<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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)
DELAWARE 93-1137888
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
293 BOSTON POST ROAD WEST
MARLBORO, MASSACHUSETTS 01752-4615
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
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 November 13, 2000, the Registrant had outstanding 39,216,947 shares of
Common Stock, $0.01 par value per share.
<PAGE>
INNOVEDA, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and January 1, 2000. 3
Condensed Consolidated Statements of Operations for the
Quarter Ended September 30, 2000 and October 2, 1999 and the
Nine Months Ended September 30, 2000 and October 2, 1999. 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2000 and October 2, 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 26
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
Exhibit index 30
</TABLE>
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<PAGE>
INNOVEDA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, 2000 January 1, 2000
------------------ ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,726 $ 531
Accounts receivable, net 18,804 14,290
Prepaid expenses and other 3,126 2,722
Prepaid income taxes 1,204 1,228
Deferred income taxes 6,641 1,342
--------- --------
Total current assets 53,501 20,113
Equipment and furniture, net 7,688 4,477
Capitalized software costs, net 2,366 2,427
Purchased technology and other intangibles, net 66,387 3,508
Goodwill, net 11,230 --
Deposits and other assets 1,245 920
--------- --------
Total assets $ 142,417 $ 31,445
========= ========
LIABILITIES
Current liabilities:
Notes payable, current portion $ 4,250 $ 3,125
Capital lease obligations, current portion 567 372
Accounts payable 3,135 2,840
Accrued liabilities 19,558 7,140
Deferred revenue 21,955 14,595
--------- --------
Total current liabilities 49,465 28,072
--------- --------
Notes payable, less current portion 5,750 13,825
Capital lease obligation, less current portion 391 554
Other long-term liabilities 1,934 --
Deferred income taxes 28,398 2,393
--------- --------
Total liabilities 85,938 44,844
--------- --------
Redeemable, convertible preferred stock -- 32,000
--------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000 authorized,
39,300 outstanding at September 30, 2000, $0.001 par value,
35,000 authorized, 7,969 outstanding at January 1, 2000 393 8
Additional paid-in capital 115,977 4,777
Notes due from stockholders (932) (927)
Deferred compensation (1,261) (1,701)
Accumulated deficit (57,770) (47,845)
Accumulated other comprehensive income 72 289
--------- --------
Total stockholders' equity (deficit) 56,479 (45,399)
--------- --------
Total liabilities and stockholders' equity (deficit) $ 142,417 $ 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)
(unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software $ 12,578 $ 6,008 $ 31,819 $ 19,107
Services and other 10,525 7,577 27,229 21,710
-------- -------- -------- --------
Total revenue 23,103 13,585 59,048 40,817
-------- -------- -------- --------
Costs and expenses:
Cost of software 1,994 1,766 5,466 4,503
Cost of services and other 2,214 1,514 5,826 4,670
Sales and marketing 8,046 5,334 22,983 16,564
Research and development 5,750 2,902 15,021 8,380
General and administrative 1,776 996 4,555 3,015
Amortization of intangibles 2,508 234 5,588 354
Amortization of stock compensation 147 139 441 384
In process research and development 3,053 -- 5,453 --
Merger related restructuring costs 493 -- 2,736 --
-------- -------- -------- --------
Total operating expenses 25,981 12,885 68,069 37,870
-------- -------- -------- --------
Operating income (loss) (2,878) 700 (9,021) 2,947
Other expense (200) (546) (340) (1,172)
-------- -------- -------- --------
Income (loss) before provision for
income taxes (3,078) 154 (9,361) 1,775
Provision (benefit) for income taxes 1,736 (38) 564 708
-------- -------- -------- --------
Net income (loss) ($ 4,814) $ 192 ($ 9,925) $ 1,067
======== ======== ======== ========
Earnings (loss) per share:
Basic ($ 0.14) $ 0.04 ($ 0.40) $ 0.32
======== ======== ======== ========
Diluted ($ 0.14) $ 0.01 ($ 0.40) $ 0.07
======== ======== ======== ========
Weighted average shares outstanding:
Basic 33,336 4,557 24,590 3,302
======== ======== ======== ========
Diluted 33,336 16,353 24,590 14,694
======== ======== ======== ========
</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 Nine Months Ended
September 30, October 2,
------------- ----------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 9,925) $ 1,067
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,649 2,854
Compensation under stock option agreements 440 384
Write-off of in process research and development 5,453 --
Change in assets and liabilities:
Accounts receivable 2,294 (2,525)
Prepaid and other current assets 622 (1,059)
Deferred income taxes (3,919) 40
Accounts payable (1,427) 219
Accrued liabilities 3,621 126
Deferred revenue (3,104) 44
-------- -------
Net cash provided by operating activities 3,704 1,150
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,168) (743)
Capitalized software costs (1,353) (811)
Proceeds from sale of VirSim product line 7,000 --
Cash acquired in acquisition of PADS Software, Inc.
net of transaction costs 2,857 --
Cash acquired in acquisition of Summit Design, Inc.
