-----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, LsLFls7YrRYBUpihIwUuKMjpJMWkW+/2GkXDiBoRdQRMAOVTPcDPebyPJCiMQ4dI tPT/wR4F5Az5hsbKJU+7Kw== 0000912057-01-539143.txt : 20020410 0000912057-01-539143.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-539143 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVEDA 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: 1934 Act SEC FILE NUMBER: 000-20923 FILM NUMBER: 1784287 BUSINESS ADDRESS: STREET 1: 293 BOSTON POST ROAD WEST CITY: MARLBORO STATE: MA ZIP: 01752 BUSINESS PHONE: 5084800881 MAIL ADDRESS: STREET 1: 293 BOSTON POST RD WEST CITY: MARLBORO STATE: MA ZIP: 01752 FORMER COMPANY: FORMER CONFORMED NAME: SUMMIT DESIGN INC DATE OF NAME CHANGE: 19960514 10-Q 1 a2063260z10-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 September 29, 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 November 8, 2001, the Registrant had outstanding 40,265,125 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, the availability of financial resources, 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
PAGE PART 1 FINANCIAL INFORMATION ITEM 1 Condensed Consolidated Financial Statements 4 Condensed Consolidated Balance Sheets as of September 29, 2001 4 (unaudited) and December 30, 2000 Condensed Consolidated Statements of Operations for the Quarters 5 and Nine Months Ended September 29, 2001 (unaudited) and September 30, 2000 (unaudited) Condensed Consolidated Statements of Cash Flows for the Quarters 6 and Nine Months Ended September 29, 2001 (unaudited) and September 30, 2000 (unaudited) Notes to Condensed Consolidated Financial Statements 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and 15 Results of Operations ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 35 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K 36 SIGNATURE 37 EXHIBIT INDEX 38 EXHIBITS 39
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INNOVEDA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 29, December 30, 2001 2000 (unaudited) ------------ ------------ ASSETS Current assets: Cash and cash equivalents ...................................................... $ 7,585 $ 20,799 Accounts receivable, net ....................................................... 17,853 27,260 Prepaid expenses and other ..................................................... 1,996 2,800 Deferred income taxes .......................................................... 7,378 6,626 ------------ ------------ Total current assets ......................................................... 34,812 57,485 Equipment and furniture, net ...................................................... 5,553 7,642 Capitalized software costs, net ................................................... 2,241 2,358 Purchased technology and other intangibles, net ................................... 27,664 62,198 Goodwill and other ................................................................ 2,249 12,941 ------------ ------------ Total assets ................................................................. $ 72,519 $142,624 ============ ============ LIABILITIES Current liabilities: Long-term debt, current portion ................................................ $ 3,875 $ 3,550 Capital lease obligations, current portion ..................................... 378 548 Accounts payable ............................................................... 2,333 3,652 Accrued liabilities ............................................................ 15,421 20,565 Deferred revenue ............................................................... 19,794 24,514 ------------ ------------ Total current liabilities .................................................... 41,801 52,829 Long-term debt .................................................................... 2,750 5,750 Capital lease obligations ......................................................... 16 250 Other long-term liabilities ....................................................... 1,455 1,553 Deferred income taxes ............................................................. 15,284 27,642 ------------ ------------ Total liabilities ............................................................ 61,306 88,024 ------------ ------------ STOCKHOLDERS' EQUITY Common stock, $0.01 par value, 100,000 authorized, 40,093 outstanding at September 29, 2001, 39,347 outstanding at December 30, 2000 .............................................. 402 393 Treasury stock .................................................................... (1,663) (832) Additional paid-in-capital ........................................................ 117,367 116,047 Notes due from stockholders ....................................................... (932) (932) Deferred compensation ............................................................. (673) (1,113) Accumulated deficit ............................................................... (102,608) (59,013) Accumulated other comprehensive income (loss) ..................................... (680) 50 ------------ ------------ Total stockholders' equity ................................................... 11,213 54,600 ------------ ------------ Total liabilities and stockholders' equity ................................... $ 72,519 $142,624 ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 INNOVEDA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Third Quarter Ended Nine Months Ended ----------------------------- ---------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Revenue: Software ............................................... $ 8,447 $ 12,578 $ 33,821 $ 31,819 Services and other ..................................... 11,585 10,525 35,546 27,229 ------------- ------------- ------------- ------------- Total revenue ........................................ 20,032 23,103 69,367 59,048 ------------- ------------- ------------- ------------- Cost and expenses: Cost of software ....................................... 1,595 1,994 5,169 5,466 Cost of services and other ............................. 2,767 2,214 8,203 5,826 Sales and marketing .................................... 10,240 8,046 32,793 22,983 Research and development ............................... 6,377 5,750 21,576 15,021 General and administrative ............................. 1,996 1,776 6,316 4,555 Amortization of intangibles ............................ 2,777 2,508 12,087 5,588 Amortization of stock compensation ..................... 147 147 440 441 In-process research and development .................... -- 3,053 -- 5,453 Impairment of intangible assets ........................ 32,945 -- 32,945 -- Restructuring costs .................................... 5,271 493 5,865 2,736 ------------- ------------- ------------- ------------- Total operating expenses ............................. 64,115 25,981 125,394 68,069 ------------- ------------- ------------- ------------- Operating loss ....................................... (44,083) (2,878) (56,027) (9,021) Other expense, net ........................................ (165) (200) (334) (340) ------------- ------------- ------------- ------------- Loss before provision (benefit) for income taxes .......... (44,248) (3,078) (56,361) (9,361) Provision (benefit) for income taxes ...................... (9,497) 1,736 (12,766) 564 ------------- ------------- ------------- ------------- Net loss .................................................. $ (34,751) $ (4,814) $ (43,595) $ (9,925) ============= ============= ============= ============= Net loss per share: Basic and diluted .................................... $ (0.89) $ (0.14) $ (1.12) $ (0.40) ============= ============= ============= ============= Weighted average shares outstanding: Basic and diluted .................................... 39,108 33,336 39,080 24,590 ============= ============= ============= =============
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)
For the Nine Months Ended ----------------------------- September 29, September 30, 2001 2000 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ....................................................................... $(43,595) $ (9,925) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .............................................. 16,254 9,649 Non-cash portion of restructuring and impairment costs ..................... 34,445 -- Compensation under stock option agreements ................................. 440 440 Write-off of in-process research and development ........................... -- 5,453 Changes in assets and liabilities: Accounts receivable ........................................................ 9,122 2,294 Prepaid and other current assets ........................................... 773 622 Deferred income taxes ...................................................... (13,110) (3,919) Accounts payable ........................................................... (2,088) (1,427) Accrued liabilities ........................................................ (5,199) 3,621 Tax benefit on stock option exercises ...................................... 43 -- Deferred revenue ........................................................... (4,720) (3,104) ------------- ------------- Net cash provided by (used in) operating activities ........................ (7,635) 3,704 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ........................................ (2,047) (2,168) Capitalized software costs ................................................. (794) (1,353) Proceeds from sale of VirSim product line .................................. -- 7,000 Cash acquired in acquisition of PADS Software, Inc, net of purchase costs ........................................................... -- 2,857 Cash acquired in acquisition of Summit, net of purchase costs .............. -- 27,036 ------------- ------------- Net cash provided by (used in) investing activities ........................ (2,841) 33,372 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of principal on debt .............................................. (2,675) (14,320) Proceeds from exercise of stock options and employee stock purchase plan ............................................................ 1,286 872 Payments of capital lease obligations ...................................... (404) (300) Purchase of treasury stock ................................................. (831) -- ------------- ------------- Net cash used in financing activities ...................................... (2,624) (13,748) ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ (114) (133) ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (13,214) 23,195 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 20,799 531 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 7,585 $ 23,726 ============= =============
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 condensed consolidated statements of operations and the condensed consolidated statements of cash flows represents the results for Viewlogic for the periods stated and includes the financial results for Summit commencing March 24, 2000 and the financial results for PADS commencing September 23, 2000. 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 1.0 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 condensed 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 condensed 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 September 29, 2001. All remaining amounts are expected to be settled within the fourth quarter of fiscal 2001.
Total Non-Cash Amount September 29, 2001 Accrual Write-Off Paid Accrual Balance ------- --------- ------ ------------------- PADS MERGER COSTS Severance ............................................ $ 250 $ 32 $ 218 $ -- Non-cancelable commitments ........................... 199 -- 199 -- Capitalized software ................................. 44 44 -- -- ------ ------ ------ ------ $ 493 $ 76 $ 417 $ -- ------ ------ ------ ------ SUMMIT MERGER COSTS Severance ............................................ $ 780 $ 5 $ 775 $ -- Non-cancelable commitments ........................... 1,389 -- 1,300 89 Capitalized software ................................. 74 74 -- -- ------ ------ ------ ------ $2,243 $ 79 $2,075 $ 89 ------ ------ ------ ------ TOTALS ............................................... $2,736 $ 155 $2,492 $ 89 ====== ====== ====== ======
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.
Third Quarter Ended Nine Months Ended ----------------------------- ---------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net Loss ............................... $(34,751) $ (4,814) $(43,595) $ (9,925) ============= ============ ============ ============= Weighted average number of common shares - Basic .............. 39,108 33,336 39,080 24,590 ============= ============ ============ ============= Weighted average number of common and potential common shares - Diluted ................... 39,108 33,336 39,080 24,590 ============= ============ ============ ============= Net loss per share: Basic .............................. $ (0.89) $ (0.14) $ (1.12) $ (0.40) ============= ============ ============ ============= Diluted ............................ $ (0.89) $ (0.14) $ (1.12) $ (0.40) ============= ============ ============ =============
For the three and nine months ended September 29, 2001 and September 30, 2000, there were 10,320 and 5,449 anti-dilutive 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:
For the Third Quarter Ended For the Nine Months Ended --------------------------- ------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------ ------------ ------------ Revenue: North America ....................... $13,645 $14,017 $46,437 $37,956 Europe .............................. 3,164 2,584 11,095 7,325 Japan ............................... 2,499 4,094 7,378 9,599 Other ............................... 724 2,408 4,457 4,168 ------- ------- ------- ------- Total Revenue ......................... $20,032 $23,103 $69,367 $59,048 ======= ======= ======= ======= As a percentage of Total Revenue North America ....................... 68% 61% 67% 64% Europe .............................. 16% 11% 16% 13% Japan ............................... 12% 18% 11% 16% Other ............................... 4% 10% 6% 7% ------- ------- ------- ------- Total ................................. 100% 100% 100% 100% ======= ======= ======= =======
