-----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, Ms3/Wdljs56UNg+rD4dOUa8LCDesj6laZ2ch3062KgWIHTrl403EdMHpuDQEs8C9 CAqimy2hhXYyf1WALB6t2Q== 0000912057-00-024389.txt : 20000516 0000912057-00-024389.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024389 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13442 FILM NUMBER: 631941 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070-7777 BUSINESS PHONE: 5036857000 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q - -------------------------------------------------------------------------------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2000. Commission File No. 0-13442 - -------------------------------------------------------------------------------- MENTOR GRAPHICS CORPORATION (Exact name of registrant as specified in its charter) Oregon 93-0786033 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777 (Address including zip code of principal executive offices) Registrant's telephone number, including area code: (503) 685-7000 - -------------------------------------------------------------------------------- NO CHANGE Former name, and former fiscal year, if changed since last report 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 Number of shares of common stock, no par value, outstanding as of May 1, 2000: 63,219,013 MENTOR GRAPHICS CORPORATION Index to Form 10-Q
PART I FINANCIAL INFORMATION Page Number ----------- Item 1. Financial Statements Consolidated Statements of Operations for the three 3 months ended March 31, 2000 and 1999 Consolidated Balance Sheets as of March 31, 2000 4 and December 31, 1999 Consolidated Statements of Cash Flows for the 5 three months ended March 31, 2000 and 1999 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13-14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Mentor Graphics Corporation Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED MARCH 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- IN THOUSANDS, EXCEPT PER SHARE DATA REVENUES: System and software $ 72,639 $ 72,740 Service and support 55,495 49,833 ----------------- ----------------- Total revenues 128,134 122,573 ----------------- ----------------- COST OF REVENUES: System and software 5,329 7,446 Service and support 21,444 22,382 ----------------- ----------------- Total cost of revenues 26,773 29,828 ----------------- ----------------- Gross margin 101,361 92,745 ----------------- ----------------- OPERATING EXPENSES: Research and development 30,009 28,869 Marketing and selling 44,773 42,315 General and administration 12,930 12,896 Special charges - 16,575 ----------------- ----------------- Total operating expenses 87,712 100,655 ----------------- ----------------- OPERATING INCOME (LOSS) 13,649 (7,910) Other expense, net (268) (2,821) ------------------ ------------------ Income (loss) before income taxes 13,381 (10,731) Income tax expense (benefit) 2,944 (2,361) ----------------- ------------------ Net income (loss) $ 10,437 $ (8,370) ================= ================== Net income (loss) per share: Basic $ .16 $ (.13) ================= ================== Diluted $ .16 $ (.13) ================= ================== Weighted average number of shares outstanding: Basic 64,124 66,213 ================= ================= Diluted 66,781 66,213 ================= ================= - -------------------------------------------------------------------------------------------------------------------
3 Mentor Graphics Corporation Consolidated Balance Sheets
AS OF AS OF MARCH 31, 2000 DECEMBER 31, 1999 - -------------------------------------------------------------------------------------------------------------------- IN THOUSANDS (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 74,542 $ 95,637 Short-term investments 25,597 37,550 Trade accounts receivable, net 126,693 125,417 Other receivables 5,799 6,440 Prepaid expenses and other 20,570 14,921 Deferred income taxes 10,889 10,954 ----------------- ----------------- Total current assets 264,090 290,919 PROPERTY, PLANT AND EQUIPMENT, NET 79,573 83,970 TERM RECEIVABLES, LONG-TERM 29,616 31,695 OTHER ASSETS, NET 40,577 42,755 ----------------- ----------------- Total assets $ 413,856 $ 449,339 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 7,071 9,979 Income taxes payable 23,354 22,599 Accrued payroll and related liabilities 27,602 41,628 Accrued liabilities 32,392 37,085 Deferred revenue 57,272 46,425 ----------------- ----------------- Total current liabilities 147,691 157,716 OTHER LONG-TERM DEFERRALS 1,165 1,221 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST 1,696 1,622 STOCKHOLDERS' EQUITY: Common stock 256,659 289,478 Accumulated deficit (9,925) (20,362) Accumulated other comprehensive income - foreign currency translation adjustment 16,570 19,664 ----------------- ----------------- Total stockholders' equity 263,304 288,780 ----------------- ----------------- Total liabilities and stockholders' equity $ 413,856 $ 449,339 ================= ================= - ---------------------------------------------------------------------------------------------------------------------
