SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended March 31, 1994. Commission File No. 0-13442
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0786033
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (503) 685-7000
NO CHANGE
Former name, and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of common stock, no par value, outstanding as of
April 30, 1994: 48,335,741
MENTOR GRAPHICS CORPORATION
Index to Form 10Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three 3
months ended March 31, 1994 and 1993
Consolidated Balance Sheets as of March 31, 1994 4
and December 31, 1993
Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1994 and 1993
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12 - 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income (loss) per share)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Revenues:
System and software $ 48,839 $ 48,842
Service and support 35,612 33,797
Total revenues 84,451 82,639
Cost of revenues:
System and software 10,29 14,045
Service and support 16,235 16,223
Total cost of revenues 26,532 30,268
Gross margin 57,919 52,371
Expenses:
Research and development (note 3) 18,544 19,038
Marketing, general and
administration 35,201 36,650
Total expenses 53,745 55,688
Operating income (loss) 4,174 (3,317)
Other income (expense), net 558 (253)
Income (loss) before
income taxes 4,732 (3,570)
Provision for income taxes 940 728
Net income (loss) $ 3,792 $ (4,298)
Net income (loss) per common and
common equivalent share $ .08 $ (.09)
Weighted average number of common and common
equivalent shares outstanding 49,542 45,803
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
(Unaudited)
As Of As Of
March 31, 1994 December 31, 1993
Assets
Current assets:
Cash and cash equivalents $ 96,236 $ 95,958
Short-term investments 15,545 13,610
Trade accounts receivable, net 77,228 72,655
Other receivables 4,233 4,167
Inventory 541 2,299
Prepaid expenses and
other (note 2) 11,840 9,399
Total current assets 205,623 198,088
Property, plant and equipment, net 103,844 104,912
Cash and investments, long-term 30,000 30,000
Other assets (note 3) 25,090 20,584
Total $ 364,557 $ 353,584
Liabilities & Stockholders' Equity
Current liabilities:
Short-term borrowings $ 8,421 $ 6,364
Accounts payable 8,309 10,637
Income taxes payable 10,355 9,974
Accrued and other liabilities 55,261 57,139
Deferred revenue 17,770 17,638
Total current liabilities 100,116 101,752
Long-term debt 54,317 54,321
Other long-term deferrals 1,659 1,800
Total liabilities 156,092 157,873
Stockholders' equity:
Common stock 248,404 243,951
Retained deficit (50,350) (55,779)
Foreign currency
translation adjustment 10,411 7,539
Total stockholders' equity 208,465 195,711
Total $ 364,557 $ 353,584
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Operating Cash Flows:
Net income (loss) $ 3,792 $ (4,298)
Adjustments to reconcile net
income (loss) to
net cash provided (used) by
operating activities:
Depreciation and amortization
of property, plant & equipment 6,372 6,531
Deferred taxes (40) 493
Amortization of other assets 2,170 2,068
Changes in operating assets and
liabilities:
Trade accounts receivable (2,800) 395
Inventory 266 1,724
Prepaid expenses and other assets (6,008) (42)
Accounts payable (3,101) (37)
Accrued liabilities (2,372) (173)
Other liabilities and deferrals 15 1,228
Net cash provided (used) by operating
activities (1,706) 7,889
Investing Cash Flows:
Maturities (purchases) of
short-term investments (1,935) 21,763
Purchases of property and equipment (3,058) (8,327)
Development of corporate facilities 0 (37)
Capitalization of software
development costs (873) (1,363)
Net cash provided (used) by investing
activities (5,866) 12,036
Financing Cash Flows:
Proceeds from issuance of
common stock 4,452 1,502
Increase (decrease) in short-term
borrowings 2,731 (51)
Repayment of long-term debt (844) (120)
Dividends paid to stockholders 0 (2,748)
Net cash provided (used) by financing
activities 6,339 (1,417)
Effect of exchange rate changes on
cash and cash equivalents 1,511 567
Net change in cash and cash equivalents 278 19,075
Cash and cash equivalents at beginning
of period 95,958 72,012
Cash and cash equivalents at end
of period $ 96,236 $ 91,087
See accompanying notes to unaudited consolidated financial
statements.
