Selected Consolidated Financial Data
Year ended December 31, 1994 1993 1992 1991 1990
In thousands, except per share data
and percentages
Statement of Operations Data
Total revenues $ 348,294 $ 339,775 $ 350,766 $ 400,127 $ 435,185
Research and development
expense $ 72,484 $ 77,598 $ 73,947 $ 79,539 $ 76,315
Operating income (loss) $ 28,460 $ (29,392)$ (40,732)$ (60,501)$ 20,715
Net income (loss) $ 27,537 $ (32,073)$ (50,861)$ (61,613)$ 23,625
Gross margin percent 69.3% 64.6% 56.4% 50.0% 58.3%
Operating income (loss)
as a percent of total
revenues 8.2% (8.7%) (11.6%) (15.1%) 4.8%
Per Share Data
Net income (loss) per
common and common
equivalent share $ .53 $ (.69) $ (1.13 $ (1.43) $ .53
Cash dividends per common
share outstanding $ 0 $ .18 $ .24 $ .24 $ .22
Weighted average number of
common and common
equivalent shares
outstanding 52,120 46,410 45,142 43,153 44,833
Balance Sheet Data
As of December 31, 1994 1993 1992 1991 1990
Cash and short-term
investments $ 137,856 $ 109,568 $ 108,783 $ 144,022 $ 161,755
Cash and investments,
long-term $ 30,000 $ 30,000 $ 30,000 $ 0 $ 0
Working capital $ 138,779 $ 96,336 $ 108,892 $ 169,875 $ 208,223
Property, plant and
equipment, net $ 97,701 $ 104,912 $ 109,580 $ 114,213 $ 62,438
Construction in progress $ 0 $ 0 $ 0 $ 1,156 $ 60,603
Total assets $ 393,797 $ 353,584 $ 378,565 $ 445,661 $ 504,287
Short-term borrowings $ 8,450 $ 6,364 $ 5,548 $ 4,511 $ 11,953
Long-term debt $ 53,625 $ 54,321 $ 55,709 $ 50,554 $ 50,167
Stockholders' equity $ 239,068 $ 195,711 $ 221,406 $ 267,667 $ 326,419
Management's Discussion and Analysis of Results of
Operations and Financial Conditions
Results of Operations
Revenue and Gross Margins
1994 Change 1993 Change 1992
System and software
revenue $ 187,117 (2)% $ 191,180 (10)% $ 212,397
System and software
gross margins $ 150,360 8% $ 138,879 7% 130,404
Percentage of revenue 80.4% 72.6% 61.4%
Service and support
revenue $ 161,177 8% $ 148,595 7% $ 138,369
Service and support gross
margins $ 91,114 13% $ 80,704 20% $ 67,394
Percentage of revenue 56.5% 54.3% 48.7%
Total revenue $ 348,294 3% $ 339,775 (3) $ 350,766
Total gross margins $ 241,474 10% $ 219,583 11% $ 197,798
Percentage of revenue 69.3% 64.6% 56.4%
System and Software
System and software revenue is derived from software
products owned by the Company, software products owned by
third parties for which royalties are paid by the Company,
and hardware products. System and software revenue declined
2% from 1993 to 1994 and 10% from 1992 to 1993. The primary
factors contributing to the decline in system and software
revenue include a significant reduction in hardware revenue
and a generally poor world-wide economy in 1993. Offsetting
these reductions, the software component of 1993 and 1994
system and software revenue increased due to improved
product offerings, the completion of Version 8 and
additional point tool products.
The hardware component of system and software revenue
declined to 8% in 1994 from 17% and 34% in 1993 and 1992,
respectively. During the last three years the Company has
been executing a plan to exit the hardware business. While
almost all of the Company's customers now meet their
hardware needs by working directly with hardware vendors,
the Company continues to meet the demands of some customers
who prefer to purchase complete systems from one vendor.
Hardware revenue will continue to decline, at a much slower
rate, becoming an insignificant element of revenue in the
future.
Revenue for 1992, 1993, and to a much lesser extent 1994
were negatively impacted by a poor world-wide economy. In
1994 the Company experienced improved activity in Europe
while Japan continued to reflect weakness. During 1994 the
software component of system and software revenue was up 24%
for the European region compared to the same period last
year while North America and Japan experienced modest
4% and 7% improvement for the same periods, respectively.
From December 31, 1993 to December 31, 1994, the U.S. dollar
weakened approximately 7% on a revenue-based weighted
average against the Japanese yen, resulting in higher U.S.
dollar revenue from Japanese yen based sales in 1994.
Exclusive of currency exchange rate changes, the software
component of system and software revenue was flat year to
year in Japan. The North American sales force executed a
reorganization during the first quarter of 1994 which
resulted in a temporary reduction in productivity.
The result of the reorganization was to streamline
operations by reducing two layers of management and better
aligning the sales team to meet customer demand. North
America sales were also impacted by the absence of large
multi-year contracts which made a significant contribution
to revenue in 1993. 1994 systems and
software revenue was characterized by smaller sales
contracts to a much broader customer base.
The software component of system and software revenue
increased 8% from 1993 to 1994 and 14% from 1992 to 1993.
The slower-than-anticipated conversion of customers to the
Company's Version 8 software, which previously had slowed
sales of the new software tools, was substantially completed
by the end of 1993. During the first quarter of 1993 the
Company shipped Version 8.2 of its software. This release
included enhanced performance and reliability of the Version
8 software and was a key factor in the Company's ability to
increase the conversion of existing customers. Customers
who transitioned or were in the process of transitioning
from Version 7 to Version 8 increased from 30% in 1992 to
approximately 80% in 1993. Customer conversion to Version 8
was no longer an issue in 1994.
In 1994, the Company merged with Anacad Electrical
Engineering Software GmbH (Anacad) and Model Technology
Incorporated (MTI). The Anacad transaction was accounted
for as a purchase and was completed on September 30, 1994,
while the MTI transaction was accounted for as a pooling of
interests and was completed on November 30, 1994.
The consolidated financial results of Anacad were included
in the Company's consolidated statements of operations for
the fourth quarter of 1994 only.
The financial results of MTI were included in the Company's
consolidated statements of operations for all of 1994, while
the Company's prior year financial statements were not
restated due to the relative immateriality of MTI's separate
financial statements for 1993 and 1992. The addition of
Anacad and MTI revenue increased the software component of
system and software revenue by approximately 3% in 1994.
Overall growth in the EDA industry has been slower over the
last several years. To achieve additional revenue growth,
EDA vendors must increase market share by either developing
or acquiring new technologies that provide additional
competitive solutions. The mergers with Anacad and MTI
were a result of the Company's strategy to evaluate make-or-
buy alternatives to achieve revenue growth. Anacad's mixed
signal simulation and optimization product offerings and
MTI's VHDL simulation product offerings are complementary to
the Company's current product lines and will contribute to
revenue growth in 1995. This growth may be offset as some
of the Company's maturing products reach the late stages of
their product life cycles.
System and software gross margin improvement in 1994 and
1993 were primarily a result of increased software versus
hardware sales each year. Software gross margins are much
higher than hardware gross margins. The impact of hardware-
software mix-shift on gross margins will be less significant
in 1995 as hardware revenue will decline at a much slower
rate.
Amortization of previously capitalized software development
costs to system and software cost of goods sold was $6,220,
$7,449, and $5,875 for 1994, 1993, and 1992, respectively.
Amortization of purchased technology increased in the
fourth quarter of 1994 due to the acquisition of Anacad and
other technologies during the third quarter of 1994.
Quarterly purchased technology amortization to system and
software cost of revenues for the next three years,
exclusive of additional acquisitions, is expected to increase by
approximately $500. This increase will be partially
offset by reduced amortization of software development costs
as several capitalized projects became fully amortized in
1994. Technology acquisitions are expected to continue in
1995 and may increase purchased technology and related
amortization, depending on the nature of the transaction.
Service and Support
Service and support revenue consists of software support,
which consists primarily of revenue from annual maintenance
contracts, hardware support, and professional services,
which includes consulting services, customer training and
custom design services. Service and support revenue
increased 8% from 1993 to 1994 and 7% from 1992 to 1993.
Rapid growth in professional services combined with
sustained growth in software support yielded this result.
These positive factors were offset by a reduction in
hardware support revenues as many customers contracted
directly with primary providers of hardware service. The
reduction in hardware support revenue reflects the Company's
planned shift to a software-only business model.
The Company also recognized a one-time benefit from an
individual service contract in the third quarter of 1993
increasing service and support revenue by $2,100.
