UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarter Ended March 31, 1998. Commission File No. 0-13442
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MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0786033
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777
(Address including zip code of principal executive offices)
Registrant's telephone number, including area code: (503) 685-7000
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NO CHANGE
Former name, and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock, no par value, outstanding as of April 30,
1998: 64,999,521
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MENTOR GRAPHICS CORPORATION
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page Number
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Item 1. Financial Statements
Consolidated Statements of Operations for the three 3
months ended March 31, 1998 and 1997
Consolidated Balance Sheets as of March 31, 1998 4
and December 31, 1997
Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-12
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 13
SIGNATURES 14
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Statements of Operations
(Unaudited)
Three months ended March 31, 1998 1997
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In thousands, except per share data
<S> <C> <C>
Revenues:
System and software................................................. $ 58,206 $ 55,440
Service and support................................................. 49,802 46,119
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Total revenues................................................. 108,008 101,559
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Cost of revenues:
System and software................................................. 6,256 19,153
Service and support................................................. 24,547 28,674
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Total cost of revenues......................................... 30,803 47,827
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Gross margin................................................... 77,205 53,732
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Operating expenses:
Research and development............................................ 28,405 27,277
Marketing and selling............................................... 38,954 39,750
General and administration.......................................... 10,505 10,289
Special charges..................................................... 5,775 8,560
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Total operating expenses....................................... 83,639 85,876
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Operating loss........................................................... (6,434) (32,144)
Other income (expense), net......................................... (3,123) 515
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Loss before income taxes....................................... (9,557) (31,629)
Income tax benefit.................................................. (2,103) (3,480)
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Net loss....................................................... $ (7,454) $ (28,149)
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Net loss per share:
Basic.......................................................... $ (.12) $ (0.43)
============ ============
Diluted........................................................ $ (.12) $ (0.43)
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Weighted average number of shares outstanding:
Basic.......................................................... 64,582 64,871
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Diluted........................................................ 64,582 64,871
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</TABLE>
3
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<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Balance Sheets
As of As of
March 31, 1998 December 31, 1997
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In thousands (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 111,651 $ 84,402
Short-term investments......................................... 12,241 52,658
Trade accounts receivable, net................................. 101,650 106,010
Other receivables.............................................. 7,938 6,282
Prepaid expenses and other..................................... 15,861 12,906
Deferred income taxes.......................................... 10,044 10,081
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Total current assets....................................... 259,385 272,339
Property, plant and equipment, net.................................. 102,536 103,452
Other assets, net................................................... 31,029 26,511
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Total assets............................................... $ 392,950 $ 402,302
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................... $ 9,793 $ 11,125
Income taxes payable........................................... 20,043 23,000
Accrued payroll and related liabilities........................ 21,282 31,055
Accrued liabilities............................................ 28,773 30,119
Deferred revenue............................................... 38,527 28,849
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Total current liabilities.................................. 118,418 124,148
Long-term debt...................................................... 93 120
Other long-term deferrals........................................... 433 497
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Total liabilities.......................................... 118,944 124,765
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Minority interest................................................... 975 -
Stockholders' Equity:
Common stock................................................... 293,941 291,263
Retained deficit............................................... (28,975) (21,521)
Foreign currency translation adjustment........................ 8,065 7,795
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Total stockholders' equity................................. 273,031 277,537
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Total liabilities and stockholders' equity................. $ 392,950 $ 402,302
============ ============
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</TABLE>
5
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<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, 1998 1997
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In thousands
