<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2000 OR
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM _________ TO________
COMMISSION FILE NUMBER: 000-20923
INNOVEDA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 93-1137888
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
293 BOSTON POST ROAD WEST
MARLBORO, MASSACHUSETTS 01752-4615
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 480-0881
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 8, 2000, the Registrant had outstanding 32,446,270 shares of Common
Stock.
<PAGE>
INNOVEDA, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of April 1, 2000
and January 1, 2000 .............................................. 3
Condensed Consolidated Statements of Operations for the
First Quarter Ended April 1, 2000 and April 3, 1999 .............. 4
Condensed Consolidated Statements of Cash Flows for
the First Quarter Ended April 1, 2000 and April 3, 1999 .......... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk ............. 23
PART II OTHER INFORMATION
Item 2. Changes in Securities ................................................. 25
Item 4 Submission of Matters to a vote of Security Holders ................... 25
Item 6 Exhibits and Reports on Form 8-K ...................................... 26
Signature ...................................................................... 27
</TABLE>
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<PAGE>
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 1, 2000 January 1, 2000
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 27,632 $ 531
Accounts receivable, net ................................................... 13,768 14,290
Prepaid expenses and other ................................................. 3,354 2,722
Prepaid income taxes ....................................................... 1,228 1,228
Deferred income taxes ...................................................... 6,406 1,342
------ ------
Total current assets .................................................... 52,388 20,113
Equipment and furniture, net .................................................. 7,052 4,477
Capitalized software costs, net ............................................... 2,341 2,427
Purchased technology and other intangibles, net ............................... 26,302 3,508
Goodwill, net ................................................................. 14,482 -
Deposits and other assets ..................................................... 1,065 920
-------- --------
Total assets ......................................................... $103,630 $ 31,445
======== ========
LIABILITIES
Current liabilities:
Notes payable, current portion ............................................. $ 3,306 $ 3,125
Capital lease obligations, current portion ................................. 391 372
Accounts payable ........................................................... 3,633 2,840
Accrued liabilities ........................................................ 14,450 7,140
Deferred revenue ........................................................... 19,156 14,595
------ ------
Total current liabilities ............................................... 40,936 28,072
------ ------
Notes payable, less current portion ........................................... 11,750 13,825
Capital lease obligation, less current portion ................................ 495 554
Deferred revenue, less current portion ........................................ 69 -
Other long-term liabilities ................................................... 135 -
Deferred income taxes ......................................................... 14,010 2,393
------ -----
Total liabilities .................................................... 67,395 44,844
------ ------
Redeemable, convertible preferred stock ....................................... -- 32,000
------ ------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000 authorized, 32,312 outstanding at April 1,
2000, $.001 par value, 35,000 authorized, 7,969 outstanding at
January 1, 2000 .............................................................. 323 8
Additional paid-in capital .................................................... 90,417 4,777
Notes due from stockholders ................................................... (927) (927)
Deferred compensation ......................................................... (1,554) (1,701)
Accumulated deficit ........................................................... (52,287) (47,845)
Accumulated other comprehensive income ........................................ 263 289
--- ---
Total stockholders' equity ................................................. 36,235 (45,399)
------ --------
Total liabilities and stockholders' equity ........................... $ 103,630 $ 31,445
========= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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<PAGE>
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Revenue:
Software .................................................... $ 7,628 $ 6,534
Services and other .......................................... 6,757 7,450
-------- --------
Total revenue ............................................ 14,385 13,984
-------- --------
Costs and expenses:
Cost of software ............................................ 1,516 1,366
Cost of services and other .................................. 1,562 1,549
Sales and marketing ......................................... 6,451 5,578
Research and development .................................... 3,528 2,690
General and administrative .................................. 1,260 994
Amortization of intangibles and stock compensation .......... 624 152
In process research and development ......................... 2,400 --
Non-recurring restructuring costs ........................... 2,243 --
-------- --------
Total operating expenses ................................. 19,584 12,329
Operating income (loss) ............................... (5,199) 1,655
Other income (expense) ......................................... (403) (340)
-------- --------
Income (loss) before provision for income taxes ................ (5,602) 1,315
Provision (benefit) for income taxes ........................... (1,160) 575
-------- --------
Net income (loss) .............................................. ($ 4,442) $ 740
======== ========
Earnings (loss) per share:
Basic ....................................................... ($ 0.57) $ 0.27
======== ========
Diluted ..................................................... ($ 0.57) $ 0.05
======== ========
Weighted average shares outstanding:
Basic ....................................................... 7,837 2,742
======== ========
Diluted ..................................................... 7,837 13,889
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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<PAGE>
INNOVEDA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ................................................................. ($ 4,442) $ 740
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................................. 1,480 857
Compensation under stock option agreements ..................................... 147 123
Write-off of in process research and development ............................... 2,400 --
Change in assets and liabilities:
Accounts receivable ............................................................ 4,813 (354)
Prepaid and other current assets ............................................... 192 (595)
Deferred income taxes .......................................................... (1,198) 252
Accounts payable ............................................................... (205) (265)
Accrued liabilities ............................................................ 925 (1,130)
Deferred revenue ............................................................... (1,130) 835
-------- --------
Net cash provided by operating activities ................................... 2,982 463
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................ (575) (175)
Capitalized software costs ........................................................ (321) (275)
(Increase) decrease in other assets ............................................... -- (37)
Cash acquired in acquisition of Summit Design, Inc.,
net of transaction costs ................................................... 27,036 --
Purchase of OmniView .............................................................. -- (1,100)
-------- --------
Net cash provided by (used in) investing activities ......................... 26,140 (1,587)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt ..................................................... (1,950) (500)
Proceeds from exercise of stock options ........................................... 28 --
Repayments of capital lease obligations ........................................... (94) (10)
-------- --------
Net cash used in financing activities ....................................... (2,016) (510)
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH ....................................... (5) (123)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 27,101 (1,757)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................................... 531 4,487
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................................... $ 27,632 $ 2,730
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest .................................................................... 378 351
======== ========
Income taxes ................................................................ 2 882
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements
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<PAGE>
INNOVEDA, INC.
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
Innoveda, Inc. ("Innoveda" or the "Company"), a publicly traded Delaware
Corporation, was created by the Merger of Summit Design, Inc. ("Summit") and
Viewlogic Systems, Inc. ("Viewlogic") which was consummated on March 23, 2000
(the "Effective Date"). The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary to
present fairly the information set forth therein have been included. The Merger
of Summit with Viewlogic on March 23, 2000 (see Note 2, the "Merger") was
accounted for as a reverse acquisition as former shareholders of Viewlogic owned
a majority of the outstanding stock of Summit subsequent to the Merger.