4 Mentor Graphics Corporation Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED MARCH 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- IN THOUSANDS OPERATING CASH FLOWS: Net income (loss) $ 10,437 $ (8,370) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization of property, plant and equipment 4,845 6,180 Deferred taxes 101 (203) Amortization of other assets 1,673 971 Write-down of assets - 18,134 Business disposals - 746 Gain on sale of property, plant, and equipment, net (3,118) - Gain on sale of investments - (3,669) Changes in operating assets and liabilities: Trade accounts receivable (3,581) 1,276 Prepaid expenses and other (5,534) 1,827 Term receivables, long-term 1,518 (14,654) Accounts payable (2,813) (3,623) Accrued liabilities (17,945) (17,549) Other liabilities and deferrals 12,466 7,630 ----------------- ----------------- Net cash used by operating activities (1,951) (11,304) ------------------ ------------------ INVESTING CASH FLOWS: Net maturities of short-term investments 11,953 17,386 Purchases of property, plant and equipment, net (2,309) (3,571) Purchases of equity interests - (7,572) Proceeds from sale of property, plant, and equipment 4,725 - Proceeds from sale of investments - 8,191 ----------------- ----------------- Net cash provided by investing activities 14,369 14,434 ----------------- ----------------- FINANCING CASH FLOWS: Proceeds from issuance of common stock 8,715 3,259 Repayment of short-term borrowings - (24,000) Repurchase of common stock (41,534) (5,998) ------------------ ------------------ Net cash used by financing activities (32,819) (26,739) ------------------ ------------------ Effect of exchange rate changes on cash and cash equivalents (694) (606) ------------------ ------------------ Net change in cash and cash equivalents (21,095) (24,215) Cash and cash equivalents at beginning of period 95,637 118,512 ----------------- ----------------- Cash and cash equivalents at end of period $ 74,542 $ 94,297 ================= ================= - ---------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 MENTOR GRAPHICS CORPORATION Notes to Consolidated Financial Statements (In thousands) (Unaudited) (1) GENERAL - The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. Certain reclassifications have been made in the accompanying financial statements for 1999 to conform with the 2000 presentation. (2) SPECIAL CHARGES - During the first three months of 1999 the Company recorded special charges of $16,575 compared to zero in the same period of 2000. The charges consisted of acquisition related costs attributable to the purchase of the minority interest of a subsidiary, costs attributable to the terminated tender offer for Quickturn Design Systems, Inc. (Quickturn) net of a gain from the sale of acquired stock, a subsidiary divestiture and related employee terminations. Substantially all of these costs were disbursed in the first quarter of 1999. In January of 1999, the Company completed the purchase of the remaining minority interest of its then 84% owned subsidiary, Exemplar Logic, Inc. (Exemplar) for cash and stock options valued at $13,003. The cost of the acquisition was allocated on the basis of the estimated fair value of assets assumed. This allocation resulted in charges for in process research and development (R&D) and compensation and other related costs of $624 and $6,951, respectively, in addition to capitalized goodwill and technology of $4,452 and $976, respectively. The goodwill and technology will be amortized to R&D over five years and system and software product cost of goods sold over three years, respectively. (3) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - The following provides additional information concerning cash flow activities:
Three months ended March 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Interest paid $ 237 $ 219 Income taxes paid, net of refunds $ 2,019 $ 195 Issuance of stock options for purchase of minority interest of subsidiary $ - $ 5,232 - ---------------------------------------------------------------------------------------------------------------------
(4) COMPREHENSIVE INCOME (LOSS) - The following provides a summary of comprehensive income (loss):
Three months ended March 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 10,437 $ (8,370) Foreign currency translation adjustment (3,094) (1,178) ------------------ ------------------ Comprehensive income (loss) $ 7,343 $ (9,548) ================= ================== - ---------------------------------------------------------------------------------------------------------------------
6 (5) REVENUE RECOGNITION - The Company has adopted the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions", which amends SOP 97-2 and supercedes SOP 98-4. Under SOP 97-2, license revenues are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, no significant company obligations remain, the fee is fixed or determinable and collectibility is probable. Revenues from system and software licenses are recognized at the time of shipment, except for those that include rights to future software products or have significant other delivery requirements. Product revenues from term or installment sales agreements which include either perpetual or term licenses are with the Company's top-rated credit customers and are recognized upon shipment while any maintenance revenues included in these arrangements are deferred and recognized ratably over the contract term. Revenues from subscription-type term license agreements, which typically include software, rights to future software products, and services, are deferred and recognized ratably over the term of the subscription period. Training and consulting contract revenues are recognized using the percentage of completion method or as contract milestones are achieved. SOP 98-9 amends certain paragraphs of SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by vendor specific objective evidence (VSOE), is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for