10-Q 1 a2056892z10-q.txt FORM 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 June 30, 2001 OR / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to________ Commission file number: 000-20923 INNOVEDA, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 93-1137888 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 293 BOSTON POST ROAD WEST, MARLBORO, MASSACHUSETTS 01752-4615 ------------------------------------------------------------- (Address and Zip Code of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (508) 480-0881 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of August 10, 2001, the Registrant had outstanding 39,132,737 shares of Common Stock, $0.01 par value per share. IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are subject to a number of risks and uncertainties. All statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words "will", "believe", "anticipate", "intend", "estimate", "expect", "project", "plans", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, reorganizations, restructurings, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the following discussion, and, in particular, the risks discussed below under the subheading "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock". The forward-looking statements provided by Innoveda in this Quarterly Report on Form 10-Q represent Innoveda's estimates as of the date this report is filed with the SEC. Innoveda anticipates that subsequent events and developments will cause its estimates to change. While Innoveda may elect to update its forward-looking statements in the future, it specifically disclaims any obligation to do so. Innoveda's forward-looking statements should not be relied upon as representing its estimates as of any date subsequent to the date this report is filed with the SEC. INNOVEDA, INC. QUARTERLY REPORT ON FORM 10-Q INDEX

3 INNOVEDA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

The accompanying notes are an integral part of the condensed consolidated financial statements. 4 INNOVEDA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. 5 INNOVEDA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of the condensed consolidated financial statements. 6 INNOVEDA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except per Share Data) 1. BASIS OF PRESENTATION Innoveda, Inc. (the "Company"), a Delaware corporation, was created by the business combination of Summit Design, Inc. ("Summit") and Viewlogic Systems, Inc. ("Viewlogic"), which was consummated on March 23, 2000. In addition, the Company subsequently acquired PADS Software, Inc. ("PADS") on September 22, 2000. The business combination of Summit with Viewlogic was effected by means of the merger of a wholly owned subsidiary of Summit with and into Viewlogic, with Viewlogic surviving as a wholly owned subsidiary of Summit. The business combination was accounted for as a reverse acquisition, as former stockholders of Viewlogic owned the majority of the outstanding stock of Summit subsequent to the business combination. Therefore, for accounting purposes, Viewlogic is deemed to have acquired Summit. The business combination of Innoveda and PADS was accounted for as a purchase of PADS by Innoveda. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the information set forth therein have been included. The fiscal 2000 financial information presented in the consolidated statements of operations, and the consolidated statements of cash flows represents the results for Viewlogic for the periods stated and includes the financial results for Summit commencing March 24, 2000, and the financial results for PADS commencing September 23, 2000. 2. ACQUISITIONS ACQUISITION BY INNOVEDA OF PADS - On June 2, 2000, Innoveda entered into a merger agreement with PADS. The merger was consummated on September 22, 2000. The merger agreement provided that a wholly owned subsidiary of Innoveda would merge with and into PADS, with PADS surviving as a wholly owned subsidiary of Innoveda following the merger. For the merger, Innoveda issued 6,473 shares of its common stock and paid approximately $2.0 million to the PADS stockholders. PADS capital stock outstanding at the merger date was exchanged for shares of Innoveda common stock at the rate of approximately 1 to 1.9 per share, plus $0.579 per share in cash. In addition, each outstanding option to purchase shares of PADS common stock was converted into an option to purchase 2.0355 shares of Innoveda common stock, and the option exercise prices were adjusted accordingly. The operating results of PADS have been included in the accompanying consolidated financial statements from the date of acquisition. Under the purchase method of accounting, the acquired assets and assumed liabilities have been recorded at their estimated fair values at the date of acquisition. 7 2. ACQUISITIONS (CONTINUED) Innoveda recorded merger costs of approximately $0.5 million in merger related charges relating to the PADS merger. This was primarily comprised of severance payments related to one employee and exit costs to close Innoveda duplicative facilities as a result of the merger. BUSINESS COMBINATION OF VIEWLOGIC AND SUMMIT - On March 23, 2000, the stockholders of Viewlogic and the stockholders of Summit approved an Agreement and Plan of Reorganization. Summit was a publicly held company engaged in a business similar to that of Viewlogic. In connection with the business combination contemplated by the Agreement and Plan of Reorganization, (1) each share of Viewlogic common stock and preferred stock issued and outstanding at the effective time of the business combination was converted into 0.67928 (the "Exchange Ratio") of a share of Summit common stock, and (2) each option to purchase shares of Viewlogic common stock was converted into an option to purchase Summit common stock based upon the Exchange Ratio. The business combination was accounted for under the purchase method of accounting and was treated as a reverse acquisition, as the stockholders of Viewlogic received the majority portion of the voting interests in the combined company. Viewlogic was considered the acquirer for accounting purposes and recorded Summit's assets and liabilities based upon their estimated fair values. The operating results of Summit have been included in the accompanying consolidated financial statements from the date of acquisition. Under the purchase method of accounting, the acquired assets and assumed liabilities have been recorded at their estimated fair values at the date of acquisition. During the first quarter ended April 1, 2000, Innoveda recorded approximately $2.2 million in merger costs relating to the Summit business combination. This primarily included severance and other costs relating to the consolidation of duplicative facilities as a result of the business combination between Summit and Viewlogic. Other costs relating to property and equipment lease contracts (less any applicable sublease income) after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment are also included. Further action was taken to restructure the Innoveda sales and services business in Japan as a result of an exclusive distributor agreement executed with Marubeni Solutions Corporation during the first quarter of fiscal 2000. Charges associated with the Japanese reorganization include severance and benefit continuance for approximately 14 employees, costs associated with office closings and subsequent lease termination, and other facility and exit related costs. 8 2. ACQUISITIONS (CONTINUED) The following table presents the components of the merger costs accrued during the mergers with PADS and Summit and the charges against these reserves through June 30, 2001. All significant amounts are expected to be settled within the third quarter of fiscal 2001.

