UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
AMENDMENT NO. 1
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarter Ended June 30, 1997. Commission File No. 0-13442
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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
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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, 1997:
64,923,000
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MENTOR GRAPHICS CORPORATION
Index to Form 10-Q/A
PART I FINANCIAL INFORMATION Page Number
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Item 1. Financial Statements
Consolidated Statements of Operations for the three 3
months ended June 30, 1997 and 1996
Consolidated Statements of Operations for the six 4
months ended June 30, 1997 and 1996
Consolidated Balance Sheets as of June 30, 1997 5
and December 31, 1996
Consolidated Statements of Cash Flows for the 6
nine months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-16
PART II OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders 16
SIGNATURES 17
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Three Months Ended
June 30,
1997 1996
-----------------------------------
<S> <C> <C>
Revenues:
System and software $ 56,437 $ 65,801
Service and support 58,201 51,478
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Total revenues 114,638 117,279
----------- -----------
Cost of revenues:
System and software 10,854 10,483
Service and support 26,816 22,907
----------- -----------
Total cost of revenues 37,670 33,390
----------- -----------
Gross margin 76,968 83,889
Operating expenses:
Research and development 26,903 21,532
Marketing and selling 37,102 35,899
General and administration 10,132 9,973
Merger and acquisition related charges -- 12,423
----------- -----------
Total operating expenses 74,137 79,827
----------- -----------
Operating income 2,831 4,062
Other income (expense), net 1,362 (165)
----------- -----------
Income before income taxes 4,193 3,897
Provision for income taxes 461 1,370
----------- -----------
Net income $ 3,732 $ 2,527
=========== ===========
Net income per common and
common equivalent share $ .06 $ .04
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 64,825 65,692
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Statements of Operations
(In thousands, except net income per share)
(Unaudited)
Six Months Ended
June 30,
1997 1996
-----------------------------------
<S> <C> <C>
Revenues:
System and software $ 111,877 $ 127,028
Service and support 104,320 99,304
----------- -----------
Total revenues 216,197 226,332
----------- -----------
Cost of revenues
System and software 30,007 21,226
Service and support 55,490 45,725
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Total cost of revenues 85,497 66,951
----------- -----------
Gross margin 130,700 159,381
Operating expenses:
Research and development (R&D) 54,180 45,229
Marketing and selling 76,852 70,471
General and administration 20,421 19,980
Special charges 8,560 --
Merger and acquisition related charges -- 16,833
----------- -----------
Total operating expenses 160,013 152,513
----------- -----------
Operating income (loss) (29,313) 6,868
Other income, net 1,877 1,640
----------- -----------
Income (loss) before income taxes (27,436) 8,508
Provision (benefit) for income taxes (3,019) 2,210
----------- -----------
Net income (loss) $ (24,417) $ 6,298
=========== ===========
Net income (loss) per common and
common equivalent share $ (.38) $ .10
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 64,848 65,451
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Balance Sheets
(In thousands)
As of As of
June 30, 1997 December 31, 1996
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119,566 $ 165,406
Short-term investments 16,929 31,673
Trade accounts receivable, net 109,977 108,957
Other receivables 6,261 6,697
Prepaid expenses and other 25,128 25,459
----------- -----------
Total current assets 277,861 338,192
Property, plant and equipment, net 112,396 102,253
Cash and investments, long-term -- 30,000
Other assets 27,487 42,914
----------- -----------
Total $ 417,744 $ 513,359
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 985 $ 9,055
Accounts payable 10,034 15,003
Income taxes payable 13,984 19,598
Accrued and other liabilities 59,839 61,623
Deferred revenue 34,695 32,065
----------- -----------
Total current liabilities 119,537 137,344
Long-term debt 326 52,441
Other long-term deferrals 3,480 3,934
----------- -----------
Total liabilities 123,343 193,719
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Stockholders' equity:
Common stock 298,057 297,756
Retained earnings (deficit) (14,631) 9,786
Foreign currency translation adjustment 10,975 12,098
----------- -----------
Total stockholders' equity 294,401 319,640
----------- -----------
Total $ 417,744 $ 513,359
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Mentor Graphics Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
-------------------------------------
<S> <C> <C>
Operating Cash Flows:
Net income (loss) $ (24,417) $ 6,298
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization of plant and equipment 14,133 11,318
Deferred taxes (214) (86)
Amortization of other assets 6,755 4,771
Writedown of assets 7,468 -
Charge for in-process R&D - 12,423
Changes in operating assets and liabilities:
Trade accounts receivable, net (2,679) (22,768)
Prepaid expenses and other assets 1,613 768
Accounts payable (4,924) 2,746
Accrued liabilities (123) (4,930)
Other liabilities and deferrals (3,155) 5,342