MENTOR GRAPHICS CORPORATION
Notes to Consolidated Financial Statements
(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 1993 to conform with the 1994
presentation.
(2) Change in Accounting Principle, Accounting for
Certain Investments in Debt and Equity Securities- In
May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Statement No. 115 requires reporting of
investments as either held to maturity, trading or available
for sale. The Company owns common stock and common stock
warrants of an independent public company with an original
carrying cost of $0 and a market value of $1,638 as of March
31, 1994. Under Statement No. 115, the securities have been
classified as held for sale, which required the difference
between original carrying cost and market value to be
recognized which is included on the balance sheet in prepaid
and other assets, and as a reduction of the same amount in
accumulated deficit. No other investments owned by the
Company are expected to be materially impacted by provisions
of this Statement as the underlying carrying values
approximate market.
(3) Capitalization of Software Development Costs -
During the first three months of 1994 and 1993, $873 and
$1,363 of new product development costs were capitalized and
included in other assets on the consolidated balance sheets,
respectively. Amortization of previously capitalized
software development costs amounted to $2,010 and $1,528 for
the three months ended March 31, 1994 and 1993, respectively,
and is included in system and software cost of revenues on
the consolidated statements of operations.
(4) Supplemental Disclosures of Cash Flow Information -
The following provides additional information concerning cash
flow activities:
Three Months Ended
March 31,
1994 1993
Interest paid $ 582 $ 1,883
Income taxes paid,
net of refunds $ 728 $ 111
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
(All numerical references are in thousands, except for
dividend payment amount and percentages)
RESULTS OF OPERATIONS
REVENUES AND GROSS MARGINS
System and Software
System and software revenues for the quarter ended March 31, 1994,
totaled $48,839 compared to $48,842 for the same period of 1993.
As a percentage of system and software revenues, gross margins
were 79% for the quarter ended March 31, 1994, compared to 71% for
the first quarter of 1993.
Revenues during the first quarter of 1994 improved by 13% for the
international regions compared to the same period last year while
North America experienced a 13% reduction for the same periods.
Revenues for the past three years have been negatively impacted by
a poor international economy. Much of the international
improvement over the first quarter of last year is a result of
exchange rate changes in Japan. While difficult to predict, the
Company's revenues will likely continue to be negatively impacted
by the economic recession in Japan for the next several quarters.
For North America, the reduction is attributable to a planned
reduction in hardware revenue. Also, the North American sales
force executed a reorganization during the first quarter of 1994
which resulted in reduced productivity in the region. The goal of
the reorganization was to streamline operations by reducing two
layers of management and better align the sales team with
respective territories.
Historically the Company experiences improved order activity in
the second and fourth quarter while the first and third quarters
are slower. Japan has usually posted stronger third quarter order
activity which has somewhat off-set an otherwise seasonally slow
quarter. Due to continued weakness in the Japanese economy, third
quarter order levels may result in lower system and software
revenue levels than the first quarter. System and software
revenue levels are dependant on order activity, as such sustained
performance for the next two quarters is not guaranteed.
While revenue levels were comparable for the quarters ended March
31, 1994 and 1993, the overall mix of hardware versus software
continues to move toward software. The Company experienced some
hardware sales to meet customer requests when gross margins were
above a minimum level. In the first quarter of 1994, the hardware
component of system and software revenue declined to 10% from 20%
for the same quarter last year. This mix shift resulted in
improved gross margins as software gross margins are much higher
compared to hardware gross margins. The Company expects the
decline of hardware revenue to continue as the year progresses
which should benefit gross margins.
Gross margins are significantly impacted by levels of third party
software content for which royalties are paid, and amortization of
previously capitalized software development costs. Amortization
of previously capitalized software development costs to system and
software cost of revenues was $2,010 and $1,528 for the first
quarter of 1994 and 1993, respectively. The increase is a result
of amortization in 1994 on a higher level of capitalized costs
accumulated during development of Version 8 software products.
Amortization levels are expected to decline as several capitalized
projects will become fully amortized during the year. Levels of
third party software content in future revenues are difficult to
predict as they are based on customer demand for non-Company owned
software, which has historically varied from quarter to quarter.