The software support component of service and support
revenue increased 12% from 1993 to 1994 and 12% from 1993 to
1992. Significant Version 8 releases during 1993 and 1994
were the main factors contributing to the success of the
Company's software support program. These releases were a
key to increasing both installed customer base and the
percent of established customers signing up for the software
support program. Growth in software support revenue is
contingent on continued development and acquisition of
competitive software products.
The mergers with MTI and Anacad discussed above had minimal
impact on 1994 service and support revenue. Anacad and MTI
are expected to contribute to software maintenance and
support revenue growth in 1995. This growth may be offset
as some of the Company's current products reach the late
stages of their product life cycles.
The Company has focused resources in the past three years
toward development of the professional service business to
meet customer needs for comprehensive EDA solutions. The
response to this service has been favorable since many
customers want consulting and other services, in addition to
software products, to optimize their design processes.
Increased professional service revenue is expected in 1995
as the Company continues to respond to customer demand.
The increase in service and support gross margins is
primarily attributable to the reduction of lower margin
hardware support and higher volume to absorb the fixed cost
of overhead. In addition, 1993 gross margins were favorably
impacted by 100% margin associated with the individual
service contract discussed above. 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. Lower overall service and support gross
margins are anticipated as growth in the professional
service business is expected to be higher than growth in
software maintenance and support.
Operating Expenses
1994 Change 1993 Change 1992
Research and development $ 72,484 (7)% $ 77,598 5% $ 73,947
Percentage of total
revenues 20.8% 22.8% 21.1%
Marketing, general, and
administration $ 137,310 (6)% $ 146,577 (3)% $ 151,683
Percentage of total
revenues 39.4% 43.1% 43.2%
Restructure costs $ (6,045) 0 $ 24,800 92% 12,900
Percentage of total
revenues (1.7)% 7.3% 3.7%
Research and Development
Gross research and development (R&D) costs were $77,640,
$81,207 and $80,067 for 1994, 1993 and 1992, respectively,
representing a 4% decrease from 1993 to 1994 and a 1%
increase from 1992 to 1993. In 1994, R&D expenditures
decreased due a lower headcount plan that was achieved
through attrition and layoffs. The Company closed an
Integrated Circuit Division R&D site during the first
quarter of 1994, consolidating activities with other pre-
existing locations. Additional cost saving actions were
taken in other R&D divisions of the Company during the year.
Offsetting these cost savings were the acquisitions of
Anacad and MTI. Anacad and MTI increased R&D expense by
approximately $1,100 each in 1994. In 1993, R&D
expenditures remained flat while the Company focused on
performance improvements of it's Version 8 software release.
In the fourth quarter of 1993, the Company acquired
CheckLogic Systems, Inc. resulting in additional R&D expense
of $630 for the year. Offsetting these expenses was a
reduction in headcount for the year due to attrition.
During 1994 the Company capitalized software development
costs of $5,156, compared to $3,609 and $6,120 for 1993 and
1992, respectively. Capitalization increased in 1994 as
more resources were directed toward development of new
products and enhancement of existing products. The decline
in software development cost capitalization during 1993
relates to substantial completion of development activities
associated with Version 8, focus on performance improvements
and an effort toward transition of customers to the
new software.
Gross R&D costs are expected to increase from 1994 levels
due to acquisitions of Anacad and MTI, discussed above and
additional research and development investment in the coming
year. In addition, the Company will continue to evaluate
make-or-buy alternatives in 1995 which may result in more
acquisitions. Overall, the ratio of R&D expense as a
percent of revenue may increase in 1995 due to this additional
investment activity.
Marketing, General, and Administration
Marketing, general and administration (MG&A) expenses were
$137,310, $146,577 and $151,683 for 1994, 1993 and 1992,
respectively, representing a 6% decrease from 1993 to 1994
and a 3% decrease from 1992 to 1993. In 1994, MG&A expenses
declined as actions associated with the December 1993
restructuring were executed during the year. The North
American sales force executed a reorganization during the
first quarter of 1994 which resulted in lower headcount and
reduced layers of management to better align the sales teams
with their respective territories.
In addition, actions were executed at several international
locations to streamline the organizations to improve the
ratio of selling and administrative expense compared to
regional revenue levels.
Offsetting these cost savings were the acquisitions of
Anacad and MTI, which increased MG&A expense by
approximately $1,100 and $1,300, respectively in 1994. The
decline in 1993 represents headcount reductions by selective
replacement of voluntary attrition, partially offset by
increased recruiting costs associated with the successful
hiring of several key management positions.
In 1995 MG&A expenses are expected to increase from 1994
levels due to acquisitions of Anacad and MTI, discussed
above. In addition, the Company will experience increased
costs associated with the implementation of a new global
information system in the coming year. The system is
expected to reduce the costs associated with capturing and
analyzing financial and non-financial data in 1996.
Overall, the goal of management is to improve the ratio of
MG&A expense as a percent of revenue as compared to 1994
levels. Achievement of this goal is not guaranteed due to
the uncertainty of revenues.
Restructuring Costs
During 1994, the Company continued the execution of the
restructuring plan approved by Company management in
December 1993. This plan was aimed at reducing operating
expenses by streamlining and reorganizing certain Company
operations. In 1994, implementation of the restructuring
plan reduced expenses by an estimated $10,000. When all
elements of the restructuring plan have been fully
implemented, the Company expects future costs and expenses
to be reduced even further.
During 1994, the Company recorded a gross restructure credit
of $10,045. This credit was the result of reduced estimates
for the costs of executing certain elements of the
restructure plan, and cancellation of certain actions, and
was partially offset by an accrual of $4,000 associated with
new restructure activities approved by management during the
year. The new restructure costs accrued in 1994 were
limited to severance and write-offs of excess equipment and
intangible software technology assets related to
discontinued product development activities. Reductions in
the estimated costs of the plan were realized primarily due
to greater than anticipated employee attrition, which
allowed the Company to achieve its cost reduction objectives
at a lower cost. In addition, the reduction in costs
reflects lower than anticipated severance package costs
overseas. Approximately $10,000 of the 1993 restructure
accrual resulted in cash expenditures in 1994.
Approximately $10,000 of the remaining $11,897 restructure
accrual should result in cash expenditures in 1995.
Spending associated with certain facilities closures should
extend beyond 1995.
In 1993, restructure costs of $24,800 were recognized for
the execution of this plan. These costs
consisted primarily of direct costs related to the severance
and relocation of employees, facilities closure, and write-
offs of excess equipment and intangible software technology
assets related to discontinued product development activities.
In August 1992, the Company executed a restructuring plan
aimed at improving its focus on the core businesses of
integrated circuit design and electronic systems design. As
part of the restructuring, the Company substantially reduced
internal development on various software products and
consolidated certain field facilities to more economically
support sales efforts. Costs associated with the
restructuring of $12,900 were recognized in 1992.
Restructuring costs included direct costs related to the
severance and relocation of employees, consolidation of
facilities, and write-offs of intangible software technology
assets related to discontinued product lines. The result
was to significantly reduce operating costs of administration,
distribution and sales.
Merger Related Charges
Merger related charges are the result of a write-off of in-
process R&D of $8,265 associated with the Anacad transaction
and consulting service costs of $1,000 associated with the
MTI transaction. On September 30, 1994, the Company
completed the acquisition of Anacad. The acquisition was
accounted for as a purchase. The cost of the acquisition
has been allocated on the basis of estimated fair value of
the assets and liabilities assumed. This allocation
resulted in a one-time charge for in-process R&D of $8,265,
capitalization of goodwill of $2,897 and capitalization of
technology of $4,735. The charge for in-process R&D was a
result of allocating a portion of the acquisition cost to
Anacad's in-process product development that had not reached
technological feasibility. On December 1, 1994, the
Company completed the merger with MTI. The transaction was
accounted for as a pooling of interests. The Company's
prior year financial statements were not restated due to
relative materiality of MTI's separate financial statements
for 1993 and 1992. The merger costs of $1,000 were paid by
MTI for consulting services rendered to facilitate negotiation
of the various components of the merger agreement.
