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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 March 31, 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 April 30, 1996: 61,751,610
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 March 31, 1996 and 1995
Consolidated Balance Sheets as of March 31, 1996 4
and December 31, 1995
Consolidated Statements of Cash Flows for the 5
three months ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 7-11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
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
March 31,
1996 1995
Revenues:
System and software $61,107 $53,260
Service and support 47,558 45,214
Total revenues 108,665 98,474
Cost of revenues:
System and software 10,834 9,192
Service and support 21,165 18,891
Total cost of revenues 31,999 28,083
Gross margin 76,666 70,391
Expenses:
Research and development 23,521 20,484
Marketing and selling 35,197 32,175
General and administration 9,714 8,884
Merger and acquisition
related charges 4,410 --
Total expenses 72,842 61,543
Operating income 3,824 8,848
Other income, net 1,789 1,365
Income before income taxes 5,613 10,213
Provision for income taxes 840 2,234
Net income $4,773 $7,979
Net income per common and
common equivalent share $ .08 $ .13
Weighted average number of common
and common equivalent shares
outstanding 62,847 61,692
See accompanying notes to unaudited consolidated
financial statements.
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
As of As of
March 31, 1996 December 31, 1995
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $172,789 $185,825
Short-term investments 23,922 24,504
Trade accounts receivable, net 111,076 95,946
Other receivables 4,378 3,421
Prepaid expenses and other 15,179 15,155
Total current assets 327,344 324,851
Property, plant and equipment, net 98,285 99,363
Cash and investments, long-term 30,000 30,000
Other assets 35,509 38,160
Total $491,138 $492,374
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $8,855 $9,108
Accounts payable 11,597 9,484
Income taxes payable 14,782 14,542
Accrued and other liabilities 47,426 52,856
Deferred revenue 30,415 27,371
Total current liabilities 113,075 113,361
Long-term debt 52,704 52,700
Other long-term deferrals 1,704 2,102
Total liabilities 167,483 168,163
Stockholders' equity:
Common stock 282,505 285,809
Retained earnings 29,231 24,808
Foreign currency translation
adjustment 11,919 13,594
Total stockholders' equity 323,655 324,211
Total $491,138 $492,374
See accompanying notes to unaudited consolidated
financial statements.
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1996 1995
Operating Cash Flows:
Net income $ 4,773 $ 7,979
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization of
property, plant & equipment 6,191 6,589
Deferred taxes (167) (25)
Amortization of other assets 2,591 2,352
Changes in operating assets and
liabilities:
Trade accounts receivable (15,750) 9,550
Prepaid expenses and other assets 5 1,266
Accounts payable 2,165 (2,506)
Accrued liabilities (5,188) (4,256)
Other liabilities and deferrals 3,340 2,080
Net cash provided (used) by operating
activities (2,040) 23,029
Investing Cash Flows:
Maturities (purchases) of short-term
investments 436 (15,983)
Purchases of property and equipment (5,361) (5,033)
Purchase of businesses (704) --
Purchase of technology (500) --
Capitalization of software
development costs (473) (2,214)
Net cash used by investing activities (6,602) (23,230)
Financing Cash Flows:
Proceeds from issuance of common stock 1,787 4,189
Repurchase of common stock (5,092) --
Decrease in short-term borrowings (206) (1,333)
Repayment of long-term debt -- (133)
Net cash provided (used) by financing
activities (3,511) 2,723
Effect of exchange rate changes on
cash and cash equivalents (883) 4,178
Net change in cash and cash equivalents (13,036) 6,700
Cash and cash equivalents at beginning
of period 185,825 143,254
Cash and cash equivalents at end of
period $172,789 $149,954
See accompanying notes to unaudited consolidated
financial statements.
MENTOR GRAPHICS CORPORATION
Notes to Consolidated Financial Statements
(In thousands)
(Unaudited)
(1) General - The accompanying financial statements have
been prepared in conformity with generally accepted
accounting principles. However, certain information
and footnote disclosures normally included in
financial statements prepared in accordance with
generally accepted accounting principles have been
condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange
Commission. In the opinion of management, the
statements include all adjustments necessary for a
fair presentation of the results of the interim
periods presented. Certain reclassifications have
been made in the accompanying financial statements
for 1995 to conform with the 1996 presentation.
