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): May 8, 2000
----------------------------
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, 97070-7777
WILSONVILLE, OR
- --------------------------------------------------------------------------------
(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 May 8, 2000, pursuant to the Plan and Agreement of Merger (the
"Merger Agreement") by and among Mentor Graphics Corporation, an Oregon
corporation ("Mentor Graphics"), Mentor Graphics Acquisition, Inc., a Delaware
corporation and wholly owned subsidiary of Mentor Graphics ("Sub"), and Escalade
Corp., a Delaware corporation ("Escalade"), dated as of April 27, 2000, Sub was
merged with and into Escalade (the "Merger"). As a result of the Merger,
Escalade has become a wholly owned subsidiary of Mentor Graphics.
At the time the Merger became effective on May 8, 2000, each
outstanding share of Preferred Stock of Escalade was converted into a right to
receive $0.0632894 per share in cash and each outstanding share of Common Stock
of Escalade was converted into a right to receive $0 per share. The aggregate
amount of cash payable by Mentor Graphics in connection with the Merger is
$3,500,000, a portion of which is being applied to certain of Escalade's
expenses of the transaction.
The cash payable in the Merger is being funded from Mentor Graphics'
available cash balances. The amount of consideration payable in connection with
the transaction was determined in arms-length negotiations between Mentor
Graphics and Escalade.
Escalade is a provider of Hardware Description Language (HDL) graphical
design tools for application specific integrated circuits (ASICs) and field
programmable gate arrays (FPGAs). Mentor Graphics will continue to support
Escalade's DesignBook HDL graphical design product, and customers will be
offered an upgrade path to Mentor's next-generation graphical design product.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Audited Consolidated Balance Sheets of Escalade as of December
31, 1998 and 1999, and related audited Consolidated Statements
of Operations, Stockholders' Equity (Deficit) and Cash Flows
of Escalade for each of the years in the two-year period ended
December 31, 1999. 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 December 31, 1999 and pro forma
Statement of Operations for the year ended December 31, 1999.
Included as pages F-17 to F-21 of this Form 8-K/A Amendment
No. 1.
2
(c) EXHIBITS.
2.1 Plan and Agreement of Merger dated as of April 27,
2000 among Mentor Graphics Corporation, Mentor
Graphics Acquisition, Inc. and Escalade Corp.
(Included with original Form 8-K filed by
Registrant on May 12, 2000)
23.1 Consent of KPMG LLP.
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: July 24, 2000 By: /s/ Dean Freed
-----------------------------------
Dean M. Freed
Vice President and General Counsel
3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Escalade Corp.:
We have audited the accompanying consolidated balance sheets of Escalade Corp.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the years in the two-year period ended December 31,
1999. 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 Escalade
Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations, and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG LLP
Portland, Oregon
July 23, 2000
F-1
ESCALADE CORP.
Consolidated Balance Sheets
(In thousands, except per share data)
DECEMBER 31,
-----------------------------------------
ASSETS 1999 1998
------------------- -------------------
Current assets:
Cash and cash equivalents $ 1,622 $ 71
Accounts receivable, net 503 1,595
Deposits and prepaid expenses 106 97
------------------- -------------------
Total current assets 2,231 1,763
Property and equipment, net 660 759
Other assets 82 83
------------------- -------------------
$ 2,973 $ 2,605
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 243 $ 927
Accrued liabilities 347 746
Deferred revenue 390 429
Customer deposits 599 672
Notes payable, current 242 315
Deferred rent, current 53 149
------------------- -------------------
Total current liabilities 1,874 3,238
Notes payable, noncurrent 244 343
Deferred rent, noncurrent 128 181
------------------- -------------------
2,246 3,762
------------------- -------------------
Commitments and contingencies (note 8)
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.0001 par value; 7,025 shares
authorized; 7,025 shares issued and outstanding at December 31,
1999 and 1998 1 1
Series B convertible preferred stock, $0.0001 par value; 690 shares
authorized; 690 shares issued and outstanding at December 31,
1999 and 1998 -- --
Series C convertible preferred stock, $0.0001 par value; 2,464 shares
authorized; 2,464 shares issued and outstanding at December 31,
1999 and 1998 -- --
Series D convertible preferred stock, $0.0001 par value; 18,504 shares
authorized; 7,231 and 6,832 shares issued and outstanding at
December 31, 1999 and 1998, respectively 1 --
Series D convertible preferred stock warrants; 11,273 and 10,988 shares
issued and outstanding at December 31, 1999 and 1998, respectively 4,611 4,562
Series E convertible preferred stock, $0.0001 par value; 18,750 shares
authorized; 18,448 and -0- shares issued and outstanding at
December 31, 1999 and 1998, respectively 2 --
Series E convertible preferred stock warrants; 200 and -0- shares issued
and outstanding at December 31, 1999 and 1998, respectively 68 --
Common stock, $0.0001 par value; 80,000 shares authorized; 6,848 and
4,253 shares issued and outstanding at December 31, 1999 and 1998,
respectively 1 --
Common stock note receivable (147) --
Additional paid-in capital 21,843 14,118
Accumulated deficit (25,653) (19,838)
------------------- -------------------
Total stockholders' equity (deficit) 727 (1,157)
------------------- -------------------
$ 2,973 $ 2,605
=================== ===================
See accompanying notes to consolidated financial statements.