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Net cash provided (used) by operating activities (5,543) 15,882
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Investing Cash Flows:
Purchases of short-term investments, net 14,377 3,463
Purchases of plant and equipment (22,901) (12,220)
Purchase of businesses (2,393) (14,856)
Purchase of technology (600) (2,684)
Capitalization of software development costs - (2,484)
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Net cash used by investing activities (11,517) (28,781)
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Financing Cash Flows:
Proceeds from issuance of common stock 4,265 5,218
Repurchase of common stock (3,964) (6,952)
Decrease in short-term borrowings (8,053) (1,662)
Repayment of long-term debt (52,115) (295)
Decrease in cash and investments long-term 30,000 -
------------- -------------
Net cash used by financing activities (29,867) (3,691)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 1,087 (831)
------------- -------------
Net change in cash and cash equivalents (45,840) (17,421)
Cash and cash equivalents at beginning of period 165,406 186,676
------------- -------------
Cash and cash equivalents at end of period $ 119,566 $ 169,255
============= =============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
6
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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 1996 to conform with the 1997 presentation.
(2) Special Charge - During the first three months of 1997 the Company recorded
a special charge of $8,560. The charge consisted of disposals of
subsidiaries and related employee terminations, early termination of an
interest rate swap agreement, and recognition of the impairment in value of
goodwill and purchased technology. It is expected that all of the costs
associated with the subsidiary disposals and employee terminations will be
disbursed by the end of 1997.
(3) Supplemental Disclosures of Cash Flow Information - The following provides
additional information concerning cash flow and non-cash investing
activities:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
-------------------------------
<S> <C> <C>
Interest paid $ 657 $ 977
Income taxes paid, net of refunds $ 2,513 $ 472
Issuance of common stock for
purchase of business $ -- $ 1,825
</TABLE>
7
<PAGE>
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 second quarter and six months ended June
30, 1997, totaled $56,437 and $111,877, respectively, representing a decrease of
$9,364 or 14% and $15,151 or 12% from the same periods of 1996. The decline in
system and software revenues during the second quarter and first six months of
1997 is primarily attributable to lower software product revenue as well as
lower hardware product revenue. System and software revenues were lower in the
first half of 1997 due in part to weakness of the Company's older product
offerings which decreased at an accelerated rate. The rate of decline of
revenues for these older software product offerings will continue to negatively
impact system and software revenue growth. The rate of expected increases in
revenue from newer product offerings to offset these declines is difficult to
predict. Also, the weakening of the Japanese Yen versus the US dollar negatively
impacted revenues. See Geographic Revenue Information for further discussion. In
addition, software product sales at Microtec experienced a year over year
decline due principally to turnover of sales personnel.
System and software gross margins were 81% and 73% for the second quarter and
first six months of 1997, compared to 84% and 83% for the same periods a year
ago. The decrease in gross margins for the first six months of 1997 is primarily
due to a first quarter write-down of certain previously capitalized software
development costs and sales of accelerated verification systems made by Meta
Systems which, because of their hardware content, yield lower gross margins.
Amortization of previously capitalized software development costs to system and
software cost of was $1,645 and $3,083 for the second quarter and first six
months of 1997, respectively, compared to $1,433 and $3,140 for the same periods
of 1996, respectively. In addition, the Company recognized an impairment in
value of certain previously capitalized software development costs in the first
quarter of 1997 primarily as a result of the accelerated decline in sales of
older software product offerings discussed above. These costs, which totaled
$5,358, were determined to be unrecoverable and were charged to system and
software cost of revenues during the first quarter. All remaining previously
capitalized software development costs are to be fully amortized by the end of
1997 to recognize the change in estimated useful lives of these older
technologies. The decline of system and software gross margins from 84% to 81%
from the second quarter of 1996 to the same period of 1997 is partially
attributable to increased purchased technology amortization.
8
<PAGE>
Purchased technology amortization to system and software cost of goods sold was
$1,580 and $3,321 for the second quarter and first six months of 1997,
respectively, compared to $817 and $1,481 for the same periods of 1996,
respectively. The increase in amortization of purchased technology is
principally attributable to five business acquisitions since June 30, 1996
accounted for as purchases. Amortization of purchased technology should continue
at approximately the current rate for the next quarter and decline in the fourth
quarter as older technologies become fully amortized.