Other Income (Expense)
1994 Change 1993 Change 1992
Other income (expense),
net $ 2,452 0 $ (257) 97% (7,539)
Other income (expense) has increased significantly over the
last three years due to increased interest income in 1994,
lower interest expense in 1994 and 1993, and one-time charges
of $7,298 in 1992. Interest income was $4,953, $4,338 and
$5,284 in 1994, 1993 and 1992, respectively. The improvement in
interest income is attributable to higher interest rates and
higher average cash balances due to earnings in 1994. In 1993,
compared to 1992, average interest rates on investments were much
lower, while average cash balances were flat, resulting in lower
interest income. Interest expense was $2,703, $4,404 and $5,469
in 1994, 1993 and 1992, respectively. In 1994, average debt
outstanding was lower due to improved cashflow from operating
activities and continued management of the Company's long term
committed revolving credit facility. Interest expense
declined significantly in 1993 as a result of a reduction in
the notional amount of its interest rate swap agreement from
$50,000 to $17,500 and lower average debt outstanding
through management of the Company's long term committed
revolving credit facility. The interest rate swap agreement
converts floating rates on $17,500 of borrowings to a fixed
rate of 9.55%. The reduction in notional amount resulted
in moving $32,500 of borrowings to more favorable floating
rates.
Other expense for 1992 includes a charge of $6,150 related
to termination of a contractual relationship with a third-
party software supplier. The Company paid $4,250 in the
fourth quarter of 1992 and took a write-off of $1,900 in
balance sheet amounts related to the contract. In exchange,
the supplier relinquished all future claims against the
Company, including cancellation of the obligation to pay
royalties on sales of certain products through September 30,
1994. Other expense in 1992 also includes write-downs for
certain non-operating assets to net realizable value,
totaling $1,148.
Provision for Income Taxes
The provision for income taxes was $3,375, $2,424 and $2,590
in 1994, 1993 and 1992, respectively. 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
carrybacks, and tax expense for subsidiaries with pre-tax
income. As such, the Company's income tax position and
resultant effective tax rate is uncertain in 1995.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No.109, "Accounting for
Income Taxes." The cumulative effect of the change in the
method for accounting for income taxes was not material to
the Company's financial statements, and is therefore not
disclosed separately in the Consolidated Statement of
Operations for the year ending December 31, 1993.
Effects of Foreign Currency Fluctuations
The Company experienced net gains from foreign currency
transactions of $177, $247 and $297 in 1994, 1993 and 1992,
respectively. These amounts are composed of realized gains and
losses on cash transactions involving various foreign currencies,
and unrealized gains andlosses related to foreign currency receivables
and payables resulting from exchange rate fluctuations between
the various currencies in which the Company operates. Foreign
currency gainsand losses are included as a component of other income and
expense.
The "foreign currency translation adjustment," as reported
in the stockholders' equity section of the consolidated balance
sheet, increased to $12,674 at December 31, 1994, from $7,539 at the
end of 1993. This reflects the increase in the value of net
assets denominated in foreign currencies since year-end 1993 as a
result of a weaker US dollar at the close of 1994.
During 1994, the U.S. dollar weakened approximately 8% against
the Japanese yen and 2% against European currencies in which the
Company does business, primarily the Deutsche mark, British pound,
and French franc. The Japanese yen strengthened steadily over 1994,
while European currencies fluctuated minimally during the same period.
A weaker U.S.dollar results in the Company's products being more
affordable in foreign markets, which generally results in favorable
economics for the Company. The weakening of the dollar relative to
the foreign currencies also has a positive impact on revenues as local
currency revenues translate into more U.S. dollars. However, this
translation also results in higher reported expenses in U.S. dollar
terms.
During 1993, the U.S. dollar was volatile against the
European currencies, strengthening during the first three months and
last six months of the year. The dollar weakened when compared to
the yen during the first nine months of 1993 and rebounded slightly
in the fourth quarter. Foreign currency fluctuations in Europe and
Japan resulted in a slightly weaker US dollar overall during 1993.
The Company generates approximately half of its revenues
outside of 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 future foreign currency fluctuations.
Liquidity and Capital Resources
Year Ended December 31, 1994 1993 1992
Current Assets $ 238,006 $ 198,088 $ 207,987
Cash and short term investments $ 137,856 $ 109,568 $ 108,783
Cash and investments, long-term $ 30,000 $ 30,000 $ 30,000
Cash provided by operations $ 50,397 $ 25,289 $ 13,610
Cash used for investment
activities, excluding short-term
investments $ (31,233) $ (26,754) $ (29,559)
Cash provided (used) by financing
activities $ 6,455 $ 1,862 $ (18,354)
Cash and Investments
Total cash and investments increased $28,288 during 1994.
Cash provided by operations was $50,397, an increase of $25,108
from 1993. Positively impacting cash provided by operations in 1994
was net income of $27,537 coupled with the impact of the adjustment
for in-process R&D associated with the Anacad acquisition of $8,265.
These sources of cash were offset by an increase in trade accounts
receivable and decreased accrued liabilities associated with
the restructuring accrual changes discussed previously. In 1993,
cash was negatively impacted by the net loss incurred of $32,073 for
the year and reductions in accounts payable.These uses of cash were
offset by a reduction in trade accounts receivable, continued transition
out of the hardware business resulting in lower inventory levels and
increased accrued liabilities associated with the year-end restructuring.
Cash and short-term investments were positively impacted by
the proceeds from issuance of common stock upon exercise of stock
options and employee stock plan purchases in the amount of $10,205
and $11,179 in 1994 and 1993, respectively. This increase was offset
by investment in property, plant and equipment of $14,327 in 1994
and $22,790 in 1993. In addition, the purchase of Anacad late in 1994
resulted in cash payments totalling $10,050. In 1993, dividends paid
to stockholders totalled $8,291. See dividends discussion below.
Trade Accounts Receivable
The trade accounts receivable balance increased $9,630 from
the December 31, 1993 balance. The increase is primarily attributable
to a large customer contract receivable due in 1995 totalling $8,000.
In addition, Anacad and MTI acquisitions increased the trade receivable
balance by $2,531 year to year. Excluding the large customer contract
and the impact of acquisitions on trade receivables, the Company was
able to improve cash collections and reduce days sales outstanding
in 1994.
Inventory
Inventory levels at December 31, 1994 totaled $856, down
$1,443 since December 31, 1993. The reduction in inventory
reflects the Company's shift to a software-only business model
resulting in the reclassification of demonstration equipment to
property, plant and equipment in 1994. In 1994, demonstration
equipment was not promoted for sale as it was in prior years.
Demonstration equipment included in inventory amounted to $1,835 at
December 31, 1993. The remaining balance in inventory primarily consists
of documentation and CD ROM media for software updates. Inventory
is expected to be at approximately current levels in 1995. For any
remaining hardware requests from customers, the Company will use a
drop ship approach, shipping directly from the hardware vendor to the
customer.
Other Assets
Other assets increased to $28,090 at December 31, 1994 from
$20,584 at year-end 1993. The 1994 acquisition of Anacad resulted
in goodwill capitalization of $2,897 and technology capitalization
of $4,735. The goodwill costs will be amortized over a three year
period to R&D expense. The technology costs will be amortized over a
three year period to system and software cost of revenues. Net
capitalized software development costs decreased by $1,064 as
capitalization and amortization were $5,156 and $6,220, respectively,
in 1994. Also, capitalized purchased technology increased by $1,700 in
1994. In 1993, capitalization and amortization of software development
costs were $3,609 and $7,449, respectively.
Long-term Debt
Long-term debt decreased $696 from December 31, 1993.
The Company had borrowings outstanding of $54,160 and $55,000 under its
$55,000 committed revolving credit facility as of December 31, 1994
and 1993 respectively. Due to required annual commitment reductions,
the Company reduced credit facility borrowings by $840 in July 1994. In
addition, $840 of the credit facility borrowings are classified as
current and included in short-term borrowings on the consolidated balance
sheets as of December 31, 1994 and 1993.
Dividends
In October 1993, the Board of Directors voted to discontinue
paying a quarterly dividend to shareholders. The Company intends to
reinvest future earnings in opportunities for growth. Dividends were
paid during the first three quarters of 1993 totalling $8,291.
Capital Resources
Total capital expenditures increased to $26,077 for 1994,
compared to $23,145 and $23,439 for 1993 and 1992, respectively. The
purchase of Anacad late in 1994 resulted in cash payments totalling
$10,050 during the year. In addition, the Company purchased technologies
totalling $1,700 during 1994. The Company will continue to evaluate
make-or-buy alternatives which should result in additional capital
expenditures in 1995.
Expenditures for property and equipment were $14,327 and
$22,790 in 1994 and 1993, respectively. In 1994 investment in computer
equipment for development engineers declined as significant investment
in 1993 and 1992 completed the Company's transition to a UNIX-based
operating system environment. Future capital expenditure plans include
maintaining a state of the art design environment for research and
development and sales demonstration equipment and implementing a new global
information system.