the Company's fiscal year 2000. The Company has applied the residual method to multi-element transactions when VSOE was not present for all delivered elements. Application of the residual method did not have a material impact on the Company's consolidated financial statements. (6) SEGMENT REPORTING - The Company operates exclusively in the EDA industry. The Company markets its products primarily to customers in the communications, computer, semiconductor, consumer electronics, aerospace, and transportation industries. The Company sells and licenses its products through its direct sales force in North and South America (Americas), Europe, Japan and Pacific Rim, and through distributors where a direct sales presence is not warranted. The Company's reportable segments are based on geographic area. All intercompany revenues and expenses are eliminated in computing revenues and operating income (loss). The corporate component of operating income (loss) represents research and development, corporate marketing and selling, corporate general and administration, special, and merger and acquisitions related charges. Corporate capital expenditures and depreciation and amortization are generated from assets allotted to research and development, corporate marketing and selling, and corporate general and administration. Reportable segment information is as follows:
Three months ended March 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- REVENUES Americas $ 61,906 $ 58,476 Europe 39,781 34,947 Japan 20,166 24,245 Pac Rim 6,281 4,905 ----------------- ----------------- Total $ 128,134 $ 122,573 ================= ================= OPERATING INCOME (LOSS) Americas $ 33,171 $ 30,181 Europe 17,990 13,627 Japan 11,177 12,013 Pac Rim 3,929 2,652 Corporate (52,618) (66,383) ------------------ ------------------ Total $ 13,649 $ (7,910) ================= ================== - ---------------------------------------------------------------------------------------------------------------------
7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (ALL NUMERICAL REFERENCES IN THOUSANDS, EXCEPT FOR PERCENTAGES) RESULTS OF OPERATIONS REVENUES AND GROSS MARGINS SYSTEM AND SOFTWARE System and software revenues for the quarter ended March 31, 2000 totaled $72,639, which was approximately flat compared to the first quarter of 1999. Software product revenues increased while accelerated verification revenue declined for the 2000 period. The decrease in accelerated verification system sales was partly due to timing of delivery as defined by the Company's customers. Accelerated verification systems products are not available in U.S. markets due to a 1997 court ruling. See "Part II - Item 1. Legal Proceedings" for further discussion. System and software gross margins were 93% and 90% for the quarters ended March 31, 2000 and 1999, respectively. Gross margins were favorably impacted in 2000 by a slight increase in mix of higher margin software sales and improved margins on accelerated verification sales partly offset by increased technology amortization. Purchased technology amortization to system and software cost of goods sold was $878 and $402 for the quarters ended March 31, 2000 and 1999, respectively. The increase in amortization of purchased technology is attributable to the acquisition of VeriBest, Inc. (VeriBest) in the fourth quarter of 1999. SERVICE AND SUPPORT Service and support revenues for the first quarter of 2000 totaled $55,495 compared to $49,833 for the same period of 1999. Service and support revenues consist of software support and professional services, both of which increased compared to the first quarter of 1999. The increase in software support revenue was attributable to earlier renewal of annual support contracts, the acquisition of VeriBest, and the increase in prior period software product sales, which increased the installed base of customers. Service and support gross margins were 61% and 55% for the quarters ended March 31, 2000 and 1999, respectively. The increase in overall service and support gross margins is attributable to improved professional service realization as a result of better worldwide program management. Program management includes initial scoping, subsequent pricing and final delivery of the contracted services. GEOGRAPHIC REVENUES INFORMATION Americas revenues including service and support revenues, increased by 6% compared to the first quarter of 1999. Revenues outside of the Americas represented 52% of total revenues in for the first quarters of 2000 and 1999. European revenues increased by approximately 14% from the first quarter of 1999. Japanese revenues decreased by approximately 17% from the first quarter of 1999. The effects of exchange rate differences from the Japanese Yen to the U.S. dollar positively impacted revenues by approximately 7%. Exclusive of currency effects, lower revenue levels in Japan are partly due to two large accelerated verification transactions in the first quarter of 1999 which were not matched in the same period this year. Since the Company generates approximately half of its revenues outside of the U.S. and expects this to continue in the future, revenue results should continue to be impacted by the effects of future foreign currency fluctuations. 