(2) Capitalization of Software Development Costs -
During the first three months of 1996 and 1995, $473
and $2,214 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 $1,503 and $1,248 for
the three months ended March 31, 1996 and 1995,
respectively, and is included in system and software
cost of revenues on the consolidated statements of
operations.
(3) Supplemental Disclosures of Cash Flow Information -
The following provides additional information
concerning cash flow activities:
Three Months Ended
March 31,
1996 1995
Interest paid $ 484 $ 592
Income taxes paid, net of refunds $ 499 $ 3,632
(4) 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 has
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. Microtec's product
offerings are complementary to the Company's current
broad line of EDA tools and systems.
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 March
31, 1996, totaled $61,107 compared to $53,260 for the
same period of 1995. As a percentage of system and
software revenues, gross margins were 82% for the quarter
ended March 31, 1996, compared to 83% for the first
quarter of 1995.
Revenues during the first quarter of 1996 improved by 15%
compared to the same period last year. Software product
revenue accounted for approximately 95% of the increase
while hardware product revenue made up the balance of the
change. System and software revenues were higher in the
first quarter 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 windows based products. In addition, the
merger with Microtec provided product offerings for the
embedded systems market which increases the available
market in which the Company competes. Microtec's
software product revenue experienced a slight decline as
expected due to transition issues resulting from the
merger which was completed on January 31, 1996. The
Company is currently executing sales channel integration
actions to address this issue. 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.
The Company experienced revenue growth for the first
quarter of 1996 compared to the first quarter of 1995 in
Asia Pacific and North America while Europe remained flat
as discussed further under geographic revenue
information. Historically the Company experiences
improved revenues in the second and fourth quarter while
the first and third quarters are slower. Japan has
usually posted stronger first and third quarter revenues
that has somewhat offset otherwise seasonally slow
quarters.
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.
Software product gross margins were approximately flat
quarter to quarter while lower hardware product gross
margins resulted in the overall one percent decline
quarter to quarter. Amortization of previously
capitalized software development costs to system and
software cost of revenues was $1,503 and $1,248 for the
first quarter of 1996 and 1995, respectively. Purchased
technology amortization to system and software cost of
goods sold was $664 and $554 for the quarters ended March
31, 1996 and 1995, respectively. 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 first quarter of
1996 were $47,558, an increase of 5% from the comparable
quarter 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 increased approximately 2% in the first
quarter of 1996 compared to the same period of 1995. The
slowdown in professional service revenue growth is the
result of reorganization activities of the division and
delayed recognition of revenue from contracts where
services were provided in advance of finalizing and
signing such contracts. All such contracts were signed
in the second quarter of 1996. The professional services
division transitioned to a new management team which is
currently addressing billings and realization issues of
its services team.
Service and support gross margins were 55% and 58% for
the quarters ended March 31, 1996 and 1995, respectively.
The decrease in service and support gross margins is
attributable to lower than anticipated levels of
professional service revenue without a corresponding
decrease in costs. 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. 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.
Geographic Revenue Information
Domestic revenue from unaffiliated customers including
service and support revenue increased by 11% as compared
to the first quarter of 1995. Improvement of domestic
revenue is partially the result of higher fourth quarter
backlog in 1995 versus the same period of 1994.
International revenues from unaffiliated customers
including service and support revenue represented 49% of
total revenue for the first quarters of 1996 and 1995.
European and Japanese revenue increased approximately 1%
and 15%, respectively from the first quarter of 1995 to
1996. A stronger U.S. dollar in 1996 negatively impacted
revenues by approximately 2% and 7% 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 research and development (R&D)
expenses:
Three Months Ended
March 31,
1996 1995
Gross R&D $23,994 $22,698
Capitalized R&D (473) (2,214)
Net R&D $23,521 $20,484
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. 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. Exclusive of additional
acquisitions, gross and net R&D costs are expected to
decline as these one time events are not expected to
continue in the coming quarter. Capitalization of
software development costs was substantially lower in the
first quarter of 1996 compared to the same quarter 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
are expected to reach capitalization milestones in the
second quarter of 1996, which should result in higher
capitalized software development costs.