For accounting purposes, Viewlogic is deemed to have acquired Summit.
All fiscal 1999 financial information presented herein represents only the
financial results for Viewlogic. The fiscal 2000 financial information
presented in the Condensed Consolidated Statements of Operations, and the
Condensed Consolidated Statements of Cash Flows represents the results for
Viewlogic for the periods stated and includes the financial results for
Summit for the post-merger period extending from March 24, 2000 to April 1,
2000. The operating results for the quarter ended April 1, 2000 are not
necessarily indicative of the results that may be expected for any future
period.
The accompanying financial statements should be read in conjunction with the
fiscal 1999 consolidated financial statements of Viewlogic and Summit, and the
Innoveda form 8-K/A and 8K filings on May 15, 2000 and April 7, 2000,
respectively.
2. MERGER OF VIEWLOGIC AND SUMMIT
On March 23, 2000 a change in control of the Registrant occurred at the
Effective Date of the Merger contemplated by that certain Agreement and Plan
of Reorganization dated as of September 16, 1999 (the "Reorganization
Agreement") by and among Summit, Hood Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Summit ("Merger Sub"), and
Viewlogic. At the Effective Time, Merger Sub merged with and into Viewlogic
with Viewlogic surviving as a wholly owned subsidiary of Summit (the
"Merger"). In connection with the Merger, Summit changed its name to
Innoveda, Inc. Pursuant to the Reorganization Agreement, Summit issued
16,337,979 shares of its common stock to Viewlogic shareholders in exchange
for all the outstanding common stock of Viewlogic (24,051,963 outstanding
shares) at a .67928 to 1 exchange ratio. After the transaction, Viewlogic
shareholders owned 50.6% of the outstanding common stock of Innoveda, Inc.,
and the former Summit shareholders owned the remaining 15,941,418 shares of
Innoveda common stock.
The Merger was accounted for under the purchase method of accounting and was
treated as a reverse acquisition as the stockholders of Viewlogic received
the larger portion of the voting interests in the combined company. Viewlogic
was considered the acquirer for accounting purposes and recorded Summit's
assets and liabilities based upon their estimated fair values. The operating
results of Summit have been included in the accompanying consolidated
financial statements from the date of acquisition. Under the purchase method
of accounting, the acquired assets and assumed liabilities have been recorded
at their estimated fair values at the date of acquisition. On a preliminary
basis, approximately $38.0 million have been allocated to goodwill and other
intangibles. As a result of the Merger, $2,400,000 relating to in-process
research and development has been expensed. The goodwill and other
intangibles will be amortized over estimated useful lives of three to seven
years.
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<PAGE>
Below is a table of the acquisition costs and the preliminary purchase price
allocation (in thousands):
<TABLE>
<S> <C>
Preliminary purchase price:
Common stock .......................................................... $ 49,020
Stock options ......................................................... 4,882
Acquisition costs ..................................................... 1,136
--------
Total preliminary purchase price ........................................ $ 55,038
========
Preliminary purchase price allocation:
Tangible net assets acquired .......................................... $ 28,489
Assets impaired by Merger ............................................. (750)
Deferred income taxes ................................................. (11,492)
Intangible net assets acquired:
Purchased technology, assembled workforce, and customer
base .............................................................. 23,200
Goodwill .............................................................. 14,537
In-process research and development ................................... 2,400
Estimated Merger related severance and shutdown costs, net
of tax benefits ..................................................... (1,346)
--------
Total ................................................................. $ 55,038
========
</TABLE>
The unaudited consolidated results of operations on a pro forma basis as if the
Merger had occurred as of the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
-------------- --------------
<S> <C> <C>
Revenue ............................................ $ 17,846 $ 20,800
Net loss* .......................................... (11,309) (906)
Net income per share - basic ....................... ($0.35) ($0.03)
Net income per share - diluted ..................... ($0.35) ($0.03)
</TABLE>
*Quarter ended April 1, 2000 includes $5,437 of non-recurring charges and
write-off of $2,400 of in-process research and development.
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
Merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
3. RESTRUCTURING AND NON-RECURRING CHARGES
For the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges. This included primarily severance and
other costs relating to the consolidation of duplicative facilities as a
result of the Merger between Summit and Viewlogic. Other costs relating to
property and equipment lease contracts (less any applicable sublease income)
after the properties were abandoned, lease buyout costs, restoration costs
associated with certain lease arrangements, and costs to maintain facilities
during the period after abandonment are also included. Further action was
taken to restructure the Innoveda sales and services business in Japan as a
result of an exclusive distributor agreement executed with Marubeni during
the first quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for approximately 14
employees, costs associated with office closings and subsequent lease
termination, and other facility and exit related costs.
The following table presents the components of the non-recurring restructuring
charges accrued during the
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<PAGE>
period ended April 1, 2000 and the charges against the reserves through April 1,
2000.
<TABLE>
<CAPTION>
April 1, 2000
Total Non-cash Amounts Accrual
Charge Write-offs Paid Balance
------ ---------- ---- -------
<S> <C> <C> <C> <C>
Severance and related ................... $ 780 $ -- $ 270 $ 510
Non-cancelable commitments............... 1,389 -- -- 1,389
Capitalized software..................... 74 74 -- --
------ ------ ------ ------
Totals ............................... $2,243 $ 74 $ 270 $1,899
====== ====== ====== ======
</TABLE>
All significant amounts are expected to be paid within one year from the Merger
date of March 23, 2000.
4. EARNINGS PER SHARE
Although Summit is the surviving legal entity after the Merger and the legal
acquirer for accounting purposes the Merger was treated as an acquisition of
Summit by Viewlogic. The weighted average number of common shares outstanding
has been adjusted for all periods reported to reflect the exchange ratio of
.67928.
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Net income (loss) ................................... ($ 4,442) $ 740
========== =======
Weighted average number of common shares - Basic ...... 7,837 2,742
Dilutive effect of employee stock options ........... -- 279
---------- -------
Assumed conversion of preferred stock ............... -- 10,868
---------- -------
Weighted average number of common shares - Diluted .... 7,837 13,889
========== =======
Net income (loss) per share - basic .................... ($ 0.57) $ 0.27
========== =======
Net income (loss) per share - diluted .................. ($ 0.57) $ 0.05
========== =======
</TABLE>
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<PAGE>
5. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company operates in a single industry segment comprising the electronic
design automation industry. Net revenue by geographic region (in thousands) and
as a percentage of total revenue for each region is as follows:
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Revenue
North America .......................... $ 9,699 $ 8,992
Europe ................................. 1,552 2,476
Japan .................................. 2,672 1,695
Other .................................. 462 821
------- -------
Total Revenue ....................... $14,385 $13,984
======= =======
As a Percentage of Total Revenue
North America .......................... 67% 64%
Europe ................................. 11% 18%
Japan .................................. 19% 12%
Other .................................. 3% 6%
------- -------
Total ............................... 100% 100%
======= =======
</TABLE>
6. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income for the
periods indicated.