9 3. EARNINGS PER SHARE Basic earnings per share is calculated using weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares plus the effect, if dilutive, of outstanding stock options using the treasury stock method.

For the quarters ended June 30, 2001 and July 1, 2000, there were 8,460 and 4,891 anti-dilutive weighted average potential common shares, respectively, not included in the table above. 10 4. BUSINESS SEGMENTS AND GEOGRAPHIC DATA Innoveda operates in a single industry segment comprising the electronic design automation industry. Net revenue by geographic region (in thousands) and as a percentage of total revenue for each region is as follows:

5. COMPREHENSIVE LOSS The following table presents the components of comprehensive loss for the periods indicated.

11 6. DEBT CREDIT FACILITY -The Company has a credit facility with a commercial bank consisting of a $6.0 million revolving line of credit ("Line of Credit") and a $7.5 million term loan (the "Term Loan") (together, the "Credit Facility"), secured by substantially all of the assets of the Company. Interest terms on the Line of Credit and the Term Loan are determined, at the option of the Company, for varying periods. The Company may elect to have the interest rate based on the bank's prime rate or based on the LIBOR rate at the time of the election, depending on the Company's leverage financial ratio, as defined, in the Credit Facility. The interest rates on the Line of Credit at June 30, 2001 and December 30, 2000 were 7.25% and 10%, respectively. The interest rates on the Term Loan at June 30, 2001 and December 30, 2000 were 6.9% and 9.2%, respectively. Payments of principal outstanding under either the Line of Credit or the Term Loan may be made at any time and must be repaid in full by September 30, 2003. The Credit Facility contains certain limitations on additional indebtedness and capital expenditures, and includes financial covenants, which include, but are not limited to, the maintenance of certain minimum levels of profitability, interest and debt service coverage ratios and maximum leverage ratios and minimum working capital ratios. For the quarter ended June 30, 2001, the Company did not meet certain of its financial covenants, as required by its Credit Facility agreement. Under the terms of the Credit Facility agreement, the lender may demand immediate payment of all principal, interest and other amounts when limitations and covenants are not met and therefore, the Term Loan has been classified as current debt on the condensed consolidated balance sheet. The Company is currently negotiating with the lender for a revised Credit Facility agreement and expects to obtain a revised agreement that will allow Innoveda to maintain its current Line of Credit and to continue to repay its Term Loan as previously scheduled. As of August 14th, 2001, the lender had not demanded payment and the Company does not expect the lender to demand immediate payment. 7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which established accounting and reporting standards for derivative instruments. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Adoption of SFAS 133 did not have a material effect on the Company's consolidated financial position or results of operations. 12 8. RESTRUCTURING COSTS On May 4, 2001, the Company decided to close an office located in Pittsburgh, Pennsylvania and transfer the operations to other offices in the United States and overseas. The total charge of $594 consists of intangible asset and fixed asset impairment charges of $415, $64 of severance related to the termination of 8 employees and $115 of other costs incurred due to the closure. All significant amounts are expected to be settled within a year of the office closure.

9. SUBSEQUENT EVENT Subsequent to June 30, 2001, the Company determined to restructure its operations towards a return to future profitability and to be positioned to operate effectively during the current economic downturn. The restructuring includes an August 2001 global workforce reduction of approximately 140 people. At the time of this filing the company has not fully evaluated the effect of this restructuring, therefore, the amount of any charge for the restructuring is not currently determinable. 10. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that an entity account for business combinations using the purchase method and eliminates the pooling method. In addition, SFAS No. 141 provides guidance regarding the initial recognition and measurement of goodwill and other intangible assets. SFAS No.142 requires that goodwill no longer be amortized and instead be tested annually for impairment. The provisions of SFAS No. 141 apply to all business combinations completed after June 30, 2001 and the provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact of adopting these statements. 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under "Additional Risk Factors that Could Affect Operating Results and Market Price of Stock" commencing on page 21, as well as those otherwise discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. See "Important Note About Forward-Looking Statements". OVERVIEW Innoveda, Inc., a Delaware corporation, was created by the business combination of Summit Design, Inc. and Viewlogic Systems, Inc., which was consummated on March 23, 2000. The merger of Summit Design with Viewlogic was accounted for as a reverse acquisition as former stockholders of Viewlogic owned a majority of the outstanding stock of Summit subsequent to the business combination. For accounting purposes, Viewlogic is deemed to have acquired Summit Design. On September 22, 2000, Innoveda completed its acquisition of PADS Software, Inc. Accordingly, all financial information presented herein includes the results for Viewlogic for the entire period, the results of Summit from March 24, 2000 and the results of PADS from September 22, 2000. Innoveda operates in the United States and international markets developing, marketing and providing a comprehensive family of software tools used by engineers in the design of advanced electronic products and systems, and technical support and consulting services for those software tools. Innoveda currently markets and sells its products worldwide through multiple distribution channels, including independent distributors, value-added resellers, direct sales and telesales. 14 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenue of certain items in Innoveda's consolidated statements of operations:

