<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 September 30, 1997 or
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to ________
- -------------------------------------------------------------------------------
Commission file number: 0-20923
SUMMIT DESIGN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1137888
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
9305 S. W. GEMINI DRIVE,
BEAVERTON, OREGON 97008
(Address of principal executive office)
Registrant's Telephone number, including area code: (503) 643-9281
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of November 4, 1997, the Registrant had outstanding 14,655,899 shares of
Common Stock.
<PAGE>
SUMMIT DESIGN, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 1997
(unaudited) and December 31, 1996. 3
Condensed Consolidated Statements of Operations for the
three month and nine month periods ended September 30, 1997
and 1996 (unaudited). 4
Condensed Consolidated Statements of Cash Flows for
the nine month periods ended September 30, 1997 and 1996 (unaudited). 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Not Applicable
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 27
Item 6 Exhibits and Reports on Form 8-K 27
Item 1 and Item 3 through Item 5 Not Applicable
Signature 28
Exhibit Index 29
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 November 14, 1997 for the purpose of
restating financial information and related disclosures for the three and
nine month periods ended September 30, 1997. See Note 1 to the Condensed
Consolidated Financial Statements.
-2-
<PAGE>
SUMMIT DESIGN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Restated)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............. $ 17,224 $ 19,801
Accounts receivable, net .............. 5,223 5,578
Prepaid expenses and other ............ 554 490
------------------ -----------------
Total current assets ................ 23,001 25,869
Furniture and equipment, net ............ 2,608 1,862
Notes receivable from related parties ... 490 -
Intangibles, net ........................ 6,246 -
Goodwill, net ........................... 3,681 -
Deferred taxes .......................... - 500
Deposits and other assets ............... 497 469
------------------ -----------------
Total assets ........................ $ 36,523 $ 28,700
------------------ -----------------
------------------ -----------------
LIABILITIES
Current liabilities:
Long-term debt, current portion ....... $ 390 $ 473
Capital lease obligation, current
portion ............................... 41 66
Accounts payable ...................... 1,900 1,456
Accrued liabilities ................... 4,741 2,880
Deferred revenue ...................... 5,033 3,758
------------------ -----------------
Total current liabilities ........... 12,105 8,633
Long-term debt, less current portion .... 754 754
Capital lease obligations, less
current portion ......................... 59 95
Deferred revenue, less current portion .. 333 67
Deferred taxes .......................... 696 -
------------------ -----------------
Total liabilities ................... 13,947 9,549
------------------ -----------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value.
Authorized 30,000 shares; issued
and outstanding 14,862 shares at
September 30, 1997 and 14,079 shares
at December 31, 1996.................. 148 141
Additional paid-in capital .............. 49,676 33,261
Accumulated deficit ..................... (15,703) (14,251)
Treasury stock, at cost, 939 shares at
September 30, 1997 ................... (11,545) -
------------------ -----------------
Total stockholders' equity .......... 22,576 19,151
------------------ -----------------
Total liabilities and
stockholders' equity ................ $ 36,523 $ 28,700
------------------ -----------------
------------------ -----------------
</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 Nine Months
Ended Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
---------- -------- ---------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Product licenses..................... $ 6,444 $ 3,851 $ 16,951 $11,143
Maintenance and services............. 1,374 1,168 4,300 3,063
Other................................ 91 142 358 425
---------- -------- ---------- ---------
Total revenue................... 7,909 5,161 21,609 14,631
Cost of revenue:
Product licenses..................... 165 156 514 434
Maintenance and services............. 171 124 423 337
Amortization of purchased
technologies....................... 54 - 54 -
---------- -------- ---------- ---------
Total cost of revenue........... 390 280 991 771
---------- -------- ---------- ---------
Gross profit............... 7,519 4,881 20,618 13,860
---------- -------- ---------- ---------
Operating expenses:
Research and development............. 1,817 1,478 4,944 4,386
Sales and marketing.................. 2,705 2,374 7,820 6,811
General and administrative........... 954 789 3,015 2,340
Amortization of intangibles and
goodwill........................... 244 - 244 -
In-process technology................ 11,689 - 11,689 -
---------- -------- ---------- ---------
Total operating expenses........ 17,409 4,641 27,712 13,537
---------- -------- ---------- ---------
Income (loss) from operations............. (9,890) 240 (7,094) 323
Interest expense.......................... (1) (17) (10) (95)
Other income, net......................... 347 27 796 49
Gain on sale of TDS product line.......... 5,569 - 5,569 -
---------- -------- ---------- ---------
Income (loss) before income taxes......... (3,975) 250 (739) 277
Income tax provision...................... 533 34 713 243
---------- -------- ---------- ---------
Net income (loss)......................... $ (4,508) $ 216 $ (1,452) $ 34
---------- -------- ---------- ---------
---------- -------- ---------- ---------
Earnings per share-Basic:
Earnings (loss) per share............ $ (0.31) $ 0.02 $ (0.10) $ (0.00)
---------- -------- ---------- ---------
---------- -------- ---------- ---------
Earnings per share-Diluted:
Earnings (loss) per share............ $ (0.31) $ 0.02 $ (0.10) $ (0.00)
---------- -------- ---------- ---------
---------- -------- ---------- ---------
Number of shares used in computing
basic earnings per share.................. 14,456 12,959 14,245 12,608
Number of shares used in computing
diluted earnings per share................ 14,456 12,959 14,245 12,608
</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>
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- ---------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (1,452) $ 34
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 905 663
Amortization of future contingent share
liability.................................... 183 -
Gain on sale of TDS product line................. (5,569) -
Writeoff of acquired in-process technology....... 11,689 -
Loss on asset disposition........................ (1) 5
Changes in assets and liabilities:
Accounts receivable.......................... 858 1,439
Prepaid expenses and other................... (27) (96)
Accounts payable............................. 436 (74)
Accrued liabilities.......................... 1,226 557
Deferred revenue............................. 1,294 1,164
Deferred taxes............................... (126) -
Other, net................................... (75) 129
--------- ---------
Net cash provided by operating activities........... 9,341 3,821
--------- ---------
Cash flows from investing activities:
Additions to furniture and equipment................ (1,266) (553)
Acquisitons, net of cash received................... (3,816) -
Proceeds from sale of TDS product line, net......... 4,643 -
Proceeds from sale of assets........................ 8 6
Notes receivable from related parties............... (490) -
Invest in Joint Venture............................. - (100)
--------- ---------
Net cash used in investing activities............ (921) (647)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs 700 119
Payments to acquire treasury stock.................. (11,555) -
Issuance of TriQuest Preferred Stock................ - 986
Stock issuance costs................................ - (674)
Repurchase of common stock.......................... - (2)
Proceeds from long-term debt........................ - 73
Short term borrowings............................... - (164)
Principal payments of debt obligations.............. (81) (411)
Principal payments of capital lease obligations..... (61) (1,050)
--------- ---------
Net cash used in financing activities............ (10,997) (1,123)
--------- ---------
Increase (decrease) in cash and cash
equivalents.................................... (2,577) 2,051
Cash and cash equivalents, beginning of period.......... 19,801 711
--------- ---------
Cash and cash equivalents, end of period................ $ 17,224 $ 2,762
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 10 $ 64
Income taxes..................................... 104 188
Supplemental disclosure of non-cash investing
and financing activities:
Equipment acquired under capital lease........... - 23
Acquisition, net of cash acquired:
Net current assets, other than cash acquired........ $ (1,603)
Furniture and equipment............................. 377
In-process technology............................... 11,689
Purchased technology and intangibles................ 10,225
Stock issued........................................ (15,550)
Cash used, net of cash acquired..................... (3,816)
</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 AND RESTATEMENT
The accompanying unaudited financial statements have been prepared by Summit
Design, Inc. ("the Company") in accordance with the rules and regulations of
the Securities and Exchange commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
in accordance with such rules and regulations. The December 31, 1996 balance
sheet was derived from the audited financial statements but does not include
all of the disclosures required by generally accepted accounting principles.
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company, and its
results of operations and cash flows. These financial statements should be
read in conjunction with the audited financial statements and notes thereto
for the years ended December 31, 1996, 1995, and 1994 included in the
Company's Form 10-K filed for December 31, 1996.
After discussion with the staff of the Securities and Exchange Commission
(the "staff") the condensed consolidated financial statements as of September
30, 1997 and for the three and nine months ended September 30, 1997 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. In addition, Summit adjusted the
discount on common shares paid to SimTech shareholders from 28% to 10% and
allocated $4.4 million of the purchase price, associated with certain shares,
to contingent compensation. The Company has reduced the amount originally
allocated to IPR&D from $19.9 million to $11.7 million and increased the
amounts allocated to purchased technology, identifiable intangibles, deferred
tax liability, and goodwill from $1.0 million to $2.4 million, $1.0 million
to $4.1 million, $0 to $1.3 million and $0 to $3.8 million, respectively.