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
Net income (loss) .............................. ($4,442) $ 740
Foreign currency translation adjustments ....... (26) (259)
------- -------
Comprehensive income (loss) .................... ($4,468) $ 481
======= =======
</TABLE>
7. DEBT
Viewlogic has an $18.0 million term loan with Fleet Bank, with approximately
$14.5 million outstanding as of April 1, 2000. The term loan agreement
currently applies to Viewlogic only. The Company and the lender are
discussing an amendment to the loan agreement as a result of the Merger of
Viewlogic and Summit. Based on these discussions, the lender has given
Viewlogic a waiver on meeting the financial covenants of its credit facility
for the quarter ending April 1, 2000. The Company expects to add Innoveda as
a borrower to the credit facility and add a financial covenant which will
require the Company to maintain minimum working capital and minimum quarterly
earnings, in which event it would not be required to meet the existing
covenant for debt service. In connection with this amendment the Company also
expects to reduce its term loan to approximately $10 Million by June 30, 2000.
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<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Words such as "anticipates," "expects," "intends," "plans," "believes,"
"seeks," "estimates" and similar expressions identify such forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Factors which could cause actual
results to differ materially include those set forth in the following
discussion, and, in particular, the risks discussed below under the subheading
"Additional Risk Factors that Could Affect Operating Results and Market Price of
Stock." Unless required by law, the Company undertakes no obligation to update
publicly any forward-looking statements.
OVERVIEW
Innoveda operates in the United States and international markets developing,
marketing and providing a comprehensive family of software tools used by
engineers in the design of advanced electronic products and systems, and
technical support and consulting services for those software tools. Innoveda
currently markets and sells its products worldwide through multiple distribution
channels, including independent distributors, value added resellers, a direct
sales organization, telesales and strategic sales alliances with OEM partners.
As previously disclosed, for the year, the Company is planning for modest
revenue growth as compared to the pro forma combined revenue of Viewlogic and
Summit for the same period of the prior year. This is primarily due to
uncertainties involved with the merging of the distribution channels of the
two companies and the establishment of a market presence for the newly named
company. However, by the fourth quarter of 2000, the Company expects to
achieve a revenue growth rate that is higher than the overall industry growth
rate.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of total
revenue for the periods indicated:
<TABLE>
<CAPTION>
For the First Quarter Ended
April 1, 2000 April 3, 1999
<S> <C> <C>
Revenue:
Software .............................................. 53% 47%
Services and other .................................... 47% 53%
--- ---
Total revenue ...................................... 100% 100%
Costs and expenses:
Cost of software ...................................... 10% 10%
Cost of services and other ............................ 11% 11%
Sales and marketing ................................... 45% 41%
Research and development .............................. 24% 19%
General and administrative ............................ 9% 7%
Amortization of intangibles and stock compensation .... 4% 1%
In process research and development ................... 17% --
Non-recurring restructuring costs ..................... 16% --
--- ---
Total operating expenses ........................... 136% 89%
Operating income (loss) ......................... -36% 12%
Other income (expense) ................................... -3% -2%
Income (loss) before provision for income taxes .......... -39% 9%
Provision (benefit) for income taxes ..................... -8% 4%
--- ---
Net income (loss) ........................................ -31% 5%
</TABLE>
SOFTWARE REVENUE
The Company's software revenue is derived from license fees from the Company's
software products, licensed into the electronic design automation market.
Software revenue increased by $1.1 million, or 16.7% from $6.5 million for the
first quarter ended April 3, 1999 to $7.6 million for the first quarter ended
April 1, 2000. This increase is primarily due to additional sales resulting from
an exclusive distribution agreement signed with a Japanese distributor early in
the first quarter of 2000.
SERVICES AND OTHER REVENUE
The Company's services revenue is derived from maintenance contracts related to
the Company's software products. The Company's other revenue is derived from
consulting services and training classes offered to purchasers of the Company's
products. Services and other revenue decreased by $0.7 million, or 9.3% from
$7.5 million for the first quarter ended April 3, 1999 to $6.8 million for the
first quarter ended April 1, 2000. The decrease was primarily due to the fact
that during 1999, several major customers did not renew their maintenance
contracts due to the fact they were using Viewlogic's products in applications
related to integrated circuit design, which is no longer fully supported by
Viewlogic, and to a lesser extent a number of customers migrated their products
from the version based on the Unix operating system to the version based on the
Microsoft Windows NT operating system, which has lower maintenance prices. This
was partially offset by a 52% increase in training and consulting revenue.
-11-
<PAGE>
COSTS AND EXPENSES
COST OF SOFTWARE REVENUE
Cost of software revenue includes royalties, amortization of purchased
technology, product packaging, labor and other costs associated with ordering,
handling, packaging and shipping products and other production related costs.
The cost of software revenue increased by $0.1 million, or 11.0% from $1.4
million for the first quarter ended April 3, 1999 to $1.5 million for the first
quarter ended April 1, 2000. The increase in the cost of software revenue is
consistent with the increase in software revenue for the period.
COST OF SERVICES AND OTHER REVENUE
Cost of services and other revenue consists primarily of personnel costs and
facilities costs for customer support, consulting, and training classes offered
to purchasers of the Company's products. The cost of service revenue increased
by $0.1 million or 1.0% from $1.5 million for the first quarter ended April 3,
1999 to $1.6 million for the first quarter ended April 1, 2000. Although service
revenue decreased for the first quarter ended April 1, 2000 from the first
quarter ended April 3, 1999, the increase in the cost of service revenue is a
result of a higher percentage of consulting and training revenue in the first
quarter of 2000, compared to the same period in fiscal 1999, which yield lower
margins than maintenance revenue.