QUARTERS ENDED AND SIX MONTHS ENDED JUNE 30, 2001 AND JULY 1, 2000 REVENUE For the quarter ended June 30, 2001, total revenue increased 2% to $22.1 million from $21.6 million for the quarter ended July 1, 2000. The increase in revenue consisted of a 21% increase in services and other revenue to $12.1 million from $9.9 million, offset by a 14% decrease in software license revenue to $10.0 million from $11.6 million. For the six months ended June 30, 2001, total revenue increased 37% to $49.3 million from $35.9 million for the six months ended July 1, 2000. The increase consisted of a 43% increase in services and other revenue to $24.0 million from $16.7 million and a 32% increase in software license revenue to $25.4 million from $19.2 million. The increase in total revenue for the second quarter ended June 30, 2001 is primarily attributable to the products acquired as part of the acquisition of PADS. The decrease in 15 software revenue in the second quarter year over year is primarily related to delays or postponements in several large orders from major electronics companies associated with generally slowing economic conditions particularly in the telecommunications and equipment manufacturing industries. The decrease is also attributable to the Company no longer realizing revenue from its VirSim product line, which was sold in the third quarter of 2000. Software revenue increased for the six-month period ended June 30, 2001 over the same period of the prior year due primarily to additional product sales in the first quarter related to Visual products acquired as part of the acquisition of Summit Design in March 2000 and products acquired as part of the acquisition of PADS Software in September 2000. Furthermore, the Company realized increased consulting revenue during the first and second quarters of 2001 versus the same periods in 2000 attributable to an increased focus in this area. As a percentage of total revenue, software license revenue decreased to 45% for the quarter ended June 30, 2001 from 54% for the quarter ended July 1, 2000 and decreased to 51% for the six months ended June 30, 2001 from 54% for the six months ended July 1, 2000. As a percentage of total revenue, services and other revenue increased to 55% for the quarter ended June 30, 2001 from 46% for the quarter ended July 1, 2000, and increased to 49% for the six months ended June 30, 2001 from 46% for the six months ended July 1, 2000. COST OF SOFTWARE Cost of software revenue consists primarily of cost of product media, documentation, duplication, packaging, and royalties. Cost of software revenue decreased 7% to $1.8 million for the quarter ended June 30, 2001 from $2.0 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, cost of software revenue increased 3% to $3.6 million from $3.5 million for the six months ended July 1, 2000. The decrease in the second quarter of 2001 versus the same period in 2000 was due primarily to decreased royalty costs consistent with the decrease in software license revenue for the same period. The increase in the six-month period ended June 30, 2001 was primarily due to increased salary and related costs of additional headcount resulting from the acquisitions of Summit Design in March 2000 and PADS Software in September 2000. As a percentage of total revenue, cost of software decreased to 8% for the quarter ended June 30, 2001 from 9% for the quarter ended July 1, 2000, and decreased to 7% for the six months ended June 30, 2001 from 10% for the six months ended July 1, 2000. The decrease was primarily due to the economies of scale resulting from Innoveda's acquisitions of Summit Design and PADS Software. COST OF SERVICES AND OTHER Cost of services and other consists primarily of costs of providing technical support, education and consulting services. Cost of services and other increased 38% to $2.8 million for the quarter ended June 30, 2001 from $2.1 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, cost of services and other increased 50% to $5.4 million from $3.6 million for the six months ended July 1, 2000. These increases are primarily due to increased salary and related costs of additional headcount resulting from the acquisitions of Summit Design in March 2000 and PADS Software in September 2000, as well as increased staffing and related costs in the Company's consulting organization necessary to build the infrastructure to support expansion in that area of our business. As a percentage of total revenue, cost of services and other increased to 13% for the quarter ended June 30, 2001 from 10% for the quarter ended July 1, 2000, and increased to 11% for the six months ended June 30, 2001 from 10% for the six months ended July 1, 2000. 16 SALES AND MARKETING Sales and marketing expenses increased 33% to $11.3 million for the quarter ended June 30, 2001 from $8.5 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, sales and marketing expense increased 51% to $22.6 million from $14.9 million for the six months ended July 1, 2000. These increases are primarily due to increased salary and related costs of additional headcount resulting from the acquisition of Summit Design in March 2000 and PADS Software in September 2000 as well as additional new hires in the sales area. Innoveda also incurred increased costs associated with variable compensation plans as a result of its increase in revenue during the second quarter and six months ended June 30, 2001. Additionally, discretionary marketing spending for trade shows, direct mail solicitations and advertising campaigns designed to increase awareness of the Innoveda name, and marketing of our product lines resulted in higher sales and marketing expenses. As a percentage of total revenue, sales and marketing expenses increased to 51% for the quarter ended June 30, 2001 from 39% for the quarter ended July 1, 2000, and increased to 46% for the six months ended June 30, 2001 from 41% for the six months ended July 1, 2000. RESEARCH AND DEVELOPMENT Research and development expenses increased 31% to $7.5 million for the quarter ended June 30, 2001 from $5.7 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, research and development expense increased 64% to $15.2 million from $9.3 million for the six months ended July 1, 2000. These increases are primarily due to increased salary and related costs of additional headcount resulting from the acquisition of Summit Design in March 2000 and PADS Software in September 2000. These increases are also attributable to the development of new products, including Visual Elite, a product that provides added functionality to existing tools, FabFactory, a tool for printed circuit board (PCB) fabricators, and TransOVM and TransBridge, for the design of complex wiring harnesses for large electrical systems. The Company also released the latest version of the CAM350 PCB design tool, which further integrates the design and manufacturing tasks in the printed circuit board design flow. As a percentage of total revenue, research and development expenses increased to 34% for the quarter ended June 30, 2001 from 26% for the quarter ended July 1, 2000, and increased to 31% for the six months ended June 30, 2001 from 26% for the six months ended July 1, 2000. The amount of software development costs capitalized for the quarter ended June 30, 2001 was approximately $0.3 million or 4% of research and development expense for that period, and for the quarter ended July 1, 2000 was $0.3 million or 5% of research and development expense for that period. For the six months ended June 30, 2001, approximately $0.5 million was capitalized versus $0.6 million in 2000 for the same period, or 4% versus 6% of research and development costs for the same six-month period of 2001 and 2000, respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses include the costs of the administrative, finance, human resources, legal, and information systems departments of Innoveda. General and administrative expenses increased 42% to $2.2 million for the quarter ended June 30, 2001 from $1.5 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, general and administrative expenses increased 55% to $4.3 million from $2.8 million for the six months ended July 