-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HZNJDpPiFA2+glKEl21xdrUxNw6/CTBRyF7xYN+Nvw8c7BsNw0ATKzqzysXlH2YO jtGkCcQAHMos7tp6dK3r7A== 0000701811-96-000002.txt : 19960515 0000701811-96-000002.hdr.sgml : 19960515 ACCESSION NUMBER: 0000701811-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13442 FILM NUMBER: 96563998 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036857000 10-Q 1 Page UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended 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 EX-27 2
5 3-MOS DEC-31-1996 MAR-31-1996 172,789 23,922 111,076 0 0 327,344 234,646 (136,361) 491,138 113,075 0 282,505 0 0 41,150 491,138 108,665 108,665 31,999 72,842 (2,137) 0 348 5,613 840 4,773 0 0 0 4,773 .08 .08
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