-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdF3xIxpDcmoMZJb1JzaY3hRItAPyrR1HeNO055xj7j4ZVjHl1fZLQzI3sn+MP2C pb4s5ZNpn1pmRzqcppt2sg== 0000912057-00-009503.txt : 20000307 0000912057-00-009503.hdr.sgml : 20000307 ACCESSION NUMBER: 0000912057-00-009503 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT DESIGN INC CENTRAL INDEX KEY: 0000925072 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 931137888 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20923 FILM NUMBER: 559990 BUSINESS ADDRESS: STREET 1: 9305 S W GEMINI DRIVE CITY: BEAVERTON STATE: OR ZIP: 97008 BUSINESS PHONE: 5036439281 MAIL ADDRESS: STREET 1: 9305 S W GEMINI DRIVE CITY: BEVERTON STATE: OR ZIP: 97008 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------------- /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to ___________ COMMISSION FILE NUMBER: 0-20923 SUMMIT DESIGN, INC. (Exact name of registrant as specified in its charter) DELAWARE 93-1137888 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 9305 S. W. GEMINI DRIVE, BEAVERTON, OREGON 97008 (Address of principal executive office) Registrant's Telephone number, including area code: (503) 643-9281 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 par value (Title of Class) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- The aggregate market value of the voting-stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 25, 2000 as reported on the Nasdaq National Market, was approximately $118,360,055. Shares of Common Stock held by each named executive officer and director and by each entity that owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 25, 2000, Registrant had outstanding 15,913,957 shares of Common Stock. 1 DOCUMENTS INCORPORATED BY REFERENCE The Registrant has incorporated by reference into Part III of this Form 10-K to the extent stated herein certain sections of its definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be held during the year 2000. 2 PART I IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. Such risks and uncertainties include those set forth in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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. ITEM 1. BUSINESS GENERAL Summit Design, Inc. ("Summit" or the "Company") is a leading supplier of software tools designed to solve the integrated circuit ("IC" or "chip") engineering problems caused by increasing chip complexity and the corporate problem of reusing the highly valuable intellectual property ("IP") created by IC engineers. The worldwide community of IC engineers is rapidly moving up in the design hierarchy from physical design entry to functional level design. This migration is intended to achieve greater engineering efficiency and shorter time and to market and to provide an excellent basis for IC intellectual property management. At the functional level of design, engineers conceptualize designs in graphical paradigms such as block diagrams, state machines and flow diagrams and then write programs describing those concepts in a textual language called a Hardware Descriptive Language ("HDL"). There are two standard HDLs, Verilog and VHDL. There are two levels of functional design, Register Transfer Level ("RTL") and Behavioral level. The mathematical process to translate from an RTL design to the physical level of design is called synthesis. With Summit's Visual HDL product, the IC engineer can draw functional level designs on a workstation or PC using familiar graphical paradigms such as block diagrams, state machines and flow diagrams. Visual HDL compiles these graphical representations into correct by construction, synthesis ready, behavioral or RTL designs. Summit's suite of RTL simulation, verification and optimization software tools then provide a highly efficient environment for getting a design from concept to synthesis. The Company's IP solutions allow the synthesizable design with graphical executable documentation to be placed in libraries for reuse or to be distributed in a software model format for early inclusion in future electronic system or product designs. The Company was incorporated in the State of Delaware on December 29, 1993. The Company's principal executive offices are located at 9305 SW Gemini Drive, Beaverton, Oregon 97008 and its telephone number is (503) 643-9281. Unless the context otherwise requires, the terms "Company" and "Summit" as used in this report refer to (i) Summit Design, Inc. and its wholly-owned subsidiaries following the acquisition of SEE Technologies Software Environment for Engineers Ltd. ("SEE Technologies"), SEE Technologies changed its name to Summit Design (EDA) Ltd. in September 1994, and the reorganization of Test Systems Strategies, Inc. ("TSSI") as a wholly-owned subsidiary of Summit (collectively, the "Reorganization"), (ii) TSSI prior to the Reorganization, which has been merged into the Company, (iii) TriQuest Design Automation, Inc. ("TriQuest") which was acquired February 1997 and which has been merged into the Company, (iv) Summit Verification, Inc., the surviving company from the acquisition of Simulation Technologies Corp. ("SimTech") in September 1997 and (v) ProSoft Oy ("ProSoft") which was acquired in June 1998. 3 INTRODUCTION Summit's target marketplace for its software based front-end design tools includes hardware companies who develop chips, such as Intel, AMD and Motorola, as well as hardware companies who build electronic systems consisting of both hardware and software, such as IBM, Sun Microsystems and Cisco Systems. More specifically, Summit develops and licenses software applications which help our customers to create and verify ICs and systems. The specific segments in the front-end of the design cycle where Summit participates are: - design entry; - simulations; and - verification Summit's products include: - VISUAL HDL--a graphical design entry tool which allows engineers to conceptualize and capture a design - TEXT TO GRAPHICS--converts a design model initially created in an all-text style to the graphical representation of Visual HDL where it can be visualized by those new to the design team and used for making modifications to the model - VISUAL IP--provides a method of packaging design models, a common form of intellectual property, so they may be re-used in subsequent versions or other designs - VIRSIM--a simulation utility that produces graphical waveforms, schematics with time values and displays code execution while a model is being simulated - HDLSCORE--a verification tool which verifies how well a particular test or tests have exercised a design - V-CPU--a co-verification tool which allows the system designer to execute software code against a simulated model of a chip or system; V-CPU is used for hardware/software co-verification to ensure the software design really works on the proposed hardware before the chip is produced The end users of Summit's products are electronic engineers and computer science engineers who use Summit's products to create software models of proposed chips and systems and verify these models for accuracy, speed and behavior. These software models are typically written in a Hardware Description Language, or HDL, which can be run in a simulation environment. The two principal HDLs are Verilog and VHDL. The simulation environment allows the end user to evaluate how the chip or system responds to various inputs and to make timing measurements to establish how fast the chip or system can operate. Once the model is perfected, it can be synthesized for physical implementation into the real chip. This design process typically uses tools from multiple electronic design automation, or EDA, companies. The simplified front-end design flow below identifies where Summit's tools are used in the design process: DESIGN FLOW Design Entry-> Simulation-> Verification-> Synthesis-> Layout, Place & Route-> Manufacture
Summit Product Offerings: Visual HDL VirSim HDLScore Visual IP V-CPU INDUSTRY BACKGROUND Electronic design automation software is software that automates the tasks and process of designing electronic components, systems and products. This software has played a critical role in accelerating the dramatic advances in the electronics industry over the past two decades. For most of this period, the need for more advanced electronic design automation tools has been driven by the rapid increase in complexity of integrated circuits or chips. An integrated circuit is an electrical device consisting of various components, connections and switches that can be designed to perform a specific function. The increase in complexity of integrated circuits has been compounded by the increasing number of new chips being developed and the scarcity of engineers skilled in the design and testing of chips. Moreover, the increase in the complexity of chips lengthens their development cycle while, at the same time, competitive pressures shorten the life cycles of the products that incorporate chips. In recent years, chip development productivity has increased through the evolution of electronic design automation. But this development productivity has not kept pace with the advances in chip manufacturing technology. Chip manufacturing technology has advanced from the ability to produce chips with over one thousand switches and five micron wide wires connecting parts of the chip in the 1970s to greater than one million switches at less than 0.5 micron wire widths today. The productivity of the average chip design engineer has not kept pace with the progress in manufacturing technology. As a result, a greater number of engineering hours are required to design many of today's more complex electronic components and systems, leading to either longer development schedules or the need for larger design teams. To address this challenge, organizations with chip design 4 capabilities continue to search for electronic design automation tools that enable them to increase their productivity and meet the aggressive development schedules dictated by competitive forces. In recent years, lengthening design cycles and significant time-to-market pressures have influenced a shift in the choice of chip technologies away from fully customized integrated circuits and partially pre-designed integrated circuits also know as application-specific integrated circuits, to more flexible technologies that shorten the design cycle. These more flexible technologies include: - chips whose function can be changed with software-like programming known as field programmable gate arrays; - chips created to provide a fixed function for a specific application known as application-specific standard parts; and - multi-purpose processing chips that actually run software programs known as embedded processors. These integrated circuit choices help to provide greater flexibility and faster time to market for companies that design electronic products. They also present new design automation challenges, including design and testing of systems that contain significant embedded software programs. Further complicating the design task is the effect that faster chips have on overall system design. Fast-switching signals (when an electrical signal changes voltage beyond a predetermined amount) are required to achieve the very fast processor speeds we now take for granted. These fast signals can cause electrical signals to radiate from the chip and cause unintentional negative effects on other signals on the chip, potentially causing the system to fail. If the necessary analysis and testing is not performed before the system is manufactured, these problems can affect the quality of the final system that the chips are embedded in. This situation has created the need for sophisticated tools to design and test the wires on the chip and those that connect the chips and other components within electronic products. This emerging design challenge, driven by faster, more complex chips, creates many new problems for the manufacturers of electronic products and opportunities for companies that provide tools for the design of electronic products. The objectives of electronic design automation are to reduce time to market and the costs associated with product design, analysis, testing and optimization, while permitting the development of a greater number of product designs of higher speed and greater complexity which can be reliably manufactured. Summit believes that time to market pressures and the complexity of chip designing will cause manufacturers of electronic products to move towards differentiating their products at the system level rather than at the chip level and plan to focus on providing tools for that purpose. Electronic design automation has come to mean hardware design automation, and Summit believes it is no longer appropriate to describe the breadth of the market for software to automate the design of electronic products. The scope of this expanded market can be defined by the stages of the electronic design process. The system-level design automation phase of development is comprised of the software and services that serve the needs of designers designing electronic products that also include computer software. This system-level design is based on the cooperative design of both hardware and software for the completed electronic product. An increasing number of electronic products now include software as a major component of the overall functionality of the product. Therefore, system-level design involves managing tradeoffs among the following factors: - system performance and features; - system memory requirements; - processor selection; - chip area/cost; - product cost; - system power/battery life; - system programmability; and - project schedule. It is also the stage of a project where decisions are usually made about adopting new design partners, methodologies, policies and automation tools. These decisions include choices regarding software development tools, strategies needed for the design and test of hardware and software components together, chip vendors and electronic design automation tools and processes. In addition, refinements to the processes and tools that are created to help large design teams work together efficiently also emerge at this phase of development. 5 SUMMIT STRATEGY Summit's mission is to become the leading supplier of High Level Design Automation or HLDA software and to achieve wide-spread acceptance of these technologies by expanding the size of Summit's served market. The key elements of Summit's strategy to achieve this mission are as follows: ACCELERATE MARKET ADOPTION OF HLDA Summit intends to expand market acceptance by focusing on key customer accounts to ensure their successful adoption of the HLDA methodology. Summit believes that successful adoption by certain key customers in various industries will promote adoption by other customers within those industries. Summit also believes that its joint development and marketing programs with industry leaders promote awareness and adoption of HLDA. In addition, Summit supports all of the industry's major synthesis, simulation, and many test products and continues to support and complement new standards as they emerge. Summit also targets student engineers by introducing them to its HLDA products through programs with various universities. LEVERAGE SUMMIT'S HLDA TECHNOLOGY Summit's products target HDLA users and support both popular hardware description languages: Verilog and VHDL. There is significant investment being made in the EDA industry to move up further in abstraction to certain programming languages such as C and C++. In 1999, Summit embarked on product development for a new design entry product, SLD (System Level Design). SLD will include the core technology of Visual HDL, but will also be enhanced to accommodate the higher level programming languages and will be tightly integrated with the Summit's V-CPU and related technology to produce a true system level design entry and analysis product for any design language the end user desires. In addition, SLD will be optimized to handle analysis and simulation of both the hardware and software components of the design. Summit is the only EDA company who has access to technology for integrating real-time operating system, or RTOS, functions into the system simulation. BROADEN THE SCOPE OF SUMMIT'S HLDA SOLUTIONS Summit will continue to identify challenges facing both IC systems engineers and IC design engineers in the areas of HLDA and to focus its development efforts on products to further increase productivity in the creation, analysis, verification, documentation and optimization of single function ICs and complete systems on a chip. Summit believes that power, timing, thermal and cost constraints management and analog circuit design will become increasingly significant bottlenecks, especially in the area of complete systems on a chip. Summit believes that in the future its HLDA products will provide a graphical means for both systems and design engineers to specify the functional intent and simulate the interoperability of hardware and software, as well as providing the capability to perform what-if analysis on constraints such as power, speed, temperature and cost early in the design cycle. SUMMIT PRODUCTS VISUAL HDL In 1994, Summit introduced Visual HDL. It is the result of a focused five-year development effort of approximately 40 EDA software development experts. Visual HDL provides system design management, graphical design creation, graphical level simulation, automatic HDL code generation and high speed compiled code simulation of the design. It assists design engineers in meeting the market demands for rapid time to market, increased product functionality and lower product cost while providing the corporations that employ these engineers an efficient way to document, revise and distribute the highly valuable IC intellectual property they create. Visual HDL automates manual design entry and verification by enabling IC systems and design engineers to create and verify IC designs using familiar graphical paradigms rather than less intuitive textual HDL code. Visual HDL allows engineers to quickly determine the cause of a bug by highlighting the specific line of text and the related graphical representation where the error exists, thereby significantly shortening the time to debug a program. Visual HDL has become an industry leader for graphical design creation, analysis and IP management and is available for use on both UNIX and PC based workstations. 6 Visual HDL is designed to provide the following key benefits: - Increased design productivity - Highly interactive cause and effect feedback for design debugging - Enhanced documentation of designs algorithms - Graphical presentation to allow new developers to better understand a design - Complete and understandable design archives for future design revisions TEXT TO GRAPHICS Introduced in 1997, Text to Graphics provides companies who purchase Visual HDL an automated methodology to convert their existing designs into the Visual format. Prior to this product, Visual HDL was only purchased for doing new designs. Existing HDL text based designs had to be dealt with in the old fashioned way--by reviewing thousands of lines of code to try and understand how a model worked. Text to graphics thus expanded the use of Visual HDL by making it easy to convert text-based code to a graphics-based presentation. Working from a graphics representation is especially useful to international users who may not understand the nuances of the common English programming constructs. Text to Graphics provides the following key benefits: - Automatic conversion from a text-based design to a graphical representation of the design which can be used in Visual HDL for design analysis and simulation - Re-constructs the design graphically so that new users can easily grasp the designs concepts and algorithms VISUAL IP Companies spend significant budgets in developing and testing models, and re-use is a key strategy for many companies to leverage their existing technology. The goal of Summit's Visual IP product is to provide a mechanism for distributing these highly confidential simulation models to other users, either within the organization or externally, while at the same time protecting the intellectual value through encryption. The protection is not only so they can not be copied, but so that internal users cannot change the source code which represents the design thus eliminating the value of all the prior testing that has been done on the IC model. Visual IP is designed to provide the following benefits: - Encryption of intellectual property for design reuse - Generates models which can be used with any simulator - Generates models which can be executed stand alone allowing the user to apply his own criteria to a model before selecting it for reuse - Provides a safe mechanism for companies to provide soft versions of their design while maintaining the proprietary nature of their intellectual property VIRSIM VirSim is a debug and analysis tool which provides an integrated set of debug capabilities for use with the leading HDL simulators provided by other EDA companies. VirSim makes extensive use of graphics in presenting detailed yet cohesive information to the user about simulation results. Outputs from both digital and analog simulations are supported and signal values can be displayed as digital or analog waveforms. Multiple simulation runs can be debugged at the same time, allowing signals from different simulations to be compared easily. VirSim is designed to provide the following benefits: - Fast waveform tracing with minimum file size - Extensive waveform editing and algebraic combination capabilities - Color coded source tracing with breakpoint insertion - Powerful graphical logic tracing even from text based designs - Integration with all the popular simulators 7 HDL SCORE HDLScore provides a quantitative measure of the quality of simulation tests that have been applied to an entire design model or to selected portions of a design. Simply stated, HDLScore answers the question "have I adequately tested my design with the tests I have developed?" To answer this question, HDLScore provides a percentage measurement of how much of the design has been exercised with the provided tests. At the end of any simulation, the user can get the score or coverage he has accomplished. HDLScore works with all popular simulation environments and fits seamlessly into the design verification process. In addition, HDLScore provides a graphic user interface which displays exactly which statements in the model have been executed and, more importantly, which statements have not been executed. HDLScore is designed to provide the following benefits: - Answers the question, "how much of my design has been tested?" - Provides graphical display of untested areas of the design - Provides a percentage of the design covered by each test so that tests which are redundant can be eliminated to save simulation time - Provides test ordering capability so high coverage tests can be simulated first, thus exposing potential errors early in the simulation run V-CPU allows embedded-system designers to analyze and validate the interaction between hardware and software early in the development process, while design options are still open. Co-verification of software can begin as soon as there is an executable description of the software and hardware. This early integration allows problems to be detected while they are still easy to fix. With V-CPU, software developers can test software against simulated hardware at high execution rates, and hardware developers can validate the system architecture with stimulus provided by the software. In short, V-CPU allows early simulation of hardware with the actual software before the IC's are even built. V-CPU is designed to provide the following benefits: - Use the actual software to test the hardware under design, exposing potential miscommunication between hardware and software groups - Encourages early design communication between hardware and software groups when co-verification displays unexpected results - Minimizes the activity in the hardware simulator allowing for fast run times - Provides a specific interface to the hardware simulator to allow use of standard programming languages to create test suites SUMMIT CUSTOMERS Summit's end-user customers include companies in a wide range of industries, including semiconductor devices, telecommunications, computer peripherals, consumer electronics, aerospace defense and other electronics entities. In 1999, no single customer accounted for more than 10% of total revenue. In 1998 and 1997, sales to Credence Systems Corporation ("CSC") accounted for 25% and 29% of Summit's total revenue, respectively. As of December 31, 1999, Summit had installed more than 7,100 seats of its Design tools in more than 500 companies, of which more than 300 companies had entered into support contracts. In addition, as of such date, Summit had licensed more than 4500 seats of verification solution tools. SUMMIT BACKLOG Summit's backlog was $5.6 million, $5.9 million and $7.0 million at December 31, 1999, 1998 and 1997, respectively. Such backlog amounts include $5.6 million, $5.4 million and $5.7 million that were reflected in deferred revenue in Summit's financial statements for December 31, 1999, 1998 and 1997, respectively. Backlog consists of orders for which Summit has received a firm purchase order for products that are currently shippable and certain amounts previously invoiced to customers which are included in deferred revenue. Amounts included in deferred revenue consist of maintenance and support contracts that are expected to be completed within one year, orders for customer training services that are expected to be completed within one year, prepaid exclusivity fees that are expected to be recognized within one year, and shipments made subject to conditions that are expected to be satisfied within one year. In addition to the backlog amounts reflected above, at December 31, 1997, Summit had the right to ship up to a maximum of $8.8 million of Visual Testbench licenses during 1998 to CSC pursuant to a contract with CSC. During 1998, all obligations pursuant to the contract with CSC were satisfied such that, at December 31, 1998, CSC had no further obligation to purchase Visual Testbench licenses. Third-parties to such commitments may terminate or breach their obligations. Therefore, these revenues may not be recognized in fiscal 2000 or in any later period. Summit recognized no such revenue during 1999. 