Page
UNITED STATES 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 September 30, 1995. 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
incorporation or organization) Identification No.)
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
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
October 31, 1995: 55,454,205
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 September 30, 1995 and 1994
Consolidated Statements of Operations for the nine 4
months ended September 30, 1995 and 1994
Consolidated Balance Sheets as of September 30, 1995 5
and December 31, 1994
Consolidated Statements of Cash Flows for the 6
nine months ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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
September 30,
1995 1994
Revenues:
System and software $47,290 $41,674
Service and support 48,038 39,693
Total revenues 95,328 81,367
Cost of revenues:
System and software 7,955 7,871
Service and support 19,867 16,485
Total cost of revenues 27,822 24,356
Gross margin 67,506 57,011
Expenses:
Research and development 18,628 16,469
Marketing, general and
administration 35,118 33,124
Restructuring adjustment -- (5,600)
Merger related charges -- 8,265
Total expenses 53,746 52,258
Operating income 13,760 4,753
Other income, net 874 1,214
Income before income taxes 14,634 5,967
Provision for income taxes 1,760 900
Net income $12,874 $5,067
Net income per share $ .23 $ .10
Shares used in per share
calculations 56,025 51,872
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
Revenues:
System and software $137,182 $135,495
Service and support 137,639 110,944
Total revenues 274,821 246,439
Cost of revenues
System and software 24,392 24,332
Service and support 58,250 47,315
Total cost of revenues 82,642 71,647
Gross margin 192,179 174,792
Expenses:
Research and development 53,431 50,035
Marketing, general and
administration 107,755 106,884
Restructuring adjustment (2,040) (5,600)
Merger related charges 800 8,265
Total expenses 159,946 159,584
Operating income 32,233 15,208
Other income, net 3,862 2,122
Income before income taxes 36,095 17,330
Provision for income taxes 4,790 2,800
Net income $31,305 $14,530
Net income per share $ .57 $ .28
Shares used in per share
calculations 55,323 51,966
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
As of As of
September 30, 1995 December 31, 1994
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $154,419 $130,676
Short-term investments 31,425 7,180
Trade accounts receivable, net 76,755 82,285
Other receivables 2,772 4,853
Prepaid expenses and other 13,253 13,012
Total current assets 278,624 238,006
Property, plant and equipment, net 94,442 97,701
Cash and investments, long-term 30,000 30,000
Other assets 29,436 28,090
Total $432,502 $393,797
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $8,815 $8,450
Accounts payable 7,979 11,570
Income taxes payable 13,329 12,793
Accrued and other liabilities 45,296 48,765
Deferred revenue 21,216 17,649
Total current liabilities 96,635 99,227
Long-term debt 52,589 53,625
Other long-term deferrals 839 1,877
Total liabilities 150,063 154,729
Stockholders' equity:
Common stock 266,525 254,271
Retained earnings
(accumulated deficit) 2,346 (27,877)
Foreign currency translation
adjustment 13,568 12,674
Total stockholders' equity 282,439 239,068
Total $432,502 $ 393,797
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
Operating Cash Flows:
Net income $31,305 $14,530
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
property, plant & equipment 18,723 18,674
Deferred taxes (2,172) (54)
Amortization of other assets 6,413 5,390
Charge for in process R&D 400 8,265
Restructuring adjustment (2,040) (5,600)
Changes in operating assets and liabilities:
Trade accounts receivable 5,838 2,061
Prepaid expenses and other assets 2,226 (1,544)
Accounts payable (3,622) (4,978)
Accrued liabilities (226) (5,790)
Other liabilities and deferrals 3,482 2,898
Net cash provided by operating
activities 60,327 33,852
Investing Cash Flows:
Maturities (purchases) of short-term
investments (24,170) 9,314
Purchases of property and equipment (14,957) (8,425)
Capitalization of software
development costs (5,002) (4,064)
Purchase of businesses (3,820) (9,345)
Purchase of technology -- (1,770)
Net cash used by investing activities (47,949) (14,290)
Financing Cash Flows:
Proceeds from issuance of common stock 14,504 7,627
Repurchase of common stock (2,250) --
Increase (decrease) in short-term
borrowings 339 (4,826)
Repayment of long-term debt (1,038) (2,982)
Adjustment for pooling of interests (331) 899
Cash Distribution -- (1,848)
Net cash provided (used) by financing
activities 11,224 (1,130)
Effect of exchange rate changes on
cash and cash equivalents 141 2,969
Net change in cash and cash equivalents 23,743 21,401
Cash and cash equivalents at beginning
of period 130,676 95,958
Cash and cash equivalents at end
of period $ 154,419 $ 117,359
See accompanying notes to unaudited consolidated financial
statements.