1, 2000. These increases are primarily a result of Innoveda building its general and administrative infrastructure to support the planned 17 growth in revenue of Innoveda's products and services and related acquisitions. This increase was also due to increased salary and related costs of additional headcount resulting from the acquisition of PADS Software. To a lesser extent, the increase is due to expenses associated with becoming a publicly traded company. As a percentage of total revenue, general and administrative expenses increased to 10% for the quarter ended June 30, 2001 from 7% for the quarter ended July 1, 2000, and increased to 9% for the six months ended June 30, 2001 from 8% for the six months ended July 1, 2000. AMORTIZATION OF INTANGIBLES Amortization expense increased 77% to $4.6 million in the quarter ended June 30, 2001 from $2.6 million for the quarter ended July 1, 2000, and increased 202% for the six months ended June 30, 2001 to $9.3 million from $3.1 million for the six months ended July 1, 2000. These increases in amortization expense are mainly due to the increase in intangibles from the acquisitions of Summit and PADS. Innoveda had $64.3 million in intangible assets as of June 30, 2001, consisting primarily of purchased technology, goodwill, workforce, customer base and trademarks, resulting from the Summit Design business combination in March 2000, the PADS acquisition in September 2000, and the remaining intangible assets from the acquisition of Transcendent Design Technology, Inc. and certain assets from OmniView, Inc., both in 1999. As of July 1, 2000, Innoveda had $38.1 million in intangible assets consisting of purchased technology, goodwill, workforce and customer base from the Summit Design acquisition along with certain assets acquired from OmniView, Inc. in March 1999, and purchased technology related to the acquisition of Transcendent Design Technology, Inc. in August 1999. Innoveda's intangible assets are being amortized over periods ranging from three to seven years. RESTRUCTURING CHARGES RELATED TO CLOSING THE PITTSBURGH OFFICE On May 4, 2001, the Company decided to close an office located in Pittsburgh, Pennsylvania and transfer the operations to other offices in the United States and overseas. This office was used primarily to support the Company's e-Architect product. The total charge of $594 consists of intangible asset and fixed asset impairment charges of $415, $64 of severance related to the termination of 8 employees and $115 of other costs incurred due to the closure. All significant amounts are expected to be settled within a year of the office closure.

18 MERGER RELATED CHARGES During the six months ended July 1, 2000, Innoveda recorded approximately $2.2 million in merger related charges relating to the Summit merger. This primarily included severance and other costs relating to the consolidation of duplicative facilities. Other costs relating to property and equipment lease contracts (less any applicable sublease income) after the properties were abandoned, lease buyout costs, restoration costs associated with certain lease arrangements, and costs to maintain facilities during the period after abandonment are also included. Further action was taken to restructure the Innoveda sales and services business in Japan as a result of an exclusive distributor agreement executed with Marubeni Solutions Corporation during the first quarter of fiscal 2000. Charges associated with the Japanese reorganization include severance and benefit continuance for approximately 14 employees, costs associated with office closings and subsequent lease termination, and other facility and exit related costs. IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES In conjunction with the business combination of Summit and Viewlogic in the six months ended July 1, 2000, Innoveda charged to expense $2.4 million representing acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use, as determined by an independent appraiser. OTHER INCOME/EXPENSE Other income/expense consists of the net of interest expense relating to Innoveda's term loan and revolving credit line, interest income from cash and cash equivalent balances, and currency exchange rate differences resulting from foreign operations conducted in local currencies. Other income/expense increased by $0.4 million, to a $0.2 million expense for the second quarter ended June 30, 2001 from $0.3 million of income for the second quarter ended July 1, 2000. For the six months ended June 30, 2001, other expense increased less than $0.1 million. The net increase in expense is primarily a result of a decrease in interest income due to the reduction of cash and cash equivalents to $14.8 million as of June 30, 2001 from $21.7 million as of July 1, 2000. INCOME TAX BENEFIT The benefit for income taxes increased to $2.3 million for the quarter ended June 30, 2001 from less than $0.1 million for the quarter ended July 1, 2000. For the six months ended June 30, 2001, the benefit for income taxes increased by $2.1 million to $3.3 million from $1.2 million for the six months ended July 1, 2000. Quarterly tax provisions are based on the estimated effective tax rates for the respective fiscal year. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION As of June 30, 2001, Innoveda had approximately $14.8 million in cash and cash equivalents. Innoveda has a $6.0 million revolving Line of Credit with Fleet Bank. As of June 30, 2001, no balance was outstanding under this Line of Credit. Innoveda has a Term Loan with Fleet Bank, with $7.5 million outstanding as of August 13, 2001. Borrowings under the Credit Facility are secured by substantially all of Innoveda's assets. The Credit Facility contains limitations on additional indebtedness and capital expenditures, and includes financial covenants, which include but are not limited to the maintenance of minimum levels of profitability, interest and debt service coverage ratios and maximum leverage ratios and minimum working capital ratios. 19 For the quarter ended June 30, 2001, the Company did not meet certain of its financial covenants, as required by its Credit Facility agreement. Under the terms of the Credit Facility agreement, the lender may demand immediate payment of all principal, interest and other amounts when limitations and covenants are not met and therefore, the Term Loan has been classified as current debt on the condensed consolidated balance sheet. The Company is currently negotiating with the lender for a revised Credit Facility agreement and expects to obtain a revised agreement that will allow Innoveda to maintain its current Line of Credit and to continue to repay its Term Loan as previously scheduled. As of August 14th, 2001, the lender had not demanded payment and the Company does not expect the lender to demand immediate payment. For the six months ended June 30, 2001, net cash used in operating activities was approximately $1.3 million. This was primarily due to a net loss of $8.8 million, a decrease in accounts payable of approximately $0.5 million, a decrease in accrued liabilities of $5.7 million, a $2.7 million decrease in deferred revenue and a $3.4 million increase in deferred income taxes offset by non-cash depreciation and amortization of approximately $12.3 million and a decrease in accounts receivable of $7.2 million. Net cash used in