8 SUMMIT MARKETING AND SALES Summit markets its products to customers worldwide who design or manufacture ICs for their own use or sale in a wide variety of industries. The primary objectives of Summit's marketing effort are to (i) increase market awareness of Summit's products, (ii) promote the adoption of HLDA methodologies, and (iii) evaluate customer satisfaction and determine additional customer demands. To increase market awareness, Summit displays its HLDA products at all major industry trade shows, including the annual Design Automation Conference in the U.S., Design Automation and Test Conference in Europe, Japan DAC in Japan and the Embedded Systems Conference in the U.S. Summit also promotes its products through advertisements in trade journals and by sponsoring various seminar series. To promote the adoption of its methodologies, Summit offers its products at a reduced cost to design engineering programs at several universities so that engineering students may become familiar with Summit's products and design techniques. Summit's sales strategy is to employ its direct sales as well as its independent and affiliated distributors to efficiently and effectively target individual customer and product market segments worldwide. DIRECT SALES Summit employs direct sales teams which combine technically proficient sales persons with skilled field applications engineers capable of serving the sophisticated needs of the management and engineering staff of its customers. Summit assigns selected direct sales personnel to target major accounts, such as vertically integrated systems design houses like Lucent, IBM, Motorola and Siemens that produce their own IC designs for their electronic products. Major accounts receive particular focus because of their size and influence as industry leaders. Summit's direct sales force operates in the United States and portions of Europe, with offices in Arizona, California, Colorado, Florida, Maryland, Massachusetts, Minnesota, Oregon and Texas, as well as France, Germany, Italy and the United Kingdom. Approximately 72%, 77%, and 71% of Summit's revenue for the years ended December 31, 1999, 1998, and 1997, respectively, were generated through Summit's direct sales force. DISTRIBUTORS Summit relies on distributors for licensing and support of Summit's products outside of North America. Approximately 28%, 23%, and 29% of Summit's revenue for the years ended December 31, 1999, 1998 and 1997, respectively, came from sales made through distributors. In Asia, Summit Design Asia, Ltd., or SDA, a joint venture of Summit, has the exclusive rights to sell, distribute and support Summit's products in the Asia Pacific region, excluding Japan. In turn, SDA has granted exclusive rights to sell, distribute and support products in Korea to Asia Design Corporation, or ADC, a company in which SDA has an equity investment. SDA has also granted non-exclusive distribution rights to Semiconductor Technologies Australia for the Asia Pacific region, excluding Japan and Korea. In addition, in the first quarter of 1996, Summit entered into a three-year, exclusive distribution agreement for Summit's HLDA products in Japan with Seiko. The agreement is renewable for successive five-year terms by mutual agreement of Summit and Seiko and is terminable by either party for breach. The agreement was renewed for an additional five-year term which began in February 1999. Sales through Seiko accounted for 22%, 14%, and 12% of its total for the years ended December 31, 1999, 1998, and 1997, respectively. 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, Summit 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. INTERNATIONAL SALES Approximately 44%, 36%, and 34% of Summit's revenue for the years ended December 31, 1999, 1998 and 1997, respectively, came from sales made outside of the United States which includes the Asia Pacific region and Europe. Approximately 25%, 22%, and 22% of Summit's revenue for the years ended December 31, 1999, 1998 and 1997, respectively, came from sales made in the Asia Pacific region and approximately 19%, 14%, and 12% of Summit's revenue for the years ended December 31, 1999, 1998, and 1997, respectively, came from sales made in Europe. In order to successfully expand international sales, Summit 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 Summit's operating margins. In addition, to the extent that Summit is unable to effect these additions in a timely manner, Summit's growth, if any, in international sales will be limited. Summit may not be able to maintain or increase international Sales of Summit's products, and failure to do so could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. In addition, financial markets and economies in the Asia Pacific region have been experiencing adverse economic conditions. Demand for and sales of Summit's products in the Asia Pacific region have decreased and may further decrease. 9 CUSTOMER SERVICES Technical support is available to customers on both a pre-sale and post-sale basis. Pre-sale support involves Summit's application engineers working with Summit's direct sales force and distributors to provide on-site support during the end user's evaluation and implementation process. Post-sale support is provided through annual world wide web (internet) maintenance contracts which provide customers access to Summit's technical support team via telephone, minor enhancements and any major upgrades. This program is sold for 15% to 20% of the list price of the product, depending on the product. Summit provides its customers with a 90-day warranty that its product media is free from defects. In addition to its maintenance, technical support and upgrade fees, Summit also conducts a variety of training programs ranging from introductory level courses to advanced training on full use of all of its products. Training is offered at Summit's facilities, at distributors' facilities and at customer locations worldwide. For the years ended December 31, 1999, 1998 and 1997, maintenance and services provided approximately 38%, 22%, and 20% of Summit's total revenue, respectively. SUMMIT COMPETITION The electronic design automation industry is highly competitive and Summit expects competition to increase as other electronic design automation companies introduce HLDA products. Summit's Design Entry products compete principally with Mentor Graphics and Escalade, a small private company. Summit's Verification products compete with Cadence Design Systems, Synopsys, Mentor Graphics and Verisity. Indirectly, Summit also competes with other firms that offer alternatives to HLDA and could potentially offer more directly competitive products in the future. Certain of these companies have significantly greater financial, technical and marketing resources and larger installed customer bases than Summit. Some of Summit's current and future competitors offer a more complete range of electronic design automation products and may distribute products that directly compete with Summit's HLDA products by bundling such products with their core product line. In addition, Summit's products perform a variety of functions, certain of which are, and in the future may be, offered as separate products or discrete point solutions by Summit's existing and future competitors. For example, certain companies currently offer design entry products without simulators. Competition may cause Summit to offer point solutions instead of, or in addition to, Summit's current software products. Such point solutions might be priced lower than Summit's current product offerings and could cause Summit's average selling prices to decrease, which could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. Summit competes on the basis of certain factors including: - product capabilities; - product performance; - price; - support of industry standards; - ease of use; - first to market; and - customer technical support and service. Summit believes that it competes favorably overall with respect to these factors. However, in particular cases, Summit's competitors may offer HLDA products with functionality which is sought by Summit's prospective customers and which differs from that offered by Summit. In addition, certain 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. The acquisition of one of Summit's competitors by a larger, more established electronic design automation vendor could create a more significant competitor. Summit may not be able to compete successfully against current and future competitors. Competitive pressures faced by Summit may have a material adverse effect on its business, financial condition, results of operations or cash flows. Summit's current and future competitors may be able to develop products comparable or superior to those developed by Summit or adapt more quickly than Summit to new technologies, evolving industry trends or customer requirements. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. 10 SUMMIT PRODUCT DEVELOPMENT Development of HLDA products has been performed at Summit's offices in Israel and at Summit's principal office in Beaverton, Oregon. As the result of the acquisitions of TriQuest and SimTech during 1997 and ProSoft in 1998, Summit has added additional research and development facilities in San Jose, California, New Brighton, Minnesota, and Finland. As of December 31, 1999, Summit's research and development team consisted of 87 software developers, dedicated to Summit's products. For the years ended December 31, 1999, 1998, and 1997, Summit's research and development expenditures were approximately $10.2 million, $13.0 million, and $7.7 million, respectively, which represented approximately 34%, 30%, and 25% of revenue in each such period. Summit has to date expensed all research and development costs as incurred. Summit's $13.0 million expenditure in 1998 and $7.7 million expenditure in 1997 included $3.7 million and $733,000, respectively, of expense in connection with the acquisition of SimTech in September 1997. In connection with Summit's acquisition of SimTech in September 1997, Summit recorded a total of $4.4 million of compensation expense for shares issued as part of the acquisition which were contingent upon continued employment and were being expensed as the employment obligation lapsed. See "Summit Management's Discussion and Analysis of Financial Condition and Results of Operations." Summit's research and development strategy is to be proactive in determining customer needs and to develop new HLDA products to meet these needs. Summit believes that system-level definition and design analysis will become increasingly significant bottlenecks in the IC development process and thus present product development opportunities. Summit's research and development efforts are focused on creating products to further increase productivity in the creation, verification, documentation and the preservation of both IC and system level designs. Summit has actively sought to establish cooperative relationships with certain electronic design automation industry leaders in order to gain early access to new product information and to better integrate Summit's products with those supplied by other vendors in the electronic design automation market. For example, Summit has a relationship with Cadence pursuant to which Cadence helps specify the integration between Summit's Visual HDL for Verilog and Cadence Verilog XL simulator. Summit believes that these relationships mutually benefit Summit and the electronic design automation vendors by fostering development and facilitating interoperability of Summit's and vendors' complimentary products. These relationships are informal and may be terminated by either party with limited notice. In addition, such relationships are with companies that are current or potential future competitors of Summit. If any of these relationships were terminated and Summit was unable to obtain in a timely manner information regarding modifications of third party products necessary for modifying its software products to interoperate with these third party products, Summit could experience a significant increase in development costs, the development process would take longer, product introductions would be delayed and Summit's business, financial condition, results of operations or cash flows could 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 embodying new technologies and the emergence of new industry standards can make 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. Summit's future success will depend upon its ability to enhance its current products, develop and introduce new products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. Summit may not be successful in developing and marketing product enhancements or new products that respond to technological change or emerging industry standards. Summit may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or its new products may not adequately meet the requirements of the marketplace and achieve market acceptance. If Summit is unable, for technological or other reasons, to develop and introduce products in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if such product releases have been pre-announced, Summit's business, financial condition, results of operations or cash flows would be materially adversely affected. Software products as complex as those offered by Summit may contain errors that may be detected at any point in the products' life cycles. Summit 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 Summit and by current and potential customers, errors may be found, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to Summit's reputation or increased service and warranty costs, any of which could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. SUMMIT PROPRIETARY RIGHTS Summit's success depends upon its proprietary technology. Summit relies on a combination of copyright, trademark and trade secret laws, confidentiality procedures, licensing arrangements and technical means to establish and protect its proprietary rights. As part of its confidentiality procedures, Summit generally enters into non-disclosure agreements with its employees, distributors and corporate partners, and limits access to, and distribution of, its software, documentation and other proprietary information. In addition, Summit's products are protected by hardware locks and software encryption techniques designed to deter unauthorized use and copying. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use Summit's products or technology without 11 authorization, or to develop similar technology independently. In addition, effective protection of intellectual property rights may be unavailable or limited in certain foreign countries. Summit provides its products to end-users primarily under "shrink-wrap" license agreements included within the packaged software. In addition, Summit delivers certain of its verification products electronically under an electronic version of a "shrink-wrap" license agreement. These agreements are not negotiated with or signed by the licensee, and thus may not be enforceable in certain jurisdictions. In addition, the laws of some foreign countries do not protect Summit's proprietary rights as fully as do the laws of the United States. Summit's means of protecting its proprietary rights in the United States or abroad may not be adequate, and competitors may independently develop similar technology. Summit could be increasingly subject to infringement claims as the number of products and competitors in Summit's industry segment grows, the functionality of products in its industry segment overlaps and an increasing number of software patents are granted by the United States Patent and Trademark Office. Although Summit is not aware of any threatened litigation or infringement claims, a third party may claim such infringement by Summit with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product delays or require Summit to enter into royalty or licensing agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to Summit or at all. Failure to protect its proprietary rights or claims of infringement could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. SUMMIT OPERATIONS IN ISRAEL Summit's research and development operations related to Visual HDL products are located in Israel. Economic, political and military conditions may affect Summit's operations in that country. Hostilities involving Israel, for example, could materially adversely affect Summit's business, financial condition and results of operations. Restrictions on Summit'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 potential impact. While all of Summit'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 Summit to foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation of, for example, approximately 4.5% and 9% in 1999 and 1998, respectively. 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 with and management of the Israeli operations requires Summit to address differences in culture, regulations and time zones. Failure to successfully address these differences could disrupt Summit's operations. Summit's Israeli production facility has been granted the status of an "Approved Enterprise" under the Israeli Investment Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"). Taxable income of a company derived from an "Approved Enterprise" is eligible for certain tax benefits, including significant income tax rate reductions for up to seven years following the first year in which the "Approved Enterprise" has Israeli taxable income (after using any available net operating losses) subject to certain conditions. In the event of a failure by Summit to comply with these conditions, the tax benefits could be canceled, in whole or in part, and Summit would be required to refund the amount of the canceled benefits, adjusted for inflation and interest. No "Approved Enterprise" tax benefits had been realized by Summit from its Israeli operations as of December 31, 1995 since the Israeli operations were still incurring losses at that time. During 1999 and 1998, Summit realized income of $1.3 million and $4.3 million, respectively, from its Israeli operations and "Approved Enterprise" tax benefits of $672,000 and $1.9 million, respectively. Summit has recently applied for "Approved Enterprise" status with respect to a new project and intends to apply in the future with respect to additional projects. However, Summit's Israeli production facility may not continue to operate or qualify as an "Approved Enterprise", and the benefits under the "Approved Enterprise" regulations may not continue, or be applicable, in the future. Management of Summit intends to permanently reinvest earnings of the Israeli subsidiary outside the U.S. If such earnings were remitted to the U.S., additional U.S. federal and foreign taxes may be due. The loss of, or any material decrease in, these income tax benefits could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS Summit's Israeli subsidiary obtained research and development grants from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade of approximately $232,000 and $608,000 in 1993 and 1995, respectively. As of December 31, 1997, all amounts have been repaid. The terms of the grants prohibit the manufacture of products developed under these grants outside of Israel and the transfer of the technology developed pursuant to these grants to any person, without the prior written consent of the Chief Scientist. Summit's Visual HDL for VHDL products have been developed under grants from the Chief Scientist and thus are subject to these restrictions. If Summit is unable to obtain the consent of the government of Israel, Summit would be unable to take advantage of potential economic benefits such as lower taxes, lower labor and other manufacturing costs and advanced research and development facilities that may be available if such technology and manufacturing operations could be transferred to locations outside of Israel. In addition, Summit would be unable to minimize risks particular to operations in Israel, such as hostilities involving Israel. 12 SUMMIT EMPLOYEES As of December 31, 1999, Summit had 168 employees, 100 of whom were engaged primarily in research and development and related operations, 36 of whom were engaged primarily in sales and marketing and 32 of whom were engaged primarily in corporate management and administration. A total of 86 of these employees were located in the United States, 65 in Israel and 17 in Europe. Summit's employees are not represented by any collective bargaining organization and Summit has never experienced a work stoppage. Summit's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel, who are in great demand. ITEM 2. PROPERTIES Summit's principal facility, located in Beaverton, Oregon, consists of approximately 31,000 square feet of office space leased pursuant to an agreement which terminates on March 31, 2000. The rent and common area fees payable on this facility are currently approximately $28,000 per month. This space is used for Summit's production, sales and marketing and administration. Summit also leases approximately 12,000 square feet of office space in Herzlia, Israel for research and development pursuant to a lease that expires on December 8, 2003 with an option to renew for five years. The rent payable on this office space is currently $24,650 per month. Additionally, Summit leases approximately 9,300 square feet of office space in San Jose, California and 16,600 square feet in St. Paul, Minnesota for research and development and sales activities. The aggregate rent payable for both facilities is currently approximately $54,000 per month, and the leases expire in October 2003 and August 2004, respectively. Summit also leases office space for sales activities throughout the United States and Europe at an aggregate annual rental of approximately $200,000. Summit expects that its current facilities will be adequate to serve its needs for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation and is not aware of any pending or threatened litigation that could have a material adverse effect upon the Company's business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE COMPANY The executive officers and directors of the Company and their ages as of February 25, 2000 are as follows:
Name Age Position - ----------------------------------------------------------------------------------------------------------------- William V. Botts.................... 64 Chairman of the Board, Chief Executive Officer and Interim Chief Financial Officer Richard Davenport................... 55 President and Chief Operating Officer Moshe Guy........................... 42 Vice President, General Manager and Chief Operating Officer Design Solutions Division Eric Benhayoun...................... 46 Vice President, General Manager--European Operations Arthur Fletcher..................... 35 Vice-President of Finance, Treasurer and Director of Investor Relations Sean Whiteley-Ross.................. 33 Chief Accounting Officer and Corporate Controller
Mr. Botts was elected Chairman of the Board and Chief Executive Office in July 1999. He served as a Director of the Company from May 1997 to the present. Mr. Botts served as Chairman and CEO of California Lifestyles, Inc., an early stage consumer products company from 1997 to 1999. Prior to that, from March 1996 to March 1997, he was Chairman of the Board and Chief Executive Officer of Hard Candy, Inc., a fashion cosmetics company. From June 1993 to March 1996, Mr. Botts was the owner and President of WV Associates, a consulting firm involved in mergers, acquisitions, business turnarounds and strategic planning. From late 1992 until the end of 1995 he served on the Board of Creative Nail Design Inc. From October 1992 to June 1993, Mr. Botts served as President and Chief Executive Officer of Aurora Electronics, Inc., a semiconductor company and from March 1992 to June 1993 he was President and Chief Executive Officer of Micro-C Corporation. Mr. Botts served as founder, President and Chief Executive Officer of Vertex Design Systems, Inc., a CAD software company, from September 1988 to March 1992 and as Chairman of the Board, Chief Executive Officer 13 and President of EI International Inc., a computer systems, software and consulting company from April 1978 to January 1988. Prior to that time, Mr. Botts was a divisional Vice President of Rockwell International Corporation. Mr. Davenport has served as President and Chief Operating Officer of the Company since February 1999. Mr. Davenport was Vice President and Chief Operating Officer of the Company's Verification Products Division from September 1997 to February 1999. Mr. Davenport was the founder and CEO of SimTech from 1991 through September 1997. From 1987 through 1991, Mr. Davenport was a Regional Sales Manager for Gateway Design Automation and Cadence Systems. Mr. Guy has served as Vice President, General Manager and Chief Operating Officer of the Design Solutions Division of Summit Design, Inc. since September of 1997. From May 1996 to September 1997 Mr. Guy served as General Manager of Summit Design (EDA) Ltd. Mr. Guy served as the Vice President of Product Marketing for Summit Design Inc. from February 1994 to May 1996. Mr. Guy was the Director of Marketing and Sales for SEE Technologies from January 1991 to February 1994. SEE Technologies was the continuation of the Israeli Design Center of Daisy and the main supplier of EDA Tools for Intergraph. From 1987 to 1991, Mr. Guy was a Technical Manager for Daisy Systems. Prior to that time, Mr. Guy held various engineering positions with companies in the computer design industry in Israel. Mr. Benhayoun has served as Vice President, General Manager--European Operations since June 1996 and as Vice President--European Sales Operations from November 1994 to June 1996. From June 1994 to November 1994, Mr. Benhayoun was the European Marketing Manager for the Modeling Product Division of Synopsys. From March 1990 to June 1994, Mr. Benhayoun was the General Manager and Director of Logic Modeling Corporation France, an SDA provider which was acquired by Synopsys in January 1994. Prior to that time, he held various European sales and marketing management positions with Cadnetix Corporation and Daisy Systems, each an EDA supplier. Mr. Fletcher has served as Vice President of Finance since January 2000 and as Treasurer and Director of Investor Relations since April 1996. From October 1995 to March 1996, Mr. Fletcher was Director of Business and Financial Planning. From April 1994 to September 1995, Mr. Fletcher was Manager of Financial Planning and Systems. Prior to April 1994, Mr. Fletcher held a variety of finance and accounting positions with high technology companies. Mr. Whiteley-Ross has served as Corporate Controller since May 1999 and as Chief Accounting Officer since January 2000. Prior to that time, he was an audit manager with PricewaterhouseCoopers LLP. Mr. Whiteley-Ross was with PricewaterhouseCoopers LLP from January 1993 to May 1999. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on the Nasdaq National Market under the trading symbol SMMT on October 18, 1996. The price for the Common Stock as of the close of business on February 25, 2000 was $7.4375 per share. As of January 23, 2000, the Company had approximately 3500 stockholders of record. The following table sets forth the high and low sales prices per share of the Company's the Common Stock for the periods indicated:
HIGH LOW ------------- ---------------- 1997: First Quarter .......................... $ 11.875 $ 7.375 Second Quarter ......................... $ 9.375 $ 5.250 Third Quarter .......................... $ 18.125 $ 7.625 Fourth Quarter ......................... $ 18.750 $ 8.750 1998: First Quarter .......................... $ 16.625 $ 9.438 Second Quarter ......................... $ 17.125 $ 13.500 Third Quarter .......................... $ 15.375 $ 5.875 Fourth Quarter ......................... $ 10.250 $ 4.750 1999: First Quarter ......................... $ 9.625 $ 3.125 Second Quarter ......................... $ 4.000 $ 2.375 Third Quarter .......................... $ 3.500 $ 2.219 Fourth Quarter ......................... $ 4.188 $ 2.125 2000: First Quarter (through February 25, 2000) $ 8.063 $ 3.375
The Company has never paid any cash dividends on its Common Stock. The Company intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The stock markets have experienced price and volume fluctuations that have particularly affected technology companies, resulting in changes in the market prices of the stocks of many companies which may not have been directly related to the operating performance of those companies. Such broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, factors such as announcements of technological innovations or new products by the Company or its competitors, market conditions in the computer software or hardware industries and quarterly fluctuations in the Company's operating results may have a significant adverse effect on the market price of the Company's Common Stock. 15 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data relating to the Company should be read in conjunction with the Company's consolidated financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included herein. The selected balance sheet financial data set forth below for the Company as of December 31, 1999 and 1998 and the selected statement of operations financial data for each of the three years in the period ended December 31, 1999 are derived from the audited financial statements included elsewhere herein. All other selected financial data set forth below for the Company is derived from the financial statements not included elsewhere herein.