These amounts are being amortized on a straight line basis over periods
ranging from two to five years. The $4.4 million allocated to compensation
will be recorded as expense as the employment obligation lapses.
The restatement does not affect previously reported net cash flows for the
periods. The effect of this reallocation on previously reported condensed
consolidated financial statements as of and for the three and nine months
ended September 30, 1997 is as follows (in thousands except per share
amounts, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
Statements of Operations: As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Cost of revenues $ 355 $ 390 $ 956 $ 991
Gross margin 7,554 7,519 20,653 20,618
Operating expenses, excluding
In-process technology 5,301 5,720 15,604 16,023
In-process technology 19,937 11,689 19,937 11,689
Income (loss) from operations (11,769) (3,975) (14,888) (7,094)
Net income (loss) (12,409) (4,508) (9,353) (1,452)
Net income (loss) per share
Basic $ (0.86) $ (0.31) $ (0.66) $ (0.10)
Diluted $ (0.86) $ (0.31) $ (0.66) $ (0.10)
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
Balance Sheets: As Reported Restated
----------- --------
<S> <C> <C>
Noncurrent assets $ 6,378 $ 13,522
Total assets 29,379 36,523
Deferred tax liability 0 696
Accumulated deficit (23,603) (15,703)
Total shareholders' equity 15,611 22,576
</TABLE>
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997 or any other future interim period, and the Company
makes no representations related thereto.
2. ACQUISITION OF TRIQUEST DESIGN AUTOMATION, INC.
On February 28, 1997, the Company acquired TriQuest Design Automation, Inc.,
a California corporation (TriQuest"). TriQuest develops hardware description
language ("HDL") analysis, optimization and verification tools for the design
of high performance, deep submicron integrated circuits. The aggregate
consideration for the acquisition (including shares of common stock reserved
for issuance upon exercise of TriQuest options assumed by the Company) was
775,000 shares of common stock. The transaction was accounted for as a
"pooling of interests" in accordance with generally accepted accounting
principles. In compliance with such principles, the Company's operating
results have been restated to include the results of TriQuest as if the
acquisition had occurred at the beginning of the first period presented.
The following presents the previously separate results of TriQuest and Summit
(in thousands):
<TABLE>
<CAPTION>
Two Months Ended Year Ended Year Ended
February 28, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Summit Design, Inc.
Revenues $1,473 $20,163 $14,292
Net Income (loss) (921) 2,688 (3,123)
TriQuest
Revenues 199 151 --
Net Income (loss) 143 (1,425) (488)
</TABLE>
3. SALE OF TDS PRODUCT LINE
On July 11, 1997 the Company sold substantially all of the assets used in its
business of developing and marketing its Test Development Series "TDS"
Products (the "Asset Sale") to Credence Systems Corporation ("CSC") for $5
million. CSC assumed certain liabilities, including the Company's
obligations under TDS maintenance contracts entered into prior to the
closing. CSC also agreed to purchase $2 million of Visual interface licenses
in the second quarter of 1997. TDS product license, maintenance and services
and other revenue for the three months ended September 30, 1997 and 1996 were
$0 and $1,758,000, respectively, and for the nine months ended September 30,
1997 and 1996 were $3,530,000 and $5,400,000, respectively, and $7,331,000
for the year ended December 31, 1996.
The Company and CSC also entered into a Software OEM License agreement ("OEM
Agreement") in which CSC agreed to purchase $16 million of Visual Testbench
licenses over a thirty-month period beginning July 1997 subject to specified
quarterly maximums and certain additional conditions. Additionally CSC
entered into an 18 month maintenance agreement beginning July 1997 for $2
million associated with the Visual Testbench product.
-6-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. ACQUISITION OF SIMULATION TECHNOLOGIES CORP.
On September 9, 1997, the Company acquired Simulation Technologies Corp.
("SimTech"), a Minnesota Corporation. SimTech 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 the
Summit Common Stock, 723,200 options to purchase Summit common stock, and
$3,875,000 of cash. An additional $315,000 of direct acquisition costs were
also incurred and included in the purchase price. The total consideration at
estimated fair value as originally reported and as restated is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Originally As
Reported Restated
--------- --------
<S> <C> <C>
Cash.......................................... $ 3,875 $ 3,875
Common stock of Summit........................ 11,367 14,649
Options to purchase Summit common stock....... 5,299 5,299
Other direct acquisition costs................ 315 315
------- -------
$20,856 $24,138
------- -------
------- -------
</TABLE>
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of SimTech's operations have been combined with
those of Summit since the date of acquisition. The allocation of the
purchase price to the net assets acquired based upon their estimated fair
values as originally reported and as restated is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Originally As
Reported Restated
--------- --------
<S> <C> <C>
Current assets............................... $ 937 $ 937
Property and equipment....................... 377 377
In-process technology........................ 19,937 11,689
Purchased technology......................... 1,037 2,390
Identifiable intangibles..................... 735 4,079
Goodwill..................................... - 3,756
Current liabilities assumed.................. (707) (707)
Unearned revenue assumed..................... (1,460) (1,460)
Deferred taxes............................... - (1,322)
Compensation expense contingent upon
future employment.......................... - 4,399
------- -------
$20,856 $24,138
------- -------
------- -------
</TABLE>
The amount allocated to in-process technology was written off immediately
subsequent to the acquisition of SimTech as the in-process technology had not
reached technological feasibility and had no probable alternative future use.
The amounts allocated to purchased technology and identifiable intangibles
are being amortized on a straight-line basis over two to five years.
Additionally, the Company will record a charge to expense for shares issued
in the transaction which are contingent upon continued employment for up to
two years from the acquisition date. A total of $4.4 million of compensation
expense will be recorded as the employment obligation lapses.
The following table reflects unaudited pro forma combined results of
operations of the Company and SimTech on a basis that the acquisition had
taken place at the beginning of the fiscal year for each of the periods
presented, excluding the effect of the one time charge of in-process
technology:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- -----------------
(Restated) (Restated)
(In thousands, except per share data)
<S> <C> <C>
Revenues $ 24,391 $ 25,525
-------- --------
-------- --------
Net Income (loss) $ (4,104) $ 4,594
-------- --------
-------- --------
Net income per diluted share $ (0.31) $ 0.29
-------- --------
-------- --------
Number of shares used in
per share calculation 13,292 16,033
-------- --------
-------- --------
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisition been consummated at the beginning of 1996 or at the
beginning of 1997 or under the ownership and management of the Company.
In connection with this transaction the Company also repurchased 939,000
shares of Summit common stock in private transactions at an average price of
$12.30 per share for an aggregate of $11,555,000 in cash.
5. NOTE RECEIVABLE
In July 1997, the Company entered into an agreement to lend up to $2.5
million to an independent software development company pursuant to a secured
loan agreement. Borrowings under this agreement bear interest at prime rate
plus 2%.
6. BALANCE SHEET COMPONENTS, (IN THOUSANDS)
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
Accounts Receivable:
Trade receivables....................... $ 5,672 $ 6,011
Less allowance for doubtful accounts.... (449) (433)
------------------ -----------------
$ 5,223 $ 5,578
------------------ -----------------
------------------ -----------------
Furniture and equipment:
Office furniture equipment............. $ 530 $ 513
Computer equipment..................... 4,432 3,154
Leasehold improvements................. 66 41
In-process assets...................... 102 -
------------------ -----------------
5,130 3,708
Less: accumulated depreciation........... (2,522) (1,846)
------------------ -----------------
$ 2,608 $ 1,862
------------------ -----------------
------------------ -----------------
-7-
<PAGE>
SUMMIT DESIGN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accrued expenses:
Commissions payable.................... $ 46 $ 173
Payroll and related benefits........... 2,314 1,610
Accrued management relocation costs.... 160 24
Accounting and legal................... 418 301
Federal and state income taxes payable. 738 18
Sales taxes payable.................... 117 96
Other.................................. 948 658
------------------ -----------------
Total accrued expenses.............. $ 4,741 $ 2,880
------------------ -----------------
------------------ -----------------
Long-term debt:
Marketing grant payable to the Israeli $ 364 $ 364
government Chief Scientist grant
payable to the Israeli government.... 702 773
Other.................................. 78 90
------------------ -----------------
Total long-term debt..................... 1,144 1,227
Less current portion..................... (390) (473)
------------------ -----------------
Non current portion...................... $ 754 $ 754
------------------ -----------------
------------------ -----------------
7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") and Statement of Financial Accounting Standards No. 129
"Disclosure of Information about Capital Structure" ("SFAS 129"), which are
effective for the Company's 1997 fiscal year. The Company's management has
studied the implications of SFAS 128 and SFAS 129, and based on the initial
evaluation, does not expect the adoption to have a material impact on the
Company's financial condition or results of operations.