F-2
ESCALADE CORP.
Consolidated Statements of Operations
(In thousands)
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
------------- -------------
Licenses and maintenance revenues $ 2,819 $ 2,789
------------- -------------
Costs and expenses:
Cost of licenses and maintenance revenues 599 645
Research and development 4,305 4,821
Selling, general and administrative 3,664 4,355
------------- -------------
Total costs and expenses 8,568 9,821
------------- -------------
Loss from operations (5,749) (7,032)
Interest income 116 78
Interest expense (132) (124)
------------- -------------
Net loss before income taxes (5,765) (7,078)
Provision for income taxes (50) (135)
------------- -------------
Net loss $ (5,815) $ (7,213)
============= =============
See accompanying notes to consolidated financial statements.
F-3
ESCALADE CORP.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1999 and 1998
(In thousands)
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------ ------------------------ ------------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ----------- ----------- ---------- ----------- ----------- -------
Balance at December 31, 1997 7,025 $ 1 690 $ -- 2,464 $ -- 4,865 $ --
Issuance of Series D preferred
stock, net of issuance costs -- -- -- -- -- -- 1,843 --
Subscription received for
Series D preferred stock -- -- -- -- -- -- -- --
Issuance of Series D preferred
stock warrants -- -- -- -- -- -- -- --
Exercise of Series D preferred
stock warrants -- -- -- -- -- -- 124 --
Common stock -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ----------- ----------- -------
Balance at December 31, 1998 7,025 1 690 -- 2,464 -- 6,832 --
Issuance of Series D preferred
stock, net of issuance costs -- -- -- -- -- -- 261 1
Issuance of Series D preferred
stock warrants -- -- -- -- -- -- -- --
Exercise of Series D preferred
stock warrants -- -- -- -- -- -- 138 --
Issuance of Series E preferred
stock -- -- -- -- -- -- -- --
Issuance of Series E preferred
stock warrants -- -- -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ----------- ----------- -------
Balance at December 31, 1999 7,025 $ 1 690 $ -- 2,464 $ -- 7,231 $ 1
========== =========== =========== =========== ========== =========== =========== =======
SERIES D
PREFERRED STOCK WARRANTS
------------------------
SHARES AMOUNT
---------- -----------
Balance at December 31, 1997 7,892 $ 3,300
Issuance of Series D preferred
stock, net of issuance costs -- --
Subscription received for
Series D preferred stock -- --
Issuance of Series D preferred
stock warrants 3,220 1,314
Exercise of Series D preferred
stock warrants (124) (52)
Common stock -- --
Net loss -- --
---------- -----------
Balance at December 31, 1998 10,988 4,562
Issuance of Series D preferred
stock, net of issuance costs -- --
Issuance of Series D preferred
stock warrants 423 108
Exercise of Series D preferred
stock warrants (138) (59)
Issuance of Series E preferred
stock -- --
Issuance of Series E preferred
stock warrants -- --
Issuance of common stock -- --
Repurchase of common stock -- --
Net loss -- --
---------- -----------
Balance at December 31, 1999 11,273 $ 4,611
========== ===========
SERIES E SERIES E
PREFERRED STOCK PREFERRED STOCK WARRANTS COMMON STOCK
--------------------------- --------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ----------- ------------ ------------ ------------ --------------
Balance at December 31, 1997 -- $ -- -- $ -- $ 3,499 $ --
Issuance of Series D preferred
stock, net of issuance costs -- -- -- -- -- --
Subscription received for
Series D preferred stock -- -- -- -- -- --
Issuance of Series D preferred
stock warrants -- -- -- -- -- --
Exercise of Series D preferred
stock warrants -- -- -- -- -- --
Common stock -- -- -- -- 754 --
Net loss -- -- -- -- -- --
------------- ----------- ------------ ------------ ------------ --------------
Balance at December 31, 1998 -- -- -- -- 4,253 --
Issuance of Series D preferred
stock, net of issuance costs -- -- -- -- -- --
Issuance of Series D preferred
stock warrants -- -- -- -- -- --
Exercise of Series D preferred
stock warrants -- -- -- -- -- --