5. COMPREHENSIVE LOSS The following table presents the components of comprehensive loss for the periods indicated.
For the Third Quarter Ended For the Nine Months Ended ---------------------------------- ------------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------- ------------ ------------ Net loss ........................................ $(34,751) $ (4,814) $(43,595) $ (9,925) Foreign currency translation adjustments ........ (202) (88) (730) (217) -------- -------- -------- -------- Comprehensive loss .............................. $(34,953) $ (4,902) $(44,325) $(10,142) ======== ======== ======== ========
11 6. DEBT CREDIT FACILITY - For the fiscal quarter ended June 30, 2001, the Company did not meet certain financial covenants under its Credit Facility. Effective September 29, 2001, the Company and the lender have amended the terms and conditions of its existing $6.6 million term loan (the "Term Loan") and its revolving line of credit ("Line of Credit") (together, the "Credit Facility") to revise certain covenants and provide a waiver for past violations. Under this amendment, the Term Loan portion of the Credit Facility remains in place with the original repayment schedule, and the Line of Credit portion of the Credit Facility has been reduced to approximately $0.4 million to cover only existing letters of credit issued by the lender at the request of the Company. Borrowings under the Credit Facility are secured by substantially all of Innoveda's assets. The amended Credit Facility contains limitations on additional indebtedness and capital expenditures, and includes financial covenants, which include but are not limited to maintaining certain levels of profitability, deferred revenue, working capital ratio and debt service coverage ratio. Interest rates 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 September 29, 2001 and December 30, 2000 were 6% and 10%, respectively. The interest rates on the Term Loan at September 29, 2001 and December 30, 2000 were 5.6% 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. A payment of $0.9 million is due in the fourth quarter of fiscal 2001. Successive payments of $1.0 million are due each quarter through September 2002, and $1.4 million and $0.4 million are due in the first and second quarters of fiscal 2003, respectively. 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 AND IMPAIRMENT OF LONG-LIVED ASSETS In August 2001, Innoveda, in response to current economic conditions and as part of its revised strategic direction and technology focus, completed a restructuring and streamlining of company operations. RESTRUCTURING COSTS As a result of the restructuring, the Company recorded charges of $5.3 million. The restructuring costs include workforce reductions, closing or reducing space in certain facilities and asset write-downs. The restructuring program resulted in the reduction in workforce of approximately 140 employees across all business functions and geographic regions. The workforce reductions were substantially completed by the end of the third quarter. The Company recorded a workforce reduction charge of $2.3 million relating primarily to severance, fringe benefits and outplacement services. The Company recorded a restructuring charge of $1.5 million relating to lease terminations, non-cancelable lease costs, and excess facility space. These facility costs relate to business activities that have been exited or restructured. In addition, the restructuring charge includes an additional $0.4 million in professional fees, travel expenses and other related costs incurred in connection with the restructuring activities and a $1.1 million restructuring charge related to certain fixed assets that became impaired as a result of the decision to reduce the workforce and close facilities. IMPAIRMENT OF LONG-LIVED ASSETS As part of our review of financial results during the quarter ended September 29, 2001, we performed an assessment of the carrying values of intangible assets recorded in connection with the acquisitions of PADS and Summit Design. The assessment was performed as a result of the current economic downturn and negative industry trends impacting our current operations and expected future growth rates. The conclusion of that assessment was that the decline in economic conditions within our industry was significant and other than temporary. As a result, we recognized pre-tax charges of $32.9 million representing write downs to record intangible assets at their estimated fair values. The impaired intangible assets include goodwill, purchased technology, workforce and customer base. The estimated fair value was based on expected future cash flows, discounted at a rate commensurate with the risks involved. The following table sets forth an analysis of the components of the fiscal 2001 third quarter restructuring and intangible asset impairment charges. The table indicates payments made against the reserve through September 29, 2001.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001 ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE ------- --------- ------ ------------------ Impairment of intangibles ........................... $32,945 $32,945 $ -- $ -- Disposal of fixed assets ............................ 1,085 1,085 -- Severance and related expenses ...................... 2,267 -- 1,330 937 Lease commitment and related fees ................... 1,511 -- 62 1,449 Other ............................................... 408 -- 116 292 ------- --------- ------- ------------------ $38,216 $34,030 $ 1,508 $ 2,678 ======= ========= ======= ==================
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0 million, with the remaining amounts to be paid in subsequent periods. 13 8. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED) PITTSBURGH OFFICE CLOSURE In May 2001, the Company closed an office located in Pittsburgh, Pennsylvania and transferred the operations to other offices in the United States and overseas. The total charge of $0.6 million consists of intangible asset and fixed asset impairment charges of $0.4 million, $0.1 million of severance related to the termination of 8 employees and $0.1 million of other costs incurred due to the closure. All significant amounts are expected to be settled within a year of the office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001 ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE ------- --------- ------ ------------------ Impairment of intangibles and fixed assets ................. $415 $415 $-- $-- Severance .......................... 64 -- 64 -- Lease commitment ................... 48 -- 20 28 Other .............................. 67 -- 20 47 ------- --------- ------ ------------------ $594 $415 $104 $ 75 ======= ========= ====== ==================
9. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS 121, and the accounting and reporting provisions of APB 30, for the disposal of a segment of a business. The provisions of SFAS 144 are required to be adopted by the Company effective January 2002. 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 initiated 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. 14 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 26, 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" above. 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. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenue of certain items in our condensed consolidated statements of operations:
For the Third Quarter Ended For the Nine Months Ended --------------------------- --------------------------- September 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------ Revenue: Software ......................................... 42% 54% 49% 54% Services and other ............................... 58% 46% 51% 46% ------------- ------------- ------------- ------------ Total Revenue ...................................... 100% 100% 100% 100% ------------- ------------- ------------- ------------ Costs and expenses: Cost of software ................................. 8% 9% 8% 9% Cost of services and other ....................... 14% 10% 12% 10% Sales and marketing .............................. 51% 35% 47% 39% Research and development ......................... 32% 25% 31% 25% General and administrative ....................... 10% 8% 9% 8% Amortization of intangibles and stock compensation ................................... 15% 11% 18% 10% In-process research and development .............. -- 13% -- 9% Impairment of intangible assets .................. 164% -- 47% -- Restructuring costs .............................. 26% 2% 8% 5% ------------- ------------- ------------- ------------ Total operating expenses ........................... 320% 113% 180% 115% ------------- ------------- ------------- ------------ Loss from operations ............................... -220% -13% -80% -15% Other expense, net ................................. -1% -1% -1% -1% ------------- ------------- ------------- ------------ Loss before provision (benefit) for income taxes ... -221% -14% -81% -16% ------------- ------------- ------------- ------------ Provision (benefit) for income taxes ............... -47% 7% -18% 1% ------------- ------------- ------------- ------------ Net loss ........................................... -174% -21% -63% -17% ------------- ------------- ------------- ------------
16 QUARTERS ENDED AND NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 REVENUE For the quarter ended September 29, 2001, total revenue decreased 13% to $20.0 million from $23.1 million for the quarter ended September 30, 2000. The decrease in revenue consisted of a 33% decrease in software license revenue to $8.4 million from $12.6 million, offset by a 10% increase in services and other revenue to $11.6 million from $10.5 million. For the nine months ended September 29, 2001, total revenue increased 17% to $69.4 million from $59.0 million for the nine months ended September 30, 2000. The increase consisted of a 31% increase in services and other revenue to $35.5 million from $27.2 million and a 6% increase in software license revenue to $33.8 million from $31.8 million. The decrease in total revenue for the third quarter ended September 29, 2001 is primarily attributable to the impact of the global economic downturn, particularly with our target customers in the telecom and computer industries. Discretionary spending by these customers has been reduced, causing delays and postponement of orders. The decrease is also attributable to revenue no longer being realized from our VirSim product line, which was sold during the third quarter of 2000. The increase in services and other revenue in the third quarter year over year is primarily related to the products acquired as part of the acquisition of PADS. Software revenue increased for the nine-month period ended September 29, 2001 over the same period of the prior year due primarily to additional product sales in the first quarter related to 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. This has been offset by a decrease in orders, as discussed above. Furthermore, we realized increased consulting revenue during the first three 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 42% for the quarter ended September 29, 2001 from 54% for the quarter ended September 30, 2000 and decreased to 49% for the nine months ended September 29, 2001 from 54% for the nine months ended September 30, 2000. As a percentage of total revenue, services and other revenue increased to 58% for the quarter ended September 29, 2001 from 46% for the quarter ended September 29, 2000, and increased to 51% for the nine months ended September 29, 2001 from 46% for the nine months ended September 30, 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 20% to $1.6 million for the quarter ended September 29, 2001 from $2.0 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, cost of software revenue decreased 5% to $5.2 million from $5.5 million for the nine months ended September 30, 2000. The decrease in the third quarter of 2001 versus the same period in 2000 was primarily due to the decreased royalty costs consistent with the decrease in software license revenue, the retirement of products with large royalty costs and economies of scale resulting from the acquisition of Summit Design and PADS Software. The decrease in the nine-month period ended September 29, 2001 also relates to the decreasing royalty costs and economies of scale resulting from the acquisition of Summit Design and PADS Software offset by increased salary and related costs of additional headcount resulting from the acquisitions of Summit Design in March 2000 and PADS Software in September 2000. 17 As a percentage of total revenue, cost of software decreased to 8% for the quarter ended September 29, 2001 from 9% for the quarter ended September 30, 2000, and decreased to 8% for the nine months ended September 29, 2001 from 9% for the nine months ended September 30, 2000. 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 25% to $2.8 million for the quarter ended September 29, 2001 from $2.2 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, cost of services and other increased 41% to $8.2 million from $5.8 million for the nine months ended September 30, 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 our 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 14% for the quarter ended September 29, 2001 from 10% for the quarter ended September 30, 2000, and increased to 12% for the nine months ended September 29, 2001 from 10% for the nine months ended September 30, 2000. SALES AND MARKETING Sales and marketing expenses increased 27% to $10.2 million for the quarter ended September 29, 2001 from $8.0 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, sales and marketing expense increased 43% to $32.8 million from $23.0 million for the nine months ended September 30, 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. 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 September 29, 2001 from 35% for the quarter ended September 30, 2000, and increased to 47% for the nine months ended September 29, 2001 from 39% for the nine months ended September 30, 2000. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of costs related to support product development. Research and development expenses increased 11% to $6.4 million for the quarter ended September 29, 2001 from $5.8 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, research and development expense increased 44% to $21.6 million from $15.0 million for the nine months ended September 30, 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. 18 As a percentage of total revenue, research and development expenses increased to 32% for the quarter ended September 29, 2001 from 25% for the quarter ended September 30, 2000, and increased to 31% for the nine months ended September 29, 2001 from 25% for the nine months ended September 30, 2000. The amount of software development costs capitalized for the quarter ended September 29, 2001 was approximately $0.3 million or 4% of research and development expense for that period, and for the quarter ended September 30, 2000 was $0.1 million or 3% of research and development expense for that period. For the nine months ended September 29, 2001 capitalized software development costs were $0.8 million, and for the nine months ended September 30, 2000, approximately $0.7 million was capitalized. GENERAL AND ADMINISTRATIVE General and administrative expenses include the costs of the administrative, finance, human resources, legal and information systems departments. General and administrative expenses increased 12% to $2.0 million for the quarter ended September 29, 2001 from $1.8 million for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, general and administrative expenses increased 39% to $6.3 million from $4.6 million for the nine months ended September 30, 2000. These increases are primarily a result of building our general and administrative infrastructure to support the planned growth in revenue of our products and services and related acquisitions. 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 September 29, 2001 from 8% for the quarter ended September 30, 2000, and increased to 9% for the nine months ended September 29, 2001 from 8% for the nine months ended September 30, 2000. AMORTIZATION OF INTANGIBLES AND STOCK COMPENSATION Amortization expense increased 10% to $2.9 million in the quarter ended September 29, 2001 from $2.7 million for the quarter ended September 30, 2000, and increased 108% for the nine months ended September 29, 2001 to $12.5 million from $6.0 million for the nine months ended September 30, 2000. These increases in amortization expense are mainly due to the increase in intangibles from the acquisitions of Summit Design and PADS Software. There were $28.7 million and $74 million in intangible assets as of September 29, 2001 and December 30, 2000, respectively. Intangible assets as of September 29, 2001 consisted primarily of purchased technology, goodwill, workforce and trademarks, resulting from the Summit Design acquisition in March 2000, the PADS acquisition in September 2000, and the acquisition of Transcendent Design Technology, Inc. in 1999. As of December 30, 2000, there was $74 million in intangible assets consisting of purchased technology, goodwill, workforce and customer base resulting primarily from the Summit Design acquisition, assets acquired from OmniView, Inc. in March 1999, and the acquisition of Transcendent Design Technology, Inc. in August 1999. Intangible assets are being amortized over periods ranging from three to seven years. See "Impairment of Long-Lived Assets" below. 19 IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES In conjunction with the acquisition of PADS in the third quarter ended September 30, 2000, Innoveda charged to expense $3.1 million representing the write-off of acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use, as determined by an independent appraiser. Similarly, in conjunction with the business combination of Summit and Viewlogic in the first quarter ended April 1, 2000, we charged to expense $2.4 million representing acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use, as determined by another independent appraiser. For the nine months ended September 30, 2000, Innoveda charged approximately $5.5 million to expense. RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS In August 2001, Innoveda, in response to current economic conditions and as part of our revised strategic direction and technology focus, implemented a restructuring and streamlining of company operations. RESTRUCTURING COSTS As a result of the restructuring, we recorded charges of $5.3 million. The restructuring costs include workforce reductions, closing or reducing space in certain facilities and asset write-downs. The restructuring program resulted in the reduction in workforce of approximately 140 employees across all business functions and geographic regions. The workforce reductions were substantially completed by the end of the third quarter. We recorded a workforce reduction charge of $2.3 million relating primarily to severance, fringe benefits and outplacement services. We recorded a restructuring charge of $1.5 million relating to lease terminations, non-cancelable lease costs, and excess facility space. These facility costs relate to business activities that have been exited or restructured. In addition, the restructuring charge includes an additional $0.4 million in professional fees, travel expenses and other related costs incurred in connection with the restructuring activities and a $1.1 million restructuring charge related to certain fixed assets that became impaired as a result of the decision to reduce the workforce and close facilities. 20 IMPAIRMENT OF LONG-LIVED ASSETS As part of our review of financial results during the quarter ended September 29, 2001, we performed an assessment of the carrying values of intangible assets recorded in connection with the acquisitions of PADS and Summit Design. The assessment was performed as a result of the current economic downturn and negative industry trends impacting our current operations and expected future growth rates. The conclusion of that assessment was that the decline in economic conditions within our industry was significant and other than temporary. As a result, we recognized pre-tax charges of $32.9 million representing write downs to record intangible assets at their estimated fair values. The impaired intangible assets include goodwill, purchased technology, workforce and customer base. The estimated fair value was based on expected future cash flows to be generated, discounted at a rate commensurate with the risks involved. The following table sets forth an analysis of the components of the fiscal 2001 third quarter restructuring and intangible asset impairment charges. The table indicates payments made against the reserve through September 29, 2001.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001 ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE ------- --------- ------ ------------------ Impairment of intangibles ............... $32,945 $32,945 $ -- $ -- Disposal of fixed assets ................ 1,085 1,085 -- -- Severance and related expenses .......... 2,267 -- 1,330 937 Lease commitment and related fees ....... 1,511 -- 62 1,449 Other ................................... 408 -- 116 292 ------- ------- ------- ------- $38,216 $34,030 $ 1,508 $ 2,678 ======= ======= ======= =======
Cash payments in the fourth quarter of fiscal 2001 are expected to be $1.0 million, with the remaining amounts to be paid in subsequent periods. 21 PITTSBURGH OFFICE CLOSURE In May 2001, we closed an office located in Pittsburgh, Pennsylvania and transferred the operations to other offices in the United States and overseas. The total charge of $0.6 million consists of intangible asset and fixed asset impairment charges of $0.4 million, $0.1 million of severance related to the termination of 8 employees and $0.1 million of other costs incurred due to the closure. All significant amounts are expected to be settled within a year of the office closure.
