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 June 30, 1996. 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 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
July 31, 1996: 62,024,302
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, 1996 and 1995
Consolidated Statements of Operations for the six 4
months ended June 30, 1996 and 1995
Consolidated Balance Sheets as of June 30, 1996 5
and December 31, 1995
Consolidated Statements of Cash Flows for the 6
six months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
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,
1996 1995
Revenues:
System and software $ 65,286 $ 55,653
Service and support 51,072 49,955
Total revenues 116,358 105,608
Cost of revenues:
System and software 10,453 8,865
Service and support 22,423 20,355
Total cost of revenues 32,876 29,220
Gross margin 83,482 76,388
Operating expenses:
Research and development 21,089 21,137
Marketing and selling 35,152 35,464
General and administration 9,814 8,977
Restructure costs -- (2,040)
Merger and acquisition related charges 12,423 800
Total operating expenses 78,478 64,338
Operating income 5,004 12,050
Other income (expense), net (156) 2,179
Income before income taxes 4,848 14,229
Provision for income taxes 1,370 1,628
Net income $ 3,478 $ 12,601
Net income per common and
common equivalent share $ .05 $ .20
Weighted average number of common and
common equivalent shares outstanding 63,267 62,732
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Six Months Ended
June 30,
1996 1995
Revenues:
System and software $ 126,233 $ 108,634
Service and support 98,507 95,343
Total revenues 224,740 203,977
Cost of revenues
System and software 21,011 18,191
Service and support 44,424 38,831
Total cost of revenues 65,435 57,022
Gross margin 159,305 146,955
Operating expenses:
Research and development (R&D) 44,380 41,270
Marketing and selling 69,735 67,100
General and administration 19,529 18,693
Restructure costs -- (2,040)
Merger and acquisition related charges 16,833 800
Total operating expenses 150,477 125,823
Operating income 8,828 21,132
Other income, net 1,633 3,544
Income before income taxes 10,461 24,676
Provision for income taxes 2,210 3,862
Net income $ 8,251 $ 20,814
Net income per common and
common equivalent share $ .13 $ .34
Weighted average number of common and
common equivalent shares outstanding 63,057 62,212
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
As of As of
June 30, 1996 December 31, 1995
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 170,004 $ 185,825
Short-term investments 22,309 24,504
Trade accounts receivable, net 118,187 95,946
Other receivables 5,465 3,421
Prepaid expenses and other 14,789 15,155
Total current assets 330,754 324,851
Property, plant and equipment, net 100,502 99,363
Cash and investments, long-term 30,000 30,000
Other assets 43,729 38,160
Total $ 504,985 $ 492,374
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 7,289 $ 9,108
Accounts payable 14,543 9,484
Income taxes payable 15,652 14,542
Accrued and other liabilities 50,131 52,856
Deferred revenue 33,238 27,371
Total current liabilities 120,853 113,361
Long-term debt 52,476 52,700
Other long-term deferrals 1,648 2,102
Total liabilities 174,977 168,163
Stockholders' equity:
Common stock 285,646 285,809
Retained earnings 33,159 24,808
Foreign currency translation adjustment 11,203 13,594
Total stockholders' equity 330,008 324,211
Total $ 504,985 $492,374
See accompanying notes to unaudited consolidated financial
statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
Operating Cash Flows:
Net income $ 8,251 $ 20,814
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization of property,
plant & equipment 11,228 11,151
Deferred taxes (86) (41)
Amortization of other assets 4,771 5,136
Charge for in process R&D 12,423 400
Restructure costs -- (2,040)
Changes in operating assets and liabilities:
Trade accounts receivable (22,684) 8,638
Prepaid expenses and other assets 741 617
Accounts payable 2,684 (5,135)
Accrued liabilities (4,889) (4,577)
Other liabilities and deferrals 5,294 1,654
Net cash provided by operating activities 17,733 36,617
Investing Cash Flows:
Maturities (purchases) of short-term
investments 3,463 (22,434)
Purchases of property and equipment (12,188) (9,450)
Capitalization of software development costs (2,484) (3,441)
Purchase of businesses (17,540) (3,261)
Net cash used by investing activities (28,749) (38,586)
Financing Cash Flows:
Proceeds from issuance of common stock 4,964 11,281
Repurchase of common stock (6,952) --
Decrease in short-term borrowings (1,762) (1,098)
Repayment of long-term debt (224) (43)
Net cash provided (used) by financing
activities (3,974) 10,140
Effect of exchange rate changes on cash
and cash equivalents (831) 4,474
Net change in cash and cash equivalents (15,821) 12,645
Cash and cash equivalents at beginning
of period 185,825 143,254
Cash and cash equivalents at end of period $ 170,004 $ 155,899
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 1995 to conform with the 1996
presentation.