investing activities for the six months ended June 30, 2001 was approximately $2.4 million, primarily due to the purchase of property and equipment. Innoveda considers all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At June 30, 2001 and July 1, 2000, substantially all of Innoveda's cash and cash equivalents were invested in interest-bearing deposits and other short-term investments with an original maturity of three months or less as of the date of purchase. By policy of Innoveda's board of directors, all debt instruments must have quality ratings no lower than an A rating. Net cash used in financing activities was approximately $2.1 million for the six months ended June 30, 2001, primarily due to the repayment of principal on debt and the repurchase of Innoveda common stock. On October 19, 2000, Innoveda's board of directors authorized Innoveda to repurchase up to 2 million shares of its common stock during the period ending October 31, 2001. The repurchased shares will be held as treasury shares and used in company stock option plans, employee stock purchase plans and for general corporate purposes. As of August 13, 2001, Innoveda had purchased 550,606 shares of common stock at an aggregate cost of $1,663,371 under its stock re-purchase program. Innoveda believes that its current cash and cash equivalents, combined with cash generated from operations and amounts available under the revolving line of credit, will satisfy Innoveda's anticipated working capital and other cash requirements for at least the next 12 months. 20 NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that an entity account for business combinations using the purchase method and eliminates the pooling method. In addition, SFAS No. 141 provides guidance regarding the initial recognition and measurement of goodwill and other intangible assets. SFAS No.142 requires that goodwill no longer be amortized and instead be tested annually for impairment. The provisions of SFAS No. 141 and SFAS No. 142 apply to all business combinations completed prior to June 30, 2001. The Company is evaluating the impact of adopting these statements. ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF STOCK INNOVEDA'S DEPENDENCE ON THE ELECTRONIC INDUSTRY MAKES IT VULNERABLE TO GENERAL INDUSTRY-WIDE DOWNTURNS. Innoveda's future operating results may reflect substantial fluctuations from period to period as a consequence of industry patterns, general economic conditions affecting the timing of orders from customers and other factors. The electronics industry involves: o rapid technological change; o short product life cycles; o fluctuations in manufacturing capacity; and o pricing and margin pressures. Correspondingly, certain segments, including the computer, semiconductor, semiconductor test equipment and telecommunications industries, have experienced sudden and unexpected economic downturns. During these periods, capital spending and research and development budgets often fall, and the number of design projects often decreases. Because Innoveda's sales depend upon capital spending trends, research and development budgets and new design projects, negative factors affecting the electronics industry could have a material adverse effect on Innoveda's business, financial condition, results of operations, or cash flows. 21 VARIOUS FACTORS WILL CAUSE INNOVEDA'S QUARTERLY RESULTS TO FLUCTUATE AND FLUCTUATION MAY ADVERSELY AFFECT THE STOCK PRICE OF INNOVEDA COMMON STOCK. Innoveda's quarterly operating results and cash flows have fluctuated in the past and have fluctuated significantly in certain quarters. These fluctuations resulted from several factors, including, among others: o the size and timing of orders; o large one-time charges incurred as a result of restructurings, acquisitions or consolidations; o seasonal factors; o the rate of acceptance of new products; o product, customer and channel mix; o lengthy sales cycles; and o level of sales and marketing staff. These fluctuations will likely continue in future periods because of the above factors. Additional factors potentially causing fluctuations include, among others: o the timing of new product announcements and introductions by Innoveda and Innoveda's competitors; o the rescheduling or cancellation of customer orders; o the ability to continue to develop and introduce new products and product enhancements on a timely basis; o the level of competition; o purchasing and payment patterns, pricing policies of competitors; o product quality issues; o currency fluctuations; and o general economic conditions. 22 Innoveda believes that period-to-period comparisons of Innoveda's operating results are not necessarily meaningful. As a result, you should not rely on these comparisons as indications of Innoveda's future performance. In addition, Innoveda operates with high gross margins, and a downturn in revenue could have a significant impact on income from operations and net income. Innoveda's results of operations could be below investors' and market makers' expectations in future quarters, which could have a material adverse effect on the market price of Innoveda's common stock. INNOVEDA'S REVENUE IS DIFFICULT TO FORECAST BECAUSE OF THE TIMING OF REVENUE RECOGNITION AND UNPREDICTABLE NATURE OF CUSTOMER BEHAVIOR. Innoveda's revenue is difficult to forecast for several reasons. Innoveda operates with little product backlog because Innoveda typically ships its products shortly after it receives orders. Consequently, license backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's expected revenue. Correspondingly, license fee revenue in any quarter is difficult to forecast because it is substantially dependent on orders booked and shipped in that quarter. Moreover, Innoveda generally recognizes a substantial portion of its revenue in the last month of a quarter, frequently in the latter part of the month. Any significant deferral of purchases of Innoveda's products could have a material adverse affect on its business, financial condition and results of operations in any particular quarter. If significant sales occur earlier than expected, operating results for subsequent quarters may also be adversely affected. Quarterly license fee revenue is difficult to forecast also because Innoveda's typical sales cycle ranges from six to nine months and varies substantially from customer to customer. In addition, Innoveda makes a portion of its sales through indirect channels, and these sales can be difficult to predict. IF INNOVEDA CANNOT SUCCESSFULLY INTEGRATE THE ACQUISITION BY INNOVEDA OF PADS, THE ANTICIPATED ADVANTAGES OF THE BUSINESS COMBINATION BETWEEN INNOVEDA AND PADS MAY NOT BE REALIZED, IN FULL, IF AT ALL. Innoveda acquired PADS Software, Inc. in September 2000. The integration of Innoveda and PADS requires the dedication of Innoveda management resources. This may distract management's attention from the management of the day-to-day business of Innoveda. Employee uncertainty and lack of focus during integration may also disrupt the business of Innoveda. Retention of key employees by Innoveda has been, and will remain, critical to ensure continued advancement, development and support of the Company's technologies and ongoing sales and marketing efforts. During the integration phase, competitors may intensify their efforts to recruit key employees. The inability to successfully integrate Innoveda and PADS and to retain key technical, sales or marketing personnel after the merger of Innoveda and PADS would adversely affect the combined company's business. SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS. Innoveda establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on Innoveda's expectations as to future revenue. Because a high percentage of Innoveda's expenses are relatively fixed in the near term, if revenue in any quarter falls below expectations, expenditure levels could be disproportionately high as a percentage of revenue and materially adversely affect Innoveda's operating results. 