SALES AND MARKETING
Sales and marketing expenses, consisting primarily of salaries, commissions,
travel and advertising costs, increased by $0.9 million, or 15.7% from $5.6
million for the first quarter ended April 3, 1999 to $6.5 million for the first
quarter ended April 1, 2000. This increase was primarily attributable to
marketing costs relating to the corporate name change and expenses associated
with the integration of the Summit and Viewlogic sales forces. The first quarter
ended April 1, 2000 includes expenses of Summit for the period after the
consummation of the Merger on March 23, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the engineering and related costs
of developing new products and enhancements to existing products and performing
quality assurance activities. Research and development expenses increased by
$0.8 million, or 31.2% from $2.7 million for the first quarter ended April 3,
1999 to $3.5 million for the first quarter ended April 1, 2000. This increase
was primarily due to additional headcount resulting from the acquisition of
Omniview Inc. and Transcendent Design Inc. during 1999, and to a lesser extent,
research and development expenses of Summit for the period after the
consummation of the Merger on March 23, 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the executive, finance,
human resource, information services, administrative, legal and accounting
expenses of the Company. General and administrative expenses increased by $0.3
million, or 26.8% from $1.0 million for the first quarter ended April 3, 1999,
to $1.3 million for the first quarter ended April 1, 2000. This increase was
primarily a result of the Company continuing the building of its management and
employee infrastructure to support the Merger of Viewlogic and Summit.
AMORTIZATION OF INTANGIBLES AND GOODWILL
Amortization expense increased from $0.2 million in the first quarter ended
April 3, 1999 to $0.6 million in the first quarter ended April 1, 2000. The
Company held $1.1 million in intangibles at April 3, 1999, relating to purchased
technology from the acquisition of OmniView, Inc. The Company expensed $0.2
million in intangibles and stock based compensation for the first quarter ended
April 3, 1999. The Company holds goodwill and other intangibles primarily due to
the Merger of Viewlogic and Summit, which are being amortized to expense on a
straight-line basis over periods ranging from three to seven years beginning
March 24, 2000. The Company expensed $0.6 million in intangibles and stock based
compensation for the first quarter ended April 1, 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
Upon consummation of the Merger, Innoveda immediately charged to expense $2.4
million representing acquired in-process research and development that had not
yet reached technological feasibility and had no
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<PAGE>
alternative future use. See "Notes to Condensed Consolidated Financial
Statements". The value assigned to acquired in-process research and development
was determined by an independent appraiser, identifying research projects in
areas for which technological feasibility has not been established.
RESTRUCTURING AND NON-RECURRING CHARGES
For the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges. This included primarily severance and
other costs relating to the consolidation of duplicative facilities as a
result of the Merger between Summit and Viewlogic. Other costs relating to
property and equipment lease contracts (less any applicable sublease income)
after the properties were abandoned, lease buyout costs, restoration costs
associated with certain lease arrangements, and costs to maintain facilities
during the period after abandonment are also included. Further action was
taken to restructure the Innoveda sales and services business in Japan as a
result of an exclusive distributor agreement executed with Marubeni during
the first quarter of fiscal 2000. Charges associated with the Japanese
reorganization include severance and benefit continuance for approximately 14
employees, costs associated with office closings and subsequent lease
termination, and other facility and exit related costs.
The following table presents the components of the non-recurring restructuring
charges accrued during the period ended April 1, 2000 and the charges against
the reserves through April 1, 2000.
<TABLE>
<CAPTION>
April 1, 2000
Total Non-Cash Amounts Accrual
Charge Write-offs Paid Balance
------ ---------- ------- -------------
<S> <C> <C> <C> <C>
Severance and related ............... $ 780 $ -- $ 270 $ 510
Non-cancelable commitments .......... 1,389 -- -- 1,389
Capitalized software ................ 74 74 -- --
------ ------ ------ ------
Totals ........................... $2,243 $ 74 $ 270 $1,899
====== ====== ====== ======
</TABLE>
All significant amounts are expected to be paid within one year from the Merger
date of March 23, 2000.
OTHER INCOME (EXPENSE)
Other income (expense) consists of the net of interest expense relating to the
Company's term loan and revolving credit line, interest income from cash and
cash equivalent balances, and currency exchange rate differences resulting from
foreign operations in local currencies. Other expense increased by $63,000, or
18.5% to $340,000 for the first quarter ended April 3, 1999 to $403,000 for the
first quarter ended April 1, 2000.
INCOME TAX PROVISION
The income tax provision decreased by $1.7 million, from a provision of $0.6
million for the first quarter ended April 3, 1999 to an income tax benefit of
$1.1 million for the first quarter ended April 1, 2000. Quarterly tax provisions
are based on the estimated effective tax rate for the full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through cash generated from
operations, supplemented by short-term borrowings from a revolving credit line.
The Company also acquired approximately $28.1 million in cash and cash
equivalents as a result of the Merger of Viewlogic and Summit on March 23, 2000.
As of April 1, 2000, the Company had approximately $27.6 million in cash and
cash equivalents. Viewlogic has an available $6.0 million revolving line of
credit with Fleet Bank. As of April 1, 2000, there was approximately $500,000
outstanding under this line of credit.
Viewlogic has an $18.0 million term loan with Fleet Bank, with approximately
$14.5 million outstanding as of April 1, 2000. The term loan agreement
currently applies to Viewlogic only. The Company and the lender are
discussing an amendment to the loan agreement as a result of the Merger of
Viewlogic and Summit. Based on these discussions, the lender has given
Viewlogic a waiver on meeting the financial covenants in its credit facility
for the quarter ending April 1, 2000. The Company expects to add Innoveda as
a borrower to the credit facility and add a financial covenant which will
require the Company to maintain minimum working capital and minimum quarterly
earnings, in which event it would not be required to meet the existing
covenant for debt service. In connection with this amendment the Company also
expects to reduce its term loan to approximately $10 million by June 30, 2000.
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As of April 1, 2000, the Company had working capital of approximately $11.5
million.
For the first quarter ended April 3, 1999, net cash provided by operating
activities was approximately $0.5 million, resulting primarily from net income
for the period of $0.7 million. For the first quarter ended April 1, 2000, net
cash provided by operating activities was approximately $3.0 million. This was
due primarily to the collection of $4.8 million dollars of accounts receivable,
offset by a net loss before non-cash charges.
Net cash used in investing activities was approximately $1.6 million for the
first quarter ended April 3, 1999, mainly from the purchase of OmniView. Net
cash provided by investing activities for the first quarter ended April 1, 2000
was approximately $26.1 million, primarily due to the Merger of Viewlogic and
Summit.
Net cash used in financing activities was approximately $0.5 million and $2.0
million for the first quarter ended April 3, 1999 and April 1, 2000,
respectively, primarily due to the repayment of principal on debt.
The Company believes that its current cash and cash equivalents, combined with
amounts available under the revolving line of credit, will satisfy the Company's
anticipated working capital and other cash requirements for at least the next 12
months.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
IF INNOVEDA AND VIEWLOGIC CANNOT BE SUCCESSFULLY INTEGRATED, THE ANTICIPATED
ADVANTAGES OF THE RECENT MERGER OF INNOVEDA AND VIEWLOGIC MAY NOT BE REALIZED.