In June 1997, FASB issued SFAS No. 130, "Comprehensive Income" SFAS No. 130
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in
the amounts of certain items, including foreign currency translation
adjustments and gains and losses on certain securities be shown in the
financial statements. SFAS No. 130 does not require a specific format for the
financial statement in which comprehensive income is reported, but does
require that an amount representing total comprehensive income be reported in
that statement. Management has not yet determined the effect, if any, of SFAS
No. 130 on the consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected
segment information in their quarterly reports issued to shareholders. It
also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement is effective for fiscal
years beginning after December 15, 1997. Management has no yet determined
the effect, if any, of SFAS No.131 on the consolidated financial statements.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1 and is effective for transactions entered into in
years beginning after December 15, 1997. Management is currently studying the
implications of this Statement and does not expect adoption to have a material
impact on the Company's financial condition or results of operations.
8. SUBSEQUENT EVENT--(UNAUDITED):
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.
-8-
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
The following discussion contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Predictions of future events are inherently
uncertain. Actual events could differ materially from those predicted in the
forward looking statements as a result of the risks set forth in the
following discussion, and, in the particular, the risks discussed below under
the subheading "Additional Risk Factors that Could Affect Operating Results
and Market Price of Stock."
OVERVIEW
Summit previously announced it would revise the accounting treatment of its
September 1997 acquisition of SimTech in response to comments received from
the Securities and Exchange Commission. The following discussion includes all
changes that have been made related to the restatement.
Summit was founded in December 1993 to act as the holding company for Test
Systems Strategies, Inc. ("TSSI") and SEE Technologies Software Environment
for Engineers Ltd. ("SEE Technologies"), (now Summit Design (EDA) Ltd.)
(collectively , the "Reorganization"). TSSI was founded in 1979 to develop
and market integrated circuit ("IC" or "chip") manufacturing test products.
In January 1993, TSSI retained a new Chief Executive Officer and began to
restructure its senior management team. Thereafter, the Company broadened its
strategy from focusing primarily on manufacturing test products to include
providing graphical Systems Level Design Automation ("SLDA") design 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 SLDA market. As a
result of the Reorganization, TSSI and SEE Technologies became wholly-owned
subsidiaries of Summit in the first quarter of 1994.
The Company's ongoing implementation of its strategy has involved significant
expenditures. Following the Reorganization, the Company significantly
increased its research and development expenditures to support the continued
development of SLDA and Design to Test products. To promote its products, the
Company has added sales and marketing staff, increasing its sales and
marketing expenditures by 147% from 1993 to 1996, and has restructured its
key distributor relationships. This concurrent effort to develop products and
promote market awareness and acceptance of its products in a new and evolving
market contributed to the Company's annual losses. The Company introduced
its first SLDA product, Visual HDL for VHDL 1.0, in the first quarter of
1994. This product lacked compiled simulation and operated only on a PC
platform. In the third quarter of 1994, with the release of version 2.5,
Summit expanded the simulation capability of Visual HDL for VHDL and
introduced its UNIX-based version of this product.
Prior to the Reorganization, the Company's TDS product and related
maintenance revenue accounted for all of the Company's revenue. After the
Reorganization, the Company's revenue has been predominantly derived from two
product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL
for Verilog, and TDS. As of July 1, 1997 with the sale of the TDS product
line, Design to Test products are no longer a source of revenue. With the
acquisition of TriQuest Design Automation ("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 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. The Company sells its products through a direct sales
force in North America and selected European countries and through
distributors in the Company's other international markets. Revenue from
product sales through distributors is recognized net of the associated
distributor
-9-
<PAGE>
discounts. Fees received for granting distribution rights are deferred and
recognized ratably over the term of the distribution agreement. Although the
Company has not adopted a formal return policy, the Company generally
reimburses customers in full for returned products. Estimated sales returns
are recorded upon delivery of the product.
The Company's products have a range of prices which depend on platform, HDL
language, functionality 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 has entered into a joint venture with Anam, effective April 1,
1996, pursuant to which the joint venture corporation (Summit Asia) shall
acquire exclusive rights to sell, distribute and support all of Summit's
products in the Asia-Pacific region, excluding Japan. 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 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. Excluding one-time sales of technology, sales through Anam
accounted for 2.4% and 3.6% of the Company's total revenue and for 21.7% and
33.8% of the Company's revenue attributable to the Asia-Pacific region
excluding Japan for the years ended December 31, 1995 and 1994, respectively.
For the year ended December 31, 1996, Anam and Summit Asia together
accounted for 3.8% of the Company's revenue for the nine months ended
September 30, 1997. Summit Asia accounted for 3.0% of the Company's revenue.
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 is recognized as income or losses in
the Company's income statement in "Other income, net." The Company does not
expect Summit Asia to recognize a profit for the foreseeable future and thus
does not expect to recognize income from its investment in Summit Asia for
the foreseeable future, if at all.
Approximately 26%, 51%, 38% and 51% of the Company's total revenue for the
three months ended September 30, 1997 and 1996, and for the nine months ended
September 30, 1997 and 1996, respectively, were attributable to sales made
outside the United States. The decline in the percentage of revenue from
sales made outside the United States for the three and nine months ended
September 30, 1997 as compared to the same periods in 1996 is primarily the
result of domestic sales to one customer. The Company expects that
international revenue will continue to represent a significant portion of its
total revenue. The Company's international revenue is currently denominated
in U.S. dollars. As a result, increases in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more
expensive and, therefore, potentially less competitive in those markets. The
Company pays the expenses of its international operations in local currencies
and does not engage in hedging transactions with respect to such obligations.
International sales and operations are subject to numerous risks, including
tariff regulations and other trade barriers, requirements for licenses,
particularly with respect to the export of certain technologies,
collectability of accounts receivable, changes in regulatory requirements,
difficulties in staffing and managing foreign operations and extended payment
terms. (1)
On February 28, 1997, Summit completed its acquisition of TriQuest. TriQuest
develops HDL analysis, optimization and verification tools for the design of
high performance, deep submicron integrated circuits. The transaction is
being accounted for as a "pooling of interest" in accordance with generally
accepted accounting principals.
- -------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 19 for a discussion of factors that could affect future performance.
-10-
<PAGE>
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 nine
quarters has been primarily due to increased revenue associated with the
Company's SLDA 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 year ended December 31, 1996
and the nine months ended September 30, 1997 were attributable to the TDS
products. As of July 1, 1997, TDS products ceased to be a source of such
revenues. CSC assumed the Company's obligations under TDS maintenance
contracts entered into prior to the closing and the Company will not
recognize deferred revenue associated with such contracts after June 30, 1997.
The Company maintained exclusive rights to its Visual Testbench technology
and CSC agreed to purchase a minimum of $16,000,000 of Visual Testbench
licenses over a thirty-month period beginning July 1997 subject to specified
quarterly maximums and certain additional conditions, and $2,000,000 of
maintenance over an eighteen month period beginning July 1997. 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 financial
statements. 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 September
30, 1997 and for the three and nine months ended September 30, 1997 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 purchase 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.
-11-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial
data as a percentage of revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Product licenses. . . . . . . . . 81.5 % 74.6 % 78.4 % 76.2 %
Maintenance and services. . . . . 17.4 22.6 19.9 20.9
Other . . . . . . . . . . . . . . 1.1 2.8 1.7 2.9
-------- -------- -------- --------
Total revenue . . . . . . . . 100.0 100.0 100.0 100.0
Cost of revenue:
Product licenses. . . . . . . . . 2.1 3.0 2.4 3.0
Maintenance and services. . . . . 2.2 2.4 2.0 2.3
Amortization of purchased
technologies . . . . . . . . . . 0.7 - 0.2 -
-------- -------- -------- --------
Total Cost of revenue . . . . 5.0 5.4 4.6 5.3
-------- -------- -------- --------
Gross profit. . . . . . . . . 95.0 94.6 95.4 94.7
Operating expenses:
Research and development. . . . . 23.0 28.6 22.8 30.0
Sales and marketing . . . . . . . 34.2 46.0 36.2 46.6
General and administrative (a). . 12.1 15.3 14.0 16.0
Amortization of intangibles and
goodwill . . . . . . . . . . . . 3.1 1.1 -
In-process technology . . . . . . 147.8 - 54.1 -
-------- -------- -------- --------
Total operating expenses. . . 220.2 89.9 128.2 92.6
-------- -------- -------- --------
Income-from operations . . . . . . . . (125.2) 4.7 (32.8) 2.1
Other income (expense), net. . . . . . 74.8 0.2 29.4 (0.3)
-------- -------- -------- --------
Income (loss) before income taxes. . . (50.4) 4.9 (3.4) 1.8
Income tax provision . . . . . . . . . 6.7 0.7 3.3 1.7
-------- -------- -------- --------
Net income (loss) . . . . . .. . . . . (57.1) % 4.2 % (6.7) % 0.1 %
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(a) General and administrative expenses for the nine months ended September
30, 1997 include a one-time charge of $379,000 (1.8% of revenue) for
costs relating to the acquisition of TriQuest.
