SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31, 1995 1994 1993 1992 1991
In thousands, except per share data and percentages ----------- ----------- ----------- ----------- -----------
Statement of Operations Data
Total revenues $ 384,461 $ 346,204 $ 338,983 $ 347,114 $ 395,866
Research and development $ 72,692 $ 67,792 $ 75,304 $ 70,295 $ 75,278
Operating income (loss) $ 51,592 $ 28,880 $ (29,340) $ (40,732) $ (60,501)
Net income (loss) $ 49,859 $ 27,767 $ (32,060) $ (50,861) $ (61,613)
Gross margin percent 71.2% 71.2% 65.7% 55.9% 49.5%
Operating income (loss)
as a percent of total revenues 13.4% 8.3% (8.7%) (11.7%) (15.3)%
Per Share Data
Net income (loss) per common and common
equivalent share $ .88 $ .51 $ (.66) $ (1.13) $ (1.43)
Cash dividends per common
share outstanding $ -- $ -- $ .18 $ .24 $ .24
Weighted average number of common and
common equivalent shares outstanding 56,381 54,367 48,657 45,142 43,153
Balance Sheet Data
As of December 31, 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
Cash and short-term investments $ 201,004 $ 138,169 $ 109,881 $ 108,783 $ 144,022
Cash and investments, long-term $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ --
Working capital $ 200,714 $ 137,245 $ 96,384 $ 108,892 $ 169,875
Property, plant and equipment, net $ 94,556 $ 98,020 $ 105,231 $ 109,580 $ 114,213
Total assets $ 461,622 $ 395,358 $ 355,145 $ 378,565 $ 445,661
Short-term borrowings $ 9,108 $ 8,488 $ 6,364 $ 5,548 $ 4,511
Long-term debt and other deferrals $ 53,472 $ 55,650 $ 56,270 $ 58,064 $ 53,462
Stockholders' equity $ 305,521 $ 239,527 $ 195,939 $ 221,406 $ 267,667
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
All numerical references in thousands, except percentages
NATURE OF OPERATIONS
Mentor Graphics Corporation (the Company) is a supplier of electronic
design automation (EDA) systems - advanced computer software used to
automate the design, analysis and testing of electronic systems and
components. Established in 1981, the Company is a leader in worldwide EDA
sales and markets its products and services primarily to customers in the
computer, telecommunications, consumer electronics, semiconductor,
aerospace and automotive industries. The Company sells and licenses its
products primarily through its direct sales force in North America, Europe
and Asia, and through distributors in territories where the volume of
business does not warrant a direct sales presence. In addition to its
corporate offices in Wilsonville, Oregon, the Company has sales, support,
software development and professional services offices worldwide.
RECENT MERGERS AND ACQUISITIONS
Acquisitions of complementary businesses are an integral part of the
Company's overall business strategy. Acquisitions accommodate the Company's
focused strategic requirements by filling gaps in existing products or
technologies, eliminating dependencies on third parties and providing the
Company with an avenue into new lines of business and new distribution
channels. The Company will continue to evaluate make versus buy
alternatives, which should result in additional business combinations in
1996. There can be no assurance that products, technologies and businesses
of acquired companies, or the technical and sales personnel of such
companies, will be effectively assimilated with those of the Company.
On January 31, 1996 the Company completed the acquisition of Microtec
Research, Inc. (Microtec), pursuant to a merger accounted for as a pooling
of interests. A total of 6,223 shares of the Company's common stock were
issued in the transaction. Since the acquisition was not consummated as of
December 31, 1995, the results of Microtec are not included in the
Company's consolidated financial statements.
The Company acquired Axiom Datorer Scandinavian AB (Axiom), 3Soft
Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995,
December 1995, and December 1995, respectively. These acquisitions were
accounted for as purchases and accordingly, their results of operations are
included in the Company's results of operations from the date of
acquisition. The cost of each acquisition was allocated on the basis of
estimated fair value of the assets and liabilities assumed. These
allocations resulted in charges for in-process research and development
(R&D) of $1,430, goodwill capitalization of $528 and technology
capitalization of $892.
In October 1995, the Company acquired Precedence Incorporated
(Precedence), pursuant to a merger accounted for as a pooling of interests.
Accordingly, the results of Precedence are included in the Company's
consolidated financial statements for all periods presented. A total of 735
shares of the Company's common stock were issued in the transaction. Merger
expenses of $210 were for services rendered to facilitate completion of the
merger agreement.