net of transaction costs 27,036 --
Purchase of Transcendent Design Technologies, Inc. -- 285
Purchase of OmniView, Inc. -- (1,153)
Other -- (300)
-------- -------
Net cash provided by (used in) investing activities 33,372 (2,722)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal on debt (14,320) (1,500)
Proceeds from exercise of stock options 872 --
Repayments of capital lease obligations (300) (94)
-------- -------
Net cash used in financing activities (13,748) (1,594)
-------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (133) (25)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,195 (3,191)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 531 4,487
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,726 $ 1,296
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 657 1,281
======== =======
Income taxes 257 1,369
======== =======
</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
(in thousands, except per share data)
1. BASIS OF PRESENTATION
Innoveda, Inc. ("Innoveda" or the "Company"), a Delaware corporation, was
created by the business combination of Summit Design, Inc. ("Summit") and
Viewlogic Systems, Inc. ("Viewlogic") which was consummated on March 23, 2000.
In addition, the Company subsequently acquired PADS Software, Inc. ("PADS") on
September 22, 2000. 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 business
combination of Summit with Viewlogic was effected by means of the merger of a
wholly owned subsidiary of Summit with and into Viewlogic, with Viewlogic
surviving as a wholly owned subsidiary of Summit. The business combination was
accounted for as a reverse acquisition, as former shareholders of Viewlogic
owned a majority of the outstanding stock of Summit subsequent to the business
combination. Therefore, for accounting purposes, Viewlogic is deemed to have
acquired Summit. The business combination of Innoveda and PADS was accounted for
as a purchase of PADS by Innoveda.
All fiscal 1999 financial information presented herein, with the exception of
pro forma results, 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 commencing March 24, 2000, and the financial
results for PADS commencing September 23, 2000. The operating results for the
quarter ended September 30, 2000 and for the nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for any
future period. There has been no change to the estimated fair value of assets
acquired, liabilities assumed and resulting goodwill relating to the Summit
merger, reported in Innoveda's Quarterly Report on Form 10-Q for the period
ended April 1, 2000. However, the estimated fair value of assets may be
subject to further refinement.
The accompanying financial statements should be read in conjunction with the
fiscal 1999 consolidated financial statements of Viewlogic, Summit, and PADS, as
well as Innoveda's Current Report on Form 8-K dated March 23, 2000, as amended,
the Innoveda Form S-4 filed August 11, 2000 as amended, and note 2 on this
Form 10-Q entitled "Merger of Innoveda and PADS".
2. MERGER OF INNOVEDA AND PADS
On June 2, 2000, Innoveda, Inc. entered into a merger agreement with PADS
Software, Inc. The merger was consummated on September 22, 2000. The merger
agreement provided that a wholly owned subsidiary of Innoveda would merge with
and into PADS, with PADS surviving as a wholly owned subsidiary of Innoveda
following the merger. For the merger, Innoveda issued 6,473,136 shares of its
common stock and paid approximately $2.0 million to the PADS stockholders. PADS
capital stock outstanding at the merger date was exchanged for shares of
Innoveda common stock at the rate of approximately 1 to 1.9 per share, plus
$.579 per share in cash. In addition, each outstanding option to purchase
shares of PADS common stock was converted into an option to purchase 2.0355
shares of Innoveda common stock, and the option exercise prices were adjusted
accordingly.
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<PAGE>
The Merger was accounted for under the purchase method of accounting. The
operating results of PADS 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, goodwill and other intangibles in the amount of approximately $49,071
have been capitalized. As a result of the Merger, $3,053 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.
Below is a table of the PADS acquisition costs and the preliminary purchase
price allocation (in thousands):
<TABLE>
<S> <C>
Preliminary purchase price:
Common stock $ 23,870
Stock options 366
Cash payment to PADS stockholders 1,976
Acquisition costs 550
--------
Total preliminary purchase price $ 26,762
========
Preliminary purchase price allocation:
Tangible net assets acquired $ 227
Assumed debt (7,381)
Deferred income taxes (18,208)
Intangible net assets acquired:
Purchased technology, assembled workforce,
customer base, and trademarks 47,293
Goodwill 1,778
In-process research and development 3,053
--------
Total $ 26,762
========
</TABLE>
Pursuant to the PADS merger agreement, Innoveda paid all of the assumed debt
after the closing.
During the third quarter ended September 30, 2000, Innoveda recorded
approximately $0.5 million in restructuring charges relating to the PADS merger.
This was primarily comprised of severance and exit costs to close Innoveda
duplicative facilities as a result of the merger.
The following table presents the components of the merger related restructuring
charges accrued during the period ended September 30, 2000 and the charges
against the reserves through September 30, 2000. All significant amounts are
expected to be paid within one year from the merger date of September 22, 2000.