MENTOR GRAPHICS CORPORATION
Notes to Consolidated Financial Statements
(All numerical references are in thousands, except for per share calculations)
(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 1994 to conform with the 1995
presentation.
(2) Acquisitions - On May 4, 1995, the Company completed the
acquisition of Axiom Datorer Skandinavien AB (Axiom),
headquartered in Stockholm, Sweden. Axiom is primarily
engaged in developing, marketing and supporting software
library tools used to model electronic components primarily
for the printed circuit board and to a lesser extent the
application specific integrated circuit markets of the
electronic design automation (EDA) industry. Axiom's
product offerings are complementary to the Company's current
broad line of EDA tools and systems. The total purchase
price was $480 in addition to Axiom's net deficit of $413
for a total acquisition cost basis of $893. The transaction
was accounted for as a purchase, and therefore, the
Consolidated Balance Sheet of Axiom has been included in the
accompanying Consolidated Balance sheets as of June 30,
1995. The cost of the acquisition was allocated on the
basis of estimated fair value of the assets and liabilities
assumed. This allocation resulted in a charge for in-
process R&D of $400, goodwill capitalization of $398 and
technology capitalization of $95. The charge for in-process
R&D was a result of allocating a portion of the acquisition
cost to Axiom's in-process product development that had not
reached technological feasibility. The goodwill costs will
be amortized over a three year period to R&D expense
primarily to recognize the value of the development work-
force acquired. The technology costs will be amortized over
a three year period to system and software cost of revenues.
Financial results subsequent to the acquisition date have
been included in the Consolidated Statements of Operations
and Cash Flows. The separate operational results of Axiom
were not material compared to the Company's overall results
of operations, and accordingly pro-forma financial
statements of the combined entities have been omitted.
On May 31, 1995, the Company issued 1,512 shares of its
common stock for all outstanding common stock of Exemplar
Logic, Inc. (Exemplar) headquartered in Alameda, California.
Exemplar develops, markets and supports a family of software
tools for high-level-design-automation for the application
specific integrated circuit and field programmable gate
array markets. Exemplar's product offerings are
complementary to the CompanyOs line of EDA tools and
systems. The Company accounted for this transaction as a
pooling of interests. The balance sheet of Exemplar is
included in the accompanying Consolidated Balance Sheet as
of September 30, 1995 and Exemplar's results of operations
are included in the accompanying Consolidated Statement of
Operations for all of 1995. The Company's prior year
financial statements were not restated due to the relative
materiality of Exemplar's separate financial statements for
1994 and prior. Merger expenses of $350 were for services
rendered to facilitate completion of the merger agreement
and severance costs.
(3) Restructuring- Implementation of the Company's
restructuring plan which was approved by management in
December 1993, and modified in 1994, continued during 1995.
Costs remaining 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.
During the second quarter of 1995, several elements of the
restructuring plan were adjusted due to updated information.
Costs associated with an international reorganization were
modified due to additional cost information related to
implementation activities associated with a new global
information system. In addition, certain actions associated
with a product discontinuance plan will not be taken as the
technology will be used by the Company's consulting
organization. As a result, the Company recorded a $2,040
credit during the second quarter of 1995 reflecting these
lower costs.
(4) Capitalization of Software Development Costs - During the
first nine months of 1995 and 1994, $5,002 and $4,064 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 $3,653 and $5,027 for
the nine months ended September 30, 1995 and 1994,
respectively, and is included in system and software cost of
revenues on the Consolidated Statements of Operations.
(5) Supplemental Disclosures of Cash Flow Information - The
following provides additional information concerning cash
flow activities:
Nine Months Ended
September 30,
1995 1994
Interest paid $ 1,671 $ 1,686
Income taxes paid, net of refunds $ 5,951 $ 2,054
(6) Stock Repurchase - In August, 1995 the Company's Board of
Directors approved a plan to repurchase, from time to time
over the next eighteen months on the open market, up to
$50,000 in market value of the CompanyOs common shares.
During the third quarter of 1995, the Company repurchased
110 shares on the open market with a market value of $2,250.
