SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): OCTOBER 31, 1999
----------------
MENTOR GRAPHICS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
OREGON 0-13442 93-0786033
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8005 S.W. BOECKMAN ROAD,
WILSONVILLE, OR 97070-7777
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 685-7000
--------------
NO CHANGE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets.
------------------------------------
On October 31, 1999, Mentor Graphics Corporation, an Oregon corporation
("Mentor Graphics") completed the acquisition of substantially all of the assets
of VeriBest, Inc. ("VeriBest"), a Delaware corporation and subsidiary of
Intergraph Corporation ("Intergraph"). Mentor Graphics intends to continue to
offer and support VeriBest's electronic design automation product lines, and to
continue to use VeriBest's product development resources.
The purchase price for VeriBest's assets consisted of $9,130,000 in cash
and a warrant to purchase 500,000 shares of Mentor Graphics common stock at $15
per share exercisable from October 31, 2001 until October 31, 2002. Mentor
Graphics also assumed deferred maintenance and other liabilities.
The cash paid at closing was funded from Mentor Graphics' available cash
balances. The amount of consideration paid in connection with the transaction
was determined in arms-length negotiations between Mentor Graphics and
Intergraph.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
Audited Consolidated Balance Sheets of VeriBest as of September 30,
1999 and December 31, 1998, and related audited Consolidated Statements
of Operations, Stockholders' Equity (Deficit) and Cash Flows for the
nine months ended September 30, 1999 and each of the years in the
two-year period ended December 31, 1998. Included as pages F-1 to F-16
of this Form 8-K/A Amendment No. 1.
(b) Pro Forma Financial Information.
Pro forma Balance Sheet as of September 30, 1999 and pro forma
Statements of Operations for the year ended December 31, 1998 and the
nine-month period ended September 30, 1999. Included as pages F-17 to
F-22 of this Form 8-K/A Amendment No. 1.
(c) Exhibits.
2.1 Asset Purchase Agreement dated October 31, 1999 among Registrant
and VeriBest, Inc. (Included with original Form 8-K filed by
Registrant on November 15, 1999.)
23.1 Consent of KPMG LLP.
2
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 hereunto duly authorized.
MENTOR GRAPHICS CORPORATION
(Registrant)
Date: January 14, 2000 By: ANTHONY B. ADRIAN
---------------------------------------
Anthony B. Adrian
Vice President and Corporate Controller
3
VERIBEST, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
Index
Page
Index F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
VeriBest, Inc.:
We have audited the accompanying consolidated balance sheets of VeriBest, Inc.
and subsidiaries as of September 30, 1999 and December 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the nine months ended September 30, 1999 and each of the years in the
two-year period ended December 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VeriBest, Inc. and
subsidiaries as of September 30, 1999 and December 31, 1998, and the results of
their operations and their cash flows for the nine months ended September 30,
1999 and each of the years in the two-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
December 22, 1999
F-2
VERIBEST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
In thousands
September 30, December 31,
Assets 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 2,227 $ 1,951
Trade accounts receivable, net of allowance for doubtful
accounts of $178 at September 30, 1999 and
$434 at December 31, 1998 6,016 7,047
Inventories -- 324
Other receivables 496 990
Prepaid expenses and other 463 488
------------ ------------
Total current assets 9,202 10,800
Property, plant and equipment, net 736 890
Capitalized software development costs, net 3,037 3,692
Other assets, net 338 238
------------ ------------
Total assets $ 13,313 $ 15,620
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Due to parent $ 443 $ 18,122
Accounts payable 396 833
Value added taxes payable 437 441
Accrued compensation and commissions 2,966 3,089
Accrued liabilities 1,608 1,857
Deferred revenue 4,962 5,317
Other -- 27
------------ ------------
Total liabilities 10,812 29,686
------------ ------------
Stockholders' equity (deficit):
Common stock, .10 par value, authorized 25,000 shares;
21,003 and 21,000 issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 2,100 2,100
Additional paid-in capital 52,295 29,100
Accumulated deficit (52,444) (45,374)
Accumulated other comprehensive income 550 108
------------ ------------
Total stockholders' equity (deficit) 2,501 (14,066)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 13,313 $ 15,620
============ ============
See accompanying notes to consolidated financial statements.