TOTAL NON-CASH AMOUNT SEPTEMBER 29, 2001 ACCRUAL WRITE-OFF PAID ACCRUAL BALANCE ------- --------- ------ ------------------ Impairment of intangibles and fixed assets .................. $415 $415 $ -- $ -- Severance ........................... 64 -- 64 -- Lease commitment .................... 48 -- 20 28 Other ............................... 67 -- 20 47 ----- ------- ---- -------- $594 $415 $104 $ 75 ===== ======= ==== ========
22 MERGER RELATED RESTRUCTURING CHARGES During the third quarter ended September 30, 2000, we recorded approximately $0.5 million in restructuring charges relating to the PADS merger. This was primarily comprised of severance and exit costs to close duplicative facilities. During the first quarter ended April 1, 2000, we 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 our 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. For the nine months ended September 30, 2000, Innoveda charged approximately $2.7 million to expense for merger related charges. OTHER EXPENSE Other expense consists of the net of interest expense relating to our term loan and revolving credit line, interest income from cash and cash equivalent balances, and gains and losses from foreign currency transactions resulting from foreign operations conducted in local currencies. Other expense remained flat at $0.2 million expense for the third quarter ended September 29, 2001 and for the third quarter ended September 30, 2000. For the nine months ended September 29, 2001, other expense also remained flat as compared to the nine months ended September 30, 2000. Other expense remained essentially the same primarily as a result of a decrease in interest income due to the reduction of cash and cash equivalents, offset by the decrease in interest expense due to the pay down of debt obligations. INCOME TAX BENEFIT The benefit for income taxes increased to $9.5 million for the quarter ended September 29, 2001 from a $1.7 million provision for the quarter ended September 30, 2000. For the nine months ended September 29, 2001, the benefit for income taxes increased to $12.8 million from a $0.6 million provision for the nine months ended September 30, 2000. The benefit for income taxes in 2001 is primarily due to the reversal of deferred taxes related to the impaired intangible assets and the tax benefit of the loss in 2001. The income tax provision for 2000 includes an estimated $1.5 million resulting from the sale of the VirSim product line on August 2, 2000. Quarterly tax provisions are based on the estimated effective tax rates for the respective fiscal year. 23 LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION We have a Credit Facility with a commercial bank, which includes a Term Loan and a Line of Credit. The Term Loan had $6.6 million outstanding as of September 29, 2001. Borrowings under the Credit Facility are secured by substantially all of our 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 and deferred revenue, and minimum working capital and debt service coverage ratios. For the fiscal quarter ended June 30, 2001, we did not meet certain financial covenants under our Credit Facility. The Company and the lender have amended the Credit Facility to revise certain of the covenants and provide a waiver for past violations. See Exhibit 10.6. Under this amendment, the Term Loan portion of the Credit Facility remains in place with the original repayment schedule and the Line of Credit portion of the Credit Facility has been reduced from $6.0 million to approximately $0.4 million and may be used only to cover existing letters of credit issued by the lender at our request. Innoveda is currently in negotiations with a commercial lender to replace the Credit Facility. Interest rates 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 September 29, 2001 and December 30, 2000 were 6% and 10%, respectively. The interest rates on the Term Loan at September 29, 2001 and December 30, 2000 were 5.6% 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. A payment of $0.9 million is due in the fourth quarter of fiscal 2001. Successive payments of $1.0 million are due each quarter through September 2002, and $1.4 million and $0.4 million are due in the first and second quarters of fiscal 2003, respectively. For the nine months ended September 29, 2001, net cash used in operating activities was approximately $7.6 million primarily due to net operating losses, net of non-cash items including amortization, impairment of intangible assets, portions of the restructuring charge, deferred revenue and deferred taxes. Net cash used in investing activities for the nine months ended September 29, 2001 was approximately $2.8 million, primarily due to the purchase of property and equipment. Net cash used in financing activities was approximately $2.6 million for the nine months ended September 29, 2001, primarily due to the repayment of principal on debt and the repurchase of our common stock, partially offset by proceeds from exercises of employee stock options. We consider all highly liquid debt instruments with a remaining maturity of three months or less when purchased to be cash equivalents. At September 29, 2001 and September 30, 2000, substantially all 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. Pursuant to the Company's investment policy, all debt instruments must have quality ratings no lower than an A rating. 24 On October 19, 2000, our board of directors authorized the repurchase of up to 2 million shares of 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 October 31, there were 550,606 shares of common stock purchased at an aggregate cost of $1.7 million under the stock re-purchase program. We believe that our current cash and cash equivalents, combined with cash expected to be generated from operations, will satisfy anticipated working capital and other cash requirements for at least the next 12 months. NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS 121, and the accounting and reporting provisions of APB 30, for the disposal of a segment of a business. The provisions of SFAS 144 are required to be adopted by the Company effective January 1, 2002. 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 initiated after June 30, 2001. The Company is evaluating the impact of adopting these statements. 25 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. 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. 26 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. 27 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. SHORTFALLS IN REVENUE COULD ADVERSELY IMPACT QUARTERLY OPERATING RESULTS. Innoveda establishes its expenditure levels for product development, sales and marketing and other operating activities based primarily on Innoveda's expectations as to future revenue. Because a high percentage of Innoveda's expenses are relatively fixed in the near term, if revenue in any quarter falls below expectations, expenditure levels could be disproportionately high as a percentage of revenue and materially adversely affect Innoveda's operating results. INNOVEDA HAS SUBSTANTIAL TERM DEBT, AND ITS CREDIT LINE HAS BEEN SUBSTANTIALLY REDUCED, AND INNOVEDA MAY NOT BE ABLE TO REPLACE ITS CREDIT LINE OR TERM DEBT. For the fiscal quarter ended June 30, 2001, Innoveda did not meet certain financial covenants under its Credit Facility (see Management's Discussion and Analysis of Financial Condition and Results of Operations). Innoveda and its lender have amended the Credit Facility to revise certain of the covenants and provide a waiver for past violations. See Exhibit 10.6. Under this amendment, the Term Loan portion of the Credit Facility remains in place with the original repayment schedule. However, the Line of Credit portion of the Credit Facility has been reduced from approximately $6.0 million to approximately $0.4 million and may be used only to cover existing letters of credit issued by the lender at the request of the Company. Innoveda is currently in negotiations with a commercial lender to replace the Credit Facility but there can be no guaranty that Innoveda will be able to secure a replacement for the Credit Facility. 28 COVENANTS AND RESTRICTIONS INCLUDED IN INNOVEDA'S CREDIT FACILITY LIMIT MANAGEMENT'S FLEXIBILITY TO ADJUST INNOVEDA'S BUSINESS AND STRATEGIES TO CURRENT MARKET AND ECONOMIC CONDITIONS. As of September 29, 2001, Innoveda had borrowings of approximately $6.6 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 and deferred revenue, and minimum working capital and debt service coverage ratios. To avoid default under this Credit Facility, Innoveda must remain in compliance with these limitations and covenants and make all required repayments or Innoveda must obtain replacement financing. Collectively, these limitations and covenants 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. INNOVEDA HAS A LIMITED AMOUNT OF CASH AND UNEXPECTED SHORTFALLS IN CASH FLOW COULD RESTRICT THE COMPANY'S OPERATING ABILITY As of September 29, 2001, Innoveda had approximately $7.6 million in cash and cash equivalents. While Innoveda expects that its current cash and cash equivalents, combined with cash expected to be generated from operations, will be sufficient to fund its operations for at least the next 12 months, if Innoveda does not meet its financial projections it may not have sufficient cash to fund its operations. Innoveda is currently in negotiations with a commercial lender to obtain a line of credit, but there can be no assurance that Innoveda will be able to do so. 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 Innoveda'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 would adversely affect the combined company's business. 29 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 FACES INTENSE COMPETITION IN THE INDUSTRY AND MUST COMPETE SUCCESSFULLY IN VARIOUS ASPECTS OR ITS BUSINESS MAY SUFFER. The electronic design automation industry is highly competitive, and Innoveda expects competition to increase as other electronic design automation companies introduce products. In the electronic design automation market, Innoveda principally competes with Mentor Graphics and Cadence and a number of smaller firms. Indirectly, Innoveda also competes with other firms that offer alternative products. These other firms could also offer more directly competitive products in the future. Some of these companies have significantly greater financial, technical and marketing resources and larger installed customer bases than Innoveda. Some of Innoveda's current and future competitors offer a more complete range of electronic design automation products. Innoveda competes on the basis of various factors including, among others: 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. 30 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. 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. 31 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. 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. 32 These factors may have a material adverse effect on Innoveda's future international sales and operations and, consequently, on its business, financial condition, results of operations or cash flows. In addition, financial markets and economies in the Asia Pacific region have been experiencing adverse conditions, and these adverse economic conditions may worsen. Demand for and sales of Innoveda's products in this region may decrease. In order to successfully expand international sales, Innoveda may need to establish additional foreign operations, hire additional personnel and recruit additional international distributors. This will require significant management attention and financial resources and could adversely affect Innoveda's operating margins. In addition, to the extent that Innoveda cannot effect these additions in a timely manner, Innoveda can only generate limited growth in international sales, if any. Innoveda may not maintain or increase international sales of its products, and failure to do so could have a material adverse effect on its business, financial condition, results of operations or cash flows. INNOVEDA MUST MANAGE GROWTH AND ACQUISITIONS EFFECTIVELY, OR ITS FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY SUFFER. 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. 33 INNOVEDA DEPENDS ON ITS KEY PERSONNEL, AND FAILURE TO HIRE OR RETAIN QUALIFIED PERSONNEL COULD CAUSE INNOVEDA'S BUSINESS TO SUFFER. Innoveda's future success will depend in large part on its key technical and management personnel and its ability to continue to attract and retain highly skilled technical, sales and marketing and management personnel. Innoveda's business could be seriously harmed if it lost the services of its President and Chief Executive Officer, William J. Herman, or if it fails to attract and retain other key personnel. Competition for personnel in the software industry in general, and the electronic design automation industry in particular, is intense. Innoveda has in the past experienced difficulty in 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 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. 34 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 $0.4 million revolving line of credit ("Line of Credit") and a $6.6 million term loan as of September 29, 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 September 29, 2001 was 6.0% and 5.6%, 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 $6.6 million as of September 29, 2001. The interest rate-swap agreement exposes Innoveda to losses in the event Innoveda repays its Term Loan that is different than currently scheduled. Open interest rate contracts are reviewed regularly by Innoveda to evaluate their effectiveness 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 September 29, 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. Pursuant to the Company's investment policy, all debt instruments must have quality ratings no lower than A rating. 35 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 nine months ended September 29, 2001. Realized and unrealized gains and losses on foreign exchange contracts for the nine months ended September 29, 2001 were insignificant. There were no outstanding foreign exchange contracts as of September 29, 2001. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT NO. DESCRIPTION 10.1 Amendment dated September 25, 2001 to Secured Promissory Note by Paula Cassidy and John Cassidy in favor of Viewlogic dated August 11, 1999. 10.2 Amendment dated September 25, 2001 to Secured Promissory Note by William J. Herman in favor of Viewlogic dated August 11, 1999. 10.3 Amendment dated September 25, 2001 to Secured Promissory Note by Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic dated August 11, 1999. 10.4 Amendment dated September 25, 2001 to Secured Promissory Note by Richard G. Lucier in favor of Viewlogic dated August 12, 1999. 10.5 Amendment dated September 25, 2001 to Secured Promissory Note by Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999. 10.6 Second Amendment and Waiver effective September 29, 2001 by and Between Innoveda, Inc. and Fleet National Bank. (b) REPORTS ON FORM 8-K The Company did not file any current reports on Form 8-K during the fiscal quarter ended September 29, 2001. 