-----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, Rz2DjS2BblmWiups7qn/BEr+ENFAQL8GLaAcezAo4ZLRE6I5YF531TN2iolpfitZ Rh1RPKxZvpeCljTxv19o5w== 0001157523-06-007107.txt : 20060720 0001157523-06-007107.hdr.sgml : 20060720 20060720163958 ACCESSION NUMBER: 0001157523-06-007107 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20060720 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets FILED AS OF DATE: 20060720 DATE AS OF CHANGE: 20060720 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13442 FILM NUMBER: 06972094 BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070-7777 BUSINESS PHONE: 5036857000 8-K 1 a5192554.txt MENTOR GRAPHICS CORPORATION, 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): July 20, 2006 ------------- MENTOR GRAPHICS CORPORATION --------------------------- (Exact name of registrant as specified in charter) OREGON 0-13442 93-0786033 ------ ------- ---------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 8005 S.W. BOECKMAN ROAD 97070-7777 WILSONVILLE, OR -------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 685-7000 -------------- NO CHANGE --------- (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 2.02 Results of Operations and Financial Condition. - -------------------------------------------------------- Attached as Exhibit 99.1 is a copy of a press release of Mentor Graphics Corporation dated July 20, 2006, announcing the Company's financial results for the second quarter and the Company's outlook for the third quarter and full year of 2006, which is being furnished to the Securities and Exchange Commission. 2 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 hereunto duly authorized. MENTOR GRAPHICS CORPORATION (Registrant) Date: July 20, 2006 By: /s/ Dean M. Freed ----------------- Dean M. Freed Vice President and General Counsel 3 EX-99.1 2 a5192554-ex991.txt EXHIBIT 99.1 Exhibit 99.1 Mentor Graphics Reports Strong Second Quarter Results, Raises Guidance WILSONVILLE, Ore.--(BUSINESS WIRE)--July 20, 2006--Mentor Graphics Corporation (Nasdaq:MENT) today announced second quarter revenues of $178.4 million, up 15% from the year ago quarter. Earnings per share were $(.01) on a GAAP basis and $.09 on a non-GAAP basis. Bookings were at near-record levels for a second quarter and up about 20% from the second quarter of 2005. "Mentor Graphics turned in another strong quarter," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "Calibre continued to drive the business as design-for-manufacturing adoption strengthened. Customer adoption of the 90nm and 65nm process nodes, as well as prototyping at 45nm, is driving larger customer purchases." IC Design to Silicon bookings doubled over the second quarter of 2005, while Scalable Verification and Integrated Systems Design were both down about 5%, and New and Emerging was down 15%. In preparation for the Design Automation Conference, the company announced a brand new Calibre family platform that integrates design-for-manufacturing functionality, while offering dramatically higher performance. During the quarter, the company launched significant enhancements to its Questa verification platform and its Catapult C Synthesis tool. Year over year, North American bookings climbed 25%, European and Japanese bookings were down 5% and Pac Rim bookings grew 80%. Split of revenue by geography was 45% North America, 25% Europe, 15% Japan and 15% PacRim. Split of revenue by product line was 35% IC Design to Silicon, 25% Integrated Systems Design, 25% Scalable Verification and 15% New and Emerging. "We continue to keep a tight lid on expenses, with GAAP operating expense rising a modest 5% on a 15% rise in revenue," said Gregory K. Hinckley, president of Mentor Graphics. "Our renewal outlook for the second half of the year remains solid. This, combined with strong execution in the second quarter, strengthens our confidence in the business." Special charges of $0.9 million were lease abandonment and workforce related. Guidance For the third quarter, the company expects revenue of approximately $180 million, GAAP earnings per share of $(.01) and non-GAAP earnings per share of approximately $.06. For full year 2006, the company expects revenue of $763 million, GAAP earnings per share of $.19 and non-GAAP earnings per share of approximately $.70, representing 8%, 170% and 70% growth from 2005, respectively. This guidance reflects increases over prior guidance of $1 million in revenues, $.03 per share in GAAP earnings and $.05 per share in non-GAAP earnings. Discussion of Non-GAAP Financial Measures Mentor Graphics management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted net income (loss), which we refer to as non-GAAP net income (loss). Non-GAAP net income (loss) is generally based on the revenues of our product, maintenance and services business operations and the costs