8 OPERATING EXPENSES Research and development expenses totaled $30,009 and $28,869 or 23% and 24% of revenues for the first quarters of 2000 and 1999, respectively. Marketing and selling expenses totaled $44,773 and $42,315 or 35% of revenues for the first quarters of 2000 and 1999. General and administration expenses totaled $12,930 and $12,896 or 10% and 11% of revenues for the first quarters of 2000 and 1999, respectively. The increase in expense in absolute dollars is primarily attributable to the VeriBest acquisition. SPECIAL CHARGES During the first three months of 1999 the Company recorded special charges of $16,575 compared to zero in the same period of 2000. The charges in 1999 consisted of acquisition related costs attributable to the purchase of the minority interest of a subsidiary, costs attributable to the terminated tender offer for Quickturn Design Systems, Inc. (Quickturn) net of a gain from the sale of acquired stock, a subsidiary divestiture and related employee terminations. Substantially all of these costs were disbursed in the first quarter of 1999. In January of 1999, the Company completed the purchase of the remaining minority interest of its then 84% owned subsidiary, Exemplar Logic, Inc. (Exemplar) for cash and stock options valued at $13,003. The cost of the acquisition was allocated on the basis of the estimated fair value of assets assumed. This allocation resulted in charges for in process R&D and compensation and other related costs of $624 and $6,951, respectively, in addition to capitalized goodwill and technology of $4,452 and $976, respectively. The goodwill and technology will be amortized to R&D over five years and system and software product cost of goods sold over three years, respectively. OTHER EXPENSE, NET Other expense, net totaled $268 for the first quarter of 2000 compared to $2,821 for the same period of 1999. Other income (expense) was negatively impacted by legal costs associated with the ongoing patent litigation with Quickturn which totaled $3,303 and $3,992 in the first quarters of 2000 and 1999, respectively. See "Part II - Item 1. Legal Proceedings" for further discussion. Other income was positively impacted by a gain on the sale of a parcel of land adjacent to the Company's headquarters of $3,118. Interest income from investments was $2,093 for the first quarter of 2000, compared to $1,823 for the first quarter of 1999. During the first quarter of 2000, interest expense amounted to $521, up from $240 for the comparable period in 1999. PROVISION (BENEFIT) FOR INCOME TAXES The provision for income taxes amounted to $2,944 for the quarter ended March 31, 2000, as compared to a benefit of $2,361 for the same period in 1999. The tax expense (benefit) is the result of the mix of profits earned by the Company and its subsidiaries in tax jurisdictions with a broad range of income tax rates. Because the Company's income tax position for each year combines the effects of available tax benefits in certain countries where the Company does business, benefits from available net operating loss carryforwards and tax expense for subsidiaries with pre-tax income, the Company's income tax position and resultant effective tax rate is uncertain for 2000 and beyond. 9 EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS Approximately half of the Company's revenues are generated outside of the United States. For 2000 and 1999, approximately half of European and all of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. The effects of these fluctuations were substantially offset by local currency cost of revenues and operating expenses, which resulted in an immaterial net effect on the Company's results of operations. The "accumulated other comprehensive income - foreign currency translation adjustment," as reported in the stockholders' equity section of the Consolidated Balance Sheets, decreased to $16,570 at March 31, 2000, from $19,664 at the end of 1999. This reflects the decrease in the value of net assets denominated in foreign currencies since year-end 1999 as a result of a stronger dollar in the first quarter of 2000. LIQUIDITY AND CAPITAL RESOURCES CASH AND INVESTMENTS Total cash and short-term investments at March 31, 2000 were $100,139 compared to $133,187 at the end of 1999. Cash used by operations was $1,951 for the first three months of 2000 compared to cash used by operations of $11,304 during the same period of 1999. During the first quarter of 2000 operating cash was positively impacted by net income from operations of $10,437 while for 1999, it was negatively impacted by the net loss from operations of $8,370. Cash provided (used) by investing activities, excluding short-term investments, was $2,416 and $(2,952) in the first quarter of 2000 and 1999, respectively. Investing activities in the first quarter of 2000 included cash received for the sale of land adjacent to the Company's Wilsonville headquarters to a third party for $4,725. Investing activities in the first quarter of 1999 included a cash payment made for a purchase of the minority interest in Exemplar of $7,572 and capital expenditures offset by cash received from the sale of Quickturn stock of $8,191. Cash used by financing activities was $32,819 for the first three months of 2000 compared to $26,739 during the same period of 1999. Cash and short-term investments were positively impacted by the proceeds from issuance of common stock upon exercise of stock options and employee stock plan purchases in the amount of $8,715 and $3,259 in 2000 and 1999, respectively. Cash used for financing activities in 2000 included a repurchase of 2,500 shares of common stock for $41,534. The financing use of cash in 1999 included the pay-down of a short-term borrowing of $24,000 and a repurchase of 528 shares of common stock for $5,998. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable increased to $126,693 at March 31, 2000 from $125,417 at year-end 1999. Excluding the current portion of term receivables of $61,319 and $54,375, average days sales outstanding were 46 days and 41 days at March 31, 2000 and December 31, 1999, respectively. Average days sales outstanding in total accounts receivable decreased from 91 days at the end of 1999 to 89 days at the end of the first quarter of 2000. The Company sold short-term accounts receivable of $23,166 and $25,886 to a financing institution on a non-recourse basis in the first quarter of 2000 and the fourth quarter of 1999, respectively. PREPAID EXPENSES AND OTHER Prepaid expenses and other increased $5,649 from December 31, 1999 to March 31, 2000. This increase was primarily due higher accelerated verification systems inventory, which is expected to ship in the second quarter of 2000. Prepaid income taxes and benefits costs also increased during the quarter. 10 TERM RECEIVABLES, LONG-TERM Term receivables, long-term decreased to $29,616 at the end of the first quarter of 1999 compared to $31,695 at December 31, 1999. Balances under term agreements that are due within one year are included in trade accounts receivable and balances that are due in more than one year are included in term receivables, long-term. The Company uses term agreements as a standard business practice and has a history of successfully collecting under the original payment terms without making concessions on payments, products or services. ACCRUED PAYROLL AND RELATED LIABILITIES The decrease in accrued payroll and related liabilities is related to payments of 1999's annual and fourth quarter incentive compensation. CAPITAL RESOURCES Total capital expenditures decreased to $2,309 through March 31, 2000, compared to $3,571 for the same period of 1999. Expenditures in the first quarter of 2000 and 1999 did not include any individually significant projects. The Company anticipates that current cash balances, anticipated cash flows from operating activities, and existing credit facilities will be sufficient to meet its working capital needs for at least the next twelve months. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB OPINION NO. 25, (FIN 44). FIN 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee, which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock options awards to add a reload feature are effective for awards modified after January 12, 2000. We do not expect that this statement will have a significant impact on our financial condition or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION Certain statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," and words of similar import, constitute forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Company may issue other forward-looking statements. The following discussion highlights factors that could cause actual results to differ materially from the forward-looking statements. The forward-looking statements should be considered in light of these factors. The Company competes in the highly competitive and dynamic electronic design automation (EDA) industry. The Company's success is dependent upon its ability to develop and market products and selling models that are innovative, cost-competitive and meet customer expectations. Competition in the EDA industry is intense, which can create adverse effects including, but not limited to, price reductions, lower product margins, loss of market share and additional working capital requirements. Additionally, new pricing and selling models in the industry, including the use of fixed term licenses and subscription transactions versus traditional perpetual licenses further complicate the Company's ability to effectively price and package large multi-element contracts that are competitive and profitable. 11 The Company's business is largely dependent upon the success and growth of the electronics industry. From time to time the electronics industry cuts costs through employee layoffs and reductions in the number of electronic design projects which could reduce demand for the Company's products and services. In addition, there have been a number of mergers in the electronics industry worldwide, which could result in decreased or delayed capital spending patterns. The above business challenges for the electronics and related industries may have a material adverse effect on the Company's financial condition and results of operations. As a result of the acquisition of Meta Systems and its accelerated verification products, the Company is in the hardware development and assembly business. Risk factors include procuring hardware components on a timely basis, assembling and shipping systems on a timely basis with appropriate quality control, developing new distribution and shipment processes, managing inventory and related obsolescence issues, developing new processes to deliver customer support of the hardware and placing new demands on the sales force. In addition, the Company is engaged in litigation with Quickturn in which Quickturn has asserted that the Company and Meta are infringing Quickturn patents. See "Part II-Item 1. Legal Proceedings" for further discussion. The Company has been prohibited from using, selling or marketing its SimExpress emulation products in the United States and Germany. While the Company settled one SimExpress court case in the second quarter of 1999, other legal proceedings and litigation continue. These actions could adversely effect the Company's ability to