TOTAL REVENUE
The Company's revenue is comprised of product licenses revenue, maintenance
and services revenue and other revenue. Total revenue increased by 53.2% from
$5.2 million for the three months ended September 30, 1996 to $7.9 million
for the three months ended September 30, 1997 and total revenue increased by
47.7% from $14.6 million for the nine months ended September 30, 1996 to
$21.6 million for the nine months ended September 30, 1997.
Sales through one distributor accounted for 12.3% and 13.5% of the Company's
total revenue for the three months ended September 30, 1997 and 1996,
respectively. Sales through one distributor accounted for 12.9% and 15.5% of
the Company's total revenue for the nine months ended September 30, 1997 and
1996, respectively. Sales to one customer accounted for 41.4 % of total
revenue for the three months ended September 30, 1997 and 25% of total
revenue for the nine months ended September 30, 1997. No single customer
accounted for more than 10% of the Company's total revenue for the three
months and nine months ended September 30, 1996.
-12-
<PAGE>
PRODUCT LICENSES REVENUE
The Company's product licenses revenue is derived from license fees from the
Company's SLDA Design and Verification products and additionally, from Design
to Test products through June 30, 1997. Product licenses revenue increased
by 67.3% from $3.9 million for the three months ended September 30, 1996 to
$6.4 million for the three months ended September 30, 1997, and increased by
52.1% from $11.1 million for the nine months ended September 30, 1996 to
$17.0 million for the nine months ended September 30, 1997.
Because of the addition of SLDA functionality to Visual Testbench beginning
with the release of Version 2.0 in December 1996, the Company recognizes
revenue from Visual Testbench products as SLDA revenue instead of Design to
Test revenue.
SLDA revenue increased 135% from $3.4 million for the three months ended
September 30, 1996 to $7.9 million for the three months ended September 30,
1997. SLDA revenue increased 98% from $9.1 million for the nine months ended
September 30, 1996 to $18.0 million for the nine months ended September 30,
1997. The increase in SLDA revenue for the three months and nine months
ended September 30, 1997 over the same period in 1996 was primarily
attributable to sales to a single customer and to revenue from the
Verification product portfolio that was not shipping in the comparable period
in 1996. Significant sales to the single customer are expected to continue
over the next nine quarters pursuant to contractual arrangements with that
customer.
As a result of the sale of all of the assets used in the business of
developing and marketing the TDS Products effective July 1, 1997, there were
no Design to Test revenues for the three months ended September 30, 1997 as
compared to $1 million for the three months ended September 30, 1996.
MAINTENANCE AND SERVICES REVENUE
The Company's maintenance and services revenue is derived from maintenance
contracts and training classes offered to purchasers of the Company's
software products. Maintenance and services revenue increased 17.6% from
$1.2 million for the three months ended September 30, 1996 to $1.4 million
for the three months ended September 30, 1997. Maintenance and services
revenue increased 40.4% from $3.1 million for the nine months ended September
30, 1996 to $4.3 million for the nine months ended September 30, 1997.
The increase in maintenance and services revenue for the three months ended
September 30, 1997 over the same period in 1996, was comprised of $940,000
attributable to additional maintenance revenue related to growth in the
installed base of SLDA customers over the previous year, less $761,000 of
Design to Test maintenance revenue for the three months ended September 30,
1996 for which there was no revenue in the comparable period in 1997 as a
result of the sale of the TDS product line.
OTHER REVENUE
Other revenue consists of revenue from one-time technology sales and fees
received for granting distribution rights. For the three months ended
September 30, 1997 and 1996, respectively, other revenue was comprised of
$91,000 and $142,000 of distribution rights fees. For the nine months ended
September 30, 1997 and 1996, respectively, other revenue was comprised of
$358,000 and $425,000 of distribution rights fees. In May 1997 a
distribution agreement expired; and, as a result, the distribution rights
fees paid at the inception of the agreement and amortized to revenue at
$50,000 each quarter over the agreement period will no longer be a source of
other revenue. Total other revenue relating to the TDS product line amounted
to $42,000 and $75,000 for the nine months ended September 30, 1997 and
September 30, 1996, respectively. No material costs were associated with
other revenue for the three months and nine months ended September 30, 1997
and 1996.
-13-
<PAGE>
COST OF REVENUE
COST OF PRODUCT LICENSES REVENUE
Cost of product licenses revenue includes product packaging, software
documentation, labor and other costs associated with handling, packaging and
shipping product and other production related costs plus the amortization of
purchased technology acquired in the SimTech purchase. The cost of product
license revenue increased from $156,000 for the three months ended September
30, 1996 to $165,000 for the three months ended September 30, 1997 and
increased from $434,000 for the nine months ended September 30, 1996 to
$514,000 for the nine months ended September 30, 1997. As a percentage of
product licenses revenue, the cost of product licenses revenue decreased from
4.1% of product license revenue to 2.6% of product license revenue for the
three months ended September 30, 1996 and 1997, respectively, and also
decreased from 3.9% to 3.0% of product license revenue for the nine months
ended September 30, 1996 and 1997, respectively. The decrease in the cost of
product license revenue as a percent of product license revenue for the three
months and nine months ended September 30, 1997 over the same periods in 1996
was due primarily to spreading fixed costs over increased revenues and cost
savings from delivering verification products electronically.
COST OF MAINTENANCE AND SERVICES REVENUE
Cost of maintenance and services revenue, which consists primarily of
personnel costs for customer support and training classes offered to
purchasers of the Company's products, increased 37.9% from $124,000 for the
three months ended September 30, 1996 to $171,000 for the three months ended
September 30, 1997 and increased 25.5% from $337,000 for the nine months
ended September 30, 1996 to $423,000 for the nine months ended September 30,
1997. As a percentage of maintenance and services revenue, the cost of
maintenance and services revenue increased from 10.6% for the three months
ended September 30, 1996 to 12.4% for the three months ended September 30,
1997 and decreased from 11% for the nine months ended September 30, 1996 to
9.8% for the nine months ended September 30, 1997. The decrease in the cost
of maintenance and services revenue as a percent of revenue for the nine
months ended September 30, 1997 over the same period in 1996 was primarily
the result of the Company operating below forecasted staffing levels during
the first half of 1997. The Company has increased headcount during the third
quarter 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 $54,000 for the three and
nine months ended September 30, 1997.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and operations
support costs of developing new products and enhancements to existing
products and performing quality assurance activities. Research and
development expenses increased 22.9% from $1.5 million for the three months
ended September 30, 1996 to $1.8 million for the three months ended September
30, 1997. Research and development expenses increased 12.7% from $4.4
million for the nine months ended September 30, 1996 to $4.9 million for the
nine months ended September 30, 1997. A significant amount of the increase
was attributable to compensation expense in the amount of $183,000 for the
three and nine months ended September 30, 1997 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. Additionally, during the three
months ended September 30, 1997, in connection with the sale of the TDS
product line on July 1, 1997, the Company's research and development staff
decreased by 15 engineers. With the acquisition of SimTech on September 9,
1997 the Company added 28 engineers. Additionally, the Company hired 18 new
engineers during the third quarter of 1997. As a percentage of total revenue,
research and development expenses decreased from 28.6% for the three months
ended September 30, 1996 to 23.0% for the three months ended September 30,
1997 and also decreased as a percentage of revenue from 30.0% for the nine
months ended September 30, 1996 to 22.9% for the nine months ended September
30, 1997. The decrease in expense as a percentage of revenue is the result of
revenues increasing 53% and 48% for the three and nine months ended September
30, 1997, respectively. The Company continues to believe that significant
investment in research and development is required to remain competitive in
its markets.
-14-
<PAGE>
Software development costs are accounted for in accordance with Financial
Accounting Standards Board Statement No. 86, under which the Company is
required to capitalize software development costs after technological
feasibility has been established. To date, development costs have been
expensed as incurred since technological feasibility generally has not been
established until shortly before the release of a new product, and no
material development costs have been incurred after establishment of
technological feasibility.