Service and Support
Service and support revenues for the first quarter of 1994 were
$35,612, an increase of 5% from the comparable quarter of 1993.
The increase in service and support revenues is attributable to
growth in the Company's installed customer base, and continued
success of the Company's software support programs. These
positive factors were offset by a reduction in hardware support
revenues as many customers contracted directly with primary
providers of hardware service. Renewal of annual software
maintenance contracts was seasonally slow during the first quarter
of 1994, as it also was in the comparable period of 1993.
Service and support gross margins were 54% and 52% for the
quarters ended March 31, 1994 and 1993, respectively. The
increase in service and support gross margins is primarily
attributable to the mix shift in revenues towards higher gross
margin software support and away from lower gross margin hardware
support. In the first quarter of 1994, the hardware component of
service and support revenue declined from 7% to 2% compared to the
same quarter last year.
Professional service revenue was approximately flat during the
first quarter of 1994 compared to the same period of 1993. The
expected trend for professional services is an increase in revenue
levels over time as the business develops. A first quarter 1994
reorganization of the professional service team worldwide
negatively impacted the progress of professional service revenues.
Gross margins on professional service revenue declined in the
first quarter due to lower than planned staff utilization.
OPERATING EXPENSES
Gross research and development (R&D) expenses were $19,417 for the
first quarter of 1994 compared to $20,401 for the same period of
1993. Net R&D costs were $18,544 for the quarter ended March 31,
1994, compared to $19,038 for the same period of 1993. The
Company capitalized R&D costs of $873 and $1,363 during the first
quarters of 1994 and 1993, respectively. Capitalization during
the remainder of 1994 is expected to increase as development of
the Company's next release reaches capitalization milestones in
the second quarter of the year. Lower gross R&D expenses are
attributable to lower headcount due to attrition and some planned
reductions in force. The Company closed an Integrated Circuit
Division R&D site during the quarter, consolidating activities
with other pre-existing locations. Expense reductions for R&D
should continue as the Company further executes against its fourth
quarter 1993 plan for restructuring.
Marketing, general and administration expenses (MG&A) totaled
$35,201 and $36,650 for the first quarters of 1994 and 1993,
respectively. The reduction of MG&A expenses is attributable to
lower headcount. Expense reductions for MG&A should continue as
the Company further executes against its fourth quarter 1993 plan
for restructuring.
RESTRUCTURING COSTS
Implementation of the Company's restructuring plan approved by
management in December, 1993, proceeded as originally anticipated
during the first quarter of 1994. There have been no material
changes in the elements of the restructure accrual of $24,800,
which was recorded in 1993. Costs to be incurred in executing the
restructuring plan consists primarily of direct costs associated
with severance and relocation of employees, facilities closures,
and write-offs of excess equipment and intangible software
technology assets related to discontinued product development
activities.
Management continues to estimate that implementation of the
restructuring plan will reduce expenses by approximately $10,000
in 1994. These savings may be partially offset by increased
expenditures in other areas. When all elements of the
restructuring plan have been fully implemented, the Company
expects future expenses may be reduced even further.
Approximately $22,000 of the 1993 restructuring charge should
result in cash outflows during 1994. For the first quarter,
restructure-related cash outflows were approximately $1,000. For
the second quarter of 1994, disbursements are anticipated to be
near $4,000, with the balance of $17,000 scheduled for the second
half of the year. Approximately $3,000, primarily related to
facilities closures, is expected to be disbursed beyond 1994.
OTHER INCOME (EXPENSE)
Other income totaled $558 for the first quarter of 1994 compared
to expense of $253 for the same period of 1993. Interest income
from investments was $1,093 for the first quarter of 1994,
compared to $1,208 for the first quarter of 1993. During the
first quarter of 1994, interest expense amounted to $635, down
from $1,624 for the comparable period in 1993. The reduction in
interest expense is attributable to lower average debt outstanding
during the quarter.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $940 for the quarter
ended March 31, 1994, as compared to $728 for the same period in
1993. 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 carrybacks, and tax expense for subsidiaries with pre-tax
income. As such, the Company's income tax position and resultant
effective tax rate is uncertain for the remainder of 1994.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net loss from foreign currency
transactions of $91 during the first quarter of 1994 compared to a
net gain of $140 during the first quarter of 1993. 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,
1994, increased to $10,411 from $7,539 at the end of 1993. This
reflects the increase in the value of net assets denominated in
foreign currencies against the U.S. dollar since year-end 1993.