36 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: November 13, 2001 37 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.1 Amendment dated September 25, 2001 to Secured Promissory Note by Paula Cassidy and John Cassidy in favor of Viewlogic dated August 11, 1999. 10.2 Amendment dated September 25, 2001 to secured Promissory Note by William J. Herman in favor of Viewlogic dated August 11, 1999. 10.3 Amendment dated September 25, 2001 to Secured Promissory Note by Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic dated August 11, 1999. 10.4 Amendment dated September 25, 2001 to Secured Promissory Note by Richard G. Lucier in favor of Viewlogic dated August 12, 1999. 10.5 Amendment dated September 25, 2001 to secured Promissory Note by Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999. 10.6 Second Amendment and Waiver effective September 29, 2001 by and between Innoveda, Inc. and Fleet National Bank. 38 EX-10.1 3 a2063260zex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 MEMORANDUM AND AMENDMENT OF PROMISSORY NOTE DATE: September 25, 2001 TO: Paula Cassidy and John Cassidy FROM: Innoveda, Inc. RE: Amendment of the Secured Promissory Note dated August 11, 1999 in the Principal Amount of $21,963.48 Issued to Viewlogic Systems, Inc. (the "Note") I am writing, on behalf of Innoveda, Inc. ("Innoveda"), to confirm Innoveda's agreement, and obtain your agreement, that: 1. All of the rights and obligations of Viewlogic Systems, Inc. ("Viewlogic") under the Note were assigned to, and assumed by, Innoveda. 2. All of the rights and obligations of Viewlogic under the Stock Pledge Agreement that you executed in connection with the Note were assigned to, and assumed by, Innoveda. 3. The Note is hereby amended by deleting from the Note the provision that requires that the Note become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 4. In all other respects the Note remains in full force and effect as originally written and as amended as set forth in this memorandum. Agreed and accepted, and signed as a sealed instrument: Innoveda, Inc. Paula Cassidy and John Cassidy By: /s/ Peter T. Johnson /s/ Paula Cassidy /s/ John Cassidy Title: Vice President EX-10.2 4 a2063260zex-10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 MEMORANDUM AND AMENDMENT OF PROMISSORY NOTE DATE: September 25, 2001 TO: William J. Herman FROM: Innoveda, Inc. RE: Amendment of the Secured Promissory Note dated August 11, 1999 in the Principal Amount of $417,817.95 Issued to Viewlogic Systems, Inc. (the "Note") I am writing, on behalf of Innoveda, Inc. ("Innoveda"), to confirm Innoveda's agreement, and obtain your agreement, that: 1. All of the rights and obligations of Viewlogic Systems, Inc. ("Viewlogic") under the Note were assigned to, and assumed by, Innoveda. 2. All of the rights and obligations of Viewlogic under the Stock Pledge Agreement that you executed in connection with the Note were assigned to, and assumed by, Innoveda. 3. The Note is hereby amended by deleting from the Note the provision that requires that the Note become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 4. In all other respects the Note remains in full force and effect as originally written and as amended as set forth in this memorandum. Agreed and accepted, and signed as a sealed instrument, by: Innoveda, Inc. William J. Herman By: /s/ Peter T. Johnson /s/ William Herman Title: Vice President EX-10.3 5 a2063260zex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 MEMORANDUM AND AMENDMENT OF PROMISSORY NOTE DATE: September 25, 2001 TO: Peter T. Johnson and Andrea R. Johnson FROM: Innoveda, Inc. RE: Amendment of the Secured Promissory Note dated August 11, 1999 in the Principal Amount of $69,300.00 Issued to Viewlogic Systems, Inc. (the "Note") I am writing, on behalf of Innoveda, Inc. ("Innoveda"), to confirm Innoveda's agreement, and obtain your agreement, that: 1. All of the rights and obligations of Viewlogic Systems, Inc. ("Viewlogic") under the Note were assigned to, and assumed by, Innoveda. 2. All of the rights and obligations of Viewlogic under the Stock Pledge Agreement that you executed in connection with the Note were assigned to, and assumed by, Innoveda. 3. The Note is hereby amended by deleting from the Note the provision that requires that the Note become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 4. In all other respects the Note remains in full force and effect as originally written and as amended as set forth in this memorandum. Agreed and accepted, and signed as a sealed instrument, by: Innoveda, Inc. Peter Johnson and Andrea Johnson By: /s/ William Herman /s/ Peter T. Johnson /s/ Andrea R. Johnson Title: CEO EX-10.4 6 a2063260zex-10_4.txt EXHIBIT 10.4 EXHIBIT 10.4 MEMORANDUM AND AMENDMENT OF PROMISSORY NOTE DATE: September 25, 2001 TO: Richard G. Lucier FROM: Innoveda, Inc. RE: Amendment of the Secured Promissory Note dated August 12, 1999 in the Principal Amount of $330,000.00 Issued to Viewlogic Systems, Inc. (the "Note") I am writing, on behalf of Innoveda, Inc. ("Innoveda"), to confirm Innoveda's agreement, and obtain your agreement, that: 1. All of the rights and obligations of Viewlogic Systems, Inc. ("Viewlogic") under the Note were assigned to, and assumed by, Innoveda. 2. All of the rights and obligations of Viewlogic under the Stock Pledge Agreement that you executed in connection with the Note were assigned to, and assumed by, Innoveda. 3. The Note is hereby amended by deleting from the Note the provision that requires that the Note become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 4. In all other respects the Note remains in full force and effect as originally written and as amended as set forth in this memorandum. Agreed and accepted, and signed as a sealed instrument, by: Innoveda, Inc. Richard G. Lucier By: /s/ Peter T. Johnson /s/ Richard Lucier Title: Vice President EX-10.5 7 a2063260zex-10_5.txt EXHIBIT 10.5 EXHIBIT 10.5 MEMORANDUM AND AMENDMENT OF PROMISSORY NOTE DATE: September 25, 2001 TO: Kevin P. O'Brien FROM: Innoveda, Inc. RE: Amendment of the Secured Promissory Note dated August 11, 1999 in the Principal Amount of $87,853.59 Issued to Viewlogic Systems, Inc. (the "Note") I am writing, on behalf of Innoveda, Inc. ("Innoveda"), to confirm Innoveda's agreement, and obtain your agreement, that: 1. All of the rights and obligations of Viewlogic Systems, Inc. ("Viewlogic") under the Note were assigned to, and assumed by, Innoveda. 2. All of the rights and obligations of Viewlogic under the Stock Pledge Agreement that you executed in connection with the Note were assigned to, and assumed by, Innoveda. 3. The Note is hereby amended by deleting from the Note the provision that requires that the Note become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 4. In all other respects the Note remains in full force and effect as originally written and as amended as set forth in this memorandum. Agreed and accepted, and signed as a sealed instrument, by: Innoveda, Inc. Kevin P. O'Brien By: /s/ Peter T. Johnson /s/ Kevin P. O'Brien Title: Vice President EX-10.6 8 a2063260zex-10_6.txt EXHIBIT 10.6 EXHIBIT 10.6 Execution Copy INNOVEDA, INC. SECOND AMENDMENT AND WAIVER THIS SECOND AMENDMENT AND WAIVER (this "AMENDMENT") is entered into as of November 9, 2001, with an effective date of September 29, 2001 (the "EFFECTIVE DATE"), by and between INNOVEDA, INC., a Delaware corporation having its chief executive office at 293 Boston Post Road West, Marlboro, Massachusetts 01752-4615 ("BORROWER") and FLEET NATIONAL BANK, a national banking association organized under the laws of the United States of America, as agent ("AGENT"), and as the sole lender ("LENDER") under the Agreement (as defined below), to which reference is made for the definitions of all capitalized terms, used, but not otherwise defined, herein. R E C I T A L S WHEREAS, Borrower, Agent and Lender, together with Viewlogic Systems, Inc., a former Delaware corporation that had its chief executive office at 293 Boston Post Road West, Marlboro, Massachusetts 01752-4615 ("VIEWLOGIC") entered into an Amended and Restated Loan Agreement dated as of July 31, 2000 among Borrower, Agent, Lender and the other lenders from time to time party thereto (the "LENDERS"), as amended by a letter agreement dated October 23, 2000 (collectively, the "AGREEMENT"), pursuant to which Lender made a Term Loan to Borrower in the principal amount of $10,000,000.00 and established a Revolving Credit Loan Commitment to Borrower in the maximum principal amount of $6,000,000.00; WHEREAS, pursuant to a Certificate of Ownership and Merger filed by Borrower with the Secretary of State of the State of Delaware on December 26, 2000, Viewlogic was merged with and into Borrower with Borrower as the surviving entity effective December 31, 2000; WHEREAS, the Borrower has requested that the Agent waive the Borrower's failure to comply with (a) certain covenants under the following sections of the Agreement: (i) Section 4.1.19 with respect to the need to disclose registered copyrights; (ii) Section 5.1.2 with respect to the amount of business interruption insurance required; (iii) Section 5.1.24 with respect to the software escrow requirement; (iv) Section 5.2.8 with respect to the assumed debt of PADS Software, Inc.; (v) Section 5.2.12 with respect to the Borrower's Investments in Innoveda Israel Limited and with respect to the notes set forth on Exhibit 5.2.12.1; and (vi) Section 5.1.13 with respect to the Minimum EBITDA required for the fiscal quarter ended June 29, 2001, and (b) Section 3 of the Security Agreement dated as of July 3, 2000 with respect to securities of the Borrower's wholly-owned Foreign Subsidiary, Innoveda Israel Limited ("Israel") (collectively, the "COVENANT DEFAULTS"), and the Lenders have agreed to waive the Covenant Defaults conditioned on the Borrower's agreement to modify the Agreement on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the foregoing premises and the mutual benefits to be derived by Borrower and Agent from a continuing relationship under the Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree that, effective as of the Effective Date, the Agreement is hereby amended as follows: 1. The following definitions appearing in Section 1.1 of the Agreement are hereby amended, respectively in their entirety to read as follows: 1 "APPLICABLE MARGIN" means with respect to Libor Loans, 2.75%, and with respect to Prime Rate Loans, 1%. "EBITDA" means, for any fiscal period, consolidated Net Income PLUS, to the extent accounted for in consolidated Net Income, (i) consolidated Interest Expense, taxes, depreciation, amortization, (ii) through and including Borrower's fiscal period ending September 29, 2001, any other non-cash charges or any non-recurring extraordinary costs incurred by Borrower and any Subsidiaries, and (iii) commencing with Borrower's fiscal period ending December 29, 2001, any non-cash stockholder compensation expense incurred by Borrower, determined on an accrual and consolidated basis in accordance with GAAP, LESS Capitalized Software Development Costs. "DEBT SERVICE COVERAGE RATIO" means as at the date of any determination thereof, the ratio of (i) consolidated EBITDA MINUS the sum of consolidated Capital Expenditures (including, without limitation, those acquired through Capitalized Lease Obligations) and cash taxes paid and currently payable for Borrower's fiscal quarter then ending, to (ii) Total Debt Service. "LETTER OF CREDIT" means each of the following letters of credit issued by the Agent for the account of the Borrower: A. Standby Letter of Credit No. MS1250698 in the Stated Amount of $250,000.00; and B. Standby Letter of Credit No. MS1234057 in the Stated Amount of $180,508.00 as either or both may be amended, substituted or replaced by the Agent from time to time. "MATERIAL FOREIGN SUBSIDIARY" means a Foreign Subsidiary with (a) total assets (excluding intercompany receivables) of U.S.$2,000,000 or more as at the end of any fiscal quarter of the Borrower, or (b) ten (10) or more employees, independent contractors or other consultants excluding sales, sales and customer support, and administrative personnel. "REVOLVING CREDIT LOAN COMMITMENT" means the Lenders' several commitments to make Revolving Credit Loans to Borrower in accordance with SECTION 2.1.0 and this Agreement and in the maximum outstanding amount of each Lender's Pro Rata Share of $430,508 MINUS the stated amount of any Letter of Credit that has not been paid in full, expired, terminated or cancelled. "TOTAL DEBT SERVICE" means, at any date of determination, the sum of (i) consolidated interest expense for the Borrower fiscal quarter then ending, and (ii) scheduled and mandatory principal payments for the immediately succeeding Borrower fiscal quarter due on account of any consolidated Indebtedness of Borrower, but excluding any mandatory payments of principal required pursuant to SECTIONS 2.6.1.2, 2.6.1.3, 2.6.1.4 and 2.6.1.6. 2 2. The following new definitions are hereby added alphabetically to Section 1.1 of the Agreement: "INTERCOMPANY SUBORDINATION AGREEMENT" means that certain Intercompany Subordination Agreement dated as of November 9, 2001 entered into by the Borrower and those Subsidiaries from time to time named therein, as may be amended, supplemented, restated or otherwise modified from time to time. "STOCK REPURCHASE PROGRAM" means Borrower's stock repurchase plan approved by Borrower's Board of Directors for the purchase of up to $5,500,000 of Borrower's capital stock not to exceed 2,000,000 shares thereof. 3. Section 2.1.0 of the Agreement is hereby amended by including the following paragraph at the end of Section 2.1.0: Notwithstanding the foregoing provisions of this SECTION 2.1.0, the Lenders shall have no commitment to make Advances of Revolving Credit Loans, except that, the Agent may, in its sole and absolute discretion, request that the Lenders make Advances of Revolving Credit Loans equal to their respective Pro Rata Share of the amount of any drawing under a Letter of Credit (and the Lenders each hereby agree to make such advances irrespective of whether any Default or Event of Default shall have occurred or the failure of Borrower to satisfy any other term or conditions of this Agreement, including without limitation those set forth in Article III of this Agreement), the proceeds of which Advances shall be used to satisfy Borrower's reimbursement obligations under such Letter of Credit. Any and all such Revolving Credit Advances shall bear interest at the Effective Prime. Borrower agrees that promptly upon receipt by Borrower of any tax refund attributable to Borrower's fiscal period ending September 29, 2001, Borrower shall deliver to the Agent the amount of such tax refund up to the aggregate amount of the Revolving Credit Loan Commitment as cash collateral ("CASH COLLATERAL"). Such Cash Collateral shall be held by the Agent in a cash collateral account (the "CASH COLLATERAL ACCOUNT") pursuant to a Cash Collateral Account Assignment Agreement, in form and substance satisfactory to the Agent (the "CASH COLLATERAL ACCOUNT AGREEMENT"). So long as no Default or Event of Default has occurred which is continuing, the Agent shall return the amount of Cash Collateral held as collateral for any Letter of Credit that is paid, terminated of cancelled promptly to Borrower at such time as the Agent reasonably believes that it has no further obligations to make payment thereunder. 