash
flows.
MANAGEMENT OF GROWTH AND ACQUISITIONS
Summit's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit
additional employees and train and manage current and future employees.
Summit expects any such growth will place a significant strain on its
operational resources and systems. Failure effectively to manage any such
growth would have a material adverse effect on Summit's business, financial
condition, results of operations or cash flows.
On February 28, 1997, Summit completed its acquisition of TriQuest and on
September 9, 1997, Summit completed its acquisition of SimTech. As a result
of these acquisitions, Summit's operating expenses are expected to increase.
There can be no assurance that the integration of TriQuest's and SimTech's
business can be successfully completed in a timely fashion, or at all, or
that the revenues from TriQuest and SimTech will be sufficient to support the
costs associated with the acquired businesses, without adversely affecting
Summit's operating margins. Any failure to successfully complete the
integration in a timely fashion or to generate sufficient revenues from the
acquired business could have a material adverse effect on Summit's business,
financial condition, results of operations or cash flows. In addition,
Summit regularly evaluates acquisition opportunities. Future acquisitions by
Summit could result in potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, which could materially
adversely affect Summit's results of operations. Product and technology
acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations, technologies and products, diversion of
management's attention to other business concern, risks of entering markets
in which Summit has no or limited prior experience and potential loss of key
employees of acquired companies. Summit's management has had limited
experience in assimilating acquired organizations and products into Summit's
operations. No assurance can be given as to the ability of Summit to
integrate successfully any operations, personnel or products that have been
acquired or that might be acquired in the future, and the failure of Summit
to do so could have a material adverse effect on Summit's results of
operations.
OPERATIONS IN ISRAEL
The Company's research and development operations related to its HLDA
products are located in Israel and may be affected by economic, political and
military conditions in that country. Accordingly, the Company's business,
financial condition and results of operations could be materially adversely
affected if hostilities involving Israel should occur. This risk is
heightened due to the restrictions on the Company's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants
-21-
<PAGE>
from the government of Israel as described in "--Israeli Research,
Development and Marketing Grants." In addition, while all of the Company's
sales are denominated in U.S. dollars, a portion of the Company's annual
costs and expenses in Israel are paid in Israeli currency. These costs and
expenses were approximately $4.7, $4.3 and $4.3 million in 1997, 1996 and
1995, respectively. Payment in Israeli currency subjects the Company to
foreign currency fluctuations and to economic pressures resulting from
Israel's generally high rate of inflation, which has been approximately 7%,
11% and 8% during 1997, 1996, and 1995, respectively. The Company's primary
expense which is paid in Israeli currency is employee salaries for research
and development activities. As a result, an increase in the value of Israeli
currency in comparison to the U.S. dollar could increase the cost of research
and development expenses and general and administrative expenses. There can
be no assurance that currency fluctuations, changes in the rate of inflation
in Israel or any of the other aforementioned factors will not have a material
adverse effect on the Company's business, financial condition, results of
operations, or cash flows. In addition, coordination with and management of
the Israeli operations requires the Company to address differences in
culture, regulations and time zones. Failure to successfully address these
differences could be disruptive to the Company's operations.
The Company's Israeli production facility has been granted the status of an
"Approved Enterprise" under the Israeli Investment Law for the Encouragement
of Capital Investments, 1959 (the Investment Law). Taxable income of a
company derived from an "Approved Enterprise" is eligible for certain tax
benefits, including significant income tax rate reductions for up to seven
years following the first year in which the "Approved Enterprise" has Israeli
taxable income (after using any available net operating losses). The period
of benefits cannot extend beyond 12 years from the year of commencement of
operations or 14 years from the year in which approval was granted, whichever
is earlier. The tax benefits derived from a certificate of approval for an
"Approved Enterprise" relate only to taxable income attributable to such
"Approved Enterprise" and are conditioned upon fulfillment of the conditions
stipulated by the Investment Law, the regulations promulgated thereunder and
the criteria set forth in the certificate of approval. In the event of a
failure by the Company to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and the Company would be required to
refund the amount of the canceled benefits, adjusted for inflation and
interest. There can be no assurance that the Company's Israeli production
facility will continue to operate or qualify as an "Approved Enterprise" or
that the benefits under the "Approved Enterprise" regulations will continue,
or be applicable, in the future. The loss of, or any material decrease in,
these income tax benefits could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical and management personnel and its ability to continue to
attract and retain highly-skilled technical, sales and marketing and
management personnel. The Company has entered into employment agreements with
certain of its executive officers, however, such agreements do not guarantee
the services of these employees and do not contain non-competition
provisions. Competition for personnel in the software industry in general,
and the EDA industry in particular, is intense, and the Company has at times
in the past experienced difficulty in recruiting qualified personnel. There
can be no assurance that the Company will retain its key personnel or that it
will be successful in attracting and retaining other qualified technical,
sales and marketing and management personnel in the future. The loss of any
key employees or the inability to attract and retain additional qualified
personnel may have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. The Company has
obtained a $1 million key person life insurance policy on its
President/Chief Executive Officer. The Company recently hired a new Vice
President of Worldwide Marketing and Sales and several new sales persons. The
Company's future success will depend in part on the ability of these new
persons to rapidly and effectively transition into their new positions.