Issuance of Series E preferred
stock 18,448 2 -- -- -- --
Issuance of Series E preferred
stock warrants -- -- 200 68 -- --
Issuance of common stock -- -- -- -- 2,596 1
Repurchase of common stock -- -- -- -- (1) --
Net loss -- -- -- -- -- --
------------- ----------- ------------ ------------ ------------ --------------
Balance at December 31, 1999 18,448 $ 2 200 $ 68 6,848 $ 1
============= =========== ============ ============ ============ ==============
TOTAL
COMMON ADDITIONAL STOCKHOLDERS'
STOCK NOTE PAID-IN ACCUMULATED EQUITY
RECEIVABLE CAPITAL DEFICIT (DEFICIT)
--------------- --------------- --------------- ----------------
Balance at December 31, 1997 $ -- $ 13,205 $ (12,625) $ 3,881
Issuance of Series D preferred
stock, net of issuance costs -- 757 -- 757
Subscription received for
Series D preferred stock -- 49 -- 49
Issuance of Series D preferred
stock warrants -- -- -- 1,314
Exercise of Series D preferred
stock warrants -- 52 -- --
Common stock -- 55 -- 55
Net loss -- -- (7,213) (7,213)
--------------- --------------- --------------- ----------------
Balance at December 31, 1998 -- 14,118 (19,838) (1,157)
Issuance of Series D preferred
stock, net of issuance costs -- 132 -- 133
Issuance of Series D preferred
stock warrants -- -- -- 108
Exercise of Series D preferred
stock warrants -- 59 -- --
Issuance of Series E preferred
stock -- 7,319 -- 7,321
Issuance of Series E preferred
stock warrants -- -- -- 68
Issuance of common stock (147) 215 -- 69
Repurchase of common stock -- -- -- --
Net loss -- -- (5,815) (5,815)
--------------- --------------- --------------- ----------------
Balance at December 31, 1999 $ (147) $ 21,843 $ (25,653) $ 727
=============== =============== =============== ================
See accompanying notes to consolidated financial statements.
F-4
ESCALADE CORP.
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998
---------------- ----------------
Cash flows from operating activities:
Net loss $ (5,815) $ (7,213)
Adjustments to reconcile net loss to net cash used
in operating activities:
(Gain) loss on fixed assets (6) 54
Depreciation and amortization 331 463
Expense related to warrant issuance 68 36
Changes in assets and liabilities:
Accounts receivable 1,092 (922)
Prepaid expenses and other assets (8) (73)
Accounts payable (684) 761
Accrued liabilities (399) 382
Deferred revenue (39) 300
Customer deposits (73) 81
Other liabilities (149) (61)
---------------- ----------------
Net cash used in operating activities (5,682) (6,192)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (238) (835)
Proceeds on sale of fixed assets 12 --
---------------- ----------------
Net cash used in investing activities (226) (835)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net
of issuance costs 7,562 2,084
Proceeds from issuance of common stock, net of issuance costs -- 55
Exercise of stock options 69 --
Principal payments under notes payable (172) (257)
Proceeds from related party loan -- 120
Repayment of capital leases -- (213)
Proceeds from bank loan -- 547
---------------- ----------------
Net cash provided by financing activities 7,459 2,336
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,551 (4,691)
Cash and cash equivalents at beginning of year 71 4,762
---------------- ----------------
Cash and cash equivalents at end of year $ 1,622 $ 71
================ ================
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable $ 147 $ --
================ ================
See accompanying notes to consolidated financial statements.
F-5
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Escalade Corp. (the Company) was incorporated in the State of
Delaware on October 1, 1993. The Company develops software products
for use in high-level design automation in foreign and domestic
markets.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned French subsidiary. All significant
intercompany balances and transactions have been eliminated.
(c) REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with
American Institute of Certified Public Accountants' Statement of
Position 97-2, SOFTWARE REVENUE RECOGNITION, as amended.