4. Section 2.6.4 of the Agreement is hereby deleted in its entirety and intentionally omitted and Section 2.6.1.5 of the Agreement is hereby confirmed to have been intentionally omitted. 3 5. Section 4.1.19 of the Agreement is hereby amended in its entirety to read as follows: SECTION 4.1.19. COPYRIGHTS. EXHIBIT 4.1.19 accurately and completely sets forth all copyrights of Borrower and/or any of the Subsidiaries registered with the United States Copyright Office on and after November 1, 2001. Borrower has not violated in any material respect any of the provisions of the Copyright Revision Act of 1976, 17 U.S.C. 101, ET SEQ. Borrower has filed all registration statements, notices and statements of account and all necessary supplements and adjustment schedules thereto with the United States Copyright Office and has made all payments to the United States Copyright Office to obtain and maintain those copyrights which it has registered with the United States Copyright Office. To the knowledge of Borrower, no inquiries regarding any copyright listed on Exhibit 4.1.19 have been received by the Copyright Office. Except as set forth in EXHIBIT 4.1.19, Borrower and any Subsidiaries own, possess, or have licenses to use all the copyrights, and all rights with respect thereto, reasonably necessary for the conduct of their respective businesses as now conducted, without, to Borrower's knowledge, any conflict with the rights of others with respect thereto. 6. The first sentence of Section 4.1.22 of the Agreement is hereby amended in its entirety to read as follows: EXHIBIT 4.1.22 attached hereto contains a complete and accurate schedule of all registered patents and registered trademarks of Borrower and/or any of the Subsidiaries, and pending applications therefor, and all other intellectual property (other than copyrights) in which Borrower and/or any of the Subsidiaries has any rights and which, in the good faith exercise of Borrower's reasonable business judgment, has significant value to the conduct of Borrower's and/or any Subsidiary's business, other than so-called "off-the shelf" software which is generally available to the general public at retail. 7. The third sentence of Section 5.1.2 of the Agreement beginning with the word "Maintain" and ending with the phrase "at least $8,000,000" is hereby amended in its entirety to read as follows: Borrower shall maintain (i) on the tangible insurable collateral under any of the Security Documents insurance against loss by fire, hazards included within the term "extended coverage", and such other hazards, casualties and contingencies as the Agent may from time to time require, in an amount equal to the greater of (a) $8,000,000 OR (b) one hundred percent (100%) of the replacement cost of the collateral under any of the Security Documents, and (ii) business interruption insurance in an amount equal to the greater of (a) $2,000,000 or (b) such other amount as is usually carried by companies in similar businesses and in accordance with the requirements of any governmental agency having jurisdiction over Borrower and/or any Subsidiary. 8. Section 5.1.10 of the Agreement is hereby amended in its entirety to read as follows: SECTION 5.1.10. MINIMUM DEBT SERVICE COVERAGE RATIO/QUICK RATIO. Maintain at the end of each fiscal quarter of Borrower both (i) a consolidated Debt Service Coverage Ratio and (ii) a consolidated Quick Ratio as set forth opposite such fiscal quarter below: 4
- --------------------------------------------------------------------------------------------- MINIMUM DEBT SERVICE FISCAL PERIOD ENDING COVERAGE RATIO MINIMUM QUICK RATIO - --------------------------------------------------------------------------------------------- 9/29/01 NONE [GREATER THAN/EQUAL TO] .95 - --------------------------------------------------------------------------------------------- 12/29/01 [GREATER THAN/EQUAL TO] 1.50 [GREATER THAN/EQUAL TO] 1.05 - --------------------------------------------------------------------------------------------- 3/30/02 [GREATER THAN/EQUAL TO] 0.65 [GREATER THAN/EQUAL TO] 1.15 - --------------------------------------------------------------------------------------------- 6/29/02 [GREATER THAN/EQUAL TO] 1.25 [GREATER THAN/EQUAL TO] 1.25 - --------------------------------------------------------------------------------------------- 9/28/02 [GREATER THAN/EQUAL TO] 1.15 [GREATER THAN/EQUAL TO] 1.25 - --------------------------------------------------------------------------------------------- 12/28/02 and thereafter [GREATER THAN/EQUAL TO] 1.25 [GREATER THAN/EQUAL TO] 1.25 - ---------------------------------------------------------------------------------------------
9. Section 5.1.11 of the Agreement is hereby amended in its entirety to read as follows: Section 5.1.11. MINIMUM DEFERRED REVENUE. Maintain at the end of each fiscal quarter of Borrower Deferred Revenue of not less than $19,000,000. 10. Section 5.1.12 of the Agreement is hereby deleted in its entirety and intentionally omitted from the Agreement. 11. Section 5.1.13 of the Agreement is hereby amended in its entirety to read as follows: SECTION 5.1.13. MINIMUM EBITDA. At the end of each fiscal quarter of Borrower have consolidated EBITDA of not less than the amount set forth opposite such fiscal quarter identified below, which commencing with the Borrower's fiscal quarter ending March 30, 2002 and thereafter shall be calculated on the basis of a rolling two Borrower fiscal quarters consisting of the aggregate EBITDA for the Borrower fiscal quarter then ending and the immediately preceding Borrower fiscal quarter:
---------------------------------------------------------- FISCAL PERIOD ENDING Minimum EBITDA ---------------------------------------------------------- 9/29/01 ($2,600,000) ---------------------------------------------------------- 12/29/01 $2,800,000 ---------------------------------------------------------- 3/30/02 and thereafter $4,000,000 ----------------------------------------------------------
12. Section 5.1.23 of the Agreement is hereby amended in its entirety to read as follows: SECTION 5.1.23. ACQUISITIONS OF ADDITIONAL REGISTERED PATENTS, TRADEMARKS, COPYRIGHTS, ETC. Concurrently with the acquisition of any registered trademark, patent, tradename, service mark or copyright, notify the Agent in writing and collaterally assign and grant a first priority perfected Lien thereon to the Agent pursuant to documents in form and substance reasonably satisfactory to the Agent, except for any such registered copyrights that in the good faith exercise of Borrower's reasonable business judgment, do not have significant value to the conduct of Borrower's or any of its Subsidiary's businesses. 13. Section 5.1.24 of the Agreement is hereby deleted in its entirety. 5 14. Section 5.2.6 of the Agreement is hereby amended in its entirety to read as follows: SECTION 5.2.6. SALE AND LEASEBACK. Sell or transfer any of the Borrower's or Subsidiaries' properties to any Person with the intention of taking back a lease of the same property or leasing other property for substantially the same use as the property being sold or transferred other than with respect to office equipment used in the ordinary course of business as to which such sale or transfer is consummated by any Borrower or any Subsidiary in one or more series of transactions having an aggregate consideration not to exceed $300,000. 15. Section 5.2.8.6 of the Agreement is hereby amended in its entirety to read as follows: SECTION 5.2.8.6. Indebtedness owing by (i) Borrower to any Subsidiary not to exceed in the aggregate US$500,000 outstanding at any time, or (ii) any Subsidiary to Borrower or any other Subsidiary, which in the case of any such Indebtedness described in the foregoing subsections (i) or (ii) has been subordinated to the Obligations pursuant to the Intercompany Subordination Agreement and which has not been subordinated in favor of any Person other than the Agent and/or the Lenders. 16. Section 5.2.12.1 of the Agreement is hereby amended by the inclusion of the following new subsections (ixi) and (x) immediately at the end thereof: (ix) those promissory notes listed on Exhibit 5.2.12.1; and (x) Investments in the Borrower's wholly-owned Subsidiary, Innoveda Israel Limited, to the extent required to maintain such Subsidiary's status as an "approved enterprise" for purposes of certain favorable tax treatments arising under the law of the State of Israel not to exceed US$100,000 in the aggregate for any fiscal year of the Borrower. 17. The notice address for the Agent set forth in Section 9.6 of the Agreement is hereby amended in its entirety to read as follows: If to Agent: Fleet National Bank, as Agent 100 Federal Street Boston, Massachusetts 02110 Attention: Larisa B. Chilton, Vice President Technology and Communications, MA DE 10009H Telephone: (617) 434-8957 Telecopy: (617) 434-0819 18. Any provision of the Agreement notwithstanding, including, without limitation, Sections 5.2.10, 5.2.11 and 5.2.12 of the Agreement, Borrower shall not make any repurchases of Borrower's capital stock pursuant to the Stock Repurchase Program on or after the Effective Date. 19. EXHIBIT 1.1 ("Equity Investments, Ownership Interests and Subsidiaries"), EXHIBIT 3.1.1.8 ("Permitted Indebtedness and Capitalized Leases"), EXHIBIT 3.1.1.10 ("Form of Officer's Certificate"), EXHIBIT 4.1.11.1 ("Ownership of Properties"), EXHIBIT 4.1.21 ("Material Agreements") and EXHIBIT 4.1.22 ("Patent, Trademark, and other Property Rights") are hereby deleted in their entirety and replaced with new EXHIBIT 1.1, EXHIBIT 3.1.1.8, EXHIBIT 3.1.1.10, EXHIBIT 4.1.11.1, EXHIBIT 4.1.21 and EXHIBIT 4.1.22 attached hereto. 6 20. New EXHIBITS 5.2.8.6 and 5.2.12.1, attached hereto, are hereby incorporated into the Agreement. 21. Upon giving effect to this Amendment, the representations and warranties contained or referred to in Article IV of the Agreement are true and accurate as of the date of this Amendment, and no Default or Event of Default has occurred and is continuing or will after giving effect to this Amendment or the transactions contemplated by this Amendment or the Agreement. 22. This Amendment shall take effect upon the satisfaction of each of the following conditions and the receipt by Agent of all of the items specified below (other than any item or conditions expressly deferred or waived in writing by Agent): (i) this Amendment and the Cash Collateral Account Agreement, each duly executed by Borrower; (ii) certified copies of all votes, consents and authorizations of the Borrower as may be reasonably required in connection with the execution and delivery of this Amendment and the Cash Collateral Account Agreement; (iii) an Officers Certificate as of September 29, 2001; (iv) payment to the Agent of an amendment fee in the amount of $20,000.00; (v) payment to Agent of all other fees and expenses of Agent, including, without limitation, the reasonable legal fees and expenses of Agent's counsel incurred in connection with this Amendment and the other matters referenced herein; (vi) an executed post-closing letter in form and substance satisfactory to the Agent; and (vii) such other documents, and evidence of completion of such other matters, as Agent reasonably may deem necessary or desirable and request from the Borrower. 23. In reliance upon the representations of the Borrower to the Agent and the Lender that no Default or Event of Default exists under the Agreement (other than the Covenant Defaults), the Lender hereby waives Borrower's compliance with the Covenant Defaults. This waiver is limited to the foregoing covenant default only and is not, nor shall it be construed as, a waiver of any other default under the Agreement, now existing or hereafter occurring, nor shall anything herein or the Lender's actions hereunder be construed so as to imply that the Lender has agreed, or is obligated, to grant any future waivers under the Agreement. 24. This Amendment is executed as an instrument under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts without regard to its 7 conflicts of law rules. All parts of the Agreement not affected by this Amendment are hereby ratified and affirmed in all respects, PROVIDED THAT if any provision of the Agreement shall conflict or be inconsistent with this Amendment, the terms of this Amendment shall supersede and prevail. Upon and after the date of this Amendment all references to the Agreement in that document, or in any related document, shall mean the Agreement as amended by this Amendment. Except as expressly provided in this Amendment, the execution and delivery of this Amendment does not and will not amend, modify or supplement any provision of, or constitute a consent to or a waiver of any noncompliance with the provisions of the Agreement, and, except as specifically provided in this Amendment, the Agreement shall remain in full force and effect. This Amendment may be executed in one or more counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. [SIGNATURE PAGE FOLLOWS] 8 IN WITNESS WHEREOF, each of Borrower, Agent and Lender in accordance with SECTION 9.5 of the Agreement has caused this Amendment to be executed and delivered by their respective duly authorized officers as of the date set forth in the preamble on page one of this Amendment. BORROWER: WITNESSED: INNOVEDA, INC. /s/ Peter T. Johnson By: /s/ Kevin P. O'Brien - ------------------------------- ------------------------------------- Kevin P. O'Brien, Vice President Peter T. Johnson and Chief Financial Officer - ------------------------------- PRINT NAME AGENT: FLEET NATIONAL BANK, as Agent By: /s/ Sharon A. Stone ------------------------------------- Name: Sharon A. Stone Title: Managing Director LENDER: FLEET NATIONAL BANK, as the sole Lender By: /s/ Sharon A. Stone ------------------------------------- Name: Sharon A. Stone Title: Managing Director 9 EXHIBIT 1.1 Part A Equity Investments THE SPROUT GROUP SHALL CONSTITUTE THE FOLLOWING SIX ENTITIES: 1. DLJ Capital Corp. 2. DLJ ESC II, L.P. 3. Sprout Capital VIII, L.P. 4. Sprout Growth II, L.P. 5. Sprout Venture Capital, L.P. 6. The Sprout CEO Fund, L.P. Part B Ownership Interests Innoveda's Common Stock is listed on the Nasdaq National Market. Part C Subsidiaries and Other Ownership Interests 1. The following identifies all Subsidiaries of the Borrower which are organized under the laws of a jurisdiction other than the United States of America ("Foreign Subsidiaries"):
Innoveda's % Jurisdiction of Name Ownership Interest Organization - ---- ----------------- ------------ Innoveda SARL 100% France Innoveda Limited 100% United Kingdom Innoveda GmbH 100% Germany Innoveda KK* 100% Japan Innoveda Srl 100% Italy Innoveda Israel Limited.* 100% Israel Innoveda Finland Oy 100% Finland Innoveda Foreign Sales Corp. 100% Barbados
*Material Foreign Subsidiary 1 2. The following identifies all the other Subsidiaries of the Borrower which are not Foreign Subsidiaries ("DOMESTIC SUBSIDIARIES")