<S> <C> <C>
Operating Cash Flows:
Net loss................................................................. $ (7,454) $ (28,149)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization of
property, plant and equipment................................... 6,238 6,221
Deferred taxes...................................................... 19 40
Amortization of other assets........................................ 1,018 3,588
Write-down of assets................................................ 1,630 7,468
Business disposals.................................................. 2,160 5,395
Changes in operating assets and liabilities:
Trade accounts receivable........................................... 5,174 8,931
Prepaid expenses and other.......................................... (6,287) (33)
Accounts payable.................................................... (1,211) (3,433)
Accrued liabilities................................................. (13,370) (10,739)
Other liabilities and deferrals..................................... 6,511 14
----------- -----------
Net cash used by operating activities.................................... (5,572) (10,697)
----------- -----------
Investing Cash Flows:
Net maturities of short-term investments............................ 40,455 4,067
Purchases of property, plant and equipment, net .................... (5,791) (10,581)
Purchase of businesses.............................................. (4,000) (946)
Purchase of technologies............................................ - (600)
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Net cash provided (used) by investing activities......................... 30,664 (8,060)
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Financing Cash Flows:
Proceeds from issuance of common stock............................ 2,678 1,991
Repayment of short-term borrowings................................. (135) (7,457)
Repayment of long-term debt......................................... (26) (51,779)
Repurchase of common stock.......................................... - (1,912)
Decrease in cash and investments, long-term........................ - 30,000
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Net cash provided (used) by financing activities......................... 2,517 (29,157)
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Effect of exchange rate changes on
cash and cash equivalents .......................................... (360) (1,129)
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Net change in cash and cash equivalents.................................. 27,249 (49,043)
Cash and cash equivalents at beginning of period......................... 84,402 165,406
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Cash and cash equivalents at end of period............................... $ 111,651 $ 116,363
============ ===========
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</TABLE>
5
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MENTOR GRAPHICS CORPORATION
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
(1) General - The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the statements include all adjustments necessary for a fair
presentation of the results of the interim periods presented. Certain
reclassifications have been made in the accompanying financial statements
for 1997 to conform with the 1998 presentation.
(2) Special Charges - During the first three months of 1998 the Company
recorded special charges of $5,775. The charges consisted of two subsidiary
closures, related employee terminations, and the recognition of impairment
in value of certain assets. Nearly all of these costs were disbursed in the
first three months of 1998. During the first three months of 1997 the
Company recorded special charges of $8,560. The charges consisted of
subsidiary closures and related employee terminations, early termination of
an interest rate swap agreement, and recognition of the impairment in value
of goodwill and purchased technology. Nearly all of these costs were
disbursed in 1997.
(3) Supplemental Disclosures of Cash Flow Information - The following provides
additional information concerning cash flow activities:
<TABLE>
<CAPTION>
Three months ended March 31, 1998 1997
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<S> <C> <C>
Interest paid.......................................... $ 96 $ 548
Income taxes paid, net of refunds...................... $ 672 $ 1,578
</TABLE>
(4) Comprehensive Income - In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No.
130, "Reporting Comprehensive Income." This Statement establishes standards
for the reporting and display of comprehensive income and its components.
The Company adopted SFAS No. 130 on January 1, 1998. The impact on the
Company's Consolidated Financial Statements is not material and as a result
no disclosures have been made.
(5) Software Revenue Recognition - In October 1997, the AICPA issued Statement
of Position (SOP) 97-2, "Software Revenue Recognition", which supercedes
SOP 91-1. The Company adopted SOP 97-2 for software transactions entered
into beginning January 1, 1998. SOP 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. The revenue
allocated to software products generally is recognized upon delivery of the
products. The revenue allocated to post-contract customer support generally
is recognized ratably over the term of the support and revenue allocated to
service elements generally is recognized as the services are performed. The
impact on the Company's Consolidated Financial Statements is not material.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
(All numerical references are in thousands, except for percentages)
RESULTS OF OPERATIONS
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REVENUES AND GROSS MARGINS
System and Software
System and software revenues for the quarter ended March 31, 1998 totaled
$58,206 representing an increase of $2,766 or 5 percent from the first quarter
of 1997. Software product revenues increased significantly for the comparable
periods while lower accelerated verification system revenues substantially
offset this increase. The increase in software product revenues is attributable
to growth of the Company's newer product offerings year over year. The decline
in accelerated verification system sales is primarily due to the pending release
of a next generation product offering where customers have elected to wait for
its availability. This new accelerated verification systems product offering is
expected to be available in limited quantities in the second or third quarter of
1998. This product is not available in U.S. markets due to a 1997 court ruling.
See "Part II - Item 1. Legal Proceedings" for further discussion.