<TABLE>
<CAPTION>
Total Non-cash Amounts September 30, 2000
Charge Write-offs Paid Accrual Balance
------ ---------- ------- ------------------
<S> <C> <C> <C> <C>
Severance $250 $-- $- $250
Non-cancelable commitments 199 -- 3 196
Capitalized software 44 44 - --
---- --- -- ----
Totals $493 $44 $3 $446
==== === == ====
</TABLE>
3. MERGER OF VIEWLOGIC AND SUMMIT
On March 23, 2000, a change in control of the Registrant occurred at the
effective time (the "Effective Time") 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
-7-
<PAGE>
(24,051,963 outstanding shares) at a .67928 to 1 exchange ratio. Immediately
after the Effective Time, the shareholders of Viewlogic immediately prior to the
Effective Time owned 50.6% of the outstanding common stock of Innoveda, Inc.,
and the shareholders of Summit immediately prior to the Effective Time owned the
remaining 49.4% of the outstanding 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, goodwill and
other intangibles in the amount of approximately $37,737 have been
capitalized. As a result of the Merger, $2,400 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.
Below is a table of Summit 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>
During the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges relating to the Summit merger. This
primarily included 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 Solutions Corporation during the first quarter of fiscal 2000. Charges
associated with 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 September 30, 2000. All significant amounts are expected to
be paid within one year from the merger date of March 23, 2000.
-8-
<PAGE>
<TABLE>
<CAPTION>
Total Non-cash Amounts September 30, 2000
Charge Write-offs Paid Accrual Balance
------ ---------- ------- ------------------
<S> <C> <C> <C> <C>
Severance and related $ 780 $ - $ 759 $ 21
Non-cancelable commitments 1,389 - 720 669
Capitalized software 74 74 - -
-------- --------- --------- --------
Totals $2,243 $ 74 $1,479 $690
======== ========= ========= ========
</TABLE>
4. PRO FORMA INFORMATION
The unaudited consolidated results of operations shown below are presented on a
pro forma basis and represent the results of Viewlogic, Summit and PADS had the
business combinations of these entities occurred at the beginning of the periods
presented. This schedule includes all amortization and non-recurring charges for
all entities for the periods shown.
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, October 2, September30, October 2,
------------- ---------- ------------ ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $30,160 $27,659 $84,593 $81,399
Net loss (7,174) (4,561) (18,973) (10,135)
Net income per share - basic ($0.18) ($0.12) ($0.49) ($0.26)
Net income per share - diluted ($0.18) ($0.12) ($0.49) ($0.26)
</TABLE>
Pro forma net losses for the periods presented include non-recurring
merger-related charges of $6,531 and $2,665 for the quarters ended September 30,
2000 and October 2, 1999 respectively, and includes $14,368 and $4,005 for the
nine month periods ended September 30, 2000 and October 2, 1999, respectively.
The pro forma financial information is presented for informational purposes only
and is not indicative of the operating results that would have occurred had the
merger been consummated as of the above dates, nor are they necessarily
indicative of future operating results.
5. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus the effect of
outstanding stock options using the treasury stock method.
Although Summit is the surviving legal entity after the March 2000 merger and
the legal acquirer, for accounting purposes the Summit merger was treated as an
acquisition of Summit by Viewlogic. The weighted average number of common shares
outstanding has been adjusted for all periods reported in the table below to
reflect the Summit exchange ratio of .67928, and the issuance of Innoveda shares
to PADS shareholders as of September 22, 2000.
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<PAGE>
EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
---- --- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($ 4,814) $ 192 ($ 9,925) $ 1,067
======== ======= ======== =======
Denominator:
Weighted average number of common
shares - Basic 33,336 4,557 24,590 3,302
Dilutive effect of employee
stock options -- 928 -- 524
-------- -------
Dilutive effect of assumed conversion
of preferred stock -- 10,868 -- 10,868
-------- ------- -------- -------
Weighted average number of common
shares - Diluted 33,336 16,353 24,590 14,694
======== ======= ======== =======
Net income (loss) per share - basic ($ 0.14) $ 0.04 ($ 0.40) $ 0.32
======== ======= ======== =======
Net income (loss) per share - diluted ($ 0.14) $ 0.01 ($ 0.40) $ 0.07
======== ======= ======== =======
</TABLE>
For the quarters ended September 30, 2000 and October 2, 1999, there were 2,033
and 4,309 anti-dilutive weighted average shares, respectively, not included in
the table above. For the nine month periods ending September 30, 2000 and
October 2, 1999, there were 1,869 and 4,298 anti-dilutive weighted average
shares, respectively, not included in the table above.
6. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
Innoveda 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 Quarter Ended For the Nine Months Ended
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
North America $14,017 $ 9,238 $37,956 $27,448
Europe 2,584 2,205 7,325 6,591
Japan 4,094 1,622 9,599 4,310
Other 2,408 520 4,168 2,468
------- ------- ------- -------
Total Revenue $23,103 $13,585 $59,048 $40,817
======= ======= ======= =======
As a Percentage of Total Revenue
North America 61% 68% 64% 67%
Europe 11% 16% 13% 16%
Japan 18% 12% 16% 11%
Other 10% 4% 7% 6%
------- ------- ------- -------
Total 100% 100% 100% 100%
======= ======= ======= =======
</TABLE>
-10-
<PAGE>
7. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income for the
periods indicated.