Name Innoveda's % Ownership Interest - ---- ------------------------------- Transcendent Design Technology, Inc. 100% Innoveda Korean Holdings, Inc. 100% First to Market, Inc. 100% Innoveda Minnesota Holdings, Inc. 100%
2 EXHIBIT 3.1.1.8 PERMITTED INDEBTEDNESS AND CAPITALIZED LEASES AT&T Phone Equipment Capital Lease Lease #A012151 Schedule 00090 60 Months Commencing 9/30/96 Monthly Payment: $2053.07 AT&T Phone Equipment Capital Lease Lease #A012151 Schedule 00080 60 Months Commencing 9/30/96 Monthly Payment: $1787.36 Indebtedness secured by Lien of Hewlett-Packard Company Financing Agreement Agreement #4144-53924 (as referenced in Financing Statement #245185, dated June 30, 1994, filed with the Secretary of State of Massachusetts and Financing Statement No. 35340 file on June 30, 1994, with the City Clerk, Marlborough, Massachusetts) Indebtedness up to $335,000 to Sanwa Business Credit Corporation pursuant to that certain Letter Agreement dated December 20, 1994 $18,000,000 demand promissory note from Borrower to Synopsys to be paid out of proceeds of the Term Loans hereunder Lease Agreement dated 12/16/98 between Winthrop Resources Corporation and Viewlogic Systems, Inc. with the following schedules. Lease Agreement #V1121698, Schedule #A01, Monthly payment $11,740, Outstanding Principle as of 1/1/00 $291,103.88, Commencement Date 4/1/99, Term 36 months. Lease Agreement #V1121698, Schedule #A03R, Monthly Payment $2,689, Outstanding Principle as of 1/1/00 $79,021.52, Commencement Date 11/1/99, Term 36 months. Lease Agreement #V1121698, Schedule #A02, Monthly payment $11,319, Outstanding Principle as of 1/1/00 $324,980.71, Commencement Date 10/1/99, Term 36 months. Lease Agreement #V1121698, Schedule #A02, Monthly payment $1,093, Outstanding Principle as of 1/1/00 $17,655.05, Commencement Date 6/1/99, Term 36 months. Lease Agreement #V1121698, Monthly payment estimated $2,367, Commencement Date Undetermined, Term 36 months. Master Lease Agreement dated January 18, 1998 between Omniview Design, Inc. and Sun Microsystems Finance, Monthly payment $475.26, Expires January 31, 2000. Rental Lease Agreement between Yokokawa Rental and Viewlogic Systems, Inc. Japan, Monthly payment (approximate) $386, Expires November 30, 2000. In connection with the merger of PADS Software, Inc. ("PADS") and Borrower, Borrower assumed certain debt in the amount of $133,333 owed by PADS to HL Acquisition Corp. There remains a balance of $50,000 due under this debt, which is payable in three more quarterly payments of $16,667 each. 1 EXHIBIT 3.1.1.10 - FORM OF OFFICER'S CERTIFICATE OFFICER'S CERTIFICATE FLEET NATIONAL BANK, AS AGENT ATTN: [ ] [ ] MAILSTOP: [ ] 100 FEDERAL STREET BOSTON, MA 02110 Re: Officer's Certificate Required by SECTION 5.3.4 of the Amended and Restated Loan Agreement dated as of July 31, 2000 among Innoveda, Inc., Viewlogic Systems, Inc. and Fleet National Bank, as Agent, as amended (the "Loan Agreement") Ladies and Gentlemen: This certificate is submitted by the undersigned (hereinafter the "Borrower") pursuant to SECTION 5.3.4 of the Loan Agreement. Capitalized terms used herein have the same meaning as in the Loan Agreement. The Borrower hereby certifies to the Agent that the following information is true, accurate and complete as of ______________________________, 20________. 1. MINIMUM DEBT SERVICE COVERAGE RATIO (SECTION 5.1.10) (i) Net Income (or Net Loss)................................................... $_______________ (ii) Interest Expense........................................................... $_______________ (iii) Taxes...................................................................... $_______________ (iv) Depreciation............................................................... $_______________ (v) Amortization............................................................... $_______________ (vi) [Any other non-cash charges or any non-recurring extraordinary costs (1)] [Non-cash Stockholder Compensation Expense(2)] $_______________ (vii) Capitalized Software Development Costs..................................... $_______________ (viii) EBITDA [Line (i) PLUS the sum of Lines (ii) - (vi) minus Line (vii)]...... $_______________ (ix) Capital Expenditures(3).................................................... $_______________ (x) Taxes paid and currently payable........................................... $_______________ (xi) Total Debt Service......................................................... $_______________ (xii) Ratio: [Line (viii) minus the sum of Lines (ix) + (x) divided.............. by Line (xi)].................................................. :1.00 ____________ (xiii) Minimum Permitted by Agreement................................. :1.00 ____________ - -------- (1) Applicable for fiscal period ending 9/28/01 only. (2) Applicable for fiscal quarters ended 12/29/01 and thereafter. (3) Including those acquired thru Capitalized Lease Obligations 1 2. MINIMUM QUICK RATIO (SECTION 5.1.10) (i) Cash Equivalent Investments................................................ $_______________ (ii) Accounts Receivable........................................................ $_______________ (iii) Sum of Lines (i) and (ii).................................................. $_______________ (iv) Current Liabilities........................................................ $_______________ (v) Deferred Revenue........................................................... $_______________ (vi) Long Term Debt............................................................. $_______________ (vii) Line (iv) minus Line (v) plus Line (vi).................................... $_______________ (viii) Quick Ratio [Line (iii) / Line (vii)]...................................... $_______________ (ix) Minimum Permitted by Agreement............................................. $_______________ 3. MINIMUM DEFERRED REVENUE (SECTION 5.1.11) (i) Deferred Revenue........................................................... $_______________ (ii) Minimum Permitted by Agreement............................................. $_______________ 4. MINIMUM EBITDA (SECTION 5.1.13) (i) EBITDA [Line 1(viii)]...................................................... $_______________ (ii) Minimum Permitted by Agreement............................................. $ :1.00 _______________ 5. MAXIMUM CAPITAL EXPENDITURES (SECTION 5.2.17) (i) Actual..................................................................... $_______________ (ii) Maximum Permitted by Agreement............................................. $_______________
6. MATERIAL FOREIGN SUBSIDIARIES (SECTION 5.3.4) As of the date of this Certificate the following Subsidiaries are the only Material Foreign Subsidiaries: The Borrower further certifies to the Agent that as of the date hereof no Event of Default or Default has occurred without having been waived in writing. INNOVEDA, INC. By: -------------------------------- Name: Title: 2 EXHIBIT 4.1.11.1 OWNERSHIP OF PROPERTIES** The following are the locations of all real property leased by the Borrower or any Subsidiary. INNOVEDA OFFICE LOCATIONS DOMESTIC OFFICES ARIZONA ILLINOIS NORTH CAROLINA Innoveda, Inc. Innoveda, Inc. Innoveda, Inc. 15849 North 71st Street, Suite 210 3800 N. Wilke Rd. Suite 300 4825 Creekstone Dr., Suite 200 Scottsdale, AZ 85254 Arlington Heights, IL 60004-1267 Durham, NC 27703 T 480-898-1455 / F 480-898-1799 T 847-577-7805 / F 847-577-7806 T 919-474-5120 / F 919-474-5050 Innoveda, Inc. MARYLAND OREGON 1201 South Alma School Road Innoveda, Inc. Innoveda, Inc. Suite 7550 108 East Ridgeville Blvd. Suite C Lincoln Center, Suite 400 Mesa, AZ 85210 Mount Airy, MD 21771 10260 SW Greenburgh Road T 301-829-8636 / F 301-829-8638 Portland, OR 97223 CALIFORNIA T 503-293-8458 / F 503-293-3547 Innoveda, Inc. MASSACHUSETTS 1369 Del Norte Road Innoveda, Inc. PENNSYLVANIA Camarillo, CA 93010 293 Boston Post Road West Innoveda, Inc. T 805-988-8250 / F 805-988-8259 Marlboro, MA 01752 100 High Tower Blvd. T 508-480-0881 / F 508-480-0882 Pittsburgh, PA 15205 Innoveda, Inc. (Transcendent) 711 Daily Drive MICHIGAN TEXAS Camarillo, CA 93010 Innoveda, Inc. Innoveda, Inc 27777 Franklin Road Suite 300 11149 Research Blvd., Suite 110 Innoveda, Inc. Southfield, MI 48034 Austin, TX 78759 2600 Michelson Drive, Suite 1700 T 248-213-0377 / F 248-213-0378 T 512-345-1779 Irvine, CA 92612 T 949-852-3535 / F 949-852-3536 MINNESOTA Innoveda, Inc Innoveda, Inc. 5001 Spring Valley Rd. Innoveda, Inc. 8 Pine Tree Drive, Suite 300 Suite 400 East 2077 Gateway Place, Suite 400 Arden Hills, MN 55112-0374 Dallas, TX 75244 San Jose, CA 95110 T 651-765-2200 / F 651-765-2205 T 972-383-1262 T 408-487-4800 / F 408-487-4880 Innoveda, Inc. WASHINGTON Innoveda, Inc. (Summit) 1530 Greenview Dr SW Innoveda, Inc. 2055 Gateway Place, Suite 150 Rochester, MN 55902 USA 14715 NE 95th Street, Suite 200 San Jose, CA 95110 T 507-292-8829 / F 507-292-8807 Redmond, WA 98052-2569 T 425-869-2320 / F 425-881-1008 Innoveda, Inc. (PADS) NEW JERSEY 100 Century Center Court, Suite 140 Innoveda, Inc. WISCONSIN San Jose, CA 95510 9 Sylvan Way, Suite 240 Innoveda, Inc. Parsippany, NJ 07054 204 East Grand Ave COLORADO T 973-656-1952 Eau Claire, WI 54701 Innoveda, Inc. T 715-830-1348 / F 715-830-1449 1155 Kelly Johnson Blvd., Suite 111 Colorado Springs, CO 80920 T 719-590-4130 / F 719-590-4129 1 INTERNATIONAL OFFICES - --------------------- CANADA Innoveda, Inc. GERMANY UNITED KINGDOM 38 Auriga Drive, Suite 216 Innoveda, GmbH Innoveda, LTD Ottawa, Ontario K2E 8A5 Hans-Pinsel-str.4 Berkshire Court, Western Road T 613-224-8493 D-85540 Haar Muenchen Bracknell Berkshire F 613-224-6881 T 011-49-89-461469-0 RG12 1RE U.K. F 011-49-89461469-69 T 011-44-1344303737 CHINA F 011-44-1344304747 Innoveda, Inc. ISRAEL Room (1018-1001), 10th Floor Innoveda, Inc. Beijing Canway Building 8 Hasadnaot Street 65 Nan Li Shi Lu, Beijing Herzlia Israel 46728 100045, China T 011-972-9-9708708 T 011-86-1068042592 F 011-972-9-9509118 F 011-86-1068042549 JAPAN FINLAND Innoveda, Inc. Innoveda Finland Oy 1-26-20 Higashi, Shibuya-ku Elektroniikkatie 8 Tokyo 150-0011, Japan FIN-90570 T 011-81-3-5485-8101 Oulu, Finland F 011-81-3-5485-8102 T 011-358-8-551-3747 F 011-358-8-551-3750 KOREA FRANCE Innoveda, Inc. Innoveda, SARL 30TH Floor ASEM TOWER 2 Boulevard De L'oise 159-1 Samsung-dong, Kangnam-Ku Immeuble Le Beloise - Pontoise Seoul 135-798 KOREA 95015 Cergy-Pontoise Cedex T 011-82-25725203 France F 011-82-25582819 T 011-33-1-34-251-251 F 011-33-1-34-251-250
**In connection with the merger of Summit Design, Inc. and Viewlogic and the merger of Innoveda and PADS Software, Inc., the Borrower may not have received all consents necessary to assign and/or transfer interest in certain of the aforementioned properties. 2 EXHIBIT 4.1.21 MATERIAL AGREEMENTS*** ---------------------- 1. Agreement and Plan of Merger and Reorganization by and between PADS Software, Inc., Innoveda, Innovative Software, Inc. and Kyoden Co., Ltd., dated June 2, 2000. 2. MainWin Dedicated Library Reproduction and Distribution Agreement between Viewlogic and Mainsoft Corporation, effective June 29, 1998. 3. Employment Agreement between Innoveda and Eric Benhayoun dated February 25, 1999. 4. Employment Agreement between Innoveda and Moshe Guy executed May 28, 2000. 5. Lease Agreement between Innoveda and Petula Associates Ltd. And Koll Creekside Associates II dated October 26, 1993, as amended. 6. Sublease Agreement, dated as of January 1993 between DCL Technologies, Ltd. and SEE Technologies, Ltd. 7. Distributor Agreement between Innoveda and Seiko Instruments, Inc., dated February 1, 1996, as amended. 8. Option Exchange Agreement dated as of June 30, 1998 among Innoveda, ProSoft Oy, and Optionholders of ProSoft Oy. 9. Employment Agreement between Viewlogic and Richard G. Lucier dated October 2, 1998. 10. Employment Agreement between Viewlogic and William J. Herman dated October 2, 1998. 11. VCS OEM Agreement between Viewlogic and Synopsys dated October 2, 1998. 12. FPGA OEM Agreement between Viewlogic and Synopsys dated October 2, 1998. 13. Software Assignment and License Agreement between Viewlogic and Synopsys dated October 2, 1998. 14. Patent Assignment and Cross-License Agreement between Viewlogic and Synopsys dated October 2, 1998. 15. Blast Software License and Assignment Agreement between Viewlogic and Synopsys dated October 2, 1998. 16. Office Lease Agreement between Viewlogic and Rosewood III Associates Limited Partnership, as amended, dated November 16, 1989. 17. Exclusive Distribution Agreement by and between Viewlogic and Marubeni Solutions Corporation dated as of January 1, 2000, as amended. 1 18. Secured Promissory Note by Paula J. Cassidy and John F. Cassidy in favor of Viewlogic dated August 11, 1999 as amended September 25, 2001. 19. Secured Promissory Note by Peter T. Johnson and Andrea R. Johnson in favor of Viewlogic dated August 11, 1999 as amended September 25, 2001. 20. Secured Promissory Note by William J. Herman in favor of Viewlogic dated August 11, 1999 as amended September 25, 2001. 21. Secured Promissory Note by Richard G. Lucier in favor of Viewlogic dated August 12, 1999 as amended September 25, 2001. 22. Secured Promissory Note by Kevin P. O'Brien in favor of Viewlogic dated August 11, 1999 as amended September 25, 2001. 23. Software Development, Consulting and Services Agreement dated as of December 1, 1998 between PADS Software, Inc. and Milena, Inc. ***BORROWER IS A PARTY TO CERTAIN CONTRACTS OR AGREEMENTS WHICH MAY PROHIBIT THE ASSIGNMENT OR TRANSFER OF ANY INTEREST THEREIN WITHOUT THE CONSENT OF THE OTHER PARTY OR PARTIES THERETO. CERTAIN OF THE AFOREMENTIONED AGREEMENTS EITHER BY THEIR TERMS OR BY OPERATION OF LAW MAY PROHIBIT ASSIGNMENT WITHOUT CONSENT OF THE OTHER PARTY OR PARTIES THERETO. 2 EXHIBIT 5.2.8.6 FORM OF INTERCOMPANY SUBORDINATION AGREEMENT This INTERCOMPANY SUBORDINATION AGREEMENT (as amended, supplemented, amended and restated or otherwise modified, this "SUBORDINATION AGREEMENT"), dated as of November 9, 2001, is among INNOVEDA, INC., a corporation organized under the laws of Delaware (the "BORROWER"), TRANSCENDENT DESIGN TECHNOLOGY, INC., a corporation organized under the laws of Delaware, INNOVEDA KOREAN HOLDINGS, INC., a corporation organized under the laws of Delaware, FIRST TO MARKET, INC., a corporation organized under the laws of Delaware, INNOVEDA MINNESOTA HOLDINGS, INC., a corporation organized under the laws of Delaware, INNOVEDA SARL., a company organized under the laws of the Federal Republic of France, INNOVEDA LIMITED, a company organized under the laws of the United Kingdom, INNOVEDA GMBH, a company organized under the laws of the Federal Republic of Germany, INNOVEDA KK, a company organized under the laws of Japan, INNOVEDA SRL, a company organized under the laws of Italy, INNOVEDA ISRAEL LIMITED, a company organized under the laws of Israel, INNOVEDA FINLAND OY, a company organized under the laws of Finland, INNOVEDA FOREIGN SALES CORP., a company organized under the laws of Barbados (collectively, together with each other Subsidiary that may from time to time become a party hereto, the "SUBSIDIARIES" and together with the Borrower, the "SUBORDINATED DEBTORS"), the Borrower and the Subsidiaries, other than in their capacity as Subordinated Debtors (collectively, the "SUBORDINATED CREDITORS") and FLEET NATIONAL BANK, as agent (together with any successors thereto in such capacity, the "AGENT") for itself and the various financial institutions or other lenders (the "LENDERS") as are, or may from time to time become, parties to the Loan Agreement (referred to below). All capitalized terms used in this Subordination Agreement, unless otherwise defined in this Subordination Agreement shall have the meanings provided for in the Loan Agreement (referred to below). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the Amended and Restated Loan Agreement dated as of July 31, 2000, as amended by a letter agreement dated October 23, 2000 and by a Second Amendment and Waiver dated as of November 9, 2001 (as may be further amended, supplemented, amended and restated or otherwise modified from time to time, the "LOAN AGREEMENT"), among the Borrower, the Agent and the Lenders, the Lenders have agreed to provide certain financial accommodations to the Borrower; WHEREAS, pursuant to SECTION 5.2.8.6 of the Loan Agreement, the Subordinated Debtors are permitted to have certain intercompany Indebtedness pursuant to the terms of this Subordination Agreement (such intercompany Indebtedness collectively referred to as the "INTERCOMPANY DEBT"); WHEREAS, in order for the Intercompany Debt to be permitted under the Loan Agreement, the Subordinated Debtors and the Subordinated Creditors are required to execute and deliver this Subordination Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders to continue to provide financial accommodations to the Borrower under the Loan Agreement, each Subordinated Creditor and each 1 Subordinated Debtor hereby agrees, for the benefit of each Lender, as follows. SECTION 1. AGREEMENT TO SUBORDINATE. (a) Each Subordinated Creditor and each Subordinated Debtor agrees that the Subordinated Debt (as defined below) is and shall be subordinate, to the extent and in the manner hereinafter set forth, and junior in right of payment to the prior payment in full in cash of the Senior Debt (as defined below). Except as provided in CLAUSE (b) of this Section 1 or unless otherwise consented to in writing by the Agent, no payment or other item of value on account of any component of Subordinated Debt shall be made by any Subordinated Debtor or received or accepted by any Subordinated Creditor until the indefeasible payment in full in cash of all Senior Debt has been made and received, all Letters of Credit have expired or been terminated and all Commitments have been terminated and all payments to the Lenders have been retained by them for a period of time in excess of all applicable preference (or other similar) periods under applicable bankruptcy, insolvency or creditors' rights laws (such date to be the "SENIOR DEBT TERMINATION DATE"). When used in this Subordination Agreement, (i) "SENIOR DEBT" means all Obligations (including the aggregate amount of all Obligations with respect to Letters of Credit and Hedge Agreements with any Lender), it being expressly understood and agreed that the term "Senior Debt" shall include, without limitation, (i) any and all interest accruing as part of the Obligations (whether or not permitted as a claim under applicable law) after the commencement of any bankruptcy, insolvency or other proceedings referred to in SECTION 4, notwithstanding any provision or rule of law which might restrict the rights of any Lender, as against the Borrower or any other Person, to collect such interest in the manner and to the extent set forth in this Subordination Agreement, (ii) all renewals, extensions, increases, refinancings or refundings of such Obligations and (iii) all costs of enforcement and collection of such Obligations; and (ii) "SUBORDINATED DEBT" means all Indebtedness, obligations, liabilities, claims and other amounts of any nature or type now or hereafter owing to any Subordinated Creditor by any Subordinated Debtor or to any Subordinated Creditor by any other Subordinated Creditor or to any Subordinated Debtor by any other Subordinated Debtor in respect of the Intercompany Debt, interest thereon and fees in respect thereof, payable from time to time hereafter and any extensions, renewals, refinancings or refundings thereof in whole or in part. (b) Until an Event of Default under the Loan Agreement shall have occurred and be continuing, any Subordinated Debtor may make, and any Subordinated Creditor may ask, demand, accelerate, make any claim for, sue for, or otherwise seek to enforce, take or receive from such Subordinated Debtor, directly or indirectly, in cash or other property or by set-off or in any other manner (including from or by way of collateral), payment of Subordinated Debt or interest and/or premium thereon or fees relating thereto. SECTION 2. NO SECURITY. The parties hereto agree that no Subordinated Debtor will give, nor will any Subordinated Creditor receive or accept from any Subordinated Debtor, any security interest in or Lien on any assets or properties of any Subordinated Debtor, whether consensual or non-consensual, of any nature whatsoever to secure any obligations arising in connection with Subordinated Debt. 2 SECTION 3. TRUST; SECURITY AGREEMENT. Except with respect to payments of Subordinated Debt permitted by CLAUSE (b) of SECTION 1, each Subordinated Creditor will hold in trust for, and will promptly pay over to the Agent, all amounts which such Subordinated Creditor receives on account of the Subordinated Debt, and each Subordinated Creditor hereby assigns and pledges to the Agent for its benefit and the ratable benefit of the Lenders, and hereby grants to the Agent for its benefit and the ratable benefit of each of the Lenders, a security interest in any and all dividends, distributions and other amounts and all other property (including any capital stock or other equity interest, collectively referred to herein as "CAPITAL SECURITIES"), whether now or hereafter existing or acquired by any Subordinated Creditor on account of the Subordinated Debt. All amounts so paid, and all payments and distributions on account of the Subordinated Debt received by the Agent pursuant to SECTION 4 hereof, shall be applied to the payment of the Senior Debt, or, if in a form other than cash, shall be held by the Agent for the ratable benefit of the Lenders as security for the Senior Debt and disposed of in accordance with the Loan Agreement and applicable law. Upon the occurrence of the Senior Debt Termination Date, any balance of such amounts or any security remaining in the hands of the Agent shall be paid over to, reassigned and redelivered to the applicable Subordinated Creditor, at its cost and expense. SECTION 4. DISSOLUTION OR INSOLVENCY. Upon any payment or distribution of assets of any Subordinated Debtor of any kind or character, whether in cash, property or Capital Securities, to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of any Subordinated Debtor, whether voluntary or involuntary or in bankruptcy, insolvency, receivership, or similar arrangement or other similar proceeding (each of the foregoing, a "PROCEEDING"), all outstanding amounts in respect of the Senior Debt shall first be indefeasibly paid in full in cash before any payment is made on account of any component of the Subordinated Debt. Upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of assets of any Subordinated Debtor of any kind or character, whether in cash, property or Capital Securities, to which any Subordinated Creditor would be entitled except for the provisions hereof, shall be paid by such Subordinated Debtor or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution on behalf of such Subordinated Debtor, or by any Subordinated Creditor (if received by a Subordinated Creditor), directly to the Agent to the extent necessary to pay the Senior Debt in cash in full, after giving effect to any concurrent payment or distribution made on account of the Senior Debt, before any payment or distribution is made to any Subordinated Creditor on account of the Subordinated Debt. For such purpose, each Subordinated Creditor hereby assigns to the Agent all right, title, claim and interest in and to any and all such payments and distributions on account of the Subordinated Debt (each such right, title, claim and interest, a "CLAIM"). In furtherance of the terms of this Subordination Agreement, each Subordinated Creditor hereby irrevocably appoints the Agent as such Subordinated Creditor's attorney-in-fact, with full authority in the place and stead of such Subordinated Creditor and in the name of such Subordinated Creditor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Subordination Agreement (including the filing of claims, proof of claim or other instrument of similar character by the Agent on behalf (and in the name) of a Subordinated Creditor. Each Subordinated Creditor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. Each Subordinated Creditor shall execute and deliver to the Agent any instruments of assignment or further assurance of such right, claim, title or interest as the Agent may hereafter request. The Agent is hereby irrevocably authorized and empowered, at its election and in its own name or in the name of each Subordinated Creditor, to execute and file any proof of claim or other document and to take any and all action with respect to the Subordinated Debt necessary or appropriate to ensure payment to the Agent of all such 3 payments and distributions made on account of the Subordinated Debt, and for such purpose each Subordinated Creditor will upon the request of the Agent assign or endorse and deliver to the Agent any instrument or instruments hereafter held by such Subordinated Creditor evidencing Subordinated Debt, and will execute and deliver or will cause to be executed and delivered any and all affidavits, powers of attorney and other instruments and documents as may be requested by the Agent for such purpose. SECTION 5. INSPECTION OF RECORDS. From time to time upon the request of the Agent, each Subordinated Debtor will permit the Agent to inspect and to make extracts from its books and records pertaining to any Subordinated Debt, and each Subordinated Creditor will permit the Agent at all reasonable times to examine the accounts of such Subordinated Creditor evidencing Subordinated Debt and any other instrument or instruments hereafter held by such Subordinated Creditor evidencing Subordinated Debt. SECTION 6. OBLIGATIONS ABSOLUTE, ETC. So long as any portion of the Senior Debt remains outstanding, or the Loan Agreement has not been terminated, this Subordination Agreement and all rights of the Lenders and all obligations and duties of each Subordinated Debtor and each Subordinated Creditor hereunder shall continue in full force and effect notwithstanding any action which any Lender or the Borrower, without notice to or consent of any Subordinated Creditor, may take or refrain from taking with respect to the Senior Debt, including (i) any amendment, modification, waiver, extension, increase or renewal of the Senior Debt or any part thereof or of any instrument or instruments now or hereafter evidencing the Senior Debt or any part thereof or of any agreement or agreements (including any Financing Document) now or hereafter entered into by the Lenders and the Borrower pursuant to which the Senior Debt or any part thereof is issued or governed, (ii) any change in the amount, manner or place of payment of, rate of interest on, or in any other term of, the Senior Debt or any part thereof or any release, compliance or settlement with respect thereto, (iii) any forbearance or agreement of forbearance with respect to the Senior Debt, (iv) any substitution, release, non-perfection, exchange, indulgence, forbearance or other action or dealing with respect to any collateral security for the Senior Debt, whether such collateral is now or hereafter existing, (v) any extension of additional credit to the Borrower by the Lenders, it being understood that all such additional credit will become Senior Debt for purposes of this Subordination Agreement, (vi) any lack of validity or enforceability of the Loan Agreement or any other Loan Document or any other agreement or instrument relating thereto or (vii) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Borrower, any other Subordinated Debtor or any Subordinated Creditor. SECTION 7. APPLICATION OF PAYMENTS. All payments and distributions received by the Agent in respect of the Subordinated Debt, to the extent received in or converted into cash, may be applied by the Agent, first to the payment of any and all expenses (including attorneys' fees and legal expenses) paid or incurred by the Lenders in enforcing or collecting the Senior Debt, in enforcing this Subordination Agreement, or in endeavoring to collect or realize upon any of the Subordinated Debt, and any balance thereof shall, solely as between the Subordinated Creditors and the Agent (except as may be otherwise provided in the Loan Agreement), be applied by the Agent in such order of application as the Agent may from time to time select, toward the payment of the Senior Debt remaining unpaid; but, as between the Subordinated Debtors and the Subordinated Creditors (other than the Agent and the Lenders), no such payments or distributions of any kind or character shall be deemed to be payments or distributions in respect of the Subordinated Debt. SECTION 8. SUBROGATION. Each Subordinated Creditor agrees that no payment or distribution to the Agent shall entitle such Subordinated Creditor to exercise any rights of subrogation in respect thereof 4 until the Senior Debt Termination Date has occurred. Each Subordinated Creditor agrees that the subordination provisions contained herein shall not be affected by any action, or failure to act by any Lender which results, or may result, in affecting, impairing or extinguishing any right of reimbursement or subrogation or other right or remedy of any Subordinated Creditor. SECTION 9. WAIVERS BY EACH SUBORDINATED CREDITOR. Except as may be otherwise provided in the Loan Agreement, each Subordinated Creditor hereby waives: (a) notice of acceptance of this Subordination Agreement by any Lender or any other holder of Senior Debt, (b) notice of the existence, or creation or non-payment of all or any portion of, the Senior Debt and (c) all diligence in collection or protection of, or realization upon, the Senior Debt, or any part thereof, or any security therefor. SECTION 10. NO COMMENCEMENT OF ANY PROCEEDING. Each Subordinated Creditor agrees that, until the Senior Debt Termination Date has occurred, it will not commence, or join with any creditor other than the Agent (if the Agent specifically approves in writing) in commencing, any Proceeding or otherwise making any Claim. SECTION 11. SUBORDINATION LEGEND; FURTHER ASSURANCES. Each Subordinated Creditor and each Subordinated Debtor will cause any promissory note evidencing Subordinated Debt to be endorsed with the following legend: "The indebtedness evidenced by this instrument is subordinated to the prior payment in full in cash of the Senior Debt, as defined in, and to the extent provided in, the Intercompany Subordination Agreement dated as of November 9, 2001 by (among others), the maker hereof and payee named herein in favor of Fleet National Bank, as Agent