23 IF THE SYSTEM DESIGN PORTION OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY ON WHICH INNOVEDA PRIMARILY FOCUSES DOES NOT GROW, INNOVEDA'S BUSINESS MAY SUFFER. Innoveda focuses on the electro-mechanical, printed circuit board and system-level design automation markets while most major competitors focus their resources on the application-specific integrated circuit and integrated circuit design automation markets. Innoveda has adopted this focus because it believes that the increased complexity of application-specific integrated circuits and integrated circuit designs, and the resulting increase in design time, will cause electronic product manufacturers to differentiate their products at the system level. If the system design portion of the electronic design automation industry does not grow, it could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. INNOVEDA HAS SUBSTANTIAL SECURED DEBT, WHICH MAY SUBSTANTIALLY RESTRICT INNOVEDA'S ABILITY TO REACT TO THE RAPIDLY CHANGING ENVIRONMENT OF THE ELECTRONIC DESIGN AUTOMATION INDUSTRY, AND WHICH IT MAY NOT BE ABLE TO REPLACE. As of June 30, 2001, Innoveda had borrowings of approximately $7.5 million under its Credit Facility. Borrowings under the Credit Facility are secured by substantially all of Innoveda's assets. The Credit Facility contains limitations on additional indebtedness and capital expenditures, and includes financial covenants, which include but are not limited to the maintenance of minimum levels of profitability, interest and debt service coverage ratios and maximum leverage ratios and minimum working capital ratios. Collectively, these limitations and covenants may substantially restrict the flexibility of Innoveda's management in quickly adjusting its financial and operational strategies to react to changing economic and business conditions and may compromise Innoveda's ability to react to the rapidly evolving environment of the electronic design automation industry. To avoid default under this credit facility, Innoveda must remain in compliance with these limitations and covenants and make all required repayments or Innoveda must obtain replacement financing. The Company is currently not in compliance with certain financial covenants under its Credit Facility. See Note 6 to the Company's Condensed Consolidated Financial Statements contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations. INNOVEDA FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER. The electronic design automation industry is highly competitive, and Innoveda expects competition to increase as other electronic design automation companies introduce products. In the electronic design automation market, Innoveda principally competes with Mentor Graphics and Cadence and a number of smaller firms. Indirectly, Innoveda also competes with other firms that offer alternative products. These other firms could also offer more directly competitive products in the future. Some of these companies have significantly greater financial, technical and marketing resources and larger installed customer bases than Innoveda. Some of Innoveda's current and future competitors offer a more complete range of electronic design automation products. 24 Innoveda competes on the basis of various factors including, among others: o product capabilities; o product performance; o price; o support of industry standards; o ease of use; o first to market; and o customer technical support and service. Innoveda believes that its products are competitive overall with respect to these factors. However, in particular cases, Innoveda's competitors may offer products with functionality sought by Innoveda's prospective customers and which differs from those Innoveda offers. In addition, some competitors may achieve a marketing advantage by establishing formal alliances with other electronic design automation vendors. Further, the electronic design automation industry in general has experienced significant consolidation in recent years, and the acquisition of one of Innoveda's competitors by a larger, more established electronic design automation vendor could create a more significant competitor. Innoveda may not compete successfully against current and future competitors, and competitive pressures may have a material adverse effect on Innoveda's business, financial condition, results of operations, or cash flows. Innoveda's current and future competitors may develop products comparable or superior to Innoveda's or more quickly adapt new technologies, evolving industry trends or customer requirements. Increased competition could result in price reductions, reduced margins and loss of market share, all of which could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. INNOVEDA DEPENDS ON THIRD PARTIES FOR PRODUCT INTEROPERABILITY, AND THAT MAKES INNOVEDA VULNERABLE IF THESE THIRD PARTIES REFUSE TO COOPERATE WITH INNOVEDA ON ECONOMICALLY FEASIBLE TERMS. Because Innoveda's products must interoperate, or be compatible, with electronic design automation products of other companies, Innoveda must have timely access to third party software to perform development and testing of products. Although Innoveda has established relationships with a variety of electronic design automation vendors to gain early access to new product information, any of these parties may terminate these relationships with limited notice. In addition, these relationships are with companies that are Innoveda's current or potential future competitors, including Synopsys, Mentor Graphics and Cadence. If any of these relationships terminate and Innoveda were unable to obtain, in a timely manner, information regarding modifications of third party products, Innoveda would not have the ability to modify its software products to interoperate with these third party products. As a result, Innoveda could experience a significant increase in development costs, the development process would take longer, product introductions would be delayed, and Innoveda's business, financial condition, results of operations or cash flows could be materially adversely affected. 