Years Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------------- (in thousands, except per share data) Statement of Operations Data: Revenue: Product licenses....................... $ 18,620 $ 33,589 $ 24,828 $ 15,446 $10,604 Maintenance and services............... 11,615 9,642 6,161 4,301 2,637 Other.................................. - 367 450 567 1,051 --------- --------- ---------- --------- ---------- Total revenue........................ 30,235 43,598 31,439 20,314 14,292 Cost of revenue: Product licenses....................... 776 744 701 573 651 Maintenance and services............... 1,034 955 632 466 400 Amortization of purchased technologies. 561 661 219 -- -- --------- --------- ---------- --------- ---------- Total cost of revenue................ 2,371 2,360 1,552 1,039 1,051 --------- --------- ---------- --------- ---------- Gross profit........................... 27,864 41,238 29,887 19,275 13,241 Operating expenses: Research and development............... 10,204 13,042 7,749 5,867 5,447 Sales and marketing.................... 11,143 11,713 10,591 9,319 7,547 General and administrative............. 5,151 4,398 3,785 3,188 3,286 Amortization of intangibles and goodwill 2,111 2,791 942 -- -- Merger costs........................... 1,218(1) 1,249(1) 379(1) -- -- Severance and write-off of note receivable 4,005(3) -- -- -- -- In-process technology.................. -- -- 11,689 -- -- --------- --------- ---------- --------- ---------- Total operating expenses............. 33,832 33,193 35,135 18,374 16,280 --------- --------- ---------- --------- ---------- Income (loss) from operations............. (5,968) 8,045 (5,248) 901 (3,039) Other income (expense), net............... 1,147 1,093 6,619 (2) 117 (172) --------- --------- ---------- --------- ---------- Income (loss) before income taxes......... (4,821) 9,138 1,137 1,018 (3,211) Income tax provision (benefit)............ -- 4,037 940 (245) 400 --------- --------- ---------- --------- ---------- Net income (loss)......................... $ (4,821) $ 5,101 $ 431 $ 1,263 $(3,611) ========= ========= ========== ========= ========== Net income (loss) per diluted share ...... $ 0.31 $ 0.32 $ 0.03 $ 0.10 $ (0.33) ========= ========= ========== ========= ========== Number of shares used in per diluted share calculation .............................. 15,678 16,115 15,402 13,243 11,085 December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (in thousands) Balance Sheet Data: Cash and cash equivalents.............. $ 28,403 $ 27,693 $19,973 $ 19,801 $711 Working capital (deficit) 24,702 24,255 14,603 17,236 (540) Total assets........................... 44,044 50,210 39,670 28,700 9,151 Long-term obligations, less current portion -- 156 237 770 1,216 Total stockholders' equity ............ 31,309 35,475 26,196 19,151 548
(1) Merger costs relate to charges associated with business combinations and acquisitions. During 1997, the Company incurred $379,000 in costs relating to the TriQuest acquisition. During 1998, the Company incurred $227,000 in costs relating to the ProSoft acquisition and approximately $1.0 million related to the terminated acquisition of OrCAD. During 1999, the Company incurred $1.2 million in costs related to the pending acquisition of Viewlogic. (2) Includes a gain of $5.6 million in connection with the sale of the TDS product line. (3) Includes a write-off of a note receivable of approximately $2.7 million and a severance charge of approximately $1.3 million. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K. This item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock." OVERVIEW Summit was founded in December 1993 to act as the holding company for Test Systems Strategies, Inc. ("TSSI") and SEE Technologies, (now Summit Design (EDA) Ltd.) (collectively , the "Reorganization"). TSSI was founded in 1979 to develop and market integrated circuit ("IC" or "chip") manufacturing test products. In January 1993, TSSI retained a new Chief Executive Officer and began to restructure its senior management team. Thereafter, the Company broadened its strategy from focusing primarily on manufacturing test products to include providing HLDA design creation and verification tools and integrating these with its core technology. As part of its strategy, in early 1994, TSSI acquired SEE Technologies, an Israeli company that, through its predecessor, began operations in 1983 and had operated primarily as a research and development and consulting company focused on the electronic design automation ("EDA") market. As a result of the Reorganization, TSSI and SEE Technologies became wholly-owned subsidiaries of Summit in the first quarter of 1994. Prior to the Reorganization, the Company's TDS product and related maintenance revenue accounted for all of the Company's revenue. After the Reorganization and through June 30, 1997, the Company's revenue was predominantly derived from two product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS. As a result of the July 1997 sale of the TDS product line, Design to Test products are no longer a source of revenue for the Company. With the acquisition of TriQuest in February 1997, SimTech, in September 1997, and ProSoft in June 1998, the Company has also derived revenue from verification products which include hardware-software co-verification, code coverage, and HDL debugging products as well as analysis, verification and RTL optimization tools. Summit generated net losses in 1993, 1994 and 1995, as a result of investing heavily in research and development as well as developing a direct sales channel for new products. In 1996, this investment generated increased revenues, which resulted in net income. Summit operates with high gross margins and, as such, a downturn in revenue could have a significant impact on income from operations and net income. Revenue consists primarily of fees for licenses of the Company's software products, maintenance and customer training. Product license revenue is derived from the sale of software licenses to distributors and end-users. Revenue from the sale of software licenses is recognized upon shipment of the product if remaining vendor obligations are insignificant and collection of the resulting receivable is probable, otherwise revenue from such software products is deferred until such time as vendor obligations are met. Maintenance revenue is deferred and recognized ratably over the term of the maintenance agreement, which is typically 12 months. Revenue from customer training is recognized when the service is performed. Revenue earned on software arrangements involving multiple elements is allocated to each element based on vendor-specific objective evidence (VSOE) of the fair value of the various elements within the arrangement. The Company sells its products through a direct sales force in North America and selected European countries and through distributors in the Company's other international markets. Revenue from product sales through distributors is recognized net of the associated distributor discounts. Fees received for granting distribution rights are deferred and recognized ratably over the term of the distribution agreement. Although the Company has not adopted a formal return policy, the Company generally reimburses customers in full for returned products. Estimated sales returns are recorded when the related revenue is recognized. The Company's products perform a variety of functions, certain of which are, and in the future may be, offered as separate products or discrete point solutions by the Company's existing and future competitors. For example, certain companies currently offer design entry products without simulators. There can be no assurance that such competition will not cause the Company to offer point solutions instead of, or in addition to, the Company's current software products. Such point solutions would be priced lower than the Company's current product offerings and could cause the Company's average selling prices to decrease. Accordingly, based on these and other factors, the Company expects that average selling prices for its products may continue to fluctuate in the future. Effective April 1, 1996, the Company invested $100,000 for a minority interest in a joint venture corporation, Asia Design Corporation ("ADC"), which acquired the exclusive rights to sell, distribute and support all of the Company's products in the Asia-Pacific region, excluding Japan. In May 1998, the Company exchanged a portion of its investment in the joint venture for a 50% non-controlling interest in Summit Design Asia, Ltd. ("SDA"). SDA also acquired an equity investment in ADC. In June 1998, Summit loaned SDA $750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive rights to sell, distribute and support Summit's products in Asia 17 Pacific region, excluding Japan. SDA granted distribution rights to Summit's products to ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA cancelled ADC's distribution rights in all areas except Korea. In April 1999, SDA granted non-exclusive distribution rights to Semiconductor Technologies Australia for the Asia Pacific region, excluding Japan and Korea. As of December 31, 1999 and 1998, the Company owned 50% of SDA and 30% of ADC through direct and indirect ownership. For the years ended December 31, 1999, 1998, and 1997, sales through SDA and ADC combined accounted for 1.0%, 1.7% and 1.9% of Summit's revenue, respectively. The Company accounts for its ownership interest in SDA and ADC on the equity method of accounting and, as a result, the Company's share of the earnings and losses of SDA and ADC are recognized as income or losses in the Company's income statement in "Other income, net." The Company does not expect SDA or ADC to recognize a profit for the foreseeable future and thus does not expect to recognize income from its investment in SDA or ADC for the foreseeable future, if at all. There can be no assurance that the restructuring will result in SDA or ADC becoming profitable or that revenue attributable to sales in the Asia Pacific region, excluding Japan, would increase. Approximately 44%, 36%, and 34% of the Company's total revenue for the years ended December 31, 1999, 1998 and 1997, respectively, were attributable to sales made outside the United States which includes the Asia Pacific region and Europe. Approximately 25%, 22%, and 22% of the Company's revenue for the years ended December 31, 1999, 1998 and 1997, respectively, were attributable to sales made in the Asia Pacific region and approximately 19%, 14%, and 12% of the Company's revenue for the years ended December 31, 1999, 1998 and 1997, respectively, were attributable to sales made in Europe. The decline in the percentage of revenue from sales made outside the United States in 1998 and 1997 is primarily the result of (1) domestic sales to CSC, (2) the loss of Design to Test product sales in the last half of 1997 as a result of the sale of the product line, which had a strong international market, and (3) the addition of revenue from products acquired in the SimTech acquisition which had a principally domestic market. The Company expects that international revenue will continue to represent a significant portion of its total revenue. The Company's international revenue is currently denominated in U.S. dollars. As a result, increases in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. The Company pays the expenses of its international operations in local currencies and does not engage in hedging transactions with respect to such obligations. International sales and operations are subject to numerous risks, including tariff regulations and other trade barriers, requirements for licenses, particularly with respect to the export of certain technologies, collectability of accounts receivable, changes in regulatory requirements, difficulties in staffing and managing foreign operations and extended payment terms. In addition, financial markets and economies in the Asia Pacific region have been experiencing adverse economic conditions. Demand for and sales of Summit's products in the Asia Pacific region have decreased and, there can be no assurance that economic conditions will not worsen or that demand for and sales of Summit's products in such region will not further decrease.(1) On February 28, 1997, Summit completed its acquisition of TriQuest. TriQuest develops HDL analysis, optimization, and verification tools for the design of high performance, deep submicron integrated circuits. The transaction has been accounted for as a pooling of interest in accordance with generally accepted accounting principles. Effective July 1, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products (the "Asset Sale") to CSC. The increase in the Company's product licenses revenue during the last twelve months has been primarily due to increased revenue associated with the Company's HLDA products. Substantially all of Summit's Design to Test product license revenue and related maintenance and services revenue for the nine months ended September 30, 1997 were attributable to the TDS products. As of July 1, 1997, TDS products ceased to be a source of such revenues. CSC assumed Summit's obligations under TDS maintenance contracts entered into prior to the closing and Summit has not recognized deferred revenue associated with such contracts since June 30, 1997. - -------------------------- (1) This paragraph contains forward-looking statements reflecting current expectations. There can be no asurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. 18 The Company maintained exclusive rights to its Visual Testbench technology and CSC agreed to purchase a minimum of $16 million of Visual Testbench licenses over a thirty-month period beginning July 1997, subject to specified quarterly maximums and certain additional conditions, and $2 million of maintenance over an eighteen month period beginning July 1997. In December 1998, the Company and CSC agreed to amend the OEM agreement and as of December 31, 1998, CSC had satisfied its obligation to purchase $16.0 million of Visual Testbench licenses. CSC also obtained shared ownership of the Visual Testbench source code in December 1998 and has the right to sell Visual Testbench licenses based on the source code received from the Company. The Company does not expect to receive any additional revenue from sales of Visual Testbench licenses to CSC. On September 9, 1997, the Company acquired SimTech, a company that develops and distributes hardware-software co-verification, code coverage and HDL debugging software. The aggregate consideration for the acquisition was 1,256,800 shares of Summit common stock, 723,200 options to purchase Summit common stock and $3.9 million in cash. The transaction was accounted for using the purchase method of accounting. Accordingly, SimTech's results of operations for the period from September 9, 1997 are included in the consolidated statements of operations. The purchase price was allocated to the net assets acquired based on their estimated fair market values at the date of acquisition. After discussion with the staff of the Securities and Exchange Commission (the "Staff") the Company restated the consolidated financial statements as of and for the quarters ended September 30, 1997, March 31, 1998, June 30, 1998 and September 30, 1998 and as of and for the year ended December 31, 1997 to reflect a change in the original accounting treatment to the September 1997 acquisition of SimTech. In connection with the acquisition of SimTech, Summit repurchased 939,000 shares of common stock in private transactions at an average price of $12.30 per share for $11.6 million in September 1997. On December 23, 1997, the Company announced that the Board of Directors had authorized the repurchase of up to 750,000 shares of the Company's Common Stock. From January 1, 1998 to May 12, 1998, the Company repurchased 162,500 shares of its common stock at a cost of $2.3 million. Summit subsequently reissued these shares through the exercise of stock options during the three months ended June 30, 1998. On June 29, 1998, Summit cancelled this stock repurchase plan. On June 30, 1998 Summit completed its acquisition of ProSoft. ProSoft develops software tools used to verify embedded systems software prior to the availability of a hardware prototype. The aggregate consideration for the acquisition (including shares of common stock reserved for issuance upon exercise of ProSoft options which were exchanged for options of Summit) was 248,334 shares of common stock. The transaction has been accounted for as a pooling-of-interests in accordance with generally accepted accounting principles. In compliance with such principles, Summit's financial statements have been restated to include the accounts of ProSoft as if the acquisition had occurred at the beginning of the first period presented. In September 1998, the Company announced its proposed acquisition of OrCAD, Inc. In February 1999, Summit announced that its planned acquisition of OrCAD, Inc. had been terminated. During the quarter ended December 31, 1998, the Company incurred approximately $1.0 million in costs related to the terminated acquisition. On September 16, 1999, the Company entered into a definitive agreement to merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software company headquartered in Marlboro, Massachusetts under which the Company will acquire Viewlogic. Each share of Viewlogic Preferred and Common Stock will be assumed by the Company and will be exchanged for 0.67928 shares for Summit Common Stock upon closing of the transaction. In addition, the Company will assume all options outstanding under Viewlogic's stock option plan. The estimated purchase price in common stock, stock options and acquisition costs is approximately $48.3 million, $4.5 million, and $1.5 million, respectively. The Company intends to account for this acquisition as a purchase. Although Summit will be acquiring Viewlogic, after such transaction, Viewlogic stockholders will hold a controlling interest in Summit. Accordingly, for accounting purposes, the acquisition will be a "reverse acquisition" and Viewlogic will be the "accounting acquirer". As Viewlogic will be the accounting acquirer, its accounts will be recorded at historical cost and the assets and liabilities of Summit will be recorded at their estimated fair value as of the closing date. 19 RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of total revenue represented by selected income statement items.