(2) Business Acquisitions - On January 31, 1996, the Company
issued 6,223 shares of its common stock for all outstanding
common stock of Microtec Research, Inc. (Microtec). In
addition, the Company reserved 688 shares of its common
stock for previously outstanding options to purchase
Microtec common stock. These options vest and become
exercisable under the terms of the respective, original
Microtec stock option agreements. The Company accounted for
this transaction as a pooling of interests and accordingly,
the Company's consolidated financial statements have been
restated to include the results of Microtec for all periods
presented. Microtec is primarily engaged in developing and
marketing embedded operating systems and 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.
On April 1, 1996, the Company completed the acquisition of
dQdt, Inc. (dQdt). dQdt is primarily engaged in developing
and marketing digital signal processing intellectual
property products. The total purchase price including
merger related costs and the re-issuance of 127 shares of
Company treasury stock (with a market value of $1,825) was
$2,303. 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 $1,323 and technology capitalization of $980.
The charge for in-process R&D was a result of allocating a
portion of the acquisition cost to dQdt's in-process product
development that had not reached technological feasibility.
On June 3, 1996, the Company completed the acquisition of
Seto Software GmbH (Seto). Seto is primarily engaged in
developing and marketing personal computer-based layout
tools used in the printed circuit board design process. The
total purchase price including merger related costs was
$3,495. 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 $1,747, goodwill capitalization of $225 and
technology capitalization of $1,523. The charge for in-
process R&D was a result of allocating a portion of the
acquisition cost to Seto's in-process product development
that had not reached technological feasibility.
On May 31, 1996, the Company completed the acquisition of
Meta Systems, Inc. (Meta). Meta is primarily engaged in
developing and marketing logic emulation products. The
total purchase price including merger related costs was
$13,741. 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 $9,353, goodwill capitalization of $3,297 and
technology capitalization of $1,091. The charge for in-
process R&D was a result of allocating a portion of the
acquisition cost to Meta's in-process product development
that had not reached technological feasibility.
The technology costs for dQdt, Seto and Meta will be
amortized over a three year period to system and software
cost of revenues. The goodwill costs for Seto and Meta will
be amortized over a three year period to R&D expense.
Financial results subsequent to the acquisition date have
been included in the consolidated statements of operations
and cash flows. The separate operational results of dQdt,
Seto and Meta were not material compared to the Company's
overall results of operations, and accordingly pro-forma
financial statements which include these entities have been
omitted.
(3) Capitalization of Software Development Costs - During the
first six months of 1996 and 1995, respectively $2,484 and
$3,441 of new product development costs were capitalized and
included in other assets on the consolidated balance sheets.
Amortization of previously capitalized software development
costs amounted to $3,140 and $2,776 for the six months ended
June 30, 1996 and 1995, 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 and non-cash investing activities:
Six Months Ended
June 30,
1996 1995
Interest paid $ 977 $ 1,113
Income taxes paid, net of refunds $ 472 $ 4,250
Issuance of common stock for
purchase of business $ 1,825 $ --
(5) Commitments and contingencies - The Company is involved in
various administrative matters and litigation. Management
believes that the ultimate outcome resulting from known
matters will not have a material adverse impact on the
Company's consolidated financial position or results of
operations.
During 1995, the Company filed suit in United States (U.S.)
Federal District Court against Quickturn Design Systems,
Inc. (competitor) for declarative judgment on non-
infringement, invalidity and unenforceability of three of
the competitor's patents in anticipation of acquiring Meta.
In January 1996, the competitor filed a complaint with the
International Trade Commission (ITC) seeking to hinder the
distribution of the Meta technology in the United States.
Early in the third quarter of 1996, the ITC issued a
temporary ruling allowing the importation of this technology
to the U.S., but requiring posting of a bond for each sale.
The required amount of the bond for each sale and the
likelihood of the Company losing the posted amounts is
uncertain at this time. There has been no final decision on
the Company's declaratory judgment claims and the Company
has applied for U.S. patent protection of certain aspects of
this technology. While the outcome of this matter is
uncertain at this time, management believes it will prevail.