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($4,814) $192 ($ 9,925) $1,067
Foreign currency translation
adjustments (88) 350 (217) 89
------- ---- -------- ------
Comprehensive income (loss) ($4,902) $542 ($10,142) $1,156
======= ==== ======== ======
</TABLE>
8. DEBT
Innoveda has a $16.0 million credit facility with Fleet Bank, consisting of a
$10.0 million term loan and a $6.0 million revolving credit line. There was
approximately $10.0 million outstanding under the term loan and no amounts
outstanding under the revolving credit line as of September 30, 2000. Borrowings
under the credit facility are secured by substantially all of Innoveda'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 profits, interest and debt
service coverage ratios and maximum leverage ratios. 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 is in compliance with all of its debt covenants as of
September 30, 2000.
9. SALE OF VIRSIM PRODUCT LINE
On July 28, 2000, Innoveda entered into an agreement with Synopsys, Inc. in
which Synopsys agreed to acquire Innoveda's VirSim electronic design software
tool and certain related assets for a purchase price of $7.0 million. The
sale was completed on August 2, 2000. There was no gain or loss on the sale
as the proceeds were offset by a related write-off of goodwill and other
intangible assets that were recorded from the merger of Summit and Viewlogic
in March 2000. This transaction resulted in an additional tax provision of
approximately $1.5 million in the third quarter of 2000. VirSim is used as a
debugging and analysis environment with hardware description language
simulators, including the Synopsys VCS Verilog simulator. Previously,
Synopsys licensed VirSim from Innoveda for resale. Innoveda has retained
rights to the product source code and plans to integrate the functionality of
VirSim with its suite of verification tools. Innoveda customers who purchased
VirSim bundled with other products from Innoveda will have continued support
from Innoveda and will be transitioned to the integrated version of the
technology over time. The sale will reduce anticipated revenues for the
balance of the year by approximately $1.2 million due to the elimination of
revenue from VirSim royalties.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
This SFAS establishes standards for derivative instruments and hedging
activities. SFAS 133 requires an entity to recognize all derivatives as
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<PAGE>
either an asset or liability in the statement of financial position and measure
those instruments at fair value. SFAS 133 requires that changes in the fair
value of a derivative be recognized currently in earnings unless specific hedge
accounting criteria are met and that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge accounting. SFAS
133 is effective for fiscal years beginning after June 15, 2000. Innoveda is
planning to adopt SFAS 133 in the first quarter of fiscal 2001. Innoveda is
currently evaluating this statement, but does not expect the adoption of SFAS
133 to have a material effect on Innoveda's consolidated financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The SAB
summarizes certain of the SEC's views in applying revenue recognition in
financial statements. Innoveda is required to adopt SAB No. 101 in the fourth
quarter of fiscal 2000 and has not yet completed its evaluation of the effects
of SAB No. 101.
-12-
<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 includes 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 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical facts
included in this Quarterly Report on Form 10-Q, regarding our strategy, future
operations, financial position, estimated revenues, projected costs, prospectus,
plans and objectives of management are forward-looking statements. When used in
this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate",
"intend", "estimate", "expect", "project", "plans", and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
future results, levels of activity, performance or achievements and you should
not place undue reliance on our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or strategic alliances. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including 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, Innoveda 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, and telesales.
Innoveda continues to merge the operations of Summit, Viewlogic, and PADS,
integrate distribution channels, and establish a significant market presence
under it's new name. Innoveda believes that it has made significant progress in
those areas during the period beginning at the business combination of Viewlogic
and Summit and ended September 30, 2000.
The results discussed below for fiscal 1999 include only the operations of
Viewlogic. The results for fiscal 2000 discussed below include the operations of
Viewlogic for the periods stated, the operations of Summit commencing March 24,
2000, and the operations of PADS commencing September 23, 2000.
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RESULTS OF OPERATIONS
The following table sets forth-certain income and expense items as a percentage
of total revenue, and the percentage change in dollar amounts of such items
compared with the corresponding period in the previous fiscal year.
<TABLE>
<CAPTION>
For the Third Quarter Ended For the Nine Months Ended
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software 54% 44% 54% 47%
Services and other 46% 56% 46% 53%
--- --- --- ---
Total revenue 100% 100% 100% 100%
Costs and expenses:
Cost of software 9% 13% 9% 11%
Cost of services and other 10% 11% 10% 11%
Sales and marketing 35% 39% 39% 41%
Research and development 25% 22% 25% 21%
General and administrative 8% 7% 8% 7%
Amortization of intangibles and stock
Compensation 11% 3% 10% 2%
In process research and development 13% -- 9% --
Non-recurring restructuring costs 2% -- 5% --
--- --- --- ---
Total operating expenses 113% 95% 115% 93%
Operating income (loss) -13% 5% -15% 7%
Other income (expense) -1% -4% -1% -3%
--- --- --- ---
Income (loss) before provision for
income taxes -14% 1% -16% 4%
Provision (benefit) for income taxes 7% -- 1% 2%
--- --- --- ---
Net income (loss) -21% 1% -17% 2%
=== === === ===
</TABLE>
REVENUE
SOFTWARE REVENUE
Innoveda software revenue is derived from license fees from Innoveda's software
products, licensed into the electronic design automation market. Software
revenue increased by $6.6 million, or 109.4%, from $6.0 million for the third
quarter ended October 2, 1999 to $12.6 million for the third quarter ended
September 30, 2000. Software revenue increased by $12.7 million, or 66.5%, from
$19.1 million for the nine months ended October 2, 1999 to $31.8 million for the
nine months ended September 30, 2000. These increases are due to sales of SLD
products, that were acquired as a result of the Summit merger in March 2000,
increased sales from the acquisition of PADS Software Inc. in September 2000,
and due to increased sales of Innoveda's HSSD and Enterprise products in the
three month and nine month periods ended September 30, 2000 versus the same
periods in 1999.