sell its accelerated verification products in other jurisdictions worldwide and may negatively affect demand for accelerated verification products for the Company worldwide until the outcome is determined. This litigation could result in lower sales of accelerated verification products, increase the risk of inventory obsolescence and have a materially adverse effect on the Company's results of operations. A material amount of the Company's software product revenue is usually the result of current quarter order performance of which the majority is usually booked in the last few weeks of each quarter. In addition, the Company's revenue often includes multi-million dollar contracts. The timing of the completion of these contracts and the terms of delivery of software, hardware and other services can have a material impact on revenue recognition for a given quarter. The combination of these factors impairs and delays the Company's ability to identify shortfalls or overages from quarterly revenue targets. The Company uses term or installment sales agreements as a standard business practice and has a history of successfully collecting under the original payment terms without making concessions on payments, products or services. These multi-year, multi-element term license and perpetual license term agreements are from the Company's top-rated credit customers and average between one and three years in length. These agreements may increase the element of risk associated with collectibility from customers that can arise for a variety of reasons including ability to pay, product satisfaction or disagreements and disputes. If collectibility for any of these multi-million dollar agreements becomes a problem the Company's results of operations could be adversely affected. The Company generally realizes approximately half of its revenues outside the U.S. and expects this to continue in the future. As such, the effects of foreign currency fluctuations can impact the Company's business and operating results. To hedge the impact of foreign currency fluctuations, the Company enters into foreign currency forward contracts. However, significant changes in exchange rates may have a material adverse impact on the Company's results of operations. International operations subject the Company to other risks including, but not limited to, changes in regional or worldwide economic or political conditions, government trade restrictions, limitations on repatriation of earnings, licensing and intellectual property rights protection. The Company's operating expenses are generally committed in advance of revenue and are based to a large degree on future revenue expectations. Operating expenses are incurred to generate and sustain higher future revenue levels. If the revenue does not materialize as expected, the Company's results of operations can be adversely impacted. Acquisitions of complementary businesses are a part of the Company's overall business strategy. There are several risks associated with this strategy including integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, retention of key employees, integration of systems of internal controls, and integration of information systems. All of these factors can impair the Company's ability to forecast, to meet quarterly revenue and earnings targets, to meet various debt obligations used to finance 12 acquisitions and to effectively manage the business for long-term growth. There can be no assurance that these challenges will be effectively met. The Company has been able to recruit and retain necessary personnel to research and develop, market, sell and service products that satisfy customers' needs. There can be no assurance that the Company can continue to recruit and retain such personnel. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The Company is involved in various administrative matters and litigation. There can be no assurance that various litigation and administrative matters will not have a material adverse impact on the Company's consolidated financial position or results of operations. See "Part II-Item 1. Legal Proceedings" for further discussion. Due to the factors above, as well as other market factors outside the Company's control, the Company's future earnings and stock price may be subject to significant volatility. Past financial performance should not be considered a reliable indication of future performance. The investment community should use caution in using historical trends to estimate future results or trends. In addition, if future results vary significantly from expectations of analysts, the Company's stock price could be adversely impacted. Item 3. Quantitative And Qualitative Disclosures About Market Risk (ALL NUMERICAL REFERENCES IN THOUSANDS, EXCEPT FOR RATES AND PERCENTAGES) INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company does not use derivative financial instruments for speculative or trading purposes. The Company places its investments in instruments that meet high credit quality standards, as specified in the Company's investment policy. The policy also limits the amount of credit exposure to any one issuer and type of instrument. The Company does not expect any material loss with respect to its investment portfolio. The table below presents the carrying value and related weighted-average interest rates for the Company's investment portfolio. The carrying value approximates fair value at March 31, 2000. In accordance with the Company's investment policy all investments mature in twelve months or less.