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions
and promotional costs, increased 13.9% from $2.4 million for the three months
ended September 30, 1996 to $2.7 million for the three months ended September
30, 1997 and increased 14.8% from $6.8 million for the nine months ended
September 30, 1996 to $7.8 million for the nine months ended September 30,
1997. The increase for the nine months ended September 30, 1997 over the
same period in 1996 was attributable to the addition of ten sales and
marketing personnel and the related increased commissions and travel
expenses. As a percentage of total revenue, sales and marketing expenses
decreased from 46.0% for the three months ended September 30, 1996 to 34.2%
for the three months ended September 30, 1997 and decreased from 46.6% for
the nine months ended September 30, 1996 to 36.2% for the nine months ended
September 30, 1997. The decrease as a percentage of revenue was primarily
attributable to the increase in total revenue for 1997.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the corporate,
finance, human resource, information services, administrative, and legal and
accounting expenses of the Company. General and administrative expenses
increased 20.9% from $789,000 for the three months ended September 30, 1996
to $954,000 for the three months ended September 30, 1997 and increased 28.8%
from $2.3 million for the nine months ended September 30, 1996 to $3.0
million for the nine months ended September 30, 1997, which includes a
$379,000 one-time charge for costs associated with the acquisition of
TriQuest. Excluding this one-time charge, general and administrative
expenses increased by $296,000 (12.6%) for the nine months ended September
30, 1997 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
15.3% for the three months ended September 30, 1996 to 12.1% for the three
months ended September 30, 1997 and decreased from 16.0% for the nine months
ended September 30, 1996 to 12.2% for the nine months ended September 30,
1997. The decrease as a percentage of total revenue was attributable to the
increase in total revenue in 1997. The Company expects general and
administrative expenses to increase in absolute dollars to support future
sales and operations, including acquired operations, and the additional costs
associated with being a public company.(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 being amortized to expense on a straight line basis
over periods ranging from two to five years beginning September 9, 1997. The
Company expensed $244,000 for the three and nine months ended September 30,
1997.
ACQUIRED IN-PROCESS TECHNOLOGY
For the three and nine months ended September 30, 1997, $11.7 million of the
purchase price for the acquisition of SimTech ($25.4 million) was allocated
to in-process technology and, accordingly, was expensed as of the acquisition
date (September 9, 1997). The amount allocated to the in-process technology
represented the technology that had not yet reached technological feasibility
and had no alternative future use.
The value assigned to purchased in-process technology was related primarily
to two research projects for which technological feasibility had not been
established, V-CPU ($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.
The nature of the efforts to develop the purchased in-process technology into
commercially viable products principally related to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the product can be produced to meet its
design specification, including function, features and technical performance
requirements. The originally estimated costs to be incurred to develop the
purchased in-process technology into commercially viable products was
approximately $1.8 million. The estimated resulting net cash flows from such
products were based on Summit management's estimates of revenues, costs of
sales, research and development costs, selling, general and administrative
costs, and income taxes from such projects.
The estimated revenues include average compounded annual revenue growth rates
for the V-CPU and HDL Score products of 155% to 88% during 1998 to 2000,
declining slightly in 2001 and declining thereafter as other new products are
expected to enter the market.(2) These projections are based on Summit
management's estimates of market size and growth (which are supported by
independent market data), expected trends in technology and the nature and
expected timing of new product introductions by Summit.
Estimated cost of sales of 5% is consistent with Summit's current cost of sales
and future expectations for cost of sales. Sales, marketing and general
administrative costs are expected to be higher than the Company's average costs
in the introduction phase and then stabilize upon introduction at levels that
are expected to be consistent with the Company's expected overall costs in these
areas in future periods. Research and development costs are expected to be
higher than the Company's average costs in the introduction and early phases of
product sales and then decline below the Company's average costs as sales of the
products begin to decline in 2001. This research and development cost pattern
is consistent with the Company's historical experience through product life
cycles. Income taxes were estimated at 30%, which are consistent with the
Company's anticipated tax rate for the foreseeable future.(1)
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)
- -------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That could Affect Operating Results and Market Price of Stock" commencing on
page 19 for a discussion of factors that could affect future performance.
(2) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 19 for a discussion of factors that could affect future performance.
-15-
<PAGE>
INTEREST EXPENSE
Interest expense decreased from $17,000 for the three months ended September
30, 1996 to $1,000 for the three months ended September 30, 1997 and
decreased from $95,000 for the nine months ended September 30, 1996 to
$10,000 for the nine months ended September 30, 1997 due to decreased
borrowings under the Company's bank line of credit, long term debt and
capital leases obligations.
OTHER INCOME, NET
Other income consists of interest income associated with available cash
balances, gains or losses from the sale of property and equipment, the
Company's pro rata share of the earnings and losses of Summit Design Asia and
foreign exchange rate differences resulting from paying operating expenses of
foreign operations in the local currency. Other income was $27,000 for the
three months ended September 30, 1996 and $347,000 for the three months ended
September 30, 1997 and $49,000 for the nine months ended September 30, 1996
and $796,000 for the nine months ended September 30, 1997. The increase in
other income was primarily due to increased interest earned on the Company's
cash holdings.
GAIN ON SALE OF TDS PRODUCT LINE
On July 11, 1997 the Company sold substantially all of the assets used in its
business of developing and marketing its Test Development Series "TDS"
Products to CSC for $5 million. CSC assumed certain liabilities, including
the Company's obligations under TDS maintenance contracts entered into prior
to the closing. The Company has recorded a gain on the sale of $5,569,000.
INCOME TAX PROVISION
The income tax provision increased from $34,000 for the three months ended
September 30, 1996 to $533,000 for the three months ended September 30, 1997
and increased from $243,000 for the nine months ended September 30, 1996 to
$713,000 for the nine months ended September 30, 1997. The Company utilized
substantially all of its U.S. Federal and State net operating loss
carryforwards to offset a considerable portion of U.S. taxable income for the
nine months ending September 30, 1997. The provision of $713,000 for the
nine months ended September 30, 1997 is comprised of $1,357,000 of Federal,
State and foreign taxes payable, less $644,000 of deferred tax benefit
recognized for research and development credits and alternative minimum tax
credits. The provision for the nine months ended September 30, 1996 is
comprised primarily of Japanese withholding tax on sales in Japan through
June 1996 and alternative minimum tax.
VARIABILITY OF OPERATING RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and cash flows and it is likely that these fluctuations will continue
in future periods. These fluctuations have been, and may in the future be,
caused by a number of factors, including the rate of acceptance of new
products, corporate acquisitions and consolidations, product, customer and
channel mix, the size and timing of orders, lengthy sales cycles, the timing
of new product announcements and introductions by the Company and its
competitors, seasonal factors, rescheduling or cancellation of customer
orders, the Company's ability to continue to develop and introduce new
products and product enhancements on a timely basis, the level of
competition, purchasing and payment patterns and product enhancements on a
timely basis, the level of competition, purchasing and payment patterns,
pricing policies of the Company and its competitors, product quality issues,
currency fluctuations and general economic conditions.
The Company has generally recognized a substantial portion of its revenue in
the last month of each quarter, with this revenue concentrated in the latter
part of the month. Any significant deferral of purchases of the
-16-
<PAGE>
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations in any particular
quarter, and to the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely
affected. The Company's revenue is difficult to forecast for several reasons.
The market for certain of the Company's software products is evolving. The
Company's sales cycle is typically six to nine months and varies
substantially from customer to customer. In addition, a significant portion
of the Company's sales are made through indirect channels and can be harder
to predict. The Company establishes its expenditure levels for product
development, sales and marketing and other operating activities based
primarily on its expectations as to future revenue. As a result, if revenue
in any quarter falls below expectations, expenditure levels could be
disproportionately high as a percentage of revenue, and the Company's
operating results for that quarter would be adversely affected. Based upon
the factors described above, the Company believes that its quarterly revenue,
expenses and operating results are likely to vary significantly in the
future, that period-to-period comparisons of its results of operations are
not necessarily meaningful and that, as a result, such comparisons should not
be relied upon as indications of the Company's future performance. Moreover,
although the Company's revenue has increased in recent periods, there can be
no assurance that the Company's revenue will grow in future periods or that
the Company will remain profitable on a quarterly or annual basis. Due to the
foregoing or other factors, it is likely that the Company's results of
operations may be below investors' and market analysts' expectations in some
future quarters, which could have a severe adverse effect on the market price
of the Company's Common Stock.
EFFECTIVE CORPORATE TAX RATES
The Company is taxed in its jurisdictions of operations based on the extent
of taxable income generated in each jurisdiction. For income tax purposes,
revenue is attributed to the taxable jurisdiction where the sales
transactions generating the revenue were initiated. All sales transactions by
Summit Design (EDA) Ltd., the Company's Israeli subsidiary, to the Company
were recorded as arm's length transactions based on an intercompany pricing
agreement. All sales transactions by the Company are to unrelated parties and
are based upon prevailing market prices. There is no offset of taxes between
the United States and Israel. The Israeli operations are performed entirely
by Summit Design (EDA) Ltd., which is a separate taxable Israeli entity.