F-3
VERIBEST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
In thousands, except per share data
Nine months Years ended
ended December 31,
September 30, -----------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
Software licenses $ 10,811 $ 13,337 $ 16,379
Service and support 11,275 14,906 12,911
------------ ------------ ------------
Total revenues 22,086 28,243 29,290
------------ ------------ ------------
Cost of revenues:
Software licenses 3,289 5,031 7,897
Service and support 5,658 8,728 7,979
------------ ------------ ------------
Total cost of revenues 8,947 13,759 15,876
------------ ------------ ------------
Gross margin 13,139 14,484 13,414
------------ ------------ ------------
Operating expenses:
Research and development 5,197 6,968 7,775
Marketing and selling 10,628 16,941 18,792
General and administration 2,554 3,008 3,228
Special charges 871 500 --
------------ ------------ ------------
Total operating expenses 19,250 27,417 29,795
------------ ------------ ------------
Operating loss (6,111) (12,933) (16,381)
Interest expense (670) (453) (1,488)
Foreign currency transaction gains (losses) (423) 356 593
Other income (expense), net 134 (88) (662)
------------ ------------ ------------
Net loss $ (7,070) $ (13,118) $ (17,938)
============ ============ ============
Net loss per share -
basic and diluted (0.34) (0.62) (0.85)
============ ============ ============
Weighted average number of shares outstanding -
basic and diluted 21,003 21,000 21,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
VERIBEST, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the nine months ended September 30, 1999
and the years ended December 31, 1998 and 1997
In thousands
Accumulated
Common stock Additional other Total
------------------- paid-in comprehensive Accumulated Comprehensive stockholders'
Shares Amount capital income (loss) deficit loss equity (deficit)
-------- --------- ---------- ------------- ----------- ------------- ----------------
Balance at December 31, 1996 21,000 $ 2,100 $ 7,558 $ 207 $ (14,318) $ $ (4,453)
Net loss -- -- -- -- (17,938) (17,938) (17,938)
Foreign currency translation
adjustment -- -- -- 149 -- 149 149
-------- --------- ---------- ------------- ----------- ------------- ----------------
Comprehensive loss $ (17,789)
=============
Balance at December 31, 1997 21,000 2,100 7,558 356 (32,256) (22,242)
Debt abatement -- -- 21,542 -- -- 21,542
Net loss -- -- -- -- (13,118) $ (13,118) (13,118)
Foreign currency translation
adjustment -- -- -- (248) -- (248) (248)
-------- --------- ---------- ------------- ----------- ------------- ----------------
Comprehensive loss $ (13,366)
=============
Balance at December 31, 1998 21,000 2,100 29,100 108 (45,374) (14,066)
Debt abatement -- -- 23,194 -- -- 23,194
Option exercise 3 -- 1 -- -- 1
Net loss -- -- -- -- (7,070) $ (7,070) (7,070)
Foreign currency translation
adjustment -- -- -- 442 -- 442 442
-------- --------- ---------- ------------- ----------- ------------- ----------------
Comprehensive loss $ (6,628)
=============
Balance at September 30, 1999 21,003 $ 2,100 $ 52,295 $ 550 $ (52,444) $ 2,501
======== ========= ========== ============= =========== ================
See accompanying notes to consolidated financial statements.