In order to maintain and increase profitability Innoveda will need to
successfully integrate and streamline overlapping functions of Viewlogic and
Innoveda. For example, Innoveda's operations in Beaverton, Oregon, will be
relocated. The desired cost savings may not be achieved and the integration of
Innoveda's and Viewlogic's operations may not be accomplished smoothly,
expeditiously or successfully. Each of Innoveda and Viewlogic has recently
completed other business acquisitions. Integration of Innoveda and Viewlogic may
be complicated by the need to integrate these acquisitions and combine multiple
corporate cultures, as well.
THE INTEGRATION OF INNOVEDA'S AND VIEWLOGIC'S BUSINESSES MAY DISTRACT MANAGEMENT
FROM ACHIEVING ITS OPERATIONAL OBJECTIVES WHICH COULD LIMIT INNOVEDA'S ABILITY
TO RETAIN ITS EMPLOYEES.
The integration of Innoveda's and Viewlogic's businesses will require the
dedication of management resources. This may distract management's attention
from the day-to-day business of Innoveda. Employee uncertainty and lack of focus
during integration may also disrupt the business of Innoveda. The retention by
Innoveda of key employees is critical to ensure continued advancement,
development and support of Innoveda's technologies as well as on-going sales and
marketing efforts. During the integration phase, competitors may intensify their
efforts to recruit key employees. Innoveda may not be able to retain key
technical, sales or marketing personnel which would adversely affect Innoveda's
business.
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<PAGE>
INNOVEDA MAY NOT SUCCESSFULLY INTEGRATE RECENT BUSINESS ACQUISITIONS OF INNOVEDA
AND VIEWLOGIC.
Each of Innoveda and Viewlogic has recently completed other business
acquisitions. The size and number of recent acquisitions may add to the
difficulties of integrating Innoveda's and Viewlogic's businesses. Products,
technologies, distribution channels, key personnel and businesses of previously
acquired companies may not effectively integrate into Innoveda's business or
product offerings. Moreover, this integration may adversely affect Innoveda's
business.
BECAUSE INNOVEDA IS BEING MANAGED BY A NEW MANAGEMENT TEAM, THAT NEW MANAGEMENT
MAY MOVE INNOVEDA'S BUSINESS IN A NEW DIRECTION.
The management of Viewlogic is now the management of Innoveda and is able to
exert significant control over Innoveda, its business and direction, subject to
the oversight of Innoveda's board of directors. The manner in which the new
management team conducts the business of Innoveda, and the direction in which
the new management team moves the business, may differ from the manner and
direction in which the prior management of Innoveda would have directed
Innoveda. This control by the new management team, together with the effects of
future market factors and business conditions, could ultimately evolve into an
integration and business strategy that, when implemented, differs from the prior
strategy and business direction of Innoveda. The new management team, and any
change in business or direction, may not improve, and could adversely impact,
Innoveda's financial condition and results of operations.
A SMALL NUMBER OF PRIOR STOCKHOLDERS OF VIEWLOGIC HAVE SIGNIFICANT VOTING
CONTROL OVER INNOVEDA.
The former stockholders of Viewlogic hold approximately 50.6% of the common
stock of Innoveda. Moreover, the five largest former stockholders of Viewlogic
beneficially own approximately 45.5% of the common stock of Innoveda. Acting
together, former Viewlogic's stockholders are able to control, and the five
largest former stockholders will be able to substantially influence, all matters
submitted to the stockholders of Innoveda for approval, including the election
of directors and any merger, consolidation or sale of all or substantially all
of Innoveda's assets. This control could have the effect of delaying a change of
control of Innoveda that other stockholders may believe would result in a
premium or better management. In addition, this control could decrease
Innoveda's stock price because it will be more difficult to acquire a
controlling interest in Innoveda.
INNOVEDA'S QUARTERLY RESULTS WILL LIKELY FLUCTUATE AND AFFECT THE MARKET PRICE
OF INNOVEDA'S COMMON STOCK.
VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE.
Innoveda's quarterly operating results and cash flows have fluctuated in the
past and have fluctuated significantly in certain quarters. These fluctuations
resulted from several factors, including, among others:
the size and timing of orders;
large one-time charges incurred as a result of an acquisition or
consolidation;
seasonal factors;
the rate of acceptance of new products;
product, customer and channel mix;
lengthy sales cycles; and
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level of sales and marketing staff.
These fluctuations will likely continue in future periods because of the above
factors. Additional factors potentially causing fluctuations include, among
others:
corporate acquisitions and consolidations and the integration of
acquired entities and any resulting large one-time charges;
the timing of new product announcements and introductions by Innoveda
and Innoveda's competitors;
the rescheduling or cancellation of customer orders;
the 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 competitors;
product quality issues;
currency fluctuations; and
general economic conditions.
INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE
RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR.
Innoveda's revenue is difficult to forecast for several reasons. Innoveda
operates with little product backlog because Innoveda typically ships its
products shortly after it receives orders. Consequently, license backlog at the
beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. Correspondingly, license fee revenue in any
quarter is difficult to forecast because it is substantially dependent on orders
booked and shipped in that quarter. Moreover, Innoveda generally recognizes a
substantial portion of its revenue in the last month of a quarter, frequently in
the latter part of the month. Any significant deferral of purchases of
Innoveda's products could have a material adverse affect on its business,
financial condition and results of operations in any particular quarter. If
significant sales occur earlier than expected, operating results for subsequent
quarters may also be adversely affected. Quarterly license fee revenue is
difficult to forecast also because Innoveda's typical sales cycle ranges from
six to nine months and varies substantially from customer to customer. In
addition, Innoveda makes a portion of its sales through indirect channels, and
these sales can be difficult to predict.
SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS.
Innoveda establishes its expenditure levels for product development, sales and
marketing and other operating activities based primarily on Innoveda's
expectations as to future revenue. Because a high percentage of Innoveda's
expenses are relatively fixed in the near term, if revenue in any quarter falls
below expectations, expenditure levels could be disproportionately high as a
percentage of revenue and materially adversely affect Innoveda's operating
results.
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<PAGE>
INNOVEDA'S OPERATING RESULTS WILL LIKELY FLUCTUATE, AND FLUCTUATION MAY
ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK.
Innoveda believes that its quarterly revenue, expenses and operating results
will likely vary significantly from quarter to quarter. Innoveda also believes
that period-to-period comparisons of Innoveda's operating results are not
necessarily meaningful. As a result, you should not rely on these comparisons as
indications of Innoveda's future performance. In addition, Innoveda operates
with high gross margins, and a downturn in revenue has had a significant impact
on income from operations and net income. Summit's results of operations fell
below investors' and market makers' expectations for the quarter ended September
30, 1999 and Innoveda's results of operations could be below investors' and
market makers' expectation in other quarters, which could have a material
adverse effect on the market price of Innoveda's common stock.