of those operations, such as cost of revenue, research and development, sales and marketing and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. Non-GAAP net income (loss) consists of net income (loss) excluding amortization of intangible assets, merger and acquisition charges, special charges, equity plan-related compensation expenses and charges and gains which management does not consider reflective of our core operating business. Intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships and employment agreements. Merger and acquisition charges represent in-process research and development charges related to products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition rebalance costs including severance and benefits, excess facilities and asset-related charges, and also include strategic reallocations or reductions of personnel resources. Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options, as required under SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R). For purposes of comparability across other periods and against other companies in our industry, non-GAAP net income (loss) is adjusted by the amount of additional taxes or tax benefit that the company would accrue using a normalized effective tax rate applied to the non-GAAP results. In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP EPS is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation. In addition, during the six months ended June 30, 2006, $5,905 thousand of interest expense attributable to net retirement premiums and write-offs of debt issuance costs related to the refinancing of certain convertible debt was excluded as management does not consider this transaction a part of its core operating performance. During the six months ended June 30, 2005, $4.75 million purchase of technology that had not yet reached technological feasibility, and a $957 thousand gain on the sale of a building were also excluded. Non-GAAP net income (loss) is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Moreover, it should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We present non-GAAP net income (loss) because we consider it an important supplemental measure of our performance. Management excludes from its non-GAAP net income (loss) certain recurring items to facilitate its review of the comparability of the company's core operating performance on a period to period basis because such items are not related to the company's ongoing core operating performance as viewed by management. Management uses this view of its operating performance for purposes of comparison with its business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically management adjusts for the excluded items for the following reasons: -- Amortization charges for our intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of the company's acquisition transactions. We therefore consider our operating results without these charges when evaluating our core performance. Generally, the most significant impact to inter-period comparability of the company's net income (loss) is in the first twelve months following the acquisition. -- Special charges are primarily severance related and are due to the company's reallocation or reduction of personnel resources driven by modifications of business strategy or business emphasis and by assimilation of acquired businesses. These costs are originated based on the particular facts and circumstances of business decisions and can vary in size. Special charges also include excess facility and asset-related restructuring charges. These charges are not specifically included in the company's annual operating plan and related budget due to the rapidly changing technology and competitive environment in our industry. We therefore exclude them when evaluating our managers' performance internally. -- Merger and acquisition charges are in-process R&D charges, which are largely disregarded as acquisition decisions are made and which often result in charges that vary significantly in size and amount. Management excludes these charges when evaluating the impact of an acquisition transaction and our ongoing performance. -- Management supplementally considers performance without the impact of stock-based compensation charges and believes this information is useful to investors to compare our performance to prior periods before SFAS 123R and to the performance of other companies in our industry who present non-GAAP results adjusted to exclude stock compensation expense. We therefore exclude these charges for purposes of evaluating our core performance. -- Income tax expense (benefit) is adjusted by the amount of additional tax expense or benefit that we would accrue if we used non-GAAP results instead of GAAP results in the calculation of our tax liability, taking into consideration the company's long-term tax structure. We use a normalized effective tax rate of 17%, which reflects the weighted average tax rate applicable under the various tax jurisdictions in which the company operates. This non-GAAP weighted average tax rate is subject to change over time for various reasons, including changes in the geographic business mix and changes in statutory tax rates. Our GAAP tax rate for the six months ended June 30, 2006, is 44%. This tax rate considers certain mandatory and other non-scalable tax costs which may adversely or beneficially affect the Company's tax rate depending upon the Company's level of profitability. Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. However, non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. In the future the company expects to continue to incur expenses similar to the non-GAAP adjustments described above and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are: -- Amortization of intangibles, though not directly affecting our current cash position, represent the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program. -- The company regularly engages in acquisition and assimilation activities as part of its ongoing business and therefore we will continue to experience special charges and merger and acquisition charges on a regular basis. These costs also directly impact available funds of the company. -- The company's stock option and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results for the foreseeable future under SFAS 123R. -- The company's income tax expense (benefit) will be ultimately based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the 17% rate assumed in our non-GAAP presentation. -- Other companies, including other companies in our industry, may calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure. About Mentor Graphics Mentor Graphics Corporation (Nasdaq:MENT) is a world leader in electronic hardware and software design solutions, providing products, consulting services and award-winning support for the world's most successful electronics and semiconductor companies. Established in 1981, the company reported revenues over the last 12 months of over $725 million and employs approximately 4,050 people worldwide. Corporate headquarters are located at 8005 S.W. Boeckman Road, Wilsonville, Oregon 97070-7777. World Wide Web site: http://www.mentor.com/. Statements in this press release regarding the company's guidance for future periods constitute "forward-looking" statements based on current expectations within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: (i) the company's ability to successfully offer products and services that compete in the highly competitive EDA industry, including the risk that the company's technology, products or inventory become obsolete; (ii) reductions in spending on the company's products by its customers due to cyclical downturns or initiatives to increase profitability; (iii) discounting of products and services by competitors, which could force the company to lower its prices or offer other more favorable terms to customers; (iv) changes in accounting or reporting rules or interpretations, limitations on repatriation of earnings, licensing and intellectual property rights protection; (v) changes in tax laws, regulations or enforcement practices where the company does business; (vi) effects of the increasing volatility of foreign currency fluctuations on the company's business and operating results; (vii) effects of unanticipated shifts in product mix on gross margin; (viii) effects of customer seasonal purchasing patterns and the timing of significant orders may negatively or positively impact the company's quarterly results of operations; and (ix) weakness in the US or other economies, all as may be discussed in more detail under the heading "Risk Factors" in the company's most recent Form 10-K or Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. In addition, statements regarding guidance do not reflect potential impacts of mergers or acquisitions that have not been announced or closed as of the time the statements are made. Mentor Graphics disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements to reflect future events or developments. MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- 2006 2005 2006 2005 -------- ---------- -------- -------- Revenues: System and software $101,226 $ 81,375 $204,166 $172,935 Service and support 77,207 73,461 150,589 146,235 -------- ---------- -------- -------- Total revenues 178,433 154,836 354,755 319,170 -------- ---------- -------- -------- Cost of revenues: System and software 3,559 4,828 7,874 9,563 Service and support 20,800 20,339 41,050 40,247 Amortization of purchased Technology 3,421 2,700 6,656 5,413 -------- ---------- -------- -------- Total cost of revenues 27,780 