Years Ended December 31, ------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------- Revenue: Product licenses.................................. 61.6 % 77.1 % 79.0 % Maintenance and services.......................... 38.4 22.1 19.6 Other .......................................... - 0.8 1.4 ----------- ------------ ------------------ Total revenue................................ 100.0 100.0 100.0 Cost of revenue: Product licenses.................................. 2.6 1.7 2.2 Maintenance and services.......................... 3.4 2.2 2.0 Amortization of purchased technologies 1.8 1.5 0.7 ----------- ------------ ------------------ Total cost of revenue........................ 7.8 5.4 4.9 ----------- ------------ ------------------ Gross profit................................. 92.2 94.6 95.1 Operating expenses: Research and development.......................... 33.8 29.9 24.7 Sales and marketing............................... 36.9 26.8 33.7 General and administrative........................ 17.0 10.1 12.0 Amortization of intangibles and goodwill.......... 7.0 6.4 3.0 Merger costs...................................... 4.0 (a) 2.9 (a) 1.2 (a) Severance and write-off of note receivable........ 13.2 (c) - - In-process technology............................. - - 37.2 ----------- ------------ ------------------ Total operating expenses..................... 111.9 76.1 111.8 ----------- ------------ ------------------ Income (loss) from operations.......................... (19.7) 18.5 (16.7) Other income, net...................................... 3.8 2.5 21.1 (b) ----------- ------------ ------------------ Income before income taxes............................. (15.9) 21.0 4.4 Income tax provision .................................. - 9.3 3.0 ----------- ------------ ------------------ Net income (15.9) % 11.7 % 1.4 % =========== ============ ==================
(a) Merger costs relate to mergers and acquisitions. During 1997, the Company incurred $379,000 in costs relating to the TriQuest acquisition. During 1998, the Company incurred $227,000 in costs relating to the ProSoft acquistiion and approximately $1.0 million related to the terminated acquisition of OrCAD. During 1999, the Company incurred $1.2 million in costs related to the pending acquisition of Viewlogic. (b) Includes a gain of $5.6 million (17.7% of revenues) in conjunction with the sale of the TDS product line. (c) Includes a write-off of a note receivable of approximately $2.7 million and a severance charge of approximately $1.3 million. YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 TOTAL REVENUE The Company's revenue is comprised of product licenses revenue, maintenance and services revenue and other revenue. Total revenue decreased by 30.7% from $43.6 million for the year ended December 31, 1998 to $30.2 million for the year ended December 31, 1999. Sales through one distributor, accounted for 22% and 14.0% of the Company's total revenue for the years ended December 31, 1999 and 1998, respectively. Sales to CSC accounted for 25.1% of the Company's total revenue for the year ended December 31, 1998. Revenue for the year ended December 31, 1998 include $9.8 million of Visual Testbench licenses sales made pursuant to an OEM agreement with CSC. As of December 31, 1998, CSC had fully satisfied its obligation to purchase Visual Testbench licenses pursuant to the OEM agreement and the Company does not expect to receive any additional revenue from sales of Visual Testbench licenses to CSC. 20 PRODUCT LICENSES REVENUE The Company's product licenses revenue is derived from license fees from the Company's HLDA products. Product licenses revenue decreased by 44.6% from $33.6 million for the year ended December 31, 1998 to $18.6 million for the year ended December 31, 1999. The decrease in product licenses revenue was primarily attributable to the Company ceasing to receive revenue from CSC pursuant to the OEM Agreement. The decrease was also attributable to decreased sales as a result of the Company hiring fewer sales and marketing personnel than planned in the fourth quarter of 1998 and the first two quarters of 1999 and attrition in the existing sales force during the first two quarters of 1999. MAINTENANCE AND SERVICES REVENUE The Company's maintenance and services revenue is derived from maintenance contracts related to the Company's HLDA products and training classes offered to purchasers of the Company's software products. Maintenance and services revenue increased 20.5% from $9.6 million for the year ended December 31, 1998 to $11.6 million for the year ended December 31, 1999. This increase is primarily attributable to maintenance contract renewals by the installed base of HLDA customers, and to a lesser extent from non-recurring engineering services provided to one customer, which is not expected to reoccur. OTHER REVENUE Other revenue consists of revenue from one-time technology sales and fees received for granting distribution rights. Other revenue decreased 100% from $367,000, for the year ended December 31, 1998 to $0 for the year ended December 31, 1999. Although the Company renewed a significant distribution agreement, the renewal did not include additional fees. As a result, the distribution rights fees paid at the inception of the agreement and amortized into revenue at $91,000 each quarter over the agreement period were no longer a source of other revenue for the year ended December 31, 1999. COST OF REVENUE COST OF PRODUCT LICENSES REVENUE Cost of product licenses revenue includes product packaging, software documentation, labor and other costs associated with handling, packaging and shipping product and other production related costs. Cost of product licenses revenue increased 4.3% from $744,000 for the year ended December 31, 1998 to $776,000 for the year ended December 31, 1999. As a percentage of product licenses revenue, the cost of product licenses revenue increased from 2.2% for the year ended December 31, 1998 to 4.2% for the year ended December 31,1999. This increase was primarily due to leveraging fixed costs across decreased product licenses revenue. COST OF MAINTENANCE AND SERVICES REVENUE Cost of maintenance and services revenue, which consists primarily of personnel costs for customer support and training classes offered to purchasers of the Company's products, increased 8.3% from $955,000 for the year ended December 31, 1998 to $1.0 million for the year ended December 31, 1999. As a percentage of maintenance and services revenue, the cost of maintenance and services revenue decreased from 9.9% for the year ended December 31, 1998 to 8.9% for the year ended December 31, 1999. The decrease in the cost of maintenance and services revenue as a percentage of maintenance and services revenue was primarily a result of the 20.5% increase in maintenance and services revenue for the year ended December 31, 1999. AMORTIZATION OF PURCHASED TECHNOLOGIES The Company recorded $2.4 million of purchased technologies (intangibles) as part of the SimTech acquisition which are being amortized to cost of revenue on a straight-line basis over periods ranging from two to five years beginning September 9, 1997. The Company expensed $561,000 and $661,000 for the years ended December 31, 1999 and 1998, respectively. OPERATING EXPENSES RESEARCH AND DEVELOPMENT Research and development expenses consist of the engineering and operations support costs of developing new products and enhancements to existing products and performing quality assurance activities. Research and development expenses decreased 21.8% from $13.0 million for the year ended December 31, 1998 to $10.2 million for the year ended December 31, 1999. As a percentage of total revenue, research and development expenses increased from 29.9% for the year ended December 31, 1998 to 33.7% for the year ended December 31, 1999. The majority of the decrease was attributable to compensation expense recorded in connection with the Company's acquisition of SimTech in September 1997. The Company recorded a total of $4.4 million of compensation expense for shares issued as part of the acquisition which were contingent upon continued employment and were being expensed as the employment obligation lapsed. This expense was being recorded on a straight-line basis over the two year employment obligation period. However, in December 1998, 21 the employment agreements to which this contingent compensation related were amended to eliminate the continued employment obligation. At that time, the remaining unrecorded compensation was expensed. As a result, the Company recorded $3.7 million of compensation related to contingent employment for the year ended December 31, 1998. Excluding the $3.7 million compensation expense recorded in the year ended December 31, 1998, research and development expense increased 9.2% from $9.3 million for the year ended December 31, 1998 to $10.2 million for the year ended December 31, 1999. As a percentage of total revenue, research and development expenses increased from 29.9% to 33.7% for the years ended December 31, 1998 and 1999, respectively. The increase in research and development expenses as a percent of revenue is the result of a decrease in total revenues. The Company continues to believe that significant investment in research and development is required to remain competitive in its markets, and the Company therefore anticipates that research and development expense will increase in absolute dollars in future periods, but may vary as a percent of revenue. (2) Software development costs are accounted for in accordance with Financial Accounting Standards Board Statement No. 86, under which the Company is required to capitalize software development costs after technological feasibility has been established. To date, development costs have been expensed as incurred since technological feasibility generally has not been established until shortly before the release of a new product, and no material development costs have been incurred after establishment of technological feasibility. SALES AND MARKETING Sales and marketing expenses, consisting primarily of salaries, commissions and promotional costs, decreased 4.9% from $11.7 million for the year ended December 31, 1998 to $11.1 million for the year ended December 31, 1999. This decrease was primarily attributable to the Company hiring fewer sales and marketing personnel than planned in the fourth quarter of 1998 and the first two quarters of 1999 and attrition in the existing sales force during the first quarter of 1999. As a percentage of total revenue, sales and marketing expenses increased from 26.9% for the year ended December 31, 1998 to 36.9% for the year ended December 31, 1999. The increase as a percentage of total revenue was primarily attributable to the decrease in total revenue for 1999. In the future, the Company expects sales and marketing expenses to continue to increase in absolute dollars, in part due to the hiring of additional sales and marketing personnel.(2) GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of the corporate, finance, human resource, information services, administrative, legal and auditing expenses of the Company. General and administrative expenses increased 17.1% from $4.4 million for the year ended December 31, 1998 to $5.1 million for the year ended December 31, 1999. As a percentage of total revenue, general and administrative expenses increased from 10.1% for 1998 to 17.0% for 1999. The increase in general and administrative expenses as a percentage of total revenue and in actual dollars was primarily attributable to the addition of three positions, the cost of the CEO search, and a decrease in total revenue for the year ended December 31, 1999. The Company expects general and administrative expenses to increase in absolute dollars to support future sales and operations. (2) AMORTIZATION OF INTANGIBLES AND GOODWILL The Company recorded $4.1 million in intangibles (excluding $2.4 million of purchased technologies) and $3.8 million of goodwill as part of the SimTech acquisition which are being amortized to expense on a straight-line basis over periods ranging from two to five years beginning September 9, 1997. The Company expensed $2.1 million and $2.8 million for the years ended December 31, 1999 and 1998, respectively. MERGER COSTS Merger costs relate to charges associated with mergers and acquisitions. During 1998, the Company incurred $227,000 in costs relating to the ProSoft acquisition and approximately $1.0 million relating to the terminated acquisition of OrCAD. During 1999, the Company incurred $1.2 million in costs relating to the pending acquisition of Viewlogic. - -------------------------- (2) This sentence is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. 22 SEVERANCE AND WRITE-OFF OF NOTE RECEIVABLE During the year ended December 31, 1999, the Company recorded $1.3 million in non-recurring charges related to severance obligations for certain management personnel. During the same period, the Company also recorded $2.7 million in write-off of a loan receivable. The Company had loaned $2.7 million to an independent software company pursuant to a secured loan agreement entered into July 1997. During the third quarter of 1999, it became evident that because of missed product development milestones, the independent software company's cash flows would not be sufficient to repay the loan. The Company exercised its right under the terms of the contract with the independent software company to retain co-ownership of the technology and distribution rights to the product in satisfaction of the note. During the third quarter the Company also evaluated its business strategy relative to the technology acquired from the software company. Based on the Company's assessment of market potential, revised sales projections, and limited manpower resources, management decided that Summit could not provide the support necessary to successfully market and sell this product. The Company concluded that the technology had no value and Summit has no plans to sell this product in the future. The Company therefore wrote-off the balance of the note receivable of $2.7 million. OTHER INCOME, NET Other income consists of interest income associated with available cash balances, gains or losses from the sale of property and equipment, the Company's share of the earnings and losses of SDA and ADC and foreign exchange rate differences resulting from paying operating expenses of foreign operations in the local currency. Other income was $1.2 million and $1.1 million for the years ended December 31, 1999 and 1998, respectively. Interest income increased approximately $142,000 to $1.5 million for the year ended December 31, 1999. This increase was offset by losses recorded on the equity method which related to SDA and ADC. INCOME TAX PROVISION The income tax provision decreased from $4.0 million for the year ended December 1998 to $0 for the year ended December 31, 1999. The provision of $4.0 million for 1998 is comprised of $3.4 million of federal, state and foreign taxes payable, plus $659,000 of deferred tax liabilities. The $0 tax provision for 1999 is comprised of $261,000 of federal, state and foreign taxes payable less, $261,000 of deferred tax benefit recognized for an increase in reserve for legal settlements as well as an increase in allowance for receivables from Summit Design Asia and ADC. The effective tax rate decreased from 44% for the year ended December 31, 1998 to 0% for the year ended December 31, 1999. The 1998 effective tax rate is higher than the statutory rate due primarily to nondeductible amortization and contingent stock compensation expense relating to the SimTech acquisition. The zero effective rate for 1999 is primarily due to the increase in valuation allowance due to the management's determination of the future recoverability of net deferred assets due to the uncertainty of future income. YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 TOTAL REVENUE The Company's revenue is comprised of product licenses revenue, maintenance and services revenue and other revenue. Total revenue increased by 38.7% from $31.4 million for the year ended December 31, 1997 to $43.6 million for the year ended December 31, 1998. Sales through one distributor, accounted for 14.0% and 12.1% of the Company's total revenue for the years ended December 31, 1998 and 1997, respectively. Sales to CSC accounted for 25.1% and 28.6% of the Company's total revenue for the years ended December 31, 1998 and 1997, respectively. Revenues for the years ended December 31, 1997 and 1998 include $6.2 million and $9.8 million of Visual Testbench licenses sales made pursuant to an OEM agreement with CSC. As of December 31, 1998, CSC had fully satisfied its obligation to purchase Visual Testbench licenses pursuant to the OEM agreement and the Company does not expect to receive any additional revenue from sales of Visual Testbench licenses to CSC. PRODUCT LICENSES REVENUE The Company's product licenses revenue is derived from license fees from the Company's HLDA products and, additionally, from Design to Test products through June 30, 1997. Product licenses revenue increased by 35.3% from $24.8 million for the year ended December 31, 1997 to $33.6 million for the year ended December 31, 1998. Revenue from HLDA and Design to Test products accounted for 91.7% and 8.3%, respectively, of product licenses revenue for the year ended December 31, 1997, respectively, and 100% and 0% of product licenses revenue for the year ended December 31, 1998, respectively. The decline in revenue from Design to Test products is a result of the sale of the TDS product line effective July 1, 1997. HLDA revenue increased 47.5% from $22.8 million for the year ended December 31, 1997 to $33.6 million for the year ended December 31, 1998. Revenues attributable to products existing in 1997 accounted for 46% of the increase in HLDA revenues, while revenues from products introduced in 1998 accounted for 54% of the increase in such revenues. A significant amount of the increase in the existing products revenue for 1998 over the same period in 1997 was attributable to sales of Visual Testbench and Visual to one customer. The increase in revenues from new products was primarily from sales of products developed from in-process technology acquired in the SimTech acquisition in September 1997. 23 Design to Test revenue decreased from $2.1 million for the year ended December 31, 1997 to $0 for the year ended December 31, 1998 as a result of the sale of all of the assets used in the business of developing and marketing the TDS Products effective July 1, 1997. MAINTENANCE AND SERVICES REVENUE The Company's maintenance and services revenue is derived from maintenance contracts related to the Company's HLDA and Design to Test products and training classes offered to purchasers of the Company's software products. Maintenance and services revenue increased 56.5% from $6.2 million for the year ended December 31, 1997 to $9.6 million for the year ended December 31, 1998. The increase in maintenance and services revenue was attributable to maintenance contracts for verification products acquired in the SimTech acquisition, a maintenance contract with one customer, and additional maintenance revenue related to growth in the installed base of HLDA customers over the previous year, less a decrease in Design to Test maintenance revenue of $1.4 million, due to the sale of the TDS product line. OTHER REVENUE Other revenue consists of revenue from one-time technology sales and fees received for granting distribution rights. Other revenue decreased 18.4% from $450,000, for the year ended December 31, 1997 to $367,000 for the year ended December 31, 1998. In May 1997, a distribution agreement expired; and as a result, the distribution rights fees paid at the inception of the agreement and amortized into revenue, ($83,000 for the year ended December 31, 1997) were no longer a source of other revenue. COST OF REVENUE COST OF PRODUCT LICENSES REVENUE Cost of product licenses revenue includes product packaging, software documentation, labor and other costs associated with handling, packaging and shipping product and other production related costs plus the amortization of purchased technology acquired in the SimTech purchase. Cost of product licenses revenue increased 6.1% from $701,000 for the year ended December 31, 1997 to $744,000 for the year ended December 31, 1998. As a percentage of product licenses revenue, the cost of product licenses revenue decreased from 2.8% for the year ended December 31, 1997 to 2.2% for the year ended December 31,1998. This decrease was primarily due to leveraging fixed costs across increased product licenses revenue. COST OF MAINTENANCE AND SERVICES REVENUE Cost of maintenance and services revenue, which consists primarily of personnel costs for customer support and training classes offered to purchasers of the Company's products, increased 51.1% from $632,000 for the year ended December 31, 1997 to $955,000 for the year ended December 31, 1998. As a percentage of maintenance and services revenue, the cost of maintenance and services revenue decreased from 10.3% for the year ended December 31, 1997 to 9.9% for the year ended December 31, 1998. The decrease in the cost of maintenance and services revenue as a percentage of maintenance and services revenue was primarily a result of the 56.5% increase in maintenance and services revenue for the year ended December 31, 1998. AMORTIZATION OF PURCHASED TECHNOLOGIES The Company recorded $2.4 million of purchased technologies (intangibles) as part of the SimTech acquisition which are being amortized to cost of revenue on a straight-line basis over periods ranging from two to five years beginning September 9, 1997. The Company expensed $219,000 and $661,000 for the years ended December 31, 1997 and 1998, respectively. OPERATING EXPENSES RESEARCH AND DEVELOPMENT Research and development expenses consist of the engineering and operations support costs of developing new products and enhancements to existing products and performing quality assurance activities. Research and development expenses increased 68.3% from $7.7 million for the year ended December 31, 1997 to $13.0 million for the year ended December 31, 1998. As a percentage of total revenue, research and development expenses increased from 24.7% for the year ended December 31, 1997 to 29.9% for the year ended December 31, 1998. The majority of the increase was attributable to compensation expense recorded in connection with the Company's acquisition of SimTech in September 1997. The Company recorded a total of $4.4 million of compensation expense for shares issued as part of the acquisition which were contingent upon continued employment and were being expensed as the employment obligation lapsed. This expense was being recorded on a straight-line basis over the two year employment obligation period. However, in December 1998, the employment agreements to which this contingent compensation related were amended to eliminate the continued employment obligation. At that time, the remaining unrecorded compensation was expensed. As a result, the Company recorded $723,000 and $3.7 million of compensation related to contingent employment for the years ended December 31, 1997 and 1998, respectively. The remaining increase in research and development expenses was primarily attributable to an increase in the number of engineers employed by the 24 Company. During the second half of 1997, the Company hired 38 additional engineers. The Company believes that significant investment in research and development is required to remain competitive in its markets, and the Company, therefore, anticipates that research and development expenses will increase in absolute dollars in future periods, but may vary as a percentage of total revenue.(2) Software development costs are accounted for in accordance with Financial Accounting Standards Board Statement No. 86, under which the Company is required to capitalize software development costs after technological feasibility has been established. To date, development costs have been expensed as incurred since technological feasibility generally has not been established until shortly before the release of a new product, and no material development costs have been incurred after establishment of technological feasibility. SALES AND MARKETING Sales and marketing expenses, consisting primarily of salaries, commissions and promotional costs, increased 10.6% from $10.6 million for the year ended December 31, 1997 to $11.7 million for the year ended December 31, 1998. This increase was primarily attributable to expenses related to the sales and marketing of products acquired in the SimTech acquisition in September 1997. As a percentage of total revenue, sales and marketing expenses decreased from 33.7% for the year ended December 31, 1997 to 26.9% for the year ended December 31, 1998. The decrease was primarily attributable to the increase in total revenue for 1998. The decrease was also attributable to the Company hiring fewer sales and marketing personnel than planned during 1998. The Company expects sales and marketing expenses to continue to increase in absolute dollars, in part due to the hiring of additional sales and marketing personnel.(2) GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of the corporate, finance, human resource, information services, administrative, legal and auditing expenses of the Company. General and administrative expenses increased 16.2% from $3.8 million for the year ended December 31, 1997 to $4.4 million for the year ended December 31, 1998. As a percentage of total revenue, general and administrative expenses decreased from 12.0% for 1997 to 10.1% for 1998. The decrease as a percentage of total revenue was primarily attributable to the increase in total revenue in 1997. The Company expects general and administrative expenses to increase in absolute dollars to support future sales and operations. (2) AMORTIZATION OF INTANGIBLES AND GOODWILL The Company recorded $4.1 million in intangibles (excluding $2.4 million of purchased technologies) and $3.8 million of goodwill as part of the SimTech acquisition which are being amortized to expense on a straight-line basis over periods ranging from two to five years beginning September 9, 1997. The Company expensed $942,000 and $2.8 million for the years ended December 31, 1997 and 1998, respectively. MERGER COSTS Merger costs relate to charges associated with business combinations and acquisitions. During 1997, the Company incurred $379,000 in costs relating to the TriQuest acquisition. During 1998, the Company incurred $227,000 in costs relating to the ProSoft acquisition and approximately $1.0 million related to the terminated acquisition of OrCAD. IN-PROCESS TECHNOLOGY For the year ended December 31, 1997, $11.7 million of the purchase price for the acquisition of SimTech ($25.4 million) was allocated to in-process technology and, accordingly, was expensed as of the acquisition date (September 9, 1997). The amount allocated to the in-process technology represented the technology that had not yet reached technological feasibility and had no alternative future use. The Company had no acquisitions in 1998 that generated a charge to in-process technology. The value assigned to purchased in-process technology in 1997 was related primarily to two research projects for which technological feasibility had not been established, V-CPU ($8.1 million) and HDL Score ($3.1 million). The value was determined by estimating the net cash flows from the sale of products resulting from the completion of such projects, and discounting the net cash flows back to their present value adjusted for the stage of completion of the technologies at the date of acquisition. Summit released the commercial version of the V-CPU hardware/software co-verification product in the first quarter of 1998, consistent with expectations at the time of the acquisition. A market requirement for extensive embedded system component interfaces called bus functional models ("BFM") and instruction set simulators ("ISS") was underestimated in the introduction schedule and has caused delays - ---------------------------- (2) This sentence is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. 