SERVICES AND OTHER REVENUE
Innoveda's service revenue is derived from maintenance contracts related to
Innoveda's software products. Innoveda's other revenue is derived from
consulting services and training classes offered to purchasers of Innoveda's
products. Services and other revenue increased by $2.9 million, or 38.9%, from
$7.6 million for
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the third quarter ended October 2, 1999 to $10.5 million for the third quarter
ended September 30, 2000. Services and other revenue increased by $5.5 million,
or 25.4%, from $21.7 million for the nine months ended October 2, 1999 to $27.2
million for the nine months ended September 30, 2000. These increases are
primarily due to additional maintenance revenue in the second and third quarters
of 2000 related to the acquisition of Summit, and to a lesser extent due to
maintenance contract renewals, and higher consulting revenue from Innoveda's
larger consulting group in the second and third quarters of 2000 versus the same
periods in 1999.
COSTS AND EXPENSES
COST OF SOFTWARE REVENUE
Cost of software revenue includes royalties, 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 $0.2
million, or 12.9%, from $1.8 million for the third quarter ended October 2, 1999
to $2.0 million for the third quarter ended September 30, 2000. This increase is
due primarily to the added cost of software revenue related to PADS sales for
the eight-day period subsequent to the merger date. The cost of software revenue
increased by $1.0 million, or 21.4%, from $4.5 million for the nine months ended
October 2, 1999 to $5.5 million for the nine months ended September 30, 2000.
This increase reflects increased royalty and commission payments, increased
software replication costs, and the additional post-merger cost of Summit and
PADS software revenue during the nine months ended September 30, 2000.
COST OF SERVICES AND OTHER REVENUE
Cost of services and other revenue consists primarily of personnel and
facilities costs for customer support, consulting, and training classes offered
to purchasers of Innoveda's products. The cost of service revenue increased by
$0.7 million, or 46.2%, from $1.5 million for the third quarter ended October 2,
1999 to $2.2 million for the third quarter ended September 30, 2000. The cost of
service revenue increased by $1.1 million, or 24.8%, from $4.7 million for the
nine months ended October 2, 1999 to $5.8 million for the nine months ended
September 30, 2000. These amounts are consistent with the increases in services
and other revenue during the third quarter, and nine months ended September 30,
2000, respectively. Additionally, the increase in cost of services and other
revenue are indicative of increased salary and compensation expenses relating to
additional headcount as a result of the Summit merger in March 2000, and to a
lesser extent, increased travel and related expenses incurred over the current
year to support the increased services and other revenue.
SALES AND MARKETING
Sales and marketing expenses, which consist primarily of salaries, commissions,
travel, trade shows, advertising campaigns, and direct mail solicitations,
increased by $2.7 million, or 50.8%, from $5.3 million for the third quarter
ended October 2, 1999 to $8.0 million for the third quarter ended September 30,
2000. Sales and marketing expenses increased by $6.4 million, or 38.8%, from
$16.6 million for the nine months ended October 2, 1999 to $23.0 million for the
nine months ended September 30, 2000. These increases were primarily due to
higher salary and related expenses from additional sales and marketing headcount
as a result of the Summit merger in March 2000, and to a lesser extent the PADS
merger on September 22, 2000. Commission and travel expenses also increased
proportionate to revenue in the three-month and nine month periods ended
September 30, 2000, respectively. Additionally, advertising and other marketing
program expenses increased during the nine months ended September 30, 2000, due
to costs associated with the corporate identity and name change as a result of
the merger with Summit in March 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
$2.8 million, or 98.1%, from $2.9 million for the third quarter ended
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October 2, 1999 to $5.8 million for the third quarter ended September 30, 2000.
Research and development expenses increased by $6.6 million, or 79.2%, from $8.4
million for the nine months ended October 2, 1999 to $15.0 million for the nine
months ended September 30, 2000. These increases over the prior year were due
primarily to additional salary and other compensation costs resulting from
headcount obtained from the Summit merger in March 2000, and to higher
consulting, facility, and depreciation expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the executive, finance,
human resource, information services, administrative, legal and accounting
expenses of Innoveda. General and administrative expenses increased by $0.8
million, or 78.3%, from $1.0 million for the third quarter ended October 2,
1999, to $1.8 million for the third quarter ended September 30, 2000. General
and administrative expenses increased by $1.5 million, or 51.1%, from $3.0
million for the nine months ended October 2, 1999, to $4.5 million for the nine
months ended September 30, 2000. These increases were primarily due to
additional costs associated with the merger of Summit in March 2000, and to a
lesser extent the merger with PADS in September 2000. These increased costs
include additional headcount, telecommunications and depreciation expenses
resulting from capital equipment purchases that were required to build
Innoveda's infrastructure to support future growth.