The Company's future effective tax rate depends in part on the availability
of United States and Israeli net operating loss ("NOLs") and credit
carryforwards. As of December 31, 1996, the Company had recorded U.S. federal
and state NOLs of approximately $9.0 million and $5.6 million, respectively
and Israeli NOLs of approximately $4.7 million. In addition the Company has
$1 million in credit carry forwards for U.S. tax purposes as of December 31,
1996. Neither the United States nor the Israeli taxing authorities have
verified the accuracy or availability of the Company's NOLs and credit
carryforward amounts. However, as a result of the Asset Sale and the Company's
current taxable income in the United States for the nine months ended
September 30, 1997, the Company expects to utilize substantially all of the
U.S. NOLs to offset current taxable income during 1997.(1)
In addition to its NOLs and credit carryforwards, the Company is currently
scheduled to receive tax benefits over the next several years under a tax
holiday in Israel. The Company's existing Israeli production facility has
been granted "Approved Enterprise" status under the Israeli Investment Law,
which entitles the Company to reductions in the tax rate normally applicable
to Israeli companies with respect to the income generated by its "Approved
Enterprise" programs. In particular, the tax holiday covers the seven-year
period beginning the first year in which Summit Design (EDA) Ltd. generates
taxable income from its "Approved Enterprise"
- ------------------------
(1) This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Additional Risk Factors
That Could Affect Operating Results and Market Price of Stock" commencing on
page 19 for a discussion of factors that could affect future performance.
-17-
<PAGE>
(after using any available NOLs), provided that such benefits will terminate
in 2006 regardless of whether the seven-year period has expired. The tax
holiday provides that, during such seven-year period, a portion of the
Company's taxable income from its Israeli operations will be taxed at
favorable tax rates. The termination or reduction of the Company's Israeli
tax benefits would have a material adverse effect on the Company's overall
actual effective tax rate. The Company has recently applied for "Approved
Enterprise" status with respect to a new project and intends to apply in the
future with respect to additional projects. There can be no assurance that
the Company will be granted any approvals and therefore there can be no
assurance the Company will continue to receive favorable tax status in
Israel.
The Company is also subject to the risk that United States and foreign tax
laws and rates may change in a future period or periods, and that any such
changes may materially adversely affect the Company's tax rate. As a result
of the factors described above and other related factors, there can be no
assurance that the Company will maintain a favorable tax rate in future
periods. Any increase in the Company's effective tax rate, or variations in
the effective tax rate from period to period, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its initial public offering in October 1996, raising
$16.2 million, net of offering expenses. Prior to the IPO, the Company had
financed its operations primarily through the private placement of
approximately $15.4 million of capital stock, as well as capital equipment
leases, borrowings under its bank line of credit, Israeli research and
development grants and cash generated from operations. As of September 30,
1997, the Company had approximately $17.2 million in cash and cash
equivalents and a $1.0 million bank line of credit with United States
National Bank of Oregon ("the Bank"). The line of credit expires on April 30,
1998. Borrowings thereunder accrue interest at specified percentages above
the prime lending rate based on the Company's ratio of debt to tangible net
worth. Advances under the line of credit are limited to a specified
percentage of eligible accounts receivable (as defined in the line of
credit). Borrowings under the line of credit are collateralized by the
Company's accounts receivable, inventory and general intangible assets,
including its intellectual property rights. As of September 30, 1997, the
Company had no borrowings outstanding under this line of credit.
The Company is obligated to lend up to $2,500,000 to an independent software
development company pursuant to a secured loan agreement entered into during
July 1997. Borrowings under the agreement bear interest at prime rate plus 2%.
As of September 30, 1997, the Company had working capital of approximately
$10.9 million.
Net cash generated by operating activities was approximately $9.3 million and
$3.8 million for the nine months ended September 30, 1997 and 1996,
respectively. Cash generated by operating activities resulted primarily from
profitable operations plus the increase in accounts payable, accrued
liabilities and deferred revenue and a decrease in accounts receivable for
the nine months ended September 30, 1997. Cash generated from operating
activities for the nine months ended September 30, 1996 resulted primarily
from the significant collection of accounts receivable and an increase in
deferred revenue.
Net cash used in investing activities was approximately $921,000 and $647,000
for the nine months ended September 30, 1997 and 1996, respectively. Net cash
used in investing activities for the nine months ended September 30, 1997 was
related primarily to the acquisition of Simulation Technologies, Corp. in
September 1997, the purchase of furniture and equipment and loans to related
parties less the cash provided from the sale of the TDS product line. Net
cash used in investing activities for the nine months ended September 30,
1996 related to the acquisition of furniture and equipment and a $100,000
investment in a Joint Venture.
Net cash used in financing activities for the nine months ended September 30,
1997,was approximately $11.0 million. Approximately $ 11.6 million was used
to purchase treasury stock and $142,000 was used for repayment of long-term
debt and capital lease obligations; $700,000 was provided by the issuance of
common
-18-
<PAGE>
stock. Net cash used in financing activities for the nine months ended
September 30, 1996, was approximately $1.1 million. For the nine months ended
September 30, 1996 approximately $1.6 million of cash was used for repayment
of short term borrowings, long-term debt and capital lease obligations which
was off set by $73,000 of cash provided by proceeds from long-term debt and
approximately $1.1 million of cash provided from the issuance of Summit
common and TriQuest preferred stock less IPO issuance costs of $674,000.
The Company presently believes that its current cash and cash equivalent,
together with funds expected to be generated from operations, will satisfy
the Company's anticipated working capital and other cash requirements for at
least the next 12 months.(2)
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE
OF STOCK
HISTORY OF OPERATING LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS
While the Company has generated net income in prior quarters, there can be no
assurance that the Company will be profitable in the future. In addition, the
Company has experienced significant quarterly fluctuations in operating
results and cash flows and it is likely that these fluctuations will continue
in future periods. These fluctuations have been, and may in the future be,
caused by a number of factors, including the rate of acceptance of new
products, corporate acquisitions and consolidations, product, customer and
channel mix, the size and timing of orders, lengthy sales cycles, the timing
of new product announcements and introductions by the Company and its
competitors, seasonal factors, rescheduling or cancellation of customer
orders, the Company's ability to continue to develop and introduce new
products and product enhancements on a timely basis, the level of
competition, purchasing and payment patterns, pricing policies of the Company
and its competitors, product quality issues, currency fluctuations and
general economic conditions.
The Company has generally recognized a substantial portion of its revenue in
the last month of each quarter, with this revenue concentrated in the latter
part of the month. Any significant deferral of purchases of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations in any particular quarter, and
to the extent that significant sales occur earlier than expected, operating
results for subsequent quarters may be adversely affected. The Company's
revenue is difficult to forecast for several reasons. The market for certain
of the Company's software products is evolving. The Company's sales cycle is
typically six to nine months and varies substantially from customer to
customer. The Company operates with little product backlog because its
products are typically shipped shortly after orders are received. In
addition, a significant portion of the Company's sales are made through
indirect channels and can be harder to predict. The Company establishes its
expenditure levels for product development, sales and marketing and other
operating activities based primarily on its expectations as to future
revenue. As a result, if revenue in any quarter falls below expectations,
expenditure levels could be disproportionately high as a percentage of
revenue, and the Company's operating results for that quarter would be
adversely affected. Based upon the factors described above, the Company
believes that its quarterly revenue, expenses and operating results are
likely to vary significantly in the future, that period-to-period comparisons
of its results of operations are not necessarily meaningful and that, as a
result, such comparisons should not be relied upon as indications of the
Company's future performance. Moreover, although the Company's revenue has
increased in recent periods, there can be no assurance that the Company's
revenue will grow in future periods or that the Company will remain
profitable on a quarterly or annual basis. Due to the foregoing or other
factors, it is likely that the Company's results of operations may be below
investors' and market analysts' expectations in some future quarters, which
could have a severe adverse effect on the market price of the Company's
Common Stock.
- ------------------------
(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.
-19-
<PAGE>
PRODUCT CONCENTRATION; UNCERTAINTY OF MARKET ACCEPTANCE OF SLDA
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 SLDA products will continue to account for a
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 SLDA products. The Company commercially shipped its
first SLDA product, Visual HDL for VHDL, in the first quarter of 1994. For
the three months and the nine months ended September 30, 1997 and for the
years ended December 31, 1996, 1995 and 1994, respectively, revenue from SLDA
products and related maintenance contracts represented 100%, 83.6%, 60.9%,
43.6% and 34.8%, respectively, of the Company's total revenue. The Company's
SLDA products incorporate certain unique design methodologies and thus
represent a departure from industry standards for design creation and
verification. The Company believes that broad market acceptance of its SLDA
products will depend on several factors, including the ability to
significantly enhance design productivity, ease of use, interoperability with
existing EDA tools, price and the customer's assessment of the Company's
financial resources and its technical, managerial, service and support
expertise. The Company also depends on its distributors to assist the Company
in gaining market acceptance of its products. There can be no assurance that
sufficient priority will be given by the Company's distributors to marketing
the Company's products or whether such distributors will continue to offer
the Company's products. There can be no assurance that the Company's SLDA
products will achieve broad market acceptance. A decline in the demand for,
or the failure to achieve broad market acceptance of, the Company's SLDA
products will have a material adverse effect on the Company's business,
financial condition and results of operations.