Carrying Average Principal (notional) amounts in U.S. dollars Amount Interest Rate - --------------------------------------------------------------------------------------------------------------------- Cash equivalents - fixed rate $ 47,679 4.88% Short-term investments - fixed rate 25,597 5.16% ----------------- ------------- Total interest bearing instruments $ 73,276 4.97% ================= ============= - ---------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY RISK The Company enters into foreign exchange options for highly anticipated sales transactions between its foreign subsidiaries. These instruments provide the Company the right to sell foreign currencies to third parties at future dates with fixed exchange rates. The premium on such instruments is immaterial and is amortized over the life of the contracts to other income (expense). The Company currently has foreign currency options outstanding to sell Japanese Yen over the next 9 months with contract values totaling approximately $22,087 at average contract 13 exchange rates of approximately JPY 108.66. At March 31, 2000 the difference between the recorded value and the fair value of the Company's foreign exchange position related to these option contracts was approximately zero. The Company entered into a forward contract to stabilize the currency effects on a portion of the Company's net investment in its Japanese subsidiary. This contract to sell Yen 2.65 billion will guarantee the Company $25,130 at the contract's expiration. Any differences between the contracted currency rate and the currency rate at each balance sheet date will impact the foreign currency translation adjustment component of the stockholders' equity section of the consolidated balance sheet. The result is a partial offset of the effect of Japanese currency changes on stockholders' equity during the contract term. This forward contract should not impact current or future consolidated statements of operations. At March 31, 2000, the difference between the recorded value and the fair value of the Company's foreign exchange position related to this contract was approximately zero. The Company also enters into forward foreign exchange contracts as a hedge against foreign currency sales commitments and intercompany balances. Remeasurement gains and losses on forward contracts are deferred and recognized when the sale occurs. All subsequent remeasurement gains and losses are recognized as they occur to offset remeasurement gains and losses recognized on the related foreign currency accounts receivable balances. These contracts generally have maturities, which do not exceed twelve months. At March 31, 2000, the difference between the recorded value and the fair value of the Company's foreign exchange position related to these contracts was approximately zero. The Company does not anticipate non-performance by the counter-parties to these contracts. Looking forward, the Company does not expect any material adverse effect on its consolidated financial position, results of operations, or cash flows resulting from the use of these instruments. There can be no assurance that these strategies will be effective or that transaction losses can be minimized or forecasted accurately. The following table provides information about the Company's foreign exchange forward contracts at March 31, 2000. Due to the short-term nature of these contracts, the contract rate approximates the weighted-average contractual foreign currency exchange rate and the amount in U.S. dollars approximates the fair value of the contract at March 31, 2000. These forward contracts mature in approximately thirty days. The following table presents short-term forward contracts to sell and buy foreign currencies in U.S. dollars related to customer receivables and intercompany balances:
Short-term forward contracts Amount Contract Rate - --------------------------------------------------------------------------------------------------------------------- Japanese yen $ 32,924 $ 105.48 French franc 31,391 6.34 Euro 5,817 1.02 Swedish krona 4,562 8.65 British pound sterling 3,292 1.57 Other 2,685 - - ---------------------------------------------------------------------------------------------------------------------
The unrealized gain (loss) on the outstanding forward contracts at March 31, 2000, was not material to the Company's consolidated financial statements. The realized gain (loss) on these contracts as they matured was not material to the Company's consolidated financial position, results of operations, or cash flows for the periods presented. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings During 1995, the Company filed suit in U.S. Federal District Court in Portland, Oregon, against Quickturn Design Systems, Inc. (Quickturn) for a declaratory judgment of non-infringement, invalidity and unenforceability of three of Quickturn's patents. This action related to the SimExpress products of Meta Systems SRL (Meta), a French company acquired by the Company in 1996. Quickturn filed a counterclaim against the Company alleging infringement of six Quickturn patents, including the three patents subject to the declaratory judgment action. The counterclaim sought a permanent injunction prohibiting sales of the Company's SimExpress products in the U.S., compensatory and punitive damages and attorneys' fees. In June 1999, the Company and Quickturn settled this litigation. The Company agreed that five Quickturn patents are valid and enforceable, and were infringed by the Company's sale in the U.S. of its SimExpress product from 1995-1997. Mentor Graphics also paid Cadence Design Systems, Quickturn's parent company, $3 million in damages for infringement, with each side to bear its own fees and costs. The court directed that the Company's payment and its consent to the validity and infringement of the Quickturn patents may not be used as evidence or for any other purpose in litigation outside the U.S., and that the settlement does not address in any way the issue of whether the Company's Celaro product infringes any patent issued in the U.S. or other countries. Quickturn filed an administrative complaint with the U.S. International Trade Commission (ITC) in 1996 seeking to prohibit the distribution of SimExpress products in the U.S. In December 1997, the ITC issued a Cease and Desist Order prohibiting the Company from importing certain hardware emulation products or components and from providing repair or maintenance services to its existing U.S. customers. That order took effect in 1998. In October 1997, Quickturn filed an action against the Company's German subsidiary in a German District Court alleging infringement by SimExpress of a European patent. The German court ruled in April 1999 that the Company's German subsidiary's sales of SimExpress violated a European patent owned by Quickturn and awarded unspecified damages. The Company's German subsidiary no longer offers the SimExpress product in Germany. Although the Company is appealing the ruling and contesting the validity of the Quickturn patent, the Company can give no assurance as to the outcome of such proceedings. In October 1998, Quickturn filed an action against Meta and the Company in France alleging infringement by SimExpress and Celaro of a European patent. There have been no rulings by the French court regarding the merits of this case to date. In February 1998, Meta filed a patent infringement action against Quickturn in the U.S. District Court for the Northern District of California in San Francisco, California. The complaint, which is based on a patent licensed to the Company and Meta and which Meta has a right to enforce, seeks damages for infringement as a result of Quickturn's manufacture and sale of certain emulation equipment. Meta, which has been joined in the suit by Aptix Corporation of San Jose, California, will ultimately seek an injunction prohibiting further infringement by Quickturn. A trial in U.S. District Court is expected to occur in October 2000. In July 1999, the Company filed suit in U.S. District Court for the District of Delaware against Quickturn alleging infringement of two Mentor Graphics owned patents by Quickturn's Mercury product ("Mercury lawsuit"). That lawsuit has been transferred to the Northern District of California. The Company is seeking a permanent injunction prohibiting sales of Quickturn's Mercury products in the U.S., along with damages and attorney's fees. In March 2000, the Company filed a misappropriation of trade secret case in U.S. District Court in San Jose. The case has been consolidated with the Mercury lawsuit for purposes of discovery and scheduling. In addition to the above litigation, from time to time the Company is involved in various disputes and litigation matters that arise from the ordinary course of business. These include disputes and lawsuits relating to intellectual property rights, licensing, contracts, and employee relation matters. The Company believes that final resolution of such disputes and lawsuits will not have a material adverse effect on the Company's financial position or results of operations. 15 Item 6. Exhibits and Reports on Form 8-K. On January 14, 2000, the Company filed a Current Report on Form 8-K/A Amendment No. 1 to amend its previously filed Form 8-K relating to the acquisition on October 31, 1999 of substantially all of the assets of VeriBest, Inc., a subsidiary of Intergraph Corporation. The amendment includes under Item 7 the consolidated financial statements of VeriBest as of and for the periods ended September 30, 1999 and December 31, 1998, and pro forma financial information as of September 30, 1999 and for the periods ended September 30, 1999 and December 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 13, 2000. MENTOR GRAPHICS CORPORATION (Registrant) /s/ Gregory K. Hinckley --------------------------- Gregory K. Hinckley Executive Vice President and Chief Operating Officer/Chief Financial Officer 16 EX-27 2 EX-27
5 1,000 3-MOS DEC-31-2000 MAR-31-2000 75,542 25,597 126,693 0 0 264,090 79,573 0 413,856 147,691 0 0 0 256,659 6,645 413,856 128,134 128,134 26,773 26,773 87,712 0 521 13,649 2,944 10,437 0 0 0 10,437 .16 .16
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