Service and Support
Service and support revenues for the second quarter and six months ended June
30, 1997, totaled $58,201 and $104,320, respectively, representing an increase
of $6,723 or 13% and $5,016 or 5% from the same periods of 1996. The revenue
increase in the second quarter and first six months of 1997 is primarily
attributable to increased consulting services revenue and to a lesser extent
increased software support revenue. The overall increase for the first six
months of 1997 was partially offset by a first quarter decline in consulting
services revenue principally due to adjusting the Company's revenue recognition
policy to recognize revenue only on completion of contract milestones.
Previously, the Company used either the percent completion method or the
contract milestone method to recognize consulting service revenues. The impact
of this restriction on future consulting services revenues is not expected to be
significant.
Service and support gross margins were 54% and 47% for the second quarter and
first six months of 1997, compared to 56% and 54% for the same periods a year
ago. The decrease in gross margins for the comparable six month periods is due
primarily to lower than anticipated levels of consulting services revenue in the
first quarter of 1997 without a corresponding decrease in costs, including the
revenue adjustment previously discussed. Consistent with consulting and training
business models, gross margins generated by the Company's consulting service
activities have been and are expected to continue to be lower than software
support. The decrease in gross margins for the comparable quarters is
attributable to an increase in consulting service revenues as a percent of total
service and support revenues from 27% in the second quarter of 1996 to 31% for
the same period of 1997. Service and support gross margins are expected to
continue to be lower than historical levels as growth in the consulting service
business is expected to be higher than growth in software support.
9
<PAGE>
Geographic Revenue Information
Domestic revenue from unaffiliated customers including service and support
revenue for second quarter and first six months of 1997 was 59% and 53% compared
to 54% and 52% for the comparable periods of 1996. The increase in domestic
revenue volume is attributable to timing of shipments in various regions and the
strengthening of the US dollar against the Japanese yen during the comparable
periods. From the second quarter and first six months of 1996 to 1997, European
revenue decreased approximately 10% and 8%, respectively and Japanese revenue
decreased approximately 31% and 22%, respectively. A stronger US dollar in 1997
negatively impacted international revenues during the comparable periods and
most significantly in Japan where the Yen weakened against the US dollar from
the second quarter and first six months of 1997 to 1996 by approximately 10% and
14%, respectively. 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.
OPERATING EXPENSES
Research and development expenses totaled $26,903 and $21,532 or 23% and 18% of
revenue for the second quarters of 1997 and 1996, respectively and $54,180 and
$45,229 or 25% and 20% of revenue for the first six months of 1997 and 1996,
respectively. These increases are attributable to five prior year acquisitions
accounted for as purchases discussed above, lower revenue for the 1997 periods
and lower capitalization of software development costs.
Capitalization of software development costs was zero in the second quarter and
first six months of 1997 compared to $2,011 and $2,734 for the comparable
periods of 1996. This decrease in capitalization is due to timing and content of
product development activities which resulted in a lower level of costs eligible
for capitalization. Based on these lower costs, product development activities
have been expensed on a current basis. The Company does not expect any
significant capitalization for the remainder of 1997.
Marketing and selling expenses totaled $37,102 and $35,899 or 32% and 31% of
revenue for the second quarters of 1997 and 1996, respectively and $76,852 and
$70,471 or 36% and 31% of revenue for the first six months of 1997 and 1996,
respectively. These increases are attributable to five prior year acquisitions
accounted for as purchases discussed above, increased volumes of sales through
independent distributors and lower revenue for the 1997 periods. The Company has
experienced lower expenses in marketing, selling and administration from the
first quarter to the second quarter of 1997 as a result of a focused effort to
manage discretionary spending. General and administration expenses totaled
$10,132 and $9,973 or 9% of revenue for the second quarters of 1997 and 1996,
respectively and $20,421 and $19,981 or 9% of revenue for the first six months
of 1997 and 1996, respectively.
10
<PAGE>
MERGER RELATED CHARGES
In the first quarter of 1996, the Company completed a merger with Microtec
Research, Inc. which was accounted for as a pooling of interests and included a
one time merger related charge of $4,410. In the second quarter of 1996, the
Company completed acquisitions of Meta Systems, SA, dQdt, Inc. and Seto Software
GmbH which were accounted for as purchases and resulted in charges for
in-process R&D of $12,423. No such merger related charges have been incurred in
the first six months of 1997.