AMORTIZATION OF INTANGIBLES AND GOODWILL
Amortization expense increased 612% from $0.4 million in the third quarter ended
October 2, 1999 to $2.7 million in the third quarter ended September 30, 2000.
Amortization expense increased 717% from $0.7 million in the nine months ended
October 2, 1999 to $6.0 million in the nine months ended September 30, 2000.
Innoveda had $3.8 million in intangible assets as of October 2, 1999, consisting
of purchased technology and workforce from its acquisition of OmniView, Inc. in
March 1999, and purchased technology related to the acquisition of Transcendent
Design Technology, Inc. in August 1999. Innoveda had $77.6 million in intangible
assets as of September 30, 2000, consisting primarily of purchased technology,
goodwill, and purchased workforce and customer base, resulting from the Summit
merger in March 2000 and the PADS merger on September 22, 2000, and the
remaining intangible assets from the OmniView and Transcendent acquisitions in
1999. Innoveda's intangible assets are being amortized to expense over periods
ranging from three to seven years.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES
In conjunction with the acquisition of PADS on September 22, 2000, in the third
quarter ended September 30, 2000 Innoveda charged to expense $3.1 million
representing the write-off of acquired in-process research and development that
had not yet reached technological feasibility and had no alternative future use,
as determined by an independent appraiser. Similarly, in conjunction with the
business combination of Summit and Viewlogic in March 2000, in the first quarter
ended April 1, 2000 Innoveda charged to expense $2.4 million representing
acquired in-process research and development that had not yet reached
technological feasibility and had no alternative future use, as determined by
another independent appraiser. For the nine months ended September 30, 2000,
Innoveda charged approximately $5.5 million to expense.
RESTRUCTURING AND NON-RECURRING CHARGES RELATED TO SUMMIT MERGER
During the first quarter ended April 1, 2000, Innoveda recorded approximately
$2.2 million in restructuring charges relating to the Summit merger. This
primarily included 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 Solutions Corporation during the first quarter of fiscal 2000. Charges
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associated with 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 September 30, 2000. All significant amounts are expected to
be paid within one year from the merger date of March 23, 2000.
<TABLE>
<CAPTION>
Total Non-cash Amounts September 30, 2000
Charge Write-offs Paid Accrual Balance
------ ---------- ------- ------------------
<S> <C> <C> <C> <C>
Severance and related $ 780 $ -- $ 759 $ 21
Non-cancelable commitments 1,389 -- 720 669
Capitalized software 74 74 -- --
------ ---- ------ ----
Totals $2,243 $ 74 $1,479 $690
====== ==== ====== ====
</TABLE>
RESTRUCTURING AND NON-RECURRING CHARGES RELATED TO PADS MERGER
During the third quarter ended September 30, 2000, Innoveda recorded
approximately $0.5 million in restructuring charges relating to the PADS merger.
This was primarily comprised of severance and exit costs to close duplicative
facilities as a result of the merger.
The following table presents the components of the non-recurring restructuring
charges accrued during the period ended September 30, 2000 and the charges
against the reserves through September 30, 2000. All significant amounts are
expected to be paid within one year from the merger date of September 22, 2000.
<TABLE>
<CAPTION>
Total Non-cash Amounts September 30, 2000
Charge Write-offs Paid Accrual Balance
------ ---------- ------- ------------------
<S> <C> <C> <C> <C>
Severance $250 $-- $- $250
Non-cancelable commitments 199 -- 3 196
Capitalized software 44 44 - --
---- --- -- ----
Totals $493 $44 $3 $446
==== === == ====
</TABLE>
OTHER INCOME (EXPENSE)
Other income (expense) consists of the net of interest expense relating to
Innoveda'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 decreased by $0.3 million,
from $0.5 million for the third quarter ended October 2, 1999 to $0.2 million
for the third quarter ended September 30, 2000. Other expense decreased by $0.8
million, from $1.1 million for the nine months ended October 2, 1999 to $0.3
million for the nine months ended September 30, 2000. These decreases in other
income and expense are primarily due to the higher interest income in 2000
resulting from the $28.1 million in cash acquired as a result of the Summit
merger in March 2000.
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INCOME TAX PROVISION
The income tax provision increased by $1.8 million, from a tax benefit of
$38,000 for the third quarter ended October 2, 1999 to a provision of $1.7
million for the third quarter ended September 30, 2000. The income tax provision
decreased by $0.1 million from a provision of $0.7 million for the nine months
ended October 2, 1999 to a provision of $0.6 million for the nine months ended
September 30, 2000. The income tax provision for the third quarter ended
September 30, 2000 includes an estimated $1.5 million resulting from the sale of
the VirSim product line on August 2, 2000. Quarterly tax provisions are based on
the estimated effective tax rate for the full year.