IF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON
WHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER.
Innoveda intends to focus on the field programmable gate array, printed circuit
board and system-level design automation markets while most major competitors
focus their resources on the application-specific integrated circuits and
integrated circuit design automation markets. Innoveda has adopted this focus
because it believes that the increased complexity of application-specific
integrated circuits and integrated circuit designs, and the resulting increase
in design time, will cause electronic product manufacturers to differentiate
their products at the system level. If the system design portion of the
electronic design automation industry does not grow, it could have a material
adverse effect on Innoveda's business, financial condition, results of
operations or cash flows.
INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY
IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER.
The electronic design automation industry is highly competitive, and Innoveda
expects competition to increase as other electronic design automation companies
introduce products. In the electronic design automation market, Innoveda
principally competes with Mentor Graphics and Cadence and a number of smaller
firms. Indirectly, Innoveda also competes with other firms that offer
alternative products. These other firms could also offer more directly
competitive products in the future. Some of these companies have significantly
greater financial, technical and marketing resources and larger installed
customer bases than Innoveda. Some of Innoveda's current and future competitors
offer a more complete range of electronic design automation products. They may
also distribute products that directly compete with Innoveda's products by
selling such products together with their core product line. In addition,
Innoveda's products perform a variety of functions, and its existing and future
competitors are offering, or may offer in the future, some of the same functions
as separate products or discrete point solutions. For example, some companies
currently offer design entry products without simulators. Competition may cause
Innoveda to offer point solutions instead of, or in addition to, Innoveda's
current software products. Innoveda would have to price such point solutions
lower than Innoveda's current product offerings, causing Innoveda's average
selling prices to decrease. This, in turn, could have a material adverse effect
on Innoveda's business, financial condition, results of operations, or cash
flows.
Innoveda competes on the basis of various factors including, among others:
product capabilities;
product performance;
price;
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<PAGE>
support of industry standards;
ease of use;
first to market; and
customer technical support and service.
Innoveda believes that its products are competitive overall with respect to
these factors. However, in particular cases, Innoveda's competitors may offer
products with functionality sought by Innoveda's prospective customers and which
differs from those Innoveda offers. In addition, some competitors may achieve a
marketing advantage by establishing formal alliances with other electronic
design automation vendors. Further, the electronic design automation industry in
general has experienced significant consolidation in recent years, and the
acquisition of one of Innoveda's competitors by a larger, more established
electronic design automation vendor could create a more significant competitor.
Innoveda may not compete successfully against current and future competitors,
and competitive pressures may have a material adverse effect on Innoveda's
business, financial condition, results of operations, or cash flows. Innoveda's
current and future competitors may develop products comparable or superior to
Innoveda's or more quickly adapt 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 Innoveda's business, financial condition, results of
operations or cash flows.
INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL
INDUSTRY-WIDE DOWNTURNS.
Innoveda's future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. The
electronics industry involves
rapid technological change;
short product life cycles;
fluctuations in manufacturing capacity; and
pricing and margin pressures.
Correspondingly, certain segments, including the computer, semiconductor,
semiconductor test equipment and telecommunications industries, have experienced
sudden and unexpected economic downturns. During these periods, capital spending
often falls, and the number of design projects often decreases. Because
Innoveda's sales depend upon capital spending trends and new design projects,
negative factors affecting the electronics industry could have a material
adverse effect on Innoveda's business, financial condition, results of
operations, or cash flows. A number of electronics companies, including
Innoveda's customers, have experienced a slowdown in their businesses.
INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES
INNOVEDA VULNERABLE IF THESE THIRD PARTIES' REFUSE TO COOPERATE WITH INNOVEDA ON
ECONOMICALLY FEASIBLE TERMS.
Because Innoveda's products must interoperate, or be compatible, with electronic
design automation products of other companies, Innoveda must have timely access
to third party software to perform development and testing of products. Although
Innoveda has established relationships with a variety of
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electronic design automation vendors to gain early access to new product
information, any of these parties may terminate these relationships with limited
notice. In addition, these relationships are with companies that are Innoveda's
current or potential future competitors, including Synopsys, Mentor Graphics and
Cadence. If any of these relationships terminate and Innoveda were unable to
obtain, in a timely manner, information regarding modifications of third party
products, Innoveda would not have the ability to modify its software products to
interoperate with these third party products. As a result, Innoveda could
experience a significant increase in development costs, the development process
would take longer, product introductions would be delayed, and Innoveda's
business, financial condition, results of operations or cash flows could be
materially adversely affected.
IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER.
If Innoveda cannot, for technological or other reasons, develop and introduce
products in a timely manner in response to changing market conditions, industry
standards or other customer requirements, particularly if Innoveda has
pre-announced the product releases, its business, financial condition, results
of operations or cash flows will be materially adversely affected. The
electronic design automation industry is characterized by extremely rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products with new technologies and the emergence
of new industry standards can render existing products obsolete and
unmarketable. In addition, customers in the electronic design automation
industry require software products that allow them to reduce time to market,
differentiate their products, improve their engineering productivity and reduce
their design errors. Innoveda'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 Innoveda's customers. Innoveda may not
succeed in developing and marketing product enhancements or new products that
respond to technological change or emerging industry standards. It may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products. Innoveda's products may not
adequately meet the requirements of the marketplace and achieve market
acceptance.
INNOVEDA'S SOFTWARE MAY HAVE DEFECTS.
Innoveda's software products may contain errors that may not be detected until
late in the products' life cycles. Innoveda 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. Despite testing by
Innoveda and by current and prospective customers, errors may persist, resulting
in loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to Innoveda's reputation or increased service and warranty
costs, any of which could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY
INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO
SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH
INNOVEDA.
DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors
fails, Innoveda's business may suffer. Innoveda relies on distributors for
licensing and support of Innoveda's products outside of North America. Innoveda
depends on the relationships with its distributors to maintain or increase
sales. Since Innoveda'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. Accordingly, Innoveda depends on the continued viability and
financial stability of these distributors.
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<PAGE>
DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's
distributors may offer products of several different companies, including
Innoveda's competitors. Innoveda's current distributors may not continue to
market or service and support Innoveda's products effectively. Any distributor
may discontinue to sell Innoveda's products or devote its resources to products
of other companies. The loss of, or a significant reduction in, revenue from
Innoveda's distributors could have a material adverse effect on its business,
financial condition, results of operations or cash flows.