27,867 55,580 55,223 -------- ---------- -------- -------- Gross margin 150,653 126,969 299,175 263,947 -------- ---------- -------- -------- Operating expenses: Research and development 55,293 56,193 110,356 107,503 Marketing and selling 69,334 65,324 136,305 132,899 General and administration 22,876 18,752 43,795 37,460 Amortization of intangible assets 1,121 972 2,247 2,094 Special charges 917 1,264 6,153 2,577 Merger and acquisition related charges - 750 180 750 -------- ---------- -------- -------- Total operating expenses 149,541 143,255 299,036 283,283 -------- ---------- -------- -------- Operating income (loss) 1,112 (16,286) 139 (19,336) Other income, net 5,403 2,842 9,035 6,457 Interest expense (6,758) (5,638) (20,465) (10,669) -------- ---------- -------- -------- Loss before income taxes (243) (19,082) (11,291) (23,548) Provision (benefit) for income taxes 205 (12,239) (4,983) (12,319) -------- ---------- -------- -------- Net loss $ (448)$ (6,843)$ (6,308)$(11,229) ======== ========== ======== ======== Net loss per share: Basic $ (0.01)$ (.09)$ (.08)$ (.14) ======== ========== ======== ======== Diluted $ (0.01)$ (.09)$ (.08)$ (.14) ======== ========== ======== ======== Weighted average number of shares outstanding: Basic and diluted 80,348 78,165 80,229 78,086 ======== ========== ======== ======== MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Three Months Ended June 30, 2006 GAAP Adjustments Non-GAAP ------------------------------------- Revenues: System and software $101,226 $ - $101,226 Service and support 77,207 - 77,207 -------- -------- -------- Total revenues 178,433 - 178,433 -------- -------- -------- Cost of revenues: System and software 3,559 - 3,559 Service and support 20,800 (261)(1) 20,539 Amortization of purchased technology 3,421 (3,421)(2) - -------- -------- -------- Total cost of revenues 27,780 (3,682) 24,098 -------- -------- -------- Gross margin 150,653 3,682 154,335 -------- -------- -------- Gross margin percentage 84.4% 86.5% -------- -------- Operating expenses: Research and development 55,293 (1,566)(1) 53,727 Marketing and selling 69,334 (1,297)(1) 68,037 General and administration 22,876 (490)(1) 22,386 Amortization of intangible assets 1,121 (1,121)(3) - Special charges 917 (917)(4) - -------- -------- -------- Total operating expenses 149,541 (5,391) 144,150 -------- -------- -------- Operating income 1,112 9,073 10,185 Other income, net 5,403 - 5,403 Interest expense (6,758) 34 (5) (6,724) -------- -------- -------- Income (loss) before income taxes (243) 9,107 8,864 Provision for income taxes 205 1,301 (6) 1,506 -------- -------- -------- Net income (loss) $ (448) $ 7,806 $ 7,358 ======== ======== ======== Net income per share: Basic $ (0.01) $ 0.09 ======== ======== Diluted $ (0.01) $ 0.09 ======== ======== Weighted average number of shares outstanding: Basic 80,348 80,348 ======== ======== Diluted 80,348 901 (7) 81,249 - --------------------------------- ======== ========------ ======== (1) Equity plan-related compensation expense totaling $3,614 recognized in accordance with SFAS 123R, Share-Based Payment. (2) Amortization of purchased technology acquired in 19 separate acquisition transactions, 5 of which were completed in the last 12 months. Purchased technology is amortized over two to five years. (3) Amortization of other identified intangible assets including trade names, employment agreements and customer relationships acquired in 13 separate acquisition transactions, 5 of which were completed in the last 12 months. Other identified intangible assets are amortized over two to five years. (4) Special charges include (i) $352 of costs incurred for employee rebalances, which include severance benefits, notice pay and outplacement services, (ii) $585 charge for abandonment of excess leased facility space, (iii) $(20) for other costs and adjustments, net. (5) Consists of the write-off of previously capitalized convertible debt costs of $106 offset by a discount on the retirement of convertible debt of $(72). (6) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income before income taxes. (7) Dilutive shares related to the stock options and employee stock purchase plan, which were anti-dilutive under GAAP. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Three Months Ended June 30, 2005 GAAP Adjustments Non-GAAP --------------------------------------- Revenues: System and software $ 81,375 $ - $ 81,375 Service and support 73,461 - 73,461 ------------------------ --------- Total revenues 154,836 - 154,836 ------------------------ --------- Cost of revenues: System and software 4,828 - 4,828 Service and support 20,339 - 20,339 Amortization of purchased technology 2,700 (2,700)(1) - ------------------------ --------- Total cost of revenues 27,867 (2,700) 25,167 ------------------------ --------- Gross margin 126,969 2,700 129,669 ------------------------ --------- Gross margin percentage 82.0% 83.7% ------------- --------- Operating expenses: Research and development 56,193 (4,750)(2) 51,443 Marketing and selling 65,324 - 65,324 General and administration 18,752 - 18,752 Amortization of intangible assets 972 (972)(3) - Special charges 1,264 (1,264)(4) - Merger and acquisition related charges 750 (750)(5) - ------------------------ --------- Total operating expenses 143,255 (7,736) 135,519 ------------------------ --------- Operating loss (16,286) 10,436 (5,850) Other income, net 2,842 - 2,842 Interest expense (5,638) - (5,638) ------------------------ --------- Loss before income taxes (19,082) 10,436 (8,646) Income tax benefit (12,239) 10,769 (6) (1,470) ------------------------ --------- Net loss $(6,843) $(333) $(7,176) ======================== ========= Net loss per share: Basic $(.09) $(.09) ============= ========= Diluted $(.09) $(.09) ============= ========= Weighted average number of shares outstanding: Basic 78,165 78,165 ============= ========= Diluted 78,165 78,165 - -------------------------------=============-----------------========= (1) Amortization of purchased technology acquired in 15 separate acquisition transactions, 8 of which were completed in the 12 months ending June 30, 2005. Purchased technology is amortized over two to five years. (2) A charge of $4,750 for a purchase of technology that had not reached technological feasibility. (3) Amortization of other identified intangible assets including trade names, employment agreements and customer relationships acquired in 10 separate acquisition transactions, 6 of which were completed in the 12 months ending June 30, 2005. Other identified intangible assets are amortized over two to five years. (4) Special charges consist of (i) $1,157 incurred for severance benefits, notice pay and outplacement services related to employee rebalances, (ii) a $91 charge for abandonment of excess leased facility space, and (iii) $16 for other costs incurred. (5) Merger and acquisition related charges consist of in-process R&D charges related to the acquisitions of Volcano Communications Technologies AB and Aptix Corporation. (6) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income before income taxes. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Six Months Ended June 30, 2006 GAAP Adjustments Non-GAAP --------------------------------- Revenues: System and software $204,166 $ - $ 204,166 Service and support 150,589 - 150,589 -------- --------- --------- Total revenues 354,755 - 354,755 -------- --------- --------- Cost of revenues: System and software 7,874 - 7,874 Service and support 41,050 (453)(1) 40,597 Amortization of purchased technology 6,656 (6,656)(2) - -------- --------- --------- Total cost of revenues 55,580 (7,109) 48,471 -------- --------- --------- Gross margin 299,175 7,109 306,284 -------- --------- --------- Gross margin percentage 84.3% 86.3% -------- --------- Operating expenses: Research and development 110,356 (2,865)(1) 107,491 Marketing and selling 136,305 (2,307)(1) 133,998 General and administration 43,795 (930)(1) 42,865 Amortization of intangible assets 2,247 (2,247)(3) - Special charges 6,153 (6,153)(4) - Merger and acquisition related charges 180 (180)(5) - -------- --------- --------- Total operating expenses 299,036 (14,682) 284,354 -------- --------- --------- Operating income 139 21,791 21,930 Other income, net 9,035 - 9,035 Interest expense (20,465) 5,905 (6) (14,560) -------- --------- --------- Income (loss) before income taxes (11,291) 27,696 16,405 Provision (benefit) for income taxes) (4,983) 7,771 (7) 2,788 -------- --------- --------- Net income (loss) $ (6,308) $ 19,925 $ 13,617 ======== ========= ========= Net income (loss) per share: Basic $ (.08) $ .17 ======== ========= Diluted $ (.08) $ .17 ======== ========= Weighted average number of shares outstanding: Basic 80,229 80,229 ======== ========= Diluted 80,229 647 (8) 80,876 - ------------------------------------- ======== =========--- ========= (1) Equity plan-related compensation expense totaling $6,555 recognized in accordance with SFAS 123R, Share-Based Payment. (2) Amortization of purchased technology acquired in 20 separate acquisition transactions, 5 of which were completed in the last 12 months. Purchased technology is amortized over two to five years. (3) Amortization of other identified intangible assets including trade names, employment agreements and customer relationships acquired in 13 separate acquisition transactions, 5 of which were completed in the last 12 months. Other identified intangible assets are amortized over two to five years. (4) Special charges include (i) $3,944 of costs incurred for employee rebalances, which include severance benefits, notice pay and outplacement services, (ii) $1,613 