The Company's revenues are derived from license revenues for its
software and related services, which include maintenance and
support, training and consulting services. For agreements not
requiring significant customization and implementation services or
complex interfaces, license revenues are recognized upon shipment of
the product if a signed contract exists, the fee is fixed and
determinable and collection of the resulting receivable is probable.
In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied.
Annual maintenance and support revenues consist of ongoing support
and unspecified product updates and are recognized ratably over the
term of the contract. Revenues from training and consulting are
recognized when the services are performed. For the multiple-element
agreements, the revenue is allocated to each individual element
based on vendor specific objective evidence of its fair value.
(d) RESEARCH AND DEVELOPMENT COSTS
Software development costs are included in research and development
and are expensed as incurred. Completion of a working model of the
Company's products and general release have substantially coincided.
As a result, the Company has not capitalized any software
development costs during 1999 since the amounts have not been
material.
F-6 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(e) CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents and those with
maturities greater than three months but less than one year are
considered short-term investments. At December 31, 1999 and 1998, the
Company had no investments with original maturities greater than
three months.
(f) CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. Substantially all of
the Company's cash and cash equivalents are invested in highly liquid
money market funds with major financial institutions. The Company
performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of all accounts receivable.
The allowance for doubtful accounts was $-0- and $22 at December 31,
1999 and 1998, respectively.
At December 31, 1999, receivables from three customers represented
20%, 19% and 13% of the Company's accounts receivables. At December
31, 1998, receivables from two customers represented 30% and 13% of
the Company's accounts receivable. No other customers represented
over 10% of accounts receivable as of December 31, 1999 and 1998.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties. The following methods and assumptions were used to
estimate the fair value of the Company's financial instruments.
The carrying amounts for cash, accounts receivable, accounts payable
and accrued liabilities approximate their respective fair values
because of the short-term maturity of these items. The carrying
amounts for notes payable approximate their respective fair values
since they bear interest at rates close to prevailing market rates.
F-7 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(h) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the shorter of estimated useful
lives of the assets, generally four years, or the lease term. The
costs of repairs and maintenance are expensed as incurred.
As required by 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 the 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 the 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.
(i) DEFERRED RENT
The Company accounts for rent expense in accordance with provisions
of SFAS No. 13, ACCOUNTING FOR LEASES. Under SFAS No. 13, rent
expense is recognized on a straight-line basis with the difference
between the actual amounts paid and amounts recognized as rent
expense in the statement of operations included in other liabilities.
(j) 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 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. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
(k) STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting
for employee stock options and similar equity instruments. 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 and provide the pro forma disclosures as prescribed by SFAS No.
123.
F-8 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(l) CUSTOMER DEPOSITS
Customer deposits are comprised of deposits made by major foreign
distributors which will be applied to future purchases.
(m) ADVERTISING
The Company expenses costs of advertising when the costs are
incurred. Advertising expense was approximately $280 for the year
ended December 31, 1999.
(n) COMPREHENSIVE INCOME
The Company has no material components of other comprehensive loss so
the comprehensive loss is the same as net loss for all periods
presented.
(o) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates
and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(2) BALANCE SHEET COMPONENTS
DECEMBER 31,
--------------------------------------
1999 1998
---------------- ------------------
Property and equipment:
Company equipment, software and
purchased software $ 925 $ 709
Furniture and fixtures 125 251
Leasehold improvements 13 8
---------------- ------------------
1,063 968
Less accumulated depreciation and
amortization (403) (209)
---------------- ------------------
$ 660 $ 759
================ ==================
F-9 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(3) NOTES PAYABLE
The Company's notes payable obligations consist of at December 31:
1999 1998
---------------- -----------------
Notes payable under term facility, monthly
principal and interest payments of $9;
interest at prime plus 0.75% (9.25% at
December 31, 1999); final payment due
May 14, 2001 $ 153 $ --
Notes payable under term facility, monthly
principal and interest payments of $11;
interest at prime plus 1.00% (9.50% at
December 31, 1999); final payment due
June 14, 2002 333 482
Note payable under line of credit, interest
at prime plus 1%; final payment due June
1999 -- 126
Notes payable to related party, interest at
1.75%
of the face value of the loan plus 18% per
annum; final payment due January 1999 -- 50
---------------- -----------------
486 658
Less current portion (242) (315)
---------------- -----------------
$ 244 $ 343
================ =================
The above term loans are collateralized by substantially all of the
Company's assets presently owned or later acquired. Except for permitted
liens, any security interest will be a first priority security interest in
the collateral.
