-----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, U+uqHVzxUz3tAT08nVSQ3UBpXM53RrnTk2M6qbdfwzemlQRXbnTtU4s4amA2P4Vj 899mMOrOrYmf2i1LLh8Qeg== 0001047469-97-004993.txt : 19971117 0001047469-97-004993.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004993 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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-Q SEC ACT: SEC FILE NUMBER: 000-20923 FILM NUMBER: 97721366 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-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q - ------------------------------------------------------------------------------- X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1997 or - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ________ - ------------------------------------------------------------------------------- Commission file number: 0-20923 SUMMIT DESIGN, INC. (Exact name of registrant as specified in its charter) DELAWARE 93-1137888 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 9305 S. W. GEMINI DRIVE, BEAVERTON, OREGON 97008 (Address of principal executive office) Registrant's Telephone number, including area code: (503) 643-9281 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 4, 1997, the Registrant had outstanding 14,655,899 shares of Common Stock. SUMMIT DESIGN, INC. INDEX PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet as of September 30, 1997 (unaudited) and December 31, 1996. 3 Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 1997 and 1996 (unaudited). 4 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1997 and 1996 (unaudited). 5 Notes to Condensed Consolidated Financial Statements. 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 Not Applicable PART II OTHER INFORMATION Item 2 Changes in Securities and Use of Proceeds 27 Item 6 Exhibits and Reports on Form 8-K 27 Item 1 and Item 3 through Item 5 Not Applicable Signature 28 Exhibit Index 29 -2- SUMMIT DESIGN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, 1997 December 31, 1996 ------------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ............. $ 17,224 $ 19,772 Accounts receivable, net .............. 5,218 5,567 Prepaid expenses and other ............ 519 487 ------------------ ----------------- Total current assets ................ 22,961 25,826 Furniture and equipment, net ............ 2,577 1,832 Notes receivable from related parties ... 490 - Purchased technology, net ............... 1,018 - Intangibles, net ........................ 727 - Deferred taxes .......................... 1,037 500 Deposits and other assets ............... 496 468 ------------------ ----------------- Total assets ........................ $ 29,306 $ 28,626 ------------------ ----------------- ------------------ ----------------- LIABILITIES Current liabilities: Long-term debt, current portion ....... $ 391 $ 462 Capital lease obligation, current portion ............................... 41 65 Accounts payable ...................... 1,893 1,454 Accrued liabilities ................... 5,247 2,869 Deferred revenue ...................... 5,033 3,758 ------------------ ----------------- Total current liabilities ........... 12,605 8,608 Long-term debt, less current portion .... 675 675 Capital lease obligations, less current portion ......................... 59 95 Deferred revenue, less current portion .. 333 67 ------------------ ----------------- Total liabilities ................... 13,672 9,445 ------------------ ----------------- Commitments and contingencies STOCKHOLDERS' EQUITY Common stock, $.01 par value. Authorized 30,000 shares; issued and outstanding 14,656 shares at September 30, 1997 and 13,873 shares at December 31, 1996.................. 146 139 Additional paid-in capital .............. 50,585 33,235 Accumulated deficit ..................... (23,552) (14,193) Treasury stock . 939 shares at September 30, 1997 ................... (11,545) - ------------------ ----------------- Total stockholders' equity .......... 15,634 19,181 ------------------ ----------------- Total liabilities and stockholders' equity ................ $ 29,306 $ 28,626 ------------------ ----------------- ------------------ -----------------
The accompanying notes are an integral part of the condensed consolidated financial statements -3- SUMMIT DESIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Nine Months Ended Ended September 30, September 30, --------------------- ---------------------- 1997 1996 1997 1996 ---------- -------- ---------- --------- Revenue: Product licenses..................... $ 6,430 $ 3,801 $ 16,884 $10,992 Maintenance and services............. 1,345 1,167 4,244 3,062 Other................................ 91 141 358 425 ---------- -------- ---------- --------- Total revenue................... 7,866 5,109 21,486 14,479 Cost of revenue: Product licenses..................... 184 156 533 434 Maintenance and services............. 171 122 421 333 ---------- -------- ---------- --------- Total cost of revenue........... 355 278 954 767 ---------- -------- ---------- --------- Gross profit............... 7,511 4,831 20,532 13,712 ---------- -------- ---------- --------- Operating expenses: Research and development............. 1,611 1,453 4,698 4,310 Sales and marketing.................. 2,690 2,357 7,778 6,761 General and administrative........... 959 785 3,014 2,329 In-process technology................ 19,937 - 19,937 - ---------- -------- ---------- --------- Total operating expenses........ 25,197 4,595 35,427 13,400 ---------- -------- ---------- --------- Income (loss) from operations............. (17,686) 236 (14,895) 312 Interest expense.......................... (1) (17) (10) (93) Other income, net......................... 348 27 797 49 Gain on sale of TDS product line.......... 5,569 - 5,569 - ---------- -------- ---------- --------- Income (loss) before income taxes......... (11,770) 246 (8,539) 268 Income tax provision...................... 640 34 820 243 ---------- -------- ---------- --------- Net income (loss)......................... $(12,410) $ 212 $(9,359) $ 25 ---------- -------- ---------- --------- ---------- -------- ---------- --------- Net income (loss) per share................ $ (0.87) $ 0.02 $ (0.67) $ (0.00) ---------- -------- ---------- --------- ---------- -------- ---------- --------- Number of shares used in per share calculation............................... 14,250 12,959 14,039 12,608
The accompanying notes are an integral part of the condensed consolidated financial statements -4- SUMMIT DESIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, ----------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net income (loss).................................... $ (9,359) $ 25 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................... 624 663 Gain on sale of TDS product line................. (5,569) - Writeoff of acquired in-process technology....... 19,937 - Loss on asset disposition........................ (1) 5 Changes in assets and liabilities: Accounts receivable.......................... 855 1,403 Prepaid expenses and other................... 5 (99) Accounts payable............................. 434 (65) Accrued liabilities.......................... 1,742 557 Deferred revenue............................. 1,294 1,081 Deferred taxes............................... 537 - Other, net................................... (76) 194 --------- --------- Net cash provided by operating activities........... 9,349 3,764 --------- --------- Cash flows from investing activities: Additions to furniture and equipment................ (1,252) (553) Acquisitons, net of cash received................... (3,819) - Proceeds from sale of TDS product line, net......... 4,643 - Proceeds from sale of assets........................ 8 6 Notes receivable from related parties............... (490) - Invest in Joint Venture............................. - (100) --------- --------- Net cash used in investing activities............ (910) (647) --------- --------- Cash flows from financing activities: Issuance of common stock, net of issuance costs 700 119 Payments to acquire treasury stock.................. (11,555) - Issuance of TriQuest Preferred Stock................ - 986 Stock issuance costs................................ - 674 Repurchase of common stock.......................... - (2) Proceeds from long-term debt........................ - 73 Short term borrowings............................... - (164) Principal payments of debt obligations.............. (71) (347) Principal payments of capital lease obligations..... (61) (1,050) --------- --------- Net cash used in financing activities............ (10,987) (1,059) --------- --------- Increase (decrease) in cash and cash equivalents.................................... (2,548) 2,058 Cash and cash equivalents, beginning of period.......... 19,772 704 --------- --------- Cash and cash equivalents, end of period................ $ 17,224 $ 2,762 --------- --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest......................................... $ 10 $ 64 Income taxes..................................... 104 188 Supplemental disclosure of non-cash investing and financing activities: Equipment acquired under capital lease........... - 23 Acquisition, net of cash acquired: Net current assets, other than cash acquired........ $ (1,600) Furniture and equipment............................. 377 In-process technology............................... 19,937 Purchased technology and intangibles................ 1,772 Stock issued........................................ (16,667) Cash used, net of cash acquired..................... (3,819)
The accompanying notes are an integral part of the condensed consolidated financial statements -5- SUMMIT DESIGN, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared by Summit Design, Inc. ("the Company") in accordance with the rules and regulations of the Securities and Exchange commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The December 31, 1996 balance sheet was derived from the audited financial statements but does not include all of the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 1996, 1995, and 1994 included in the Company's Form 10-K filed for December 31, 1996. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997 or any other future interim period, and the Company makes no representations related thereto. 2. ACQUISITION OF TRIQUEST DESIGN AUTOMATION, INC. On February 28, 1997, the Company acquired TriQuest Design Automation, Inc., a California corporation (TriQuest"). TriQuest develops hardware description language ("HDL") analysis, optimization and verification tools for the design of high performance, deep submicron integrated circuits. The aggregate consideration for the acquisition (including shares of common stock reserved for issuance upon exercise of TriQuest options assumed by the Company) was 775,000 shares of common stock. The transaction was accounted for as a "pooling of interests" in accordance with generally accepted accounting principles. In compliance with such principles, the Company's operating results have been restated to include the results of TriQuest as if the acquisition had occurred at the beginning of the first period presented. The following presents the previously separate results of operations of TriQuest for the year ended December 31, 1996 and for the two months ended February 28, 1997: December 31, 1997 February 28, 1997 ----------------- ----------------- (In thousands, except per share data) Revenues $ 151 $ 199 ------- ------- ------- ------- Net loss $ 1,425 $ 143 ------- ------- ------- ------- 3. SALE OF TDS PRODUCT LINE On July 11, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products (the "Asset Sale") to Credence Systems Corporation ("CSC") for $5 million. CSC assumed certain liabilities, including the Company's obligations under TDS maintenance contracts entered into prior to the closing. CSC also agreed to purchase $2 million of Visual interface licenses in the second quarter of 1997. TDS product license, maintenance and services and other revenue for the three months ended September 30, 1997 and 1996 were $0 and $1,758,000, respectively, and for the nine months ended September 30, 1997 and 1996 were $3,530,000 and $5,400,000, respectively, and $7,331,000 for the year ended December 31, 1996. The Company and CSC also entered into a Software OEM License agreement ("OEM Agreement") in which CSC agreed to purchase $16 million of Visual Testbench licenses over a thirty-month period beginning July 1997 subject to specified quarterly maximums and certain additional conditions. Additionally CSC entered into an 18 month maintenance agreement beginning July 1997 for $2 million associated with the Visual Testbench product. -6- SUMMIT DESIGN, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 4. ACQUISITION OF SIMULATION TECHNOLOGIES CORP. On September 9, 1997, the Company acquired Simulation Technologies Corp. ("SimTech"), a Minnesota Corporation. SimTech develops and distributes hardware-software co-verification, code coverage and HDL debugging software. The aggregate consideration for the acquisition (including shares of common stock reserved for issuance upon exercise of SimTech options assumed by the Company) was 1,980,000 shares of Summit common stock valued at $16,667,000 and $3,875,000 in cash. The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations for the period from September 9, 1997 are included in the consolidated financial statements. The purchase price was allocated to the net assets acquired based on their estimated fair market values at the date of acquisition. The fair value of tangible assets acquired and liabilities assumed were $1.3 million and $2.1 million, respectively. In addition, $19.9 million was allocated to in-process technology which had not reached technological feasibility and had no probable alternative uses, which the Company expensed as of the acquisition date. The remainder of the purchase price was allocated to Purchased technology ($1,037,000) and identifiable intangibles ($735,000), which are being amortized on a straight-line basis over three and five years respectively. 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, 1996 September 30, 1997 ----------------- ----------------- (In thousands, except per share data) Revenues $ 24,038 $ 25,325 -------- -------- -------- -------- Net Income $ 2,872 $ 8,409 -------- -------- -------- -------- Net income per common share $ 0.21 $ 0.53 -------- -------- -------- -------- Number of shares used in per share calculation 13,629 15,827 -------- -------- -------- -------- In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisition been consummated at the beginning of 1996 or at the beginning of 1997 or under the ownership and management of the Company. In connection with this transaction the Company also repurchased 939,000 shares of Summit common stock in private transactions at an average price of $12.30 per share for an aggregate of $11,555,000 in cash. 5. NOTE RECEIVABLE In July 1997, the Company entered into an agreement to lend up to $2.5 million to an independent software development company pursuant to a secured loan agreement. Borrowings under this agreement bear interest at prime rate plus 2%. 6. BALANCE SHEET COMPONENTS, (IN THOUSANDS) September 30, 1997 December 31, 1996 ------------------ ----------------- (Unaudited) Accounts Receivable: Trade receivables....................... $ 5,667 $ 6,000 Less allowance for doubtful accounts.... (449) (433) ------------------ ----------------- $ 5,218 $ 5,567 ------------------ ----------------- ------------------ ----------------- Furniture and equipment: Office furniture equipment............. $ 530 $ 513 Computer equipment..................... 4,401 3,124 Leasehold improvements................. 66 41 In-process assets...................... 102 - ------------------ ----------------- 5,099 3,678 Less: accumulated depreciation........... (2,522) (1,846) ------------------ ----------------- $ 2,577 $ 1,832 ------------------ ----------------- ------------------ ----------------- -7- SUMMIT DESIGN, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Accrued expenses: Commissions payable.................... $ 46 $ 173 Payroll and related benefits........... 2,314 1,610 Accrued management relocation costs.... 160 24 Accounting and legal................... 418 301 Federal and state income taxes payable. 1,256 18 Sales taxes payable.................... 117 96 Other.................................. 936 647 ------------------ ----------------- Total accrued expenses.............. $ 5,247 $ 2,869 ------------------ ----------------- ------------------ ----------------- Long-term debt: Marketing grant payable to the Israeli $ 364 $ 364 government Chief Scientist grant payable to the Israeli government.... 702 773 ------------------ ----------------- Total long-term debt..................... 1,066 1,137 Less current portion..................... (391) (462) ------------------ ----------------- Non current portion...................... $ 675 $ 675 ------------------ ----------------- ------------------ ----------------- 7. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS During February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and Statement of Financial Accounting Standards No. 129 "Disclosure of Information about Capital Structure" ("SFAS 129"), which are effective for the Company's 1997 fiscal year. The Company's management has studied the implications of SFAS 128 and SFAS 129, and based on the initial evaluation, does not expect the adoption to have a material impact on the Company's financial condition or results of operations. In June 1997, FASB issued SFAS No. 130, "Comprehensive Income" SFAS No. 130 becomes effective in 1998 and requires reclassification of earlier financial statements for comparative purposes. SFAS No. 130 requires that changes in the amounts of certain items, including foreign currency translation adjustments and gains and losses on certain securities be shown in the financial statements. SFAS No. 130 does not require a specific format for the financial statement in which comprehensive income is reported, but does require that an amount representing total comprehensive income be reported in that statement. Management has not yet determined the effect, if any, of SFAS No. 130 on the consolidated financial statements. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Statement is effective for fiscal years beginning after December 15, 1997. Management has no yet determined the effect, if any, of SFAS No.131 on the consolidated financial statements. In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition", which supersedes SOP 91-1 and is effective for transactions entered into in years beginning after December 15, 1997. Management is currently studying the implications of this Statement and does not expect adoption to have a material impact on the Company's financial condition or results of operations. -8- ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS The following discussion contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Predictions of future events are inherently uncertain. Actual events could differ materially from those predicted in the forward looking statements as a result of the risks set forth in the following discussion, and, in the particular, the risks discussed below under the subheading "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock." OVERVIEW Summit was founded in December 1993 to act as the holding company for Test Systems Strategies, Inc. ("TSSI") and SEE Technologies Software Environment for Engineers Ltd. ("SEE Technologies"), (now Summit Design (EDA) Ltd.) (collectively , the "Reorganization"). TSSI was founded in 1979 to develop and market integrated circuit ("IC" or "chip") manufacturing test products. In January 1993, TSSI retained a new Chief Executive Officer and began to restructure its senior management team. Thereafter, the Company broadened its strategy from focusing primarily on manufacturing test products to include providing graphical Systems Level Design Automation ("SLDA") design creation and verification tools and integrating these with its core technology. As part of its strategy, in early 1994, TSSI acquired SEE Technologies, an Israeli company that, through its predecessor, began operations in 1983 and had operated primarily as a research and development and consulting company focused on the electronic design automation ("EDA") and SLDA market. As a result of the Reorganization, TSSI and SEE Technologies became wholly-owned subsidiaries of Summit in the first quarter of 1994. The Company's ongoing implementation of its strategy has involved significant expenditures. Following the Reorganization, the Company significantly increased its research and development expenditures to support the continued development of SLDA and Design to Test products. To promote its products, the Company has added sales and marketing staff, increasing its sales and marketing expenditures by 147% from 1993 to 1996, and has restructured its key distributor relationships. This concurrent effort to develop products and promote market awareness and acceptance of its products in a new and evolving market contributed to the Company's annual losses. The Company introduced its first SLDA product, Visual HDL for VHDL 1.0, in the first quarter of 1994. This product lacked compiled simulation and operated only on a PC platform. In the third quarter of 1994, with the release of version 2.5, Summit expanded the simulation capability of Visual HDL for VHDL and introduced its UNIX-based version of this product. Prior to the Reorganization, the Company's TDS product and related maintenance revenue accounted for all of the Company's revenue. After the Reorganization, the Company's revenue has been predominantly derived from two product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS. As of July 1, 1997 with the sale of the TDS product line, Design to Test products are no longer a source of revenue. With the acquisition of TriQuest Design Automation ("TriQuest") in February 1997 and Simulation Technologies Corp ("SimTech"), in September 1997,the Company has also derived revenue from verification products which include hardware-software co-verification, code coverage,and HDL debugging products as well as analysis, verification and RTL optimization tools. Revenue consists primarily of fees for licenses of the Company's software products, maintenance and customer training. Revenue from the sale of software licenses is recognized at the later of the time of shipment or satisfaction of all acceptance terms. Maintenance revenue is deferred and recognized ratably over the term of the maintenance agreement, which is typically 12 months. Revenue from customer training is recognized when the service is performed. The Company sells its products through a direct sales force in North America and selected European countries and through distributors in the Company's other international markets. Revenue from product sales through distributors is recognized net of the associated distributor -9- discounts. Fees received for granting distribution rights are deferred and recognized ratably over the term of the distribution agreement. Although the Company has not adopted a formal return policy, the Company generally reimburses customers in full for returned products. Estimated sales returns are recorded upon delivery of the product. The Company's products have a range of prices which depend on platform, HDL language, functionality and duration of license. In addition, the Company's products perform a variety of functions, certain of which are, and in the future may be, offered as separate products or discrete point solutions by the Company's existing and future competitors. For example, certain companies currently offer design entry products without simulators. There can be no assurance that such competition will not cause the Company to offer point solutions instead of, or in addition to, the Company's current software products. Such point solutions would be priced lower than the Company's current product offerings and could cause the Company's average selling prices to decrease. Accordingly, based on these and other factors, the Company expects that average selling prices for its products may continue to fluctuate in the future. The Company has entered into a joint venture with Anam, effective April 1, 1996, pursuant to which the joint venture corporation (Summit Asia) shall acquire exclusive rights to sell, distribute and support all of Summit's products in the Asia-Pacific region, excluding Japan. Summit Asia has acted in such capacity since April 1, 1996. Prior to that date, Anam was an independent distributor of the Company's products in Korea. The amount of revenue from sales through Summit Asia which is remitted to the Company is fixed by the joint venture agreement at a percentage which approximates the percentage applicable to sales through Anam prior to the formation of the joint venture. Excluding one-time sales of technology, sales through Anam accounted for 2.4% and 3.6% of the Company's total revenue and for 21.7% and 33.8% of the Company's revenue attributable to the Asia-Pacific region excluding Japan for the years ended December 31, 1995 and 1994, respectively. For the year ended December 31, 1996, Anam and Summit Asia together accounted for 3.8% of the Company's revenue for the nine months ended September 30, 1997. Summit Asia accounted for 3.0% of the Company's revenue. The Company accounts for its ownership interest in Summit Asia on the equity method of accounting and, as a result, the Company's pro rata share of the earnings and losses of Summit Asia is recognized as income or losses in the Company's income statement in "Other income, net." The Company does not expect Summit Asia to recognize a profit for the foreseeable future and thus does not expect to recognize income from its investment in Summit Asia for the foreseeable future, if at all. Approximately 24%, 51%, 37% and 51% of the Company's total revenue for the three months ended September 30, 1997 and 1996, and for the nine months ended September 30, 1997 and 1996, respectively, were attributable to sales made outside the United States. The decline in the percentage of revenue from sales made outside the United States for the three and nine months ended September 30, 1997 as compared to the same periods in 1996 is primarily the result of domestic sales to one customer. The Company expects that international revenue will continue to represent a significant portion of its total revenue. The Company's international revenue is currently denominated in U.S. dollars. As a result, increases in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. The Company pays the expenses of its international operations in local currencies and does not engage in hedging transactions with respect to such obligations. International sales and operations are subject to numerous risks, including tariff regulations and other trade barriers, requirements for licenses, particularly with respect to the export of certain technologies, collectability of accounts receivable, changes in regulatory requirements, difficulties in staffing and managing foreign operations and extended payment terms. (1) On February 28, 1997, Summit completed its acquisition of TriQuest. TriQuest develops HDL analysis, optimization and verification tools for the design of high performance, deep submicron integrated circuits. The transaction is being accounted for as a "pooling of interest" in accordance with generally accepted accounting principals. - ------------------- (1) This paragraph contains forward-looking statements reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 19 for a discussion of factors that could affect future performance. -10- Effective July 1, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products (the "Asset Sale") to Credence Systems Corporation ("CSC"). The increase in the Company's product licenses revenue during the last nine quarters has been primarily due to increased revenue associated with the Company's SLDA products. The Asset Sale will allow the Company to focus on the development and marketing of these products. Substantially all of the Company's Design to Test product license revenue and related maintenance and services revenue for the year ended December 31, 1996 and the nine months ended September 30, 1997 were attributable to the TDS products. As of July 1, 1997, TDS products ceased to be a source of such revenues. CSC assumed the Company's obligations under TDS maintenance contracts entered into prior to the closing and the Company will not recognize deferred revenue associated with such contracts after June 30, 1997. The Company maintained exclusive rights to its Visual Testbench technology and CSC agreed to purchase a minimum of $16,000,000 of Visual Testbench licenses over a thirty-month period beginning July 1997 subject to specified quarterly maximums and certain additional conditions, and $2,000,000 of maintenance over an eighteen month period beginning July 1997. At the completion of the thirty month period, under certain conditions, CSC may obtain shared ownership to the Visual Testbench for sales into the ATE marketplace. On September 9, 1997, the Company acquired SimTech, a company that develops and distributes hardware-software co-verification, code coverage and HDL debugging software. The aggregate consideration for the acquisition (including shares of common stock reserved for issuance upon exercise of SimTech options assumed by the Company) was 1,980,000 shares of Summit common stock and $3,875,000 in cash. The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations for the period from September 9, 1997 are included in the consolidated financial statements. The purchase price was allocated to the net assets acquired based on their estimated fair market values at the date of acquisition. The fair value of tangible assets acquired and liabilities assumed were $1.3 million and $2.1 million, respectively. In addition, $19.9 million was allocated to in-process technology which had not reached technological feasibility and had no probable alternative uses, which the Company expensed as of the acquisition date. The remainder of the purchase price was allocated to Purchased technology ($1,097,000) and identifiable intangibles ($735,000), which are being amortized on a straight-line basis over three and five years respectively. The Company's net loss per share for the three and nine months ended September 30, 1997 was $(0.87) and (0.67), respectively. Common stock equivalents are excluded from the calculation of earnings per share when the effect on earnings per share is antidilutive. Had the common stock equivalents been included in the earnings per share calculation, net loss per share for the three months and nine months ended September 30, 1997 would have been $(0.82) and $(0.63), respectively. -11- RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain financial data as a percentage of revenue.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Revenue: Product licenses. . . . . . . . . 81.7 % 74.4 % 78.6 % 75.9 % Maintenance and services. . . . . 17.1 22.8 19.8 21.2 Other . . . . . . . . . . . . . . 1.2 2.8 1.6 2.9 -------- -------- -------- -------- Total revenue . . . . . . . . 100.0 100.0 100.0 100.0 Cost of revenue: Product licenses. . . . . . . . . 2.3 3.1 2.5 3.0 Maintenance and services. . . . . 2.2 2.4 2.0 2.3 -------- -------- -------- -------- Total Cost of revenue . . . . 4.5 5.5 4.5 5.3 -------- -------- -------- -------- Gross profit. . . . . . . . . 95.5 94.5 95.5 94.7 Operating expenses: Research and development. . . . . 20.5 28.5 21.9 29.8 Sales and marketing . . . . . . . 34.2 46.1 36.2 46.7 General and administrative (a). . 12.2 15.3 14.0 16.1 In-process technology . . . . . . 253.4 - 92.8 - -------- -------- -------- -------- Total operating expenses. . . 320.3 89.9 164.9 92.6 -------- -------- -------- -------- Income-from operations . . . . . . . . (224.8) 4.6 (69.4) 2.1 Other income (expense), net. . . . . . 75.2 0.2 29.6 (0.2) -------- -------- -------- -------- Income (loss) before income taxes. . . (149.6) 4.8 (39.8) 1.9 Income tax provision . . . . . . . . . 8.2 0.7 3.8 1.7 -------- -------- -------- -------- Net income (loss) . . . . . .. . . . . (157.8) % 4.1 % (43.6) % 0.2 % -------- -------- -------- -------- -------- -------- -------- --------