related to the abandonment of excess leased facility space, the disposal of related assets and other costs related to discontinuation of one of the company's intellectual property product lines, (iii) $585 charge for abandonment of excess leased facility space, and (iv) $11 in other costs incurred. (5) Write-off of $180 for in-process research and development related to an acquisition. (6) Consists of the write-off of previously capitalized convertible debt costs of $2,260 and net premium paid on the retirement of convertible debt of $3,645. (7) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income before income taxes. (8) Dilutive shares related to the stock options and employee stock purchase plan, which were anti-dilutive under GAAP. MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except earnings per share data - Unaudited) Six Months Ended June 30, 2005 GAAP Adjustments Non-GAAP --------------------------------- Revenues: System and software $172,935 $ - $ 172,935 Service and support 146,235 - 146,235 -------- --------- --------- Total revenues 319,170 - 319,170 -------- --------- --------- Cost of revenues: System and software 9,563 - 9,563 Service and support 40,247 - 40,247 Amortization of purchased technology 5,413 (5,413)(1) - -------- --------- --------- Total cost of revenues 55,223 (5,413) 49,810 -------- --------- --------- Gross margin 263,947 5,413 269,360 -------- --------- --------- Gross margin percentage 82.7% 84.4% -------- --------- Operating expenses: Research and development 107,503 (4,750)(2) 102,753 Marketing and selling 132,899 - 132,899 General and administration 37,460 - 37,460 Amortization of intangible assets 2,094 (2,094)(3) - Special charges 2,577 (2,577)(4) - Merger and acquisition related charges 750 (750)(5) - -------- --------- --------- Total operating expenses 283,283 (10,171) 273,112 -------- --------- --------- Operating loss (19,336) 15,584 (3,752) Other income, net 6,457 (957)(6) 5,500 Interest expense (10,669) - (10,669) -------- --------- --------- Loss before income taxes (23,548) 14,627 (8,921) Income tax benefit (12,319) 10,802 (7) (1,517) -------- --------- --------- Net loss $(11,229) $ 3,825 $ (7,404) ======== ========= ========= Net loss per share: Basic $ (.14) $ (.09) ======== ========= Diluted $ (.14) $ (.09) ======== ========= Weighted average number of shares outstanding: Basic 78,086 78,086 ======== ========= Diluted 78,086 78,086 - ------------------------------------- ========------------- ========= (1) Amortization of purchased technology acquired in 15 separate acquisition transactions, 8 of which were completed in the 12 months ending June 30, 2005. Purchased technology is amortized over two to five years. (2) A charge of $4,750 for a purchase of technology that had not reached technological feasibility. (3) Amortization of other identified intangible assets including trade names, employment agreements and customer relationships acquired in 10 separate acquisition transactions, 6 of which were completed in the 12 months ending June 30, 2005. Other identified intangible assets are amortized over two to five years. (4) Special charges include (i) $2,348 incurred for severance benefits, notice pay and outplacement services related to employee rebalances, (ii) a $91 charge for abandonment of excess leased facility space, and (iii) $138 for other costs incurred. (5) Merger and acquisition related charges consist of in-process R&D charges related to the acquisitions of Volcano Communications Technologies AB and Aptix Corporation. (6) Non-GAAP other net income excludes $957 gain on the sale of a building. (7) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income before income taxes. MENTOR GRAPHICS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands - Unaudited) As of As of June 30, December 31, 2006 2005 - ---------------------------------------------------------------------- Assets Current assets: Cash and short-term investments $ 136,332 $ 114,410 Trade accounts receivable, net 101,358 101,593 Term receivables, short-term 132,003 133,273 Prepaid expenses and other 28,262 29,728 Deferred income taxes 13,448 13,127 ----------- ------------ Total current assets 411,403 392,131 Property, plant and equipment, net 81,099 81,374 Term receivables, long-term 120,912 131,676 Intangibles, net 378,082 381,125 Other assets 41,239 34,631 ----------- ------------ Total assets $ 1,032,735 $ 1,020,937 =========== ============ Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 9,651 $ 11,858 Accounts payable 12,095 15,268 Income taxes payable 32,083 37,598 Accrued payroll and related liabilities 72,040 73,244 Accrued liabilities 31,469 29,362 Deferred revenue 123,897 106,453 ----------- ------------ Total current liabilities 281,235 273,783 Long-term notes payable 271,855 282,188 Other long-term liabilities 15,857 