SPECIAL CHARGES
During the first quarter of 1997 the Company recorded a special charge of
$8,560. The charge consisted of disposals of subsidiaries and related employee
terminations, early termination of an interest rate swap agreement, and
recognition of the impairment in value of goodwill and purchased technology. It
is expected that all of the costs associated with the subsidiary disposals and
employee terminations will be disbursed by the end of 1997.
OTHER INCOME (EXPENSE)
During the second quarter and the first six months of 1997, other income was
$1,362 and $1,877 compared to other income (expense) of $(165) and $1,640 for
the same periods of 1996, respectively. Interest income from investments was
$1,806 and $3,601 for the second quarter and first six months of 1997,
respectively, compared to $2,324 and $4,707 for the same periods of 1996. During
the second quarter and first six months of 1997, interest expense amounted to
$108 and $375, respectively, down from $563 and $1,131 for the comparable
periods in 1996. The decrease in interest income and interest expense is
primarily attributable to lower average cash, cash equivalent and short term
investments outstanding during the comparable quarters due to pay-down of short
term lines of credit and the long term revolving credit facility. Included in
other income (expense) are external legal costs associated with the Quickturn
Design Systems, Inc. litigation which total $700 and $1,490 for the second
quarter and first six months of 1997, respectively compared to $2,200 and $2,600
for the comparable periods in 1996.
PROVISION (BENEFIT) FOR INCOME TAXES
The benefit for income taxes amounted to $(3,019) for the six months ended June
30, 1997, as compared to a provision of $2,210 for the same period in 1996. 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. Due to the impact of the first quarter loss on the
projected mix of pre-tax income and losses among various tax jurisdictions, the
Company expects a tax rate of approximately 11% for the remaining two quarters
of 1997. The Company's tax rate remains sensitive to the shifts in income and
losses among various tax jurisdictions previously discussed.
11
<PAGE>
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company experienced a net gain from foreign currency transactions of $24 and
a net loss of $296 during the second quarter and first six months of 1997,
respectively, compared to a net loss of $138 and $487 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, 1997, decreased to $10,975
from $12,098 at the end of 1996. This reflects the decrease in the value of net
assets denominated in foreign currencies against the US dollar since year-end
1996.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share". This
Statement establishes a different method of computing net income per share than
is currently required under the provisions of Accounting Principles Board
Opinion No. 15. Under SFAS No. 128, the Company will be required to present both
basic net income per share and diluted net income per share. Basic net income
per share is expected to be comparable or slightly higher than the currently
presented net income per share as the effect of dilutive stock options will not
be considered in computing basic net income per share. Diluted net income per
share is expected to be comparable or slightly lower than the currently
presented net income per share.
The Company plans to adopt SFAS No. 128 in the fourth quarter of 1997 and at
that time all historical net income per share data presented will be restated to
conform to the provisions of this Statement.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes requirements for disclosure
of comprehensive income. The objective of SFAS No. 130 is to report all changes
in equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income and
all other non-owner changes in equity. The Company has not quantified the effect
of adoption of SFAS No. 130.
The Company plans to adopt SFAS No. 130 in the first quarter of 1998 and at that
time earlier financial statements will be reclassified for comparative purposes.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH AND INVESTMENTS
Total cash and short-term investments at June 30, 1997 were $136,495 compared to
$197,079 at the end of 1996. Cash used by operations was $5,543 for the first
six months of 1997 compared to cash provided by operations of $15,882 during the
same period of 1996. During the first half of 1997, cash used by operations was
negatively impacted by the net loss from operations and increased days sales
outstanding in trade accounts receivable. Cash also decreased as expenditures
for property, plant and equipment exceeded depreciation by $8,768. Cash used by
financing activities was negatively impacted by the pay-down of short term lines
of credit and the long term revolving credit facility totaling $60,168 offset by
the release of cash held as collateral previously classified as long term on the
consolidated balance sheets.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable increased to $109,977 at June 30, 1997 from $108,957
at year-end 1996. Average days sales outstanding in accounts receivable
increased from 81 days at the end of 1996 to 86 days at the end of the second
quarter of 1997 and decreased slightly from the first quarter 1997 total of 89
days. The year to date increase in average trade receivables days sales
outstanding is principally attributable to a few large contract sales where the
Company provided its customers extended payment terms. The Company is currently
reviewing all policies related to accounts receivable and customer payment terms
in an attempt to improve these ratios.