F-5
VERIBEST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
In thousands
Nine months Years ended
ended December 31,
September 30, -----------------------------
1999 1998 1997
------------ ------------ ------------
Operating cash flows:
Net loss $ (7,070) $ (13,118) $ (17,938)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,577 3,647 4,909
Loss (gain) on sale of assets 149 (42) 307
Provision for doubtful accounts (256) (124) 320
Changes in operating assets and liabilities:
Trade accounts receivable 1,287 (12) 555
Other receivables 494 51 970
Intercompany receivable (payables) (17,679) (10,246) 12,098
Prepaid expenses and other assets (75) 605 (247)
Accounts payable (437) (87) (359)
Accrued liabilities, compensation and commissions (372) 455 (12)
Deferred revenue (355) 1,225 2,340
Other assets (liabilities) 293 (326) (116)
------------ ------------ ------------
Net cash provided (used) by operating
activities (21,444) (17,972) 2,827
------------ ------------ ------------
Investing cash flows:
Purchases of property, plant and equipment (369) (480) (819)
Capitalized software development costs (1,548) (3,495) (2,248)
------------ ------------ ------------
Net cash provided (used by) investing
activities (1,917) (3,975) (3,067)
------------ ------------ ------------
Financing cash flows:
Proceeds from issuance of common stock 1 -- --
Debt abatement 23,194 21,542 --
------------ ------------ ------------
Net cash provided by financing activities 23,195 21,542 --
------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents 442 (248) 149
------------ ------------ ------------
Net change in cash and cash equivalents 276 (653) (91)
Cash and cash equivalents at beginning of period 1,951 2,604 2,695
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,227 $ 1,951 $ 2,604
============ ============ ============
Supplementary information -
cash paid for - interest expense $ 36 $ 19 $ 35
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
(1) Summary of Significant Accounting Policies
(a) Nature of Business
VeriBest, Inc. (the Company) a subsidiary of Intergraph Corporation,
is a worldwide supplier of Electronic Design Automation (EDA)
solutions that enhance customer's ability to design electronic systems
and subsystems. The Company's system design solutions include tools
for design entry, analog, PCB and digital design as well as consulting
services. The Company markets its products and services primarily to
customers in the communications, computer and consumer electronics
industries. The Company primarily licenses its products through its
direct sales force in the United States, Europe and Japan. The Company
is headquartered in Boulder, Colorado.
On October 31, 1999, Intergraph Corporation sold substantially all
assets and liabilities of the Company to Mentor Graphics Corporation
for approximately $9,100 in cash and a warrant to purchase 500 shares
of Mentor Graphics common stock at $15 per share exercisable from
October 31, 2001 until October 31, 2002.
As shown in the accompanying consolidated financial statements, the
Company incurred net losses and had stockholders' equity at September
30, 1999 after abatement of intercompany debt in 1999 of $23,194, and
stockholders' deficit at December 31, 1998 and 1997. The Company is
economically dependent upon continued financial support from Mentor
Graphics to fund operating losses and working capital needs until such
time as profitable operations are attained.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its wholly-owned subsidiaries: VeriBest
International, Ltd., located in the United Kingdom, VeriBest, S.A.
located in France, VeriBest GmbH located in Germany and VeriBest K.K.
located in Japan. All significant intercompany accounts and
transactions are eliminated in consolidation.
(c) Foreign Currency
Translation Local currencies are the functional currencies for the
Company's foreign subsidiaries. Assets and liabilities of foreign
operations are translated to U.S. dollars at current rates of
exchange, and revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency translation are
included as a separate component of stockholders' equity. Foreign
currency transaction gains and losses are included as a component of
other income and expense.
F-7 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
(d) Financial Instruments
The Company places its cash equivalents and short-term investments
with major banks and financial institutions. Concentrations of credit
risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base, and their
dispersion across different businesses and geographic areas. The
carrying amounts of cash equivalents, short-term investments, trade
receivables, other receivables, accounts payable and accrued expenses
approximate fair value because of the short-term nature of these
instruments. The Company does not believe it is exposed to any
significant credit risk or market risk on its financial instruments.
(e) Cash and Cash Equivalents
Cash and cash equivalents represent cash and money market accounts.
The Company classifies highly liquid investments purchased with an
original maturity of three months or less as cash equivalents.
(f) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for
additions to property, plant and equipment are capitalized. The cost
of repairs and maintenance is expensed as incurred. Depreciation of
computer equipment, equipment and furniture and fixtures is computed
principally on a straight-line basis over the estimated useful lives
of the assets, generally three to five years. Leasehold improvements
are amortized on a straight-line basis over the lesser of the term of
the lease or estimated useful lives of the improvements.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, management reviews long-lived
assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of
the operation to which the assets relate, to the carrying amount
including associated intangible assets of such operation. If the
operation is determined to be unable to recover the carrying amount of
its assets, then intangible assets are written down first, followed by
the other long-lived assets of the operation, to fair value. Fair
value is determined based on discounted cash flows or appraised
values, depending upon the nature of the assets.
(g) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts
and tax balances of existing assets and liabilities. Deferred tax
assets and liabilities
F-8 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(h) Revenue Recognition
Revenue from software licenses is recognized at the time of shipment.