System and software gross margins were 89 and 65 percent for the quarters ended
March 31, 1998 and 1997, respectively. Gross margins were significantly higher
for the 1998 period due to lower third party product sales for which royalties
are paid, lower purchased technology and capitalized software development costs
amortization, and a write-down of certain previously capitalized software
development costs in 1997. In addition, the gross margin benefited from
decreased sales of lower margin accelerated verification systems in first
quarter 1998 versus first quarter of 1997. Amortization of previously
capitalized software development costs to system and software cost of revenues
was $0 and $1,438 for the first quarter of 1998 and 1997, respectively. In
addition, the Company recognized an impairment in value of certain previously
capitalized software development costs in the first quarter of 1997 primarily as
a result of the accelerated decline in sales of older software product
offerings. These costs, which totaled $5,348, were determined to be
unrecoverable and were charged to system and software cost of revenues during
the quarter.
Purchased technology amortization to system and software cost of goods sold were
$876 and $1,741 for the quarters ended March 31, 1998 and 1997, respectively.
The decrease in amortization of purchased technology is attributable to lower
levels of purchased technology in the comparable periods.
Service and Support
Service and support revenues for the first quarter of 1998 were $49,802, an
increase of 8 percent from the first quarter of 1997. Software support revenues
accounted for the majority of the increase while professional service revenues
were approximately flat for the comparable periods. The increase in software
support revenues is attributable to a higher contract renewal rate as a result
of ongoing efforts to decrease delinquencies compared to prior year. The decline
in growth of professional service revenues is principally due to signing delays
for strategic contracts and withholding earmarked resources from other
engagements to ensure their availability to service these potential contracts.
Service and support gross margins were 51 and 38 percent for the quarters ended
March 31, 1998 and 1997, respectively. The increase in overall service and
support gross margins is attributable to higher software support revenues,
slightly lower software support cost of revenues and significantly lower
professional service cost of revenues during the comparable periods. The
reduction in professional service cost of revenues is attributable to cost
control measures taken in 1997.
7
<PAGE>
Geographic Revenues Information
Domestic revenues from unaffiliated customers including service and support
revenues increased by 8 percent as compared to the first quarter of 1997.
International revenues from unaffiliated customers including service and support
revenues represented 49 percent of total revenues for the first quarters of 1998
and 1997. From the first quarter of 1997 to 1998, European revenues increased
approximately 30 percent and Japanese revenues decreased approximately 15
percent. Increased revenues in Europe are attributable to economic strength in
the region. A stronger U.S. dollar in 1998 negatively impacted revenues in Asia
Pacific between the comparable periods, most significantly in Japan where the
Yen weakened against the U.S. dollar by approximately 5 percent in the first
quarter of 1998. In addition, the economic slow down in Asia Pacific further
impacted revenues in the first quarter of 1998 compared to the same period last
year. Since the Company generates approximately half of its revenues outside of
the United States and expects this to continue in the future, revenue results
should continue to be impacted by the effects of future foreign currency
fluctuations.
OPERATING EXPENSES
Research and development expenses totaled $28,405 and $27,277 or 26 and 27
percent of revenues for the first quarters of 1998 and 1997, respectively.
Marketing and selling expenses totaled $38,954 and $39,750 or 36 and 39 percent
of revenues for the first quarters of 1998 and 1997, respectively. General and
administration expenses totaled $10,505 and $10,289 or 10 percent of revenues
for the first quarters of 1998 and 1997, respectively. The overall absolute
dollar increase in regular operating expenses is attributable to increased
investment in research and development activities for the comparable periods.
SPECIAL CHARGES
During the first three months of 1998 the Company recorded special charges of
$5,775. The charges consisted of two subsidiary closures, related employee
terminations, and the recognition of impairment in value of certain assets.
Nearly all of these costs were disbursed in the first three months of 1998.
During the first three months of 1997 the Company recorded special charges of
$8,560. The charges consisted of subsidiary closures and related employee
terminations, early termination of an interest rate swap agreement, and
recognition of the impairment in value of goodwill and purchased technology.
Nearly all of these costs were disbursed in 1997.