The Company anticipates that current cash balances, anticipated
cashflows from operating activities, and existing credit facilities will
be sufficient to meet its working capital needs for at least the next
twelve months.
Consolidated Statements of Operations
Year ended December 31, 1994 1993 1992
In thousands, except per share data
Revenues:
System and software $ 187,117 $ 191,180 $ 212,397
Service and support 161,177 148,595 138,369
Total revenues 348,294 339,775 350,766
Cost of revenues:
System and software 36,757 52,301 81,993
Service and support 70,063 67,891 70,975
Total cost of revenues 106,820 120,192 152,968
Gross margin 241,474 219,583 197,798
Operating expenses:
Research and development (note 6) 72,484 77,598 73,947
Marketing, general, and
administration 137,310 146,577 151,683
Restructure costs (note 2) (6,045) 24,800 12,900
Merger related charges (note 3) 9,265 0 0
Total operating expenses 213,014 248,975 238,530
Operating Income (loss) 28,460 (29,392) (40,732)
Other income (expense),
net (note 12) 2,452 (257) (7,539)
Income (loss) before income
taxes 30,912 (29,649) (48,271)
Provision for income taxes
(note 4) 3,375 2,424 2,590
Net Income (loss) $ 27,537 $ (32,073) $ (50,861)
Net Income (loss) per common and
common equivalent share $ .53 $ (.69) $ (1.13)
Weighted average number of common
and common equivalent shares
outstanding 52,120 46,410 45,142
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
As of December 31, 1994 1993
In thousands
Assets
Current assets:
Cash and cash equivalents $ 130,676 $ 95,958
Short-term investments 7,180 13,610
Trade accounts receivable, net of allowance
for doubtful accounts of $2,847 in 1994 and
$3,928 in 1993 82,285 72,655
Other receivables 4,853 4,167
Inventory 856 2,299
Prepaid expenses and other 12,156 9,399
Total current assets 238,006 198,088
Property, plant and equipment, net
(notes 5 and 8) 97,701 104,912
Cash and investments, long-term (notes 8) 30,000 30,000
Other assets (note 6) 28,090 20,584
Total assets $ 393,797 $ 353,584
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings (notes 7 and 8) $ 8,450 $ 6,364
Accounts payable 11,570 10,637
Income taxes payable (note 4) 12,793 9,974
Accrued payroll and related liabilities 19,469 14,162
Accrued restructure costs 11,897 28,374
Accrued and other liabilities 17,399 14,603
Deferred revenue 17,649 17,638
Total current liabilities 99,227 101,752
Long-term debt (note 8) 53,625 54,321
Other long-term deferrals 1,877 1,800
Total liabilities 154,729 157,873
Stockholders' equity: (notes 9 and 10)
Common stock, no par value, authorized
100,000 shares; 51,350 and 47,659 issued
and outstanding for 1994 and 1993,
respectively 254,271 243,951
Incentive stock, no par value, authorized
1,200 shares; none issued 0 0
Accumulated deficit (27,877) (55,779)
Foreign currency translation adjustment 12,674 7,539
Total stockholders' equity 239,068 195,711
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $ 393,797 $ 353,584
See accompanying notes to consolidated
financial statements.
Consolidated Statements of Cash Flows
Year ended December 31, 1994 1993 1992
In thousands
Operating Cash Flows:
Net Income (loss) $ 27,537 $ (32,073) $ (50,861)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization of
property, plant and equipment 24,687 27,600 25,750
Deferred taxes (290) (259) 2,512
Amortization of other assets 7,428 8,217 8,743
Amortization of nonqualified
stock options 114 1,418 237
Write-down of assets - in-process R&D 8,265 0 0
Write-down of assets - other 0 812 6,088
Changes in operating assets and liabilities:
Trade accounts receivable (4,921) 2,788 23,490
Inventory 46 7,771 13,934
Prepaid expenses and other assets (1,782) 6,623 9,409
Accounts payable (1,596) (5,845) (9,383)
Accrued liabilities (11,345) 16,634 (8,078)
Other liabilities and deferrals 2,254 (8,397) (8,231)
Net cash provided by operating
activities 50,397 25,289 13,610
Investing Cash Flows:
Net maturities of short-term
investments 6,430 23,161 28,831
Purchases of property, plant
and equipment (14,327) (22,790) (18,784)
Capitalization of software
development costs (5,156) (3,609) (6,120)
Development of corporate facilities 0 (355) (4,655)
Purchase of business (10,050) 0 0
Purchases of technology (1,700) 0 0
Net cash used by investing
activities (24,803) (3,593) (728)
Financing Cash Flows:
Proceeds from issuance of
common stock 10,205 11,179 16,074
Proceeds (repayment) of short-term
borrowings (367) (89) 1,222
Proceeds (repayment) of long-term debt (1,936) (937) 5,176
Cash distribution (2,346) 0 0
Adjustment for pooling of interests 899 0 0
Dividends paid to stockholders 0 (8,291) (10,826)
Increase in cash and investments,
long-term 0 0 (30,000)
Net cash provided (used) by financing
activities 6,455 1,862 (18,354)
Effect of exchange rate changes on
cash and cash equivalents 2,669 388 (992)
Net change in cash and cash equivalents 34,718 23,946 (6,464)
Cash and cash equivalents at beginning
of period 95,958 72,012 78,476
Cash and cash equivalents at end of
period $ 130,676 $ 95,958 $ 72,012
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Foreign Total
In Thousands, Retainded Currency Stock
except per Common Stock Earnings Translation holder's
share data Shares Amount (Deficit) Adjustment Equity
Balance at
December 31, 1991 43,595 $ 215,043 $ 46,272 $ 6,352 $ 267,667
Stock issued under stock
option and stock
purchase plans 2,002 16,074 0 0 16,074
Compensation related to
nonqualified stock
options granted
(note 10) 0 237 0 0 237
Foreign currency
translation adjustment 0 0 0 (885) (885)
Net loss 0 0 (50,861) 0 (50,861)
Cash dividends
($.24 per common
share outstanding) 0 0 (10,826) 0 (10,826)
Balance at
December 31, 1992 45,597 231,354 (15,415) 5,467 221,406
Stock issued under stock
option and stock
purchase plans 1,641 10,672 0 0 10,672
Stock issued for
acquisition of business
(note 3) 421 507 0 0 507
Compensation related to
nonqualified stock options
granted (note 10) 0 1,418 0 0 1,418
Foreign currency translation
adjustment 0 0 0 2,072 2,072
Net loss 0 0 (32,073) 0 (32,073)
Cash dividends
($.18 per common
share outstanding) 0 0 (8,291) 0 (8,291)
Balance at
December 31, 1993 47,659 243,951 (55,779) 7,539 195,711
Stock issued under stock
option and stock
purchase plans 1,248 10,205 0 0 10,205
Stock issued for
acquisition of
business (note 3) 2,443 1 899 0 900
Compensation related to
nonqualified stock
options granted
(note 10) 0 114 0 0 114
Foreign currency
translation adjustment 0 0 0 5,135 5,135
Change in value of trading
securities 0 0 1,812 0 1,812
Net Income 0 0 27,537 0 27,537
Cash distribution 0 0 (2,346) 0 (2,346)
Balance at
December 31, 1994 51,350 $ 254,271 $ (27,877) $ 12,674 $ 239,068
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
All numerical references in thousands, except percentages
and per share data
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial
statements of Mentor Graphics Corporation and its wholly owned and
majority-owned subsidiaries (the Company). All significant
intercompany accounts and transactions are eliminated in
consolidation.
Foreign Currency Translation
Local currencies are the functional currencies for the
Company's foreign subsidiaries except for the Netherlands
and Singapore where the U.S. dollar is used as the
functional currency. Assets and liabilities of foreign
operations are translated to U.S. dollars at current rates
of exchange, and revenues and expenses are translated using
weighted average rates. Gains and losses from foreign
currency translation are included as a separate component of
stockholders' equity. Foreign currency transaction gains
and losses are included as a component of other income and
expense (note 12).
Financial Instruments
The Company enters into forward foreign exchange contracts
as a hedge against foreign currency sales commitments. To
hedge its foreign currency against highly anticipated sales
transactions, the Company also purchases foreign exchange
options which permit but do not require foreign currency
exchanges at a future date with another party at a
contracted exchange price. Remeasurement gains and losses
on forward and option contracts are deferred and recognized
when the sale occurs. All subsequent remeasurement gains
and losses are recognized as they occur to offset
remeasurement gains and losses recognized on the related
foreign currency accounts receivable balances. At December
31, 1994 and 1993 the Company had forward contracts and
options outstanding of $25,825 and $13,847, respectively, to
primarily sell various foreign currencies. These contracts
generally have maturities which do not exceed twelve months.