LIQUIDITY AND CAPITAL RESOURCES
Innoveda finances its operations primarily through cash generated from
operations, and also has short-term borrowings available from a revolving credit
line. As of September 30, 2000, Innoveda had approximately $23.7 million in cash
and cash equivalents. Innoveda has an available $6.0 million revolving line of
credit with Fleet Bank. As of September 30, 2000, there was no balance
outstanding under this line of credit.
Innoveda has an $10.0 million term loan with Fleet Bank, with approximately
$10.0 million outstanding as of September 30, 2000. Borrowings under the credit
facility are secured by substantially all of Innoveda'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 profits, interest and debt
service coverage ratios and maximum leverage ratios. 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 is in compliance with all of its debt covenants as of
September 30, 2000.
As of September 30, 2000, Innoveda had working capital of approximately $4.0
million.
For the nine months ended October 2, 1999, net cash provided by operating
activities was approximately $1.2 million, resulting primarily from net income
for the period of $1.1 million. For the nine months ended September 30, 2000,
net cash provided by operating activities was approximately $3.7 million. This
was due primarily to the net change of $2.3 million of accounts receivable
during the period, as well as non-cash charges such as depreciation,
amortization, and in-process R&D that more than offset the net loss of $9.9
million for the period.
Net cash used in investing activities was approximately $2.7 million for the
nine months ended October 2, 1999, due to the purchase of OmniView, purchases of
property and equipment, and spending for capitalized software projects. Net cash
provided by investing activities for the nine months ended September 30, 2000
was approximately $33.4 million, primarily due to the cash acquired in the
Summit and PADS mergers, and the sale of the VirSim product line during the nine
months ended September 30, 2000.
Net cash used in financing activities was approximately $1.6 million for the
nine months ended October 2, 1999 due to the repayment of principal on debt and
repayment of capital lease obligations. Net cash used in financing activities
was approximately $13.7 million for the nine months ended September 30, 2000 and
was primarily due to the repayment of principal on debt, partially offset by
cash provided by the exercise of stock options.
As part of the PADS merger, Innoveda repaid approximately $7.4 million of PADS'
debt and made a cash payment of approximately $2.0 million to PADS shareholders.
Innoveda funded these amounts using PADS' cash, which totaled approximately $4.8
million on the merger date of September 22, 2000, as well as the net proceeds
from the sale of the VirSim product line as discussed above.
On October 19, 2000, Innoveda's Board of Directors authorized the Company to
repurchase up to 2,000,000 shares of its common stock during the period ending
October 31, 2001. To date, Innoveda has repurchased 128,900 shares at a total
cost of $359,274.75.
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<PAGE>
Innoveda believes that its current cash and cash equivalents, combined with
amounts available under the revolving line of credit, will satisfy Innoveda's
anticipated working capital and other cash requirements for at least the next 12
months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
This SFAS establishes standards for derivative instruments and hedging
activities. SFAS 133 requires an entity to recognize all derivatives as either
an asset or liability in the statement of financial position and measure those
instruments at fair value. SFAS 133 requires that changes in the fair value of a
derivative be recognized currently in earnings unless specific hedge accounting
criteria are met and that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. Innoveda is planning
to adopt SFAS 133 in the first quarter of fiscal 2001. Innoveda is currently
evaluating this statement, but does not expect the adoption of SFAS 133 to have
a material effect on Innoveda's consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The SAB
summarizes certain of the SEC's views in applying revenue recognition in
financial statements. Innoveda is required to adopt SAB No. 101 in the fourth
quarter of fiscal 2000 and has not yet completed its evaluation of the effects
of SAB No. 101.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE SUMMIT AND VIEWLOGIC AND/OR INNOVEDA
AND PADS, THE ANTICIPATED ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN SUMMIT
AND VIEWLOGIC AND/OR INNOVEDA AND PADS MAY NOT BE REALIZED, IN FULL, IF AT ALL.
Innoveda was formed by the business combination of Viewlogic Systems, Inc., and
Summit Design, Inc. in March 2000. Innoveda also merged with PADS Software, Inc
on September 22, 2000. The integration of Summit and Viewlogic requires the
dedication of Innoveda management resources. This may distract management's
attention from the effort to integrate PADS into Innoveda and from the
management of the day-to-day business of Innoveda. Employee uncertainty and lack
of focus during integration may also disrupt the business of Innoveda. Retention
of key employees by Innoveda has been, and will remain, critical to ensure
continued advancement, development and support of the Company's technologies and
ongoing sales and marketing efforts. During the integration phase, competitors
may intensify their efforts to recruit key employees. The inability to
successfully integrate Summit and Viewlogic and/or Innoveda and PADS and to
retain key technical, sales or marketing personnel after the Summit and
Viewlogic combination and the merger of Innoveda and PADS would adversely affect
the combined Company's business.
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;
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<PAGE>
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
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.
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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.
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 could have a significant
impact on income from operations and net income. Innoveda's results of
operations could be below investors' and market makers' expectations in future
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 focuses on the electromechanical, printed circuit board and
system-level design automation markets while most major competitors focus their
resources on the application-specific integrated circuit 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.