OTHER INCOME (EXPENSE)
Other income (expense), net totaled $(3,123) for the first quarter of 1998
compared to $515 for the same period of 1997. Other income (expense) was
negatively impacted by increased legal costs associated with the ongoing patent
litigation with Quickturn Design Systems, Inc. (Quickturn) which totaled $4,693
and $790 in the first quarters of 1998 and 1997, respectively. The increase in
the current period is attributable to the one-time expense of certain
intellectual property rights purchased from Aptix Corporation as a basis for a
patent infringement lawsuit filed jointly by a subsidiary of the Company and
Aptix against Quickturn. See "Part II - Item 1. Legal Proceedings" for further
discussion. Interest income from investments was $1,944 for the first quarter of
1998, compared to $1,795 for the first quarter of 1997. During the first quarter
of 1998, interest expense amounted to $96, down from $266 for the comparable
period in 1997.
8
<PAGE>
PROVISION (BENEFIT) FOR INCOME TAXES
The benefit for income taxes amounted to $2,103 for the quarter ended March 31,
1998, as compared to a benefit of $3,480 for the same period in 1997. The
Company's income tax position for each year combines the effects of available
tax benefits in certain countries where the Company does business, benefits from
available net operating loss carry forwards, and tax expense for subsidiaries
with pre-tax income. The Company's tax rate remains sensitive to the shifts in
income and losses among various tax jurisdictions and as a result, the effective
tax rate for the remaining three quarters of 1998 is difficult to predict.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net gain from foreign currency transactions of $103
during the first quarter of 1998 compared to a net loss of $367 during the first
quarter of 1997. These amounts are comprised of realized gains and losses on
cash transactions involving various foreign currencies, and unrealized gains and
losses related to foreign currency receivables and payables resulting from
exchange rate fluctuations between the various currencies in which the Company
operates. Foreign currency gains and losses are included as a component of other
income. The "foreign currency translation adjustment", as reported in the equity
section of the consolidated balance sheet at March 31, 1998, increased to $8,065
from $7,795 at the end of 1997. This reflects the increase in the value of net
assets denominated in foreign currencies against the US dollar since year-end
1997.
The Company generally realizes approximately half of its revenue outside the
United States and expects this to continue in the future. As such, the Company's
business and operating results may be impacted by the effects of future foreign
currency fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
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CASH AND INVESTMENTS
Total cash and short-term investments at March 31, 1998 were $123,892 compared
to $137,060 at the end of 1997. Cash used by operations was $5,572 for the first
three months of 1998 compared to cash used by operations of $10,697 during the
same period of 1997. During the first quarters of 1998 and 1997, cash used by
operations was negatively impacted by the net loss from operations including
payments related to special charges taken in the first quarter of 1998. Cash
used by investing activities, excluding short-term investments was $9,791 and
$12,127 in the first quarter of 1998 and 1997, respectively. Investing
activities in the first quarter of 1998 included a cash payment of $4,000 for a
controlling interest in the Company's Korean distributor which was more than
offset by a decrease in capital expenditures for the comparative periods. Cash
provided (used) by financing activities was $2,517 for the first three months of
1998 compared to $(29,157) during the same period of 1997. The use of cash in
1997 was due to the pay-down of short term lines of credit and the long term
revolving credit facility totaling $59,236 offset by the release of cash held as
collateral previously classified as long term on the consolidated balance
sheets.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable decreased to $101,650 at March 31, 1998 from $106,010
at year-end 1997. Average days sales outstanding in accounts receivable
increased from 76 days at the end of 1997 to 85 days at the end of the first
quarter of 1998. This increase in average trade receivables days sales
outstanding is principally attributable to a few large contract sales where the
Company provided its customers extended payment terms.
9
<PAGE>
OTHER ASSETS
Other assets increased to $31,029 at March 31, 1998 from $26,511 at year-end
1997. The increase is due to goodwill of approximately $4,000 generated from the
purchase of a controlling interest in the Company's Korean distributor and an
increase of approximately $2,500 in the long-term portion of term contract
receivables, offset by purchased technology amortization.
CAPITAL RESOURCES
Total capital expenditures decreased to $5,791 through March 31, 1998, compared
to $10,581 for the same period of 1997. The capital expenditures in the first
quarter of 1997 were leasehold improvements for new facilities, and global
information systems and sales force automation projects. Expenditures in the
first quarter of 1998 did not include any individually significant projects. The
Company anticipates that current cash balances, anticipated cash flows from
operating activities, and existing credit facilities will be sufficient to meet
its working capital needs for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
- --------------------------------------------------------------
The statements contained in this report that are not statements of historical
fact are forward looking statements that involve a number of risks and
uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following discussion highlights factors that
could cause actual results to differ materially from the forward-looking
statements. The forward-looking statements should be considered in light of
these factors.