25 in initial sales of the product. Summit introduced the HDL Score product in the second quarter of 1998, approximately four months later than originally anticipated, due to delays in completing the control logic support functionality that was essential for product introduction to take place. For 1998, revenues from the sales of the products acquired in connection with the SimTech acquisition fell short of forecast by 10%. The Company's forecast of revenues for 1999 reflects that the shortfall of revenues in 1998 related to HDL Score will be realized in 1999 and that V-CPU will have revenues that are approximately 50% of those originally estimated due to the delays in availability of BFM's and ISS's.(2) Although these delays affected the timing of the realization of revenue from these products as originally estimated by Summit, Summit believes the aggregate revenue streams originally anticipated from these products will be realized and that there has been no material change in expected return on investment related to these products.(2) However, there can be no assurance that Summit will realize revenue for V-CPU and HDL Score in the amounts estimated, and actual revenue realized from either or both of these products may be significantly lower than expected.(1) INTEREST EXPENSE Interest expense decreased from $12,000 for the year ended December 31, 1997 to $4,000 for the year ended December 31, 1998 due to the expiration of certain capital leases obligations. OTHER INCOME, NET Other income consists of interest income associated with available cash balances, gains or losses from the sale of property and equipment, the Company's share of the earnings and losses of SDA and ADC and foreign exchange rate differences resulting from paying operating expenses of foreign operations in the local currency. Other income was $1.1 million for the years ended December 31, 1998 and 1997. Interest income increased approximately $200,000, to $1.3 million for the year ended December 31, 1998. This increase was offset by losses recorded on the equity method which were incurred in SDA and ADC. GAIN ON SALE OF TDS PRODUCT LINE On July 11, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products to CSC for $5 million. CSC assumed certain liabilities, including the Company's obligations under TDS maintenance contracts entered into prior to the closing. The Company has recorded a gain on the sale of $5.6 million in 1997. INCOME TAX PROVISION The income tax provision increased from $940,000 for the year ended December 31, 1997 to $4.0 million for the year ended December 31, 1998. The Company utilized substantially all its U.S. Federal and State net operating loss carryforwards to offset a considerable portion of U.S. taxable income for the year ended December 31, 1997. The provision of $940,000 for 1997 is comprised of $1.7 million of federal, state and foreign taxes payable, less $719,000 of deferred tax benefit recognized for NOL's available from the TriQuest acquisition as well as research and development credits and alternative minimum tax credits. The provision of $4.0 million for 1998 is comprised of $3.4 million of federal, state and foreign taxes payable, plus $659,000 of deferred tax liabilities. The effective tax rate decreased from 69% for the year ended December 31, 1997 to 44% for the year ended December 31, 1998. The 1997 effective tax rate was high primarily due to the write-off of in-process research and development costs which are not deductible for tax purposes, reduced by the tax benefit realized in 1997 for utilizing the net operating loss carryforwards. The 1998 effective tax rate is higher than the statutory rate due primarily to nondeductible amortization and contingent stock compensation expense relating to the SimTech acquisition. EFFECTIVE CORPORATE TAX RATES The effective tax rate decreased from 44% for the year ended December 31, 1998 to 0% for the year ended December 31, 1999. The 1998 effective tax rate is higher than the statutory rate due primarily to nondeductible amortization and contingent stock compensation expense relating to the SimTech acquisition. The zero effective rate for 1999 is primarily due to the increase in valuation allowance due to the management's determination of the future recoverability of net deferred assets due to the uncertainty of future income. - -------------------------------- (2) This sentence is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. (1) This paragraph contains forward-looking statements reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. 26 The Company's Israeli operations are performed entirely by Summit Design (EDA) Ltd., which is a separate taxable Israeli entity. The Company's existing Israeli production facility has been granted "Approved Enterprise" status under the Israeli Investment Law, which entitles the Company to reductions in the tax rate normally applicable to Israeli companies with respect to the income generated by its "Approved Enterprise" programs. In general, the tax holiday covers the seven year period beginning the first year in which Summit Design (EDA) Ltd. generates taxable income from its "Approved Enterprise." The tax holiday provides that, during such future years, a portion of the Company's taxable income from its Israeli operations will be taxed at favorable rates. The Company has recently applied for "Approved Enterprise" status with respect to a new project and intends to apply in the future with respect to additional projects. There can be no assurance that the Company will be granted any approvals and therefore there can be no assurance the Company will continue to have favorable tax status in Israel. Management of the Company intends to permanently reinvest earnings of the Israeli subsidiary outside the U.S. If such earnings were remitted to the U.S., additional U.S. federal and foreign taxes may be due. The Company has foreign income tax net operating losses of approximately $5.6 million at both December 31, 1999 and 1998. These foreign losses were generated in Israel over several years and have not yet received final assessment from the Israeli government. Consequently, management is uncertain as to the availability of a substantial portion of such foreign loss carryforwards. The Company is also subject to risk that United States and foreign tax laws and rates may change in a future period or periods, and that any such changes may materially adversely affect the Company's effective tax rate. As a result of the factors described above and other related factors, there can be no assurance that the Company will maintain a favorable tax rate in future periods. Any increase in the Company's effective tax rate, or variations in the effective tax rate from period to period, could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. LIQUIDITY AND CAPITAL RESOURCES The Company completed its initial public offering in October 1996, raising $16.2 million, net of offering expenses. Prior to the IPO, the Company had financed its operations primarily through the private placement of approximately $15.4 million of capital stock, as well as capital equipment leases, borrowings under its bank line of credit, Israeli research and development grants and cash generated from operations. As of December 31, 1999, the Company had approximately $28.4 million in cash and cash equivalents. In July 1997, the Company entered into an agreement to lend up to $2.5 million to an independent software development company pursuant to a loan agreement which is collateralized by the intellectual property and stock of the software development company. Borrowings under this agreement bear interest at prime rate plus 2%. Total amounts due to the Company under this agreement at December 31, 1998 was $1.7 and was included in Deposits and Other Assets. During 1999, borrowings under this agreement reached $2.5 million. During 1999, the Company agreed to loan an additional $200,000 to the independent software company. During the third quarter of 1999, it became evident that because of missed product development milestones, the independent software company's cash flows would not be sufficient to repay the loan. The Company exercised its right under the terms of the contract with the independent software company to retain co-ownership of the technology and distribution rights to the product in satisfaction of the note. During the third quarter the Company also evaluated its business strategy relative to the technology acquired from the software company. Based on the Company's assessment of market potential, revised sales projections, and limited manpower resources, management decided that Summit could not provide the support necessary to successfully market and sell this product. The Company concluded that the technology had no value and Summit has no plans to sell this product in the future. The Company therefore wrote-off the balance of the note receivable of $2.7 million. As of December 31, 1999, the Company had working capital of approximately $24.7 million. Net cash generated by operating activities was approximately $2.4 million, $11.9 million, and $12.1 million for the years ended December 31, 1999, 1998, and 1997, respectively. For the year ended December 31, 1999, cash generated by operating activities resulted primarily from a net loss offset by depreciation, amortization, write-off of note receivable, decreases in accounts payable and collections of accounts receivable. For the year ended December 31, 1998, cash generated by operating activities resulted primarily from an increase in profitability, and to a lesser extent from an increase in accounts payable and accrued liabilities offset by an increase in accounts receivable. For the year ended December 31, 1997, cash generated by operating activities resulted primarily from improved collection of accounts receivable, an increase in deferred revenues and accrued liabilities and profitability during the period. Net cash used in investing activities was approximately $2.1 million, $4.5 million, and $1.3 million for the years ended December 31, 1999, 1998, and 1997, respectively. For the year ended December 31, 1999, net cash used in investing activities was related to the acquisition of furniture and equipment, and a loan to an independent software company. For the year ended December 31, 1998, net cash used was primarily related to the acquisition of furniture and equipment and loans to an independent software development company and to an unconsolidated joint venture. For the year ended December 31, 1997, net cash used was primarily related to the acquisition of furniture and equipment, the acquisition of SimTech, and a loan to an independent software development company, which was partially offset by proceeds from the sale of the TDS product line. During 1996, net cash used in investing activities was related primarily to the acquisition of furniture and equipment. 27 Net cash provided by financing activities was approximately $440,000 and $345,000 for the years ended December 31, 1999 and 1998, respectively. Net cash used in financing activities was approximately $10.6 million for the year ended December 31, 1997. The net cash provided by financing activities in 1999 was primarily generated by proceeds from the issuance of common stock through stock options plans, offset by payments of debt obligations and capital leases, and a tax benefit from option exercises. The net cash provided in 1998 was primarily a result of the proceeds from the issuance of common stock through stock option plans and the employee stock purchase plan and the tax benefit of option exercises, partially offset by the repurchase of $2.3 million of the Company's outstanding common stock. For the year ended December 31, 1997 net cash used in financing activities resulted primarily from the Company purchasing approximately 939,000 shares of treasury stock and repayment of debt, less proceeds from the issuance of common stock. The Company presently believes that its current cash and cash equivalents, together with funds expected to be generated from operations, will satisfy the Company's anticipated working capital and other cash requirements for at least the next 12 months.(2) YEAR 2000 The Year 2000 issue results from computer programs written using two, rather than four, digits to define the applicable year. These computer programs may recognize a date using "00" as the year 1900 instead of 2000 and cause system failures or miscalculations, material disruptions of business operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business operations. Summit upgraded or replaced the software packages underlying its financial, production, communication, desktop and other systems, as appropriate, to address the Year 2000 issue. It performed an in-depth analysis of all of its products and modified products that were not Year 2000 compliant. Summit also contacted all major external third parties that provide products and services to Summit to assess their readiness for the Year 2000. Summit created contingency plans for its internal information technology systems and products. These contingency plans were in place by December 31, 1999. Summit made certain investments in systems, applications and products to address Year 2000 issues. Summit did not track internal resources dedicated to the resolution of the Year 2000 issue and, therefore, is unable to quantify internal costs incurred to date that are associated with the Year 2000 issue. Summit did, however, hire external consultants to resolve internal information system issues related to the resolution of the Year 2000 issue. Identifiable expenditures for these consultants were approximately $250,000 through December 31, 1999. Expenditures to resolve any future Year 2000 issues are not expected to be material and are expected to be funded through cash generated from operations. To date, Summit has not experienced any known Year 2000 issues and has been informed by material suppliers and vendors that they have also not experienced material Year 2000 issues. Summit will continue to monitor any on-going issues. - ---------------------------- (2) This sentence is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 29 for a discussion of factors that could affect future performance. 28 ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF STOCK SUMMIT'S QUARTERLY RESULTS WILL LIKELY FLUCTUATE AND AFFECT THE MARKET PRICE OF SUMMIT'S COMMON STOCK. Various factors will cause summit's quarterly results to fluctuate. Summit'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 - 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 Summit and Summit'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. SUMMIT'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR. Summit's revenue is difficult to forecast for several reasons. Summit operates with little product backlog because Summit 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, Summit 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 Summit'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 Summit's typical sales cycle ranges from six to nine months and varies substantially from customer to customer. In addition, Summit 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. Summit establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on Summit's expectations as to future revenue. Because a high percentage of Summit'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 Summit's operating results. SUMMIT'S OPERATING RESULTS WILL LIKELY FLUCTUATE, AND FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF SUMMIT COMMON STOCK. Summit believes that its quarterly revenue, expenses and operating results will likely vary significantly from quarter to quarter. Summit also believes that period-to-period comparisons of Summit's operating results are not necessarily meaningful. As a result, you should not rely on these comparisons as indications of Summit's future performance. In addition, Summit 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 year ended December 31, 1999 and could be below investors' and market makers' expectation in other quarters, which could have a material adverse effect on the market price of Summit's common stock. 29 FAILURE TO REPLACE REVENUE ASSOCIATED WITH CREDENCE SYSTEMS WILL HURT SUMMIT'S OPERATING RESULTS. As of December 31, 1998, Credence Systems Corporation, or CSC, one of Summit's larger customers, had satisfied its obligation to purchase a minimum number of Visual Testbench licenses prsuant to an OEM agreement entered into in July 1997, and Summit does not expect to receive any additional revenue from sales of Visual Testbench to CSC. Summit will need to replace this revenue, and the failure to replace this revenue would have a material adverse affect on Summit's operating results. BECAUSE HIGH LEVEL DESIGN AUTOMATION, OR HLDA, PRODUCTS MAKE UP MOST OF SUMMIT'S REVENUE, SUMMIT FACES THE RISK OF LACK OF DIVERSIFICATION. Summit's future success depends primarily upon the broad market acceptance of Summit's existing and future HLDA products. For the years ended December 31, 1999, 1998 and 1997, revenue from HLDA products and related maintenance contracts represented 100%, 100%, and 88.8%, respectively, of Summit's total revenue. As a result, factors adversely affecting sales of these products could have a material adverse effect on Summit's business, financial condition and results of operations. These factors include: - increased competition; - inability to successfully introduce enhanced or improved versions of these products; - product quality issues; and - technological change. SUMMIT MAY NOT GAIN BROAD MARKET ACCEPTANCE OF HLDA PRODUCTS, AND FAILURE TO DO SO WILL MATERIALLY ADVERSELY AFFECT SUMMIT'S BUSINESS. Although demand for HLDA products has increased in recent years, the market for HLDA products is still emerging. The market may not continue to grow. Even if it does grow, businesses may not continue to purchase Summit's HLDA products. If the market for HLDA products fails to grow or grows more slowly than Summit currently anticipates, it will materially adversely affect Summit's business, financial condition, results of operations or cash flows. Summit believes that broad market acceptance of its HLDA products will depend on several factors, including, among others: - the ability to significantly enhance design productivity; - ease of use; - interoperability with existing electronic design automation tools; - price; and - the customer's assessment of Summit's financial results and Summit's technical, managerial, service and support expertise. Summit also depends on its distributors to assist it in gaining market acceptance of its products. These distributors may not give sufficient priority to marketing Summit's products. They may even discontinue offering Summit's products. A decline in the demand for, or the failure to achieve broad market acceptance of, Summit's HLDA products will have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. SUMMIT 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 Summit expects competition to increase as other electronic design automation companies introduce HLDA products. In the HLDA market, Summit principally competes with Mentor Graphics and a number of smaller firms. Indirectly, Summit also competes with other firms that offer alternatives to HLDA. 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 Summit. Some of Summit's current and future competitors offer a more complete range of electronic design automation products. They may also distribute products that directly compete with Summit's HLDA products by selling such products together with their core product line. In addition, Summit'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 Summit to offer point solutions instead of, or in addition to, Summit's current software products. Summit would have to price such point solutions lower than Summit's current product offerings, causing Summit's average selling prices to decrease. This, in turn, could have a material adverse effect on Summit's business, financial condition, results of operations, or cash flows. 30 Summit competes on the basis of various factors including, among others: - product capabilities; - product performance; - price; - support of industry standards; - ease of use; - first to market; and - customer technical support and service. Summit believes that its products are competitive overall with respect to these factors. However, in particular cases, Summit's competitors may offer HLDA products with functionality sought by Summit's prospective customers and which differs from those Summit 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 Summit's competitors by a larger, more established electronic design automation vendor could create a more significant competitor. Summit may not compete successfully against current and future competitors, and competitive pressures may have a material adverse effect on Summit's business, financial condition, results of operations, or cash flows. Summit's current and future competitors may develop products comparable or superior to Summit'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 Summit's business, financial condition, results of operations or cash flows. SUMMIT'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL, INDUSTRY-WIDE DOWNTURNS. Summit'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 Summit's sales depend upon capital spending trends and new design projects, negative factors affecting the electronics industry could have a material adverse effect on Summit's business, financial condition, results of operations, or cash flows. A number of electronics companies, including Summit's customers, have experienced a slowdown in their businesses. SUMMIT DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES SUMMIT VULNERABLE FROM THESE THIRD PARTIES' REFUSAL TO COOPERATE WITH SUMMIT ON ECONOMICALLY FEASIBLE TERMS. Because Summit's products must interoperate, or be compatible, with electronic design automation products of other companies, particularly simulation and synthesis products, Summit must have timely access to third party software to perform development and testing of products. Although Summit has established relationships with a variety of 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 Summit's current or potential future competitors, including Synopsys, Mentor Graphics and Cadence. If any of these relationships terminate and Summit were unable to obtain, in a timely manner, information regarding modifications of third party products, Summit would not have the ability to modify its software products to interoperate with these third party products. As a result, Summit could experience a significant increase in development costs, the development process would take longer, product introductions would be delayed, and Summit's business, financial condition, results of operations or cash flows could be materially adversely affected. IF SUMMIT CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS, SUMMIT'S BUSINESS WILL SUFFER. If Summit 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 Summit 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 31 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. Summit'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 Summit's customers. Summit 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. Summit's products may not adequately meet the requirements of the marketplace and achieve market acceptance. SUMMIT'S SOFTWARE MAY HAVE DEFECTS. Summit's software products may contain errors that may not be detected until late in the products' life cycles. Summit 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 Summit 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 Summit'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. SUMMIT DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO SELLING SUMMIT'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH SUMMIT. DISTRIBUTORS' CONTINUED VIABILITY. If any of Summit's distributors fails, Summit's business may suffer. Summit relies on distributors for licensing and support of Summit's products outside of North America. Summit depends on the relationships with its distributors to maintain or increase sales. Since Summit'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, Summit depends on the continued viability and financial stability of these distributors. DISTRIBUTORS' EFFORTS IN SELLING SUMMIT'S PRODUCTS. Summit's distributors may offer products of several different companies, including Summit's competitors. Summit's current distributors may not continue to market or service and support Summit's products effectively. Any distributor may discontinue to sell Summit's products or devote its resources to products of other companies. The loss of, or a significant reduction in, revenue from Summit'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 21.5% of Summit's revenue for the year ended December 31, 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, Summit 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. SUMMIT 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 Summit's total revenue and Summit expects this trend to continue. Summit'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. Summit 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 Summit'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 Summit's products in the Asia Pacific region have decreased, and these adverse economic conditions may worsen. Demand for and sales of Summit's products in this region may further decrease. In order to successfully expand international sales, Summit 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 Summit's operating margins. In addition, to the extent that Summit cannot effect these additions in a timely manner, 32 Summit can only generate limited growth in international sales, if any. Summit 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. SUMMIT MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY SUFFER. Summit's ability to achieve significant growth will require it to implement and continually expand its operational and financial systems, recruit additional employees and train and manage current and future employees. Summit expects any 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 Summit's business, financial condition, results of operations or cash flows. Summit regularly evaluates acquisition opportunities. Summit'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 Summit's results of operations. Product and technology acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concern, risks of entering markets in which Summit has no or limited prior experience and potential loss of key employees of acquired companies. Summit's management has had limited experience in assimilating acquired organizations and products into its operations. Summit 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. SUMMIT FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING POLITICAL, CURRENCY FLUCTUATION AND COORDINATION RISKS. POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Summit's research and development operations related to Visual HDL products are located in Israel. Economic, political and military conditions may affect Summit's operations in that country. Hostilities involving Israel, for example, could materially adversely affect Summit's business, financial