(7) Subsequent Events - On October 16, 1995, the Company issued
735 shares of its common stock for all outstanding common
stock of Precedence Incorporated (Precedence), headquartered
in Santa Clara, California. Precedence is primarily engaged
in developing, marketing and supporting simulation backplane
technology and co-simulation solutions for the electronic
design automation industry. Precedence's product offerings
are complementary to the Company's current broad line of EDA
tools and systems. The Company accounted for this
transaction as a pooling of interests. Since the
acquisition was consummated subsequent to September 30,
1995, the results of Precedence are not included in the
Consolidated Financial Statements. The Company's prior year
financial statements will not be restated due to the
relative materiality of Precedence's separate financial
statements for 1994 and prior. In addition, the separate
operating results of Precedence are not material compared
to the Company's overall results of operations, and
accordingly, pro-forma financial statements of the combined
entities have been omitted.
On October 9, 1995, the Company entered into a merger
agreement with Microtec Research, Inc. (Microtec),
headquartered in Santa Clara, California. Under terms of
the Agreement, which is subject to approval by the
shareholders of Microtec and certain other conditions, the
Company will issue an estimated 6,500 shares of its common
stock for all outstanding common stock of Microtec. The
Company anticipates that the transaction will be completed
prior to December 31, 1995. When consummated, the merger
will be accounted for as a pooling of interests. Microtec
is primarily engaged in developing and marketing products to
optimize the development and operation of embedded systems
across hardware/software boundaries. Microtec's integrated
software product solutions enable embedded systems
developers to increase productivity, thereby decreasing
costs of product development and reducing time-to-market for
new products. Microtec's product offerings are
complementary to the Company's current broad line of EDA
tools and systems. Since the acquisition has not been
consummated, the results of Microtec are not included in the
Company's Consolidated Financial Statements.
The following is a summary of certain information concerning
pro forma consolidated financial information for the Company
and Microtec for the interim periods presented:
Three Months Ended Nine Months Ended
September 3 September 30,
1995 1994 1995 1994
Total Revenues $106,737 $ 92,204 $309,681 $278,562
Operating Income 14,428 6,090 35,320 18,995
Net Income $13,398 $ 6,050 $33,974 $17,155
Net Income
per share $ 0 .21 $ 0 .10 $ 0 .56 $ 0 .30
Shares used in per share
calculations 62,494 57,599 61,091 57,620
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 merger had been consummated at the beginning
of the periods presented, nor is it necessarily indicative
of future operating results or financial position.
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
REVENUES AND GROSS MARGINS
System and Software
System and software revenues for the quarter ended September 30,
1995, totaled $47,290, representing an increase of $5,616 or 13%
from the third quarter of 1994. For the first nine months of
1995, system and software revenues increased $1,687 or 1% from
the same period a year ago. Third quarter system and software
gross margins increased slightly to 83% in 1995 compared to 81%
in the same period of 1994. For the first nine months of 1995
and 1994, system and software gross margins were 82%.
System and software revenues experienced only modest growth in
the first nine months of 1995 versus the same period of 1994 due
to a one-time contract which yielded approximately $11,000 in the
first quarter of 1994. The acquisitions of Anacad Electrical
Engineering Software GmbH (Anacad), Exemplar and Axiom
contributed approximately $5,400 of system and software revenues
for the first nine months of 1995 compared to zero for the same
period a year ago. In addition, a general weakening of the
U.S. dollar of approximately 3% to 4%, resulted in higher
reported system and software revenues due to translation of
local currency activity to U.S. dollars for the first nine
months of 1995 versus 1994.
System and software product revenues are shifting from maturing
product offerings to new product offerings. The extent to which
sales of new products will off-set declining sales of older
products will remain difficult to predict for some time. In
addition, revenue levels for newly acquired entities are
difficult to predict due to such variables as integration of
engineering and sales personnel.
Increasingly the Company seeks to expand existing product
offerings and pursue new lines of business through acquisitions.
Acquisitions accommodate the Company's strategic requirements
including filling gaps in existing products and technologies,
eliminating dependencies on third parties and creating avenues
into new lines of business. During the fourth quarter of 1995
the Company announced the acquisition of Precedence Incorporated
(Precedence) and entered into a merger agreement with Microtec
Research, Inc. (Microtec) which is pending approval by the
shareholders of Microtec and certain other conditions. Both
transactions are expected to be accounted for as a pooling of
interests. The impact of these acquisitions are not reflected in
the accompanying financial statements since the transactions were
not consummated during the third quarter of 1995.