Additions of new personnel and departures of existing personnel, particularly
in key positions, can be disruptive and can result in departures of
additional personnel, which could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
-22-
<PAGE>
ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS
Summit's Israeli subsidiary obtained research and development grants from the
Office of the Chief Scientist (the "Chief Scientist") in the Israeli Ministry
of Industry and Trade of approximately $232,000 and $608,000 in 1993 and
1995, respectively. As of December 31, 1997, all amounts had been repaid. The
terms of the grants prohibit the manufacture of products developed under
these grants outside of Israel and the transfer of the technology developed
pursuant to these grants to any person, without the prior written consent of
the Chief Scientist. The Company's Visual HDL for VHDL products have been
developed under grants from the Chief Scientist and thus are subject to these
restrictions. If the Company is unable to obtain the consent of the
government of Israel, the Company would be unable to take advantage of
potential economic benefits such as lower taxes, lower labor and other
manufacturing costs and advanced research and development facilities that may
be available if such technology and manufacturing operations could be
transferred to locations outside of Israel. In addition, the Company would be
unable to minimize risks particular to operations in Israel, such as
hostilities involving Israel. Although the Company is eligible to apply for
additional grants from the Chief Scientist, it has no present plans to do so.
The Company received a Marketing Fund Grant from the Israeli Ministry of
Industry and Trade for an aggregate of $423,000. The grant must be repaid at
the rate of 3% of the increase in exports over the 1993 export level of all
Israeli products, until repaid. As of March 31, 1998, approximately $261,000
was outstanding under the grant.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures, licensing arrangements and technical means
to establish and protect its proprietary rights. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
limits access to, and distribution of, its software, documentation and other
proprietary information. In addition, the Company's products are protected by
hardware locks and software encryption techniques designed to deter
unauthorized use and copying. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently.
The Company provides its HLDA Plus products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software In
addition, the Company delivers certain of its verification products
electronically under an electronic version of a "shrink wrap" license
agreement. These agreements are not negotiated with or signed by the
licensee, and thus may not be enforceable in certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad will be adequate or that competitors will not
independently develop similar technology.
The Company could be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows,
the functionality of products in its industry segment overlaps and an
increasing number of software patents are granted by the United States Patent
and Trademark Office. There can be no assurance that a third party will not
claim such infringement by the Company with respect to current or future
products. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product delays or require the Company to
enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all. Failure to protect its proprietary rights or claims of
infringement could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the
market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may
-23-
<PAGE>
adversely affect the market price of the Common Stock. In addition, factors
such as announcements of technological innovations or new products by the
Company or its competitors, market conditions in the computer software or
hardware industries and quarterly fluctuations in the Company's operating
results may have a significant adverse effect on the market price of the
Company's Common Stock.
YEAR 2000
The Company is currently reviewing its products, internal systems and
infrastructure in order to identify and modify those products and systems
that are not Year 2000 compliant. The Company expects any required
modification to be made on a timely basis and does not believe that the cost
of any such modification will have a material adverse affect on the Company's
operating results. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, implementation of any such
modifications and the Company's inability to implement such modifications
could have an adverse effect on the Company's future operating results.
-24-
<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
From January 1, 1998 to March 31, 1998 the Company issued and sold
22,142 shares of Common Stock that were not registered under the
Securities Act of 1933 at prices ranging from $0.08 to $1.17 per
share upon exercise of stock options. Such issuances were made in
reliance upon the exemption from registration set forth in Rule 701
promulgated under the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
*10.15 Bank line of credit agreement between the Registrant
and U.S. National Bank of Oregon dated April 30, 1998
27.1 Financial Data Schedule
</TABLE>
* Previously filed.
(b) Reports on Form 8-K
Not applicable
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT DESIGN, INC.
By: /s/ C. Albert Koob
-----------------------
C. Albert Koob
Vice President - Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
Date: March 15, 1999
-26-
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
*EXHIBIT 10.15 Bank line of credit agreement between the Registrant
and U.S. National Bank of Oregon dated April 30, 1998
EXHIBIT 27.1 Financial Data Schedule
EXHIBIT 27.2 Financial Data Schedule
</TABLE>
* Previously filed.
-27-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,402
<SECURITIES> 0
<RECEIVABLES> 5,991
<ALLOWANCES> 592
<INVENTORY> 0
<CURRENT-ASSETS> 27,460
<PP&E> 4,700
<DEPRECIATION> 1,803
<TOTAL-ASSETS> 39,584
<CURRENT-LIABILITIES> 11,672
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 26,397
<TOTAL-LIABILITY-AND-EQUITY> 39,584
<SALES> 0
<TOTAL-REVENUES> 10,357
<CGS> 0
<TOTAL-COSTS> 583
<OTHER-EXPENSES> 7,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 2,325
<INCOME-TAX> 923
<INCOME-CONTINUING> 1,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,402
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE CONSOLIDATED BALANCE SHEETS AS OF SEP-30-1997, JUN-30-1997 AND
MAR-31-1997 AND THE RELATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 19,851 22,005 17,224
<SECURITIES> 0 0 0
<RECEIVABLES> 6,278 6,371 5,672
<ALLOWANCES> 378 439 449
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 26,263 28,380 23,001
<PP&E> 3,869 4,365 5,130
<DEPRECIATION> 1,930 2,122 2,522
<TOTAL-ASSETS> 29,191 31,879 36,523
<CURRENT-LIABILITIES> 7,817 8,458 12,105
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 141 143 148
<OTHER-SE> 20,217 22,371 22,428
<TOTAL-LIABILITY-AND-EQUITY> 29,191 31,879 36,523
<SALES> 0 0 0
<TOTAL-REVENUES> 6,520 13,700 21,609
<CGS> 0 0 0
<TOTAL-COSTS> 295 601 991
<OTHER-EXPENSES> 5,163 10,303 27,712
<LOSS-PROVISION> 0 60 120
<INTEREST-EXPENSE> 7 9 10
<INCOME-PRETAX> 1,273 3,236 (739)
<INCOME-TAX> 80 180 713
<INCOME-CONTINUING> 1,193 3,056 (1,452)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,193 3,056 (1,452)
<EPS-PRIMARY> 0.09 0.22 (0.10)
<EPS-DILUTED> 0.08 0.20 (0.10)
</TABLE>