The Company competes in the highly competitive and dynamic EDA and integrated
systems design industries. The Company's success is dependent upon its ability
to develop and market products that are innovative, cost-competitive and that
meet customer expectations. Competition in the EDA industry is intense, which
can create adverse effects including, but not limited to, price reductions,
lower product margins, loss of market share and additional working capital
requirements.
A material amount of the Company's software product revenue is usually the
result of current quarter order performance of which the majority is usually
booked in the last month of each quarter. In addition, the Company's revenue
often includes multi-million dollar contracts. The timing of the completion of
these contracts and the terms of delivery of software, hardware and other
services can have a material impact on revenue recognition for a given quarter.
The combination of these factors impairs and delays the Company's ability to
identify shortfalls or overages from quarterly revenue targets.
The Company generally realizes approximately half of its revenues outside the
U.S. and expects this to continue in the future. As such, the effects of foreign
currency fluctuations can impact the Company's business and operating results.
To hedge the impact of foreign currency fluctuations, the Company enters into
foreign currency forward contracts. However, significant changes in exchange
rates may have a material adverse impact on the Company's results of operations.
In addition, recent significant declines in the value of the currencies of many
countries in the Asia Pacific region have affected the Company's sales in the
region. The overall instability of Asian currency and stock market economies
could adversely affect the economic health of the entire region and could have
an adverse effect on the Company's results of operations. International
operations subject the Company to other risks including, but not limited to,
changes in regional or worldwide economic or political conditions, government
trade restrictions, limitations on repatriation of earnings, licensing and
intellectual property rights protection.
10
<PAGE>
The Company has experienced declines in revenues from its older software product
offerings. There can be no assurances that expected increases in revenue from
newer software products will be sufficient to offset these declines.
The Company is currently addressing staffing needs and operations issues of its
consulting services business in an attempt to better focus on ASIC and IC design
methodologies and improve profitability. Business reorganizations can increase
personnel management complexities including retention and hiring of key
technical and management personnel. While the Company will attempt to improve
the utilization of its consultants and pricing of its services, there can be no
assurance that the challenges will be effectively met.
The Company's operating expenses are generally committed in advance of revenue
and are based to a large degree on future revenue expectations. Operating
expenses are incurred in order to generate and sustain higher future revenue
levels. If the revenue does not materialize as expected, the Company's results
of operations can be adversely impacted.
Acquisitions of complementary businesses are a part of the Company's overall
business strategy. There are several risks associated with this strategy
including integration of sales channels, training and education of the sales
force for new product offerings, integration of product development efforts,
retention of key employees, integration of systems of internal controls, and
integration of information systems. All of these factors can impair the
Company's ability to forecast, to meet quarterly revenue and earnings targets,
and to effectively manage the business for long-term growth. There can be no
assurance that these challenges will be effectively met.
As a result of the acquisition of Meta Systems, the Company has entered the
hardware development and assembly business. Some additional issues include:
procuring hardware components on a timely basis, assembling and shipping systems
on a timely basis with appropriate quality control, developing new distribution
and shipment processes, managing inventory, developing new processes to deliver
customer support of the hardware and placing new demands on the sales force.
The Company has recently added new re-usable intellectual property products and
consulting services to its portfolio of offerings. As with all markets, there is
inherent uncertainty regarding the overall rate of growth. Specifically, growth
in the re-usable intellectual property market is subject to significant
uncertainties and risks as market participants seek to gain customer acceptance
for the overall concept of incorporating these re-usable intellectual property
designs into their products and identify and implement effective distribution
models for this new class of products.
The Company has been able to recruit and retain necessary personnel to research
and develop, market, sell and service products that satisfy customers needs.
There can be no assurance that the Company can continue to recruit and retain
such personnel.
Generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
contingencies at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results could
differ from those estimates.