SEIKO. Seiko, a distributor in Asia, accounted for about 23% of
Summit's revenue during the third quarter of 1999. In June 1999, Summit lowered
Seiko's first quarter 2000 product quota in recognition of the adverse economic
conditions in the Asia Pacific Region. In December 1999, Summit agreed to waive
Seiko's first quarter 2000 product quota requirements to maintain distribution
exclusivity. As a result, Innoveda expects sales through Seiko to decrease for
at least the current and following two quarters and revenue attributable to
sales in the Asia Pacific region to decrease.
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN EUROPE AND THE ASIA PACIFIC REGION.
International revenue represents a significant portion of Innoveda's total
revenue and Innoveda expects this trend to continue. Innoveda'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 its products
more expensive and, therefore, potentially less competitive in those markets.
Innoveda 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 involve numerous risks, including, among
others:
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; and
difficulties in staffing and managing foreign operations and extended
payment terms.
These factors may have a material adverse effect on Innoveda's future
international sales and operations and, consequently, on its business, financial
condition, results of operations or cash flows. In addition, financial markets
and economies in the Asia Pacific region have been experiencing adverse
conditions. Demand for and sales of Innoveda's products in the Asia Pacific
region have decreased, and these adverse economic conditions may worsen. Demand
for and sales of Innoveda's products in this region may further decrease.
In order to successfully expand international sales, Innoveda 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 Innoveda's
operating margins. In addition, to the extent that Innoveda cannot effect these
additions in a timely manner, Innoveda can only generate limited growth in
international sales, if any. Innoveda may not maintain or increase international
sales of its products, and failure to do so could have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL
CONDITION OR RESULTS OF OPERATIONS MAY SUFFER.
Innoveda'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. Innoveda expects
any growth to place a significant strain on its operational resources and
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systems. Failure to effectively manage any growth would have a material adverse
effect on Innoveda's business, financial condition, results of operations or
cash flows.
Innoveda regularly evaluates acquisition opportunities. Innoveda's future
acquisitions 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, and large one-time
charges which could materially adversely affect Innoveda'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 Innoveda has no or limited prior experience and
potential loss of key employees of acquired companies. Innoveda's management has
had limited experience in assimilating acquired organizations and products into
its operations. Innoveda may not integrate successfully the operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure to do so could have a material adverse affect on its
results of operations.
INNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING
POLITICAL, CURRENCY FLUCTUATION AND COORDINATION RISKS.
POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL products are located in Israel.
Economic, political and military conditions may affect Innoveda's operations in
that country. Hostilities involving Israel, for example, could materially
adversely affect Innoveda's business, financial condition and results of
operations. Restrictions on Innoveda's ability to manufacture or transfer
outside of Israel any technology developed under research and development grants
from the government of Israel further heightens the impact. See "Innoveda relies
on Israeli research, development and marketing grants for certain benefits."
CURRENCY RISKS. In addition, while all of Innoveda's sales are
denominated in U.S. dollars, a portion of its annual costs and expenses in
Israel are paid in Israeli currency. Payment in Israeli currency subjects
Innoveda to foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation of, for example, approximately 9%
in 1998. 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.
COORDINATION RISKS. In addition, coordination with and management of
the Israeli operations requires Innoveda to address differences in culture,
regulations and time zones. Failure to successfully address these differences
could disrupt Innoveda's operations.
INNOVEDA CURRENTLY ENJOYS CERTAIN TAX BENEFITS UNDER AN ISRAELI "APPROVED
ENTERPRISE" STATUS WHICH IT MAY NOT ENJOY IN THE FUTURE AND WHICH IN TURN MAY
ADVERSELY AFFECT INNOVEDA'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Israeli government has granted Innoveda's Israeli production facility the
status of an "Approved Enterprise" under the Israeli Investment Law for the
Encouragement of Capital Investments, 1959. Taxable income of a company derived
from an "Approved Enterprise" is eligible for 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) subject to specified conditions. In the
event of Innoveda's failure to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and Innoveda would have to refund the
amount of the canceled benefits, adjusted for inflation and interest. During
1998, Summit realized income of $4.3 million from its Israeli operations and
"Approved Enterprise" tax benefits of $1.9 million. Summit had recently applied
for "Approved Enterprise" status with respect to a new project and intends to
apply in the future with respect to additional projects. Innoveda's Israeli
production facility may not continue to operate or qualify as an "Approved
Enterprise". The benefits under the "Approved Enterprise" regulations may not
continue, or be
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applicable, in the future. If these earnings are remitted to the United States,
Innoveda may have to pay additional U.S. federal and foreign taxes. The loss of,
or any material decrease in, these income tax benefits could have a material
adverse effect on Innoveda's business, financial condition, results of
operations or cash flows.
INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED
PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER.
Innoveda's future success will depend in large part on its key technical and
management personnel and its ability to continue to attract and retain
highly-skilled technical, sales and marketing and management personnel.
Innoveda's business could be seriously harmed if it lost the services of its
President and Chief Executive Officer, William J. Herman, or if it fails to
attract and retain other key personnel.
Competition for personnel in the software industry in general, and the
electronic design automation industry in particular, is intense. Innoveda has in
the past experienced difficulty in recruiting qualified personnel. Innoveda may
fail to retain its key personnel or attract and retain 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 Innoveda's business, financial
condition, results of operations or cash flows. 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 Innoveda's business, financial condition,
results of operations or cash flows.
IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS
BUSINESS MAY SUFFER.
Innoveda's success will depend on its ability to build and expand its sales and
marketing organizations. Innoveda's future success will depend in part on its
ability to hire, train and retain qualified sales and marketing personnel and
the ability of these new persons to rapidly and effectively transition into
their new positions. Competition for qualified sales and marketing personnel is
intense, and Innoveda may not be able to hire, train and retain the number of
sales and marketing personnel needed, which would have a material adverse effect
on its business, financial condition, results of operations or cash flows.
INNOVEDA RELIES ON ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS FOR
CERTAIN BENEFITS. FAILURE TO OBTAIN SIMILAR GRANTS AND BENEFITS IN THE FUTURE
MAY ADVERSELY AFFECT INNOVEDA'S BUSINESS.
Summit had developed its Visual HDL for VHDL products under grants from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade. The
terms of the grants prohibit the manufacture of products developed under these
grants outside of Israel and the transfer of the technology developed under
these grants to any person, without the prior written consent of the Chief
Scientist. If Innoveda were unable to obtain the consent of the government of
Israel, it 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 these technology and
manufacturing operations could be transferred to locations outside of Israel. In
addition, Innoveda would be unable to minimize risks particular to operations in
Israel, such as hostilities involving Israel.