OTHER ASSETS
Other assets decreased to $27,487 at June 30, 1997 from $42,914 at year-end
1996. Previously capitalized software development costs decreased by $6,796 as a
result the of current quarters amortization and a write-down in recognition of
impaired value previously discussed. In addition, regular amortization of
goodwill and purchased technology further reduced the balance in 1997.
CAPITAL RESOURCES
Total capital expenditures increased to $22,901 through June 30, 1997, compared
to $12,220 for the same period of 1996. The increase in capital expenditures is
a result of costs associated with leasehold improvements related to moving the
Microtec facility closer to the Company's other development site in the San Jose
area where costs are expected to be more favorable. In addition, the Company
further invested in its global information and sales force automation systems.
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.
13
<PAGE>
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) and integrated systems design industries. 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 intense, 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 of which the majority is usually
booked 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 revenues 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 has experienced declines in revenues from its older software product
offerings. There can be no assurances that expected increases in revenue from
newer software products will be sufficient to offset these declines.
The Company is currently addressing staffing needs and operations issues of its
consulting services business in an attempt to better focus on ASIC and IC design
methodologies and improve profitability. Business reorganizations can increase
personnel management complexities including retention and hiring of key
technical and management positions. While the Company will attempt to improve
the utilization of its consultants and pricing of its services, there can be no
assurance that the challenges will be effectively met.
14
<PAGE>
The Company's operating expenses are generally committed in advance of revenue
and are based to a large 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 a 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 the 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 Systems, the Company has entered the
hardware development and assembly business. Some additional issues must be
managed by the Company, such as: procuring hardware components on a timely
basis, assembling and shipping systems on a timely basis with appropriate
quality control, developing new distribution and shipment processes, managing
inventory and placing new demands on the sales force.
The Company has recently added new re-usable intellectual property products and
consulting services to its portfolio of offerings to address this emerging
market. As with all markets, there is inherent uncertainty regarding the overall
rate of growth. Specifically, growth in the re-usable intellectual property
market is subject to significant uncertainties and risks as market participants,
including the Company, seek to gain customer acceptance for the overall concept
of incorporating these re-usable intellectual property designs into their
products, identify and develop the correct products to meet evolving customer
demands, and identify and implement effective distribution models for this new
class of products.
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 believes it 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.
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.
15
<PAGE>
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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of Shareholders of the Company was held pursuant to
notice at 5:00 p.m. Pacific time on May 1, 1997 at the Company's offices in
Wilsonville, Oregon. There were present at the meeting, in person or represented
by proxy, the holders of 56,881,340 shares of the outstanding common stock,
which represented approximately 88% of the outstanding shares. The 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 matter voted on at the meeting and the votes cast is as follows:
Issue: 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
shareholders and until their successors shall have been elected and qualified.
<TABLE>
<CAPTION>
Election of Directors For Withheld
--------------------- --- --------
<S> <C> <C>
Jon A. Shirley 56,480,525 400,815
Marsha B. Congdon 56,748,525 402,815
James R. Fiebiger 56,480,525 400,815
David A. Hodges 56,480,525 400,815
Walden C. Rhines 56,480,525 400,815
Fontaine K. Richardson 56,480,525 400,815
</TABLE>
16
<PAGE>
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.
Date: September 2, 1997
MENTOR GRAPHICS CORPORATION
(Registrant)
GREGORY K. HINCKLEY
-----------------------------------------
Gregory K. Hinckley
Executive Vice President and
Chief Operating Officer/Chief Financial
Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 119,566
<SECURITIES> 16,929
<RECEIVABLES> 109,977
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 277,861
<PP&E> 112,396
<DEPRECIATION> 0
<TOTAL-ASSETS> 417,744
<CURRENT-LIABILITIES> 119,537
<BONDS> 0
0
0
<COMMON> 298,057
<OTHER-SE> (3,656)
<TOTAL-LIABILITY-AND-EQUITY> 417,744
<SALES> 216,197
<TOTAL-REVENUES> 216,197
<CGS> 85,497
<TOTAL-COSTS> 85,497
<OTHER-EXPENSES> 160,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375
<INCOME-PRETAX> (27,436)
<INCOME-TAX> (3,019)
<INCOME-CONTINUING> (24,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,417)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