condition and results of operations. Restrictions on Summit'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 "Summit relies on Israeli research, development and marketing grants for certain benefits." CURRENCY RISKS. In addition, while all of Summit'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 Summit 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 Summit to address differences in culture, regulations and time zones. Failure to successfully address these differences could disrupt Summit's operations. SUMMIT 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 SUMMIT'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Israeli government has granted Summit'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 Summit's failure to comply with these conditions, the tax benefits could be canceled, in whole or in part, and Summit 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 has recently applied for "Approved Enterprise" status with respect to a new project and intends to apply in the future with respect to additional projects. Summit'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 applicable, in the future. Summit intends to permanently reinvest earnings of the Israeli subsidiary outside the United States. If these earnings are remitted to the United States, Summit 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 Summit's business, financial condition, results of operations or cash flows. Losing the "Approved Enterprise" status may likewise adversely affect the combined company's financial condition and results of operations. SUMMIT DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED PERSONNEL COULD CAUSE SUMMIT'S BUSINESS TO SUFFER. Summit'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. Summit has entered into employment agreements with 33 certain of its executive officers. These agreements, however, do not guarantee the services of these employees and do not contain noncompetition provisions. Summit recently amended the employment agreement with Richard Davenport, Summit's President. As amended, Mr. Davenport's employment agreement provides that he is entitled to certain guaranteed severance payments. Mr. Davenport may or may not continue his employment with Summit. In addition, C. Albert Koob, Summit's Vice President, Finance and Chief Financial Officer, tendered his resignation effective as of January 31, 2000. Competition for personnel in the software industry in general, and the electronic design automation industry in particular, is intense. Summit has in the past experienced difficulty in recruiting qualified personnel. Summit 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 Summit'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 Summit's business, financial condition, results of operations or cash flows. IF SUMMIT FAILS TO EXPAND ITS SALES AND MARKETING ORGANIZATIONS, ITS BUSINESS MAY SUFFER. Summit's success will depend on its ability to build and expand its sales and marketing organizations. Summit hired fewer sales and marketing personnel than planned in the fourth quarter of 1998 and the first two quarters of 1999 and experienced attrition in the existing sales force during the first quarter of 1999. In part, as a result of the lack of sales people, Summit's revenues for the fourth quarter of 1998 were lower than expected. In February 1998, Summit's Senior Vice President of Worldwide Marketing and Sales resigned. Summit's future success will depend in part on its ability to hire 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 Summit may not be able to hire 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. SUMMIT RELIES ON ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS FOR CERTAIN BENEFITS. FAILURE TO OBTAIN SIMILAR GRANTS AND BENEFITS IN THE FUTURE MAY ADVERSELY AFFECT SUMMIT'S BUSINESS. Summit has 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 Summit 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, Summit would be unable to minimize risks particular to operations in Israel, such as hostilities involving Israel. SUMMIT DEPENDS ON ITS INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS BUT PROTECTION OF THESE RIGHTS IS LIMITED. Summit's success depends in part upon its proprietary technology. Summit relies on a combination of copyright, trademark and trade secret laws, confidentiality procedures, licensing arrangements and technical means to establish and protect its proprietary rights. As part of Summit's confidentiality procedures, Summit generally enters into non-disclosure agreements with employees, distributors and corporate partners, and limit access to, and distribution of, its software, documentation and other proprietary information. In addition, Summit protects its products with hardware locks and software encryption techniques designed to deter unauthorized use and copying. Despite these precautions, a third party may still copy or otherwise obtain and use Summit's products or technology without authorization, or develop similar technology independently. Summit provides its products to end-users primarily under "shrink-wrap" license agreements included within the packaged software. In addition, Summit delivers certain of its verification products electronically under an electronic version of a "shrink wrap" license agreement. These agreements are not negotiated with or signed by the licensee, and thus may not be enforceable in certain jurisdictions. In addition, the laws of some foreign countries do not protect Summit's proprietary rights as fully as do the laws of the United States. Summit's means of protecting its proprietary rights in the United States or abroad may not be adequate, and competitors may also independently develop similar technology. SUMMIT MAY FACE INFRINGEMENT CLAIMS, AND INTELLECTUAL PROPERTY LITIGATION WILL BE COSTLY FROM BOTH THE ECONOMIC AND BUSINESS PERSPECTIVES. Summit could face an increasing number of infringement claims as the number of products and competitors in Summit's industry segment grows, the functionality of products in Summit's industry segment overlaps and an increasing number of software patents are granted by the United States Patent and Trademark Office. A third party may claim such infringement by Summit with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product delays or require Summit to enter into royalty or licensing agreements. These royalty or license agreements, if required, may not be available on acceptable 34 terms or at all. Failure to protect Summit's proprietary rights or claims of infringement could have a material adverse effect on Summit's business, financial condition, results of operations or cash flows. SUMMIT'S STOCK PRICE MAY FLUCTUATE DRAMATICALLY. The stock markets have experienced price and volume fluctuations that have particularly affected technology companies, resulting in changes in the market prices of the stocks of many companies which may not have been directly related to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of Summit's common stock. In addition, factors such as announcements of technological innovations or new products by Summit or its competitors, market conditions in the computer software or hardware industries and quarterly fluctuations in Summit's operating results may have a significant adverse effect on the market price of Summit's common stock. IF SUMMIT'S PLANNED MERGER WITH VIEWLOGIC SYSTEMS FAILS, ITS BUSINESS MAY SUFFER. On September 16, 1999, the Company entered into a definitive agreement to merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software company headquartered in Marlboro, Massachusetts under which the Company will acquire Viewlogic. Summit's overall business strategy depends upon the successful completion of this merger. Summit has expended significant resources on the merger. If the merger fails, Summit will have to dedicate significant resources to modifying its current business strategy, which could have a material adverse effect on its business, financial condition, results of operations or cash flows. Such modifications include, among other things, hiring and retaining a number of sales, marketing, and management personnel including a chief executive officer and chief financial officer, and Summit may not succeed in doing so. A failed merger could also have a material affect on the market price of Summit's common stock. ITEM 7A. 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 debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issue. 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 in 1999 was not material. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPORTING DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Report of Independent Accountants..................................................................................... 37 Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................................... 38 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997............................ 39 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.................. 40 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997............................ 41 Notes to Consolidated Financial Statements............................................................................ 42
36 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Summit Design, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Summit Design, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Portland, Oregon January 28, 2000 37 SUMMIT DESIGN, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
DECEMBER, 31 ------------------------------- 1999 1998 ------------- ----------- ASSETS Current assets: Cash and cash equivalents ............................... $ 28,403 $ 27,693 Accounts receivable, less allowance for doubtful accounts of $427 and $511 ..................................... 7,391 8,852 Deferred income taxes ................................... 564 792 Prepaid expenses and other .............................. 991 862 -------- -------- Total current assets ............................... 37,349 38,199 Furniture and equipment, net ................................. 3,598 4,113 Intangibles, net ............................................. 949 2,870 Goodwill, net ................................................ 1,991 2,742 Deposits and other assets .................................... 157 2,286 -------- -------- Total assets ....................................... $ 44,044 $ 50,210 ======== ======== LIABILITIES Current liabilities: Long-term debt, current portion ......................... $ 56 $ 54 Capital lease obligation, current portion ............... - 43 Accounts payable ........................................ 1,448 2,520 Accrued liabilities ..................................... 5,667 5,687 Deferred revenue ........................................ 5,476 5,640 -------- -------- Total current liabilities .......................... 12,647 13,944 Long-term debt, less current portion ......................... - 156 Deferred revenue, less current portion ....................... 88 146 Deferred income taxes ........................................ - 489 -------- -------- Total liabilities .................................. 12,735 14,735 ======== ======== Commitments and contingencies (Notes 10 and 17) STOCKHOLDERS' EQUITY Common stock, $.01 par value. Authorized 30,000; issued and outstanding 15,815 shares in 1999 and 15,457 shares in 1998 ............................................ 158 155 Additional paid-in capital ................................... 44,691 44,039 Accumulated deficit .......................................... (13,540) (8,719) -------- -------- Total stockholders' equity ......................... 31,309 35,475 -------- -------- Total liabilities and stockholders' equity ......... $ 44,044 $ 50,210 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 38 SUMMIT DESIGN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
YEARS ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------- ------------ ----------- Revenue: Product licenses............................ $18,620 $33,589 $ 24,828 Maintenance and services.................... 11,615 9,642 6,161 Other .................................... - 367 450 ------------- ------------ ----------- Total revenue.......................... 30,235 43,598 31,439 ------------- ------------ ----------- Cost of revenue: Product licenses............................ 776 744 701 Maintenance and services.................... 1,034 955 632 Amortization of purchased technologies...... 561 661 219 ------------- ------------ ----------- Total cost of revenue.................. 2,371 2,360 1,552 ------------- ------------ ----------- Gross profit .................................... 27,864 41,238 29,887 Operating expenses: Research and development.................... 10,204 13,042 7,749 Sales and marketing......................... 11,143 11,713 10,591 General and administrative.................. 5,151 4,398 3,785 Amortization of intangibles and goodwill.... 2,111 2,791 942 Merger costs................................ 1,218 1,249 379 Severance and write-off of note receivable.. 4,005 - - In-process technology....................... - - 11,689 ------------- ------------ ----------- Total operating expenses............... 33,832 33,193 35,135 ------------- ------------ ----------- Income (loss) from operations.................... (5,968) 8,045 (5,248) Interest expense................................. (4) (4) (12) Other income, net................................ 1,151 1,097 1,057 Gain on sale of TDS product line................. - - 5,574 ------------- ------------ ----------- Income (loss) before income taxes................ (4,821) 9,138 1,371 Income tax provision............................. - 4,037 940 ------------- ------------ ----------- Net income (loss) ............................... $(4,821) $ 5,101 $ 431 ============= ============ =========== Net income (loss) per share - Basic:............. Net income (loss) per share................... $ ( 0.31) $ 0.34 $ 0.03 ============= ============ =========== Number of shares used in computing............ basic net income (loss) per share......... 15,678 15,155 14,403 Net income (loss) per share - Diluted:........... Net income (loss) per share................... $ ( 0.31) $ 0.32 $ 0.03 ============= ============ =========== Number of shares used in computing............ diluted net income (loss) per share....... 15,678 16,115 15,402
The accompanying notes are an integral part of the consolidated financial statements. 39 SUMMIT DESIGN, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1999, 1998 and 1997 (In thousands, except shares)
Additional Total Common Stock Paid-in Treasury Stock Stock- ------------------------------------------------------------- Accumulated holders' Shares Amount Capital Shares Amount Deficit Equity ------------------------------------------------------------------------------------------ Balance, December 31, 1996 14,079,142 $ 141 $ 33,261 - - $(14,251) $ 19,151 Issuance of common stock............ 29,733 3 3 Issuance of common stock under stock option plan........... 440,711 5 563 568 Issuance of common stock under employee stock purchase plan...... 58,701 1 349 350 Repurchase of common stock.......... (23,760) (4) (4) Issuance of common stock in conjunction with a business combination....................... 1,256,777 12 15,538 15,550 Purchase of treasury stock.......... (939,381) (11,555) (11,555) Tax benefit of option exercises..... 969 969 Amortization of contingent share liability.................. 733 733 Net income.......................... 431 431 ------------------------------------------------------------------------------------------ Balance, December 31, 1997 15,841,304 159 51,412 (939,381) (11,555) (13,820) 26,196 Issuance of common stock............ 14,616 11 11 Issuance of common stock under stock option plan........... 460,590 5 994 999 Issuance of common stock under employee stock purchase plan..................... 80,252 1 602 603 Purchase of treasury stock.......... (162,500) (2,330) (2,330) Reissuance of treasury stock........ (2,330) 162,500 2,330 - Retirement of treasury stock........ (939,381) (10) (11,545) 939,381 11,555 - Amortization of contingent share liability......................... 3,666 3,666 Tax benefit of option exercises..... 1,229 1,229 Net income.......................... 5,101 5,101 ------------------------------------------------------------------------------------------ Balance, December 31, 1998 15,457,381 155 44,039 - - (8,719) 35,475 Issuance of common stock under stock option plan........... 199,535 2 153 155 Issuance of common stock under employee stock purchase plan..................... 157,571 1 392 393 Stock options issued to consultant.. 18 18 Tax benefit of option exercises..... 89 89 Net loss............................ (4,821) (4,821) ========================================================================================== Balance, December 31, 1999 15,814,487 $ 158 $ 44,691 - $ - $(13,540) $ 31,309 ==========================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 40 SUMMIT DESIGN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------------------------------------- Cash flows from operating activities: Net income (loss) $ (4,821) $5,101 $ 431 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.............................. 4,313 4,649 1,984 Amortization of contingent share liability................. - 3,666 733 Loss on asset disposition.................................. 29 - 2 Gain on sale of TDS product line........................... - - (5,574) Write-off of acquired in-process technology................ - - 11,689 Deferred income taxes...................................... (261) (81) (1,044) Equity in losses of and transactions with unconsolidated joint venture............................................. 230 520 77 Write-off of note receivable............................... 2,665 - - Issuance of stock options to consultant.................... 18 - - Changes in assets and liabilities: Accounts receivable................................... 1,461 (3,721) 951 Prepaid expenses...................................... (130) (322) (13) Accounts payable...................................... (1,072) 1,309 (254) Accrued liabilities................................... (18) 505 1,667 Deferred revenue...................................... (222) 112 1,601 Other, net............................................ 197 134 (145) ------------------------------------------- Net cash provided by operating activities........ 2,389 11,872 12,105 ------------------------------------------- Cash flows from investing activities: Additions to furniture and equipment............................ (1,166) (2,619) (1,613) Acquisitions, net of cash received.............................. - - (3,816) Proceeds from sale of TDS product line.......................... - - 4,666 Proceeds from sale of assets.................................... 12 7 30 Notes receivable advances....................................... (965) (1,210) (565) Notes receivable repayments..................................... - 75 - Investment in and advances to joint venture..................... - (750) - ------------------------------------------- Net cash used in investing activities............ (2,119) (4,497) (1,298) ------------------------------------------- Cash flows from financing activities: Issuance of common stock, net of expenses....................... 548 1,613 922 Tax benefit of option exercises................................. 89 1,229 969 Payments to acquire treasury stock.............................. - - (11,555) Repurchase of common stock...................................... - (2,330) (4) Principal payments of debt obligations.......................... (154) (118) (898) Principal payments of capital lease obligations................. (43) (49) (69) ------------------------------------------- Net cash provided by (used in) financing activities..................................... 440 345 (10,635) ------------------------------------------- Increase in cash and cash equivalents............ 710 7,720 172 Cash and cash equivalents, beginning of year......................... 27,693 19,973 19,801 ------------------------------------------- Cash and cash equivalents, end of year............................... $28,403 $27,693 $19,973 =========================================== Supplemental disclosure (see Note 16)
The accompanying notes are an integral part of the consolidated financial statements. 41 SUMMIT DESIGN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Summit Design, Inc. (Summit or the Company) develops, manufactures and markets software which enhances and accelerates the creation of electronic systems and integrated circuits using top-down design methodologies. The Company provides software products for design specification entry, design analysis and verification. Subsidiaries of the Company are located in the United States, Israel Europe and Finland. The Company markets and sells its products in the United States, Europe, and Asia through its direct sales force and distributor relationships. On September 16, 1999, the Company entered into a definitive agreement to merge with Viewlogic Systems, Inc. ("Viewlogic") a privately held software company headquartered in Marlboro, Massachusetts under which the Company will acquire Viewlogic. Each share of Viewlogic Preferred and Common Stock will be assumed by the Company and will be exchanged for 0.67928 shares for Summit Common Stock upon closing of the transaction. In addition, the Company will assume all options outstanding under Viewlogic's stock option plan. The Company intends to account for this acquisition as a purchase. Although Summit will be acquiring Viewlogic, after such transaction, Viewlogic stockholders will hold a controlling interest in Summit. Accordingly, for accounting purposes, the acquisition will be a "reverse acquisition" and Viewlogic will be the "accounting acquirer". As Viewlogic will be the accounting acquirer, its accounts will be recorded at historical cost and the assets and liabilities of Summit will be recorded at their estimated fair value as of the closing date. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the Company's significant accounting policies: BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Summit Verification, Inc., Summit Design (EDA) Ltd., ProSoft OY, Summit Design France, Summit Design GmbH, and Summit Design U.K. Ltd. Upon consolidation, all intercompany accounts, transactions and profits have been eliminated. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies (generally 20-50 percent ownership), are accounted for by the equity method. REVENUE RECOGNITION Product licenses revenue is derived from the sale of software licenses to distributors and end-users. Revenue from the sale of product licenses is recognized upon delivery of the product if remaining vendor obligations are insignificant and collection of the resulting receivable is probable, otherwise revenue from such software products is deferred until such time as vendor obligations are met. Revenue earned on software arrangements involving multiple elements is allocated to each element based on vendor-specific objective evidence (VSOE) of the fair value of the various elements within the arrangement. Revenue from the sale of software licenses is recognized at the later of the time of shipment of satisfaction of all acceptance terms. Revenue from product sales through distributors is recognized net of the associated distributor discounts. The Company provides a ninety-day warranty that its products are free from defects. Estimated sales returns and provisions for insignificant vendor obligations and estimated warranty costs are recorded when revenue is recognized. Maintenance and services revenue includes software maintenance and other service revenue, primarily from training. Software maintenance revenue is deferred and recognized ratably over the life of the maintenance contract. Other service revenue is recognized as the related service is performed. Fees received for granting distribution rights are deferred and recognized ratably over the term of the distribution agreement. RESEARCH AND DEVELOPMENT COSTS Costs related to research, design and development of products are charged to research and development expense as incurred. Software development costs are capitalized beginning when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general resale to customers. To date, completion of a working model of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant. CASH EQUIVALENTS The Company considers all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At December 31, 1999 and 1998, substantially all of the Company's cash and cash equivalents are invested in interest-bearing deposits and other short-term investments with several major banks. 42 FURNITURE AND EQUIPMENT Furniture and equipment, consisting primarily of computer equipment and office furniture, are stated at cost, net of related depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years. Amortization of equipment under capital leases is provided using the straight-line method over the shorter of the related lease terms or economic life of the leased assets. Upon disposal of an asset subject to depreciation, the cost and related accumulated depreciation are removed from the accounts and resulting gains and losses are reflected in other income, net. INTANGIBLES AND GOODWILL Intangibles, which include purchased technologies and other intangibles are being amortized on a straight-line basis over two to five years for purchased technologies and two years for other intangibles. Purchased technology represents acquired software which has been fully developed, achieved technological feasibility, reached commercial viability, and is generating revenue. Goodwill, which represents the excess of the purchase price over identifiable net assets acquired, is being amortized over five years. The carrying value of intangible assets and goodwill are reviewed whenever circumstances occur which indicate that the carrying value may not be recoverable. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of change. Valuation allowances are established when necessary, to reduce deferred tax assets to the amounts expected to be realized. CONCENTRATION OF CREDIT RISK The Company sells its products primarily to commercial end-users across many industries directly and through independent and affiliated distributors in North America, Europe and Asia. The Company's end-user customers include companies in a wide range of industries, including semiconductor devices, semiconductor test equipment, telecommunications, computer/peripherals, consumer electronics, aerospace/defense and other electronics entities. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. The Company maintains allowances for potential losses, and such losses have been within management's expectations. The Company has made equity investments in ADC and SDA and has provided loans to ADC and a privately-held, independent software company for business and strategic purposes. The Company identifies and records impairment losses on these investments when events and circumstances indicate that such assets might be impaired. FOREIGN CURRENCY TRANSLATION The Company's subsidiaries in Israel, Finland, France, Germany and the U.K. use the U.S. dollar as their functional currency for financial reporting purposes. The Company's sales to foreign distributors and customers are denominated in U.S. dollars. Operating expenses of the Company's subsidiary in Israel and other international operations are paid in the local currency. Transaction gains and losses, as well as gains and losses experienced with respect to remeasurement to the functional currency are recorded in the consolidated statement of operations. As the gains and losses are insignificant in 1999 and 1998, such amounts were recorded as other income, net. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 43 DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of financial instruments including cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities approximated fair value as of December 31, 1999 and 1998 because of the relatively short maturity of these instruments. The carrying value of capital lease obligations and long-term debt approximated fair value as of December 31, 1999 and 1998, based upon the interest rates available to the Company for similar instruments. The carrying amount of notes receivable at December 31, 1998 approximates fair value which is evaluated based upon the present value of the expected future cash flows and the fair value of the underlying collateral. COMPUTATION OF NET INCOME (LOSS) PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard (SFAS) No. 128 EARNINGS PER SHARE effective for fiscal periods ending after December 15, 1997. Basic EPS is computed using the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed using the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Common equivalent shares from stock options are excluded from the computation when their effect is antidilutive. 3. ACQUISITION OF TRIQUEST DESIGN AUTOMATION, INC.: On February 28, 1997, the Company acquired TriQuest Design Automation, Inc., a California corporation ("TriQuest"). TriQuest develops hardware description language ("HDL") analysis, optimization and verification tools for the design of high performance, deep submicron integrated circuits. The aggregate consideration for the acquisition (including shares of common stock reserved for issuance upon exercise of TriQuest options assumed by the Company) was 775,000 shares of common stock. The transaction was accounted for as a "pooling of interests" in accordance with generally accepted accounting principles. In compliance with such principles, the Company's operating results have been restated to include the results of TriQuest as if the acquisition had occurred at the beginning of the first period presented. The following presents the previously separate results of Summit and TriQuest (in thousands):