(a) General and administrative expenses for the nine months ended September 30, 1997 include a one-time charge of $379,000 (1.8% of revenue) for costs relating to the acquisition of TriQuest. TOTAL REVENUE The Company's revenue is comprised of product licenses revenue, maintenance and services revenue and other revenue. Total revenue increased by 54% from $5.1 million for the three months ended September 30, 1996 to $7.9 million for the three months ended September 30, 1997 and total revenue increased by 48.4% from $14.5 million for the nine months ended September 30, 1996 to $21.5 million for the nine months ended September 30, 1997. Sales through one distributor accounted for 12.3% and 13.5% of the Company's total revenue for the three months ended September 30, 1997 and 1996, respectively. Sales through one distributor accounted for 12.9% and 15.5% of the Company's total revenue for the nine months ended September 30, 1997 and 1996, respectively. Sales to one customer accounted for 41.4 % of total revenue for the three months ended September 30, 1997 and 25% of total revenue for the nine months ended September 30, 1997. No single customer accounted for more than 10% of the Company's total revenue for the three months and nine months ended September 30, 1996. -12- PRODUCT LICENSES REVENUE The Company's product licenses revenue is derived from license fees from the Company's SLDA Design and Verification products and additionally, from Design to Test products through June 30, 1997. Product licenses revenue increased by 69.2% from $3.8 million for the three months ended September 30, 1996 to $6.4 million for the three months ended September 30, 1997, and increased by 53.6% from $11.0 million for the nine months ended September 30, 1996 to $16.9 million for the nine months ended September 30, 1997. Because of the addition of SLDA functionality to Visual Testbench beginning with the release of Version 2.0 in December 1996, the Company recognizes revenue from Visual Testbench products as SLDA revenue instead of Design to Test revenue. SLDA revenue increased 135% from $3.4 million for the three months ended September 30, 1996 to $7.9 million for the three months ended September 30, 1997. SLDA revenue increased 98% from $9.1 million for the nine months ended September 30, 1996 to $18.0 million for the nine months ended September 30, 1997. The increase in SLDA revenue for the three months and nine months ended September 30, 1997 over the same period in 1996 was primarily attributable to sales to a single customer and to revenue from the Verification product portfolio that was not shipping in the comparable period in 1996. Significant sales to the single customer are expected to continue over the next nine quarters pursuant to contractual arrangements with that customer. As a result of the sale of all of the assets used in the business of developing and marketing the TDS Products effective July 1, 1997, there were no Design to Test revenues for the three months ended September 30, 1997 as compared to $1 million for the three months ended September 30, 1996. MAINTENANCE AND SERVICES REVENUE The Company's maintenance and services revenue is derived from maintenance contracts and training classes offered to purchasers of the Company's software products. Maintenance and services revenue increased 15.3% from $1.17 million for the three months ended September 30, 1996 to $1.35 million for the three months ended September 30, 1997. Maintenance and services revenue increased 38.6% from $3.1 million for the nine months ended September 30, 1996 to $4.2 million for the nine months ended September 30, 1997. The increase in maintenance and services revenue for the three months ended September 30, 1997 over the same period in 1996, was comprised of $940,000 attributable to additional maintenance revenue related to growth in the installed base of SLDA customers over the previous year, less $761,000 of Design to Test maintenance revenue for the three months ended September 30, 1996 for which there was no revenue in the comparable period in 1997 as a result of the sale of the TDS product line. OTHER REVENUE Other revenue consists of revenue from one-time technology sales and fees received for granting distribution rights. For the three months ended September 30, 1997 and 1996, respectively, other revenue was comprised of $91,000 and $141,000 of distribution rights fees. For the nine months ended September 30, 1997 and 1996, respectively, other revenue was comprised of $358,000 and $425,000 of distribution rights fees. In May 1997 a distribution agreement expired; and, as a result, the distribution rights fees paid at the inception of the agreement and amortized to revenue at $50,000 each quarter over the agreement period will no longer be a source of other revenue. Total other revenue relating to the TDS product line amounted to $42,000 and $75,000 for the nine months ended September 30, 1997 and September 30, 1996, respectively. No material costs were associated with other revenue for the three months and nine months ended September 30, 1997 and 1996. -13- COST OF REVENUE COST OF PRODUCT LICENSES REVENUE Cost of product licenses revenue includes product packaging, software documentation, labor and other costs associated with handling, packaging and shipping product and other production related costs plus the amortization of purchased technology acquired in the SimTech purchase. The cost of product license revenue increased from $156,000 for the three months ended September 30, 1996 to $184,000 for the three months ended September 30, 1997 and increased from $434,000 for the nine months ended September 30, 1996 to $533,000 for the nine months ended September 30, 1997. As a percentage of product licenses revenue, the cost of product licenses revenue decreased from 4.1% of product license revenue to 2.8% of product license revenue for the three months ended September 30, 1996 and 1997, respectively, and also decreased from 3.9% to 3.2% of product license revenue for the nine months ended September 30, 1996 and 1997, respectively. The decrease in the cost of product license revenue as a percent of product license revenue for the three months and nine months ended September 30, 1997 over the same periods in 1996 was due primarily to spreading fixed costs over increased revenues and cost savings from delivering verification products electronically. COST OF MAINTENANCE AND SERVICES REVENUE Cost of maintenance and services revenue, which consists primarily of personnel costs for customer support and training classes offered to purchasers of the Company's products, increased 40.2% from $122,000 for the three months ended September 30, 1996 to $171,000 for the three months ended September 30, 1997 and increased 26.4% from $333,000 for the nine months ended September 30, 1996 to $421,000 for the nine months ended September 30, 1997. As a percentage of maintenance and services revenue, the cost of maintenance and services revenue increased from 10.5% for the three months ended September 30, 1996 to 12.7% for the three months ended September 30, 1997 and decreased from 10.9% for the nine months ended September 30, 1996 to 9.9% for the nine months ended September 30, 1997. The decrease in the cost of maintenance and services revenue as a percent of revenue for the nine months ended September 30, 1997 over the same period in 1996 was primarily the result of the Company operating below forecasted staffing levels during the first half of 1997. The Company has increased headcount during the third quarter of 1997. 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 10.9% from $1.5 million for the three months ended September 30, 1996 to $1.6 million for the three months ended September 30, 1997. Research and development expenses increased 9% from $4.3 million for the nine months ended September 30, 1996 to $4.7 million for the nine months ended September 30, 1997. As a percentage of total revenue, research and development expenses decreased from 28.4% for the three months ended September 30, 1996 to 20.5% for the three months ended September 30, 1997 and also decreased as a percentage of revenue from 29.8% for the nine months ended September 30, 1996 to 21.9% for the nine months ended September 30, 1997. During the three months ended September 30, 1997, in connection with the sale of the TDS product line on July 1, 1997, the Company's research and development staff decreased by 15 engineers. With the acquisition of SimTech on September 9, 1997 the Company added 28 engineers. Additionally, the Company hired 18 new engineers during the third quarter of 1997. The Company continues to believe that significant investment in research and development is required to remain competitive in its markets. -14- 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 14.1% from $2.4 million for the three months ended September 30, 1996 to $2.7 million for the three months ended September 30, 1997 and increased 15% from $6.8 million for the nine months ended September 30, 1996 to $7.8 million for the nine months ended September 30, 1997. The increase for the nine months ended September 30, 1997 over the same period in 1996 was attributable to the addition of ten sales and marketing personnel and the related increased commissions and travel expenses. As a percentage of total revenue, sales and marketing expenses decreased from 46.1% for the three months ended September 30, 1996 to 34.2% for the three months ended September 30, 1997 and decreased from 46.7% for the nine months ended September 30, 1996 to 36.2% for the nine months ended September 30, 1997. The decrease as a percentage of revenue was primarily attributable to the increase in total revenue for 1997. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of the corporate, finance, human resource, information services, administrative, and legal and accounting expenses of the Company. General and administrative expenses increased 22.2% from $785,000 for the three months ended September 30, 1996 to $959,000 for the three months ended September 30, 1997 and increased 29.4% from $2.3 million for the nine months ended September 30, 1996 to $3.0 million for the nine months ended September 30, 1997, which includes a $379,000 one-time charge for costs associated with the acquisition of TriQuest. Excluding this one-time charge, general and administrative expenses increased by $306,000 (13.1%) for the nine months ended September 30, 1997 as compared to the same period in the prior year. As a percentage of total revenue, excluding the one time charge for costs associated with the acquisition of TriQuest, general and administrative expenses decreased from 15.4% for the three months ended September 30, 1996 to 12.2% for the three months ended September 30, 1997 and decreased from 16.1% for the nine months ended September 30, 1996 to 12.3% for the nine months ended September 30, 1997. The decrease as a percentage of total revenue was attributable to the increase in total revenue in 1997. The Company expects general and administrative expenses to increase in absolute dollars to support future sales and operations, including acquired operations, and the additional costs associated with being a public company.(2) ACQUIRED IN-PROCESS TECHNOLOGY For the three months ended September 30, 1997, $19.9 million of the purchase price for the acquisition of Simulation Technologies, Corp. ($22.1 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 estimated fair value determined based upon known valuation techniques in the high technology industry. The technological feasibility of in-process technology had not been established and had no alternative future use at the time of the acquisition. - ------------------- (2) This statement is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 19 for a discussion of factors that could affect future performance. -15- INTEREST EXPENSE Interest expense decreased from $17,000 for the three months ended September 30, 1996 to $1,000 for the three months ended September 30, 1997 and decreased from $93,000 for the nine months ended September 30, 1996 to $10,000 for the nine months ended September 30, 1997 due to decreased borrowings under the Company's bank line of credit, long term debt and capital leases obligations. OTHER INCOME, NET Other income consists of interest income associated with available cash balances, gains or losses from the sale of property and equipment, the Company's pro rata share of the earnings and losses of Summit Design Asia and foreign exchange rate differences resulting from paying operating expenses of foreign operations in the local currency. Other income was $27,000 for the three months ended September 30, 1996 and $348,000 for the three months ended September 30, 1997 and $49,000 for the nine months ended September 30, 1996 and $797,000 for the nine months ended September 30, 1997. The increase in other income was primarily due to increased interest earned on the Company's cash holdings. GAIN ON SALE OF TDS PRODUCT LINE On July 11, 1997 the Company sold substantially all of the assets used in its business of developing and marketing its Test Development Series "TDS" Products to CSC for $5 million. CSC assumed certain liabilities, including the Company's obligations under TDS maintenance contracts entered into prior to the closing. The Company has recorded a gain on the sale of $5,569,000. INCOME TAX PROVISION The income tax provision increased from $34,000 for the three months ended September 30, 1996 to $640,000 for the three months ended September 30, 1997 and increased from $243,000 for the nine months ended September 30, 1996 to $820,000 for the nine months ended September 30, 1997. The Company utilized substantially all of its U.S. Federal and State net operating loss carryforwards to offset a considerable portion of U.S. taxable income for the nine months ending September 30, 1997. The provision of $820,000 for the nine months ended September 30, 1997 is comprised of $1,357,000 of Federal, State and foreign taxes payable, less $537,000 of deferred tax benefit recognized for research and development credits and alternative minimum tax credits. The provision for the nine months ended September 30, 1996 is comprised primarily of Japanese withholding tax on sales in Japan through June 1996 and alternative minimum tax. VARIABILITY OF OPERATING RESULTS The Company has experienced significant quarterly fluctuations in operating results and cash flows and it is likely that these fluctuations will continue in future periods. These fluctuations have been, and may in the future be, caused by a number of factors, including the rate of acceptance of new products, corporate acquisitions and consolidations, product, customer and channel mix, the size and timing of orders, lengthy sales cycles, the timing of new product announcements and introductions by the Company and its competitors, seasonal factors, rescheduling or cancellation of customer orders, the Company's ability to continue to develop and introduce new products and product enhancements on a timely basis, the level of competition, purchasing and payment patterns and product enhancements on a timely basis, the level of competition, purchasing and payment patterns, pricing policies of the Company and its competitors, product quality issues, currency fluctuations and general economic conditions. The Company has generally recognized a substantial portion of its revenue in the last month of each quarter, with this revenue concentrated in the latter part of the month. Any significant deferral of purchases of the -16- Company's products could have a material adverse effect on the Company's business, financial condition and results of operations in any particular quarter, and to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company's revenue is difficult to forecast for several reasons. The market for certain of the Company's software products is evolving. The Company's sales cycle is typically six to nine months and varies substantially from customer to customer. In addition, a significant portion of the Company's sales are made through indirect channels and can be harder to predict. The Company establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on its expectations as to future revenue. As a result, if revenue in any quarter falls below expectations, expenditure levels could be disproportionately high as a percentage of revenue, and the Company's operating results for that quarter would be adversely affected. Based upon the factors described above, the Company believes that its quarterly revenue, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of its results of operations are not necessarily meaningful and that, as a result, such comparisons should not be relied upon as indications of the Company's future performance. Moreover, although the Company's revenue has increased in recent periods, there can be no assurance that the Company's revenue will grow in future periods or that the Company will remain profitable on a quarterly or annual basis. Due to the foregoing or other factors, it is likely that the Company's results of operations may be below investors' and market analysts' expectations in some future quarters, which could have a severe adverse effect on the market price of the Company's Common Stock. EFFECTIVE CORPORATE TAX RATES The Company is taxed in its jurisdictions of operations based on the extent of taxable income generated in each jurisdiction. For income tax purposes, revenue is attributed to the taxable jurisdiction where the sales transactions generating the revenue were initiated. All sales transactions by Summit Design (EDA) Ltd., the Company's Israeli subsidiary, to the Company were recorded as arm's length transactions based on an intercompany pricing agreement. All sales transactions by the Company are to unrelated parties and are based upon prevailing market prices. There is no offset of taxes between the United States and Israel. The Israeli operations are performed entirely by Summit Design (EDA) Ltd., which is a separate taxable Israeli entity. The Company's future effective tax rate depends in part on the availability of United States and Israeli net operating loss ("NOLs") and credit carryforwards. As of December 31, 1996, the Company had recorded U.S. federal and state NOLs of approximately $9.0 million and $5.6 million, respectively and Israeli NOLs of approximately $4.7 million. In addition the Company has $1 million in credit carry forwards for U.S. tax purposes as of December 31, 1996. Neither the United States nor the Israeli taxing authorities have verified the accuracy or availability of the Company's NOLs and credit carryforward amounts. However, as a result of the Asset Sale and the Company's current taxable income in the United States for the nine months ended September 30, 1997, the Company expects to utilize substantially all of the U.S. NOLs to offset current taxable income during 1997.(1) In addition to its NOLs and credit carryforwards, the Company is currently scheduled to receive tax benefits over the next several years under a tax holiday in Israel. The Company's existing Israeli production facility has been granted "Approved Enterprise" status under the Israeli Investment Law, which entitles the Company to reductions in the tax rate normally applicable to Israeli companies with respect to the income generated by its "Approved Enterprise" programs. In particular, the tax holiday covers the seven-year period beginning the first year in which Summit Design (EDA) Ltd. generates taxable income from its "Approved Enterprise" - ------------------------ (1) This paragraph contains forward-looking statements reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on page 19 for a discussion of factors that could affect future performance. -17- (after using any available NOLs), provided that such benefits will terminate in 2006 regardless of whether the seven-year period has expired. The tax holiday provides that, during such seven-year period, a portion of the Company's taxable income from its Israeli operations will be taxed at favorable tax rates. The termination or reduction of the Company's Israeli tax benefits would have a material adverse effect on the Company's overall actual effective tax rate. The Company has recently applied for "Approved Enterprise" status with respect to a new project and intends to apply in the future with respect to additional projects. There can be no assurance that the Company will be granted any approvals and therefore there can be no assurance the Company will continue to receive favorable tax status in Israel. The Company is also subject to the risk that United States and foreign tax laws and rates may change in a future period or periods, and that any such changes may materially adversely affect the Company's tax rate. As a result of the factors described above and other related factors, there can be no assurance that the Company will maintain a favorable tax rate in future periods. Any increase in the Company's effective tax rate, or variations in the effective tax rate from period to period, could have a material adverse effect on the Company's business, financial condition and results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company completed its initial public offering in October 1996, raising $16.2 million, net of offering expenses. Prior to the IPO, the Company had financed its operations primarily through the private placement of approximately $15.4 million of capital stock, as well as capital equipment leases, borrowings under its bank line of credit, Israeli research and development grants and cash generated from operations. As of September 30, 1997, the Company had approximately $17.2 million in cash and cash equivalents and a $1.0 million bank line of credit with United States National Bank of Oregon ("the Bank"). The line of credit expires on April 30, 1998. Borrowings thereunder accrue interest at specified percentages above the prime lending rate based on the Company's ratio of debt to tangible net worth. Advances under the line of credit are limited to a specified percentage of eligible accounts receivable (as defined in the line of credit). Borrowings under the line of credit are collateralized by the Company's accounts receivable, inventory and general intangible assets, including its intellectual property rights. As of September 30, 1997, the Company had no borrowings outstanding under this line of credit. The Company is obligated to lend up to $2,500,000 to an independent software development company pursuant to a secured loan agreement entered into during July 1997. Borrowings under the agreement bear interest at prime rate plus 2%. As of September 30, 1997, the Company had working capital of approximately $10.3 million. Net cash generated by operating activities was approximately $9.3 million and $3.8 million for the nine months ended September 30, 1997 and 1996, respectively. Cash generated by operating activities resulted primarily from profitable operations plus the increase in accounts payable, accrued liabilities and deferred revenue and a decrease in accounts receivable for the nine months ended September 30, 1997. Cash generated from operating activities for the nine months ended September 30, 1996 resulted primarily from the significant collection of accounts receivable and an increase in deferred revenue. Net cash used in investing activities was approximately $910,000 and $647,000 for the nine months ended September 30, 1997 and 1996, respectively. Net cash used in investing activities for the nine months ended September 30, 1997 was related primarily to the acquisition of Simulation Technologies, Corp. in September 1997, the purchase of furniture and equipment and loans to related parties less the cash provided from the sale of the TDS product line. Net cash used in investing activaities for the nine months ended September 30, 1996 related to the acquisition of furniture and equipment and a $100,000 investment in a Joint Venture. Net cash used in financing activities for the nine months ended September 30, 1997,was approximately $11.0 million. Approximately $ 11.6 million was used to purchase treasury stock and $100,000 was used for repayment of long-term debt and capital lease obligations; $700,000 was provided by the issuance of common -18- stock. Net cash used in financing activities for the nine months ended September 30, 1996, was approximately $1.1 million. For the nine months ended September 30, 1996 approximately $1.6 million of cash was used for repayment of short term borrowings, long-term debt and capital lease obligations which was off set by $73,000 of cash provided by proceeds from long-term debt and approximately $1.1 million of cash provided from the issuance of Summit common and TriQuest preferred stock less IPO issuance costs of $674,000. The Company presently believes that its current cash and cash equivalent, together with funds expected to be generated from operations, will satisfy the Company's anticipated working capital and other cash requirements for at least the next 12 months.