Maintenance revenue is deferred and recognized ratably over the
contract term. Training and consulting revenue is recognized at
contract milestones or as services are rendered.
In 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. In March 1998, the Financial Accounting Standards Board
(FASB) approved SOP 98-4, Deferral of the Effective Date of a
Provision of 97-2, Software Revenue Recognition. SOP 98-4 defers for
one year, the application of several paragraphs and examples in SOP
97-2 which limits the definition of vendor specific objective evidence
(VSOE) of the fair value of various elements in a multiple element
arrangement. The provisions of SOP's 97-2 and 98-4 have been applied
to transactions entered into beginning January 1, 1998. Prior to 1998,
the Company's revenue policy was in accordance with the preceding
authoritative guidance provided by SOP 91-1, Software Revenue
Recognition.
(i) Software Development Costs
The Company accounts for software development costs in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Software development costs are
capitalized beginning when a product's technological feasibility has
been established by completion of a working model of the product and
ending when a product is available for general release to customers.
The Company continues to have completed working models of new products
each year. The costs incurred between the completion of the working
model and general release to customers is capitalized. There was
approximately $1,548, $3,495 and $2,248 capitalized for the nine month
period ended September 30, 1999 and for the years ended December 31,
1998 and 1997, respectively.
Amortization of capitalized software development costs is calculated
as the greater of the ratio that the current product revenues bear to
estimated future revenues or the straight-line method over the
expected product life cycle of approximately two years. Amortization
expense is included in system and software cost of revenues in the
Consolidated Statements of Operations and was $2,203, $2,886 and
$3,076 for the nine months ended September 30, 1999 and the years
ended December 31, 1998 and 1997, respectively.
F-9 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
(j) Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share which
provides that "basic net income (loss) per share" and "diluted net
income (loss) per share" for all prior periods presented are to be
computed using the weighted average number of common shares
outstanding during each period, with diluted net income (loss) per
share including the effect of potentially dilutive common shares.
Potential common stock related to stock options are anti-dilutive in a
net loss year and, therefore, are not included in the calculation of
diluted net loss per share for the nine month period ended September
30, 1999 and the years ended December 31, 1998 and 1997.
(k) Comprehensive Loss
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive loss consists of net loss
and foreign currency translation adjustment and is presented in the
consolidated statement of stockholders' equity. The statement requires
only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of
operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
(l) Use of Estimates
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(2) Income Taxes
The provision for income taxes is as follows:
Nine month
Period ended Year ended Year ended
September 30, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Deferred:
Federal $ -- $ -- $ --
State -- -- --
------------ ------------ ------------
Total deferred -- -- --
------------ ------------ ------------
Total $ -- $ -- $ --
============ ============ ============
F10 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
The effective tax expense differs from the statutory federal tax expense as
follows:
Nine month
Period ended Year ended Year ended
September 30, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Federal tax $ (2,533) $ (3,497) $ (5,443)
State tax, net of federal
benefit 25 (336) (524)
Change in valuation
allowance 2,484 3,973 6,199
Other, net 24 (140) (232)
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
The tax effects of temporary differences and carryforwards which gave rise
to significant portions of deferred tax assets were as follows:
Nine month
Period ended Year ended Year ended
September 30, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Deferred tax assets:
Reserves and allowances $ 128 $ 167 $ 164
Net operating loss
carryforwards 12,315 9,837 5,763
Capitalized software
development 157 71 279
Other, net 96 137 33
------------ ------------ ------------
Total gross deferred
tax assets 12,696 10,212 6,239
Less valuation
allowance (12,696) (10,212) (6,239)
------------ ------------ ------------
Net deferred tax
asset $ -- $ -- $ --
============ ============ ============
The Company has established a valuation allowance for certain deferred tax
assets, including those for net operating loss and tax credit
carryforwards. Such a valuation allowance is recorded when it is more
likely than not that some portion of the deferred tax assets will not be
realized.
F-11 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
As of September 30, 1999, the Company, for federal income tax purposes, has
net operating loss carryforwards of approximately $33,543. If not used by
the Company to reduce income taxes payable in future periods, net operating
loss carryforwards will expire between 2012 through 2019.