16,826 ----------- ------------ Total liabilities 568,947 572,797 ----------- ------------ Stockholders' equity: Common stock 397,874 381,962 Retained earnings 39,216 45,524 Accumulated other comprehensive income 26,698 20,654 ----------- ------------ Total stockholders' equity 463,788 448,140 ----------- ------------ Total liabilities and stockholders' equity $ 1,032,735 $ 1,020,937 =========== ============ MENTOR GRAPHICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands - Unaudited) Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------- 2006 2005 2006 2005 ---------------------------------------- Operating Cash Flows: Net income (loss) $(448) $(6,843) $(6,308) $(11,229) Depreciation and amortization (1) 11,604 10,765 24,722 22,085 Other adjustments to reconcile Operating cash 1,675 689 2,852 (1,037) Changes in working capital 16,928 2,412 24,949 5,630 ---------------------------------------- Net cash provided by operating activities 29,759 7,023 46,215 15,449 Net cash used in investing activities (37,486) (11,857) (50,504) (21,044) Net cash provided by (used in) financing activities (4,429) (827) (7,325) 6,174 Effect of exchange rate changes on cash and cash equivalents 388 (1,898) 539 (2,691) ---------------------------------------- Net change in cash and cash equivalents (11,768) (7,559) (11,075) (2,112) Cash and cash equivalents at beginning of period 75,346 73,363 74,653 67,916 ---------------------------------------- Cash and cash equivalents at end of period $63,578 $65,804 $63,578 $65,804 ======================================== (1) Depreciation and amortization includes a write-off of note issuance costs in the amount of $106 and $2,260 for the three and six months ending June 30, 2006, respectively. MENTOR GRAPHICS CORPORATION SUPPLEMENTAL FINANCIAL AND OTHER INFORMATION (In thousands, except for days sales outstanding - Unaudited) Three Months Six Months Ended Ended June 30, June 30, ----------------------------------- 2006 2005 2006 2005 -------- ------- -------- -------- Geographic Revenue: Americas $ 79,676 $71,112 $143,365 $142,199 44.7% 45.9% 40.4% 44.6% Europe $ 41,820 $42,245 $ 91,499 $ 86,033 23.4% 27.3% 25.8% 26.9% Japan $ 24,825 $23,663 $ 63,806 $ 56,085 13.9% 15.3% 18.0% 17.6% Pac Rim $ 32,112 $17,816 $ 56,085 $ 34,853 18.0% 11.5% 15.8% 10.9% Other Data: Capital expenditures $ 9,272 $ 5,342 $ 12,494 $ 12,610 Days sales outstanding 118 131 - - MENTOR GRAPHICS CORPORATION RECONCILIATION OF GAAP TO NON-GAAP GUIDANCE DILUTED NET EARNINGS PER SHARE (Unaudited) The following table reconciles the specific items excluded from GAAP in the calculation of expected non-GAAP earnings per share for the periods shown below: Year ended December 31, Q3 2006 2006 ---------------------- Diluted GAAP net earnings per share $(0.01) $ 0.19 Amortization of purchased technology (1) 0.03 0.13 Amortization of intangible assets (2) 0.01 0.04 Estimated impact of stock compensation expense (3) 0.03 0.13 Special charges (4) - 0.06 Expense associate with convertible debt (5) - 0.06 Income tax adjustment (6) (0.00) 0.09 ------ ------------- Diluted non-GAAP net earnings per share $ 0.06 $ 0.70 ====== ============= (1) Excludes amortization of purchased technology acquired in 20 separate acquisition transactions. Purchased technology is amortized over two to five years. The guidance for Q3 2006 and 2006 is net of tax and does not assume any new acquisition transactions. (2) Excludes amortization of other identified intangible assets including trade names, employment agreements and customer relationships acquired in 11 separate acquisition transactions. Other identified intangible assets are amortized over two to five years. The guidance for Q3 2006 and 2006 is net of tax and does not assume any new acquisition transactions. (3) Excludes the expense related to stock options and employee stock purchase plans related to the adoption of SFAS 123R, effective Q1 2006, net of tax. (4) Excludes special charges incurred during Q1 and Q2 2006 consisting primarily of costs incurred for employee rebalances, which included severance benefits, notice pay and outplacement services, the abandonment of excess leased facility space and a loss on the disposal of assets. The guidance for Q3 2006 and 2006 is net of tax and does not assume any new special charges. (5) Excludes amounts incurred during Q1 and Q2 2006 for the write-off of previously capitalized convertible debt costs of and net premium paid on the retirement of convertible debt, net of tax. (6) Non-GAAP income tax expense adjustment is based upon the assumption of a normalized effective rate of 17% on non-GAAP income (loss) before income taxes. CONTACT: Mentor Graphics Corporation Ryerson Schwark, 503-685-1462 ry_schwark@mentor.com or Dennis Weldon, 503-685-1462 dennis_weldon@mentor.com -----END PRIVACY-ENHANCED MESSAGE-----