(2) ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF STOCK HISTORY OF OPERATING LOSSES; FLUCTUATIONS IN QUARTERLY RESULTS While the Company has generated net income in prior quarters, there can be no assurance that the Company will be profitable in the future. In addition, the Company has experienced significant quarterly fluctuations in operating results and cash flows and it is likely that these fluctuations will continue in future periods. These fluctuations have been, and may in the future be, caused by a number of factors, including the rate of acceptance of new products, corporate acquisitions and consolidations, product, customer and channel mix, the size and timing of orders, lengthy sales cycles, the timing of new product announcements and introductions by the Company and its competitors, seasonal factors, rescheduling or cancellation of customer orders, the Company's ability to continue to develop and introduce new products and product enhancements on a timely basis, the level of competition, purchasing and payment patterns, pricing policies of the Company and its competitors, product quality issues, currency fluctuations and general economic conditions. The Company has generally recognized a substantial portion of its revenue in the last month of each quarter, with this revenue concentrated in the latter part of the month. Any significant deferral of purchases of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations in any particular quarter, and to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. The Company's revenue is difficult to forecast for several reasons. The market for certain of the Company's software products is evolving. The Company's sales cycle is typically six to nine months and varies substantially from customer to customer. The Company operates with little product backlog because its products are typically shipped shortly after orders are received. In addition, a significant portion of the Company's sales are made through indirect channels and can be harder to predict. The Company establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on its expectations as to future revenue. As a result, if revenue in any quarter falls below expectations, expenditure levels could be disproportionately high as a percentage of revenue, and the Company's operating results for that quarter would be adversely affected. Based upon the factors described above, the Company believes that its quarterly revenue, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of its results of operations are not necessarily meaningful and that, as a result, such comparisons should not be relied upon as indications of the Company's future performance. Moreover, although the Company's revenue has increased in recent periods, there can be no assurance that the Company's revenue will grow in future periods or that the Company will remain profitable on a quarterly or annual basis. Due to the foregoing or other factors, it is likely that the Company's results of operations may be below investors' and market analysts' expectations in some future quarters, which could have a severe adverse effect on the market price of the Company's Common Stock. - ------------------------ (2) This statement is a forward-looking statement reflecting current expectations. There can be no assurance that the Company's actual future performance will meet the Company's current expectations. Investors are strongly encouraged to review the section entitled "Additional Risk Factors That Could Affect Operating Results and Market Price of Stock" commencing on this page for a discussion of factors that could affect future performance. -19- PRODUCT CONCENTRATION; UNCERTAINTY OF MARKET ACCEPTANCE OF SLDA Prior to July 1997, the Company's revenue was predominantly derived from two product lines, Visual HDL, which includes Visual HDL for VHDL and Visual HDL for Verilog, and TDS. Effective July 1, 1997, as a result of the Asset Sale, TDS products ceased to be a source of revenue. With the acquisition of TriQuest in February 1997 and SimTech in September 1997, the Company also derives revenue from verification products which include hardware-software co-verification, code coverage,and HDL debugging products as well as analysis, verification and RTL optimization tools. The Company believes that SLDA products will continue to account for a substantially all of its revenue in the future. As a result, factors adversely affecting sales of these products, including increased competition, inability to successfully introduce enhanced or improved versions of these products, product quality issues and technological change, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success depends primarily upon the market acceptance of its existing and future SLDA products. The Company commercially shipped its first SLDA product, Visual HDL for VHDL, in the first quarter of 1994. For the three months and the nine months ended September 30, 1997 and for the years ended December 31, 1996, 1995 and 1994, respectively, revenue from SLDA products and related maintenance contracts represented 100%, 83.6%, 60.9%, 43.6% and 34.8%, respectively, of the Company's total revenue. The Company's SLDA products incorporate certain unique design methodologies and thus represent a departure from industry standards for design creation and verification. The Company believes that broad market acceptance of its SLDA products will depend on several factors, including the ability to significantly enhance design productivity, ease of use, interoperability with existing EDA tools, price and the customer's assessment of the Company's financial resources and its technical, managerial, service and support expertise. The Company also depends on its distributors to assist the Company in gaining market acceptance of its products. There can be no assurance that sufficient priority will be given by the Company's distributors to marketing the Company's products or whether such distributors will continue to offer the Company's products. There can be no assurance that the Company's SLDA products will achieve broad market acceptance. A decline in the demand for, or the failure to achieve broad market acceptance of, the Company's SLDA products will have a material adverse effect on the Company's business, financial condition and results of operations. Although demand for SLDA products has increased in recent years, the market for SLDA products is still emerging and there can be no assurance that it will continue to grow or that, even if the market does grow, businesses will continue to purchase the Company's SLDA products. If the market for SLDA products fails to grow or grows more slowly than the Company currently anticipates, the Company's business, financial condition and results of operations would be materially adversely affected. Traditionally, EDA customers have been risk averse in accepting new design methodologies. Because many of Summit's tools embody new design methodologies, this risk aversion on the part of potential customers presents an ongoing marketing and sales challenge to the Company and makes the introduction and acceptance of new products unpredictable. The Company's Visual Testbench product, introduced in the fourth quarter of 1995, provides a new methodology and requires a change in the traditional design flow for creating IC test programs. The Company anticipates a lengthy period of test marketing for the Visual Testbench product. Accordingly, the Company cannot predict the extent, if any, to which it will realize revenue from Visual Testbench in excess of the revenue expected to be received pursuant to an OEM agreement entered into in July 1997. COMPETITION The EDA industry is highly competitive and the Company expects competition to increase as other EDA companies introduce SLDA products. In the SLDA market, the Company principally competes with Mentor -20- Graphics and a number of smaller firms. Indirectly, the Company also competes with other firms that offer alternatives to SLDA and could potentially offer more directly competitive products in the future. Certain of these companies have significantly greater financial, technical and marketing resources and larger installed customer bases than the Company. Some of the Company's current and future competitors offer a more complete range of EDA products and may distribute products that directly compete with the Company's SLDA products by bundling such products with their core product line. In addition, the Company's products perform a variety of functions, certain of which are, and in the future may be, offered as separate products or discrete point solutions by the Company's existing and future competitors. For example, certain companies currently offer design entry products without simulators. There can be no assurance that such competition will not cause the Company to offer point solutions instead of, or in addition to, the Company's current software products. Such point solutions would be priced lower than the Company's current product offerings and could cause the Company's average selling prices to decrease, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company competes on the basis of certain factors including product capabilities, product performance, price, support of industry standards, ease of use, first to market and customer technical support and service. The Company believes that it competes favorably overall with respect to these factors. However, in particular cases, the Company's competitors may offer SLDA products with functionality which is sought by the Company's prospective customers and which differs from that offered by the Company. In addition, certain competitors may achieve a marketing advantage by establishing formal alliances with other EDA vendors. Further, the EDA industry in general has experienced significant consolidation in recent years, and the acquisition of one of the Company's competitors by a larger, more established EDA vendor could create a more significant competitor. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, financial condition and results of operations. There can be no assurance that the Company's current and future competitors will not be able to develop products comparable or superior to those developed by the Company or to adapt more quickly than the Company to new technologies, evolving industry trends or customer requirements. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON ELECTRONICS INDUSTRY MARKET Because the electronics industry is characterized by rapid technological change, short product life cycles, fluctuations in manufacturing capacity and pricing and margin pressures, certain segments, including the computer, semiconductor, semiconductor test equipment and telecommunications industries, have experienced sudden and unexpected economic downturns. During these periods, capital spending is commonly curtailed and the number of design projects often decreases. Because the Company's sales are dependent upon capital spending trends and new design projects, negative factors affecting the electronics industry could have a material adverse effect on the Company's business, financial condition and results of operations. A number of electronics companies, including customers of the Company, have recently experienced a slowdown in their businesses. The Company's future operating results may reflect substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from customers and other factors. DEPENDENCE ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY Because the Company's products must interoperate with EDA products of other companies, particularly simulation and synthesis products, the Company must have timely access to third party software to perform development and testing of its products. Although the Company has established relationships with a variety of EDA vendors to gain early access to new product information, these relationships may be terminated by either party with limited notice. In addition, such relationships are with companies that are current or potential future competitors of the Company, including Synopsys, Mentor Graphics and Cadence. If any of these relationships were terminated and the Company was -21- unable to obtain, in a timely manner, information regarding modifications of third party products necessary for modifying its software products to interoperate with these third party products, the Company could experience a significant increase in development costs, the development process would take longer, product introductions would be delayed and the Company's business, financial condition and results of operations could be materially adversely affected. NEW PRODUCTS AND TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS The EDA industry is characterized by extremely rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. In addition, customers in the EDA industry require software products that allow them to reduce time to market, differentiate their products, improve their engineering productivity and reduce their design errors. The Company's future success will depend upon its ability to enhance its current products, develop and introduce new products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change or emerging industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce products in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if such product releases have been pre-announced, the Company's business, financial condition and results of operations will be materially adversely affected. Software products as complex as those offered by the Company may contain errors that may be detected at any point in the products' life cycles. The Company has in the past discovered software errors in certain of its products and has experienced delays in shipment of products during the period required to correct these errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON DISTRIBUTORS The Company relies on distributors for licensing and support of its products outside of North America. Approximately 34%, 48%, 46%, 42% and 38% of the Company's revenue for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994, respectively, were attributable to sales made through distributors. The Company has also entered into a joint venture with Anam pursuant to which the joint venture corporation (Summit Design Korea, Inc. ("Summit Asia")) shall acquire exclusive rights to sell, distribute and support all of the Company's products in the Asia-Pacific region, excluding Japan. Summit Asia has acted in such capacity since April 1, 1996. Prior to that date, Anam was an independent distributor of the Company's products. During the first quarter of 1997, the Company entered into a distribution agreement with ATE pursuant to which ATE was granted exclusive rights to sell, distribute and support Summit's Visual Testbench products within Japan until October 1998, subject to the Company's ability to terminate the relationship if ATE fails to meet quarterly sales objectives. The agreement may also be terminated by either party for breach. In addition, in the first quarter of 1996, the Company entered into a three-year, exclusive distribution agreement for its SLDA products in Japan with Seiko. In the event Seiko fails to meet specified quotas for two or more quarterly periods, exclusivity can be terminated by Summit, subject to Seiko's right to pay a specified fee to maintain exclusivity. The agreement is renewable for successive five-year terms by mutual agreement of the Company and Seiko and is terminable by either party for breach. In March 1997, the Company entered into a three-year distribution agreement with Kanematsu USA Inc. to which Kanematsu was granted exclusive distribution rights to see, distribute and support certain verification products in Japan. For the year ended December 31, 1996 and nine months ended September 30, 1997, all sales of the Company's products in the Asia-Pacific region were through Seiko, Summit Asia, ATE and Kanematsu. There can be no assurance the relationships with Seiko, Summit Asia, ATE -22- and Kanematsu will be effective in maintaining or increasing sales relative to the levels experienced prior to such relationships. The Company also has independent distributors in Europe and is dependent on the continued viability and financial stability of its distributors. Since the Company's products are used by skilled design engineers, distributors must possess sufficient technical, marketing and sales resources and must devote these resources to a lengthy sales cycle, customer training and product service and support. Only a limited number of distributors possess these resources. In addition, Seiko, Summit Asia, ATE and Kanematsu, as well as the Company's other distributors, may offer products of several different companies, including competitors of the Company. There can be no assurance that the Company's current distributors will continue to market or service and support the Company's products effectively, that any distributor will continue to sell the Company's products or that the distributors will not devote greater resources to products of other companies. The loss of, or a significant reduction in, revenue from the Company's distributors could have a material adverse effect on the Company's business, financial condition and results of operations. INTERNATIONAL SALES AND OPERATIONS Approximately 24%, 37%, 50%, 52% and 39% of the Company's revenue for the three months and nine months ended September 30, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively, were attributable to sales made outside the United States. The decline in the percent of revenue from sales made outside the United States for the three and nine months ended September 30, 1997 is related primarily to domestic sales to one customer. The Company expects that international revenue will continue to represent a significant portion of its total revenue. The Company's international revenue is currently denominated in U.S. dollars. As a result, increases in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. The Company pays the expenses of its international operations in local currencies and does not engage in hedging transactions with respect to such obligations. International sales and operations are subject to numerous risks, including tariff regulations and other trade barriers, requirements for licenses, particularly with respect to the export of certain technologies, collectability of accounts receivable, changes in regulatory requirements, difficulties in staffing and managing foreign operations and extended payment terms. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and operations and, consequently, on the Company's business, financial condition and results of operations. In order to successfully expand international sales, the Company may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors. This will require significant management attention and financial resources and could adversely affect the Company's operating margins. In addition, to the extent that the Company is unable to effect these additions in a timely manner, the Company's growth, if any, in international sales will be limited. There can be no assurance that the Company will be able to maintain or increase international sales of the Company's products, and failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH AND ACQUISITIONS Summit's ability to achieve significant growth will require it to implement and continually expand its operational and financial systems, recruit additional employees and train and manage current and future employees. Summit expects any such growth will place a significant strain on its operational resources and systems. Failure to effectively manage any such growth would have a material adverse effect on Summit's business, financial condition and results of operations. On February 28, 1997, Summit completed its acquisition of TriQuest and on September 9, 1997, Summit completed its acquisition of SimTech. As a result of these acquisitions, Summit's operating expenses are expected to increase. There can be no assurance that the integration of TriQuest's and SimTech's business can be successfully completed in a timely fashion, or at all, or that the revenues from TriQuest and SimTech will be sufficient to support the costs associated with the acquired businesses, without adversely affecting Summit's operating margins. Any failure to successfully complete the integration in a timely fashion or to generate sufficient revenues from the acquired business could have a material adverse effect on Summit's business and results of operations. In addition, Summit regularly evaluates acquisition opportunities. Future acquisitions by Summit could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, -23- which could materially adversely affect Summit's results of operations. Product and technology acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concern, risks of entering markets in which Summit has no or limited prior experience and potential loss of key employees of acquired companies. Summit's management has had limited experience in assimilating acquired organizations and products into Summit's operations. No assurance can be given as to the ability of Summit to integrate successfully any operations, personnel or products that have been acquired or that might be acquired in the future, and the failure of Summit to do so could have a material adverse effect on Summit's results of operations. OPERATIONS IN ISRAEL The Company's research and development operations related to its SLDA products are located in Israel and may be affected by economic, political and military conditions in that country. Accordingly, the Company's business, financial condition and results of operations could be materially adversely affected if hostilities involving Israel should occur. This risk is heightened due to the restrictions on the Company's ability to manufacture or transfer outside of Israel any technology developed under research and development grants from the government of Israel as described in "--Israeli Research, Development and Marketing Grants." In addition, while all of the Company's sales are denominated in U.S. dollars, a portion of the Company's annual costs and expenses in Israel are paid in Israeli currency. These costs and expenses were approximately $4.3, $4.3 and $2.9 million in 1996, 1995 and 1994, respectively. Payment in Israeli currency subjects the Company to foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation, which has been approximately 11%, 8% and 15% during 1996, 1995, and 1994, respectively. The Company's primary expense which is paid in Israeli currency is employee salaries for research and development activities. As a result, an increase in the value of Israeli currency in comparison to the U.S. dollar could increase the cost of research and development expenses and general and administrative expenses. There can be no assurance that currency fluctuations, changes in the rate of inflation in Israel or any of the other aforementioned factors will not have a material adverse effect on the Company's business, financial condition or results of operations. In addition, coordination with and management of the Israeli operations requires the Company to address differences in culture, regulations and time zones. Failure to successfully address these differences could be disruptive to the Company's operations. The Company's Israeli production facility has been granted the status of an "Approved Enterprise" under the Israeli Investment Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"). Taxable income of a company derived from an "Approved Enterprise" is eligible for certain tax benefits, including significant income tax rate reductions for up to seven years following the first year in which the "Approved Enterprise" has Israeli taxable income (after using any available net operating losses). The period of benefits cannot extend beyond 12 years from the year of commencement of operations or 14 years from the year in which approval was granted, whichever is earlier. The tax benefits derived from a certificate of approval for an "Approved Enterprise" relate only to taxable income attributable to such "Approved Enterprise" and are conditioned upon fulfillment of the conditions stipulated by the Investment Law, the regulations promulgated thereunder and the criteria set forth in the certificate of approval. In the event of a failure by the Company to comply with these conditions, the tax benefits could be canceled, in whole or in part, and the Company would be required to refund the amount of the canceled benefits, adjusted for inflation and interest. There can be no assurance that the Company's Israeli production facility will continue to operate or qualify as an "Approved Enterprise" or that the benefits under the "Approved Enterprise" regulations will continue, or be applicable, in the future. The loss of, or any material decrease in, these income tax benefits could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's future success depends in large part on the continued service of its key technical and management personnel and its ability to continue to attract and retain highly-skilled technical, sales and marketing and management personnel. The Company has entered into employment agreements with certain of its executive officers, however, such agreements do not guarantee the services of these employees and do not contain noncompetition provisions. Competition for personnel in the software industry in general, and the -24- EDA industry in particular, is intense, and the Company has at times in the past experienced difficulty in recruiting qualified personnel. There can be no assurance that the Company will retain its key personnel or that it will be successful in attracting and retaining other qualified technical, sales and marketing and management personnel in the future. The loss of any key employees or the inability to attract and retain additional qualified personnel may have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not carry "key person" life insurance on any of its key personnel. Additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive and can result in departures of additional personnel, which could have a material adverse effect on the Company's business, financial condition and results of operations. ISRAELI RESEARCH, DEVELOPMENT AND MARKETING GRANTS Summit's Israeli subsidiary has obtained research and development grants from the Office of the Chief Scientist (the "Chief Scientist") in the Israeli Ministry of Industry and Trade of approximately $232,000 and $608,000 in 1993 and 1995, respectively. As of September 30, 1997, the Company was obligated to pay back approximately $232,000 and $470,000 for the 1993 and 1995 grants, respectively. Such obligations are collateralized by all tangible and intangible assets of the Israeli subsidiary. The terms of the grants prohibit the manufacture of products developed under these grants outside of Israel and the transfer of the technology developed pursuant to these grants to any person, without the prior written consent of the Chief Scientist. The Company's Visual HDL for VHDL products have been developed under grants from the Chief Scientist and thus are subject to these restrictions. If the Company is unable to obtain the consent of the government of Israel, the Company would be unable to take advantage of potential economic benefits such as lower taxes, lower labor and other manufacturing costs and advanced research and development facilities that may be available if such technology and manufacturing operations could be transferred to locations outside of Israel. In addition, the Company would be unable to minimize risks particular to operations in Israel, such as hostilities involving Israel. Although the Company is eligible to apply for additional grants from the Chief Scientist, it has no present plans to do so. The Company also received a Marketing Fund Grant from the Israeli Ministry of Industry and Trade for an aggregate of $423,000. The grant must be repaid at the rate of 3% of the increase in exports over the 1993 export level of all Israeli products, until repaid. As of September 30, 1997, approximately $364,000 was outstanding under the grant. LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company's success depends in part upon its proprietary technology. The Company relies on a combination of copyright, trademark and trade secret laws, confidentiality procedures, licensing arrangements and technical means to establish and protect its proprietary rights. As part of its confidentiality procedures, the Company generally enters into non-disclosure agreements with its employees, distributors and corporate partners, and limits access to, and distribution of, its software, documentation and other proprietary information. In addition, the Company's products are protected by hardware locks and software encryption techniques designed to deter unauthorized use and copying. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to develop similar technology independently. The Company provides its SLDA products to end-users primarily under "shrink-wrap" license agreements included within the packaged software. In addition, the Company delivers certain of its verification products electronically under an electronic version of a "shrink-wrap" license agreement. These "shrink-wrap" license agreements are not negotiated with or signed by the licensee, and thus may not be enforceable in certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. The Company could be increasingly subject to infringement claims as the number of products and competitors in the Company's industry segment grows, the functionality of products in its industry segment overlaps and an increasing number of software patents are granted by the United States Patent and Trademark Office. There can be no assurance that a third party will not claim such infringement by the Company with respect to current or future products. Any such claims, with or without merit, could be time-consuming, result -25- in costly litigation, cause product delays or require the Company to enter into royalty or licensing agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all. Failure to protect its proprietary rights or claims of infringement could have a material adverse effect on the Company's business, financial condition and results of operations. POSSIBLE VOLATILITY OF STOCK PRICE The stock markets have experienced price and volume fluctuations that have particularly affected technology companies, resulting in changes in the market prices of the stocks of many companies which may not have been directly related to the operating performance of those companies. Such broad market fluctuations may adversely affect the market price of the Common Stock. In addition, factors such as announcements of technological innovations or new products by the Company or its competitors, market conditions in the computer software or hardware industries and quarterly fluctuations in the Company's operating results may have a significant adverse effect on the market price of the Company's Common Stock. -26- PART II Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds (c) In July and September 1997, the Company issued and sold 4,780 and 25,671 shares of the Company's Common Stock that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), at prices of $0.33 and $1.95, respectively upon exercise of stock options. In September 1997, in connection with the Company's acquisition of SimTech, the Company issued 1,256,777 shares of the Company's Common Stock to the existing shareholders of SimTech in exchange for outstanding shares of capital stock of SimTech. The shares were not registered under the Securities Act, and such issuances were deemed to be exempt from registration in reliance on Section 4(2) of the Securities Act as a transaction not involving a public offering. The recipients of the securities represented their intentions to acquire the securities for investment only and had access to all relevant information regarding the Company necessary to evaluate the investment. (d) The effective date of the Company's first registration statement, filed on Form S-1 under the Securities Act of 1933 (No. 333-6445), was October 17, 1996 (the "Registration Statement"). The class of securities registered was Common Stock. The offering commenced on October 18, 1996 and all securities were sold in the offering. The managing underwriters for the offering were Robertson, Stephens & Company LLC and Needham & Company. A total of 4,600,000 shares were registered pursuant to the Registration Statement. The Company sold 2,000,000 shares of its Common Stock for its own account, for an aggregate offering price of $19,000,000, and 2,600,000 shares of its Common Stock for the account of certain selling stockholders, for an aggregate offering price of $24,700,000. The Company incurred expenses of approximately $2,776,000, of which $1,330,000 represented underwriting discounts and commissions and $1,446,000 represented estimated other expenses. A portion of the underwriting discounts and commissions represented direct or indirect payments to directors, officers, general partners of the Reigstrant or their associates; to persons owing ten (10) percent or more of any class of equity securities of the Company; or to affiliates of the Company. The net offering proceeds to the Company after total expenses was $16,224,000. As of September 30, 1997, the Company had used all of the net proceeds from the offering as follows: $897,000 for the purchase and installation of machinery and quipment, $473,000 for the repayment of indebtedness and $14,854,000 for working capital. The use of the proceeds from the offering does not represent a material change in the use of proceeds described in the prospectus. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 10.15 Bank Line of Credit Agreement between Registrant and U.S. National Bank of Oregon dated June 24, 1997. 10.22 Loan Agreement between Registrant and Dasys, Inc. dated July 16, 1997. 11.1 Statement of Computation of Net Income per Share 27 Financial Data Schedule (b) Reports on Form 8-K On September 24, 1997, the Company filed a report on Form 8-K dated September 9, 1997 in conjunction with the acquisition of Simulation Technologies, Corp. ("SimTech"). On November 12, 1997, the Company amended this filing on Form 8-K /A to include the financial statements of SimTech and the pro forma combined financial statements for the Company and SimTech. -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT DESIGN, INC. By: /s/ C. Albert Koob ------------------------- C. Albert Koob Vice President - Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer and Duly Authorized Officer) Date: November 13, 1997 -28- EXHIBIT INDEX EXHIBIT 10.15 Bank Line of Credit Agreement between Registrant and U.S. National Bank of Oregon dated June 24, 1997. EXHIBIT 10.22 Loan Agreement between Registrant and Dasys, Inc. dated July 16, 1997. EXHIBIT 11.1 Statement of Computation of Net Income Per Share EXHIBIT 27 Financial Data Schedule -29- EX-10.15 2 EXHIBIT 10-15 Exhibit 10.15 Bank Line of Credit Agreement between Registrant and U.S. National Bank of Oregon dated June 24, 1997. April 9, 1997 C. Albert Koob Chief Financial Officer Art Fletcher Treasurer and Director of Financial Planning Summit Design, Inc. 9305 S.W. Gemini Drive Beaverton, OR 97005-7158 Gentlemen: I am pleased to advise you that United States National Bank of Oregon ("Bank") has approved the request of Summit Design, Inc. ("Summit"), for the following credit facilities, subject to the following terms and conditions: OPERATING LINE OF CREDIT ------------------------ BORROWER: Summit Design, Inc. PURPOSE: General Corporate Purposes. BORROWING LIMIT: $1,000,000.00 GUARANTORS: None EXPIRY: April 30, 1998. RATE: Pricing will be based on United States National Bank of Oregon's Prime (1), or Inter Bank Offering Rate ("IBOR"), at the Borrower's option. Rate will be fully floating and computed on a 360-day year. The spread over the base rates will be determined quarterly by the Borrower's Total Liabilities/Tangible Net Worth ("D/TNW"), as expressed in the chart below. - ---------------------------- (1) The interest rate charged to Borrower is tied to the Prime Rate of United States National Bank of Oregon, Borrower is advised that United States National Bank's Prime Rate is the rate of interest which the Bank from time to time identifies and publicly announces as its Prime Rate, and is not necessarily, for example the lowest rate of interest which the Bank collects from any borrower or group of borrowers. Summit Design, Inc. 4/9/97 Page 2 DEBT TO TANGIBLE NET WORTH IS DEFINED AS (TOTAL LIABILITIES MINUS UNEARNED REVENUE) / (SHAREHOLDERS' EQUITY MINUS INTANGIBLES). - ------------------------------------------------------------------------- DEBT/WORTH PRIME PRICING IBOR PRICING Greater than 0.50 Prime + 0.75% IBOR + 300 bps .26 to .050 Prime + 0.50%* IBOR + 275 bps Less than 0.26 Prime + 0% IBOR + 225 bps - ------------------------------------------------------------------------- * At 12/31/96 the D/TNW was 0.27:1.00. IBOR Terms: A) Minimum Amount of $500,000, increments of $100,000 thereafter. B) Maturity and availability: Up to three months; may not exceed Expiry. C) Prepayment of IBOR Borrowings not permitted. D) Notification: Two day notification prior to 12:00 noon on the day of notification. E) Irrevocability: Acceptance of a pricing commitment from the Bank will constitute an irrevocable agreement to borrow under the revolving line of credit. F) Interest computed on the basis of a 360 day year and the number of days elapsed. REPAYMENT TERMS: Interest shall be payable monthly on the 1st day of each month. Principal shall be payable on the earlier of April 30, 1998, or demand by the Bank. Repayment of each advance received by Borrower under the line of credit is subject to the terms of the promissory note evidencing that advance, as well as all terms and conditions of this letter. In the event of any conflict between the two, the terms and conditions of the promissory note shall control. FEES: UP-FRONT FEE: Initial up-front fee of 1/8 of 1% of the amount of the line of credit, due upon acceptance ($1,250). COMMITMENT FEE: A 1/8 of 1% fee, annualized, on the unused portion of the line of credit, payable quarterly in arrears. Summit Design, Inc. 4/9/97 Page 3 COLLATERAL: The revolving line of credit provides for a flexible collateral position according to the following matrix. The assets of the Borrower which are referenced below include a first lien position in all accounts, contract rights, chattel paper, general intangibles and inventory. QUICK RATIO* COLLATERAL GREATER THAN 1.75:1.00 Unsecured with negative pledge agreement. LESS THAN OR EQUAL TO 1.75:1.00 UNSECURED WITH NEGATIVE PLEDGE, IF NOT BORROWING. If borrowing and the ratio falls in this category, the line of credit will be secured. LESS THAN OR EQUAL TO 1.25 : 1.00 UNSECURED WITH NEGATIVE PLEDGE, IF NOT BORROWING. If borrowing, line is secured and advances are margined at 75% of eligible A/R up to 120 days after date of invoice. * QUICK RATIO IS DEFINED AS ((CASH + NET TRADE ACCOUNTS) / (CURRENT LIABILITIES - CURRENT PORTION OF UNEARNED REVENUE)). DOCUMENTATION: Execution of Notes, Loan Agreements, Security Agreements, UCC Financing Statements and all other documentation required by the Bank in a form satisfactory to the Bank. BORROWER WILL COMPLY WITH THE FOLLOWING QUARTERLY FINANCIAL COVENANTS: 1. TANGIBLE NET WORTH shall not be less then $10,000,000. TANGIBLE NET WORTH IS DEFINED AS (SHAREHOLDER'S EQUITY -INTANGIBLES). NOTE: INTANGIBLES INCLUDE ALL CAPITALIZED SOFTWARE. 2. TOTAL LIABILITIES TO TANGIBLE NET WORTH shall not exceed .75 to 1.00. TOTAL LIABILITIES TO TANGIBLE NET WORTH IS DEFINED AS (TOTAL LIABILITIES MINUS DEFERRED REVENUE)/ (TANGIBLE NET WORTH). Failure to maintain these covenants will be considered an event of default under the loan documents. OTHER TERMS AND CONDITIONS: 1. Distribution in the form of dividends shall not exceed 25% of net income, measured annually as of December 31. Summit Design, Inc. 4/9/97 Page 4 REPORTING REQUIREMENTS: - Quarterly financial statements to be submitted within 45 days of quarter end. - Annual CPA audited financial statements to be submitted within 90 days of fiscal year end. - If the Quick Ratio falls to 1.25:1.00 or below: A Borrower's Certificate will be submitted with each advance, and a Borrower's Certificate will accompany the monthly AR and AP agings. ADVANCE STRUCTURE: Advances will be limited to the Borrowing Limit when the Quick Ratio is greater than 1.25:1.00. When the quick ratio is less than or equal to 1.25: 1.00, advances will be limited to 75% of eligible accounts receivable to 120 days after the date of invoice. Disbursements under the line of credit shall terminate on the earlier occurrence of the date indicated above as the Expiry Date or the date on which this Bank, in its sole discretion, determines that there has been a material adverse change in the financial condition or management of the Borrower, or determines that there has been any non-compliance with any term or condition stated herein. Non-compliance with the conditions and terms of this letter and all other loan documents will be considered as an event of default, entitling the Bank to all the default provisions as provided for in documents evidencing this line of credit. OTHER: Under Oregon law, most agreements, promises and commitments made by lenders after October 3, 1989, concerning loans and other credit extensions which are not for personal, family or household purposes or secured solely by the borrower's residence must be in writing, express consideration and be signed by the lender to be enforceable. If the above terms and conditions to extend this credit facility to Summit Design, Inc. are acceptable to you, please sign and return the Acknowledgment Copy of this letter on or before June 30, 1997. Summit Design, Inc. 4/9/97 Page 5 We are pleased to provide you this borrowing accommodation and look forward to serving your banking needs in the future. Sincerely, Daniel J. Hempy Senior Vice President BY OREGON STATUTE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED: UNDER OREGON LAW MOST AGREEMENTS PROMISES AND COMMITMENTS MADE BY LENDERS AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSE OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE. THE UNDERSIGNED HEREBY ACKNOWLEDGES AND ACCEPTS THIS OFFER TO EXTEND CREDIT SUBJECT TO THE TERMS AND CONDITIONS STATED ABOVE. SUMMIT DESIGN, INC. BY: /s/ C. Albert Koob Chief Financial Officer 6/18/97 ------------------------------------------- ------- Title Date Summit Design, Inc. 4/9/97 Page 6 June 24, 1997 C. Albert Koob Chief Financial Officer Art Fletcher Treasurer and Director of Financial Planning Summit Design, Inc. 9305 S.W. Gemini Drive Beaverton, OR 97005-7158 Gentlemen: Please find enclosed the " Alternative Rate Options Promissory Note" to complete the documentation necessary for Summit Design's Operating Line of Credit. Please sign where indicated and return to me. If you have any questions or comments please call me or Dan Hempy, at 275-5172 or 275-5879, respectively. We are pleased to provide you this borrowing accommodation and look forward to serving your banking needs in the future. Sincerely, Richard Glassman Assistant Relationship Manager Summit Design, Inc. 4/9/97 Page 7 THIS EXHIBIT IS ATTACHED TO AND MADE A PART OF THAT CERTAIN PROMISSORY NOTE FOR $1,000,000.00 DATED JUNE 23, 1997 FROM SUMMIT DESIGN, INC. TO US BANK. EXHIBIT "A" PERFORMANCE PRICING: Pricing to be based upon Borrower's ratio of debt to worth, at the Borrower's Option, as expressed in the following matrix. The spread over the base rates will be determined quarterly beginning September 30, 1997. DEBT/WORTH PRIME PRICING IBOR PRICING - ---------- ------------- ------------ - -Greater than or equal to-0.51 Prime + 75% 3.00% 0.26 to .050 Prime + .50% 2.75% - -Less than or equal to-0.25 Prime + 0.00% 2.25% The initial Prime option is Prime + 0.50%. ; Current IBOR Pricing is +2.75% Debt to Tangible Net Worth is defined as ( Total Liabilities - Unearned Revenue) / (Shareholder's Equity - Intangibles). Summit Design, Inc. BY: /s/ C. Albert Koob ------------------ Authorized Officer Summit Design, Inc. 4/9/97 Page 8 ALTERNATIVE RATE OPTIONS PROMISSORY NOTE (PRIME RATE, LIBOR) $1,000,000.00 Dated as of: 06-23-97 - ----------------------------------------------------- -------- Summit Design, Inc. ("Borrower") - ----------------------------------------------------- U.S. BANK ("Lender") 1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to repay all sums which lender may from time to time advance to Borrower ("Advances") under a: / / single disbursement loan. Amounts loaned to Borrower hereunder will be disbursed in a single Advance in the amount shown in Section 2. /x/ revolving line of credit. No Advances shall be made Which create a maximum amount outstanding at any one time which exceeds the maximum amount shown in Section 2. However, Advances hereunder may be borrowed , repaid and reborrowed, and the aggregate Advances loaned hereunder from time to time may exceed such maximum amount. / / non-revolving line of credit. Each Advance made from time to time hereunder shall reduce the maximum amount available shown in Section 2. Advances loaned hereunder which are repaid may not be reborrowed. 2. PRINCIPAL BALANCE. The unpaid Principal balance of all Advances outstanding under this note ("Principal Balance") at one time shall not exceed $ 1,000,000.00. --------------- 3. PROMISE TO PAY. For value received Borrower promises to pay Lender or order at OR COMMERCIAL LOAN SERVICING, 555 SW OAK, PL-7 PORTLAND, OR 97204, the Principal Balance of this note, with interest thereon at the rate(s) specified in Sections 4 and 11 below. 4. INTEREST RATE. The interest rate on the Principal Balance outstanding may vary from time to time pursuant to the provisions of this note. Subject to the provisions of this note, Borrower shall have the option from time to time of choosing to pay interest at the rate or rates and for the applicable periods of time based on the rate options provided herein; PROVIDED, however, that once Borrower notifies Lender of the rate option chosen in accordance with the provisions of this note, such notice shall be irrevocable. The rate options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as defined herein. (a) DEFINITIONS. The following terms shall have the following meanings: "Business Day" means any other day than a Saturday, Sunday, or other day that commercial banks in Portland, Oregon or New York City are authorized or required by law to close; provided, however that when used in connection with a LIBOR Rate, LIBOR Amount, Summit Design, Inc. 4/9/97 Page 9 or LIBOR Interest Period such term shall also exclude any day on which dealings in U.S. dollar deposits are not carried on in the London interbank market. "LIBOR Amount" means each principal amount for which Borrower chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR Interest Period. "LIBOR Interest Period" means as to any LIBOR amount, a period of 1,2 OR 3 months commencing on the date the LIBOR Borrowing Rate becomes applicable thereto; PROVIDED, however, that: (I) the first day of each LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest Period shall be selected which would extend beyond EXPIRY; (iii) no LIBOR Interest Period shall extend beyond the date of any principal payment required under section 6 of this note, unless the sum of the Prime Rate Amount, plus LIBOR Amounts with LIBOR Interest Periods ending on or before the scheduled date of such principal payment, plus principal amounts remaining unborrowed under a line of credit, equals or exceeds the amount of such principal payment; (iv) any LIBOR Interest Payment which would otherwise expire on a day which is not a Business Day, shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such LIBOR Interest Period into another calendar month, in which event the LIBOR Interest Period shall end on the immediately preceding Business Day; and (v) any LIBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period) shall end on the last Business Day of a calendar month. "LIBOR Rate" means, for any LIBOR Interest Period, the rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender as its LIBOR Rate, based on Lender's determination, on the basis of such factors as Lender deems relevant, of the rate of interest at which U.S. dollar deposits would be offered to U.S. Bank in the London interbank market at approximately 11 a.m. London time on the date which is two Business Days prior to the first day of such LIBOR Interest Period for delivery on the first day of such LIBOR Interest Period for the number of months therein; provided, however, that the LIBOR Rate shall be adjusted to take into account the maximum reserves required to be maintained for Eurocurrency liabilities by banks during each such LIBOR Interest Period as specified in Regulation D of the Board of Governors of the Federal Reserve System or any successor regulation. "Prime Rate" means the rate of interest which Lender from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which Lender collects from any borrower or class of borrowers. When the Prime Rate is applicable under section 4 (b) or 11 (b), the interest rate hereunder shall be adjusted without notice effective on the day the Prime Rate changes, but in no event shall the rate of interest be higher than allowed by law. "Prime Rate Amount" means any portion of the Principal Balance bearing interest at the Prime Borrowing Rate. Summit Design, Inc. 4/9/97 Page 10 (b) THE PRIME BORROWING RATE. (i) The Prime Borrowing Rate is a per annum rate equal to the Prime Rate plus SEE ATTACHED EXHIBIT "A" % per annum. (ii) Whenever Borrower desires to use the Prime Borrowing Rate option, Borrower shall give Lender notice orally or in writing in accordance with Section 15 of this note, which notice shall specify the requested effective date (which must be a Business Day) and principal amount of the Advance or increase in the Prime Rate Amount, and whether Borrower is requesting a new Advance under a line of credit or conversion of a LIBOR Amount to the Prime Borrowing Rate. (iii) Subject to Section 11 of this note, interest shall accrue on the unpaid Principal Balance at the Prime Borrowing Rate unless and except to the extent that the LIBOR Borrowing Rate is in effect. (c) THE LIBOR BORROWING RATE. (i) The LIBOR Borrowing Rate is the LIBOR Rate plus SEE ATTACHED EXHIBIT "A" % per annum. (ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender between 8:00 a.m. and 10:00 a.m. ( Portland, Oregon time) on any Business Day. Borrower may request an Advance, conversion of any portion of the Prime Rate Amount to a LIBOR amount or a new LIBOR Interest Period for an existing LIBOR Amount, at such rate only by giving Lender notice in accordance with Section 4 ( c ) (iii) before 10:00 a.m. ( Portland, Oregon time) on such day. (iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option, Borrower shall give Lender irrevocable notice ( either in writing or orally and promptly confirmed in writing) between 8:00a.m. and 10:00 a.m. (Portland, Oregon time) two (2) business days prior to the desired effective date of such rate. Any oral notice shall be given by, and any written notice or confirmation of an oral notice shall be signed by, the person (s) authorized in Section 15 of this note, and shall specify the requested effective date of the rate, LIBOR Interest Period and LIBOR Amount, and whether Borrower is requesting a new Advance at the LIBOR Borrowing Rate under a line of credit, conversion of all or any portion of the Prime Rate Amount to a LIBOR Amount, or a new LIBOR Interest Period for an outstanding LIBOR Amount. Notwithstanding any other term of this note, Borrower may elect the LIBOR Borrowing Rate in the minimum principal amount of $500,000.00 and in multiples of $100,000.00 above such amount; PROVIDED, however, that no more than N/A separate LIBOR Interest Periods may be in effect at any one time. If at any time the LIBOR Rate is unascertainable or unavailable to Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is in effect, (A) it shall terminate automatically with respect to all LIBOR Amounts (i) on the last day of each then applicable LIBOR Interest Period, Summit Design, Inc. 4/9/97 Page 11 if Lender may lawfully continue to maintain such loans, or (ii) immediately if Lender may not lawfully continue to maintain such loans throuh such day, and (B) subject to Section 11, the Prime Borrowing Rate automatically shall become effective as to such amounts upon such termination. (iv) If at any time after the date hereof (A) any revision in or adoption of any applicable law, rule, or regulation or in the interpretation or administration thereof (i) shall subject Lender or its Eurodollar lending office to any tax, duty, or other charge, or change the basis of taxation of payments to Lender with respect to any loans bearing interest based on the LIBOR Rate, or (ii) shall impose or modify any reserve, insurance, special deposit, or similar requirements against assets of, deposits with or for the account of, or credit extended by Lender or its Eurodollar lending office, or impose on Lender or its Eurodollar lending office any other condition affecting any such loans, and (B) the result of any of the forgoing is (i) to increase the cost to Lender of making or maintaining any such loans or (ii) to reduce the amount of any sum receivable under this note by Lender or its Eurodollar lending office, Borrower shall pay Lender within 15 days after demand by Lender such additional amount as will compensate Lender for such increased cost or reduction. The determination hereunder by Lender of such additional amount shall be conclusive in the absence of manifest error. If Lender demands compensation under this Section 4 (c) (v), Borrower may upon three (3) Business Days' notice to Lender pay the accrued interest on all LIBOR Amounts, together with any additional amounts payable under Section 4 (c)(vi). Subject to Section 11, upon Borrower's paying such accrued interest and additional costs, the Prime Borrowing Rate immediately shall be effective with respect to the unpaid principal balance of such LIBOR amounts. (v) Borrower shall pay to Lender, on demand, such amount as Lender reasonably determines (determined as though 100 % of the applicable LIBOR Amount had been funded in the London interbank market) is necessary to compensate Lender for any direct or indirect losses, expenses, liabilities, costs, expenses or reductions in yield to Lender, whether incurred in connection with liquidation or re-employment of funds or otherwise, incurred or sustained by Lender as a result of: (A) Any payment or prepayment of a LIBOR Amount, termination of the LIBOR Borrowing Rate or conversion of a LIBOR Amount to the Prime Borrowing Rate on a day other than the last day of the applicable LIBOR Interest Period (including as a result of acceleration or a notice persuant to Section 4 (c)(v)); or (B) Any failure of Borrower to borrow, continue or prepay any LIBOR Amount or to convert any portion of the Prime Rate Amount to a LIBOR Amount after Borrower has given notice thereof to Lender. (vi) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay interest based on such rate, plus any other applicable taxes or charges hereunder, even though Lender may have obtained the funds loaned to Borrower from sources other than the London interbank market. Lender's determination of the Summit Design, Inc. 4/9/97 Page 12 LIBOR Borrowing Rate and any such taxes or charges shall be conclusive in the absence of manifest error. (vii) Notwithstanding any other term of this note, Borrower may not select the LIBOR Borrowing Rate if an event of default hereunder has occurred and is continuing. (viii) Nothing contained in this note, including without limitation the determination of any LIBOR Interest Period or Lender's quotation of any LIBOR Borrowing Rate, shall be construed to prejudice Lender's right, if any, to decline to make any requested Advance or to require payment on demand. 5. COMPUTATION OF INTEREST . All interest under Section 4 and Section 11 will e computed at the applicable rate based on a 360-day year and applied to he actual number of days elapsed. 6. PAYMENT SCHEDULE. (a) PRINCIPAL. Principal shall be paid: /X/ on demand / / on demand. or if no demand, on______. / / on__________. / / subject to Section 8, in installments of / /____each, plus accrued interest, beginning on ____and on the same day of each ____ thereafter until ____ when the entire Principal Balance plus interest thereon shall be due and payable. / /____each, including accrued interest, beginning on____and on the same day of each____ thereafter until ____ when the entire Principal Balance plus interest thereon shall be due and payable. / /_________. (b) INTEREST. (i) Interest on the Prime Rate Amount shall be paid: /X/ on the first day of FEBRUARY, 1997 and on the same day of each MONTH. thereafter prior to maturity and at maturity. / / at maturity. / / at the time each principal installment is due and at maturity. / /______. (ii) Interest on all LIBOR Amount shall be paid: /X/ on the last day of the applicable LIBOR Interest Period, and if such LIBOR Interest period is longer than three months, on the last day of each three month period occuring during such LIBOR Interest Period, and at maturity. /X/ on the ____ day of _____ and on the same day of each ______ thereafter prior to maturity and at maturity. / / at maturity. / / at the time each principal installment is due and at maturity. / / ______. 7. PREPAYMENT. (a) Prepayments of all or any part of the Prime Rate Amount may be made at any time without penalty. Summit Design, Inc. 4/9/97 Page 13 (b) Except as otherwise specifically set forth herein, Borrower may not prepay all or any part of any LIBOR Amount , or terminate any LIBOR Borrowing Rate except on the last day of the applicable LIBOR Interest Period. (c) Principal prepayments will not postpone the date of or change the amount of any regularly scheduled payment. At the time of any principal prepayment, all accrued interest, fees, costs, and expenses shall also be paid. 8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note changes the holder of this note may, from time to time, in holder's sole discretion, increase or decrease the amount of each of the installments remaining unpaid at the time of such change in rate to an amount holder in its sole discretion deems necessary to continue amortizing the Principal Balance at the same rate established by the installment amounts specified in Section 6(a), whether or not a "balloon" payment may also be due upon maturity of this note. Holder shall notify the undersigned of each such change in writing. Whether or not the installment amount is increased under this Section 8, Borrower understands that, as a result of increases in the rate of interest the final payment due, whether or not a "balloon" payment, shall include the entire Principal Balance and interest thereon then outstanding, and may be substantially more than the installment specified in Section 6. 9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in any month there is no day on which a scheduled payment would otherwise be due (e.g. February 31), such payment shall be paid on the last banking day of that month. 