(3) Property, Plant and Equipment
A summary of property, plant and equipment follows:
September 30, December 31,
1999 1998
------------ ------------
Computer equipment $ 11,329 $ 11,312
Equipment, furniture and fixtures 667 674
Leasehold improvements 513 513
------------ -----------
12,509 12,499
Less accumulated depreciation (11,773) (11,609)
------------ -----------
Property, plant and equipment, net $ 736 $ 890
============ ===========
(4) Stock Option Plan
The Company has three stock option plans for employees and consultants and
up to 3,600 shares of the Company's common stock are authorized for
issuance under these plans. Participants and the number of options granted
will be determined at the discretion of the Board. All options granted will
vest over a four-year period with the first eligible exercise date, one
year from initial grant, and expire within 10 years from the date of grant.
SFAS No. 123 Accounting for Stock-Based Compensation defines a fair value
based method of accounting for an employee stock option and similar equity
instrument. As is permitted under SFAS No. 123, the Company has elected to
continue to account for its stock-based compensation plans under APB
Opinion No. 25. The Company has computed, for pro forma disclosure
purposes, the value of all options granted during the period ended
September 30, 1999 and the years ended December 31, 1998 and 1997 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions for grants:
Nine months Years ended
ended December 31,
September 30, -----------------------------
1999 1998 1997
------------ ------------ ------------
Risk-free interest rate 5.5% 5.5% 6.25%
Expected dividend yield 0% 0% 0%
Expected life (in years) 5.5 5.5 5.5
Expected volatility 0% 0% 0%
F-12 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
Using the Black-Scholes methodology, the total value of options granted
during the nine months ended September 30, 1999 and the years ended
December 31, 1998 and 1997 was $66, $46 and $145, respectively, which would
be amortized on a pro forma basis over the vesting period of the options.
The weighted average fair value of options granted during the nine months
ended September 30, 1999 and the years ended December 31, 1998 and 1997 was
.50 per share. If the Company had accounted for its stock-based
compensation plans in accordance with SFAS No. 123, the Company's net loss
and net loss per share would approximate the pro forma disclosures below:
Nine months Years ended
ended December 31,
September 30, -----------------------------
1999 1998 1997
------------ ------------ ------------
Net loss $ (7,136) $ (13,164) $ (18,083)
Net loss per share, basic and
diluted (0.34) (0.63) (0.86)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior
to January 1, 1995, and additional awards are anticipated in future years.
The following table summarizes information about options outstanding and
exercisable at September 30, 1999:
Outstanding Exercisable
----------------------------------- --------------------
Range of Remaining Weighted Weighted
exercisable Number of contractual average Number of average
prices shares life (years) price shares price
------------- --------- ------------ -------- --------- --------
$ 0.50 - 1.00 3,258 3.91 $ .49 1,898 $ .50
F-13 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
Options under the plans generally become exercisable over a four-year
period from the date of grant at prices generally not less than the fair
market value at the date of grant. The excess of the fair market value of
the shares at the date of grant over the option price, if any, is charged
to operations ratably over the vesting period. At September 30, 1999, 342
shares were reserved for issuance and were available for future grant.
Stock options outstanding, the weighted average exercise price and
transactions involving the stock option plans are summarized as follows:
Shares Price
-------------- --------------
Balance at December 31, 1996 2,833 $ .50
Granted 375 .50
Canceled (113) .50
-------------- --------------
Balance at December 31, 1997 3,095 .50
Granted 492 .50
Canceled (462) .50
-------------- --------------
Balance at December 31, 1998 3,125 .50
Granted 361 1.00
Exercised (3) .50
Canceled (225) .50
-------------- --------------
Balance at September 30, 1999 3,258 $ .49
============== ==============
(5) Leases
The Company has non-cancelable operating leases for its field offices and
facilities through 2004. In addition, the Company leases automobiles under
non-cancelable operating leases which expire over the next three years.
Future minimum lease payments under all non-cancelable operating leases are
as follows:
Year ended
2000 $ 518
2001 451
2002 404
2003 332
2004 261
----------
$ 1,966
==========
Rent expense under operating leases was $651, $755, and $900 for the
nine-month period ended September 30, 1999, and for the years ended
December 31, 1998 and 1997, respectively.