25 IF INNOVEDA CANNOT DEVELOP NEW PRODUCTS TO KEEP PACE WITH TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS, INNOVEDA'S BUSINESS WILL SUFFER. If Innoveda cannot, for technological or other reasons, develop and introduce products in a timely manner in response to changing market conditions, industry standards or other customer requirements, particularly if Innoveda has pre-announced the product releases, its business, financial condition, results of operations or cash flows will be materially adversely affected. The electronic design automation industry is characterized by extremely rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products with new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. In addition, customers in the electronic design automation industry require software products that allow them to reduce time to market, differentiate their products, improve their engineering productivity and reduce their design errors. Innoveda's future success will depend upon its ability to enhance its current products, develop and introduce new products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of Innoveda's customers. Innoveda may not succeed in developing and marketing product enhancements or new products that respond to technological change or emerging industry standards. It may experience difficulties that could delay or prevent the successful development, introduction and marketing of these products. Innoveda's products may not adequately meet the requirements of the marketplace and achieve market acceptance. INNOVEDA'S SOFTWARE MAY HAVE DEFECTS. Innoveda's software products may contain errors that may not be detected until late in the products' life cycles. Innoveda has in the past discovered software errors in certain of its products and has experienced delays in shipment of products during the period required to correct these errors. Despite testing by Innoveda and by current and prospective customers, errors may persist, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to Innoveda's reputation or increased service and warranty costs, any of which could have a material adverse effect on its business, financial condition, results of operations or cash flows. INNOVEDA DEPENDS ON ITS DISTRIBUTORS TO SELL ITS PRODUCTS, ESPECIALLY INTERNATIONALLY, BUT THESE DISTRIBUTORS MAY NOT DEVOTE SUFFICIENT EFFORTS TO SELLING INNOVEDA'S PRODUCTS OR THEY MAY TERMINATE THEIR RELATIONSHIPS WITH INNOVEDA. DISTRIBUTORS' CONTINUED VIABILITY. If any of Innoveda's distributors fails, Innoveda's business may suffer. Innoveda relies on distributors for licensing and support of Innoveda's products, particularly in Japan and other parts of Asia. Innoveda depends on the relationships with its distributors to maintain or increase sales. Since Innoveda's products are used by skilled design engineers, distributors must possess sufficient technical, marketing and sales resources and must devote these resources to a lengthy sales cycle, customer training and product service and support. Only a limited number of distributors possess these resources. Accordingly, Innoveda depends on the continued viability and financial stability of these distributors. 26 DISTRIBUTORS' EFFORTS IN SELLING INNOVEDA'S PRODUCTS. Innoveda's distributors may offer products of several different companies, including Innoveda's competitors. Innoveda's current distributors may not continue to market or service and support Innoveda's products effectively. Any distributor may discontinue to sell Innoveda's products or devote its resources to products of other companies. The loss of, or a significant reduction in, revenue from Innoveda's distributors could have a material adverse effect on its business, financial condition, results of operations or cash flows. JAPAN. Innoveda has exclusive distribution agreements with two distributors in Japan, which collectively cover a significant portion of Innoveda's products in Japan. If either of these distributors terminates its relationship with Innoveda, it could have a material adverse affect on Innoveda's business, financial condition, results of operations or cash flows. INNOVEDA FACES THE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS, INCLUDING ITS BUSINESS ACTIVITIES IN ISRAEL, EUROPE AND ASIA. International revenue and expenses represent a significant portion of Innoveda's total revenue and expenses, and Innoveda expects this trend to continue. International sales and operations involve numerous risks, including, among others: o fluctuations in the value of the dollar relative to foreign currencies can make Innoveda's products and services more expensive in foreign markets or increase Innoveda's expenses; o tariff regulations and other trade barriers; o requirements for licenses, particularly with respect to the export of certain technologies; o collectibility of accounts receivable; o changes in regulatory requirements; and o difficulties in staffing and managing foreign operations and extended payment terms. These factors may have a material adverse effect on Innoveda's future international sales and operations and, consequently, on its business, financial condition, results of operations or cash flows. In addition, financial markets and economies in the Asia Pacific region have been experiencing adverse conditions, and these adverse economic conditions may worsen. Demand for and sales of Innoveda's products in this region may decrease. In order to successfully expand international sales, Innoveda may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors. This will require significant management attention and financial resources and could adversely affect Innoveda's operating margins. In addition, to the extent that Innoveda cannot effect these additions in a timely manner, Innoveda can only generate limited growth in international sales, if any. Innoveda may not maintain or increase international sales of its products, and failure to do so could have a material adverse effect on its business, financial condition, results of operations or cash flows. 27 INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY SUFFER. Innoveda's ability to achieve significant growth will require it to implement and continually expand its operational and financial systems, recruit additional employees and train and manage current and future employees. Innoveda expects any growth to place a significant strain on its operational resources and systems. Failure to effectively manage any growth would have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. Innoveda regularly evaluates acquisition opportunities. Innoveda's future acquisitions, if any, could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, and large one-time charges which could materially adversely affect Innoveda's results of operations. Product and technology acquisitions entail numerous risks, including difficulties in the assimilation of acquired operations, technologies and products, diversion of management's attention to other business concern, risks of entering markets in which Innoveda has no or limited prior experience and potential loss of key employees of acquired companies. Innoveda may not integrate successfully the operations, personnel or products that have been acquired or that might be acquired in the future, and the failure to do so could have a material adverse affect on its results of operations. INNOVEDA FACES THE RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL, INCLUDING POLITICAL AND COORDINATION RISKS. POLITICAL RISKS AND GOVERNMENTAL REGULATIONS. Innoveda's research and development operations related to Visual HDL and Visual Elite products are located in Israel. Economic, political and military conditions may affect Innoveda's operations in that country. Hostilities involving Israel, for example, could materially adversely affect Innoveda's business, financial condition and results of operations. Innoveda's ability to manufacture or transfer outside of Israel any technology developed under research and development grants from the government of Israel is subject to Israeli government restrictions which may limit Innoveda's ability to extract the full benefit of that technology. COORDINATION RISKS. In addition, coordination with and management of the Israeli operations requires Innoveda to address differences in culture, regulations and time zones. Failure to successfully address these differences could disrupt Innoveda's operations. INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER. Innoveda's future success will depend in large part on its key technical and management personnel and its ability to continue to attract and retain highly skilled technical, sales and marketing and management personnel. Innoveda's business could be seriously harmed if it lost the services of its President and Chief Executive Officer, William J. Herman, or if it fails to attract and retain other key personnel. 