INNOVEDA MUST CONTINUE TO UPDATE ITS CURRENT PRODUCTS TO SERVE ITS INSTALLED
CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL DECREASE.
A substantial portion of Innoveda's revenue is derived from maintenance
agreements for existing products. In order to maintain that revenue, Innoveda
must continue to offer those customers updates for those products or convert
those customers to new products. Innoveda may not be able to do so. During 1999
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several major customers did not renew their maintenance contracts due to the
fact they were using Viewlogic's products in applications related to integrated
circuit design, which is no longer fully supported by Viewlogic, and to a lesser
extent a number of customers migrated their products from the version based on
the Unix operating system to the version based on the Microsoft Windows NT
operating system, which have lower maintenance prices. Innoveda can give no
assurances that this trend will not continue.
INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT
INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE
ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE.
As of April 1, 2000 Viewlogic had borrowings of approximately $14.5 million
under its credit facility. Borrowings under the credit facility are secured by
substantially all of Viewlogic's assets. The credit facility contains
limitations on additional indebtedness and capital expenditures, and includes
financial covenants, which include but are not limited to the maintenance of
minimum levels of interest and debt service coverage ratios and maximum leverage
ratios. Collectively, these limitations and covenants may substantially restrict
the flexibility of Innoveda 's management in quickly adjusting its financial and
operational strategies to react to changing economic and business conditions and
may compromise Innoveda's ability to react to the rapidly evolving environment
of the electronic design automation industry. To avoid default under this credit
facility, Innoveda must remain in compliance with these limitations and
covenants and make all required repayments or Innoveda must obtain replacement
financing. Innoveda may not be able to secure replacement financing on terms
acceptable to it or to its stockholders, or at all. In the event of a default by
Innoveda, Innoveda 's lender may enforce its security interest and take
possession of substantially all or some of Innoveda 's assets. As of April 1,
2000, Innoveda had cash and cash equivalents of $27.6 million. See Note 7 to
Condensed Consolidated Financial Statements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from interest rate changes,
foreign currency fluctuations, and changes in the market values of its
investments.
INTEREST RATE RISK. The Company invests its excess cash in municipal bonds, and
in high-quality corporate issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company attempts to protect and preserve its
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, the Company's future investment income may fall
short of expectations due to changes in interest rates and the Company may
suffer losses in principal if forced to sell securities which have declined in
market value due to changes in interest rates.
FOREIGN CURRENCY RISK. The Company pays the expenses of its international
operations in local currencies. The Company's international operations are
subject to risks typical of an international business, including, but not
limited to: differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, the Company's future results could be
materially adversely impacted by changes in these or other factors.
The Company is also exposed to foreign exchange rate fluctuations as they relate
to operating expenses as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The effect of foreign exchange rate fluctuations
on the Company for the first quarter ended April 1, 2000 was not material.
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<PAGE>
INVESTMENT RISK. The Company has made equity investments in Asia Design
Corporation "ADC" and Summit Design Asia "SDA" for business and strategic
purposes. These investments are included in other long-term assets and are
accounted for under the equity method when ownership is greater than 20% and the
Company does not exert control. For these investments in privately-held
companies, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. The Company is currently in the process of negotiating to divest
this investment.
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<PAGE>
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
On March 24, 2000, Summit completed its acquisition of Viewlogic. Pursuant to
the Reorganization Agreement, Summit issued 16,337,979 shares of its common
stock to Viewlogic shareholders in exchange for all the outstanding common
stock of Viewlogic (24,051,963 outstanding shares) at a .67928 to 1 exchange
ratio. After the transaction, Viewlogic shareholders owned 50.6% of the
outstanding common stock of Innoveda and Summit shareholders owned the
remaining 15,941,418 shares of Innoveda common stock.
In March 2000, the Innoveda granted an aggregate of 72,785 shares of Innoveda
common stock to employees in connection with employee retention arrangements.
These shares were offered and sold in transactions which were exempt from
Securities Act registration under Section 4(2) of the Securities Act,
relating to sales by an issuer not involving a public offering. No
underwriters were involved in the sale of these shares.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On March 20, 2000, a meeting of stockholders of the Company was held. At the
meeting, the following actions were taken by the stockholders.
A proposal to issue shares of common stock to the stockholders of Viewlogic
pursuant to the Agreement and Plan of Reorganization among Summit, Viewlogic and
Hood Acquisition Corp., a wholly owned subsidiary of Summit, dated as of
September 16, 1999. The results of the voting were as follows:
For: ........ 8,315,439
Against: .... 346,713
Abstain: .... 18,057
A proposal to amend the Amended and Restated Certificate of Incorporation
increasing the number of shares of the Company's common stock authorized for
issuance by 20 million shares to 50 million shares, contingent upon approval of
the above stock issuance proposal. The results of the voting were as follows:
For: ........ 8,251,421
Against: .... 409,271
Abstain: .... 19,517
A proposal to amend the Amended and Restated Certificate of Incorporation
changing the Company's name to "Innoveda, Inc.," contingent and effective upon
completion of the business combination with Viewlogic. The results of the voting
were as follows:
For: ........ 8,239,743
Against: .... 396,124
Abstain: .... 44,342
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<PAGE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation. (1)
10.01 Agreement and Plan of Reorganization dated as of September 16, 1999
(the "Reorganization Agreement") by and among the Registrant, Hood
Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of the Registrant ("Merger Sub"), and Viewlogic Systems,
Inc., a Delaware corporation ("Viewlogic"). (2)
27.1 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K
On February 24, 2000, the Company filed a Current Report on Form 8-K in
connection with the financial results for the fourth quarter and year ended
December 31, 1999.
On March 9, 2000, the Company filed a Current Report on Form 8-K in connection
with the resignation of Richard Davenport effective February 2000, the former
President and Chief Operating Officer of the Company.
On April 7, 2000, the Company filed a Current Report on Form 8-K in connection
with a change in control of the Registrant at the effective time of the Merger
contemplated by that certain Agreement and Plan of Reorganization dated as of
September 16, 1999 by and among the Registrant, Hood Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of the Registrant, and
Viewlogic Systems, Inc., a Delaware corporation.
On May 15, 2000 the Company filed a Current Report on Form 8-K/A in connection
with pro forma financial information for the transaction described in Item 2 of
the Report on Form 8-K filed on April 7, 2000.
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated April 7, 2000.
(2) Incorporated by reference to the Registration Statement on Form S-4 (File
No. 333-89491) as declared effective by the Securities and Exchange
Commission February 14, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVEDA, INC.
By: /s/ Kevin P. O' Brien
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: May 16, 2000
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