F-14 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
(6) Intercompany Borrowings
The balance in intercompany borrowings consists of various intercompany
advances. These borrowings accrue interest at 9.996%, 9.915% and 10.440%
for the nine-month period ended September 30, 1999, and for the years ended
December 31, 1998 and 1997, respectively. These borrowings are due on
demand. For the nine months ended September 30, 1999 and the year ended
December 31, 1998, the parent company abated intercompany borrowings,
including interest, of approximately $23,194 and $21,542, respectively. The
abatements resulted in a reclassification of these balances from
intercompany debt to stockholders' equity.
(7) Segment Reporting
The Company operates exclusively in the EDA industry. The Company markets
its products primarily to customers in the communications, computer and
consumer electronics industries. The Company licenses its products
primarily through its direct sales force in the United States, Europe and
Japan. The Company's reportable segments are based on geographic area. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
F-15 (Continued)
VERIBEST, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1999 and December 31, 1998 and 1997
All numerical references in thousands,
except percentages and per share data
All intercompany revenues and expenses are eliminated in computing
revenues and operating income (loss). Reportable segment information is
as follows:
Nine months Years ended
ended December 31,
September 30, -----------------------------
1999 1998 1997
------------ ------------ ------------
Revenues:
United States $ 12,516 $ 16,869 $ 16,592
United Kingdom 4,841 5,757 6,459
Europe (excluding U.K.) 3,134 3,965 3,553
Japan 1,595 1,652 2,686
------------ ------------ ------------
Total $ 22,086 $ 28,243 $ 29,290
============ ============ ============
Operating loss:
United States $ (6,568) $ (10,586) $ (13,875)
United Kingdom 629 (1,028) (721)
Europe (excluding U.K.) 139 (750) (1,536)
Japan (311) (569) (249)
------------ ------------ ------------
Total $ (6,111) $ (12,933) $ (16,381)
============ ============ ============
Depreciation and amortization:
United States $ 2,525 $ 3,560 $ 4,769
United Kingdom 18 29 49
Europe (excluding U.K.) 19 33 51
Japan 15 25 40
------------ ------------ ------------
Total $ 2,577 $ 3,647 $ 4,909
============ ============ ============
Capital expenditures:
United States $ 345 $ 382 $ 736
United Kingdom 8 48 78
Europe (excluding U.K.) 15 50 5
Japan 1 -- --
------------ ------------ ------------
Total $ 369 $ 480 $ 819
============ ============ ============
Identifiable assets:
United States $ 7,665 $ 8,378 $ 8,360
United Kingdom 2,421 3,547 4,175
Europe (excluding U.K.) 2,090 2,568 2,347
Japan 1,137 1,127 1,392
------------ ------------ ------------
Total $ 13,313 $ 15,620 $ 16,274
============ ============ ============
F-16
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma combined condensed financial statements
give effect to a business combination between Mentor Graphics Corporation and
VeriBest, Inc. accounted for as a purchase. The Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1998 and the nine
months ended September 30, 1999 present unaudited pro forma operating results of
the Company as if the purchase had occurred as of January 1, 1998. The Pro Forma
Combined Condensed Balance Sheet presents the unaudited pro forma financial
condition of the Company as if the purchase had occurred as of September 30,
1999.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the transaction had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position. The pro forma adjustments are based
upon available information and assumptions that Mentor Graphics Corporation
believes are reasonable under the circumstances.
These pro forma combined condensed financial statements should be read in
conjunction with the historical consolidated financial statements of (i) Mentor
Graphics Corporation included in Form 10-Q for the quarter ended September 30,
1999 and Form 10-K for the year ended December 31, 1998, and (ii) VeriBest, Inc.
included elsewhere herein.