At December 31, 1994, the recorded value and the fair value
of the Company's foreign exchange position related to these
contracts was approximately zero. The fair value of these
contracts was calculated based on dealer quotes. The
Company does not anticipate non-performance by the
counterparties to these contracts.
The fair market value of the Company's long-
term debt approximates its carrying value as the
interest rates on borrowings are floating rate based. The
Company has entered into an interest rate swap agreement to
manage exposure to interest rate fluctuations. The
differential to be paid or received is accrued and is
recognized over the life of the agreement as an adjustment
to interest expense. The Company would incur a cost of
approximately $994 to terminate its interest rate swap
agreement as of December 31, 1994. This cost is based on
dealer quotes taking into consideration current interest
rates and the current creditworthiness of the counterparties
(note 8).
The Company places its cash equivalents and short-term
investments with major banks and financial institutions.
The investment policy limits the Company's credit exposure
to any one financial institution. Concentrations of credit
risk with respect to trade receivables are limited due to
the large number of customers comprising the Company's
customer base, and their dispersion across different
businesses and geographic areas. The carrying amounts of
cash equivalents, short-term investments, trade receivables,
accounts payable, and short term borrowings approximate fair
value because of the short-term nature of these instruments.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Statement No. 115 requires reporting of
investments as either held to maturity, available for sale
or trading. The Company owns common stock and common stock
warrants of an independent public company with an original
carrying cost of $0 and a market value of $1,812 as of
December 31, 1994. Under Statement No., 115, the securities
have been classified as available for sale, which requires
the difference between original carrying cost and market
value to be recognized. This difference is included on the
consolidated balance sheet in prepaid and other assets and
as a reduction of the same amount in accumulated deficit.
No other investments owned by the Company are materially
impacted by provisions of this Statement as the underlying
carrying values approximate market.
Cash, Cash Equivalents, and Short-Term Investments
The Company classifies highly liquid investments purchased
with an original maturity of three months or less as cash
equivalents. As of December 31, 1994 and 1993, the Company
held $50,990 and $35,614, respectively of short term
securities under agreements to resell on January 1, 1994 and
1995, respectively. Due to the short-term nature of these
investments, the Company did not take possession of the
securities which were instead held in the Company's account
at Smith Barney Inc. The Company does not believe it is
exposed to any significant credit or market risk on cash and
cash equivalent balances.
Short-term investments consist of certificates of deposit,
commercial paper and other highly liquid investments with
original maturities in excess of three months. These
investments mature primarily in less than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and consists
of land and improvements, buildings and building equipment,
computer equipment and furniture, leasehold improvements,
and service spare parts
(note 5). Expenditures for additions to property, plant and
equipment are capitalized. The cost of repairs and
maintenance is expensed as incurred. Depreciation of
buildings and building equipment, and land improvements, is
computed on a straight-line basis over lives of forty and
twenty years, respectively. Depreciation of computer
equipment and furniture is computed principally on a
straight-line basis over the estimated useful lives of the
assets, generally three to five years. Leasehold
improvements are amortized on a straight-line basis over the
lesser of the term of the lease or estimated useful lives of
the improvements. Service spare parts are amortized on a
straight-line basis over their estimated useful lives,
generally four years.
Income Taxes
Effective January 1, 1993, the Company adopted Statement
No.109, "Accounting for Income Taxes." Statement No.109
requires a change from the deferred method under APB Opinion
11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method,
deferred income taxes are recognized for the future tax
consequences attributable to temporary differences between
the financial statement carrying amounts and tax balances of
existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the
period that includes the enactment date. The cumulative
effect of that change in the method for accounting for
income taxes was not material to the Company's financial
statements, and is therefore not disclosed separately in the
Consolidated Statement of Operations for the year ending
December 31, 1993.
Pursuant to the deferred method under APB Opinion 11, which
was applied in 1992 and prior years, deferred income taxes
are recognized for income and expense items that are
reported in different years for financial reporting purposes
and income tax purposes using the tax rate applicable for
the year of calculation. Under the deferred method,
deferred taxes are not adjusted for subsequent changes in
tax rates.
Revenue Recognition
Revenues from system sales and software licenses are
recognized at the time of shipment. Contract service
revenues are billed in advance and recorded as deferred
revenue. Service revenues are then recognized ratably over
the contractual period as the services are performed.
Training and consulting revenues are recognized as the
related services are performed. Custom design and software
porting revenues are recognized using the percentage of
completion method or as contract milestones are achieved.
Software Development Costs
The Company capitalizes certain software development costs
incurred. These capitalized costs are amortized over the
estimated economic life of the software, not exceeding three
years, computed principally on a straight-line basis.
Amortization is included in system and software cost of
revenues in the Consolidated Statements of Operations. All
other research and development costs are expensed as
incurred.
Net Income (Loss) per Common and Common Equivalent Share
For 1994, net income per common and common equivalent share
was calculated on the basis of the weighted average number
of common shares outstanding plus dilutive common stock
equivalents related to stock options outstanding. For 1993
and 1992, net loss per common and common equivalent share
was calculated using only the weighted average of common
shares outstanding. Common stock equivalents related to
stock options are anti-dilutive in a net loss situation and,
therefore, were not included in 1993 and 1992.
Reclassifications
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1992 and 1993 to
conform with the 1994 presentation.
2. Restructuring
During 1994, the Company recorded a gross restructure credit
of $10,045. This credit was the result of reduced estimates
for the costs of executing certain elements of the 1993
restructure plan, and cancellation of certain actions, and
was partially offset by an accrual of $4,000 associated with
new restructure activities approved by management during the
year. The new restructure costs in 1994 are limited to
severance and write-offs of excess equipment and intangible
software technology related to discontinued product
development activities. Reductions in the estimated costs
and cancellation of certain actions were realized primarily
due to greater than anticipated employee attrition, which
allowed the Company to achieve its cost reduction plan with
lower severence costs. In addition, the reduction in costs
reflects lower than anticipated severance costs overseas.
In December 1993, the Company recorded a charge of $24,800
associated with a restructuring plan aimed at reducing
operating expenses by streamlining and reorganizing company
operations. These costs consisted primarily of direct costs
related to the severance and relocation of employees
facilities closure, and write-offs of obsolete equipment and
intangible software technology assets.
Restructuring costs of $12,900 were recognized in 1992.
Restructuring costs included direct costs related to the
severance and relocation of employees, consolidation of
facilities, and write-offs of intangible software technology
assets related to discontinued product lines. The result
was to significantly reduce operating costs of
administration, distribution, and sales.
Following is a summary of the major elements of the
restructure charges:
Year ended December 31, 1994 1993 1992
Employee severance
and relocation $ 2,430 $ 19,400 $ 5,700
Asset write-offs and product
discontinuance costs 1,570 2,300 6,435
Facilities closure and
consolidation 0 4,300 1,800
Reversal of accrued
restructure costs (10,045) (1,400) (1,600)
Other 0 200 565
Total $ (6,045) $ 24,800 $ 12,900
3. Business Aquisitions
On September 30, 1994, the Company completed the acquisition
of Anacad Electrical Engineering Software GmbH (Anacad).
Anacad is primarily engaged in developing, marketing and
supporting analog and mixed signal simulation and optimization
software for the integrated circuit and printed circuit board
markets of the electronic design automation (EDA) industry.
Anacad's product offerings are complementary to the
Company's current broad line of EDA tools and systems. The total
purchase price of $12,000 was financed with cash of $10,050 and
the issuance of a short-term obligation classified under accrued
liabilities totalling $1,950.
The acquisition was accounted for as a purchase, and
therefore, the consolidated balance sheet of Anacad has been
included in the accompanying Consolidated Balance sheets as
of December 31, 1994. The cost of the acquisition was
allocated on the basis of estimated fair value of the assets
and liabilities assumed. This allocation resulted in a
charge for
in-process R&D of $8,265, goodwill capitalization of $2,897
and technology capitalization of $4,735.
The charge for in-process R&D was a result of allocating a
portion of the acquisition cost to Anacad's in-process
product development that had not reached technological
feasibility. The goodwill costs will be amortized over a
three year period to R&D expense primarily to recognize the
value of the development work-force acquired. The technology
costs will be amortized over a three year period to system
and software cost of revenues. Financial results subsequent
to the acquisition date have been included in the
Consolidated Statements of Operations and Cash Flows. The
separate operational results of Anacad were not material
compared to the Company's overall results of operations, and
accordingly pro-forma financial statements of the combined
entities have been omitted.
