Page 1
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 June 30, 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
August 1, 1994: 48,525,837
MENTOR GRAPHICS CORPORATION
Index to Form 10Q
PART I FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Operations for the three 3
months ended June 30, 1994 and 1993
Consolidated Statements of Operations for the six 4
months ended June 30, 1994 and 1993
Consolidated Balance Sheets as of June 30, 1994 5
and December 31, 1993
Consolidated Statements of Cash Flows for the 6
six months ended June 30, 1994 and 1993
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-12
PART II OTHER INFORMATION
Item 4. Submission of matters to a Vote of
Security Holders 13-14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Three Months Ended
June 30,
1994 1993
Revenues:
System and software $ 43,485 $ 51,427
Service and support 38,045 36,989
Total revenues 81,530 88,416
Cost of revenues:
System and software 8,819 13,412
Service and support 17,010 18,790
Total cost of revenues 25,829 32,202
Gross margin 55,701 56,214
Expenses:
Research and development (note 3) 17,032 20,043
Marketing, general and administration 34,241 35,538
Total expenses 51,273 55,581
Operating income 4,428 633
Other income (expense), net 331 (271)
Income before income taxes 4,759 362
Provision for income taxes 960 72
Net income $ 3,799 $ 290
Net income per common and
common equivalent share $ .08 $ .01
Weighted average number of common and common
equivalent shares outstanding 49,601 47,308
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income (loss) per share)
(Unaudited)
Six Months Ended
June 30,
1994 1993
Revenues:
System and software $ 92,324 $ 100,269
Service and support 73,657 70,786
Total revenues 165,981 171,055
Cost of revenues:
System and software 19,116 27,457
Service and support 33,245 35,013
Total cost of revenues 52,361 62,470
Gross margin 113,620 108,585
Expenses:
Research and development (note 3) 35,576 39,081
Marketing, general and administration 69,442 72,188
Total expenses 105,018 111,269
Operating income (loss) 8,602 (2,684)
Other income (expense), net 889 (524)
Income (loss) before income taxes 9,491 (3,208)
Provision for income taxes 1,900 800
Net income (loss) $ 7,591 $ (4,008)
Net income (loss) per common and
common equivalent share $ .15 $ (.09)
Weighted average number of common and common
equivalent shares outstanding 49,571 45,983
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
As Of As Of
June 30, 1994 December 31,1993
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 110,156 $ 95,958
Short-term investments 7,087 13,610
Trade accounts receivable, net 80,962 72,655
Other receivables 4,054 4,167
Inventory 677 2,299
Prepaid expenses and
other (note 2) 10,980 9,399
Total current assets 213,916 198,088
Property, plant and equipment, net 101,522 104,912
Cash and investments, long-term 30,000 30,000
Other assets (note 3) 23,909 20,584
Total $ 369,347 $ 353,584
Liabilities & Stockholders' Equity
Current liabilities:
Short-term borrowings $ 7,485 $ 6,364
Accounts payable 8,800 10,637
Income taxes payable 11,191 9,974
Accrued and other liabilities 53,005 57,139
Deferred revenue 16,788 17,638
Total current liabilities 97,269 101,752
Long-term debt 54,310 54,321
Other long-term deferrals 2,794 1,800
Total liabilities 154,373 157,873
Stockholders' equity:
Common stock 250,013 243,951
Accumulated deficit (47,288) (55,779)
Foreign currency translation
adjustment 12,249 7,539
Total stockholders' equity 214,974 195,711
Total $ 369,347 $ 353,584
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1994 1993
Operating Cash Flows:
Net income (loss) $ 7,591 $ (4,008)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization
of property, plant & equipment 12,515 13,774
Deferred taxes (21) 36
Amortization of other assets 3,694 3,977
Changes in operating assets and liabilities:
Trade accounts receivable (5,178) (2,580)
Inventory 223 4,342
Prepaid expenses and other assets (3,415) 2,121
Accounts payable (3,360) (1,804)
Accrued liabilities (5,002) (7,261)
Other liabilities and deferrals 646 2,001
Net cash provided by operating activities 7,693 10,598
Investing Cash Flows:
Maturities of short-term investments 6,523 18,793
Purchases of property and equipment (6,456) (15,807)
Development of corporate facilities -- (355)
Capitalization of software
development costs (3,073) (2,394)
Net cash provided (used) by investing
activities (3,006) 237
Financing Cash Flows:
Proceeds from issuance of common stock 6,062 4,499
Increase (decrease) in
short-term borrowings 837 (192)
Repayment of long-term debt (11) (1,148)
Dividends paid to stockholders -- (5,508)
Net cash provided (used) by
financing activities 6,888 (2,349)
Effect of exchange rate changes on cash
and cash equivalents 2,623 1,532
Net change in cash and cash equivalents 14,198 10,018
Cash and cash equivalents at
beginning of period 95,958 72,012
Cash and cash equivalents at
end of period $ 110,156 $ 82,030
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 $900 as of June 30,
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 consolidated 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 six months of 1994 and 1993, $3,073 and $2,394 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 $3,487 and $3,448 for the six months ended June 30,
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:
Six Months Ended
June 30,
1994 1993
Interest paid $ 1,053 $ 2,572
Income taxes paid,
net of refunds $ 1,147 $ 53
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 June 30, 1994,
totaled $43,485, a decrease of $7,942 or 15% from the second
quarter of 1993. For the first six months of 1994, system and
software revenues declined $7,945 or 8% from the same period a
year ago. Second quarter system and software gross margins
increased to 80% in 1994 compared to 74% in the same period of
1993. For the first six months of 1994, system and software gross
margins improved to 79%, up from 73% in the same period of 1993.