Although demand for SLDA products has increased in recent years, the market
for SLDA products is still emerging and there can be no assurance that it
will continue to grow or that, even if the market does grow, businesses will
continue to purchase the Company's SLDA products. If the market for SLDA
products fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, financial condition and results of
operations would be materially adversely affected.
Traditionally, EDA customers have been risk averse in accepting new design
methodologies. Because many of Summit's tools embody new design
methodologies, this risk aversion on the part of potential customers presents
an ongoing marketing and sales challenge to the Company and makes the
introduction and acceptance of new products unpredictable. The Company's
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, if any, 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.
COMPETITION
The EDA industry is highly competitive and the Company expects competition to
increase as other EDA companies introduce SLDA products. In the SLDA market,
the Company principally competes with Mentor
-20-
<PAGE>
Graphics and a number of smaller firms. Indirectly, the Company also competes
with other firms that offer alternatives to SLDA and could potentially offer
more directly competitive products in the future. Certain of these companies
have significantly greater financial, technical and marketing resources and
larger installed customer bases than the Company. Some of the Company's
current and future competitors offer a more complete range of EDA products
and may distribute products that directly compete with the Company's SLDA
products by bundling such products with their core product line. In addition,
the Company's products perform a variety of functions, certain of which are,
and in the future may be, offered as separate products or discrete point
solutions by the Company's existing and future competitors. For example,
certain companies currently offer design entry products without simulators.
There can be no assurance that such competition will not cause the Company to
offer point solutions instead of, or in addition to, the Company's current
software products. Such point solutions would be priced lower than the
Company's current product offerings and could cause the Company's average
selling prices to decrease, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company competes on the basis of certain factors including product
capabilities, product performance, price, support of industry standards, ease
of use, first to market and customer technical support and service. The
Company believes that it competes favorably overall with respect to these
factors. However, in particular cases, the Company's competitors may offer
SLDA products with functionality which is sought by the Company's prospective
customers and which differs from that offered by the Company. In addition,
certain competitors may achieve a marketing advantage by establishing formal
alliances with other EDA vendors. Further, the EDA industry in general has
experienced significant consolidation in recent years, and the acquisition of
one of the Company's competitors by a larger, more established EDA vendor
could create a more significant competitor. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have
a material adverse effect on its business, financial condition and results of
operations. There can be no assurance that the Company's current and future
competitors will not be able to develop products comparable or superior to
those developed by the Company or to adapt more quickly than the Company to
new technologies, evolving industry trends or customer requirements.
Increased competition could result in price reductions, reduced margins and
loss of market share, all of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON ELECTRONICS INDUSTRY MARKET
Because the electronics industry is characterized by rapid technological
change, short product life cycles, fluctuations in manufacturing capacity and
pricing and margin pressures, certain segments, including the computer,
semiconductor, semiconductor test equipment and telecommunications
industries, have experienced sudden and unexpected economic downturns. During
these periods, capital spending is commonly curtailed and the number of
design projects often decreases. Because the Company's sales are dependent
upon capital spending trends and new design projects, negative factors
affecting the electronics industry could have a material adverse effect on
the Company's business, financial condition and results of operations. A
number of electronics companies, including customers of the Company, have
recently experienced a slowdown in their businesses. The Company's future
operating results may reflect substantial fluctuations from period to period
as a consequence of such industry patterns, general economic conditions
affecting the timing of orders from customers and other factors.
DEPENDENCE ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY
Because the Company's products must interoperate with EDA products of other
companies, particularly simulation and synthesis products, the Company must
have timely access to third party software to perform development and testing
of its products. Although the Company has established relationships with a
variety of EDA vendors to gain early access to new product information, these
relationships may be terminated by either party with limited notice. In
addition, such relationships are with companies that are current or potential
future competitors of the Company, including Synopsys, Mentor Graphics and
Cadence. If any of these relationships were terminated and the Company was
-21-
<PAGE>
unable to obtain, in a timely manner, information regarding modifications of
third party products necessary for modifying its software products to
interoperate with these third party products, the Company could experience a
significant increase in development costs, the development process would take
longer, product introductions would be delayed and the Company's business,
financial condition and results of operations could be materially adversely
affected.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The EDA industry is characterized by extremely rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. In
addition, customers in the EDA industry require software products that allow
them to reduce time to market, differentiate their products, improve their
engineering productivity and reduce their design errors. The Company's future
success will depend upon its ability to enhance its current products, develop
and introduce new products that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products
that respond to technological change or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products, or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce products in a timely manner in
response to changing market conditions, industry standards or other customer
requirements, particularly if such product releases have been pre-announced,
the Company's business, financial condition and results of operations will be
materially adversely affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has in the past discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required
to correct these errors. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and sales, diversion of
development resources, injury to the Company's reputation or increased
service and warranty costs, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON DISTRIBUTORS
The Company relies on distributors for licensing and support of its products
outside of North America. Approximately 34%, 48%, 46%, 42% and 38% of the
Company's revenue for the nine months ended September 30, 1997 and 1996 and
for the years ended December 31, 1996, 1995 and 1994, respectively, were
attributable to sales made through distributors. The Company has also entered
into a joint venture with Anam pursuant to which the joint venture
corporation (Summit Design Korea, Inc. ("Summit Asia")) shall acquire
exclusive rights to sell, distribute and support all of the Company's
products in the Asia-Pacific region, excluding Japan. Summit Asia has acted
in such capacity since April 1, 1996. Prior to that date, Anam was an
independent distributor of the Company's products. During the 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 SLDA
products in Japan with Seiko. In the event Seiko fails to meet specified
quotas for two or more quarterly periods, exclusivity can be terminated by
Summit, subject to Seiko's right to pay a specified fee to maintain
exclusivity. The agreement is renewable for successive five-year terms by
mutual agreement of the Company and Seiko and is terminable by either party
for breach. In March 1997, the Company entered into a three-year distribution
agreement with Kanematsu USA Inc. to which Kanematsu was granted exclusive
distribution rights to see, distribute and support certain verification
products in Japan. For the year ended December 31, 1996 and nine months
ended September 30, 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
-22-
<PAGE>
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 and results of
operations.
INTERNATIONAL SALES AND OPERATIONS
Approximately 24%, 37%, 50%, 52% and 39% of the Company's revenue for the
three months and nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively, were attributable to sales
made outside the United States. The decline in the percent of revenue from
sales made outside the United States for the three and nine months ended
September 30, 1997 is related primarily to domestic sales to one customer. 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. There can be no assurance that such factors will not
have a material adverse effect on the Company's future international sales
and operations and, consequently, on the Company's business, financial
condition and results of operations.
In order to successfully expand international sales, the Company may need to
establish additional foreign operations, hire additional personnel and
recruit additional international distributors. This will require significant
management attention and financial resources and could adversely affect the
Company's operating margins. In addition, to the extent that the Company is
unable to effect these additions in a timely manner, the Company's growth, if
any, in international sales will be limited. There can be no assurance that
the Company will be able to maintain or increase international sales of the
Company's products, and failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH AND ACQUISITIONS
Summit's ability to achieve significant growth will require it to implement
and continually expand its operational and financial systems, recruit
additional employees and train and manage current and future employees.
Summit expects any such growth will place a significant strain on its
operational resources and systems. Failure to effectively manage any such
growth would have a material adverse effect on Summit's business, financial
condition and results of operations.
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
and results of operations. 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,
-23-
<PAGE>
which could materially adversely affect Summit's results of operations.
Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concern,
risks of entering markets in which Summit has no or limited prior experience
and potential loss of key employees of acquired companies. Summit's
management has had limited experience in assimilating acquired organizations
and products into Summit's operations. No assurance can be given as to the
ability of Summit to integrate successfully any operations, personnel or
products that have been acquired or that might be acquired in the future, and
the failure of Summit to do so could have a material adverse effect on
Summit's results of operations.
OPERATIONS IN ISRAEL
The Company's research and development operations related to its SLDA
products are located in Israel and may be affected by economic, political and
military conditions in that country. Accordingly, the Company's business,
financial condition and results of operations could be materially adversely
affected if hostilities involving Israel should occur. This risk is
heightened due to the restrictions on the Company's ability to manufacture or
transfer outside of Israel any technology developed under research and
development grants from the government of Israel as described in "--Israeli
Research, Development and Marketing Grants." In addition, while all of the
Company's sales are denominated in U.S. dollars, a portion of the Company's
annual costs and expenses in Israel are paid in Israeli currency. These costs
and expenses were approximately $4.3, $4.3 and $2.9 million in 1996, 1995 and
1994, respectively. Payment in Israeli currency subjects the Company to
foreign currency fluctuations and to economic pressures resulting from
Israel's generally high rate of inflation, which has been approximately 11%,
8% and 15% during 1996, 1995, and 1994, respectively. The Company's primary
expense which is paid in Israeli currency is employee salaries for research
and development activities. As a result, an increase in the value of Israeli
currency in comparison to the U.S. dollar could increase the cost of research
and development expenses and general and administrative expenses. There can
be no assurance that currency fluctuations, changes in the rate of inflation
in Israel or any of the other aforementioned factors will not have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, coordination with and management of the Israeli
operations requires the Company to address differences in culture,
regulations and time zones. Failure to successfully address these differences
could be disruptive to the Company's operations.