System and software gross margin levels are dependent on such
factors as third party software content for which royalties are
paid, lower margin hardware revenue levels, and amortization of
previously capitalized software development costs and purchased
technology costs. Third party software royalty costs have been
favorably impacted by acquisitions of third parties where
existing agreements were in place. The Company continues to have
other third party contracts that contribute varying levels of
revenues and cost of revenues quarter to quarter. Similar to
Anacad, Exemplar and MTI, the fourth quarter 1995 Precedence
acquisition represents a business combination where a third party
agreement was in place. Future trends of third party revenue
content are difficult to predict since they are dependent on such
variables as new third party agreements, potential acquisitions
of third parties where existing agreements are in place, and
varying levels of customer demand for third party product
offerings.
Amortization of previously capitalized software development costs
to system and software cost of revenues was $1,181 and $3,653 for
the third quarter and first nine months of 1995, respectively,
compared to $1,540 and $5,027 for the same periods a year ago.
In 1994, amortization reflected a higher level of capitalized
costs accumulated during development of Version 8 software
products. The amortization level declined in the first nine
months of 1995 as several capitalized projects became fully
amortized during the prior year. Purchased technology
amortization to system and software cost of goods sold was $1,671
and $214 for the nine months ended September 30, 1995 and 1994,
respectively. The increase in purchased technology amortization
is due primarily to various technology acquisitions in 1994,
including the purchase of Anacad on September 30, 1994.
Exclusive of additional acquisitions, amortization of capitalized
software development and purchased technology costs is expected
to be approximately flat for the next several quarters.
Service and Support
Service and support revenues for the third quarter of 1995 were
$48,038, representing an increase of $8,345 or 21% from the
comparable quarter of 1994. For the first nine months of 1995,
service and support revenues totaled $137,639, representing an
increase of 24% from the same period of 1994.
Growth in software support revenue is attributable to growth in
the Company's installed customer base, acquisitions of Anacad and
Exemplar, and favorable effects of currency fluctuations. The
Company continues to experience increases of installed customer
base due to improved and expanded software product offerings. In
addition, a general weakening of the U.S. dollar resulted in
higher reported software support revenues due to translation of
local currency activity to U.S. dollars for the first nine months
of 1995 versus 1994. Since growth in software support is
dependent on continued success of the software product offerings,
increases in the Company's installed customer base, and the
impact of acquisitions, future software support revenue levels
are difficult to predict.
Professional and other service revenues for the third quarter of
1995 were approximately $12,200, an increase of 51% from the
comparable quarter of 1994. For the first nine months of 1995,
professional and other service revenues totaled approximately
$37,100, an increase of 51% from the same period of 1994.
Overall professional service revenues are expected to continue to
grow. In particular, integrated circuit technology center (ICTC)
custom design services are experiencing increased demand. Over
the past year, the Company has added resources to the ICTC
business in response to the increased demand resulting in higher
revenue levels as more design contracts are completed.
Service and support gross margins were 59% and 58% for the
quarters ended September 30, 1995 and 1994, respectively and 58%
and 56% for the first nine months of 1995 and 1994, respectively.
Service and support gross margins were favorably impacted by
higher software support revenue volume and unfavorably impacted
by professional service volume. Consistent with consulting and
training business models, gross margins generated by the
Company's professional service activities have been and are
expected to continue to be lower than software support.
Professional service gross margins improved for the quarter and
year to date but remain substantially lower than software
support. Future service and support gross margins are expected
to be lower as growth in the professional service business is
expected to be higher than growth in software support.
OPERATING EXPENSES
The following summarizes research and development (R&D) expenses:
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Gross R&D $20,570 $17,460 $58,433 $54,099
Capitalized R&D (1,942) (991) (5,002) (4,064)
Net R&D $18,628 $16,469 $53,431 $50,035
Higher gross R&D expenses are attributable to merger and
acquisition activity and accelerating depreciation of file-server
equipment used by the Company's engineers, off-set by lower base
business head count. The acquisitions of Anacad, Exemplar and
Axiom resulted in additional R&D expenses of approximately $4,400
in the first nine months of 1995, compared to zero in the same
period of 1994. The Company accelerated depreciation on the
remaining book value of its Wilsonville file-server environment
in the third quarter of 1995 which resulted in a one-time charge
to R&D of $1,440. Through an evaluation of the file-server
environment, the Company determined that changes in technology
had rendered the existing equipment obsolete. R&D expenses are
expected to increase as new business combinations are consummated
in the fourth quarter of 1995.