During the first half of 1994 system and software revenues were
flat for the international regions compared to the same period
last year while North America experienced a 15% reduction for the
same periods. Revenues for the past three years have been
negatively impacted by a poor international economy. Japan
realized improvement over the first half of last year, offset by
reduced sales in the Pacific Rim. From December 31, 1993 to June
30, 1994, the U.S. dollar weakened approximately 12% against the
Japanese yen, resulting in higher U.S. dollar revenue from
Japanese yen based sales. Exclusive of currency exchange rate
changes, the Japanese economy continues to reflect weakness.
While difficult to predict, the Company's revenues may continue to
be negatively impacted by the economic recession in Japan for the
next several quarters. In addition, 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 their
respective territories.
Historically the Company experiences improved order activity and
revenue levels in the second and fourth quarters while the first
and third quarters are slower. Japan usually has posted stronger
third quarter order activity which somewhat offset an otherwise
seasonally slow quarter for the Company. Due to continued
weakness in the Japanese economy and reduced third quarter order
levels in other regions, the results of the Company's third
quarter system and software revenue may be consistent with
historical seasonality. System and software revenue levels are
dependent on order activity, as such sustained revenue performance
for the next quarter is not guaranteed.
While the software component of system and software revenue was
comparable for the first halves of 1994 and 1993, the level of
hardware sales continues to decline. The Company continues to
experience some hardware sales to meet customer requests. In the
first half of 1994, the hardware component of system and software
revenue declined to 9% from 17% for the same period 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 $1,477 and $3,487 for the second
quarter and first half of 1994, respectively, compared to $1,920
and $3,448 for the same periods a year ago. Amortization levels
have declined in the second quarter as several capitalized
projects became fully amortized. 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 second quarter of 1994 were
$38,045, an increase of 3% from the comparable quarter of 1993.
For the first six months of 1994, service and support revenues
totaled $73,657, an increase of 4% from the same period 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.
Renewals rebounded in the second quarter of 1994 consistent with
historical service and support revenue trends. Company accounting
policy dictates that revenue on renewal of maintenance contracts
is recognized only when customer purchase orders are received and
services are delivered, which results in the first versus second
quarter revenue trend described above.
Service and support gross margins were 55% and 49% for the
quarters ended June 30, 1994 and 1993, respectively, and 55% and
51% for the first six months of 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 half of 1994, the hardware component of
service and support revenue declined from 6% to 2% compared to the
same period last year.
Professional service revenue increased 6% in the first half 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.
Operating Expenses
Gross research and development (R&D) expenses were $19,232 and
$38,649 for the second quarter and first six months of 1994,
respectively, compared to $21,074 and $41,475 for the same periods
of 1993, respectively. During the second quarter and first six
months of 1994, the Company capitalized R&D costs of $2,200 and
$3,073, respectively, compared to $1,031 and $2,394 for the same
periods of 1993, respectively. Net R&D costs were $17,032 for the
quarter ended June 30, 1994, compared to $20,043 for the same
period of 1993. For the first six months of 1994 and 1993, net
R&D costs were $35,576 and $39,081, respectively.
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 first
quarter of 1994, 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. See restructuring costs discussion below.
During the second quarter and the first six months of 1994,
marketing, general and administration expenses (MG&A) were $34,241
and $69,442, respectively, compared to $35,538 and $72,188 for the
same periods of 1993, respectively. The reduction of MG&A
expenses is attributable primarily 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 half of 1994. There have been no material
changes in the primary elements of the restructure accrual of
$24,800, which was recorded in 1993. Costs to be incurred in
executing the restructuring plan consist 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 should 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 $21,000 of the 1993 restructuring charge should
result in cash outflows during 1994. For the first half,
restructure-related cash outflows were approximately $5,000. For
the third quarter of 1994, disbursements are anticipated to be
near $5,000, with the balance of $11,000 scheduled for the fourth
quarter of the 1994. Approximately $4,000, primarily related to
facilities closures and employee relocation, is expected to be
disbursed after 1994.