(6) Net Income per Common and Common Equivalent Share - Net
income per common and common equivalent share was calculated
on the basis of the weighted average number of common shares
outstanding plus dilutive common stock equivalents related
to stock options outstanding.
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
BUSINESS ACQUISITIONS
In January 1996, the Company completed the acquisition of Microtec
Research, Inc. (Microtec), pursuant to a merger accounted for as a
pooling of interests. Accordingly, the results of Microtec are
included in the Company's consolidated financial statements for
all periods presented. A total of 6,223 shares of the Company's
common stock were issued in the transaction. Merger expenses of
$4,410 were incurred associated with the 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.
The Company acquired dQdt Inc. (dQdt), Seto Software GmbH (Seto),
and Meta Systems, Inc. (Meta) in April 1996, May 1996 and May
1996, respectively. These acquisitions were accounted for as
purchases and accordingly, their results of operations are
included in the Company's results of operations from the date of
acquisition. The cost of each acquisition was allocated on the
basis of estimated fair value of the assets and liabilities
assumed. These allocations resulted in a charge for in-process
research and development of $12,423, goodwill capitalization of
$3,522 and technology capitalization of $3,594.
REVENUES AND GROSS MARGINS
System and Software
System and software revenues for the quarter ended June 30, 1996,
totaled $65,286, representing an increase of $9,633 or 17% from
the second quarter of 1995. For the first six months of 1996,
system and software revenues increased $17,599 or 16% from the
same period a year ago. System and software gross margins for the
second quarter of 1996 remained consistent at 84% compared to the
same period of 1995. For the first six months of 1996 and 1995,
system and software gross margins were 83%.
System and software revenues during the first half of 1996
improved by 16% compared to the same period last year. Software
product revenue accounted for approximately 91% of the increase
while the decline in workstation hardware product revenue was more
than offset by emulation hardware revenue resulting from the
acquisition of Meta. System and software revenues were higher in
the first half of 1996 due to strong demand for the Company's
newer product offerings. In the last year, the Company has added
new library and data management products and products that operate
on the Windows 95 and Windows NT operating systems. In addition,
the Company's more mature product offerings continued to perform
well with a level of decline lower than the volume increases of
newer product offerings.
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. Amortization of previously capitalized software
development costs to system and software cost of revenues was
$1,433 and $3,140 for the second quarter and first six months of
1996, respectively, compared to $1,540 and $2,776 for the same
periods a year ago. Purchased technology amortization to system
and software cost of goods sold was $1,481 and $1,109 for the six
months ended June 30, 1996 and 1995, respectively. Due to the
acquisitions previously discussed, amortization of purchased
technology is expected to increase by approximately $300 per
quarter.
Sales of emulation systems, which are the result of the Company's
acquisition of Meta, are expected to have a negative impact on
system and software product gross margins over time. Meta
products include hardware which does not yield gross margins as
high as software product sales.
Service and Support
Service and support revenues for the second quarter of 1996 were
$51,072, representing an increase of 2% from the comparable
quarter of 1995. For the first six months of 1996, service and
support revenues totaled $98,507, representing an increase of 3%
from the same period of 1995. Growth in software support revenue
is attributable to growth in the Company's installed customer
base, and continued success of the Company's software support
programs. Professional and other service revenues for the second
quarter of 1996 were approximately $12,200, a decrease of 10% from
the comparable quarter of 1995. For the first six months of 1996,
professional and other service revenues were $24,200 compared to
$25,600 for the same period in 1995. The decline in professional
and other service revenue is attributable to a process of
realigning the business to better support the Company's integrated
systems design strategy. This required an internal focus of
resources which caused lower billable hours for revenue generating
services. Professional service productivity is expected to
improve over the second half of 1996.
Service and support gross margins were 56% and 59% for the
quarters ended June 30, 1996 and 1995, and 55% and 59% for the
first six months of 1996 and 1995, respectively. Service and
support gross margins were favorably impacted by higher software
support revenue volume and unfavorably impacted by professional
service margins. Professional service gross margins were
approximately break-even as the revenue levels were not in line
with the cost structure of the business. The Company's primary
focus will be on improvement of the revenue level through more
efficient utilization of consultants to improve gross margins in
the coming quarters.