During the third quarter and the first nine months of 1995,
marketing, general and administration (MG&A) expenses were
$35,118 and $107,755, respectively, compared to $33,124 and
$106,884 for the same periods of 1994, respectively. The
increase in MG&A expenses is principally attributable to merger
and acquisition activity discussed above, off-set by lower base
business head count. The acquisitions of Anacad, Exemplar and
Axiom resulted in additional MG&A expenses of approximately
$5,800 in the first nine months of 1995, compared to zero in the
same period of 1994. In 1994, the Company streamlined its North
American, European and Japanese organizations to improve the
ratio of selling and administrative expense compared to regional
revenue levels. This process was executed throughout 1994
resulting in lower expense levels as the year progressed. In
addition, corporate administrative costs have been reduced. MG&A
expenses are expected to increase in the fourth quarter of 1995
as new business combinations are consummated and selling costs
increase due to a seasonally strong quarter.
MERGER RELATED CHARGES
Merger related charges are the result of a write-off of in-
process R&D of $400 associated with the Axiom transaction and
$400 in expenses primarily associated with the acquisition of
Exemplar for services rendered to facilitate completion of the
merger agreement and severance costs. On May 4, 1995, the
Company completed the acquisition of Axiom. The total purchase
price of Axiom was $480 in addition to Axiom's net deficit of
$413 for a total acquisition cost basis of $893. The acquisition
was accounted for as a purchase. The cost of the acquisition has
been allocated on the basis of estimated fair value of the assets
and liabilities assumed. This allocation resulted in a one-time
charge for in-process R&D of $400, capitalization of goodwill of
$398 and capitalization of technology of $95. The charge for in-
process R&D was a result of allocating a portion of the
acquisition cost to Axiom's in-process product development that
had not reached technological feasibility. On May 31, 1995, the
Company completed the merger with Exemplar. The transaction was
accounted for as a pooling of interests. The Company's prior
year financial statements were not restated due to relative
materiality of Exemplar's separate financial statements for 1994
and prior years. It is expected that merger related charges
associated with the acquisitions of Precedence and Microtec
should result in a fourth quarter charge which is currently being
studied. The costs associated with this charge include
elimination of duplicate facilities, severance costs related to
the termination of certain employees, the write-off of certain
property and equipment and legal and accounting fees associated
with administration of the merger activities.
RESTRUCTURING COSTS
Implementation of the Company's restructuring plan which was
approved by management in December 1993, and modified in 1994,
continued during 1995. Costs remaining 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.
During the second quarter of 1995, several elements of the
restructuring plan were adjusted due to updated information.
Costs associated with an international reorganization were
modified due to additional cost information related to
implementation activities associated with a new global
information system. In addition, certain actions associated with
a product discontinuance plan will not be taken as the technology
will be used by the Company's consulting organization. As a
result, the Company recorded a $2,040 credit during the second
quarter of 1995 reflecting these lower costs.
Approximately $8,000 of the December 31, 1994 restructuring
accrual of approximately $12,000 should result in cash outflows
during 1995. For the first nine months of 1995, restructure-
related cash outflows were approximately $3,400. For the fourth
quarter of 1995, disbursements are anticipated to be near $4,600.
Other dispositions include the second quarter adjustment of
$2,040 and approximately $2,000 to be disbursed after 1995,
primarily for facilities closures.
OTHER INCOME (EXPENSE)
During the third quarter and the first nine months of 1995, other
income was $874 and $3,862, compared to other income of $1,214
and $2,122 for the same periods of 1994, respectively. Interest
income from investments was $1,975 and $5,983 for the third
quarter and first nine months of 1995, respectively, compared to
$1,369 and $3,452 for the same periods of 1994. The increase in
interest income is primarily attributable to higher average cash,
cash equivalents and short term investments outstanding during
the comparable quarters. During the third quarter and first nine
months of 1995, interest expense amounted to $679 and $1,785,
respectively, up from $351 and down from $1,855 for the
comparable periods in 1994. In addition, the Company
experienced a net loss from foreign currency transactions of $335
and $181 during the third quarter and first nine months of 1995,
respectively, compared to a net gain of $194 and $141 during the
same periods a year ago.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1,760 for the quarter
ended September 30, 1995, as compared to $900 for the same period
in 1994. For the first nine months of 1995, the provision for
income taxes was $4,790 compared to $2,800 for the same period a
year ago.