for the Lenders (as such terms are defined in, or by reference in, such Intercompany Subordination Agreement), as amended from time to time." Each Subordinated Creditor and each Subordinated Debtor each will mark its books of account in such a manner as shall be effective to give proper notice of the effect of this Subordination Agreement and will, in the case of any Subordinated Debt which is not evidenced by any instrument, upon the Agent's request, cause such Subordinated Debt to be evidenced by an appropriate instrument or instruments endorsed with the above legend. Each Subordinated Creditor and each Subordinated Debtor will, at its expense and at any time and from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be reasonably necessary or desirable, or that the Agent may request, in order to protect any right or interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder. SECTION 12. NO CHANGE IN OR DISPOSITION OF SUBORDINATED DEBT. No Subordinated Creditor will: (a) sell, assign, pledge, encumber or otherwise dispose of any or any part of any Subordinated Debt to any Person or entity other than the Subordinated Debtors or any other Subordinated Creditor or any of their respective Subsidiaries that has executed and delivered to the Agent this Subordination Agreement; (b) take or permit to be taken, any action to assert, collect or enforce any Subordinated Debt or any part thereof, except in accordance with this Subordination Agreement and only as to that portion of the Subordinated Debt, if any, to which the Subordinated Creditors are entitled; or 5 (c) permit the terms of any of the Subordinated Debt to be changed in such a manner as to have an adverse effect upon the rights or interests of any holder of Senior Debt. SECTION 13. REPRESENTATIONS AND WARRANTIES. Each Subordinated Creditor and each Subordinated Debtor hereby represent and warrant as follows: (a) No default exists in respect of any Subordinated Debt. (b) This Subordination Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligations of each Subordinated Debtor and each Subordinated Creditor, enforceable against each Subordinated Debtor and each Subordinated Creditor in accordance with its terms, except as the enforceability thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally. (c) Each Subordinated Creditor owns the outstanding Subordinated Debt free and clear of any Lien other than Permitted Encumbrances. SECTION 14. CONSTRUCTION, ETC. This Subordination Agreement is a Loan Document executed pursuant to the Loan Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 15. BINDING ON SUCCESSORS, TRANSFEREES AND ASSIGNS; ASSIGNMENT. This Subordination Agreement shall be binding upon each Subordinated Debtor and each Subordinated Creditor and their respective permitted successors, transferees and assigns and shall inure to the benefit of and be enforceable, except as the enforceability thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally, by each Lender and their respective successors, transferees and assigns; PROVIDED, HOWEVER, that no Subordinated Debtor or Subordinated Creditor may assign any of its obligations hereunder without the prior written consent of the Majority Lenders. SECTION 16. AMENDMENTS, ETC. No amendment to or waiver of any provision of this Subordination Agreement, nor consent to any departure by any Subordinated Debtor or any Subordinated Creditor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent (with the consent of the Majority Lenders), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 17. ADDRESSES FOR NOTICES. All notices and other communications provided to any Subordinated Debtor or any Subordinated Creditor under this Subordination Agreement or any other Financing Document shall be in writing and given to the Borrower, and all notices and other communications provided to the Agent under this Subordination Agreement shall be in writing and given to the Agent at, in each case, the address or facsimile number provided, and otherwise in accordance with Section 9.6 of the Loan Agreement. SECTION 18. NO WAIVER; REMEDIES. No failure on the part of the Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 6 SECTION 19. SECTION CAPTIONS. Section captions used in this Subordination Agreement are for convenience of reference only, and shall not affect the construction of this Subordination Agreement. SECTION 20. SEVERABILITY. Wherever possible each provision of this Subordination Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Subordination Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Subordination Agreement. SECTION 21. EXPENSES. Each Subordinated Creditor and each Subordinated Debtor jointly and severally agree to pay, upon demand, to the Agent any and all costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements, which any Lender may incur in connection with the exercise or enforcement of any of the rights or interest of any Lender hereunder. SECTION 22. GOVERNING LAW, ENTIRE AGREEMENT, ETC. This Subordination Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts without regard to its conflicts of law rules. This Subordination Agreement constitutes the entire understanding among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements, written or oral, with respect hereto. SECTION 23. FORUM SELECTION AND CONSENT TO JURISDICTION. Any litigation based hereon, or arising out of, under, or in connection with, this Subordination Agreement, or any course of conduct, course of dealing, statements (whether oral or written) or actions of any lender, any Subordinated Debtor or any Subordinated Creditor may be brought and maintained in any federal or state court sitting in The Commonwealth of Massachusetts; PROVIDED, HOWEVER, that any suit seeking enforcement against any property may be brought, at the Agent's option, in the courts of any jurisdiction where such property may be found. Each Subordinated Debtor and each Subordinated Creditor hereby expressly and irrevocably submits to the non-exclusive jurisdiction of all federal and state courts of The Commonwealth of Massachusetts for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation. Each Subordinated Debtor and Subordinated Creditor which is a Subsidiary hereby irrevocably appoints the Borrower (in such capacity, the "PROCESS AGENT"), with an office on the date hereof at 293 Boston Post Road West, Marlboro, Massachusetts 01752-4615, United States of America, as its agent to receive, on such Subordinated Debtor's and Subordinated Creditor's behalf and on behalf of such Subordinated Debtor's and Subordinated Creditor's property, service of copies of the summons and complaint and any other process which may be served in any such action or proceeding. Such service may be made by mailing or delivering a copy of such process to such Subordinated Debtor and Subordinated Creditor in care of the process agent at the process agent's above address, and each such Subordinated Debtor and Subordinated Creditor irrevocably authorizes and directs the process agent to accept such service on its behalf. Each Subordinated Debtor and each Subordinated Creditor further irrevocably consents to the service of process by registered mail, postage prepaid, or by personal service within or without The Commonwealth of Massachusetts. Each Subordinated Debtor and each Subordinated Creditor hereby expressly and irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in an inconvenient forum. To the extent that any Subordinated Debtor or any Subordinated Creditor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to 7 judgment, attachment in aid of execution or otherwise) with respect to itself or its property, it hereby irrevocably waives such immunity in respect of its obligations under this Subordination Agreement and the other Loan Documents. SECTION 24. WAIVER OF JURY TRIAL. EACH SUBORDINATED DEBTOR AND EACH SUBORDINATED CREDITOR EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS SUBORDINATION AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY LENDER, ANY SUBORDINATED DEBTOR OR ANY SUBORDINATED CREDITOR. EACH SUBORDINATED DEBTOR AND EACH SUBORDINATED CREDITOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE CONTINUING PROVISION OF FINANCIAL ACCOMMODATIONS BY THE LENDERS UNDER THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 25. ADDITIONAL PARTIES. Upon the execution and delivery by any other Person of a supplement in the form of ANNEX I hereto, such Person shall become either a "Subordinated Debtor," a "Subordinated Creditor" or both hereunder with the same force and effect as if it were originally a party to this Subordination Agreement and named as a "Subordinated Debtor," a "Subordinated Creditor" or both hereunder. The execution and delivery of any such instrument shall not require the consent of any other party hereto, and the rights and obligations of each party hereto hereunder shall remain in full force and effect notwithstanding the addition of any new "Subordinated Debtor" or "Subordinated Creditor" as a party to this Subordination Agreement. SECTION 26. Counterparts. This Subordination Agreement may be executed in a number of identical counterparts, each of which is deemed an original for all purposes and all of which constitute, collectively, one agreement. [SIGNATURE PAGES FOLLOW] 8 IN WITNESS WHEREOF, each Subordinated Debtor and each Subordinated Creditor has caused this Subordination Agreement to be duly executed and delivered by its respective authorized officer as of the date first written above. INNOVEDA, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ TRANSCENDENT DESIGN TECHNOLOGY, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA KOREAN HOLDINGS, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ FIRST TO MARKET, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA MINNESOTA HOLDINGS, INC. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ 9 INNOVEDA SARL. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA LIMITED By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA GMBH By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA KK By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA SRL By: ________________________________________ Name: ______________________________________ Title: _____________________________________ 10 INNOVEDA ISRAEL LIMITED By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA FINLAND OY By: ________________________________________ Name: ______________________________________ Title: _____________________________________ INNOVEDA FOREIGN SALES CORP. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ ACKNOWLEDGED AND ACCEPTED: FLEET NATIONAL BANK, as Agent By: __________________________________________ Name: Title: 11 ANNEX I to Intercompany Subordination Agreement THIS SUPPLEMENT, dated as of ________________, ____ (this "SUPPLEMENT"), is to the Intercompany Subordination Agreement dated as of November 9, 2001 (as amended, supplemented, amended and restated or otherwise modified, the "SUBORDINATION AGREEMENT"), among the initial signatories thereto and each other Person (such capitalized term, and other terms used in this Supplement, to have the meanings set forth in the Subordination Agreement) which from time to time thereafter became a party thereto pursuant to Section 25 thereof (each, individually, a "SUBORDINATED DEBTOR" or a "SUBORDINATED CREDITOR"), in favor of the Lenders. W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the provisions of Section 25 of the Subordination Agreement, the undersigned is becoming a Subordinated Creditor and/or a Subordinated Debtor, or both, as the case may be, under the Subordination Agreement; and WHEREAS, the undersigned is obligated to enter into the Subordination Agreement in order for certain Intercompany Indebtedness to be permitted under the Loan Agreement; NOW, THEREFORE, in consideration of the premises, and for other consideration (the receipt and sufficiency of which is hereby acknowledged), the undersigned agrees, for the benefit of each Lender, as follows. SECTION 1. PARTY TO SUBORDINATION AGREEMENT, ETC. In accordance with the terms of the Subordination Agreement, by its signature below the undersigned hereby irrevocably agrees to become a Subordinated Creditor and/or a Subordinated Debtor, or both, as the case may be, under the Subordination Agreement with the same force and effect as if it were an original signatory thereto and the undersigned hereby (a) agrees to be bound by and comply with all of the terms and provisions of the Subordination Agreement applicable to it as a Subordinated Creditor and/or a Subordinated Debtor, or both, as the case may be and (b) represents and warrants that the representations and warranties made by it as a Subordinated Creditor and/or a Subordinated Debtor, or both, as the case may be thereunder are true and correct as of the date hereof. In furtherance of the foregoing, each reference to a "Subordinated Creditor and a Subordinated Debtor" in the Subordination Agreement shall be deemed to include the undersigned. SECTION 2. REPRESENTATIONS. The undersigned hereby represents and warrants that this Supplement has been duly authorized, executed and delivered by it and that this Supplement and the Subordination Agreement constitute the legal, valid and binding obligation of the undersigned, enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally. SECTION 3. FULL FORCE OF SUBORDINATION AGREEMENT. Except as expressly supplemented hereby, the Subordination Agreement shall remain in full force and effect in accordance with its terms. SECTION 4. SEVERABILITY. In the event any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Subordination Agreement shall not in any way be affected or impaired. 1 SECTION 5. GOVERNING LAW, ENTIRE AGREEMENT, ETC. THIS SUPPLEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REGARD TO ITS CONFLICTS OF LAW RULES. THIS SUPPLEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. SECTION 6. COUNTERPARTS. This Supplement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. [NAME OF ADDITIONAL SUBORDINATED CREDITOR AND/OR SUBORDINATED DEBTOR] By:___________________________ Name: Title: ACCEPTED BY: FLEET NATIONAL BANK, as Agent By: _________________________________________ Name: Title: 2 EXHIBIT 5.2.12.1 PERMITTED INVESTMENTS 1. In connection with the merger of PADS Software, Inc. and Borrower, Borrower acquired a promissory note issued by Richard Almeida, an employee of PADS, to PADS in the amount of $100,000. Innoveda then accepted a revised promissory note from Mr. Almeida in favor of Innoveda. The loan is due and payable in October 2002 or sooner if Mr. Almeida resigns his employment at Innoveda or his employment is terminated by Innoveda for cause. If Mr. Almeida remains in the employ of Innoveda until October 2002, the loan is forgiven. 2. In September 2001, Innoveda amended the promissory notes with Messrs. Herman, Lucier, O'Brien and Johnson and Ms. Cassidy to eliminate the requirement that such notes become due and payable on "The date which is eighteen months after the first date, if any, on which the common stock of Viewlogic Systems, Inc. (or any security substituted therefor) is listed on a national securities exchange or the NASDAQ stock market". 3 -----END PRIVACY-ENHANCED MESSAGE-----