F-17
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Mentor Pro Forma
Graphics VeriBest Adjustments Pro Forma
----------- ----------- ----------- -----------
Net Revenue . . . . . . . . . . . . . . . . . . . $ 490,393 $ 28,243 $ - $ 518,636
----------- ----------- ----------- -----------
Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . 123,497 13,759 (3,087) (a) 134,169
Research & development . . . . . . . . . . . 117,853 6,968 - 124,821
Selling, general &
administrative. . . . . . . . . . . . . . 214,859 19,949 2,618 (a) 237,426
Special charges. . . . . . . . . . . . . . . 20,942 - - 20,942
Merger and acquisition related
charges . . . . . . . . . . . . . . . . . 8,500 500 3,094 (b) 12,094
----------- ----------- ----------- -----------
Total operating expenses. . . . . . 485,651 41,176 2,625 529,452
----------- ----------- ----------- -----------
Income (loss) from operations . . . . . . . . . . 4,742 (12,933) (2,625) (10,816)
Other income (expense), net . . . . . . . . . . . (4,721) (185) - (4,906)
----------- ----------- ----------- -----------
Income (loss) before income taxes . . . . . . . . 21 (13,118) (2,625) (15,722)
Provision for income taxes. . . . . . . . . . . . 540 - - 540
----------- ----------- ----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . $ (519) $ (13,118) $ (2,625) $ (16,262)
=========== =========== =========== ===========
Net loss per share:
Basic $ (0.25)
===========
Diluted $ (0.25)
===========
Shares used in per share calculations:
Basic 65,165
===========
Diluted 65,165
===========
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
F-18
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Mentor Pro Forma
Graphics VeriBest Adjustments Pro Forma
----------- ----------- ----------- -----------
Net Revenue . . . . . . . . . . . . . . . . . . . $ 356,161 $ 22,086 $ - $ 378,247
----------- ----------- ----------- -----------
Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . 86,679 8,947 (2,353) (a) 93,273
Research & development . . . . . . . . . . . 86,384 5,197 - 91,581
Selling, general &
administrative. . . . . . . . . . . . . . 155,763 13,182 2,051 (a) 170,996
Special charges. . . . . . . . . . . . . . . 21,831 871 - 22,702
----------- ----------- ----------- -----------
Total operating expenses. . . . . . 350,657 28,197 (302) 378,552
----------- ----------- ----------- -----------
Income (loss) from operations . . . . . . . . . . 5,504 (6,111) 302 (305)
Other income (expense), net . . . . . . . . . . . (9,120) (959) - (10,079)
----------- ----------- ----------- -----------
Income (loss) before income taxes . . . . . . . . (3,616) (7,070) 302 (10,384)
Provision (benefit) for income taxes. . . . . . . (795) - - (795)
----------- ----------- ----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . $ (2,821) $ (7,070) $ 302 $ (9,589)
=========== =========== =========== ===========
Net loss per share:
Basic $ (0.15)
===========
Diluted $ (0.15)
===========
Shares used in per share calculations:
Basic 66,042
===========
Diluted 66,042
===========
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
F-19
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
Mentor Pro Forma
Graphics VeriBest Adjustments Pro Forma
----------- ----------- ----------- -----------
Assets
Current Assets:
Cash and cash equivalents. . . . . . . . . . $ 108,657 $ 2,227 $ (2,227) (c) $ 99,127
(9,130) (d)
(400) (d)
Short-term investments . . . . . . . . . . . 2,000 - - 2,000
Trade accounts receivable. . . . . . . . . . 121,655 6,016 (6,016) (c) 121,655
Prepaid expenses and other . . . . . . . . . 33,661 959 (496) (c) 34,124
----------- ----------- ----------- -----------
Total current assets . . . . . . . . . 265,973 9,202 (18,269) 256,906
Property, plant and equipment, net. . . . . . . . 84,858 736 85,594
Goodwill. . . . . . . . . . . . . . . . . . . . . - - 15,995 (d) 15,995
Other assets. . . . . . . . . . . . . . . . . . . 57,618 3,375 (3,037) (c) 57,956
----------- ----------- ----------- -----------
$ 408,449 $ 13,313 $ (5,311) $ 416,451
=========== =========== =========== ===========
Liabilities & Stockholders' Equity
Current Liabilities:
Short-term borrowings. . . . . . . . . . . . $ - $ 443 $ (443) (c) $ -
Accounts payable . . . . . . . . . . . . . . 7,978 396 - 8,374
Income taxes payable . . . . . . . . . . . . 17,573 437 - 18,010
Accrued and other liabilities. . . . . . . . 55,608 4,574 - 60,182
Deferred revenue . . . . . . . . . . . . . . 46,754 4,962 - 51,716
----------- ----------- ----------- -----------
Total current liabilities. . . . . . . 127,913 10,812 (443) 138,282
Other long-term deferrals . . . . . . . . . . . . 1,245 - - 1,245
Minority interest . . . . . . . . . . . . . . . . 1,209 - - 1,209
----------- ----------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . 130,367 10,812 (443) 140,736
----------- ----------- ----------- -----------
Stockholders' Equity
Common stock . . . . . . . . . . . . . . . . 285,927 54,395 (54,395) (c) 286,654
727 (d)
Accumulated deficit. . . . . . . . . . . . . (25,067) (52,444) 52,444 (c) (28,161)
(3,094) (d)
Accumulated other comprehensive -
income. . . . . . . . . . . . . . . . . . 17,222 550 (550) (c) 17,222
----------- ----------- ----------- -----------
Total stockholders' equity . . . . . . 278,082 2,501 (4,868) 275,715
----------- ----------- ----------- -----------
$ 408,449 $ 13,313 $ (5,311) $ 416,451
=========== =========== =========== ===========
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
F-20
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT
(UNAUDITED)
(All numerical references in thousands)
The total estimated purchase price of the transaction has been allocated on
a preliminary basis to assets and liabilities based on management's estimate of
their fair values. The excess of the purchase price over the fair value of the
net assets acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired and
the liabilities assumed. The impact of such changes could be material.