11
<PAGE>
The Company is involved in various administrative matters and litigation. There
can be no assurance that various litigation and administrative matters will not
have a material adverse impact on the Company's consolidated financial position
or results of operations. See "Part II - Item 1. Legal Proceedings" for further
discussion.
The Company has conducted a review of its products, information technology and
facilities computer systems to identify all software that could be affected by
the "Year 2000" issue and has developed or is developing product implementation
plans to address this issue. The Company expects all Year 2000 conversion
projects to be completed on a timely basis. While the Company does not believe
its computer systems or applications currently in use will be adversely affected
by the upcoming change in the century, the Company has not made an assessment as
to whether any of its customers, suppliers or service providers will be so
affected. Failure of the Company's software or that of its customers, suppliers
or service providers could have a material adverse impact on the Company's
business, financial condition and result of operations. Provided the Company's
"Year 2000" projects are completed on a timely basis, the expense of these
projects, and its related effect on the Company's earnings, is not expected to
be material.
Due to the factors above, as well as other market factors outside the Company's
control, the Company's future earnings and stock price may be subject to
significant volatility. Past financial performance should not be considered a
reliable indication of future performance. The investment community should use
caution in using historical trends to estimate future results or trends. In
addition, if future results vary significantly from expectations of analysts,
the Company's stock price could be adversely impacted.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During 1995, the Company filed suit in U.S. Federal District Court in Portland,
Oregon, against Quickturn Design Systems, Inc. (Quickturn) for a declaratory
judgment of non-infringement, invalidity and unenforceability of three of
Quickturn's patents. These patents relate to products of Meta Systems SRL
(Meta), a French company acquired by the Company in 1996 that manufactures and
sells computers used for accelerated verification of hardware designs. Quickturn
filed a counterclaim against the Company alleging infringement of six of
Quickturn's patents, including the three patents subject to the declaratory
judgment action. The counterclaim seeks a permanent injunction prohibiting sales
of the Company's SimExpress products in the U.S., compensatory and punitive
damages and attorneys' fees.
Quickturn filed an administrative complaint with the U.S. International Trade
Commission (ITC) in 1996 seeking to prohibit the distribution of SimExpress
products in the U.S. In August 1996, the ITC issued a ruling effectively
prohibiting the importation of this technology into the U.S. In August 1997, the
ITC Administrative Law Judge recommended the imposition of evidentiary and
monetary sanctions against the Company and Meta. This order has been appealed
and no dollar amount of monetary sanctions has been set. In August 1997, the
U.S. District Court in Portland, Oregon granted Quickturn a preliminary
injunction prohibiting the Company from selling its SimExpress version 1.0 and
1.5 accelerated verification systems in the U.S. The injunction also prohibits
the Company from shipping current U.S. inventory modified in the U.S. to any of
its non-U.S. locations. In October 1997, Quickturn also filed an action
against Meta and the Company in a German court alleging infringement by
SimExpress of a German patent.
In December 1997, the ITC issued a Cease and Desist Order prohibiting the
Company from importing SimExpress products or components, and from providing
repair or maintenance services to existing U.S. customers. That order took
effect in 1998. A trial in the U.S. District Court action will likely occur
during the second or third quarter of 1998, in which Quickturn will seek a
permanent injunction, compensatory damages, punitive damages, and attorneys'
fees. An unfavorable ruling in this trial could involve substantial cost to the
Company and effectively prevent the Company from manufacturing and selling its
existing accelerated verification of hardware design products in the U.S.
market.
In February 1998, Meta filed a patent infringement action against Quickturn in
the U.S. District Court for the Northern District of California in San Jose,
California. The complaint, which is based on a patent that Meta has the right to
enforce, seeks damages for infringement as a result of Quickturn's manufacture
and sale of certain emulation equipment. Meta, which has been joined in the suit
by Aptix Corporation of San Jose, California, will ultimately seek an injunction
prohibiting further infringement by Quickturn. A trial date in the U.S. District
Court has not been set at this time.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MENTOR GRAPHICS CORPORATION
(Registrant)
GREGORY K. HINCKLEY
-----------------------------------------
Gregory K. Hinckley
Executive Vice President and Chief
Operating Officer/Chief Financial
Officer
14
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