10. PAYMENT BY AUTOMATIC DEBIT. / / Borrower hereby authorizes Lender to automatically deduct the amount of all principal and interest payments from account number _____ at _____. If there are insufficient funds in the account to pay the automatic deduction in full, Lender may allow the account to become overdrawn, or Lender may reverse the automatic deduction. Borrower will pay all the fees on the account which result from the automatic deductions, including any overdraft and non-sufficient funds charges. If for any reason Lender does not charge the account for a payment, or if an automatic payment is reversed, the payment is still due according to this note. If the account is a Money Market Account, the number of withdrawals from that account is limited as set out in the account agreement. Lender may cancel the automatic deduction at any time in its discretion. Provided, however, if no account number is entered above, Borrower does not want to make payments by automatic debit. 11. DEFAULT. (a) Without prejudice to any right of Lender to require payment on demand or to decline to make any requested Advance, each of the following shall be an event of default: ( i )Borrower fails to make any payment when due. (ii) Borrower fails to perform or comply with any term, covenant or obligation in this note or any agreement related to this note, or in any other agreement or loan Borrower has with Lender. (iii) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, Summit Design, Inc. 4/9/97 Page 14 in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this note or perform Borrower's obligations under this note or any related documents. (iv) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (v) Borrower dies, becomes insolvent, liquidates or dissolves, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (vi) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (vii) Any of the events described in this default section occurs with respect to any general partner in Borrower or any guarantor of this note, or any guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted not to be, in full force and effect. (viii) There is any material adverse change in the financial condition or management of Borrower or Lender in good faith deems itself insecure with respect to the payment or performance of Borrower's obligations to Lender. If this note is payable on demand, the inclusion of specific events of default shall not prejudice Lender's right to require payment on demand or to decline to make any requested Advance. (b) Without prejudice to any right of Lender to require payment on demand, upon the occurance of an event of default, Lender may declare the entire unpaid Principal Balance on this note and all accrued unpaid interest immediately due and payable, without notice. Upon default, including failure to pay upon final maturity, Lender at its option, may also, if permitted under applicable law, increase the interest rate on this note to a rate equal to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the maximum rate permitted by applicable law. In addition, if any payment of principal or interest is 19 or more days past due, Borrower will be charged a late charge of 5% of the delinquent payment. 12. EVIDENCE OF PRICIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall, at any time, be conclusive evidence of the unpaid Principal Balance and interest owing on this note. Notwithstanding any other provisions of this note, in the event holder makes Advances hereunder which result in an unpaid Principal Balance on this note which at any time exceeds the maximum amount specified in Section 2, Borrower agrees that all such Advances, with interest, shall be payable on demand. 13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is a revolving line of credit or a non-revolving line of credit, Borrower agrees that Lender is under no obligation and has not committed to make any Advances hereunder. Each Advance hereunder shall be made at the sole option of Lender. 14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and agrees that (a) Lender is entitled to demand Borrower's immediate payment in full of all amounts owing hereunder and (b) neither anything to the contrary contained herein or in any other loan documents (including but not limited to, provisions relating to defaults, rights of cure, default rate of interest, installment payments, late charges, periodic review of Borrower's financial condition, and covenants) nor any act of Lender pursuant to any such provisions shall limit or Summit Design, Inc. 4/9/97 Page 15 impair Lender's right or ability to require Borrower's payment in full of all amounts owing hereunder immediately upon Lender's demand. 15. REQUESTS FOR ADVANCES (a) Any Advance may be made or interest rate option selected upon the request of Borrower (if an individual), any of the undersigned (if Borrower consists of more than one individual), any person or persons authorized in subsection (b) of this Section 15, and any person or persons otherwise authorized to execute and deliver promissory notes to Lender on behalf of Borrower. (b) Borrower hereby authorizes any ____ of the following individuals to request Advances and to select interest rate options:______unless Lender is otherwise instructed in writing. (c) All Advances shall be disbursed by deposit directly to Borrower's account number ____at ____ brance of Lender, or by cashier's check issued to Borrower. (d) Borrower agrees that Lender shall have no obligation to verify the identity of any person making any request pursuant to this Section 15, and Borrower assumes all risks of the validiy and authorization of such requests. In consideration of Lender agreeing, at its sole discretion, to make Advances upon such requests, Borrower promises to pay holder, in accordance with the provisions of this note, the Principal Balanc together with interest thereon and other sums due hereunder, although any Advances may have been requested by a person or persons not authorized to do so. 16. PERIODIC REVIEW. Lender will review Borrower's credit accomodations periodically. At the time of the review, Borrower will furnish Lender with any additional information regarding Borrower's financial condition and business operations that Lender requests. This information may include but is not limited to, financial statements, tax returns, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets and forecasts. If upon review, Lender, in its sole discretion, determines that there has been a material adverse change in Borrower's financial condition, Borrower will be in default. Upon default, lender shall have all rights specified herein. 17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid and addressed to Borrower at the last known address of Borrower as shown on holder's records. If Borrower consists of more than one person, notification of any said persons shall be complete notification of all. 18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced, Borrower promises to pay all costs of collecting overdue amounts. Without limiting the foregoing , in the event that holder consults an attorney regarding the enforcement of any of its rights under this note or any ocument securing the same, or if this note is placed in the hands of an attorney for collection or if suit or litigation is brought to enforse this note or any document securing the same, Borrower promises to pay all costs thereof including such additional sums as the court or arbitrator(s) may adjudge reasonable as attorney fees, including without limitation, costs and attorney fees incurred in any appellate court, in any proceeding under the Summit Design, Inc. 4/9/97 Page 16 bankruptcy code, or in any receivership and post-judgement attorney fees incurred in enforcing any judgement. 19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or otherwise, waives diligence, demand, presentment for payment, notice of non-payment, protest and notice of protest and waives all defenses based on suretyship or impairment of collateral. Without notice to Borrower and without diminishing or affecting Lender's rights or Borrower's obligations hereunder, Lender may deal in any manner with any person who at any time is liable for, or provides any real or personal property collateral for, any indebtedness of Borrower to Lender, including the indebtedness evidenced by this note. Without limiting the foregoing, Lender may, in its sole discretion: (a) make secured or unsecured loans to Borrower and agree to any number of waivers, modifications, extensions and renewals of any length of such loans, including the loan evidenced by this note; (b) impair, release (with or without substitution of new collateral), fail to perfect a security interest in, fail to preserve the value of, fail to dispose of in accordance with applicable law, any collateral provided by any person; (c) sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. 20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers are joint and several and are binding upon any marital community of which any of the undersigned are members. Holder's rights and remedies under this note shall be cumulative. 21. SEVERABILITY. If any term or provision of this note is declared by a court of competent jurisdiction to be illegal, invalid or unenforceable for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable, and this note shall be construed as if such illegal, invalid or unenforcable provision had not been contained herein. 22. ARBITRATION. (a) Either Lender or Borrower may require that all disputes, claims, counterclaims and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this note or any transaction of which this note is a part ( the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of the U.S. Code. All claims will be subject to the statutes of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the arbitration procedure ( as opposed to any Claims of Borrower) would be to materially impair Lender's ability to realize on any collateral securing the Loan. (b) If arbitration occurs and each party's claim is less than $100,000, one neutral arbitrator will decide all issues; if any party's claim is $100,000 or more,three neutral arbitrators will decide all issues. All arbitrators will be active Oregon State Bar members in good standing. All arbitration hearings will be held in Portland, Oregon. In addition to all other powers, the arbitrator(s) shall have the exclusive right to Summit Design, Inc. 4/9/97 Page 17 determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. (c) If either party institutes any judicial proceeding relating to the Loan, such action shall not be a waiver of the right to submit any Claim to arbitration. In addition, each has the right before, during and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) Setoff; (ii) self-help repossession; (iii) judicial or non-judicial foreclosure against real or personal property collateral;and (iv) provisional remedies, including injunction, appointment of receiver, attachement, claim and delivery and replevin. 23. GOVERNING LAW. This note shall be governed by and construed and enforced in accordance with the laws of the State of Oregon without regard to conflicts of law principles; PROVIDED, however, that to the extent that Lender has greater rights or remedies under Federal law, this provision shall not be deemed to deprive Lender of such rights and remedies as may be available under Federal law. 24. DISCLOSURE. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUCT BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE. Summit Design, Inc. 4/9/97 Page 18 EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DOCUMENT. SUMMIT DESIGN, INC. - -------------------------------- -------------------------------- Borrower Name Signature of Individual Borrower /s/ C. Albert Koob, Chief Financial Officer -------------------------------- By Title Signature of Individual Borrower - -------------------------------- -------------------------------- By Title Signature of Individual Borrower For valuable consideration, Lender agrees to the terms of the arbitration provision set forth in this note. Lender Name:__________________________ By:_________________________________ Title:______________________________ Date EX-10.22 3 EXHIBIT 10-22 LOAN AGREEMENT BETWEEN SUMMIT DESIGN, INC. AND DASYS, INC. JULY 16, 1997 TABLE OF CONTENTS PAGE ---- ARTICLE 1. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4 Plural Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.5 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.8 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.9 Calculation of Interest and Fees. . . . . . . . . . . . . . . . . . 2 1.10 Other Interpretive Provisions . . . . . . . . . . . . . . . . . . . 2 ARTICLE 2. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Terms; Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Interest Payments . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.3 Maturity; Payment of Outstanding Loans; Termination of Obligations. 3 2.4 Proceeds of the Loans . . . . . . . . . . . . . . . . . . . . . . . 4 2.5 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.6 Other Payment Terms . . . . . . . . . . . . . . . . . . . . . . . . 5 2.7 Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.8 Loan Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.9 Security; Further Assurances. . . . . . . . . . . . . . . . . . . . 5 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. . . . . . . . . . . . 6 3.1 Due Incorporation, Qualification, etc.. . . . . . . . . . . . . . . 6 3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Enforceability. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.4 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.5 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6 No Violation or Default . . . . . . . . . . . . . . . . . . . . . . 6 3.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.8 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 7 3.10 Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.11 No Agreements to Sell Assets. . . . . . . . . . . . . . . . . . . . 8 3.12 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . 8 3.13 Other Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.14 Governmental Charges and Other Indebtedness . . . . . . . . . . . . 8 3.15 Subsidiaries, etc.. . . . . . . . . . . . . . . . . . . . . . . . . 8 3.16 Catastrophic Events; Labor Disputes . . . . . . . . . . . . . . . . 9 -i- TABLE OF CONTENTS (CONTINUED) PAGE ---- 3.17 No Material Adverse Effect. . . . . . . . . . . . . . . . . . . . . 9 3.18 Accuracy of Information Furnished . . . . . . . . . . . . . . . . . 9 3.19 Certain Agreements of Officers, Employees and Consultants . . . . . 9 3.20 Contracts or Commitments; Indebtedness. . . . . . . . . . . . . . . 9 3.21 GM Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . .10 3.22 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . .10 3.23 Deposit Accounts and Investment Accounts. . . . . . . . . . . . . .10 ARTICLE 4. CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . .10 4.1 Principal Loan Documents. . . . . . . . . . . . . . . . . . . . . .10 4.2 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . .11 4.3 Amendment of Borrower Stock Option Plan . . . . . . . . . . . . . .11 4.4 Amendment of GM Agreement.. . . . . . . . . . . . . . . . . . . . .11 4.5 Representations and Warranties Correct. . . . . . . . . . . . . . .11 4.6 Compliance Certificate. . . . . . . . . . . . . . . . . . . . . . .11 4.7 Amendment to Articles of Incorporation. . . . . . . . . . . . . . .11 4.8 Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . .11 4.9 Consents; Permits; Waivers. . . . . . . . . . . . . . . . . . . . .12 4.10 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . .12 4.11 Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . .12 4.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .12 4.13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 4.14 Conditions to Lender's Obligation to Make Each Loan . . . . . . . .12 4.15 Agreement to Deliver. . . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE 5. COVENANTS OF BORROWER.. . . . . . . . . . . . . . . . . . . . . .13 5.1 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . .13 5.2 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . .15 ARTICLE 6. ADDITIONAL LENDER RIGHTS. . . . . . . . . . . . . . . . . . . . .17 6.1 Notice of Events Not in Ordinary Course . . . . . . . . . . . . . .17 6.2 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . .17 6.3 Appraisal of Material Software. . . . . . . . . . . . . . . . . . .18 6.4 Additional Actions in Connection with Borrower's Stock Option Plan.18 ARTICLE 7. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . .18 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . .18 7.2 Rights of Lender upon Default . . . . . . . . . . . . . . . . . . .20 ARTICLE 8. CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . . . . . .20 -ii- TABLE OF CONTENTS (CONTINUED) PAGE ---- ARTICLE 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . .21 9.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 9.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 9.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . .22 9.5 Waivers; Amendments . . . . . . . . . . . . . . . . . . . . . . . .23 9.6 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . .23 9.7 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 9.8 No Third Party Rights . . . . . . . . . . . . . . . . . . . . . . .24 9.9 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . . . . .24 9.10 Arbitration.. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 9.11 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 SCHEDULE I - DEFINITIONS SCHEDULE II - NOTICE OF BORROWING SCHEDULE III - DISCLOSURE SCHEDULE SCHEDULE IV - BUDGET EXHIBIT A - NOTE EXHIBIT B - SECURITY AGREEMENT EXHIBIT C - STOCK PLEDGE AGREEMENT EXHIBIT D - INTELLECTUAL PROPERTY SECURITY AGREEMENT EXHIBIT E - PURCHASE OPTIONS EXHIBIT F - DISTRIBUTION AGREEMENT EXHIBIT G - EMPLOYMENT AGREEMENT EXHIBIT H - ESCROW AGREEMENT -iii- LOAN AGREEMENT This LOAN AGREEMENT (this "LOAN AGREEMENT"), dated as of July 16, 1997 is entered into by and between: (1) Summit Design, Inc., a Delaware corporation ("LENDER"); and (2) Dasys, Inc., a Pennsylvania corporation ("BORROWER"). RECITALS A. Borrower desires to obtain financing for working capital purposes. B. Lender desires to assist Borrower by providing such financing subject to the terms and conditions of this Loan Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the covenants, conditions and agreements set forth herein, the parties agree as follows: ARTICLE 1. INTERPRETATION. 1.1 DEFINITIONS. Unless otherwise indicated in this Loan Agreement, each term set forth in Schedule I, when used in this Loan Agreement, shall have the respective meaning given to that term in Schedule I or in the provision of this Loan Agreement referenced in Schedule I. 1.2 GAAP. Unless otherwise indicated in this Loan Agreement, all accounting terms used in this Loan Agreement shall be construed, and all accounting and financial computations hereunder or thereunder shall be computed, in accordance with GAAP. If GAAP changes during the term of this Loan Agreement such that any covenants contained herein would then be calculated in a different manner or with different components, Borrower and Lender agree to negotiate in good faith to amend this Loan Agreement in such respects as are necessary to conform those covenants as criteria for evaluating Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP; PROVIDED, HOWEVER, that, until Borrower and Lender so amend this Loan Agreement, all such covenants shall be calculated in accordance with GAAP as in effect immediately prior to such change. 1.3 HEADINGS. Headings in this Loan Agreement and each of the other Loan Documents are for convenience of reference only and are not part of the substance hereof or thereof. 1.4 PLURAL TERMS. All terms defined in this Loan Agreement or any other Loan Document in the singular form shall have comparable meanings when used in the plural form and VICE VERSA. 1.5 TIME. All references in this Loan Agreement and each of the other Loan Documents to a time of day shall mean Oregon time, unless otherwise indicated. 1.6 GOVERNING LAW. This Loan Agreement and each of the other Loan Documents shall be governed by and construed in accordance with the laws of the State of Delaware without reference to conflicts of law rules. 1.7 CONSTRUCTION. Each of this Loan Agreement and the other Loan Documents is the result of negotiations among, and has been reviewed by, Borrower, Lender and their respective counsel. Accordingly, this Loan Agreement and the other Loan Documents shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Borrower or Lender. 1.8 ENTIRE AGREEMENT. This Loan Agreement and each of the other Loan Documents, taken together, constitute and contain the entire agreement of Borrower and Lender and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof. 1.9 CALCULATION OF INTEREST AND FEES. All calculations of interest and fees under this Loan Agreement and the other Loan Documents for any period shall include the first day of such period and exclude the last day of such period. 1.10 OTHER INTERPRETIVE PROVISIONS. References in this Loan Agreement to "Recitals," "Sections," "Paragraphs," "Subparagraphs," "Exhibits" and "Schedules" are to recitals, sections, paragraphs, subparagraphs, exhibits and schedules herein and hereto unless otherwise indicated. References in this Loan Agreement and each of the other Loan Documents to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Loan Agreement or any other Loan Document shall refer to this Loan Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Loan Agreement or such other Loan Document, as the case may be. The words "include" and "including" and words of similar import when used in this Loan Agreement or any other Loan Document shall not be construed to be limiting or exclusive. ARTICLE 2. LOANS. 2.1 TERMS; TIMING. (a) Subject to the terms and conditions of this Loan Agreement, Lender agrees to advance to Borrower one or more term loans (each, a "LOAN" and collectively, the "LOANS") in an aggregate principal amount not to exceed $2,500,000. Each Loan shall be in an amount of at least $50,000 or any integral multiple of $10,000 in excess thereof and shall be made on a date at least five (5) Business Days after the delivery to Lender in the manner specified in Section 9.1 of a notice of borrowing in the form of Schedule II hereto (the "NOTICE OF BORROWING"), which Notice of Borrowing shall have been approved in accordance with Section 2.1(b) below prior to any obligation on the part of Lender to provide such funds. -2- (b) Except as provided in Section 2.1(b)(i) below, Borrower shall be entitled to submit not more than one Notice of Borrowing with respect to any calendar quarter. In the event Borrower desires to draw down a Loan with respect to any calendar quarter, at least five (5) Business Days prior to the beginning of such calendar quarter, Borrower shall submit to the Budget Committee a Notice of Borrowing specifying in reasonable detail Borrower's estimated expenses and working capital requirements for such upcoming calendar quarter on a monthly basis, which expenses and working capital requirements shall be in accordance with the then-existing Budget. Disbursements of Loans may only be requested by Borrower in accordance with the then-existing Budget, and Lender shall have no obligation to make any Loan which is not in accordance therewith. In addition, each Notice of Borrowing shall be subject to the review of the Budget Committee; provided, however that the Budget Committee shall not have the discretion to disapprove a Loan that is otherwise within the then-existing Budget. The Budget Committee shall approve any qualified Notice of Borrowing within ten (10) days after the receipt thereof. After review and approval by the Budget Committee, the Notice of Borrowing, including any adjustments mandated by the Budget Committee, shall be submitted to Lender for draw down of a Loan in accordance with Section 2.1(a) above. (i) Notwithstanding the provisions of Section 2.1(b), Borrower may submit to the Budget Committee up to two (2) additional Notices of Borrowing during any calendar quarter (a "Monthly Notice"). A Monthly Notice must be submitted at least five (5) Business Days prior to the beginning of such month and shall specify in reasonable detail Borrower's estimated expenses and working capital requirements for such upcoming month, which expenses and working capital requirements shall be in accordance with the then-existing Budget. Lender shall have no obligation to make any Loan which is not in accordance with the then-existing Budget. Each Monthly Notice shall be subject to the review of the Budget Committee. The Budget Committee shall approve any qualified Monthly Notice within five (5) days after the receipt thereof. After review and approval by the Budget Committee, the Monthly Notice, including any adjustments mandated by the Budget Committee, shall be submitted to Lender for draw down of a Loan in accordance with Section 2.1(a) above. 2.2 INTEREST PAYMENTS. Borrower shall pay interest on the unpaid principal amount of the Loans from the date of each such Loan until the Maturity thereof, quarterly within thirty (30) days of the last Business Day of each calendar quarter, beginning on September 30, 1997, and at Maturity, at a rate per annum equal at all times to the Prime Rate (as in effect on the first day of each new quarterly period) plus two percent (2 %). All computations of such interest shall be based on a year of 360 days for actual days elapsed. 2.3 MATURITY; PAYMENT OF OUTSTANDING LOANS; TERMINATION OF OBLIGATIONS. (a) MATURITY DATE. Unless earlier prepaid, all outstanding Loans shall be due and payable on April 1, 2000 (the "MATURITY DATE"); provided, however that no Loans shall be made after December 31, 1999. (b) PAYMENT OF OUTSTANDING LOANS. Unless earlier prepaid, on the Maturity Date, Borrower shall repay all outstanding Loans, including all unpaid fees, costs, expenses, accrued interest and principal (the "Aggregate Loan Amount"), in lawful money of the United States and in same day or immediately available funds; provided, however, that prior to the Maturity Date, Borrower may, by vote of its shareholders including the affirmative votes of the holders of a majority of the outstanding shares of preferred stock, elect to repay the Aggregate Loan Amount by tendering to Lender one hundred percent (100%) of Borrower's outstanding Equity Securities, duly endorsed in blank pursuant to the Pledge Agreement. In the event that the Fair Market Value of Borrower is greater than the Aggregate Loan Amount, Lender shall pay to the holders of Borrower's Equity Securities the difference between the Fair Market Value of Borrower and the Aggregate Loan Amount. Any such -3- payment by Lender to holders of Borrower's Equity Securities shall be made, at the option of Lender, in cash or Lender Common Stock (valued at the Fair Market Value of Lender Common Stock). In the event that the Fair Market Value of Borrower is less than the Aggregate Loan Amount, all Obligations of Borrower owing pursuant to this Loan Agreement and the Loan Documents shall be deemed to be satisfied completely upon tender of Borrower's Equity Securities to Lender, duly endorsed in blank. Any payment by Lender pursuant to this Section 2.3(b), whether in cash or Lender Common Stock, shall be made in accordance with written instructions received from Borrower's Representatives, and upon such payment, Lender shall have no liability to any holder of Borrower's Equity Securities for any amounts otherwise payable hereunder. (i) REGISTRATION OF LENDER COMMON STOCK. In the event that Lender elects to deliver Lender Common Stock to holders of Borrower's Equity Securities, pursuant to either Section 2.3(b) above or upon exercise of the Purchase Options, Lender shall file within thirty (30) days of delivery of such Lender Common Stock a registration statement on Form S-3 with the Securities and Exchange Commission covering the shares of Lender Common Stock received by the holders of Borrower's Equity Securities so as to permit the public resale thereof. Lender shall use its reasonable best efforts to have such registration statement declared effective within sixty (60) days of the filing of such registration statement. Such registration shall be on commercially reasonable terms applicable to "demand" registration rights as shall be mutually agreed upon by Lender and holders of Borrower's Equity Securities. Notwithstanding the foregoing, Lender shall have no obligation to file such registration statement (A) prior to the later of (i) the Maturity Date and (ii) thirty (30) days after the date of delivery of Lender Common Stock or (B) if all shares of Lender Common Stock so issued may be sold by the holders thereof within a three-month period pursuant to Rule 144 of the Securities Act following the date as of which the registration statement would otherwise be required to be filed hereunder. (c) TERMINATION OF OBLIGATIONS. Nothing contained in Section 2.3(b) above shall be construed to obligate Lender to accept Borrower's Equity Securities as payment for the Aggregate Loan Amount. In the event Borrower tenders the Equity Securities in accordance with Section 2.3 and Lender notifies Borrower of its intention not to accept such Equity Securities as payment, the Aggregate Loan Amount shall nonetheless be deemed to be satisfied in full and Borrower shall have no further obligations under this Loan Agreement or any other Loan Document, except that the Distribution Agreement will be modified in accordance with the provisions contained therein. 2.4 PROCEEDS OF THE LOANS. Borrower shall use the proceeds of the Loans solely to satisfy current expense requirements and for general working capital purposes. 