(a) To reflect the following depreciation and amortization adjustments:
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
----------- ------------
Elimination of historical VeriBest depreciation
and amortization.................................... $ (3,704) $ (2,728)
New amortization expense related to application
of purchase method of accounting related to
patents and goodwill................................ 2,859 2,144
New depreciation expense related to application
of purchase method of accounting to
VeriBest plant and equipment........................ 376 282
----------- -------------
Net adjustment.................................. $ (469) $ (302)
=========== =============
Intangible assets consist of patents and goodwill, both of which will be
amortized over a five-year period. The acquired plant and equipment will be
depreciated on a straight-line basis over the estimated useful life of three
years.
(b) To record a charge for in-process research and development.
(c) Reflects the elimination of certain assets and liabilities of VeriBest
that were not purchased or assumed by Mentor Graphics.
(d) The total purchase price paid by Mentor Graphics is comprised of the
following:
Cash paid................................................ $ 9,130
Liabilities assumed...................................... 10,369
Value of warrant issued.................................. 350
Value of vested options granted.......................... 377
Acquisition costs incurred............................... 400
----------
Gross purchase price................................ 20,626
In-process research and development charge............... (3,094)
----------
Net purchase price.................................. $ 17,532
==========
Liabilities assumed included deferred revenue of $4,962.
F-21
The purchase price is allocated to the assets and liabilities of VeriBest
based on preliminary fair values as follows:
Assets acquired:
Prepaid expenses and other.......................... $ 801
Property, plant and equipment....................... 736
Goodwill............................................ 15,995
----------
17,532
Less liabilities assumed................................. (10,369)
----------
Net assets acquired............................. $ 7,163
==========
(e) Mentor Graphics expects to record charges to operations subsequent to
the purchase transaction to reflect the combination of the two companies. These
charges are estimated to be approximately $500 and will consist primarily of
severance costs related to the termination of certain employees. This charge is
not reflected in the pro forma combined condensed financial information.
F-22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Asset Purchase Agreement dated October 31, 1999 among Registrant
and VeriBest, Inc. (Included with original Form 8-K filed by
Registrant on November 15, 1999.)
The following schedules and exhibits to the Asset Purchase
Agreement have been omitted and will be provided to the Securities
and Exchange Commission upon request:
Schedule 2.5.1 Material Leases/Agreement Relating to Property
Schedule 2.5.2 Material Licenses Relating to Intellectual
Property
Schedule 2.5.3 Material Employment Agreements and Benefit
Plans
Schedule 2.5.4 Patents and other Intellectual Property
Schedule 2.5.5 Agreements Relating to Indebtedness
Schedule 2.5.6 Contracts with Payments over $50,000
Schedule 2.5.7 Litigation
Schedule 2.5.8 Material Consents
Schedule 2.10 Undisclosed Material Liabilities
Schedule 2.12 Material Adverse Changes
Exhibit 8.4 Patent License
Exhibit 9.5 Escrow Release Letter
23.1 Consent of KPMG LLP.