Marketing and selling expenses totaled $35,197 and
$32,175 or 32% and 33% of revenue for the first quarters
of 1996 and 1995, respectively. The increase is
principally attributable to higher sales volume resulting
in more commissions and other related costs of selling.
General and administration expenses totaled $9,714 and
$8,884 or 9% and 9% of revenue for the first quarters of
1996 and 1995, respectively.
MERGER RELATED CHARGES
On January 31, 1996, the Company completed the merger
with Microtec. The transaction was accounted for as a
pooling of interests and included a one time merger
related charge of $4,410. 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.
OTHER INCOME (EXPENSE)
Other income, net totaled $1,789 for the first quarter of
1996 compared to $1,365 for the same period of 1995.
Interest income from investments was $2,365 for the first
quarter of 1996, compared to $1,672 for the first quarter
of 1995. The increase in interest income is primarily
attributable to higher average cash, cash equivalent and
short term investments outstanding during the comparable
quarters. During the first quarter of 1996, interest
expense amounted to $348, down from $664 for the
comparable period in 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes amounted to $840 for the
quarter ended March 31, 1996, as compared to $2,234 for
the same period in 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
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 $12 during the first quarter of 1996
compared to a net gain of $96 during the first quarter of
1995. These amounts are comprised of realized gains and
losses on cash transactions involving various foreign
currencies, and unrealized gains and losses related to
foreign currency receivables and payables resulting from
exchange rate fluctuations between the various currencies
in which the Company operates. Foreign currency gains
and losses are included as a component of other income.
The "foreign currency translation adjustment", as
reported in the equity section of the consolidated
balance sheet at March 31, 1996, decreased to $11,919
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 period from December 31, 1995 to March 31,
1996, the U.S. dollar strengthened approximately 7%
against the Japanese yen and 2% against the European
currencies. 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 March 31, 1996
were $196,711 compared to $210,329 at the end of 1995.
Cash used by operations was $2,040 for the first three
months of 1996 compared to cash provided by operations of
$23,029 during the same period of 1995. Cash used by
operations was impacted by increased trade receivables of
$15,750. Cash and short-term investments at March 31,
1996 also decreased due to the repurchase of common stock
for $5,092, the decrease in accrued and other liabilities
of $5,188, and the investment in property, plant and
equipment of $5,361.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable increased to $111,076 at March
31, 1996 from $95,946 at year-end 1995. This increase is
attributable to implementation of a new global
information system for the Company's European
operations. The Company's first phase of the systems
implementation began in the European region resulting in
expected invoicing delays during the first quarter of
1996. The invoicing cycle was moved to the end of the
quarter which moved a significant amount of the region's
cash collections to the second quarter of 1996.
Collections in Europe are expected to return to more
favorable historic levels which should result in improved
days sales outstanding in the second quarter and beyond.
OTHER ASSETS
Other assets decreased to $35,509 at March 31, 1996 from
$38,160 at year-end 1995. Net capitalized software
development costs decreased by $1,030 as capitalization
and amortization were $473 and $1,503, respectively,
during the first quarter of 1996.
CAPITAL RESOURCES
Total capital expenditures increased to $5,361 through
March 31, 1996, compared to $5,033 for the same period of
1995. The increase in capital expenditures is 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: None.
(b) During the first quarter of 1996, the
Company filed a Current Report on Form 8-
K dated January 31, 1996 to report under
Item 2 the completion of the merger with
Microtec. Under Item 7 of the Form 8-K,
the Company incorporated by reference the
financial statements of Microtec and pro
forma financial information included in
the Company's Registration Statement on
Form S-4 (Reg. No. 33-63733)
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized, on May 14, 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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