Two Months Ended Years Ended February 28, 1997 -------------------------------------------- ----------------- December 31, 1996 December 31, 1995 (unaudited) -------------------------------------------- Summit Revenues $ 1,473 $ 20,163 $ 14,292 Net income (loss) (921) 2,688 (3,123) TriQuest Revenues 199 151 - Net income (loss) 143 (1,425) (488)
4. SALE OF TDS PRODUCT LINE: On July 11, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products (the "Asset Sale") to Credence Systems Corporation ("CSC") for $5 million. CSC assumed certain liabilities, including the Company's obligations under TDS maintenance contracts entered into prior to the closing. CSC also agreed to purchase $2 million of Visual interface licenses in the second quarter of 1997. TDS product license, maintenance and services and other revenue for the years ended December 31, 1995, 1996 and 1997 were $6,978,000, $7,331,000 and $3,500,000, respectively. The Company and CSC also entered into a software license agreement ("OEM Agreement") in which CSC agreed to purchase $16 million of Visual Testbench licenses over a thirty-month period subject to specified quarterly maximums and certain additional conditions. Additionally, CSC entered into an 18 month maintenance agreement for $2 million associated with the Visual Testbench product. 44 5. ACQUISITION OF SIMULATION TECHNOLOIGES CORP: On September 9, 1997, the Company acquired Simulation Technologies Corp. ("SimTech"), a Minnesota Corporation. SimTech develops and distributes hardware-software co-verification, code coverage and HDL debugging software. The aggregate consideration for the acquisition was 1,256,800 shares of Summit common stock, 723,200 options to purchase Summit common stock and $3,875,000 in cash. An additional $315,000 of direct acquisition costs were also incurred and included in the purchase price. After discussion with the staff of the Securities and Exchange Commission, the Company restated the consolidated financial statements as of and for the quarters ended September 30, 1997, March 31, 1998, June 30, 1998 and September 30, 1998 and as of and for the year ended December 31, 1997 to reflect a change in the original accounting treatment to the September 1997 acquisition of SimTech. The total consideration at estimated fair value as originally reported and as restated is summarized as follows (in thousands):
Originally Reported As Restated -------------- ------------- Cash......................................................... $3,875 $3,875 Common stock of Summit....................................... 11,367 14,649 Options to purchase Summit common stock...................... 5,299 5,299 Other direct acquisition costs............................... 315 315 -------------- ------------- $ 20,856 $ 24,138 ============== =============
The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations have been combined with those of Summit since the date of acquisition. The allocation of the purchase price to the net assets acquired based upon their estimated fair values as originally reported and as restated is summarized as follows (in thousands):
Originally Reported As Restated -------------- -------------- Current assets..................................................... $ 937 $ 937 Property and equipment............................................. 377 377 In-process technology.............................................. 19,937 11,689 Purchased technology............................................... 1,037 2,390 Identifiable intangibles........................................... 735 4,079 Goodwill.... - 3,756 Current liabilities assumed........................................ (707) (707) Unearned revenue assumed........................................... (1,460) (1,460) Deferred taxes..................................................... - (1,322) Compensation expense contingent upon future employment - 4,399 -------------- -------------- $ 20,856 $ 24,138 ============== ==============
The amount allocated to in-process technology was written off immediately subsequent to the acquisition of SimTech as the in-process technology had not reached technological feasibility and had no probable alternative future use. The amounts allocated to purchased technology and identifiable intangibles are being amortized on a straight-line basis over two to five years. Additionally, the Company recorded a charge to expense for shares issued in the transaction which were contingent upon continued employment for up to two years from the acquisition date. A total of $4.4 million of compensation expense was recorded as the employment obligation lapsed. 45 The following table reflects unaudited pro forma combined results of operations of the Company and SimTech on a basis that the acquisition had taken place at the beginning of the fiscal year for each of the periods presented, excluding the effect of the one-time charge of in-process technology:
December 31, December 31, 1996 1997 -------------------- -------------------- (in thousands, except per share data) Revenues $ 24,391 $ 35,278 -------------------- -------------------- Net income (loss) $ (4,104) $ 6,563 -------------------- -------------------- Basic net income (loss) per share $ (0.31) $ 0.43 -------------------- -------------------- Diluted net income (loss) per share $ (0.31) $ 0.40 -------------------- -------------------- Number of shares used in computing basic net income (loss) per share 13,292 15,268 -------------------- -------------------- Number of shares used in computing diluted net income (loss)per share 13,292 16,267 -------------------- --------------------
In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1996 or at the beginning of 1997 or under the ownership and management of the Company. In connection with this transaction the Company also repurchased 939,000 shares of Summit common stock in private transactions at an average price of $12.30 per share for $11,555,000 in cash. 6. FURNITURE AND EQUIPMENT: Furniture and equipment consists of the following (in thousands):
December 31, ------------------------- 1999 1998 ---------- ----------- Office furniture and equipment.............................. $ 691 $ 1,201 Computer equipment.......................................... 5,573 5,138 Leasehold improvements...................................... 934 491 ---------- ----------- 7,198 6,830 Less accumulated depreciation and amortization.............. (3,600) (2,717) ---------- ----------- $ 3,598 $4,113 ========== ===========
7. DEPOSITS AND OTHER ASSETS: In July 1997, the Company entered into an agreement to lend up to $2.5 million to an independent software development company pursuant to a loan agreement which is collateralized by the intellectual property and stock of the software development company. Borrowings under this agreement bear interest at prime rate plus 2%. Total amounts due to the Company under this agreement at December 31, 1998 was $1.7 and was included in Deposits and Other Assets. During 1999, the Company advanced $965,000 to the sofware company bringing total borrowings to $2.7 million During 1999, the Company agreed to loan an additional $200,000 to the independent software company. During the third quarter of 1999, it became evident that because of missed product development milestones, the independent software company's cash flows would not be sufficient to repay the loan. The Company exercised its right under the terms of the contract with the independent software company to retain co-ownership of the technology and distribution rights to the product in satisfaction of the note. During the third quarter the Company also evaluated its business strategy relative to the technology acquired from the software company. Based on the Company's assessment of market potential, revised sales projections, and limited manpower resources, management decided that Summit could not provide the support necessary to successfully market and sell this product. The Company concluded that the technology had no value and Summit has no plans to sell this product in the future. The Company therefore wrote-off the balance of the note receivable of $2.7 million. 46 Also included in Deposits and Other Assets are investments in and advances to two joint ventures (see Note 19) of which $0 and $230,000 are outstanding at December 31, 1999 and December 31, 1998, respectively. Advances bear interest at 5% per year and are due June 2003. 8. NOTE PAYABLE TO BANK The Company had available a $1 million line of credit with U.S. National Bank of Oregon, which matured April 30, 1999 and was collateralized by accounts receivable, inventory, chattel paper, general intangibles, patents, trademarks, copyrights and products and proceeds of the foregoing. Maximum borrowings under the line shall not exceed 75% of eligible accounts receivable. Interest on the unpaid balance accrues at prime and is payable monthly. The prime rate at December 31, 1998 was 7.75%. There was no amount outstanding at December 31, 1998. The Company did not borrow any funds under this note through April 30, 1999 when the note matured. The Company did not renew the note. The line of credit agreement contained financial covenants, including covenants relating to maintenance of a minimum level of working capital, net worth, the ratio of debt to net worth and dividend restrictions. The Company was in compliance with these covenants at December 31, 1998. 9. ACCRUED LIABILITIES Accrued liabilities consists of the following (in thousands):
December 31, --------------------------- 1999 1998 ----------- ------------- Payroll and related benefits................................................. $4,006 $3,051 Sales and marketing.......................................................... 170 332 Accounting and legal......................................................... 575 310 Federal and state income taxes payable....................................... 564 1,549 Sales taxes payable.......................................................... 48 160 Other........................................................................ 304 285 ----------- ------------- $5,667 $5,687 =========== =============
10. LEASES The Company has entered into noncancelable operating leases for the use of buildings in Beaverton, Oregon, Herzlia, Israel, and San Jose, California. Rental expense was approximately $1.3 million, $653,000, and $495,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Future minimum lease payments under these operating and capital leases for the years ending December 31 are as follows (in thousands):
Operating Leases --------------- 2000................................................................. $ 1,286 2001................................................................... 977 2002 ............................................................... 870 2003 ............................................................... 830 2004 ............................................................... 477 --------------- Total minimum lease payments.................................... $ 4,440 ===============
47 11. LONG-TERM DEBT: Long-term debt consists of the following (in thousands):
December 31, -------------------------- 1999 1998 -------------------------- Marketing grant payable to the Israeli government.......................... $ 56 $ 187 Other...................................................................... - 23 -------------------------- 56 210 Current portion............................................................ (56) (54) -------------------------- Non-current portion........................................................ $ - $ 156 ==========================
The Chief Scientist grant represents research and development funding of approximately $232,000 in 1993 and $608,000 in 1995 received from the Israeli government. The Company repaid both the 1993 and 1995 grants in full during 1997. The Company received a Marketing Fund grant of $423,000 from the Israeli Ministry of Industry and Trade through December 31, 1998. This grant is to be repaid at the rate of 3% of the increase in export sales of all Israeli products over the base year until repaid. 12. STOCKHOLDERS' EQUITY: PREFERRED STOCK Summit has 5,000,000 shares of Preferred Stock authorized, of which there are no shares outstanding. The Summit Board has the authority to issue these shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued and undesignated shares of Preferred Stock and to fix the number of shares constituting any series and the designations of such series, without any future vote or action by the stockholders. STOCK OPTIONS GRANTED TO CONSULTANT During 1999, the Company issued options to purchase 20,000 shares of common stock to the Interim Chief Executive Officer as partial consideration for consulting services provided to the Company. The Company incurred compensation cost of approximately $18,000 related to these options. The Company does not expect to recognize additional compensation related to these options in the future. 1994 INCENTIVE STOCK OPTION PLAN The Company has an Incentive Stock Option Plan ("1994 Plan") pursuant to which the Company may grant options to employees and consultants. Under the terms of the 1994 Plan, the option price is determined as the fair value of the Company's common stock at the time the option is granted. Under the 1994 Plan, 3,447,000 shares of common stock are authorized for issuance. Options granted prior to the Company's initial public offering generally became immediately exercisable. Shares issued are subject to repurchase until vested. Options granted subsequent to the Company's initial public offering are exercisable upon vesting. Options generally vest 25% twelve months after the date of grant and the remainder at 1/48th of the grant amount in each successive month thereafter. Options expire no later than 10 years after the date of grant. There were 503,715, 342,026, and 2,659 shares of common stock reserved for the grant of stock options under the 1994 Plan at December 31, 1999, 1998, and 1997, respectively. 1996 DIRECTOR OPTION PLAN Non-employee directors are entitled to participate in the Company's 1996 Director Option Plan (the "Director Plan"). The Director Plan provides for an automatic grant of an option to purchase 7,500 shares of common stock to each non-employee director on the date on which the Director Plan becomes effective or, if later, an option to purchase 10,000 shares of common stock on the date on which the person first becomes a non-employee director and 10,000 shares on the date of the annual meeting of each subsequent year, provided that he or she is then a non-employee director and, provided further, that on such date he or she has served on the Board for at least six months. Options granted under the Director Plan generally become vested and all exercisable 12 months after the grant date and are granted at an exercise price equal to 100% of the fair market value per share on the date of the grant. The company has reserved 150,000 shares of common stock for issuance under the Director Plan. The Company granted 40,000 options in 1999, 1998, and 1997. 48 1997 NONSTATUTORY STOCK OPTION PLAN The Company established the 1997 Nonstatutory Stock Option Plan ("Nonstatutory Plan") in order to provide additional incentive to employees, directors and consultants. Options granted under the Nonstatutory Plan will be nonstatutory stock options and are not intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code. Options generally vest 25% twelve months after the date of grant and the remainder at 1/48th of the grant amount in each successive month thereafter. Options expire no later than 10 years after the grant date. In addition, no more than 25,000 options may be granted to directors and persons considered "officers" by the NASDAQ Stock Market. The maximum aggregate number of shares of common stock authorized for issuance is 1,050,000 shares. The Company granted 1,022,697 and 101,623 options under the Nonstatutory Plan in 1999 and 1998, respectively. A summary of the status of the Company's stock option plans as of December 31, 1999, 1998, and 1997 and changes during the years ended on those dates is presented below:
EXERCISE OPTIONS PRICE RANGE ----------- Balance, December 31, 1996............................................... 1,393,874 $0.02 -- $10.50 Options granted..................................................... 1,643,121 $0.08 -- $17.00 Options exercised................................................... (470,715) $0.02 -- $7.00 Options canceled.................................................... (442,906) $0.02 -- $12.75 ---------------- Balance, December 31, 1997 2,123,374 $0.08 -- $17.00 Options granted..................................................... 380,599 $6.75 -- $15.88 Options exercised................................................... (623,087) $0.08 -- $9.25 Options canceled.................................................... (147,773) $1.17 -- $17.00 ---------------- Balance, December 31, 1998 1,733,113 $0.08 -- $17.00 Options granted..................................................... 1,913,397 $2.25 -- $3.91 Options exercised................................................... (199,535) $0.08 -- $8.13 Options canceled.................................................... (1,079,736) $0.33 -- $17.00 ---------------- Balance, December 31, 1999 2,367,239 $0.14-- $17.00 ================
The following are the shares exercisable at the corresponding weighted average exercise price at December 31, 1999, 1998, and 1997, respectively: 756,813 at $5.46, 780,195 at $5.21, and 949,261 at $2.31. The weighted average exercise price per share of options outstanding at December 31, 1999 is $4.33. The following are the weighted average grant date fair value of options granted for the years ended December 31, 1999, 1998, and 1997, respectively: $2.00, $12.00, and $8.96. The following table summarizes information about stock options outstanding at December 31,1999:
Options Outstanding Options Exercisable Shares Weighted Average Weighted Shares Range of Exercise Outstanding at Contractual Life Weighted Average Exercisable at Weighted Average Prices 12/31/99 Remaining Exercise Price 12/31/99 Exercise Price - --------------------------------------------------------------------------------------------------------------------- $ 0.14 to $ 0.62 147,623 5.73 $0.4784 123,266 $0.5414 $ 1.17 to $ 1.95 163,907 6.15 1.6684 128,669 1.6560 $ 2.25 to $ 3.91 1,518,993 9.4 3.1138 152,493 2.5920 $ 4.67 to $ 7.00 60,814 8.04 6.0928 43,114 6.2102 $ 8.13 to $ 9.63 374,418 7.59 8.9604 233,688 8.9543 $ 12.75 to $ 17.00 101,484 8. 2 14.3632 75,583 14.5566
49 1996 EMPLOYEE STOCK PURCHASE PLAN The Company has established the 1996 Employee Stock Purchase Plan ("1996 Purchase Plan"). The 1996 Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue code, permits eligible employees of the Company to purchase common stock through payroll deductions of up to 10% of their base salary up to a maximum of $25,000 of common stock for all purchase periods ending within any calendar year. The price of common stock purchased under the 1996 Purchase Plan will be 85% of the lower of the fair market value of the common stock on the first day of each 24 month offering period or the last day of the applicable six-month purchase period. The Company has reserved 535,000 shares of common stock for issuance under the 1996 Purchase Plan. The Company issued approximately 157,571 and 80,252 shares of common stock under the 1996 Purchase Plan during 1999 and 1998, respectively. SFAS NO. 123 DISCLOSURE The Company applies APB No. 25 and related interpretations in accounting for its plans. However, in accordance with SFAS No. 123, pro forma disclosures as if the Company adopted the cost recognition requirements under No. SFAS 123 in 1999, 1998, and 1997 are presented below. The fair value of each option granted during the years ended December 31,1999, 1998, and 1997 are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ---------------------------------------------------- Average dividend yield 0% 0% 0% Expected volatility 59% 57% 44% Expected life in years 4 4 4 Risk free interest rate: Low 5.040% 4.050% 5.787% High 6.420% 5.665% 6.421%
Had the Company used the fair value methodology for determining compensation expense, the Company's net income (loss) and net income (loss) per share would approximate the pro forma amounts below (in thousands, except per share data):
1999 1998 1997 ---------------------------------------------------- Net income (loss) - as reported $ (4,821) $ 5,101 $ 431 Net income (loss)- pro forma $ (10,639) $ 1,802 $ (1,496) Diluted net income (loss) per common share - as reported $ (0.31) $ 0.32 $ 0.03 Diluted net income (loss) per common share - pro forma $ (0.68) $ 0.11 $ (0.10)
The effect of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. 13. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------------------------------------------------ Current: Federal................................................. $ 3 $ 1,811 $765 State................................................... 0 457 426 Foreign................................................. 258 1,110 468 ------------------------------------------------------ 261 3,378 1,659 ------------------------------------------------------ Deferred: Federal................................................. (307) 693 (486) State................................................... (40) 93 14 Foreign................................................. 86 (127) (247) ------------------------------------------------------ (261) 659 (719) ------------------------------------------------------ $ 0 $ 4,037 $ (940) ======================================================
50 The difference between the effective income tax rate and the statutory U.S. federal income tax rate is as follows (in thousands):
Years Ended December 31, --------------------------------------------- 1999 1998 1997 --------------------------------------------- Tax provision (benefit) at statutory rate....................... $ (1,661) $1,554 $ (452) In-process technology........................................... - - 3,974 Foreign taxes................................................... (135) 983 221 State........................................................... (40) 342 416 Amortization of goodwill........................................ 255 255 101 Compensation expense for contingent stock....................... - 1,246 282 Deferred taxes: Utilization of net operating losses.......................... - - (3,392) Other........................................................... 24 (343) (210) Valuation allowance............................................. 1,557 - - --------------------------------------------- $ - $4,037 $ 940 =============================================
The tax provision (benefit) at statutory rate is calculated based on U.S. income and does not include tax on earnings from foreign operations. Tax on earnings from foreign operations is included in foreign income and withholding taxes. At December 31, 1999, the Company had net operating loss carryforwards for federal and state income tax purposes which can be used to offset future income subject to taxes. Such loss carryforwards and tax credits are summarized below (in thousands):
Expiration Amount Dates Loss carryforwards: Federal................................................... $729 2009-- 2010 State..................................................... 729 2009-- 2010
Due to the acquisition of TriQuest, the federal and state net operating loss carryforwards are limited in use to approximately $300,000 annually. In addition, the Company has foreign income tax net operating losses of approximately $5.6 million. These foreign losses were generated in Israel over several years and have not yet received final assessment from the Israeli government. Consequently, management is uncertain as to the availability of a substantial portion of such foreign loss carryforwards and as such has recorded a valuation allowance against the resulting deferred tax asset. Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of the Company's foreign subsidiary, as those earnings are considered to be permanently reinvested. If such earnings were remitted to the U.S., additional federal and foreign taxes may be due. It is not practical to determine the amount of such taxes that might be payable on these foreign earnings. 51 The approximate effects of temporary differences which give rise to deferred tax assets and liabilities are as follows (in thousands):
December 31, -------------------------------- 1999 1998 -------------- -------------- Deferred tax assets: Federal and state net operating loss carryforwards............ $248 $398 Foreign operating loss carryforwards.......................... 229 336 Foreign tax credit carryforwards.............................. - 625 Accrued expenses.............................................. 421 - Accrued reserves.............................................. 1,692 - Other deferred tax items...................................... 106 271 -------------- -------------- Total deferred tax assets................................ 2,696 1,630 Less valuation allowances..................................... (1,893) (336) -------------- -------------- Net deferred tax assets.................................. 803 1,294 -------------- -------------- Deferred tax liabilities: Other deferred tax items...................................... (239) (991) -------------- -------------- Total deferred tax liabilities........................... (239) (991) -------------- -------------- Net deferred taxes....................................... $564 $303 ============== ============== Net deferred income taxes: Current...................................................... $ 564 $ 792 Deferred..................................................... - (489) -------------- -------------- $ 564 $ 303 ============== ==============
