-----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, QP1Vshm7ZTPbX/I2O+WnRyJXHswRWAX9gNq7ZQXZw4fbLdp3S22eIqcHXfmDXMAp lT3gmqUxVhnZ6lnZHN/+7A== 0000893877-97-000465.txt : 19970814 0000893877-97-000465.hdr.sgml : 19970814 ACCESSION NUMBER: 0000893877-97-000465 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 97658524 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036857000 10-Q 1 FORM 10-Q 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, 1997. 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, 1997: 64,923,000 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, 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 - ---------------------------- Item 4. Submission of Matters to a Vote of Security Holders 16 SIGNATURES 17 - ---------- 2 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, 1997 1996 ----------------------------------- Revenues: System and software $ 56,437 $ 65,801 Service and support 58,201 51,478 ----------- ----------- 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.
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Mentor Graphics Corporation Consolidated Statements of Operations (In thousands, except net income per share) (Unaudited) Six Months Ended June 30, 1997 1996 ----------------------------------- 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 ----------- ----------- 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.
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Mentor Graphics Corporation Consolidated Balance Sheets (In thousands) As of As of June 30, 1997 December 31, 1996 ------------- ----------------- (Unaudited) 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 ----------- ----------- 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.
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Mentor Graphics Corporation Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended June 30, 1997 1996 ------------------------------------- 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 ------------- ------------- Net cash provided (used) by operating activities (5,543) 15,882 ------------- ------------- 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 (2,342) (17,540) Purchase of technology (600) (500) Capitalization of software development costs - (2,484) ------------- ------------- Net cash used by investing activities (10,070) (28,781) ------------- ------------- 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.
6 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:
Six Months Ended June 30, 1997 1996 ------------------------------- Interest paid $ 657 $ 977 Income taxes paid, net of refunds $ 2,513 $ 472 Issuance of common stock for purchase of business $ -- $ 1,825
7 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 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 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 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 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 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 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 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 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.
Election of Directors For Withheld --------------------- --- -------- 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
16 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. MENTOR GRAPHICS CORPORATION (Registrant) GREGORY K. HINCKLEY ----------------------------------------- Gregory K. Hinckley Executive Vice President and Chief Operating Officer/Chief Financial Officer 17
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 119,566 16,929 109,977 0 0 277,861 112,396 0 417,744 119,537 0 0 0 298,057 (3,656) 417,744 216,197 216,197 85,497 85,497 160,013 0 375 (27,436) (3,019) (24,417) 0 0 0 (24,417) (.38) (.38)
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