On November 30, 1994, the Company issued 2,443 shares of its
common stock for all outstanding common stock of Model
Technology Incorporated (MTI). MTI is a developer of VHDL
simulation point tools using direct compile technology to
design and test application specific integrated circuits.
The Company accounted for this transaction as a pooling of
interests. The balance sheet of MTI is included in the
accompanying Consolidated Balance Sheets as of December 31,
1994 and MTI's results of operations are included in the
accompanying Consolidated Statement of Operations for all of
1994. The Company's prior year financial statements were
not restated due to the relative materiality of MTI's
separate financial statements for 1993 and 1992. Merger
costs of $1,000 were paid by MTI for consulting services
rendered to facilitate negotiation of the various components
of the merger agreement.
On December 1, 1993, the Company issued 421 shares of its
common stock for all outstanding common and preferred stock
of CheckLogic Systems, Inc. (CheckLogic). In addition, up
to 35 common shares were reserved for issuance with respect
to CheckLogic employee stock options outstanding.
CheckLogic is a developer of automatic test pattern
generation point tools used to test designs of application
specific integrated circuits. The Company accounted for
this transaction as a pooling of interests, and the
financial results for the year ended December 31, 1993
include the accounts of CheckLogic. The separate financial
results of CheckLogic prior to the acquisition were not
material, and accordingly the consolidated financial
statements for 1992 were not restated.
4. Income Taxes
Domestic and foreign pre-tax income (loss) is as follows:
Year ended
December 31, 1994 1993 1992
Domestic $ 6,279 $ (23,682) $ (41,322)
Foreign 24,633 (5,967) (6,949)
Total $ 30,912 $ (29,649) $ (48,271)
The provision (benefit) for income taxes is as follows:
1994 1993 1992
Current:
Federal $ (435) $ 0 $ (1,141)
State 63 (162) 138
Foreign 4,033 2,041 1,081
3,661 1,879 78
Deferred:
Federal (347) 655 102
Foreign 57 (110) 2,410
(290) 545 2,512
Total $ 3,375 $ 2,424 $ 2,590
The effective tax (benefit) rate differs from the Federal
statutory rate as follows:
Year ended December 31, 1994 1993 1992
Federal statutory tax
(benefit) rate 35% (35.0)% (34.0)%
State taxes, net of Federal
tax benefits 3.5 (2.3) 0.3
Foreign tax rate differential 9.2 8.0 0.3
Losses from foreign
subsidiaries 6.4 0.6 7.7
Unrealized benefit of net
operating loss carryforwards 0 0 26.9
Adjustment of deferred tax assets
due to net operating loss 0 0 4.2
Adjustment of beginning of year
balance of deferred tax assets
and liabilities for settlement
of Federal income tax
obligations 0 2.5 0
Income of acquired S
corporation not subject
to income tax (2.9) 0 0
Change in valuation allowance
for deferred tax assets (39.7) 29.5 0
Other, net (0.6) 4.9 0
Effective tax rate 10.9% 8.2% 5.4%
The significant components of deferred income tax expense
are as follows:
Year ended December 31, 1994 1993
Net changes in deferred tax
assets and liabilities $ 11,992 $ (8,205)
Increase(decrease) in beginning-of-year
balance of the valuation allowance
for deferred tax assets (12,282) 8,750
Total $ (290) $ 545
For the year ended December 31, 1992, deferred income tax
expense was $2,512, resulting from timing differences in the
recognition of income and expense for income tax and
financial reporting purposes.
The sources and tax effects of those timing differences are
presented below:
As of December 31, 1992
Depreciation $ 1,198
Inventory valuation adjustments 556
Accrued vacation and other compensation 822
Other asset valuation adjustments 413
Capitalization of software development costs (152)
Customer service accruals 901
Accrued restructure costs (292)
Adjustment of deferred tax assets
due to net operating loss (1,296)
Other, net 362
Total $ 2,512
The tax effects of temporary differences and carryforwards
which gave rise to significant portions of deferred tax
assets and liabilities were as follows:
As of December 31, 1994 1993
Deferred tax assets:
Property and equipment,
principally due to differences in
depreciation and capitalized
interest $ 2,032 $ 810
Inventories, principally due to
adjustments to lower
of cost or market 494 3,358
Accounts receivable, principally due
to allowance for doubtful accounts 836 1,241
Compensated absences and other
compensation, principally due to
accrual for financial
reporting purposes 3,730 3,105
Restructure costs, principally due to
accrual for financial reporting
purposes 4,480 9,642
Net operating loss carryforwards 23,567 29,576
Tax credit carryforwards 11,153 11,523
Other, net 2,208 1,663
Total gross deferred tax assets 48,500 60,918
Less valuation allowance (46,213) (58,495)
Net deferred tax assets 2,287 2,423
Deferred tax liabilities:
Capitalization of software
development costs for
financial reporting purposes (3,208) (3,634)
Net deferred tax liability $ (921) $ (1,211)
The Company has established a valuation allowance for
certain current deferred tax assets, and net operating loss
and tax credit carryforwards. Statement 109 requires that
such a valuation allowance be recorded when it is more
likely than not that some portion of the deferred tax assets
will not be realized. The portion of the valuation
allowance for deferred tax assets for which subsequently
recognized tax benefits will be applied directly to
contributed capital is $10,650 as of December 31, 1994.
This amount was primarily attributable to differences
between financial and tax reporting of employee stock option
transactions. During 1994, the valuation allowance
decreased by $12,282, of which $6,404 related to the
realization of net operating loss carry forwards. The
valuation allowance as of January 1, 1993 was $49,745. The
net increase in the valuation allowance for the year ended
December 31, 1993 was $8,750.
As of December 31, 1994, the Company has net operating loss
carryforwards for income tax purposes of approximately
$53,726. Such carryforwards will expire from 1998 to 2009
if not used by the Company to reduce income taxes payable in
future periods.
As of December 31, 1994 the Company has research and
experimentation tax credits available totaling approximately
$11,153. These tax credits are applicable against Federal
tax liabilities from 1994 through 2008 subject to various
limitations under current tax law.
The Company has not provided for Federal income taxes on
approximately $85,291 of undistributed earnings of foreign
subsidiaries at December 31, 1994, since these earnings have
been invested indefinitely in subsidiary operations. Upon
repatriation, some of these earnings would generate foreign
tax credits which will reduce the Federal tax liability
associated with any future foreign dividend.
The Company has settled its Federal income
tax obligations through 1991. The Company believes the
provisions for income taxes for years since 1991
are adequate.
5. Property, Plant and
Equipment
A summary of property, plant and equipment follows:
As of December 31, 1994 1993
Computer equipment and furniture $ 135,723 $ 121,975
Buildings and building equipment 53,365 53,326
Land and improvements 14,641 14,641
Leasehold improvements 9,577 9,613
Service spare parts 4,953 3,857
218,259 203,412
Less accumulated depreciation
and amortization (120,558) (98,500)
Property, plant and equipment, net $ 97,701 $ 104,912
On January 20, 1993, the Company entered into an agreement
to lease a portion of its headquarters site in Wilsonville,
Oregon. Under terms of the five-year agreement,
approximately 150 square feet of space was made available to
a third party on a firm take-down schedule. The agreement
results in rental payments of $3,252 over the remaining term
of the lease.
6. Other Assets
A summary of other assets follows:
As of December 31, 1994 1993
Software development costs, net $ 8,021 $ 9,085
Long-term deposits 6,220 5,613
Purchased technology, net 5,781 106
Goodwill 2,655 0
Investment in real estate 2,935 2,935
Long-term receivables 2,316 2,453
Other 162 392
Total $ 28,090 $ 20,584
The company capitalized software development costs amounting
to $5,156, $3,609, and $6,120 in 1994, 1993, and 1992,
respectively. Related amortization expense of $6,220,
$7,449, and $5,875 was recorded for the years ended December
31, 1994, 1993, and 1992, respectively.
Purchased technology is carried at cost and is amortized
over the estimated economic life of the technology,
generally three years. Related amortization expense of
$760, $565, and $636 was recorded for the years ended
December 31, 1994, 1993, and 1992, respectively. The 1994
Anacad acquisition resulted in goodwill capitalization of
$2,897 and technology capitalization of $4,735. In
addition, other purchased technology totalling $1,700 was
acquired in 1994.