2.5 PREPAYMENTS. (a) TERMS OF ALL PREPAYMENTS. Upon the prepayment of any Loan (whether such prepayment is an optional prepayment under Section 2.5(b) or a mandatory prepayment required by any other provision of this Loan Agreement or the other Loan Documents, including, without limitation, a prepayment upon acceleration), Borrower shall pay to Lender all accrued interest to the date of such prepayment on the amount prepaid. (b) OPTIONAL PREPAYMENTS. At its option, Borrower may, upon three (3) Business Days' notice to Lender, prepay the Loans in whole, or in part in the amount of Ten Thousand Dollars ($10,000) or any integral multiple thereof. -4- (c) APPLICATION OF PREPAYMENTS. All prepayments hereunder shall be applied first to unpaid fees, costs and expenses then due and payable under this Loan Agreement or the other Loan Documents, second to accrued interest then due and payable under this Loan Agreement or the other Loan Documents and finally to reduce the principal amount of outstanding Loans. 2.6 OTHER PAYMENT TERMS. (a) PLACE AND MANNER. Other than pursuant to Section 2.3(b)(i), Borrower shall make all payments due to Lender hereunder to a bank account designated by Lender or, at Lender's option, at the address specified in Section 9.1, in each case in lawful money of the United States and in same day or immediately available funds. (b) DATE. Whenever any payment due hereunder shall fall due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) DEFAULT RATE. From and after the occurrence of an Event of Default and during the continuance thereof, Borrower shall pay interest on the aggregate, outstanding balance of the Loans, and on interest (compounded monthly) and other amounts not paid when due hereunder or under the other Loan Documents, from the date due thereof until those amounts are paid in full at a per annum rate equal to the Prime Rate PLUS three percent (3%), such rate to change from time to time as the Prime Rate shall change. All computations of such interest shall be based on a year of 360 days for actual days elapsed. 2.7 NOTE. The obligation of Borrower to repay the Loans and to pay interest thereon at the rates provided herein shall be evidenced by a promissory note in the form of Exhibit A (the "NOTE"). 2.8 LOAN FUNDING. Lender shall disburse the proceeds of the Loans into a bank account of Borrower in which Lender has a first priority perfected security interest. 2.9 SECURITY; FURTHER ASSURANCES. (a) SECURITY. The Obligations shall be secured by the following: (i) A Security Agreement in the form of Exhibit B hereto (the "SECURITY AGREEMENT"); (ii) A Stock Pledge Agreement in the form of Exhibit C hereto (the "PLEDGE AGREEMENT"), executed by each holder of Equity Securities of Borrower; and (iii) An Intellectual Property Security Agreement in the form of Exhibit D hereto (the "INTELLECTUAL PROPERTY SECURITY AGREEMENT"). (b) FURTHER ASSURANCES. Borrower shall deliver, or shall cause to be delivered, to Lender the Security Agreement, the Pledge Agreement and the Intellectual Property Security Agreement and such other instruments, agreements, certificates, opinions and documents as Lender may reasonably request to create, perfect, evidence and maintain (i) a first priority security interest of Lender in all of the assets of Borrower and the Equity Securities of Borrower as further set forth in the Security Agreement, the Pledge Agreement and the -5- Intellectual Property Security Agreement and (ii) the rights of Lender under this Loan Agreement and the other Loan Documents. Borrower shall fully cooperate with Lender and perform all additional acts reasonably requested by Lender to effect the purposes of the foregoing and the rights granted to Lender hereunder. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce Lender to enter into this Loan Agreement and to make Loans hereunder, Borrower represents and warrants to Lender that, except as set forth in the Disclosure Schedule (which Disclosure Schedule shall set forth exceptions to each Section of this Article 3 in a separate item and no exception to one Section shall be deemed to relate to another Section unless a specific cross-reference is made in the Disclosure Schedule item corresponding to such other Section): 3.1 DUE INCORPORATION, QUALIFICATION, ETC. Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation; (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (iii) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a Material Adverse Effect. 3.2 AUTHORITY. The execution, delivery and performance by Borrower of each Loan Document to be executed by Borrower and the consummation of the transactions contemplated thereby (i) are within the power of Borrower and (ii) have been duly authorized by all necessary actions on the part of Borrower. 3.3 ENFORCEABILITY. Each Loan Document executed, or to be executed, by Borrower has been, or will be, duly executed and delivered by Borrower and constitutes, or will constitute, a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally and general principles of equity. 3.4 NON-CONTRAVENTION. The execution and delivery by Borrower of the Loan Documents executed by Borrower and the performance and consummation of the transactions contemplated thereby do not and will not (i) violate any Requirement of Law applicable to Borrower; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Borrower; or (iii) result in the creation or imposition of any Lien upon any property, asset or revenue of Borrower (except such Liens as may be created in favor of Lender pursuant to this Loan Agreement or the other Loan Documents). 3.5 APPROVALS. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Loan Documents executed by Borrower and the performance and consummation of the transactions contemplated thereby. 3.6 NO VIOLATION OR DEFAULT. Borrower is not in violation of or in default with respect to (i) any Requirement of Law; (ii) any Contractual Obligation (nor is there any waiver in effect which, if not in effect, would result in such a violation or default), where, in each case, such violation or default, individually, or together with all such violations or defaults, could reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, Borrower (A) has not violated any Environmental Laws, -6- (B) does not have any liability under any Environmental Laws, or (C) has not received notice or other communication of an investigation nor is under investigation by any Governmental Authority having authority to enforce Environmental Laws, where such violation, liability or investigation could reasonably be expected to have a Material Adverse Effect. No Event of Default or Default has occurred and is continuing. 3.7 LITIGATION. Except as set forth (with estimates of the dollar amounts involved) in Item 3.7 of the Disclosure Schedule, no actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of Borrower, threatened against Borrower at law or in equity in any court or before any other Governmental Authority which if adversely determined (i) would (alone or in the aggregate) have a Material Adverse Effect or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Borrower of the Loan Documents or the transactions contemplated thereby. 3.8 TITLE. Borrower owns and has good and marketable title in fee simple absolute to, or a valid leasehold interest in, all its real properties and good title to its other assets and properties as reflected in the most recent Financial Statements delivered to Lender (except those assets and properties disposed of in the ordinary course of business since the date of such Financial Statements) and all assets and properties acquired by Borrower since such date (except those disposed of in the ordinary course of business). Such assets and properties are subject to no Lien, except for Permitted Liens. 3.9 FINANCIAL STATEMENTS. The Financial Statements of Borrower which have been delivered to Lender, (i) are in accordance with the books and records of Borrower, which have been maintained in accordance with good business practice; (ii) have been prepared in conformity with GAAP; and (iii) fairly present the consolidated financial position of Borrower as of the dates presented therein and the results of operations, and changes in financial positions or cash flows, as the case may be, for the periods presented therein. Borrower does not have any contingent obligations, liability for taxes or other outstanding obligations which are material in the aggregate, except as disclosed in the Financial Statements dated December 31, 1996, furnished by Borrower to Lender prior to the date hereof. 3.10 EQUITY SECURITIES. Borrower's total authorized and issued capitalization (including the appropriate conversion ratios) is as set forth in Item 3.10 of the Disclosure Schedule. The Equity Securities of Borrower have the respective rights, preferences and privileges set forth in Borrower's Charter Documents in effect on the date hereof. All of the outstanding Equity Securities of the Borrower have been duly authorized and are validly issued, fully paid and nonassessable. Except as expressly referenced herein or as set forth in Item 3.10 of the Disclosure Schedule, there are as of the date of this Loan Agreement no options, warrants or rights to purchase Equity Securities authorized, issued or outstanding, nor is Borrower obligated in any other manner to issue shares of its Equity Securities. There are no restrictions on the transfer of shares of capital stock of Borrower, other than those imposed by Borrower's Charter Documents as of the date hereof, or relevant state and federal securities laws, and no holder of any Equity Security of Borrower is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which Borrower is a party or that are otherwise binding upon Borrower. The offer and sale of all shares of Equity Securities of Borrower issued before the Closing Date complied with or were exempt from registration or qualification under all applicable federal and state securities laws. No Person has the right to demand or other rights to cause Borrower to file any registration statement under the Securities Act, relating to any Equity Securities of Borrower presently outstanding or that may be subsequently issued, or any right to participate in any such registration statement. -7- 3.11 NO AGREEMENTS TO SELL ASSETS. Borrower does not have any legal obligation, absolute or contingent, to any Person to sell any of the assets of Borrower (other than sales in the ordinary course of business), or to effect any merger, consolidation or other reorganization of Borrower or to enter into any agreement with respect thereto. 3.12 EMPLOYEE BENEFIT PLANS. (a) Borrower and its ERISA Affiliates have no Employee Benefit Plan that is an "employee pension benefit plan" (within the meaning of section 3(2) of ERISA). Neither Borrower nor any ERISA Affiliate has any liability with respect to any post-retirement benefit under any Employee Benefit Plan which is a welfare plan (as defined in section 3(1) of ERISA), other than liability for health plan continuation coverage described in Part 6 of Title I(B) of ERISA, which liability for health plan contribution coverage cannot reasonably be expected to have a Material Adverse Effect. (b) Each Employee Benefit Plan complies, in both form and operation, in all material respects, with its terms, ERISA and the Code, and no condition exists or event has occurred with respect to any such plan which would result in the incurrence by either Borrower or any ERISA Affiliate of any material liability, fine or penalty. Each Employee Benefit Plan, related trust agreement, arrangement and commitment of Borrower or any ERISA Affiliate is legally valid and binding and in full force and effect. No Employee Benefit Plan is being audited or investigated by any government agency or is subject to any pending or threatened claim or suit. Neither Borrower nor any ERISA Affiliate nor any fiduciary of any Employee Benefit Plan has engaged in a prohibited transaction under section 406 of ERISA or section 4975 of the Code. (c) Neither Borrower nor any ERISA Affiliate contributes to any Multiemployer Plan. Neither Borrower nor any ERISA Affiliate has incurred any material liability (including secondary liability) to any Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan under section 4201 of ERISA or as a result of a sale of assets described in section 4204 of ERISA. Neither Borrower nor any ERISA Affiliate has been notified that any Multiemployer Plan is in reorganization or insolvent under and within the meaning of section 4241 or section 4245 of ERISA or that any Multiemployer Plan intends to terminate or has been terminated under section 4041A of ERISA. 3.13 OTHER REGULATIONS. Borrower is not subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code or to any federal or state statute or regulation limiting its ability to incur Indebtedness. 3.14 GOVERNMENTAL CHARGES AND OTHER INDEBTEDNESS. Borrower has filed or caused to be filed all tax returns which are required to be filed by it. Borrower has paid, or made provision for the payment of, all taxes and other Governmental Charges which have or may have become due pursuant to said returns or otherwise and all other Indebtedness, except such Governmental Charges or Indebtedness, if any, which are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided or which could not reasonably be expected to have a Material Adverse Effect if unpaid. 3.15 SUBSIDIARIES, ETC. Borrower has no Subsidiaries and is not a partner in any partnership or a joint venturer in any joint venture. -8- 3.16 CATASTROPHIC EVENTS; LABOR DISPUTES. Neither Borrower nor any of its properties is or has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty that could reasonably be expected to have a Material Adverse Effect. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which Borrower is a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to the best knowledge of Borrower, jurisdictional disputes or organizing activity occurring or threatened which could reasonably be expected to have a Material Adverse Effect. 3.17 NO MATERIAL ADVERSE EFFECT. No event has occurred and, to the knowledge of Borrower, no condition exists which could reasonably be expected to have a Material Adverse Effect. 3.18 ACCURACY OF INFORMATION FURNISHED. None of the Loan Documents and none of the other certificates, statements or information furnished to Lender by or on behalf of Borrower in connection with the Loan Documents or the transactions contemplated thereby contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.19 CERTAIN AGREEMENTS OF OFFICERS, EMPLOYEES AND CONSULTANTS. (a) No officer, employee or consultant of Borrower is, or is now expected to be, in violation of any term of any employment contract, proprietary information agreement, nondisclosure agreement, noncompetition agreement, or any other contract or agreement or any restrictive covenant relating to the right of any such officer, employee or consultant to be employed by Borrower because of the nature of the business conducted or to be conducted by Borrower or relating to the use of trade secrets or proprietary information of others, and to the best of Borrower's knowledge, after due inquiry, the continued employment of Borrower's officers, employees and consultants do not subject Borrower to any liability for any claim or claims, which if adversely decided could reasonably be expected to have a Material Adverse Effect, arising out of or in connection with any such contract, agreement, or covenant. (b) To the knowledge of Borrower, after due inquiry, no officers of Borrower, and no employee or consultant of Borrower whose termination or discontinuation of full-time employment, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, has any present intention of terminating or otherwise materially altering his or her employment or consulting relationship with Borrower. (c) All officers, employees and consultants of Borrower have executed an agreement relating to the use of trade secrets or proprietary information of Borrower, and Borrower has provided to Lender a copy of such agreements. 3.20 CONTRACTS OR COMMITMENTS; INDEBTEDNESS. (a) Neither Borrower nor any of its properties is subject to any Contractual Obligation or Requirement of Law which could reasonably be expected to have a Material Adverse Effect. Except for this Loan Agreement, the Note and the other Loan Documents, Borrower is not a party to any contracts or commitments (or group of related contracts or commitments) involving more than Fifty Thousand Dollars ($50,000) or having a term (including renewals or extensions optional with another party) of more than one (1) -9- year from the date thereof. Except as set forth in Item 3.20 of the Disclosure Schedule, Borrower has no Indebtedness other than Permitted Indebtedness. 3.21 GM AGREEMENT. The GM Agreement is valid, binding and in full force and effect and is enforceable by Borrower in accordance with its terms and will continue in full force and effect after the Closing. Borrower has performed all its obligations required to be performed by it to date under the GM Agreement, and Borrower is not in breach or default in any material respect thereunder and, to the knowledge of Borrower, GM is not in breach or default in any material respect thereunder. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship of Borrower with GM, and there exists no present or future condition or state of facts or circumstances involving GM that Borrower can now reasonably foresee which would have a Material Adverse Effect on Borrower's business or prevent the conduct of Borrower's business after the consummation of the transactions contemplated by this Loan Agreement and the Loan Documents in essentially the same manner in which such business has heretofore been conducted. Nothing contained in this Section 3.21 shall in any way limit the representations and warranties of Borrower with respect to the GM Agreement contained elsewhere in this Loan Agreement and the Loan Documents. 3.22 TRANSACTIONS WITH AFFILIATES. There are no loans, leases, royalty agreements or other continuing transactions between Borrower and any Affiliate of Borrower, except as set forth on the Disclosure Schedule, all of which are transactions in the ordinary course of business and on terms at least as favorable to Borrower as would be the case in an arms-length transaction with an unaffiliated Person. 3.23 DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS. Except as set forth in Item 3.23 of the Disclosure Schedule, Borrower has no deposit accounts with banks or investment or similar accounts with brokerage firms. ARTICLE 4. CONDITIONS TO CLOSING. Lender's obligation to make the initial Loan is subject to the prior satisfaction or waiver of all the conditions set forth in Sections 4.1 through 4.13 of this Article 4. Lender's obligation to make each subsequent Loan is subject to the prior satisfaction or waiver of all the conditions set forth in Section 4.14 of this Article 4. 4.1 PRINCIPAL LOAN DOCUMENTS. Borrower shall have, or shall have caused to have been, duly executed and delivered to Lender the following documents, each in form and substance satisfactory to Lender: (a) The Loan Agreement; (b) The Note; (c) The Security Agreement; (d) The Intellectual Property Security Agreement; (e) A Pledge Agreement, duly executed by each holder of Borrower's Equity Securities, together with original stock certificates representing 100% of Borrower's Equity Securities, and stock powers executed in blank; -10- (f) The Purchase Options, duly executed by each holder of Equity Securities of Borrower, in the form of Exhibit E hereto; (g) The Distribution Agreement between Lender and Borrower in the form attached hereto as Exhibit F (the "DISTRIBUTION AGREEMENT"); (h) A Notice of Borrowing (at least five (5) Business Days prior to the Closing Date); and (i) Such Uniform Commercial Code financing statements and other documents, instruments and agreements as Lender may reasonably request to perfect the security interests granted to Lender in the Security Agreement, the Pledge Agreement and the Intellectual Property Security Agreement. 4.2 EMPLOYMENT AGREEMENTS. Borrower shall have entered into employment agreements with each of its executive officers and key employees in the form attached hereto as Exhibit G (collectively, the "EMPLOYMENT AGREEMENTS"). 4.3 AMENDMENT OF BORROWER STOCK OPTION PLAN. Borrower shall have amended the Dasys Inc. Stock Purchase and Stock Option Plan of 1992 (the "Stock Option Plan"), in form and substance satisfactory to Lender, to provide, among other things, (i) for an authorized option pool not to exceed ten percent (10%) of the outstanding Equity Securities of Borrower at any given time, on an as-converted/exercised basis, and (ii) that each such option will obligate the optionholder to be bound by the terms of the Pledge Agreement and the Purchase Options. 4.4 AMENDMENT OF GM AGREEMENT. Borrower shall have entered into an amendment to the GM Agreement in form and substance reasonably satisfactory to Lender. 4.5 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by Borrower in Article 3 hereof, and by each holder of Borrower's Equity Securities in the Purchase Options and the Stock Pledge Agreements, shall be true and correct as of the Closing Date and after giving effect to the making of the initial Loan. 4.6 COMPLIANCE CERTIFICATE. Borrower shall have delivered to Lender on the Closing Date a certificate of Borrower certifying the accuracy of all representations and warranties set forth in Article 3 and certifying that all conditions to closing have been completed, executed by the Chief Executive Officer of Borrower and dated as of such Closing Date. 4.7 AMENDMENT TO ARTICLES OF INCORPORATION. Borrower shall have amended its Articles of Incorporation to modify its total number of authorized shares to 3,155,656 and to prohibit the issuance of any additional Equity Securities without the prior written consent of Lender. 4.8 CORPORATE DOCUMENTS. Borrower shall have delivered to Lender each of the following: (a) The Articles of Incorporation of Borrower, as amended in accordance with Section 4.7, certified as of a recent date prior to the Closing Date by the Secretary of State of Pennsylvania; (b) A Certificate of Good Standing or comparable certificate for Borrower, certified as of a recent date prior to the Closing Date by the Secretary of State of Pennsylvania. -11- (c) A certificate of the Secretary of Borrower, dated the Closing Date, certifying (a) that the Articles of Incorporation of Borrower, delivered to Lender pursuant to Section 4.8(a) hereof, is in full force and effect and has not been amended, supplemented, revoked or repealed since the date of such certification; (b) that attached thereto is a true and correct copy of the Bylaws of Borrower as in effect on the Closing Date; (c) that attached thereto are true and correct copies of resolutions duly adopted by the Board of Directors of Borrower and continuing in effect, which authorize the execution, delivery and performance by Borrower of this Loan Agreement and the other Loan Documents executed or to be executed by Borrower and the consummation of the transactions contemplated hereby and thereby; and (d) that there are no proceedings for the dissolution or liquidation of Borrower (commenced or threatened); and (d) A certificate of the Secretary of Borrower, dated the Closing Date, certifying the incumbency, signatures and authority of the officers of Borrower authorized to execute, deliver and perform this Loan Agreement and the other applicable Loan Documents on behalf of Borrower. 4.9 CONSENTS; PERMITS; WAIVERS. Borrower shall have obtained all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Loan Agreement which need to be obtained prior to the Closing Date, including without limitation the consent of Design Solutions, Inc. pursuant to the DSI Distribution Agreement and evidence of qualification of this Loan Agreement and the Note under applicable blue sky laws for the State of Pennsylvania and Oregon. 4.10 LEGAL MATTERS. All material matters of a legal nature which pertain to this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby shall be reasonably satisfactory to Lender and its counsel. 4.11 OPINION OF COUNSEL. There shall have been delivered to Lender a favorable written opinion of Buchanan & Ingersoll, counsel to Borrower, in form and substance reasonably acceptable to Lender, dated as of the Closing Date. 4.12 FINANCIAL STATEMENTS. Borrower shall have delivered to Lender copies of Borrower's most recent Financial Statements, which shall include information no less recent than May 31, 1997. 4.13 INSURANCE. Borrower shall have delivered to Lender an insurance certificate showing Borrower's insurance coverage complying with the provisions of Section 5.1(d) and naming Lender as loss payee with respect to casualty policies and as an additional insured with respect to liability policies. 4.14 CONDITIONS TO LENDER'S OBLIGATION TO MAKE EACH LOAN. The making of each Loan is subject to the further condition that on the date such Loan is made and after giving effect thereto, the following shall be true and correct: (a) The representations and warranties set forth in Article 3 are true and correct in all material respects as if made on such date; (b) No Default or Event of Default has occurred and is continuing or will result from the making of the Loan; (c) Each of the Loan Documents remains in full force and effect; and -12- (d) The Notice of Borrowing shall have been approved by the Budget Committee in accordance with the provisions of Section 2.1(b). The submission by Borrower to Lender of an approved Notice of Borrowing with respect to the Loan shall be deemed to be a representation and warranty by Borrower as of the date thereof as to the above. 4.15 AGREEMENT TO DELIVER. Borrower agrees (not as a condition but as a covenant) to deliver to Lender each item required to be delivered to Lender as a condition to closing under this Article 4. Borrower expressly agrees that the occurrence of the Closing Date prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower's obligation to deliver such item. ARTICLE 5. COVENANTS OF BORROWER. 