Under the terms of the term loans, the Company is required to maintain
certain financial ratios, and specified levels of tangible net worth and
profitability on a quarterly basis. As of December 31, 1999, the Company
was not in compliance with the aforementioned financial covenants. The
Company received a waiver from the Bank related to being out of compliance
with the covenants.
Future minimum payments on the notes payable are as follows:
Year ending December 31:
2000 $ 242
2001 177
2002 67
----------------
$ 486
================
F-10 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(4) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE PREFERRED STOCK
During 1999, the Company issued a total of 261 shares of Series D
preferred stock, at a price of $1.11 per share for total proceeds
(net of issuance costs) of approximately $241. In connection with the
issue of the Series D preferred stock, the Company issued 423
warrants to purchase shares of Series D preferred stock for $0.0001
per share. The warrants are exercisable until September 30, 2002.
During 1999, 138 warrants were exercised. Also in 1999, the Company
issued a total of 18,448 shares of Series E preferred stock, at a
price of $0.40 per share for total proceeds (net of issuance costs)
of approximately $7,321.
During 1998, the Company issued a total of 3,220,422 shares of Series
D preferred stock at a price of $1.11 per share for total proceeds
(net of issuance costs) of approximately $757,000. In connection with
the issue of the Series D preferred stock, the Company issued
2,990,422 warrants to purchase shares of Series D preferred stock for
$0.0001 per share. The warrants are exercisable until September 30,
2002. During 1998, 124,205 warrants were exercised. Also in 1998, the
Company issued 230,000 warrants to purchase Series D preferred stock
at $0.43 per share to a bank in connection with a loan financing.
100,000 of the warrants are exercisable in August 2003 and 130,000
are exercisable in October 2005.
The Board of Directors is authorized to issue an aggregate number of
47,432 shares of convertible preferred stock, of which 7,025 shares
have been designated as Series A, 690 shares have been designated as
Series B, 2,464 shares have been designated as Series C, 18,504
shares have been designated as Series D and 18,750 shares have been
designated Series E (collectively preferred stock). Through December
31, 1999, the Company issued 7,025, 690, 2,464, 7,231 and 18,448
shares of Series A, Series B, Series C, Series D and Series E
convertible preferred stock, respectively.
The rights, preferences, privileges and restrictions thereof are set
forth in the Company's Amended and Restated Certificate of
Incorporation, and are summarized as follows:
CONVERSION
Each share of Series A, Series B, Series C, Series D and Series E
preferred stock is convertible at the option of the holder into one
share of common stock, subject to certain adjustments, as defined in
the Certificate of Incorporation, as amended during March 1999. The
preferred stock shall automatically be converted upon the effective
date of a public offering of common stock for which the aggregate
proceeds are at least $20,000 and the offering price is at least
$1.22 per share. A total of 31,750 shares of common stock have been
reserved for issuance upon the conversion of the preferred stock.
F-11 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
LIQUIDATION
In the event of liquidation, the holders of Series A, Series B,
Series C, Series D and Series E preferred stock are entitled to
receive in preference to the holders of common stock an amount equal
to their original issue price of $0.84 per share for each share of
Series A, $3.65 per share for each share of Series B, $1.11 per share
for each share of Series C, $0.42 per share for each share of Series
D and $0.40 per share for each share of Series E, plus all declared
but unpaid dividends. In the event funds are sufficient to make a
complete distribution to the holders of Series A, Series B, Series C,
Series D and Series E preferred stock as described above, the
remaining assets will be distributed ratably among the holders of the
common stock and the Series A, Series C, Series D and Series E
preferred stock, assuming full conversion to common stock, up to a
limit of $1.68, $2.22, $0.84 and $0.80 per share for Series A, Series
C, Series D and Series E, respectively. Thereafter, any assets
available for distribution shall be distributed to the holders of the
common stock.
DIVIDENDS
Holders of the Series A, Series B, Series C, Series D and Series E
preferred stock are entitled to receive noncumulative dividends of
$0.06, $0.26, $0.08, $0.04 and $0.04 per share, respectively, when
declared by the Board of Directors. Such dividends are payable in
preference to any dividends for common stock declared by the Board of
Directors. As of December 31, 1999, no dividends have been declared
or paid.
In the event of any proposed equity offering, the holders of Series
A, Series B, Series C, Series D and Series E preferred stock have a
preference right of purchase. In the event holders do not exercise
their right, the Company has the right to offer shares for sale to
the public on terms no less favorable for a period of 120 days. This
preference right will terminate upon an initial public offering.