During 1993 and 1992, certain purchased technology and
software development costs were written off due to product
discontinuance resulting from the December 1993 and August
1992 restructurings. These write-offs, combined with write-
downs of certain other software development, prepaid
royalty, and purchased technology costs to net realizable
value, totaled $812 and $1,005 in 1993 and 1992,
respectively.
7. Short-Term Borrowings
Short-term borrowings represent drawings by subsidiaries
under multi-currency unsecured credit agreements and the
current portion of long-term debt. Interest rates are
generally based on the applicable country's prime lending
rate depending on the currency borrowed. The Company has
available lines of credit of approximately $ 23,574 as of
December 31, 1994. Certain agreements require compensatory
balances which the Company has met.
8. Long-Term Debt
Long-term debt is comprised of the following:
As of December 31, 1994 1993
Revolving term credit facility $ 54,160 $ 55,000
Bank note 0 2,681
Other 305 161
54,465 57,842
Less current portion (840) (3,521)
Total $ 53,625 $ 54,321
Effective December 31, 1992, the Company amended its
committed credit facility with First Interstate Bank of
Oregon, N.A. Under terms of the amendment, the revolving
credit facility remains in effect until July 2000 and the
commitment level was established at $55,000. Interest on
borrowings under the credit facility remain floating rate
based. Borrowings are collateralized by cash and
investments of $30,000 and a trust deed on the Company's
headquarters site in Wilsonville, Oregon of $25,000. The
amendment requires commitment reductions of $840 annually
which began in July 1994, therefore the debt was reduced by
$840 in 1994. Also, $840 of the debt is classified as
current in short-term borrowings on the Consolidated Balance
Sheets as of December 31, 1994 and 1993.
In conjunction with the loan amendment, the Company also
modified its interest rate swap
agreement with First Interstate Bank of Oregon, N.A.,
reducing the notional amount from $50,000 to $17,500 without
any negative financial impact. The interest rate swap
agreement effectively converts floating
rates on $17,500 of borrowings to a fixed rate of 9.55%
until expiration of the agreement in January 2000.
The amendment allowed the Company to move $32,500 of 9.55%
fixed rate borrowings to more favorable
floating rates. The average floating interest rate as of
December 31, 1994 was approximately 5%. While the Company
may be exposed to credit risk in the event
of nonperformance by the counterparty to the interest rate
swap agreement, the risk of incurring losses
due to nonperformance by the counterparty is
considered remote.
During 1992, the Company's Japanese subsidiary borrowed 300
million Yen ($2,681 at December 31, 1993 exchange rates)
from a local bank to finance its local operations. The
interest rate on these borrowings was floating rate based
with a cap of 5.95%. The effective rate on these borrowings
during 1994 was approximately 2%. The entire bank note was
paid off on July 20, 1994.
9. Incentive Stock Plan
The Board of Directors has the authority to issue incentive
stock in one or more series and to determine the relative
rights and preferences of the incentive stock (note 10).
The incentive stock is convertible into common stock upon
attainment of specified objectives or upon the occurrence of
certain events to be determined by the Board of Directors.
10. Employee Stock and Savings Plan
The Company has five stock option plans. The three common
stock option plans provide for the granting of incentive and
nonqualified stock options to key employees, officers, and
non-employee directors of the Company and its subsidiaries.
The three stock option plans are administered by the
Compensation Committee of the Board of Directors, and permit
accelerated vesting of outstanding options upon the
occurrence of certain changes in control of the Company.
The Company also has a stock plan which provides for the
sale of common stock to key employees of the Company and its
subsidiaries. Shares can be awarded under the plan at no
purchase price as a stock bonus and the stock plan also
provides for the granting of nonqualified stock options.
In addition, the Company has an incentive stock option plan
and has reserved 600 shares of incentive stock for issuance.
No options have been granted under this plan.
Options under all five plans generally become
exercisable over a four to five-year period from the date of
grant or from the commencement of employment at prices
generally not less than the fair market value at the date of
grant. The excess of the fair market value of the shares at
the date of grant over the option price, if any, is charged
to operations ratably over the vesting period. At December
31, 1994, options for 2,949 shares were exercisable, 19,810
shares were reserved for issuance and 3,549 shares were
available for future grant. Stock options outstanding and
transactions involving the stock option plans are summarized
as follows:
Shares Price Per Share
Balance at December 31, 1992 6,576 $ .21 - 19.76
Granted 1,180 .07 - 12.63
Exercised (1,021) .21 - 13.00
Canceled (848) 4.9 - 18.13
Balance at December 31, 1993 5,887 .07 - 19.76
Granted 983 9.63 - 14.31
Exercised (780) .07 - 13.00
Canceled (343) 6.00 - 14.63
Balance at December 31, 1994 5,747 $ .07 - 19.76
In October 1992, the Board of Directors adopted a resolution
to offer employees holding incentive and nonqualified stock
options for 5,840 shares the opportunity to exchange their
existing options for nonqualified stock options. The
exchange allowed employees to receive the same number of
shares at $6.00 per share, the then current market price.
The new options vest ratably over between two to five years,
depending on the vesting status of exchanged options as of
January 2, 1993. The offer was made because the Board of
Directors believes lower-priced options provide a greater
incentive to key employees and officers. Option holders
elected to exchange options covering 3,808 shares.
In May 1989, the shareholders adopted the 1989 Employee
Stock Purchase Plan and reserved 1,400 shares for issuance.
In April 1992, the shareholders amended the plan to reserve
an additional 2,000 shares for issuance. Under the plan,
each eligible employee may purchase up to six hundred shares
of stock per quarter at prices no less than 85% of its fair
market value determined at certain specified dates.
Employees purchased 527 and 605 shares under the plans in
1994 and 1993, respectively. At December 31, 1994, 797
shares remain available for future purchase under the plan.
The plan will expire upon either issuance of all shares
reserved for issuance or at the discretion of the Board of
Directors. There are no plans to terminate the plan at this
time.
The Company has an employee savings plan
(the Savings Plan) that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating U.S. employees
may defer a portion of their pretax earnings, up to the
Internal Revenue Service annual contribution limit. The
Company currently matches 50% of eligible employee's
contributions, up to a maximum of 6% of the employee's
earnings. Employer matching contributions vest over 5
years, 20% for each year of service completed. The
Company's matching contributions to the Savings Plan were
$1,997, $1,896, and $1,989 in 1994, 1993, and 1992,
respectively.
11. Commitments
The Company leases a majority of its field office facilities
under noncancellable operating leases.
In addition, the Company leases certain equipment used in
its research and development activities.
This equipment is generally leased on a month-to-month
basis after meeting a six-month lease minimum.
The Company rents its Japanese facilities under a two year
cancellable lease with a six month notice of cancellation.
The total commitment under this cancellable lease, which
expires in December 1996, is $6,256, of which the first six
month's payments in 1995 of $1,564 are included in the
schedule below. Future minimum lease payments under
noncancellable operating leases are approximately as
follows:
Operating
Annual periods ending Lease
December 31 Payments
1995 $ 9,270
1996 6,325
1997 5,198
1998 4,838
1999 4,624
Later years 15,698
Total $ 45,953
Rent expense under operating leases was approximately
$13,722, $16,776, and $16,156 for the years ending December
31, 1994, 1993, and 1992, respectively.
12. Other Income (Expense)
Other income (expense) is comprised of the following:
Year ended December 31, 1994 1993 1992
Interest income $ 4,953 $ 4,338 $ 5,284
Interest expense (2,703) (4,404) (5,469)
Foreign exchange gain 177 247 297
Contract settlement 0 0 (6,150)
Write-off of non-operating items 0 0 (1,148)
Other, net 25 (438) (353)
Total $ 2,452 $ (257) $ (7,539)
13. Supplemental Cash Flow Information
The following provides additional information concerning
supplemental disclosures of cash flow activities:
Year ended December 31, 1994 1993 1992
Cash paid (received) for:
Interest expense, net of
capitalized interest $ 2,201 $ 4,042 $ 5,030
Income taxes $ 2,840 $ 2,403 $ (2,662)
The Company owns common stock and common stock warrants of
an independent public company with an original carrying cost
of $0 and a market value of $1,812 as of December 31, 1994.
This difference resulted in a non-cash increase on the
consolidated balance sheet in prepaid and other assets and
as a reduction of the same amount in accumulated deficit as
of December 31, 1994.