The Company's Israeli production facility has been granted the status of an
"Approved Enterprise" under the Israeli Investment Law for the Encouragement
of Capital Investments, 1959 (the "Investment Law"). Taxable income of a
company derived from an "Approved Enterprise" is eligible for certain tax
benefits, including significant income tax rate reductions for up to seven
years following the first year in which the "Approved Enterprise" has Israeli
taxable income (after using any available net operating losses). The period
of benefits cannot extend beyond 12 years from the year of commencement of
operations or 14 years from the year in which approval was granted, whichever
is earlier. The tax benefits derived from a certificate of approval for an
"Approved Enterprise" relate only to taxable income attributable to such
"Approved Enterprise" and are conditioned upon fulfillment of the conditions
stipulated by the Investment Law, the regulations promulgated thereunder and
the criteria set forth in the certificate of approval. In the event of a
failure by the Company to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and the Company would be required to
refund the amount of the canceled benefits, adjusted for inflation and
interest. There can be no assurance that the Company's Israeli production
facility will continue to operate or qualify as an "Approved Enterprise" or
that the benefits under the "Approved Enterprise" regulations will continue,
or be applicable, in the future. The loss of, or any material decrease in,
these income tax benefits could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical and management personnel and its ability to continue to
attract and retain highly-skilled technical, sales and marketing and
management personnel. The Company has entered into employment agreements with
certain of its executive officers, however, such agreements do not guarantee
the services of these employees and do not contain noncompetition provisions.
Competition for personnel in the software industry in general, and the
-24-
<PAGE>
EDA industry in particular, is intense, and the Company has at times in the
past experienced difficulty in recruiting qualified personnel. There can be
no assurance that the Company will retain its key personnel or that it will
be successful in attracting and retaining other qualified technical, sales
and marketing and management personnel in the future. The loss of any key
employees or the inability to attract and retain additional qualified
personnel may have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not carry
"key person" life insurance on any of its key personnel. Additions of new
personnel and departures of existing personnel, particularly in key
positions, can be disruptive and can result in departures of additional
personnel, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS
Summit's Israeli subsidiary has obtained research and development grants from
the Office of the Chief Scientist (the "Chief Scientist") in the Israeli
Ministry of Industry and Trade of approximately $232,000 and $608,000 in 1993
and 1995, respectively. As of September 30, 1997, the Company was obligated
to pay back approximately $232,000 and $470,000 for the 1993 and 1995 grants,
respectively. Such obligations are collateralized by all tangible and
intangible assets of the Israeli subsidiary. The terms of the grants prohibit
the manufacture of products developed under these grants outside of Israel
and the transfer of the technology developed pursuant to these grants to any
person, without the prior written consent of the Chief Scientist. The
Company's Visual HDL for VHDL products have been developed under grants from
the Chief Scientist and thus are subject to these restrictions. If the
Company is unable to obtain the consent of the government of Israel, the
Company would be unable to take advantage of potential economic benefits such
as lower taxes, lower labor and other manufacturing costs and advanced
research and development facilities that may be available if such technology
and manufacturing operations could be transferred to locations outside of
Israel. In addition, the Company would be unable to minimize risks particular
to operations in Israel, such as hostilities involving Israel. Although the
Company is eligible to apply for additional grants from the Chief Scientist,
it has no present plans to do so. The Company also received a Marketing Fund
Grant from the Israeli Ministry of Industry and Trade for an aggregate of
$423,000. The grant must be repaid at the rate of 3% of the increase in
exports over the 1993 export level of all Israeli products, until repaid. As
of September 30, 1997, approximately $364,000 was outstanding under the grant.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret
laws, confidentiality procedures, licensing arrangements and technical means
to establish and protect its proprietary rights. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
limits access to, and distribution of, its software, documentation and other
proprietary information. In addition, the Company's products are protected by
hardware locks and software encryption techniques designed to deter
unauthorized use and copying. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently.
The Company provides its SLDA products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software. In
addition, the Company delivers certain of its verification products
electronically under an electronic version of a "shrink-wrap" license
agreement. These "shrink-wrap" license 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
-25-
<PAGE>
in costly litigation, cause product delays or require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.
Failure to protect its proprietary rights or claims of infringement could
have a material adverse effect on the Company's business, financial condition
and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that have
particularly affected technology companies, resulting in changes in the
market prices of the stocks of many companies which may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common
Stock. In addition, factors such as announcements of technological
innovations or new products by the Company or its competitors, market
conditions in the computer software or hardware industries and quarterly
fluctuations in the Company's operating results may have a significant
adverse effect on the market price of the Company's Common Stock.
-26-
<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
(c) In July and September 1997, the Company issued and sold 4,780 and
25,671 shares of the Company's Common Stock that were not
registered under the Securities Act of 1933, as amended (the
"Securities Act"), at prices of $0.33 and $1.95, respectively
upon exercise of stock options. In September 1997, in connection
with the Company's acquisition of SimTech, the Company issued
1,256,777 shares of the Company's Common Stock to the existing
shareholders of SimTech in exchange for outstanding shares of
capital stock of SimTech. The shares were not registered under the
Securities Act, and such issuances were deemed to be exempt from
registration in reliance on Section 4(2) of the Securities Act as
a transaction not involving a public offering. The recipients of
the securities represented their intentions to acquire the
securities for investment only and had access to all relevant
information regarding the Company necessary to evaluate the
investment.
(d) The effective date of the Company's first registration
statement, filed on Form S-1 under the Securities Act of 1933
(No. 333-6445), was October 17, 1996 (the "Registration
Statement"). The class of securities registered was Common
Stock. The offering commenced on October 18, 1996 and all
securities were sold in the offering. The managing underwriters
for the offering were Robertson, Stephens & Company LLC and
Needham & Company.
A total of 4,600,000 shares were registered pursuant to
the Registration Statement. The Company sold 2,000,000 shares
of its Common Stock for its own account, for an aggregate
offering price of $19,000,000, and 2,600,000 shares of its
Common Stock for the account of certain selling stockholders,
for an aggregate offering price of $24,700,000.
The Company incurred expenses of approximately $2,776,000,
of which $1,330,000 represented underwriting discounts and
commissions and $1,446,000 represented estimated other
expenses. A portion of the underwriting discounts and
commissions represented direct or indirect payments to
directors, officers, general partners of the Reigstrant or
their associates; to persons owing ten (10) percent or more of
any class of equity securities of the Company; or to affiliates
of the Company. The net offering proceeds to the Company after
total expenses was $16,224,000.
As of September 30, 1997, the Company had used all of the
net proceeds from the offering as follows: $897,000 for the
purchase and installation of machinery and quipment, $473,000
for the repayment of indebtedness and $14,854,000 for working
capital. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in
the prospectus.
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
* 10.15 Bank Line of Credit Agreement between Registrant and U.S.
National Bank of Oregon dated June 24, 1997.
* 10.22 Loan Agreement between Registrant and Dasys, Inc. dated
July 16, 1997.
* 11.1 Statement of Computation of Net Income per Share
27 Financial Data Schedule
-----------------
* Previously filed.
(b) Reports on Form 8-K
On September 24, 1997, the Company filed a report on Form 8-K
dated September 9, 1997 in conjunction with the acquisition of
Simulation Technologies, Corp. ("SimTech"). On November 12,
1997, the Company amended this filing on Form 8-K /A to include
the financial statements of SimTech and the pro forma combined
financial statements for the Company and SimTech.
-27-
<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
-28-
<PAGE>
EXHIBIT INDEX
*EXHIBIT 10.15 Bank Line of Credit Agreement between Registrant and U.S.
National Bank of Oregon dated June 24, 1997.
*EXHIBIT 10.22 Loan Agreement between Registrant and Dasys, Inc. dated
July 16, 1997.
*EXHIBIT 11.1 Statement of Computation of Net Income Per Share
EXHIBIT 27 Financial Data Schedule
* Previously filed.
-29-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,224
<SECURITIES> 0
<RECEIVABLES> 5,672
<ALLOWANCES> 449
<INVENTORY> 0
<CURRENT-ASSETS> 23,001
<PP&E> 5,130
<DEPRECIATION> 2,522
<TOTAL-ASSETS> 36,523
<CURRENT-LIABILITIES> 12,105
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 22,428
<TOTAL-LIABILITY-AND-EQUITY> 36,523
<SALES> 21,609
<TOTAL-REVENUES> 21,609
<CGS> 991
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,712
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (739)
<INCOME-TAX> 713
<INCOME-CONTINUING> (1,452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,452)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