The Company has established a valuation allowance against a portion of deferred tax assets due to the uncertainty surrounding the realization of such assets. Management evaluates on a quarterly basis the recoverability of the deferred tax assets and the level of the valuation allowance. The net change in the valuation allowance for the years ended December 31, 1999 and 1998 was an increase of approximately $1,557,000 and a decrease of approximately $227,000, respectively. The increase in the valuation allowance for the year ended December 31, 1999 resulted from management's re-evaluation of the future recoverability of net deferred tax assets due to the uncertainty of future taxable income. The decrease in the valuation allowance for the year ended December 31, 1998 resulted from a decrease in the effective tax rate in Israel. 14. RECONCILIATION OF EARNINGS PER SHARE: The following provides a reconciliation of the numerators and denominators of the basic and diluted per share computations:
December 31, ------------------------------------------------- 1999 1998 1997 ------------------------------------------------- Numerator: Net income (loss)......................... $(4,821) $5,101 $ 431 ============= ============ ============ Denominator: Denominator for basic earnings (loss) per share: Weighted average shares 15,678 15,155 14,403 Effect of dilutive securities: Employee stock options - 960 999 ------------- ------------ ------------ Denominator for diluted earnings per share 15,678 16,115 15,402 ============= ============ ============ Net income (loss) per share - basic $(0.31) $ 0.34 $ 0.03 ============= ============ ============ Net income (loss) per share - diluted $(0.31) $ 0.32 $ 0.03 ============= ============ ============
Diluted loss per common share for the year ended December 31, 1999 is based only on the weighted average number of common shares outstanding during the year, as the inclusion of approximately 172,000 common share equivalents would have been antidilutive. 52 401(K) PLAN: The Company maintains a tax qualified defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code (the Plan) and covers substantially all U.S. employees meeting minimum service requirements. The Plan was amended in 1997 to include a mandatory Company matching contribution up to a maximum of 1.5% of employee compensation. At its discretion, the Company may make additional contributions to the Plan. In connection with the required match, the Company's contributions to the Plan were approximately $71,000, $98,000 and $50,000 in 1999, 1998, and 1997, respectively. 16. SUPPLEMENTAL CASH FLOW INFORMATION IS AS FOLLOWS:
Year ended December 31 1999 1998 1997 ---------------------------------------- Cash paid for interest .............................. $ 4 $ 3 $ 11 Cash paid for income taxes .......................... $ 1,441 $ 2,108 $ 175 Noncash investing and financing activities: Retirement of treasury stock ................... - $ 11,555 - Acquisition of Simulation Technologies: In-process technology .......................... - - $ 11,689 Purchased technologies, intangibles and goodwill - - $ 10,225 Property and other assets acquired ............. - - $ 941 Deferred revenue assumed ....................... - - $ (1,460) Other liabilities assumed ...................... - - $ (707) Common stock issued ............................ - - $(15,550) Sale of TDS product line Property and other assets sold ................. - - $ (369) Deferred revenue sold .......................... - - $ 1,213 Other liabilities sold ......................... - - $ 64
17. COMMITMENTS AND CONTINGENCIES: Summit Design (EDA) Ltd. has registered floating charges on all its assets as security for compliance with the terms attached to Israeli investment grants received. The Company has entered into employment agreements with certain of its executive officers. These agreements provide for base annual compensation and certain incentive bonuses and stock options on various vesting schedules as well as severance compensation in the event of termination without cause. The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse affect on the Company's consolidated financial statements. During 1999, Summit recorded $1.3 million in non-recurring charges relating to severance obligations for certain management personnel. A significant amount of the liability relates to the retirement of Summit's Chairman of the Board and Chief Executive Officer in June 1999. Payments to four individuals will be made over a period of nine to twenty four months. At December 31, 1999, the balance of the severance benefits payable was approximately $973,000. 18. BUSINESS SEGMENTS, EXPORTS AND MAJOR CUSTOMERS: 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 outside the United States is as follows:
Years Ended December 31, 1999 1998 1997 ------------------------------------------------------ Europe........................................... $5,825 $6,061 $3,582 Japan............................................ 6,513 7,373 6,311 Other Asia Pacific............................... 1,102 2,191 709 As a Percentage of Total Revenue: Europe........................................... 19.3% 13.9% 11.4% Japan............................................ 21.5% 16.9% 20.0% Other Asia Pacific............................... 3.6% 5.0% 2.3%
53 During 1998 and 1997 Credence Systems Corporation ("CSC") accounted for 25.1% and 28.6% of total revenue, respectively. As of December 31, 1998, CSC had fully satisfied its obligation to purchase Visual Testbench Licenses pursuant to the OEM agreement. The Company did not receive any revenue from CSC during 1999 and does not expect to receive any additional revenue from sales of Visual Testbench licenses. Revenue generated pursuant to another OEM agreement accounted for 11.0% of the Company's total revenue for the year ended December 31, 1999. Sales through a single distributor accounted for 21.5%, 14.0%, and 12.1% of the Company's total revenue in 1999, 1998 and 1997, respectively. The Company entered into an agreement with Seiko Instruments, Inc. (Seiko) during the first quarter of 1996, which granted to Seiko an exclusive right to distribute and support certain Summit products in Japan. Under the terms of the agreement, Seiko will pay the Company a distribution rights fee of $1.1 million during the period of the agreement which is three years ending February 1999. The Company received payments from Seiko of $100,000, $200,000, and $800,000 in 1998, 1997 and 1996, respectively. In the years ended December 31, 1998, 1997 and 1996, the Company recognized revenue of $367,000 associated with this agreement. Foreign operations of Summit Design (EDA) Ltd. accounted for less than 10% of total revenue of the Company in each of the three years in the period ended December 31, 1999. Identifiable assets of the Company's Israeli subsidiary were less than 10% of total assets at December 31, 1999. 19. RELATED PARTIES Summit Design (EDA) Ltd. leased its corporate offices from a stockholder under a four-year sublease agreement which expired in December 1998, on the same terms and conditions that the stockholder leases such space. Lease expense paid to the stockholder for the year ended December 31, 1998 and 1997 was $180,000 and $145,000, respectively. Effective April 1, 1996, the Company invested $100,000 for a minority interest in a joint venture corporation, Asia Design Corporation ("ADC"), which acquired the exclusive rights to sell, distribute and support all of the Company's products in the Asia-Pacific region, excluding Japan. In May 1998, the Company exchanged a portion of its investment in the joint venture for a 50% non-controlling interest in Summit Design Asia, Ltd. ("SDA"). SDA also acquired an equity investment in ADC. In June 1998, Summit loaned SDA $750,000, which is guaranteed by ADC. SDA acquired from ADC the exclusive rights to sell, distribute and support Summit's products in Asia Pacific region, excluding Japan. SDA granted distribution rights to Summit's products to ADC for the Asia Pacific region, excluding Japan. In December 1998, SDA cancelled ADC's distribution rights in all areas except Korea. In April 1999, SDA granted non-exclusive distribution rights to Semiconductor Technologies Australia for the Asia Pacific region, excluding Japan and Korea. As of December 31, 1999 and 1998, the Company owned 50% of SDA and 30% of ADC through direct and indirect ownership. The Company has reflected in other income a loss in equity of and loans to the joint ventures of $230,000, $360,000, and $77,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Total product licenses and maintenance revenue for sales to the joint venture totaled approximately $293,000, $501,000, and $590,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Total accounts receivable, with payment terms similar to other customers in the Asia-Pacific region, was $12,000 and $67,000 at December 31, 1999 and 1998, respectively. QUARTERLY FINANCIAL DATA (UNAUDITED): The following table sets forth selected unaudited quarterly financial information for each of the eight quarters in the period ended December 31, 1999:
Three-Month Periods Ended --------------------------------------------------------------------------------------------------- 1999 1998 ----------------------------------------------- ------------------------------------------------ MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ----------- ----------- ------------ ----------- ------------ ----------- ----------- (in thousands, except per share data) Revenue $ 6,816 $7,182 $7,854 $8,382 $10,357 $ 11,012 $ 11,314 $ 10,915 Gross profit 6,262 6,541 7,227 7,834 9,774 10,449 10,701 10,314 Net income (loss) (2,234) (1,004) (2,300) 717 1,402 1,455 1,761 483 Net income (loss) per share-basic $ (0.14) $(0.06) $(0.15) $ 0.05 $ 0.09 $ 0.10 $ 0.12 $ 0.03 Net income (loss) per share-diluted $ (0.14) $(0.06) $(0.15) $ 0.04 $ 0.09 $ 0.09 $ 0.11 $ 0.03
The sum of quarterly earnings (loss) per share does not equal annual earnings (loss) per share as a result in the computation of quarterly versus annual average shares outstanding. 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information set forth in the sections entitled "Election of Class II Directors" and "Compliance with Section 16(a) of the Securities Exchange Act" contained in the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders, to be filed by the Company with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year ended December 31, 1999, except that the information required by this item concerning the executive officers of the Company is incorporated by reference to the information set forth in the section entitled "Executive Officers of the Company" at the end of Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth in the section entitled "Executive Officer Compensation" contained in the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year ended December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" contained in the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders and is incorporated herein by reference to be filed by the Company with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year ended December 31, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth in the section entitled "Certain Transactions" contained in the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year ended December 31, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS The following financial statements and the Report of Independent Accountants therein are filed as part of this Form 10-K:
Page No. - ------------------------------------------------------------------------------------------------------------ Report of Independent Accountants 37 Consolidated Balance Sheets as of December 31, 1999 and 1998 38 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 39 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 40 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 41 Notes to Consolidated Financial Statements 42
55 (a)(2) FINANCIAL STATEMENT SCHEDULE The following financial statement schedule for the years ended December 31, 1997, 1998 and 1999, filed as part of this Form 10-K should be read in conjunction with the consolidated financial statements and related notes thereto and report of independent accountants filed herewith:
Page No. -------- Schedule II Valuation and Qualifying Accounts 60 Report of Independent Accountants on financial statement schedule 61
Schedules not listed above have been omitted because the information required to be set forth therein is not required, not applicable or the information is otherwise included elsewhere in this Form 10-K. (a)(3) EXHIBITS
Exhibit No. ------------ 2.1 Agreement and Plan of Reorganization dated as of February 17, 1997. (2) 2.2 Assets Purchase Agreement between the Registrant, Credence Systems Corporation and Test Systems, Strategies, Inc., dated as of May 19, 1997. (3) 2.3 Agreement and Plan of Reorganization between the Registrant, Star Acquisition, Inc. and Simulation Technologies Corp. date as of September 5, 1997. (6) 3.1 Amended and Restated Certificate of Incorporation. (1) 3.2 Amended and Restated Bylaws. (5) 4.1 Specimen Common Stock Certificate of Company. (1) 4.2 Investors' Rights Agreement between the Registrant and the parties named therein dated February 10, 1994, as amended. (1) 10.1 Form of Indemnification Agreement between Registrant and its executive officers and directors (1) 10.2* 1994 Stock Plan, as amended. (1) 10.3* 1996 Employee Stock Purchase Plan. (1) 10.4* 1996 Director Option Plan. (1) 10.5* Employment Agreement between the Registrant and Larry J. Gerhard dated February 25, 1999. (14) 10.6* Employment Agreement between the Registrant and C. Albert Koob dated July 30, 1999. (16) 10.7* Employment agreement between the Registrant and Richard Davenport dated October 24, 1999. (17) 10.8* Employment agreement between the Registrant and Arthur Fletcher dated July 1, 1997. (10) 10.9* Employment Agreement between the Registrant and Eric Benhayoun dated February 25, 1999. (16) 10.10* Employment Agreement between the Registrant and Moshe Guy dated February 25, 1999. (16) 10.11* Employment Agreement between the Registrant and Joseph Masarich dated December 22, 1997. (10) 10.12+ Software OEM License Agreement between the Registrant, Test System Strategies Inc. and Credence Systems Corporation dated May 19, 1997. (5) 10.13 Lease Agreement between the Registrant and Petula Associates Ltd. And Koll Creekside Associates II dated October 26, 1993, as amended. (1) 10.14 Sublease Agreement, dated as of January 1993 between DCL Technologies, Ltd. and SEE Technologies, Ltd. (1) 10.15 Bank Line of Credit Agreement between Registrant and U.S. National Bank of Oregon dated June 24, 1997. (7) 10.16* Employment Agreement between the Registrant and Sharon L. Beelart dated January 5, 1998. (14) 10.17+ Distributor Agreement between the Registrant and Seiko Instruments, Inc., dated February 1, 1996. (1) 10.18 Option Exchange Agreement dated as of June 30, 1998 among the Registrant, ProSoft Oy, and Optionholders of ProSoft Oy. (12) 10.19* First Amendment to Employment Agreement between the Registrant and Richard Davenport dated December 21, 1998. (14) 10.20 Loan Agreement between the Registrant and Moshe Guy dated May 20, 1997. (5) 56 10.21 Loan Agreement between the Registrant and Dasys, Inc. dated July 26, 1997.(7) 10.22* TriQuest Design Automation, Inc. 1995 Stock Option Plan. (4) 10.23* Simulation Technologies 1994 Stock Option Plan and form of agreement thereto.(8) 10.24* 1997 NonStatutory Stock Option Plan and for of agreement thereto. (9) 10.25 Amendment to the Distributor Agreement between the Registrant and Seiko Instruments, Inc. (10) 10.26++ Amendment to Software OEM License Agreement between the Registrant and Credence Systems Corporation dated December 18, 1998. (14) 10.27 Shareholders Agreement between the Registrant and Summit Design Asia, Ltd. dated May 12, 1998. (13) 10.28 Shareholders Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.29+ Distributor Agreement between the Registrant and Summit Design Asia, Ltd. Dated May 12, 1998. (13) 10.30 Loan Agreement between the Registrant and Summit Design Asia, Ltd. dated June 2, 1998. (13) 10.31 Joint Escrow Agreement between the Registrant, Perkins Coie (Hong Kong) Limited, Summit Design Asia, Ltd. and Asia Design Corporation, Ltd. (13) 10.32 Guarantee Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.33 Security Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.34 Amendment to Employment Agreement between the Registrant and Larry J. Gerhard dated April 30, 1999. (15) 21.1 List of Subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP 24.1 Power of attorney, see page 61. 27.1 Financial Data Schedule.
(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-06445) as declared effective by the Securities and Exchange Commission October 17, 1996. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 28, 1997. (3) Incorporated by reference to the Registrant's Current Report on Form 8-K dated July 11, 1997. (4) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-32551) as filed on July 31, 1997. (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to the Registrant's Current Report on Form 8-K dated September 9, 1997. (7) Incorporated by reference to the Registrant's Quarterly Report on From 10-Q for the quarter ended September 30, 1997. (8) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-47481) as filed on March 6, 1998. (9) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-47545) as filed on March 9, 1998. (10) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (12) Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 30, 1998. (13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (14) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. + Documents for which confidential treatment has been granted. ++ Document for which confidential treatment has been requested. * Indicates management compensatory plan, contract or arrangement
57 (b) REPORTS ON FORM 8-K On December 7, 1998, the Company filed a Current Report on Form 8-K to update the status of the Company's proposed acquisition of OrCAD, Inc. On February 2, 1999, the Company filed a Current Report on Form 8-K dated February 2, 1999 in connection with the termination of the proposed acquisition of OrCAD, Inc. On July 6, 1999, the Company filed a Current Report on Form 8-K dated July 6, 1999 in connection with a press release issued by the Company announcing preliminary results for the second quarter of 1999. On September 21, 1999, the Company filed a Current Report on Form 8-K dated September 16, 1999 in connection with a press release issued by the Company announcing the signing of a definitive agreement to merge the Company with Viewlogic Systems, Inc. (c) EXHIBITS See Item 14(a)(3) above. (d) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1st day of March 2000. SUMMIT DESIGN, INC. By: /s/ Sean Whiteley-Ross -------------------------- Sean Whiteley-Ross Chief Accounting Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William V. Botts, Richard Davenport and Sean Whiteley-Ross, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date - ---------------------------------------- --------------------------------------- -------------------- /s/ WILLIAM V. BOTTS Chairman of the Board, Chief March 1, 2000 - --------------------------- Executive Officer and Interim Chief William V. Botts Financial Officer /s/ ART FLETCHER Vice President - Finance, Treasurer March 1, 2000 - --------------------------- and Director of Investor Relations Art Fletcher /s/ SEAN WHITELEY-ROSS Chief Accounting Officer and March 1, 2000 - ---------------------------- Corporate Controller Sean Whiteley-Ross /s/ AMIHAI BEN-DAVID Director March 1, 2000 - ---------------------------- Amihai Ben-David /s/ STEVEN P. ERWIN Director March 1, 2000 - ---------------------------- Steven P. Erwin /s/ BARBARA M. KARMEL Director March 1, 2000 - ---------------------------- Barbara M. Karmel
59 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1998, 1999 ------------------------------------------------------------- Additions/ (credits) Balance at charged to Balance at Beginning costs and end of of period expenses Deductions period ------------- ------------- ------------- --------------- Year ended December 31, 1997: Allowance for doubtful accounts 433 270 111 592 Year ended December 31, 1998: Allowance for doubtful accounts 592 (63) 18 511 Year ended December 31, 1999: Allowance for doubtful accounts 511 (84) - 427
60 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Summit Design, Inc. Our audits of the consolidated financial statements referred to in our report dated January 28, 2000 appearing in the 1999 Annual Report to Shareholders of Summit Design, Inc. and subsidiaries (which report and consolidated financial statements are incorporated in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS LLP Portland, Oregon January 28, 2000 61 EXHIBIT INDEX
Exhibit No. ------------ 2.1 Agreement and Plan of Reorganization dated as of February 17, 1997. (2) 2.2 Assets Purchase Agreement between the Registrant, Credence Systems Corporation and Test Systems, Strategies, Inc., dated as of May 19, 1997. (3) 2.3 Agreement and Plan of Reorganization between the Registrant, Star Acquisition, Inc. and Simulation Technologies Corp. date as of September 5, 1997. (6) 3.1 Amended and Restated Certificate of Incorporation. (1) 3.2 Amended and Restated Bylaws. (5) 4.1 Specimen Common Stock Certificate of Company. (1) 4.2 Investors' Rights Agreement between the Registrant and the parties named therein dated February 10, 1994, as amended. (1) 10.1 Form of Indemnification Agreement between Registrant and its executive officers and directors (1) 10.2* 1994 Stock Plan, as amended. (1) 10.3* 1996 Employee Stock Purchase Plan. (1) 10.4* 1996 Director Option Plan. (1) 10.5* Employment Agreement between the Registrant and Larry J. Gerhard dated February 25, 1999. (14) 10.6* Employment Agreement between the Registrant and C. Albert Koob dated July 30, 1999. (16) 10.7* Employment agreement between the Registrant and Richard Davenport dated October 24, 1999. (17) 10.8* Employment agreement between the Registrant and Arthur Fletcher dated July 1, 1997. (10) 10.9* Employment Agreement between the Registrant and Eric Benhayoun dated February 25, 1999. (16) 10.10* Employment Agreement between the Registrant and Moshe Guy dated February 25, 1999. (16) 10.11* Employment Agreement between the Registrant and Joseph Masarich dated December 22, 1997. (10) 10.12+ Software OEM License Agreement between the Registrant, Test System Strategies Inc. and Credence Systems Corporation dated May 19, 1997. (5) 10.13 Lease Agreement between the Registrant and Petula Associates Ltd. And Koll Creekside Associates II dated October 26, 1993, as amended. (1) 10.14 Sublease Agreement, dated as of January 1993 between DCL Technologies, Ltd. and SEE Technologies, Ltd. (1) 10.15 Bank Line of Credit Agreement between Registrant and U.S. National Bank of Oregon dated June 24, 1997. (7) 10.16* Employment Agreement between the Registrant and Sharon L. Beelart dated January 5, 1998. (14) 10.17+ Distributor Agreement between the Registrant and Seiko Instruments, Inc., dated February 1, 1996. (1) 10.18 Option Exchange Agreement dated as of June 30, 1998 among the Registrant, ProSoft Oy, and Optionholders of ProSoft Oy. (12) 10.19* First Amendment to Employment Agreement between the Registrant and Richard Davenport dated December 21, 1998. (14) 10.20 Loan Agreement between the Registrant and Moshe Guy dated May 20, 1997. (5) 10.21 Loan Agreement between the Registrant and Dasys, Inc. dated July 26, 1997.(7) 10.22* TriQuest Design Automation, Inc. 1995 Stock Option Plan. (4) 10.23* Simulation Technologies 1994 Stock Option Plan and form of agreement thereto.(8) 10.24* 1997 NonStatutory Stock Option Plan and for of agreement thereto. (9) 10.25 Amendment to the Distributor Agreement between the Registrant and Seiko Instruments, Inc. (10) 10.26++ Amendment to Software OEM License Agreement between the Registrant and Credence Systems Corporation dated December 18, 1998. (14) 10.27 Shareholders Agreement between the Registrant and Summit Design Asia, Ltd. dated May 12, 1998. (13) 10.28 Shareholders Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.29+ Distributor Agreement between the Registrant and Summit Design Asia, Ltd. Dated May 12, 1998. (13) 10.30 Loan Agreement between the Registrant and Summit Design Asia, Ltd. dated June 2, 1998. (13) 10.31 Joint Escrow Agreement between the Registrant, Perkins Coie (Hong Kong) Limited, Summit Design Asia, Ltd. and Asia Design Corporation, Ltd. (13) 10.32 Guarantee Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.33 Security Agreement between the Registrant and Asia Design Corporation, Ltd. Dated May 12, 1998. (13) 10.34 Amendment to Employment Agreement between the Registrant and Larry J. Gerhard dated April 30, 1999. (15) 21.1 List of Subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP 24.1 Power of attorney, see page 61. 27.1 Financial Data Schedule.
(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-06445) as declared effective by the Securities and Exchange Commission October 17, 1996. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 28, 1997. (3) Incorporated by reference to the Registrant's Current Report on Form 8-K dated July 11, 1997. (4) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-32551) as filed on July 31, 1997. (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to the Registrant's Current Report on Form 8-K dated September 9, 1997. (7) Incorporated by reference to the Registrant's Quarterly Report on From 10-Q for the quarter ended September 30, 1997. (8) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-47481) as filed on March 6, 1998. (9) Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-47545) as filed on March 9, 1998. (10) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (12) Incorporated by reference to the Registrant's Current Report on Form 8-K dated June 30, 1998. (13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (14) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. + Documents for which confidential treatment has been granted. ++ Document for which confidential treatment has been requested. * Indicates management compensatory plan, contract or arrangement
62 EX-21.1 2 EXHIBIT 21.1 EXHIBIT 21.1 List of Subsidiaries, Summit Design, Inc. 1. Summit Design (EDA) Ltd., an Israeli Corporation 2. Summit Verification, Inc., a Delaware Corporation 3. ProSoft Oy, a Finnish Corporation 4. Summit Design France, a French Corporation 5. Summit Design, GmbH, a German Corporation 6. Summit Design UK Limited, a British Corporation EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-18063, 333-47481, 333-32551, 333-47545, 333-84593 and 333-77835), Form S-3 (File Nos. 333-46557 and 333-44003) and Form S-4 (File No. 333-89491) of Summit Design, Inc. and subsidiaries of our report dated January 28, 2000 relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 28, 2000 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers, LLP Portland, Oregon March 1, 2000 EX-27.1 4 EXHIBIT 27.1
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 28,403 0 7,818 427 0 37,349 7,198 3,600 44,044 12,647 0 0 0 158 31,151 44,044 0 30,235 0 2,371 33,832 (84) 4 (4,821) 0 (4,821) 0 0 0 (4,821) (0.31) (0.31)
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