14. Industry and Geographic Information
The Company designs, manufactures, markets and supports
electronic design automation (EDA) software for the
integrated circuit (IC) and systems design markets. The
Company provides a broad range of EDA tools developed either
by the Company or together with third parties to support the
entire electronic design process. The Company's software
products enable engineers and designers to design, analyze,
place and route, and test custom ICs, application specific
ICs (ASICs), printed circuit boards, multichip modules and
other electronic systems and subsystems. The Company's
Falcon Framework software provides a common foundation for
the Company's EDA software products. Falcon Framework
software also allows for the integration of third party
software tools developed by other commercial EDA vendors and
by customers for their own internal use. The Company's
products help customers reduce development time while
producing innovative hardware products of high quality. In
addition to software products, the Company's Professional
Services Division offers consulting, support and training
services to enhance customers' success in the design and
manufacture of hardware products.
Foreign operations consist of offices whose
principal activities are the sale, distribution, service,
and research and development of the Company's products.
Foreign offices purchase the computer workstations on which
the Company's software operates
principally from suppliers located in each respective
geographic area.
Intercompany transfers are accounted for at amounts
generally above cost. Corporate expenses are general
expenses which are not allocated to the operations of each
geographic area. For the purposes of determining operating
income, research and development and certain marketing
expenses are allocated based on each region's percentage of
total revenue contribution. Corporate assets are comprised
of capital assets used in research and development
activities, short-term investments, and cash and investments
classified as long-term in the consolidated balance sheets.
Geographic information for 1994, 1993 and 1992 is set forth
in the table below.
Geographic Information N. America Europe Asia-Pacific
1994
Revenues from unaffiliated
customers $ 192,758 $ 88,593 $ 67,614
Intercompany transfers 2,103 1,728 14,609
Total revenues $ 194,861 $ 90,321 $ 82,223
Operating income (loss) $ 21,419 $ 6,885 $ 10,826
Identifiable assets $ 200,082 $ 150,508 $ 66,111
1993
Revenues from unaffiliated customers $ 184,303 $ 87,178 $ 68,294
Intercompany transfers 1,282 5,016 20,948
Total revenues $ 185,585 $ 92,194 $ 89,242
Operating income (loss) $ (195) $ (14,564) $ 1,678
Identifiable assets $ 152,514 $ 124,956 $ 64,271
1992
Revenues from unaffiliated customers $ 180,716 $ 99,481 $ 70,569
Intercompany transfers 1,611 11,849 15,187
Total revenues $ 182,327 $ 111,330 $ 85,756
Operating income (loss) $ (21,151) $ (7,267) $ 735
Identifiable assets $ 164,614 116,174 $ 53,518
Geographic Information Eliminations Corporate Consolidated
1994
Revenue from unaffiliated customers $ (671) $ 0 $ 348,294
Intercompany transfers (18,440) 0 0
Total Revenues $ (19,111) $ 0 $ 348,294
Operating income (loss) $ 1,979 $ (12,649) $ 28,460
Indentifiable assests $(112,701) $ 89,797 $ 393,797
1993
Revenue from unaffiliated customers $ 0 $ 0 $ 339,775
Intercompany transfers (27,246) 0 0
Total revenue $ (27,246) $ 0 $ 339,775
Operating income (loss) $ (2,939) $ (13,372) $ (29,392)
Identifiable assests $ (92,258) $ 104,101 $ 353,584
1992
Revenues from unaffiliated customers $ 0 $ 0 $ 350,766
Intercompany transfers (28,647) 0 0
Total revenues $ (28,647) $ 0 350,766
Operating income (loss) $ (1,538) $ (11,511) $ (40,732)
Indentifiable assests $ (60,471) $ 104,730 $ 378,565
Quarterly Financial Information Unaudited
Quarter ended March 31 June 30 September 30 December 31
In thousands, except
per share data
1994
Total revenues $ 85,299 $ 82,668 $ 83,543 $ 96,784
Gross margin $ 59,234 $ 57,333 $ 57,526 $ 67,381
Operating income $ 4,989 $ 5,466 $ 4,753 $ 13,252
Net income $ 4,612 $ 4,851 $ 5,067 $ 13,007
Net income per common
and common
equivalent share $ .09 $ .09 $ .10 $ .25
1993
Total revenues $ 82,639 $ 88,416 $ 84,950 $ 83,770
Gross margin $ 52,371 $ 56,214 $ 56,378 $ 54,620
Operating income (loss) $ (3,317) $ 633 $ 1,888 $ (28,596)
Net income (loss) $ (4,298) $ 290 $ 1,490 $ (29,555)
Net income (loss) per
common and common
equivalent share $ (.09) $ .01 $ .03 $ (.63)
Common stock market price:
Quarter ended March 31 June 30 September 30 December 31
1994
High $ 17 1/4 $ 16 1/8 $ 11 5/8 $ 15 5/8
Low $ 11 1/4 $ 10 $ 9 3/8 $ 10 5/8
1993
High $ 11 $ 12 $ 11 1/2 $ 15 1/2
Low $ 7 7/8 $ 7 7/8 $ 8 3/8 $ 10
The table above sets forth for the quarters indicated the
high and low sales prices for the common stock as reported
on the NASDAQ National Market System. As of December 31,
1994, the Company had 1,532 shareholders of record.
Report of Management
Management of Mentor Graphics Corporation is responsible for
the preparation of the accompanying consolidated financial
statements. The consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and necessarily
include some amounts which represent the best estimates and
judgments of management. The consolidated financial
statements have been audited by KPMG Peat Marwick,
independent auditors, whose report is included on this page.
The Audit Committee of the Board of Directors is comprised
of three directors who are not officers or employees of
Mentor Graphics Corporation or its subsidiaries. These
directors meet with management and the independent auditors
in connection with their review of matters relating to the
Company's annual financial statements, the Company's system
of internal accounting controls, and the services of the
independent auditors. The Committee meets with the
independent auditors, without management present, to discuss
appropriate matters. The Committee reports its findings to
the Board of Directors and also recommends the selection and
engagement of independent auditors.
R. Douglas Norby
Senior Vice President
and Chief Financial Officer
Walden C. Rhines
President and Chief Executive Officer
Independent Auditors' Report
To the Stockholders and Board of Directors
Mentor Graphics Corporation:
We have audited the accompanying consolidated balance sheets
of Mentor Graphics Corporation and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Mentor Graphics Corporation and
subsidiaries as of December 31, 1994, and 1993, and the
results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 4, to the consolidated financial
statements, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" in
1994 and SFAS No. 109, "Accounting for Income Taxes" in
1993.
Portland, Oregon
January 31, 1995
Shareholders' Information
Directors
Jon A. Shirley
Chairman of the Board of Directors Private Investor
Walden C. Rhines
President and Chief Executive Officer
Mentor Graphics Corporation
Marsha B. Congdon
Vice President, Policy and Strategy US West, Inc.
James R. Fiebiger
Chairman of the Board and Managing Director
Thunderbird Technologies, Inc.
David R. Hathaway
General Partner
Venrock Associates
Fontaine K. Richardson
General Partner
Eastech Management Company, Inc.
David N. Strohm
General Partner
Greylock Management Corporation
Corporate Office
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
(503) 685-7000
Executive Officers
Walden C. Rhines
President and Chief Executive Officer Mentor Graphics
Corporation
R. Douglas Norby
Senior Vice President and
Chief Financial Officer
Frank S. Delia
Vice President
Chief Administrative Officer
General Counsel and Secretary
Patricia J. O'Connor
Vice President
Human Resources
James J. Luttenbacher
Corporate Controller and
Chief Accounting Officer
Bob van Leyen
Treasurer
Counsel
Stoel Rives Boley Jones & Grey
Attorneys-at-Law
900 S.W. Fifth Avenue, Suite 2300
Portland, Oregon 97204
Independent Certified Public Accountants
KPMG Peat Marwick
1211 S.W. Fifth Avenue
Suite 2000
Portland, Oregon 97204
Transfer Agent and Registrar
American Stock, Transfer & Trust Co.
40 Wall Street
New York, New York 10005
212-936-5100
Annual Meeting
The Annual Meeting of shareholders will be held at 5:00
p.m., Pacific Time, on May 4, 1995 at:
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
Investor Relations
For additional information on the Company, or to obtain a
copy of Mentor Graphics' Annual Report on Form 10-K filed
with the Securities and Exchange Commission, contact:
Investor Relations Manager
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
For financial and company information, call 1-800-546-4628.
Stock Trading
Mentor Graphics Corporation's common stock traded publicly
in the NASDAQ National Market System under the symbol MENT.