VOTING
The holders of Series A, Series B, Series C, Series D and Series E
preferred stock have the number of votes equal to the number of
shares of common stock issuable upon conversion of the preferred
stock.
(b) SERIES E PREFERRED STOCK WARRANTS
The Company entered into a stock purchase warrant agreement with a
bank in connection with certain bridge loan agreements. Under the
agreement, the Company issued the bank warrants to purchase up to 200
shares of Series E preferred stock at $0.40 per share. These warrants
expire in April 2004.
F-12 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
The fair value of the warrants to be issued to the bank was
determined by applying the Black-Scholes methodology using the
commitment date of the loan as the measurement date. The per share
weighted average fair market value was $0.34 per share on the date of
grant, with the following weighted averaged assumptions: Risk-free
interest rate of 5.7%, expected dividend yield -0-%, a five year
term, and an expected volatility of 100%. The fair value of $68 was
recognized as interest expense during 1999, the term of the loan.
(5) STOCK OPTION PLAN
In October 1993, the Board of Directors adopted the 1993 Stock Option Plan
(the Plan) which provides for the granting of incentive stock options and
nonstatutory stock options to employees, officers and consultants of the
Company for up to 2,194 shares of common stock. The Plan has subsequently
been amended to reserve an additional 9,000 shares of common stock for
issuance, bringing the total reserved under the Plan to 11,194 shares. In
accordance with the Plan, the stated exercise price shall be at the
estimated fair market value of common stock on the date of grant for
incentive stock options and nonstatutory stock options, respectively, as
determined by the Board of Directors. Options granted to a stockholder who
owns more than 10% of the outstanding stock of the Company at the time of
grant must be issued at an exercise price not to be less than (i) 100% of
the fair value of the stock on the date of grant in the case of incentive
stock options and (ii) 110% of the fair value of the stock on the date of
grant in the case of nonstatutory stock options. Options generally vest
over a four-year period and expire over terms not exceeding ten years.
At December 31, 1999, 2,578 shares 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, 1997 3,468 $ 0.08
Granted 3,305 0.08
Exercised (754) 0.08
Canceled (634) 0.08
---------------
Balance at December 31, 1998 5,385 0.08
Granted 7,123 0.08
Exercised (2,596) 0.08
Canceled (1,296) 0.08
---------------
Balance at December 31, 1999 8,616 $ 0.08
===============
F-13 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
OUTSTANDING EXERCISABLE
----------------------------------------------- ----------------------------
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
------------- ------------- ---------------- ------------- ------------ -------------
$ 0.08 8,616 9.23 $ 0.08 1,646 $ 0.08
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 1999 using
the minimum value option pricing model as prescribed by SFAS No. 123 using
the following weighted average assumptions for grants for the year ended
December 31:
1999 1998
---------------- --------------
Risk-free interest rate 5.7% 4.04-5.69%
Expected dividend yield --% --%
Expected life (in years) 4 4
Using the minimum value methodology, the total value of options granted
during 1999 and 1998 was $95 and $53, 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 1999 and 1998
was $0.02 and $0.01 per share, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS
No. 123, the Company's net income (loss) would approximate the pro forma
disclosures below:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998
---------------- --------------
Year ended December 31:
Net loss:
As reported $ (5,815) $ (7,213)
================ ==============
Pro forma $ (5,869) $ (7,243)
================ ==============
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.
F-14 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(6) INCOME TAXES
The difference between the expected tax expense, computed by applying the
federal statutory rate of 34% to loss before taxes, and the actual tax
expense is primarily due to the increase in the valuation allowance for
deferred tax assets. No provision for federal or state income taxes has
been recorded for the years ended December 31, 1999 and 1998 as the
Company had incurred net operating losses. The tax provision recorded for
the years ended December 31, 1999 and 1998 relates to taxes due in a
foreign jurisdiction.
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax
assets and deferred tax liabilities are as follows at December 31:
1999 1998
---------------- ----------------
Deferred tax assets:
Research and experimentation
credit carryforwards $ 1,515 $ 1,341
Net operating loss carryforwards 8,667 6,356
Other 860 897
---------------- ----------------
Total gross deferred tax assets 11,042 8,594
Less valuation allowance (11,032) (8,594)
---------------- ----------------
10 --
---------------- ----------------
Deferred tax liabilities:
Deferred revenue (10) --
---------------- ----------------
Total gross deferred tax
liabilities (10) --
---------------- ----------------
Net deferred tax assets $ -- $ --
================ ================
The net change in the total valuation allowance was an increase of $2,438
and $3,054 for the years ended December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $23,537 and $9,654, respectively, to offset against future
income for federal and state tax purposes, respectively. These
carryforwards expire in 2012 through 2019. In addition, the Company has
research and experimentation credits of $1,520, that will expire by 2019.