28 Competition for personnel in the software industry in general, and the electronic design automation industry in particular, is intense. Innoveda has in the past experienced difficulty in retaining and recruiting qualified personnel. Innoveda may fail to retain its key personnel or attract and retain other qualified technical, sales and marketing and management personnel in the future. The loss of any key employees or the inability to attract and retain additional qualified personnel may have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. Additions of new personnel and departures of existing personnel, particularly in key positions, can be disruptive and can result in departures of additional personnel, which could have a material adverse effect on Innoveda's business, financial condition, results of operations or cash flows. IF INNOVEDA FAILS TO EXPAND AND TRAIN ITS SALES AND MARKETING ORGANIZATIONS, ITS BUSINESS MAY SUFFER. Innoveda's success will depend on its ability to build and expand its sales and marketing organizations. Innoveda's future success will depend in part on its ability to hire, train and retain qualified sales and marketing personnel and the ability of these new persons to rapidly and effectively transition into their new positions. Competition for qualified sales and marketing personnel is intense, and Innoveda may not be able to hire, train and retain the number of sales and marketing personnel needed, which would have a material adverse effect on its business, financial condition, results of operations or cash flows. INNOVEDA MUST CONTINUE TO ADD VALUE TO ITS CURRENT PRODUCTS TO SERVE ITS INSTALLED CUSTOMER BASE OR ITS REVENUE DERIVED FROM MAINTENANCE AGREEMENTS WILL DECREASE. A substantial portion of Innoveda's revenue is derived from maintenance agreements for existing products. In order to maintain that revenue, Innoveda must continue to offer those customers updates for those products or convert those customers to new products. Innoveda may not be able to do so. 29 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK Innoveda is exposed to interest rate risk primarily through its credit facility. Innoveda has a credit facility with a commercial bank consisting of a $6.0 million revolving line of credit ("Line of Credit") and a $7.5 million term loan as of June 30, 2001 (the "Term Loan") (together, the "Credit Facility"). Interest terms on the Line of Credit and the Term Loan are determined, at the option of Innoveda, for varying periods. Innoveda may elect to have the interest rate based on the bank's prime rate or based on the LIBOR rate at the time of the election, depending on Innoveda's leverage financial ratio, as defined, in the Credit Facility. The interest rates on the Line of Credit and the Term Loan at June 30, 2001 was 7.25% and 6.90%, respectively. Payments of principal outstanding under either the Line of Credit or the Term Loan may be made at any time and must be repaid in full by September 30, 2003. As required under the Credit Facility, Innoveda entered into a no fee interest rate-swap agreement with a bank to reduce the impact of changes in interest rates on its floating rate Credit Facility. This agreement effectively converts a portion of the floating-rate obligation into a fixed-rate obligation of 7.4% for a period of 60 months, expiring on March 31, 2003. The notional principal amount of the interest rate-swap agreement was $7.5 million as of June 30, 2001. The counter parties to the interest rate-swap agreement expose Innoveda to credit loss in the event of nonperformance. Open interest rate contracts are reviewed regularly by Innoveda to ensure that they remain effective as hedges of interest rate exposure. Management of Innoveda believes that the rate-swap agreement approximates fair value. Innoveda invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limits the amount of credit exposure to any one issue. Innoveda attempts to protect and preserve its invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, Innoveda's future investment income may fall short of expectations due to changes in interest rates and Innoveda may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. Innoveda considers all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At June 30, 2001 and December 30, 2000, substantially all of the Company's cash and cash equivalents were invested in interest-bearing deposits and other short-term investments with an original maturity of three months or less as of the date of purchase. By policy of Innoveda's board of directors, all debt instruments must have quality ratings no lower than A rating. 30 FOREIGN CURRENCY EXCHANGE RATE RISK Innoveda is also exposed to the impact of foreign currency fluctuations. Since Innoveda translates foreign currencies into U.S. dollars for reporting purposes, weakened currencies in its subsidiaries have a negative, though immaterial, impact on its results. Innoveda also believes that the exposure to currency exchange fluctuation risk is insignificant because its international subsidiaries sell to customers, and satisfy their financial obligations, almost exclusively in their local currencies. Innoveda entered into foreign exchange contracts as a hedge against certain accounts receivable denominated in foreign currencies during the twelve months ended June 30, 2001. Realized and unrealized gains and losses on foreign exchange contracts for the six months ended June 30, 2001 were insignificant. There were no outstanding foreign exchange contracts as of June 30, 2001. PART II OTHER INFORMATION ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 15, 2001, Innoveda held its Annual Meeting of Stockholders. At the meeting, the votes cast for the sole matter presented to Innoveda's stockholders were as follows: Election of two Class I directors, for the ensuing three years and until their successors are duly elected and qualified.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS No exhibits are filed with this Current Report on Form 10-Q. (b) REPORTS ON FORM 8-K The Company did not file any current reports on Form 8-K during the fiscal quarter ended June 30, 2001. 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOVEDA, INC. By: /s/ Kevin P. O'Brien ------------------------------------- Kevin P. O'Brien Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) Date: August 14, 2001 32 EXHIBIT INDEX No exhibits are filed with this Current Report on Form 10-Q. 33

INNOVEDA INC 10-Q