Other Income (Expense)
During the second quarter and the first six months of 1994, other
income was $331 and $889, compared to other expense of $271 and
$524 for the same periods of 1993, respectively. Interest income
from investments was $990 and $2,082 for the second quarter and
first half of 1994, respectively, compared to $971 and $2,178 for
the same periods of 1993. During the second quarter and first
half of 1994, interest expense amounted to $869 and $1,504,
respectively, down from $976 and $2,600 for the comparable periods
in 1993. The reduction in interest expense is attributable to
lower average debt outstanding during the comparable periods.
Provision for Income Taxes
The provision for income taxes amounted to $960 for the quarter
ended June 30, 1994, as compared to $72 for the same period in
1993. For the first six months of 1994, the provision for income
taxes was $1,900 compared to $800 for the same period a year ago.
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 foreign currency transaction gain of $38
and loss of $53 during the second quarter and first half of 1994,
respectively, compared to a net gain of $264 and $405 during the
same periods a year ago. 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 June 30, 1994, increased to $12,249 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 June 30, 1994, the U.S. dollar weakened
approximately 12% against the Japanese yen. In addition, the U.S.
dollar weakened approximately 6% against the European currencies
during the first half 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 June 30, 1994 were $147,243 compared
to $139,568 at the end of 1993. Cash provided by operations was
$7,693 for the first six months of 1994 compared to $10,598
during the same period of 1993. Cash provided by operations was
negatively impacted by late quarter shipments and a large software
and services contract, resulting in an increase in trade
receivable balances of $8,307. In addition, there was an increase
in long-term receivables of $2,379 for the long-term portion of
the same large software and services contract, classified in other
assets. Also, accrued liabilities decreased $5,002 in the first
half of 1994 due primarily to restructure-related cash outflows.
Cash and short-term investments for the six months ended June 30,
1994 were positively impacted by proceeds from the issuance of
common stock of $6,062 as a result of increased employee option
exercises due to an improved average stock price during the first
quarter, offset by investment in property, plant and equipment of
$6,456.
Inventory
Inventory levels at June 30, 1994 totaled $677, down $1,622 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 primarily
consists of documentation and CD ROM media for software updates.
Inventory is expected to be at approximately current levels for
the balance of 1994. 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 $23,909 at June 30, 1994 from $20,584 at
year-end 1993. Net capitalized software development costs
decreased by $414 as capitalization and amortization were $3,073
and $3,487, respectively, during the first half of 1994. Long-
term receivables increased by $2,379 as a result of a long-term
customer contract calling for software products and professional
services.
Capital Resources
Total capital expenditures decreased to $6,456 through June 30,
1994, compared to $16,162 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 4. Submission of Matters to a Vote of Security Holders.
The 1994 Annual Meeting of Shareholders of Company was held
pursuant to notice at 5:00 p.m. Pacific time on Tuesday, April 26,
1994 at Company's offices in Wilsonville, Oregon. There were
present at the meeting, in person or represented by proxy, the
holders of 41,200,762 shares of the outstanding common stock,
which represented approximately 85.8% of the outstanding shares.
Voting information set forth below was provided by First
Interstate Bank of Oregon, N.N., as Inspector of Election. The
matters voted on at the meeting and the votes cast are as follows:
Issue One-Election of Nominees for Directors. The nominees for
directors listed below and presented to the meeting were elected
directors of the Company upon each receiving the affirmative vote
of the holders of approximately 99.6% of those shares represented
at the meeting, to serve until the next annual meeting of the
shareholders and until their successors shall have been elected
and qualified.
FOR WITHHOLD
Walden C. Rhines 41,135,397 65,365
Marsha B. Congdon 41,089,860 110,902
David R. Hathaway 41,127,722 73,040
Fontaine K. Richardson 41,111,461 89,301
Jon A. Shirley 41,122,651 75,081
David N. Strohm 41,126,992 73,770
Issue Two-Amendment of the Company's 1982 Stock Option Plan. The
shareholders approved certain amendments to the Company's 1982
Stock Option Plan by the affirmative vote of the holders of
approximately 55.7% of those shares represented at the meeting.
BROKER
FOR AGAINST ABSTAIN NONVOTES
22,955,025 10,999,624 150,754 7,095,359
Issue Three-Amendment of the Company's 1987 Stock Option Plan.
The shareholders approved certain amendments to the Company's 1987
Stock Option Plan by the affirmative vote of the holders of
approximately 52% of those shares represented at the meeting.
BROKER
FOR AGAINST ABSTAIN NONVOTES
21,461,438 11,142,581 174,064 8,422,679
Issue Four-Ratification of KPMG Peat Marwick. The shareholders
ratified the engagement of KPMG Peat Marwick as independent
auditors of the Company by the affirmative vote of the holders of
approximately 99.6% of those shares represented at the meeting.
BROKER
FOR AGAINST ABSTAIN NONVOTES
41,047,482 77,419 75,419 NONE
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 August
11, 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
August 11, 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 June 30, 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