Effective January 1, 1993 the Company adopted Statement No. 109,
"Accounting for Income Taxes." At that time a valuation
allowance for certain current deferred tax assets, and net
operating loss and tax credit carryforwards was established. The
valuation allowance as of December 31, 1994 was $46,213, of which
$1,974 was related to deferred tax assets of the Company's
Japanese subsidiary. The reserve was established when it was
more likely than not that some portion of the deferred tax asset
would not be realized. Based on current operating income levels
before tax for the Company's Japanese subsidiary, it has been
determined that it is now more likely than not that the Japanese
subsidiary's deferred tax assets will be realized. As such, the
tax provision for the third quarter and the last nine months of
1995 has been adjusted for the reversal of the valuation
allowance for the Japanese deferred tax assets. This reversal,
in addition to changes in operating income forecasts for certain
tax jurisdictions, results in a lower effective tax rate than was
posted in the first quarter of 1995. 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 1995.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net loss from foreign currency
transactions of $335 and $181 during the third quarter and first
nine months of 1995, respectively, compared to a net gain of $194
and $141 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 September 30,
1995, increased to $13,568 from $12,674 at the end of 1994. This
reflects the increase in the value of net assets denominated in
foreign currencies against the U.S. dollar since year end 1994.
During the third quarter of 1995, the Company entered into a
three year forward contract to stabilize the currency effects on
a portion of the Company's net investment in its Japanese
subsidiary. The contract to sell Yen 2.2 billion will guarantee
the Company $25,400 at the contract's expiration. Any
differences between the contracted currency rate and the currency
rate at each balance sheet date will impact the foreign currency
translation adjustment component of the stockholders' equity
section of the Consolidated Balance Sheet. The result is a
partial off-set of the effect of Japanese currency changes on
stockholders' equity during the contract term. This forward
contract should not impact current or future Consolidated
Statements of Operations.
During the period from December 31, 1994 to September 30, 1995,
the U.S. dollar weakened approximately 1% against the Japanese
yen and 6% against the European currencies. 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 September 30, 1995 were $185,844
compared to $137,856 at the end of 1994. Cash provided by
operations was $60,327 for the first nine months of 1995 compared
to $33,852 during the same period of 1994. Cash provided by
operations was positively impacted by net income of $31,305 for
the first nine months of 1995 compared to $14,530 for the same
period of 1994. In addition, strong collection efforts decreased
trade receivables by $5,838 offset by decreased accounts payable
of $3,622 due primarily to lower quarter-end purchasing activity
versus higher year end activity due to the final quarter attempt
to match costs with fiscal year budgets. Cash and short-term
investments at September 30, 1995 were positively impacted by
proceeds from the issuance of common stock of $14,504, offset by
repurchase of common stock of $2,250, investment in property,
plant and equipment of $14,957, and new business investments of
$3,820.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable decreased to $76,755 at September 30,
1995 from $82,285 at year end 1994. This decrease was
attributable to a more evenly distributed shipment pattern during
the first nine months of 1995 compared to the fourth quarter of
1994. As a result, a higher percent of shipments made during the
third quarter of 1995 were converted into cash collections before
the period ended.
OTHER ASSETS
Other assets increased to $29,436 at September 30, 1995 from
$28,090 at year-end 1994. Net capitalized software development
costs increased by $1,349 as capitalization and amortization were
$5,002 and $3,653, respectively, during the first nine months of
1995. This increase was also attributable to the purchase of
Axiom for $493 and $1,990 spent on investment in other technology
companies in which the Company owns a minority interest. This
increase in other assets was offset by amortization of goodwill
and purchased technology of $2,760.
CAPITAL RESOURCES
Total capital expenditures increased to $14,957 through September
30, 1995, compared to $8,425 for the same period of 1994. The
increase in capital expenditures is primarily a result of costs
associated with a new global information system. These
expenditures will continue as the year progresses. 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits No. 27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the
registrant during the quarter ended September 30,
1995.
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
November 13, 1995.
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
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