Geographic Revenue Information
Domestic revenue from unaffiliated customers including service and
support revenue increased by 18% as compared to the second quarter
of 1995. Improvement of domestic revenue is partially the result
of higher first quarter backlog in 1996 versus the same period of
1995. International revenues from unaffiliated customers
including service and support revenue represented 44% and 48% of
total revenue for the second quarters of 1996 and 1995,
respectively. European and Japanese revenues were approximately
flat from the second quarter of 1995 to 1996. European and
Japanese revenue increased approximately 1% and 7%, respectively
for the first half of 1996 compared to the same period a year ago.
For the second quarter of 1996 compared to the same period a year
ago, a stronger U.S. dollar negatively impacted revenues by
approximately 4% and 28% in Europe and Japan, respectively. For
the first half of 1996 compared to the same period of 1995, a
stronger U.S. dollar negatively impacted revenues by approximately
2% and 18% in Europe and Japan, respectively. Exclusive of such
currency trends, 1996 Japanese revenue was favorably impacted by
improving economic conditions and more product offerings as
previously discussed. 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
The following summarizes R&D expenses:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Gross R&D $ 23,100 $ 22,364 $ 46,864 $ 44,711
Capitalized R&D (2,011) (1,227) (2,484) (3,441)
Net R&D $ 21,089 $ 21,137 $ 44,380 $ 41,270
Gross R&D expense was 19% and 21% of revenue for the second
quarter of 1996 and 1995, respectively and 21% and 22% of revenue
for the six months of 1996 and 1995, respectively. The decline in
R&D as a percent of revenue is primarily the result of strong
revenue growth and controlled expense outlays during the
comparable periods. Higher gross R&D expenses are attributable to
relocation of some of the Company's engineering team and
accelerating depreciation of file-server equipment used by the
Company's engineers. During the first quarter of 1996, the
Company accelerated depreciation on the remaining book value of
its Wilsonville file-server environment which resulted in a charge
to R&D of approximately $500. Through an evaluation of the file-
server environment, the Company determined that changes in
technology had rendered the existing equipment obsolete. The
Company is also consolidating certain engineering activities from
New Jersey to Wilsonville to improve productivity of certain
development activities and reduce future operating costs of such
activities. The costs of this transition are substantially
complete.
Capitalization of software development costs was substantially
lower in the first half of 1996 compared to the same period of the
prior year due to timing and content of product development
activities. In the first quarter of 1996, the Company's product
development efforts were focused on improvement of existing
functionality versus new product enhancements. Significant
product enhancement projects began to reach capitalization
milestones in the second quarter of 1996, resulting in higher
capitalized software development costs. On an absolute dollar
basis, R&D costs are expected to increase as the purchases of Meta
and Seto are combined for a full quarter versus only the last
month of the second quarter of 1996.
Marketing and selling expense totaled $35,152 and $35,464 or 30%
and 34% of revenue for the second quarter of 1996 and 1995,
respectively. Marketing and selling expense totaled $69,735 and
$67,100 or 31% and 33% of revenue for the six months of 1996 and
1995, respectively. The decline in marketing and selling costs is
related to the integration of the Anacad sales force into the
existing sales channel. In addition, a stronger U.S. dollar
during the second quarter of 1996 compared to the same period a
year ago, positively impacted expenses by approximately 5% and 25%
in Europe and Japan, respectively. For the first half of 1996
compared to the same period of 1995, a stronger U.S. dollar
positively impacted expenses by approximately 1% and 15% in Europe
and Japan, respectively. This is somewhat offset by higher
commissions paid to sales representatives. On an absolute dollar
basis, marketing and selling costs are expected to increase as the
purchases of Meta and Seto are combined for a full quarter versus
only the last month of the second quarter of 1996.
General and administrative expense totaled $9,814 and $8,977 or 8%
and 9% of revenue for the second quarter of 1996 and 1995,
respectively. General and administrative expense totaled $19,529
and $18,693 or 9% and 9% of revenue for the six months of 1996 and
1995, respectively. The decline in general and administrative
costs as compared to revenue quarter to quarter is a result of
strong revenue growth during the comparable periods.
MERGER RELATED CHARGES
During the second quarter of 1996, the Company incurred merger
related charges of $12,423 as a result of the write-off of in-
process R&D associated with the purchases of dQdt, Seto and Meta.
The charges for in-process R&D are a result of allocating a
portion of the acquisition cost to each acquired Company's in-
process product development that had not reached technological
feasibility. During the first quarter of 1996, the Company
incurred merger related charges of $4,410 as a result of the
merger with Microtec. 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. The cash
outflow of this charge is expected to occur primarily in 1996.