F-15 (Continued)
ESCALADE CORP.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(All numerical references in thousands,
except percentages and per share data)
(7) COMMITMENTS AND CONTINGENCIES
The Company leases its facility under a noncancellable operating lease
which expires in September 2002. The lease provides for the lessee to pay
all cost of utilities, insurance and taxes. Rent expense was $239 (net of
sublease income of $183) for the year ended December 31, 1999.
Future minimum payments under the Company's operating leases are disclosed
below:
OPERATING
LEASES
----------------
Fiscal year:
2000 $ 390
2001 384
2002 297
----------------
Total minimum lease payments $ 1,071
================
(8) SUBSEQUENT EVENTS
On April 28, 2000, the Company entered into a merger agreement with Mentor
Graphics Corporation. Upon the merger, the outstanding shares of the
capital stock of the Company were converted into a right to receive cash
from Mentor Graphics Corporation equal to $3,500, less amount payable by
Escalade to three of its employees upon completion of merger, and less
service and legal fees incurred by Escalade in connection with the merger,
divided by 47,125, which was the number of outstanding Escalade preferred
shares. All shares of common stock of Escalade issued and outstanding was
converted to zero value because the amount distributed to holders of
preferred shares did not equal or exceed their liquidation preferences.
F-16
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
The following unaudited pro forma combined condensed financial
statements give effect to a business combination between Mentor Graphics
Corporation and Escalade Corp. accounted for as a purchase. The Pro Forma
Combined Condensed Statements of Operations for the year ended December 31, 1999
present unaudited pro forma operating results of Mentor Graphics as if the
purchase had occurred as of January 1, 1999. The Pro Forma Combined Condensed
Balance Sheet presents the unaudited pro forma financial condition of Mentor
Graphics as if the purchase had occurred as of December 31, 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 period 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 its Form 10-K for the year ended
December 31, 1999, and (ii) Escalade Corp. included elsewhere herein.
F-17
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
(UNAUDITED)
MENTOR PRO FORMA
GRAPHICS ESCALADE ADJUSTMENTS PRO FORMA
---------------- ---------------- ----------------- ----------------
Assets
Current Assets:
Cash and cash equivalents . . . . . $ 95,637 $ 1,622 $ (3,800) (c) $ 93,459
Short-term investments. . . . . . . 37,550 - - 37,550
Trade accounts receivable. . . . . 125,417 503 - 125,920
Prepaid expenses and other . . . . 32,315 106 - 32,421
---------------- ---------------- ----------------- ----------------
Total current assets. . . . 290,919 2,231 (3,800) 289,350
Property, plant and equipment, net. . . 83,970 660 - 84,630
Term receivables, long-term. . . . . . . 31,695 - - 31,695
Other assets . . . . . . . . . . . . . . 42,755 82 3,517 (c) 46,354
---------------- ---------------- ----------------- ----------------
$ 449,339 $ 2,973 $ (283) $ 452,029
================ ================ ================= ================
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings . . . . . . . $ - $ 242 $ - $ 242
Accounts payable . . . . . . . . . . 9,979 243 - 10,222
Customer deposits - 599 - 599
Income taxes payable . . . . . . . . 22,599 - - 22,599
Accrued and other liabilities . . . . 78,713 347 - 79,060
Deferred rent . . . . . . . . . . . . - 53 (53) (a) -
Deferred revenue . . . . . . . . . . 46,425 390 - 46,815
---------------- ---------------- ----------------- ----------------
Total current liabilities . . 157,716 1,874 (53) 159,537
Other long-term deferrals. . . . . . . . 1,221 372 (128) (a) 1,465
---------------- ---------------- ----------------- ----------------
Total liabilities . . . . . . . . . 158,937 2,246 (181) 161,002
---------------- ---------------- ----------------- ----------------
Minority interest . . . . . . . . . . . 1,622 - - 1,622
Stockholders' Equity
Common stock . . . . . . . . . . . 289,478 1 (1) (b) 289,478
Common stock note receivable . . . . - (147) 147 (b) -
Perferred stock . . . . . . . . . . - 4,683 (4,683) (b) -
Additional paid in capital. . . . . - 21,843 (21,843) (b) -
Accumulated deficit . . . . . . . . (20,362) (25,653) 25,653 (b) (19,737)
1,565 (c)
(940) (e)
Accumulated other comprehensive -
income. . . . . . . . . . . . . . 19,664 - - 19,664
---------------- ---------------- ----------------- ----------------
Total stockholders' equity . . 288,780 727 (102) 289,405
---------------- ---------------- ----------------- ----------------
$ 449,339 $ 2,973 $ (283) $ 452,029