5.1 AFFIRMATIVE COVENANTS. Until the termination of the commitment to make Loans under this Loan Agreement and the satisfaction in full by Borrower of all Obligations, Borrower shall comply, and shall cause compliance, with the following affirmative covenants unless Lender shall otherwise consent in writing: (a) FINANCIAL STATEMENTS, REPORTS, ETC. Borrower shall furnish to Lender the following, each in such form and such detail as Lender shall reasonably request: (i) Within forty-five (45) days after the last day of each fiscal quarter of Borrower, a copy of the Financial Statements of Borrower for such quarter and for the fiscal year to date, certified by the chief financial officer or controller of Borrower to present fairly the financial condition, results of operations and other information presented therein and to have been prepared in accordance with GAAP consistently applied, subject to normal year end adjustments and except that no footnotes need be included with such Financial Statements; (ii) Within ninety (90) days after the close of each fiscal year of Borrower, (A) copies of the audited Financial Statements of Borrower for such year, audited by independent certified public accountants reasonably acceptable to Lender, (B) copies of the unqualified opinions and management letters delivered by such accountants in connection with such Financial Statements and (C) certificates of such accountants to Lender stating that in making the examination necessary for their opinion they have obtained no knowledge of any Event of Default or Default, or if, in the opinion of such accountants, an Event of Default or Default has occurred, a statement as to the nature thereof (or other certificates of such accountants reasonably acceptable to Lender); (iii) Contemporaneously with the quarterly and year-end financial statements required by the foregoing CLAUSES (ii) AND (iii), a certificate of the president or chief financial officer of Borrower stating that no Event of Default and no Default has occurred, or, if any such Event of Default or Default has occurred, a statement as to the nature thereof and what action Borrower proposes to take with respect thereto; -13- (iv) As soon as possible and in no event later than five (5) Business Days after the occurrence or existence of: (A) any Reportable Event under any Employee Benefit Plan or Multiemployer Plan; (B) any actual or threatened litigation, suits, claims or disputes against Borrower involving potential monetary damages payable by Borrower of One Hundred Thousand Dollars ($100,000) or more (alone or in the aggregate); (C) any other event or condition which could reasonably be expected to have a Material Adverse Effect; or (D) any Event of Default or Default; the statement of the president or chief financial officer of Borrower setting forth details of such event, condition, Event of Default or Default and the action which Borrower proposes to take with respect thereto; (v) As soon as possible and in no event later than five (5) Business Days after they are filed, copies of all IRS Form 5500 reports for all Employee Benefit Plans required to file such form; (vi) Promptly after the commencement thereof, notice of any and all agreements with any entity, or events, actions, suits and proceedings of the type described in Section 3.7 before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign; (vii) Within sixty (60) days of the commencement of each fiscal year of Borrower, a copy of the draft operating plan and budget of Borrower for such fiscal year, which operating plan and budget shall be finalized within thirty (30) days of the commencement of such fiscal year, in form, substance and detail satisfactory to Lender. Upon the Budget Committee's review and approval, in its sole discretion, of such operating plan and budget, the same shall become the Budget with respect to which Loans may be requested by Borrower in accordance with Section 2.1(b); (viii) Notice of the filing for or issuance of a registered patent or copyright or of the filing for or issuance of a registered trademark with respect to Borrower as soon as Borrower makes such filing or receives such notice and, in any event, within ten (10) business days of Borrower's receipt of such notice; and (ix) Such other instruments, agreements, certificates, opinions, statements, documents and information relating to the operations or condition (financial or otherwise) of Borrower and compliance by Borrower with the terms of this Loan Agreement and the other Loan Documents as Lender may from time to time reasonably request. (b) BOOKS AND RECORDS. Borrower shall at all times keep proper books of record and account in which full, true and correct entries will be made of their transactions in accordance with GAAP. (c) INSPECTIONS. Borrower shall permit any Person designated by Lender, upon reasonable notice and during normal business hours, to visit and inspect any of the properties and offices of Borrower, to examine the books of account of Borrower and to discuss the affairs, finances and accounts of Borrower with, and to be advised as to the same by, their officers, auditors, consultants, advisors and accountants, all at such times and intervals as Lender may reasonably request. Notwithstanding the foregoing, Lender may conduct such inspections no more frequently than once per fiscal quarter. -14- (d) INSURANCE. Borrower shall (i) carry and maintain insurance at its expense of the types and in the amounts customarily carried from time to time during the term of this Loan Agreement by others engaged in substantially the same business as such Person and operating in the same geographic area as such Person, including, but not limited to, fire, public liability, property damage and worker's compensation, such insurance to be in such form as is carried with companies and in amounts satisfactory to Lender, and (ii) deliver to Lender from time to time, as Lender may request, schedules or insurance certificates setting forth all insurance then in effect. All such policies of property insurance shall name Lender as loss payee thereunder and all liability insurance policies shall show Lender as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Lender (or ten (10) days in the case of cancellation for non-payment of premiums) before canceling its policy for any reason. All proceeds under the property insurance shall, at the option of Borrower, be payable to Lender to be applied to the Obligations. (e) GOVERNMENTAL CHARGES AND OTHER INDEBTEDNESS. Borrower shall promptly pay and discharge when due (i) all taxes and other Governmental Charges prior to the date upon which penalties accrue thereon, (ii) all Indebtedness which, if unpaid, could become a Lien upon the property of Borrower and (iii) all other Indebtedness which, if unpaid, could reasonably be expected to have a Material Adverse Effect, except such Indebtedness as may in good faith be contested or disputed, or for which arrangements for deferred payment have been made, provided that in each such case appropriate reserves are maintained in accordance with GAAP and otherwise to the reasonable satisfaction of Lender. (f) USE OF PROCEEDS. Borrower shall use the proceeds of the Loans only for the respective purposes set forth in Section 2.4. (g) GENERAL BUSINESS OPERATIONS. Borrower shall (i) preserve and maintain its corporate existence and all of its rights, privileges and franchises reasonably necessary to the conduct of its business, (ii) conduct its business activities in compliance with all Requirements of Law and Contractual Obligations applicable to such Person, (iii) keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted, and (iv) maintain its chief executive office and principal place of business in Pittsburgh, Pennsylvania unless it shall have given Lender thirty (30) days' prior written notice of its intent to change the location thereof. (h) REGISTRATION OF COPYRIGHTS; SOURCE CODE ESCROW. Borrower shall cause to be registered with the United States Copyright Office within ninety (90) days of the Closing Date the source code and user manuals for all software which is significant to the business of Borrower or software the licensing revenues from which constitute or can reasonably be expected to constitute in excess of five percent (5%) of the consolidated revenue of Borrower (collectively and including source code and user manuals, "MATERIAL SOFTWARE"). On an ongoing basis Borrower will register Material Software and major revisions of Material Software with the United States Copyright Office. On or prior to the Closing Date, Borrower shall have delivered to Escrow Agent pursuant to that certain Escrow Agreement in the form attached hereto as Exhibit H (the "ESCROW AGREEMENT") a true and correct copy of the source code for the Material Software. Not less often than quarterly after the Closing Date, Borrower will deliver copies of the source code for the latest versions of the Material Software and any new Material Software. 5.2 NEGATIVE COVENANTS. Until the termination of the commitment to make Loans under this Loan Agreement and the satisfaction in full by Borrower of all Obligations, and except as otherwise provided in Section 9.3 hereof, Borrower shall comply, and shall cause compliance, with the following negative covenants unless Lender shall otherwise consent in writing: -15- (a) INDEBTEDNESS. Borrower shall not create, incur, assume or permit to exist any Indebtedness except for Permitted Indebtedness. (b) LIENS. Borrower shall not create, incur, assume or permit to exist any Lien on or with respect to any of its assets or property of any character, whether now owned or hereafter acquired, except for Permitted Liens. (c) ASSET DISPOSITIONS. Borrower shall not sell, lease, transfer, license or otherwise dispose of (collectively, a "TRANSFER") any of its assets or property, whether now owned or hereafter acquired, except Transfers in the ordinary course of its business consisting of (i) the sale of software products pursuant to non-exclusive licenses, (ii) sales of fully depreciated, worn-out or obsolete equipment, and (iii) other sales of tangible assets not material to the business of Borrower in an amount not to exceed Twenty Five Thousand Dollars ($25,000) in any fiscal year. (d) MERGERS, ACQUISITIONS, ETC. Borrower shall not consolidate with or merge into any other Person or permit any other Person to merge into it, or acquire all or substantially all of the assets or capital stock of any other Person. (e) INVESTMENTS; SUBSIDIARIES. Borrower shall not make any Investment except for Permitted Investments. Borrower shall not create, acquire or permit to exist any Subsidiary. (f) DIVIDENDS, REDEMPTIONS, ETC. Borrower shall not (i) pay any dividends or make any distributions on its Equity Securities; (ii) purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Securities (other than repurchases by cancellation of indebtedness pursuant to the terms of employee stock purchase plans, employee restricted stock agreements or similar arrangements); (iii) return any capital to any holder of its Equity Securities as such; (iv) make any distribution of assets, Equity Securities, obligations or securities to any holder of its Equity Securities as such; (v) set apart any sum for any such purpose; or (vi) unless unanimously approved by the Board of Directors of Borrower, pay any bonus or bonuses to officers, directors, employees or consultants of Borrower in an aggregate amount greater than One Hundred Thousand Dollars ($100,000) in any twelve (12) month period. (g) ARTICLES OF INCORPORATION. Borrower shall not amend or otherwise modify its Articles of Incorporation, as amended, except in accordance with Section 4.7 hereof. (h) CAPITAL EXPENDITURES. Borrower shall not pay or incur Capital Expenditures which exceed in aggregate in any fiscal year One Hundred Thousand Dollars ($100,000) unless the Board of Directors of Borrower shall have unanimously approved a higher amount. (i) CHANGE IN BUSINESS. Borrower shall not engage, either directly or indirectly through Affiliates, in any business substantially different from its present business. (j) INDEBTEDNESS PAYMENTS. Borrower shall not (i) prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than the Obligations) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money (other than the Obligations) or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders (other than the Obligations). -16- (k) SECURITY ISSUANCES. Borrower shall not issue, offer or sell any Equity Securities of Borrower; provided, however that Borrower may issue options to employees of Borrower hired after the date of this Loan Agreement. Such options shall not in the aggregate exceed ten percent (10%) of the outstanding Equity Securities of Borrower at any given time, on an as-converted/exercised basis, and each such option will obligate the optionholder to be bound by the terms of the Pledge Agreement and the Purchase Options. (l) ERISA. Neither Borrower nor any ERISA Affiliate shall (i) adopt or institute any Employee Benefit Plan that is an employee pension benefit plan within the meaning of section 3(2) of ERISA, (ii) take any action which will result in the partial or complete withdrawal, within the meanings of sections 4203 and 4205 of ERISA, from a Multiemployer Plan, (iii) engage or permit any Person to engage in any transaction prohibited by section 406 of ERISA or section 4975 of the Code involving any Employee Benefit Plan or Multiemployer Plan which would subject either Borrower or any ERISA Affiliate to any tax, penalty or other liability including a liability to indemnify, (iv) incur or allow to exist any accumulated funding deficiency (within the meaning of section 412 of the Code or section 302 of ERISA), (v) fail to make full payment when due of all amounts due as contributions to any Employee Benefit Plan or Multiemployer Plan, (vi) fail to comply with the requirements of section 4980B of the Code or Part 6 of Title I(B) of ERISA, or (vii) adopt any amendment to any Employee Benefit Plan which would require the posting of security pursuant to section 401(a)(29) of the Code, where singly or cumulatively, the above would have a Material Adverse Effect. (m) TRANSACTIONS WITH AFFILIATES. Borrower shall not enter into any Contractual Obligation with any Affiliate or engage in any other transaction with any Affiliate except upon terms at least as favorable to Borrower as an arms-length transaction with unaffiliated Persons and unless the Board of Directors of Borrower shall have unanimously approved such transaction. (n) TERMINATION OF EMPLOYEES. Borrower shall not terminate the employment of any of the individuals covered by the Employment Agreements or any other key employee hired by Borrower after the date hereof. (o) ACCOUNTING CHANGES. Borrower shall not change (i) its fiscal year (currently December 31) or (ii) its accounting practices except as required by GAAP, in which case Borrower shall promptly advise Lender of such change. ARTICLE 6. ADDITIONAL LENDER RIGHTS. 6.1 NOTICE OF EVENTS NOT IN ORDINARY COURSE. Borrower shall provide Lender with written notice at least thirty (30) days prior to the proposed date of closing of any transaction not in the ordinary course of business involving an aggregate amount in excess of Fifty Thousand Dollars ($50,000). 6.2 BOARD OF DIRECTORS. Borrower shall have its authorized number of directors set at five (5) and shall have the Independent Representative serve as a director at all times. Borrower will use its best efforts to have its Board of Directors meet once each calendar quarter. In the event that the number of directors increases to a number greater than five (5), another Independent Representative shall be appointed such that the number of Independent Representatives is never less than twenty percent (20%) of the total number of directors. In addition to the above Independent Representative, Lender's Chief Financial Officer shall have visitation rights with respect to each meeting of Borrower's Board of Directors. -17- 6.3 APPRAISAL OF MATERIAL SOFTWARE. From time to time during the term of this Agreement, Lender may request an independent appraisal of the value of the Material Software. Borrower shall use its best efforts to cooperate with Lender in conducting appraisals of the Material Software. Such appraisals shall be conducted by an independent appraisal firm selected by Lender. Lender shall pay any and all expenses of such appraisal firm. 6.4 ADDITIONAL ACTIONS IN CONNECTION WITH BORROWER'S STOCK OPTION PLAN. During the term of this Agreement and for so long thereafter as the Purchase Options remain exercisable, Borrower shall take such actions as Lender or its counsel may request from time to time to provide that (i) the authorized option pool under the Stock Option Plan does not exceed ten percent (10%) of the outstanding Equity Securities of Borrower at any given time, on an as-converted/exercised basis, and (ii) that each share issued upon exercise of an option granted thereunder, as a condition precedent to issuance of such share, is subject to a pledge agreement and an option agreement on terms and conditions substantially identical to the Pledge Agreement and the Purchase Options. ARTICLE 7. EVENTS OF DEFAULT. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Loan Agreement and the Note; provided, however that if an Event of Default as specified in this Section 7.1 results from the unintentional acts or omissions of Borrower, and Borrower immediately notifies Lender as soon as it becomes aware of any such unintentional act or omission and otherwise undertakes to use its best efforts to cure such Event of Default, it shall not be deemed an Event of Default for purposes of Section 7.2, unless such Event of Default is not and cannot be cured within thirty (30) days and has a Material Adverse Effect: (a) FAILURE TO PAY. Borrower shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest or other payment required under the terms of this Loan Agreement or any other Loan Document on the date due and such payment shall not have been made within five (5) days; or (b) BREACHES OF CERTAIN COVENANTS. Borrower shall fail to observe or perform any covenant, obligation, condition or agreement set forth in Section 5.1(f) or Section 5.2; or (c) BREACHES OF OTHER COVENANTS. Borrower shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Loan Agreement or the other Loan Documents (other than those specified in Sections 7.1(a) and 7.1(b)) and (i) such failure shall continue for fifteen (15) days, or (ii) if such failure is not curable within such fifteen (15) day period, but is reasonably capable of cure within forty-five (45) days, either (A) such failure shall continue for forty-five (45) days or (B) Borrower shall not have commenced a cure in a manner reasonably satisfactory to Lender within the initial fifteen (15) day period; or (d) REPRESENTATIONS AND WARRANTIES. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of Borrower to Lender in writing in connection with this Loan Agreement or any of the other Loan Documents, or as an inducement to Lender to enter into this Loan Agreement, shall be false, incorrect, incomplete or misleading in any material respect when made or furnished; or -18- (e) OTHER PAYMENT OBLIGATIONS. Borrower shall (A)(i) fail to make any payment when due under the terms of any bond, debenture, note or other evidence of Indebtedness to be paid by such Person (excluding this Loan Agreement and the other Loan Documents but including any other evidence of Indebtedness of Borrower to Lender) and such failure shall continue beyond any period of grace provided with respect thereto, or (ii) default in the observance or performance of any other agreement, term or condition contained in any such bond, debenture, note or other evidence of Indebtedness, and (B) the effect of such failure or default is to cause, or permit the holder or holders thereof to cause Indebtedness in an aggregate amount of Fifty Thousand Dollars ($50,000) or more to become due prior to its stated date of maturity; or (f) VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Borrower shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing; or (g) INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Borrower or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Borrower or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or (h) JUDGMENTS. A final judgment or order for the payment of money in excess of Fifty Thousand Dollars ($50,000) (exclusive of amounts covered by insurance issued by an insurer not an Affiliate of Borrower) shall be rendered against Borrower and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of Borrower and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within thirty (30) days after issue or levy; or (i) LOAN DOCUMENTS. Any Loan Document or any material term thereof shall cease to be, or be asserted by Borrower not to be, a legal, valid and binding obligation of Borrower enforceable in accordance with its terms or if the Liens of Lender in any of the assets of Borrower shall cease to be or shall not be valid, first priority perfected Liens or Borrower shall assert that such Liens are not valid, first priority and perfected Liens; or (j) ERISA. Any Reportable Event occurs which constitutes grounds for the termination of any Employee Benefit Plan by the PBGC or for the appointment of a trustee to administer any Employee Benefit Plan, or any Employee Benefit Plan shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed to administer any Employee Benefit Plan; or (k) SALES OF COMPANY SECURITIES. A Sale or offer of any Equity Securities of Borrower; or -19- (l) LOSS OF EMPLOYMENT OF KEY INDIVIDUALS. The termination of employment of any of the employees executing the Employment Agreements, either at the election of the employee or Borrower, except by reason of the death or continued disability of such employee, or a Material Reduction in Employment with respect to any of the employees executing the Employment Agreements; or (m) MATERIAL ADVERSE EFFECT. One or more conditions exist or events have occurred which could reasonably indicate, or reasonably result in, a Material Adverse Effect. 7.2 RIGHTS OF LENDER UPON DEFAULT. (a) Except for an Event of Default covered by Section 7.2(b), upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in Sections 7.1(f) and 7.1(g)) and at any time thereafter during the continuance of such Event of Default, Lender may, by written notice to Borrower, declare all outstanding Obligations payable by Borrower hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Note to the contrary notwithstanding. Upon the occurrence or existence of any Event of Default described in Sections 7.1(f) and 7.1(g), immediately and without notice, all outstanding Obligations payable by Borrower hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Note to the contrary notwithstanding. (b) FORECLOSURE ON COLLATERAL FOR INTENTIONAL BREACH. If an Event of Default is caused by the intentional breach by Borrower of any of the covenants contained in Section 5.2, Borrower acknowledges and agrees that Lender may foreclose on the Collateral and Lender shall have no duty to, and Borrower hereby waives any right that it may have to require Lender to, account to Borrower for any surplus proceeds resulting from any such foreclosure. (c) ADDITIONAL REMEDIES. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Lender may exercise any other right, power or remedy granted to it by the Loan Documents, including without limitation exercise of the Purchase Options, or otherwise permitted to it by law, either by suit in equity or by action at law, or both. ARTICLE 8. CONFIDENTIAL INFORMATION. Each of Lender and Borrower agree not to use any Confidential Information of the other party disclosed to it, for its own use or use by any other Person or for any purpose except to carry out and perform its obligations under agreements between Borrower and Lender, and not to disclose any such Confidential Information except to employees (or consultants subject to confidentiality provisions similar to this Article 8) who are required to have such information in order to carry out and perform such obligations. Borrower and Lender will take all reasonable measures to protect the secrecy and avoid disclosure or use of Confidential Information in order to prevent it from entering the public domain or possession of Persons other than those Persons authorized hereunder to have any such information, which measures shall include, without limitation, the highest degree of care that each utilizes to protect its own confidential information of a similar nature. Either party shall notify the affected party promptly in writing of any misuse or misappropriation of Confidential Information which may come to such party's attention. -20- For purposes of this section, "Confidential Information" means (a) the terms of this Loan Agreement and the other Loan Documents and accompanying transactions, as well as (b) any proprietary information, technical data, trade secrets or know-how, including, without limitation, research, product plans, products, services, customers, markets, software, developments, inventions, processes, formulae, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business or technological information disclosed by either party to the other either directly or indirectly. "Confidential Information" of a disclosing party does not include any information which: (i) is known to the receiving party at the time of disclosure; (ii) has become publicly known through no wrongful act of the receiving party; (iii) has been rightfully received by the receiving party from a third party without restriction on disclosure and without breach of any agreement with the disclosing party; (iv) has been independently developed by the receiving party as evidenced by appropriate documentation; (v) has been approved for release by written authorization executed by an authorized officer of the non-disclosing party; (vi) is required to be disclosed by the receiving party pursuant to a Requirement of Law (including without limitation filing the Loan Documents as exhibits to Lender's periodic reports required under the U.S. securities laws); or (vii) (A) is not provided in writing or on magnetic media, or (B) if provided orally, is not confirmed in writing to be confidential within fifteen (15) days after disclosure. Notwithstanding the foregoing, Borrower may disclose generally to potential customers of Borrower the existence of a collaborative relationship between Borrower and Lender, where such disclosure does not include disclosure of any of the terms of this Loan Agreement or the other Loan Documents. Should Borrower wish to disclose the specific terms of this Loan Agreement or the other Loan Documents to a potential investor or investors, it shall first obtain written consent to such disclosure from Lender, which consent shall not be unreasonably withheld with respect to bona fide potential investors. Notwithstanding the foregoing, Lender may issue a press release with respect to the transactions contemplated hereby to the extent it deems such disclosure necessary or advisable. Each party acknowledges that the other's Confidential Information is unique property of extreme value to the other party, and that unauthorized use or disclosure thereof would cause the other party irreparable harm that could not be compensated by monetary damages. Accordingly, each party agrees that the other will be entitled to injunctive and preliminary relief to remedy any actual or threatened unauthorized use or disclosure of the other party's Confidential Information. Nothing in this Article 8 is intended to supersede any existing agreement between the parties under which confidential technical or market information has or may be given by one party to the other. As to matters not covered by such existing agreements, this Article 8 shall control in the absence of any specific agreement to the contrary. ARTICLE 9. MISCELLANEOUS. 9.1 NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Lender or Borrower under this Agreement or the other Loan Documents shall be in writing and telecopied, mailed or delivered to each party at its telecopier number or address set forth below (or to such other telecopier number or address for any party as indicated in any notice given by that party to the other party). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the Business Day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and -21- (d) when telecopied, upon confirmation of receipt; PROVIDED, HOWEVER, that any notice delivered to Lender under Article 2 shall not be effective until received by Lender. Lender: Summit Design, Inc. 9305 S.W. Gemini Drive Beaverton, OR 97008-7158 Attn: Chief Financial Officer Telephone: (503) 643-9281 Telecopier: (503) 646- 9320 Borrower: Dasys, Inc. 3547 Shadeland Avenue Pittsburgh, PA 15212 Attn: Chief Executive Officer Telephone:(412) Telecopier: (412) 9.2 EXPENSES. Each party shall bear its own expenses with respect to the preparation, execution and delivery of this Agreement and the Loan Documents; provided, however, that Borrower agrees that any fees and expenses incurred by Borrower in excess of $40,000 shall not be eligible to be paid with the proceeds of any Loan made hereunder. Borrower shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Lender with respect to the exercise of its duties under this Agreement and the other Loan Documents or with respect to any amendments or waivers hereof requested by Borrower or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Lender's rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting the Loan Documents or the Obligations or any bankruptcy or similar proceeding involving Borrower). 9.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS. All representations and warranties made by Borrower hereunder shall remain in effect for so long as any Loans are outstanding. All covenants made by Borrower hereunder shall remain in effect for so long as any Loans are outstanding; provided, however that the rights of Lender contained in Section 6 and the covenants made by Borrower in Section 5.2, except for those in Section 5.2(a), (l) and (j), shall survive the termination of this Agreement and remain in effect for the term of the Purchase Options granted to Lender in connection with this Agreement. 9.4 INDEMNIFICATION. (a) Borrower shall indemnify, defend, and hold harmless Lender and each of Lender's Subsidiaries, Affiliates, directors, officers, employees and agents (collectively, the "INDEMNIFIED PERSONS"), and reimburse the Indemnified Persons for, from, and against all demands, claims, actions or causes of action, assessments, losses, damages, liabilities, costs and expenses, including, without limitation, interest, penalties and reasonable attorneys' fees, disbursements and expenses, arising out of or in connection with (i) any breach by Borrower of any of the representations and warranties contained in this Loan Agreement or the other Loan Documents, (ii) any failure by Borrower to perform any covenant, undertaking or obligation hereunder, or (iii) any matter, action or failure to act by the Indemnified Persons arising out of or relating to thee Loan Documents, including without limitation any use by Borrower of any proceeds of the Loans, except to the extent -22- such liability arises from the gross negligence or willful misconduct of the Indemnified Person seeking indemnity hereunder. (b) If any action or claim shall be brought or asserted against an Indemnified Person under this Section 9.4 in respect of which indemnity may be sought from Borrower under this Section 9.4, the Indemnified Person shall promptly notify Borrower who shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all reasonable expenses; except that any delay or failure to so notify Borrower shall only relieve the Borrower of its obligation hereunder to the extent, if at all, that it is prejudiced by reason of such delay or failure. The Indemnified Person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the employment thereof shall have been specifically directed and required by the Borrower, (ii) the Borrower shall have elected not to assume the defense and employ counsel, or (iii) there exists an actual or potential conflict of interest between Lender and Borrower which, in the reasonable judgment of counsel to Lender, makes employing separate counsel advisable. Without the prior written consent of the Indemnified Party, the Borrower shall have no right to settle or compromise on any nonmonetary matter. This Section 9.4, in its entirety, shall survive termination of this Loan Agreement 9.5 WAIVERS; AMENDMENTS. Any term, covenant, agreement or condition of this Agreement or any other Loan Document may be amended or waived if such amendment or waiver is in writing and is signed by Borrower and Lender. No failure or delay by Lender in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. A waiver or consent given hereunder shall be effective only if in writing and in the specific instance and for the specific purpose for which given. 