The second quarter 1995 merger related costs of $800 are the
result of the acquisitions of Axiom Datorer Skandinavien AB and
Exemplar Logic, Inc..
OTHER INCOME (EXPENSE)
During the second quarter and the first six months of 1996, other
expense was $156 and other income was $1,633, compared to other
income of $2,179 and $3,544 for the same periods of 1995,
respectively. Included in other income (expense) are external
legal counsel costs associated with the Quickturn Design Systems,
Inc. litigation as previously discussed, totaling $2,200 and
$2,600 for the second quarter and first half of 1996 compared to
zero for the comparable periods of prior year. Costs related to
this litigation are expected to decline to approximately $500 to
$1,000 and continue for at least the next several quarters.
Interest income from investments was $2,315 and $4,679 for the
second quarter and first six months of 1996, respectively,
compared to $2,339 and $4,011 for the same periods of 1995. The
decrease in interest income is primarily attributable to lower
average cash, cash equivalents and short term investments
outstanding during the comparable quarters. During the second
quarter and first six months of 1996, interest expense amounted to
$545 and $1,109, respectively, down from $469 and $1,134 for the
comparable periods in 1995. The decrease in interest expense is
due to lower average debt outstanding offset by higher average
interest rates for the comparable periods.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $1,370 for the quarter
ended June 30, 1996, as compared to $1,628 for the same period in
1995. For the first six months of 1996, the provision for income
taxes was $2,210 compared to $3,862 for the same period a year
ago. The acquisitions of dQdt, Meta and Seto resulted in one-time
non-deductible charges of $12,423 which increased the Company's
anticipated effective tax rate for the year. The second quarter
1996 tax accrual also includes a catch up adjustment to align the
year to date effective rate with the current estimated year-end
effective rate. 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. As such, the Company's income
tax position and resultant effective tax rate is uncertain for the
remainder of 1996.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net loss from foreign currency
transactions of $138 and $487 during the second quarter and first
six months of 1996, respectively, compared to a net gain of $58
and $153 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, 1996,
decreased to $11,203 from $13,594 at the end of 1995. This
reflects the decrease in the value of net assets denominated in
foreign currencies against the U.S. dollar since year-end 1995.
During the balance sheet period from December 31, 1995 to June 30,
1996, the U.S. dollar strengthened approximately 6% against the
Japanese yen and 4% against the European currencies. For the
first half of 1996 compared to the same period of 1995, a stronger
U.S. dollar negatively impacted revenues by approximately 2% and
18% in Europe and Japan, respectively. In addition, for the first
half of 1996 compared to the same period of 1995, a stronger U.S.
dollar positively impacted expenses by approximately 1% and 15% in
Europe and Japan, respectively. Generally, a strengthening of the
U.S. dollar makes the Company's products more expensive in foreign
markets, which has a negative impact on the Company's revenues
over time. In addition, a strengthening U.S. dollar results in
lower 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 short-term investments at June 30, 1996 were
$192,313 compared to $210,329 at the end of 1995. Cash provided
by operations was $17,733 for the first six months of 1996
compared to $36,617 during the same period of 1995. Cash provided
by operations was negatively impacted by net income of $8,251 for
the first six months of 1996 compared to $20,814 for the same
period of 1995. In addition, trade receivables increased by
$22,684 offset by increased accounts payable of $2,684. Cash and
short-term investments at June 30, 1996 were negatively impacted
by new business investments of $17,540, decreased short-term
borrowings of $1,762, investment in property, plant and equipment
of $12,188, repurchase of common stock of $6,952, offset by
proceeds from the issuance of common stock of $4,964.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable increased to $118,187 at June 30, 1996
from $95,946 at year-end 1995. This increase was attributable to
an increase in late quarter shipments in the second quarter of
1996 compared to the fourth quarter of 1995. As a result, a lower
percent of shipments made during the second quarter of 1996 were
converted into cash collections before the period ended.
OTHER ASSETS
Other assets increased to $43,729 at June 30, 1996 from $38,160 at
year-end 1995. This increase was primarily attributable to
purchased technology of $3,594 and goodwill capitalization of
$3,522 relating to the purchases of dQdt, Seto and Meta offset by
other purchased technology and goodwill amortization of $2,100.
Net capitalized software development costs decreased by $656 as
capitalization and amortization were $2,484 and $3,140,
respectively, during the first six months of 1996.