================ ================ ================= ================
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
F-18
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MENTOR PRO FORMA
GRAPHICS ESCALADE ADJUSTMENTS PRO FORMA
-------------------- -------------------- -------------------- -------------------
Net Revenue. . . . . . . . . . . . . . . . $ 511,134 $ 2,819 $ - $ 513,953
-------------------- -------------------- -------------------- -------------------
Operating Expenses:
Cost of revenues . . . . . . . . . . 118,054 599 277 (d) 118,930
Research and development. . . . . . . 118,848 4,305 - 123,153
Selling, general and
administrative . . . . . . . . . . 219,756 3,664 264 (d) 223,684
Special charges. . . . . . . . . . . . 25,821 - - 25,821
Merger and acquisition related -
charges . . . . . . . . . . . . . 12,775 - 940 (e) 13,715
-------------------- -------------------- -------------------- -------------------
Total operating expenses. . 495,254 8,568 1,481 505,303
-------------------- -------------------- -------------------- -------------------
Income (loss) from operations . . . . . . . 15,880 (5,749) (1,481) 8,650
Other income (expense), net . . . . . . . (13,011) (16) - (13,027)
-------------------- -------------------- -------------------- -------------------
Income (loss) before income taxes. . . . 2,869 (5,765) (1,481) (4,377)
Provision (benefit) for income taxes. . . . 635 (50) - 585
-------------------- ----------------------------------------- -------------------
Net income (loss) . . . . . . . . . . . . . $ 2,234 $ (5,715) $ (1,481) $ (4,962)
==================== ========================================= ===================
Net income (loss) per share:
Basic $ 0.03 $ (0.08)
==================== ===================
Diluted $ 0.03 $ (0.07)
==================== ===================
Shares used in per share calculations:
Basic 65,629 65,629
==================== ===================
Diluted 66,324 66,324
==================== ===================
See accompanying Notes to Pro Forma Combined Condensed Financial Statements
F-19
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 eliminate deferred rent, as this liability does not represent future
obligations of Mentor Graphics.
(b) To reflect the elimination of the historical stockholders' equity
accounts of Escalade.
(c) The total purchase price paid by Mentor Graphics is comprised of the
following (in thousands):
Cash paid................................................ $3,500
Transaction costs........................................ 300
-------
Net purchase price.................................... $3,800
=======
The purchase price is allocated to the assets and liabilities of
Escalade as of December 31, 1999 based on preliminary fair values as
follows (in thousands):
Assets acquired:
Current assets ..................................... $2,231
Property, plant and equipment and other assets...... 2,677
Intangible Assets................................... 1,582
In-process research and development................. 940
---------
Less charge to accumulated deficit ...................... (1,565)
Less liabilities assumed................................. (2,065)
---------
Net assets acquired................................. $3,800
=========
Liabilities assumed included deferred revenue of $390 and excludes
deferred rent of $425 as discussed in footnote (a) above. A charge of
$1,565 was made to the accumulated deficit related to the change in net
assets of Escalade between December 31, 1999 and the acquisition date.
(d) To reflect the amortization expense related to application of purchase
method of accounting related to developed technology, workforce and
goodwill of $277, $67, and $197, respectively. Intangible assets will
be amortized over a three-year period.
(e) To record a charge for in-process research and development.
F-20
(f) 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 to $700
and will include severance costs related to the termination of certain
employees. Such costs or charges and related activities are currently
being studied by Mentor Graphics and have not been finalized. These
charges are not reflected in the pro forma combined condensed financial
information.
F-21
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Plan and Agreement of Merger dated as of April 27, 2000 among Mentor Graphics Corporation,
Mentor Graphics Acquisition, Inc. and Escalade Corp. (Included with original Form 8-K filed
by Registrant on May 12, 2000.)
The following schedules and exhibits to the Plan and Agreement of Merger have been
omitted and will be provided to the Securities and Exchange Commission upon
request:
Exhibit A Certificate of Merger
Schedule 2.2 Capitalization
Schedule 2.12 Litigation
Schedule of Exceptions
23.1 Consent of KPMG LLP.