Innoveda competes on the basis of various factors including, among others:
product capabilities;
product performance;
price;
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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.
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 electronic design
automation vendors to gain early access to new product information, any of these
parties
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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, particularly in Japan and other
parts of Asia. 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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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.
JAPAN. Innoveda has exclusive distribution agreements with two
distributors in Japan, which collectively cover a significant portion of
Innoveda's products in Japan. If either of these distributors terminates its
relationship with Innoveda, it could have a material adverse affect on
Innoveda's business, financial condition, results of operations or cash flows.
INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS,
INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND ASIA.
International revenue and expenses represent a significant portion of Innoveda's
total revenue and expenses, and Innoveda expects this trend to continue.
International sales and operations involve numerous risks, including, among
others:
fluctuations in the value of the dollar relative to foreign currencies
can make Innoveda's products and services more expensive in foreign
markets or increase Innoveda's expenses;
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, and these adverse economic conditions may worsen. Demand for and
sales of Innoveda's products in this region may 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.
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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
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 AND COORDINATION RISKS.
POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and
development operations related to Visual HDL and Visual SLD 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.
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 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
Chairman of the Board, 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 retaining and 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.
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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 MUST CONTINUE TO ADD VALUE TO 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.
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 September 30, 2000, Innoveda had cash and cash equivalents of $23.7
million and had borrowings of approximately $10.0 million under its credit
facility. Borrowings under the credit facility are secured by substantially all
of Innoveda'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 profits,
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Innoveda is exposed to market risk from interest rate changes and foreign
currency fluctuations.
INTEREST RATE RISK. Innoveda is exposed to interest rate risk primarily through
its credit facility. Innoveda has available a $16.0 million credit facility with
Fleet National Bank consisting of a $6.0 million revolving line of credit and an
$10.0 million term loan. Interest terms on the line of credit and the term loan
are determined, at the option of Innoveda, for varying periods. Innoveda may
elect to have the interest rate based on Fleet's prime rate or based on the
LIBOR rate at the time of the election, depending on Innoveda's
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leverage financial rate as defined in the credit facility. As of January 1, 2000
the interest rate on the line of credit was 7.3% and on the term loan was 8.26%.
As of September 30, 2000, the interest rate on the line of credit was 10.0% and
on the term loan was 9.25%. Payments of principal outstanding under either the
line of credit or the term loan may be made at any time and must be repaid in
full by September 30, 2003. On October 3, 1998, as required under the credit
facility, Innoveda entered into a no-fee interest swap agreement with Fleet to
reduce the impact of changes in interest rates on its floating rate credit
facility. This agreement effectively converts a portion of the floating-rate
obligation into a fixed-rate obligation of 7.2% for a period of 60 months,
expiring on September 30, 2003. The notional principal amount of the interest
rate-swap agreement was $7.8 million as of January 1, 2000. Innoveda is exposed
to credit loss in the event of non-performance by the counter parties to the
interest rate-swap agreement. Open interest rate contracts are reviewed
regularly by Innoveda to ensure that they remain effective as hedges of interest
rate exposure. Management believes that the rate-swap agreement approximates
fair value. After taking into consideration the interest-swap agreement, a
hypothetical 10% adverse movement in average interest rates would not have a
material effect on Innoveda's financial results.
FOREIGN CURRENCY RISK Innoveda is also exposed to the impact of foreign currency
fluctuations. Since Innoveda translates foreign currencies into U.S. dollars for
reporting purposes, weakened currencies in its subsidiaries have a negative,
though immaterial, impact on its results. Innoveda also believes that the
exposure to currency exchange fluctuation risk is insignificant because its
international subsidiaries sell to customers, and satisfy their financial
obligations, almost exclusively in their local currencies. Innoveda entered into
foreign exchange contracts as a hedge against certain accounts receivable
denominated in foreign currencies during the nine months ended September 30,
2000. Realized and unrealized gains and losses on foreign exchange contracts for
the nine months ended September 30, 2000 were insignificant. Based on a
hypothetical 10% adverse movement in foreign currency exchange rates, the
potential losses in future earnings, fair value of risk-sensitive instruments
and cash flows are immaterial, although the actual effects may differ materially
from the hypothetical analysis.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed as a part of this Quarterly Report on Form 10-Q are listed on
the Exhibit Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents identified by footnotes are not being filed herewith, and, pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such
documents as previously filed with the Securities and Exchange Commission.
Innoveda's file number under the Securities Exchange Act of 1934 is 000-20923.
(b) Reports on Form 8-K
On October 5, 2000, Innoveda filed a Current Report on Form 8-K dated September
22, 2000 reporting under Item 2 the acquisition of assets in connection with the
business combination between Innoveda and PADS Software, Inc. Pursuant to
General Instruction B.3 of Form 8-K, no financial statements were required to be
filed therewith.
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SIGNATURE
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: November 14, 2000
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(1) Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Innoveda, Inc.
27.1 Financial Data Schedule
--------------------------------------------------------------------------------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (File No. 333-43582).
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