CAPITAL RESOURCES
Total capital expenditures increased to $12,188 through June 30,
1996, compared to $9,450 for the same period of 1995. 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.
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
(electronic design automation) industry. The Company's success is
dependent upon its ability to develop and market products that are
innovative, cost-competitive and that meet customers'
expectations, and to deliver those products to its customers in a
timely manner. Competition in the EDA industry is high, 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 and the
Company books the majority of its orders 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 revenue
outside the United States and expects this to continue in the
future. As such, the Company's business and operating results can
be impacted by the effects of foreign currency fluctuations. In
order 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. 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.
The Company is currently reorganizing its professional services
business to better support its integrated systems design strategy.
This required an internal focus of resources which caused lower
billable hours for revenue generating services in the first half
of 1996. In addition, business reorganizations can increase
personnel management complexities including retention and hiring
of key technical and management positions. While the Company
will look to improve the utilization of its consultants, there can
be no assurance that the challenges of the reorganization will be
effectively met.
The Company's operating expenses are generally committed in
advance of revenue and are based to some 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 an integral 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 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. While the Company is aware of and
is addressing such issues, there can be no assurance that these
challenges will be effectively met.
As a result of the acquisition of Meta, the Company has entered
the hardware development and assembly business which results in
several new issues that the Company must effectively manage. Some
of the issues include its ability to procure hardware components
on a timely basis, ability to assemble and ship systems on a
timely basis with appropriate quality control, new distribution
and shipment processes, inventory management issues and new
demands on the sales force.
The Company is currently involved in the replacement of its
financial information systems, based primarily on software from
SAP. The implementation phase of new information systems can
cause significant disruptions to the Company's work efficiency.
There can be no assurance that the project will be completed
within budgeted time or dollar parameters.
The Company has been successful at recruiting and retaining
necessary personnel to research and develop products that satisfy
customers needs. There can be no assurance that the Company can
continue to recruit and retain such personnel.
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.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various administrative matters and
litigation. Management believes that the ultimate outcome
resulting from known matters will not have a material adverse
impact on the Company's consolidated financial position or results
of operations.
During 1995, the Company filed suit in United States (U.S.)
Federal District Court against Quickturn Design Systems, Inc.
(competitor) for declarative judgment on non-infringement,
invalidity and unenforceability of three of the competitor's
patents in anticipation of acquiring Meta. In January 1996, the
competitor filed a complaint with the International Trade
Commission (ITC) seeking to hinder the distribution of the Meta
technology in the United States. Early in the third quarter of
1996, the ITC issued a temporary ruling allowing the importation
of this technology to the U.S., but requiring posting of a bond
for each sale. The required amount of the bond for each sale and
the likelihood of the Company losing the posted amounts is
uncertain at this time. There has been no final decision on the
Company's declaratory judgment claims and the Company has applied
for U.S. patent protection of certain aspects of this technology.
While the outcome of this matter is uncertain at this time,
management believes it will prevail.
Item 4. Submission of Matters to a Vote of Security Holders.
The 1996 Annual Meeting of Shareholders of the Company was held
pursuant to notice at 5:00 p.m. Pacific time on May 2, 1996 at the
Company's offices in Wilsonville, Oregon. There were present at
the meeting, in person or represented by proxy, the holders of
53,026,816 shares of the outstanding common stock, which
represented approximately 84% of the outstanding shares. Voting
information set forth below was provided by American Stock
Transfer & Trust Company, the Company's Transfer Agent for its
common stock, 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% 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
Jon A. Shirley 52,893,354 133,462
Marsha B. Congdon 52,892,504 134,312
James R. Fiebiger 52,894,254 132,562
David A. Hodges 52,892,604 134,212
Walden C. Rhines 52,895,154 131,662
Fontaine K. Richardson 52,894,304 132,512
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) During the second quarter of 1996, the Company
filed a current report on Form 8-K/A Amendment
No. 1 dated April 24, 1996 related to the merger
with Microtec. Under Item 7 of the Form 8-K,
the Company filed Supplemental Consolidated
Financial Statements as of December 31, 1995 and
1994 and for the three years ended December 31,
1995, as restated to give retroactive effect to
the merger which has been accounted for as a
pooling of interests.
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
13, 1996.
MENTOR GRAPHICS
CORPORATION
(Registrant)
R. Douglas Norby
R. Douglas Norby
Senior Vice President,and
Chief Financial Officer
Richard Trebing
Richard Trebing
Corporate Controller,and
Chief Accounting Officer
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