From December 31, 1993 to March 31, 1994, the U.S. dollar weakened
approximately 12% against the Japanese yen. The U.S. dollar did
not fluctuate significantly against the European currencies during
the first quarter of 1994. Generally, a weakening of the U.S.
dollar makes the Company's products less expensive in foreign
markets, which has a positive impact on the Company's revenues
over time. In addition, a weakening U.S. dollar results in higher
reported revenues and operating expenses due to translation of
local currency activity to U.S. dollars for consolidated financial
reporting.
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
CASH AND INVESTMENTS
Total cash and investments at March 31, 1994 were $141,781
compared to $139,568 at the end of 1993. Cash used by operations
was $1,706 for the first three months of 1994 compared to cash
provided by operations of $7,889 during the same period of 1993.
Cash provided by operations was negatively impacted by late
quarter shipments resulting in an increase in trade receivable
balances of $2,800 and by increase in long-term receivables of
$5,818 classified in other assets. Cash and short-term
investments for the three months ended March 31, 1994 were
positively impacted by proceeds from the issuance of common stock
of $4,452 as a result of increased employee option exercises due
to an improved average stock price during the quarter, and
increased short-term borrowings of $2,731, offset by investment in
property, plant and equipment of $3,058.
INVENTORY
Inventory levels at March 31, 1994 totaled $541, down $1,758 since
December 31, 1993. The reduction in inventory reflects the
Company's shift towards a software-only business model resulting
in the reclassification of demonstration equipment to property,
plant and equipment. In 1994 it is anticipated that the hardware
business will be immaterial to the Company's operations and as a
result demonstration equipment will not be promoted for sale as it
was in prior years. The remaining balance in inventory consists
of documentation and CD Rom media for software updates, and some
hardware targeted for shipments in the next quarter. Inventory is
expected to be at approximately current levels for the balance of
1994 dependant on levels of documentation and CD Rom media for
software updates. For any remaining hardware requests from
customers, the Company will use a drop ship approach, shipping
directly from the hardware vendor to the customer.
OTHER ASSETS
Other assets increased to $25,090 at March 31, 1994 from $20,584
at year-end 1993. Net capitalized software development costs
decreased by $1,137 as capitalization and amortization were $873
and $2,010, respectively, during the first quarter of 1994. Long-
term receivables increased by $5,818 as a result of a long-term
customer contract calling for software products and professional
services.
CAPITAL RESOURCES
Total capital expenditures decreased to $3,058 through March 31,
1994, compared to $8,364 for the same period of 1993. The
decrease in capital expenditures is a result of completing a
planned transition of the Company's R&D equipment to a more
complete Unix-based operating system environment in 1993. Future
capital expenditure plans include maintaining a state of the art
development environment, maintaining updated sales demonstration
equipment, and implementing a new global information system which
should begin in the fourth quarter of this year.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: none.
(b) No reports were filed on Form 8-K during the
quarter for which this report is filed.
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, on May
13, 1994.
MENTOR GRAPHICS CORPORATION
(Registrant)
R. Douglas Norby
R. Douglas Norby
Senior Vice President, and
Chief Financial Officer
James J. Luttenbacher
James J. Luttenbacher
Corporate Controller, and
Chief Accounting Officer
VIA ELECTRONIC TRANSMISSION
May 13, 1993
Securities and Exchange Commission
450 Fifth Street NW
Judiciary Plaza
Washington, DC 20549
Attention: Division of Corporate Finance
Re: Mentor Graphics Corporation
File No. 0-13442
On behalf of Mentor Graphics Corporation (Company), I enclose for
filing the Company's Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 on Form 10-Q for the
quarter ended March 31, 1994.
Please inform me of receipt of the enclosed material via the
Company's MCI mail address, 313-4100.
Sincerely yours,
MENTOR GRAPHICS CORPORATION
Frank S. Delia
Frank S. Delia
Vice President and Chief Administrative Officer