9.6 SUCCESSORS AND ASSIGNS. This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of Borrower, Lender, all future holders of the Note and their respective successors and permitted assigns, except that neither Lender nor Borrower may assign or transfer any of its rights or obligations under any Loan Document without the prior written consent of the other party; provided, however that a change in control of equity ownership of Lender or other corporate proceeding whereby substantially all of the assets or shares of Lender are sold or transferred to a third party shall not be deemed to be an assignment for purposes of this Loan Agreement or any of the Loan Documents. All references in this Agreement to any Person shall be deemed to include all successors and assigns of such Person. Borrower shall keep at its principal office a register in which Borrower shall provide for the registration and transfer of the Note. Upon surrender for registration of transfer of a Note at the principal office of Borrower, Borrower shall execute and deliver a new Note of like tenor and principal amount registered in the name of such assign. Prior to due presentment for registration of transfer to an assign, Borrower may treat the Person in whose name such Note is registered as the owner thereof for purposes of receiving payments and for all other purposes. 9.7 SET-OFF. In addition to any rights and remedies of Lender provided by law, Lender shall have the right, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon the occurrence and during the continuance of a Default or an Event of Default, to set-off and apply against any indebtedness, whether matured or unmatured, of Borrower to Lender (including, without limitation, the Obligations), any amount owing from Lender to Borrower. The aforesaid right of set-off may be exercised by Lender against Borrower or against any trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of Borrower or against anyone else claiming through or against Borrower or such trustee in bankruptcy, debtor-in-possession, -23- assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by Lender prior to the occurrence of a Default or an Event of Default. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender, PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. 9.8 NO THIRD PARTY RIGHTS. Nothing expressed in or to be implied from this Agreement or any other Loan Document is intended to give, or shall be construed to give, any Person, other than the parties hereto and thereto and their permitted successors and assigns, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or any other Loan Document. 9.9 PARTIAL INVALIDITY. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 9.10 ARBITRATION. If any dispute arises with respect to this Agreement or the Loan Documents or the transactions contemplated hereby or thereby, then any party (the "DEMANDING PARTY") may demand, by written notice to each other party to the dispute (collectively, the "RESPONDING PARTY"), that such issue shall be settled by binding arbitration to be held in the city where the Responding Party has its principal corporate office (an "ARBITRATION DEMAND"). All claims shall be settled by three arbitrators in accordance with the Commercial Arbitration Rules then in effect of the American Arbitration Association (the "ARBITRATION RULES"). The Demanding Party and the Responding Party shall each designate one (1) arbitrator within fifteen (15) calendar days after the delivery of the Arbitration Demand. Such designated arbitrators shall mutually agree upon and shall designate a third arbitrator. The final decision of a majority of the arbitrators shall be furnished to Demanding Party and the Responding Party in writing and shall constitute a conclusive determination of the issue in question, binding upon all parties and shall not be contested by any of them. The non-prevailing party shall bear all costs and expenses associated with such arbitration, including all arbitrators' fees and attorneys' fees. 9.11 COUNTERPARTS. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. [The remainder of this page is intentionally left blank.] -24- IN WITNESS WHEREOF, the parties have executed this Loan Agreement as of the date first set forth above. SUMMIT DESIGN, INC. DASYS, INC. a Delaware corporation a Pennsylvania corporation By: /s/ Larry Gerhard By: /s/ David Springer ----------------------------- ---------------------------- Name: Larry Gerhard Name: David Springer Title: President Title: President SCHEDULE I DEFINITIONS "AFFILIATE" shall mean, with respect to any Person, (a) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, five percent (5%) or more of any class of Equity Securities of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person or (c) each of such Person's officers, directors, joint venturers and partners; PROVIDED, HOWEVER, that in no case shall Lender be deemed to be an Affiliate of Borrower for purposes of this Loan Agreement. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "AGGREGATE LOAN AMOUNT" shall have the meaning in Section 2.3(b). "ANNUALIZED REVENUE" shall mean the greater of (A) the product of (i) two (2), multiplied by (ii) the sum of Net Revenue for each of the past two (2) fiscal quarters of Borrower, or (B) the sum of Net Revenue for each of the last four (4) fiscal quarters of Borrower. "BORROWER" shall have the meaning given to that term in clause (2) of the introductory paragraph hereof. "BORROWER'S REPRESENTATIVES" shall mean David Springer and Eric Cooper, or their respective successors of whom Lender has been notified in writing. "BUDGET" shall mean, initially the operating plan and budget of Borrower attached as Schedule IV to this Agreement, and any subsequent operating budget that has been delivered to the Budget Committee in accordance with Section 5.1(a)(vii) and approved by the Budget Committee in its sole discretion. "BUDGET COMMITTEE" shall mean a committee composed of three (3) members of Borrower's Board of Directors, one of whom shall be the Independent Representative, and Lender's Chief Financial Officer. The Budget Committee shall have authority to review and approve the Budget. "BUSINESS DAY" shall mean any day on which commercial banks are not authorized or required to close in Beaverton, Oregon. "CAPITAL ASSET" shall mean, with respect to any Person, tangible property owned or leased (in the case of a Capital Lease) by such Person, or any expense incurred by any Person that is required by GAAP to be reported as an asset on such Person's balance sheet. "CAPITAL EXPENDITURES" shall mean, with respect to any Person and any period, all amounts expended and Indebtedness incurred or assumed by such Person during such period for the acquisition of real property and other Capital Assets (including amounts expended and Indebtedness incurred or assumed in connection with Capital Leases). "CAPITALIZED LEASE OBLIGATIONS" shall mean any and all lease obligations that, in accordance with GAAP, are required to be capitalized on the books of a lessee. I-1 "CHARTER DOCUMENTS" shall mean, with respect to any Person, the Articles or Certificate of Incorporation and Bylaws or any other organizational or governing documents of such Person, in each case as amended to date. "CLOSING DATE" shall mean the date on which each of the conditions set forth in Articles 4 shall have been satisfied or waived in writing and the Loans are made. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL" shall mean those assets, interests and Equity Securities secured by the Security Agreement, the Intellectual Property Security Agreement and the Pledge Agreement. "COMMON STOCK" shall mean the common stock of the applicable Person. "COMMON STOCK HOLDER" shall mean, collectively, any Person and all Affiliates of such Person, in each case in whose name or for whose benefit shares of Common Stock are registered or held. "CONFIDENTIAL INFORMATION" shall have the meaning given to that term in Article 8. "CONTRACTUAL OBLIGATION" of any Person shall mean, any indenture, note, security, deed of trust, mortgage, security agreement, lease, guaranty, instrument, contract, agreement or other form of obligation or undertaking to which such Person is a party or by which such Person or any of its property is bound. "DEFAULT" shall mean any event or circumstance not yet constituting an Event of Default but which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default. "DISCLOSURE SCHEDULE" shall mean the Disclosure Schedule attached hereto as Schedule III. "DISTRIBUTION AGREEMENT" shall have the meaning given in Section 4.1(f). "DOLLARS" and "$" shall mean the lawful currency of the United States of America and, in relation to any payment under this Loan Agreement, same day or immediately available funds. "DSI DISTRIBUTION AGREEMENT" shall mean that certain Distribution Agreement dated September 20, 1996, by and between Design Solutions, Inc. and Borrower. "EMPLOYEE BENEFIT PLAN" shall mean any employee benefit plan within the meaning of section 3(3) of ERISA maintained or contributed to by Borrower or any ERISA Affiliate, other than a Multiemployer Plan. "ENVIRONMENTAL LAWS" means all Requirements of Law relating to the protection of human health or the environment, including, without limitation, (a) all Requirements of Law, pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of hazardous materials, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid, or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials, or wastes, whether solid, liquid, or gaseous in nature; and (b) all Requirements of Law pertaining to the protection of the health and safety of employees or the public. I-2 "EQUITY SECURITIES" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may from time to time be amended or supplemented, including any rules or regulations issued in connection therewith. "ERISA AFFILIATE" shall mean any Person which is treated as a single employer with Borrower under section 414 of the Code. "ESCROW AGENT" shall mean Data Securities International, Inc. "ESCROW AGREEMENT" shall have the meaning given in Section 5.1(h). "EVENT OF DEFAULT" shall have the meaning given to that term in Section 7.1. "FAIR MARKET VALUE OF BORROWER" shall mean on the date of any determination, one (1) times the Annualized Revenue of Borrower. For example, if Fair Market Value of Borrower were to be calculated as of March 1, 2000, Fair Market Value of Borrower would be equal to the greater of (A) the product of (i) two (2), multiplied by (ii) the sum of Net Revenue in the fiscal quarter ended September 30, 1999 plus Net Revenue in the fiscal quarter ended December 31, 1999, or (B) the sum of Net Revenue in each of the fiscal quarters ended March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999. "FAIR MARKET VALUE OF LENDER COMMON STOCK" shall mean the average of the last sale prices of Lender's Common Stock on the Nasdaq National Market for ten (10) trading days immediately preceding the relevant date of determination. "FINANCIAL STATEMENTS" shall mean, with respect to any accounting period for any Person, statements of income and of cash flow of such Person for such period, and balance sheets of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding fiscal year, all prepared in reasonable detail and in accordance with GAAP. Unless otherwise indicated, each reference to Financial Statements of any Person shall be deemed to refer to Financial Statements prepared on a consolidated basis. "FULLY DILUTED BASIS" shall mean, as of any date, with respect to calculations involving the capital stock of any Person, making the assumption that all convertible securities of such Person then outstanding were converted on such date and that all options, warrants and similar rights to acquire shares of capital stock of such Person were exercised on such date. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "GM AGREEMENT" shall mean that certain Software License Agreement dated January 16, 1996, as amended by Amendment dated June 26, 1997, by and between General Motors Corporation and Borrower. I-3 "GOVERNMENTAL AUTHORITY" shall mean any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GOVERNMENTAL CHARGES" shall mean all taxes, levies, assessments, fees, claims or other charges imposed by any Governmental Authority upon or relating to (i) Borrower, (ii) the Loans, (iii) employees, payroll, income or gross receipts of Borrower, (iv) the ownership or use of any of its assets by Borrower, or (v) any other aspect of the business of Borrower. "GOVERNMENTAL RULE" shall mean any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority. "GUARANTY OBLIGATIONS" shall mean, with respect to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. "INDEBTEDNESS" of any Person shall mean and include the aggregate amount of, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business determined in accordance with GAAP), (d) all Capitalized Lease Obligations of such Person, (e) all obligations or liabilities of others secured by a lien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all Guaranty Obligations of such Person; (g) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement upon an event of default are limited to repossession or sale of such property), (h) net exposure under interest rate interest rate swap, currency swap, currency swap, forward, cap, floor or other similar contract that is not entered to in connection with a bona fide hedging operation that provides offsetting benefits to such Person, which agreements shall be marked to marked on a current basis, (i) all reimbursement and other payment obligations, contingent or otherwise, in respect of letters of credit. "INDEMNIFIED PERSONS" has the meaning given in Section 9.4. "INDEPENDENT REPRESENTATIVE" shall mean an individual not affiliated with Borrower, either directly or indirectly, elected by Borrower to serve as a director on Borrower's Board of Directors. "INVESTMENT" of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or I-4 Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Indebtedness incurred by such Person of the type described in CLAUSES (b) AND (c) of the definition of "Indebtedness" on behalf of any other Person); PROVIDED, HOWEVER, that Investments shall not include accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales in the ordinary course of such Person's business. "LENDER" shall have the meaning given in clause 1 of the introductory paragraph hereof. "LENDER COMMON STOCK" shall mean the common stock of Lender, or such other publicly traded equity securities of any successor of Lender. "LIEN" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, Capital Lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. "LOAN" shall have the meaning given in Section 2.1. "LOAN AGREEMENT" shall mean this Loan Agreement. "LOAN DOCUMENTS" shall mean and include this Loan Agreement, the Note, the Security Agreement, the Pledge Agreement, the Intellectual Property Security Agreement, the Purchase Options, the Distribution Agreement and all other documents, instruments and agreements delivered to Lender in connection with this Loan Agreement. "LOANS" shall have the meaning given in Section 2.1. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of Borrower, taken as a whole; (b) the ability of Borrower to pay or perform the Obligations in accordance with the terms of this Loan Agreement and the other Loan Documents and to avoid an Event of Default under any Loan Document; or (c) the rights and remedies of Lender under this Loan Agreement, the other Loan Documents or any related document, instrument or agreement. "MATERIAL REDUCTION IN EMPLOYMENT" shall be deemed to occur with respect to an employee of Borrower if such employee ceases to work at least 40 hours per week for a period of three (3) consecutive weeks, excepting accrued vacation time and absence due to a bona fide illness. Furthermore, the absence of an employee for up to one (1) month due to family emergencies or up to two (2) months for pregnancy shall not be deemed a Material Reduction in Employment, provided that such an absence does not occur more frequently than once in any given year. "MATERIAL SOFTWARE" shall have the meaning given in Section 5.1(h). "MATURITY" shall mean, with respect to any Loan, interest, fees or other amount payable by Borrower under this Loan Agreement or the other Loan Documents, the date on which such Loan, interest, fee or other amount becomes due, whether upon the stated maturity or due date, upon acceleration or otherwise. I-5 "MATURITY DATE" shall have the meaning given in Section 2.3(a). "MONTHLY NOTICE" shall have the meaning given in Section 2.1(b)(i). "MULTIEMPLOYER PLAN" shall mean any multiemployer plan within the meaning of section 3(37) of ERISA maintained or contributed to by Borrower or any ERISA Affiliate. "NET REVENUE" shall mean Lender's gross sales attributable to Borrower's Products (as such term is defined in the Distribution Agreement) minus distributor discounts and commissions. "NOTE" shall mean the Note in the form attached hereto as Exhibit A. "NOTICE OF BORROWING" shall have the meaning given in Section 2.1. "OBLIGATIONS" shall mean and include all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by Borrower to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of this Loan Agreement or any of the other Loan Documents, including, without limitation, all interest, fees, charges, expenses, reasonable attorneys' fees and accountants' fees and expenses chargeable to Borrower or payable by Borrower hereunder or thereunder. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "PERMITTED INDEBTEDNESS" shall mean and include: (a) Indebtedness of Borrower to Lender; (b) Indebtedness of Borrower under Capital Leases and operating leases to the extent that rental payments under such leases do not exceed, in the aggregate, One Hundred Thousand Dollars ($100,000) in any fiscal year; (c) Indebtedness arising from the endorsement of instruments in the ordinary course of business; and (d) Other Indebtedness of Borrower not exceeding Fifty Thousand Dollars ($50,000) at any time. "PERMITTED INVESTMENTS" shall mean and include: (a) Deposits with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; (b) Investments in marketable obligations issued or fully guaranteed by the United States and maturing not more than one (1) year from the date of issuance; and (c) Investments in open market commercial paper rated at least "A1" or "P1" or higher by a national credit rating agency and maturing not more than one (1) year from the creation thereof. I-6 (d) Investments pursuant to or arising under currency agreements or interest rate agreements entered into in the ordinary course of business; (e) Investments consisting of deposit accounts of Borrower in which Lender has a perfected security interest; and (f) Other Investments aggregating not in excess of Fifty Thousand Dollars ($50,000) at any time. "PERMITTED LIENS" shall mean and include: (a) Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; (b) Liens of carriers, warehousemen, mechanics, materialmen, vendors, and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; (c) Deposits under workers' compensation, unemployment insurance and social security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations of surety or appeal bonds or to secure indemnity, performance or other similar bonds in the ordinary course of business; (d) Liens arising out of a judgment or award in circumstances not constituting an Event of Default under Section 10.1(h); (e) Liens securing obligations under a Capital Lease if such lease is Permitted Indebtedness pursuant to clause (c) of the definition thereof and such Liens do not extend to property other than the property leased under such Capital Lease; and (f) Liens upon any equipment acquired or held by Borrower to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment; (g) Easements, reservations, rights of way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances affecting real property in a manner not materially or adversely affecting the value or use of such property; (h) Liens on insurance proceeds in favor of insurance companies to secure the financing of insurance premiums; (i) Liens which constitute rights of setoff of a customary nature or bankers' Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with arrangements entered into with banks in the ordinary course of business not relating to a financing transaction; and I-7 (j) Liens in favor of Lender. "PERSON" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a Governmental Authority. "PRIME RATE" shall mean the per annum rate publicly announced by Citibank, N.A., from time to time in New York, New York. "PURCHASE OPTION" shall mean options to be executed and delivered by each holder of Equity Securities of Borrower on or prior to the initial Closing Date. Each Purchase Option shall be made in favor of Lender and shall, among other things, entitle Lender to purchase such Equity Securities at the Fair Market Value of Borrower on the date of exercise (on a pro rata percentage for the Equity Securities represented by each such Purchase Option). The Purchase Options shall become exercisable on January 1, 2000 and shall have a term of two (2) years thereafter; provided that the exercisability of the Purchase Options shall accelerate upon (i) an Event of Default under the Loan Agreement, or (ii) the prepayment of the Aggregate Loan Amount. "REPORTABLE EVENT" shall have the meaning given to that term in ERISA and applicable regulations thereunder. "REQUIREMENT OF LAW" applicable to any Person shall mean (a) the Charter Documents of such Person, (b) any Governmental Rule applicable to such Person, (c) any license, permit, approval or other authorization granted by any Governmental Authority to or for the benefit of such Person and (d) any judgment, decision or determination of any Governmental Authority or arbitrator, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SOFTWARE" shall mean all of Borrower's proprietary products. "SUBSIDIARY" of any Person shall mean (a) any corporation of which more than 50% of the issued and outstanding Equity Securities having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries, (b) any partnership, joint venture, or other association of which more than 50% of the equity interest having the power to vote, direct or control the management of such partnership, joint venture or other association is at the time owned and controlled by such Person, by such Person and one or more of the other Subsidiaries or by one or more of such Person's other subsidiaries and (c) any other Person included in the Financial Statements of such Person on a consolidated basis. Any reference to a Subsidiary without designation of the ownership of such Subsidiary shall be deemed to refer to a Subsidiary of Borrower. I-8 SCHEDULE II NOTICE OF BORROWING _____________________, 199__ Summit Design, Inc. 9305 S.W. Gemini Drive Beaverton, OR 97008-7158 Attn: Chief Financial Officer 1. Reference is made to that certain Loan Agreement, dated as of July 16, 1997 (the "LOAN AGREEMENT"), between Dasys, Inc. ("BORROWER") and Summit Design, Inc. ("LENDER"). Unless otherwise indicated, all terms defined in the Loan Agreement have the same respective meanings when used herein. 2. Pursuant to SECTION 2.1 of the Loan Agreement, Borrower hereby requests a Loan upon the following terms: (a) The principal amount of the requested Loan is to be $__________; (b) The date of the requested Loan is to be __________, 199 . 3. Borrower hereby certifies to Lender that, on the date of such borrowing and after giving effect to the requested borrowing: (a) The expenses for the calendar quarter of Borrower ending ___________, 199_ are estimated to be approximately $___________. (b) The representations and warranties set forth in Article 3 of the Loan Agreement will be true and correct as if made on such date; (c) No Event of Default or Default has occurred and is continuing; and (d) Each of the Loan Documents remains in full force and effect. 4. Please disburse the proceeds of the requested Loan to ________________________. [The remainder of this page is intentionally left blank.] IN WITNESS WHEREOF, Borrower has executed this Notice of Borrowing on the date set forth above. DASYS, INC. By: --------------------------- Name: ------------------------- Title: ------------------------ ACKNOWLEDGED AND APPROVED: BUDGET COMMITTEE By: -------------------- Name: C. Albert Koob Title: Chief Financial Officer, Lender By: --------------------------- Name: Title: Chairman, Board of Directors, Borrower SCHEDULE III DISCLOSURE SCHEDULE SCHEDULE IV BUDGET EXHIBIT A NOTE $2,500,000 FOR VALUE RECEIVED, Dasys, Inc., a Pennsylvania corporation ("BORROWER"), agrees to pay to the order of Summit Design, Inc., a Delaware corporation ("LENDER"), at Lender's principal office, the principal sum of Two Million Five Hundred Thousand Dollars ($2,500,000) or such lower amount as shall equal the aggregate outstanding balance of the Loans, at such times as are set forth in, and together with interest from the date hereof on the unpaid principal balance thereof at the rates and on the dates provided in, the Loan Agreement dated as of July 16, 1997, between Lender and Borrower (the "LOAN AGREEMENT"). If Borrower shall have paid any interest on this Note in excess of that permitted by law, then it is the express intent of Borrower and Lender that all excess amounts previously collected by Borrower be applied to reduce the principal balance of this Note, and the provisions hereof immediately be deemed reformed and the amounts thereafter collectable as interest hereunder be reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. Borrower shall make all payments hereunder to Lender as indicated in the Loan Agreement, in lawful money of the United States and in same day or immediately available funds. This Note is the Note referred to in the Loan Agreement. This Note is subject to the terms of the Loan Agreement, including the rights of prepayment and the rights of acceleration of maturity. Terms used herein have the meanings assigned to those terms in the Loan Agreement, unless otherwise defined herein. THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT, A STOCK PLEDGE AGREEMENT AND AN INTELLECTUAL PROPERTY SECURITY AGREEMENT, IN EACH CASE DATED AS OF THE DATE HEREOF AND EXECUTED BY BORROWER OR THE SHAREHOLDERS OF BORROWER, AS THE CASE MAY BE, IN FAVOR OF LENDER. ADDITIONAL RIGHTS OF THE HOLDER OF THIS NOTE ARE SET FORTH IN SUCH AGREEMENTS. If any action should be undertaken to collect this Note or enforce the Lender's security interest herein, Borrower agrees to pay all costs and expenses, including reasonable attorney's fees, incurred in connection with such action. Borrower hereby waives notice of presentment, demand, protest or notice of any other kind. This Note shall be governed by and construed in accordance with the laws of the State of Delaware. DASYS, INC. By: ----------------------- Name: ----------------------- Title: ---------------------- EX-11.1 4 EXHIBIT 11-1 Exhibit 11.1 SUMMIT DESIGN, INC. STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- --------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Weighted average number of common shares outstanding ....................... 14,250 2,712 14,039 2,442 Common stock equivalents arising from Stock options (1) ........................ - 1,144 - 1,063 Convertible preferred shares (2) ........... - 9,103 - - --------- --------- --------- --------- 14,250 12,959 14,039 12,608 Net income (loss)........................... $(12,410) $ 212 $ (9,359) $ 25 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share ................ $ (0.87) $ 0.02 $ (0.67) $ 0.00 --------- --------- --------- --------- --------- --------- --------- ---------
(1) Assumes exercise of all outstanding options and options issued within one year of the date of the initial public offering which options are considered exercised in all periods presented prior to the initial public offering. Common stock equivalents are excluded from the calculation of earnings per share when the effect on earnings per share is antidilutive. Had the common stock equivalents been included in the earnings per share calculation, net loss per share for the three months and nine months ended September 30, 1997 would have been $(0.82) and $(0.63), respectively. (2) Assumes conversion of all preferred shares outstanding as of the date of the filing of the initial public offering which shares are considered outstanding for all periods presented. -30- EX-27 5 EXHIBIT 27 - FDS
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 17,224 0 5,667 449 0 22,961 0 0 29,306 12,605 0 0 0 146 15,488 29,306 21,486 21,486 954 0 35,427 120 10 (8,539) 820 (9,359) 0 0 0 (9,359) (0.67) 0
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