In May 1995, the Company acquired Exemplar Logic, Inc. (Exemplar),
pursuant to a merger accounted for as a pooling of interests. Accordingly,
the results of Exemplar are included in the Company's consolidated
financial statements for all periods presented. A total of 1,512 shares of
the Company's common stock were issued in the transaction. Merger expenses
of $400 were for services rendered to facilitate completion of the merger
agreement and for severance costs.
In September 1994, the Company completed the acquisition of Anacad
Electrical Engineering Software GmbH (Anacad). The acquisition was
accounted for as a purchase and accordingly, the results of operations are
included in the Company's results of operations from the date of
acquisition. 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.
In December 1994, the Company acquired Model Technology Incorporated
(MTI), pursuant to a merger accounted for as a pooling of interests. The
results of MTI are included in the Company's consolidated financial
statements for 1994 and 1995. The Company's 1993 financial statements were
not restated due to the relative materiality of MTI's separate financial
statements. A total of 2,443 shares of the Company's common stock were
issued in the transaction. Merger costs of $1,000 were paid by MTI for
consulting services rendered to facilitate negotiation of the various
components of the merger agreement. Also, cash distributions of $2,346 were
paid in 1994 by MTI to its shareholders in the normal course of
S-Corporation business prior to the date of acquisition.
14
RESULTS OF OPERATIONS
Revenues and Gross Margins
Year ended December 31, 1995 Change 1994 Change 1993
---------- ------ ----------- ------ -----------
System and software revenue $ 195,231 2% $ 190,530 (2)% $ 193,707
System and software gross margins $ 162,726 4% $ 156,758 10% $ 142,352
Percentage of revenue 83.4% 82.3% 73.5%
Service and support revenue $ 189,230 22% $ 155,674 7% $ 145,276
Service and support gross margins $ 110,890 23% $ 89,901 12% $ 80,179
Percentage of revenue 58.6% 57.8% 55.2%
Total revenues $ 384,461 11% $ 346,204 2% $ 338,983
Total gross margins $ 273,616 11% $ 246,659 11% $ 222,531
Percentage of revenues 71.2% 71.2% 65.7%
System and Software
System and software revenue is derived from software products owned by
the Company, software products owned by third parties for which the Company
pays royalties, and some limited reselling of workstation hardware. System
and software revenue increased 2% from 1994 to 1995 and declined 2% from
1993 to 1994. The primary factors contributing to the growth in 1995 are
increased software product offerings as a result of internal development
and acquisitions over the last several years and favorable effects of
foreign currency exchange rate fluctuations as discussed under geographic
revenue information. This increase was offset by a decline in older product
offerings and lower workstation hardware revenue for each of the years
presented.
The software component of system and software revenue increased by 5%
from 1994 to 1995 and 8% from 1993 to 1994. The Company has increased its
product offerings in 1995 and 1994 through development of new tools and
through acquisition of other businesses. After the transition of customers
to the Company's Version 8 generation of software products was
substantially completed in 1993, internal development resources were able
to focus more on enhancement of current products and development of new
products such as AutoLogic II, Design For Test and IC Verification.
Acquisitions previously discussed have further increased the Company's
product offerings.
The workstation hardware component of system and software revenue
declined as a percent of total system and software revenue to 6% in 1995
from 8% and 17% in 1994 and 1993, respectively, as a result of the
Company's planned exit from the workstation hardware resale business. This
decline was a primary factor in lower revenue levels in 1994 versus 1993.
While almost all of the Company's customers now meet their workstation
hardware needs by working directly with workstation hardware vendors, the
Company continues to meet the demands of some of its customers who prefer
to purchase complete systems from one supplier.
System and software gross margin levels are affected by such factors
as third party software content for which royalties are paid, lower margin
workstation hardware revenue levels, and amortization of previously
capitalized software development costs and purchased technology costs. The
Company's dependence on third party software has been reduced as a result
of recent acquisitions where third party royalty contracts previously
existed. Anacad, Exemplar, MTI and Precedence represent business
combinations where third party agreements were in place. The Company
continues to have third party contracts that contribute varying levels of
revenues and costs of revenues quarter to quarter. Future trends of
[Graphic chart:
Revenues
System & Software Service & Support
(Hardware Included) (Hardware Included)
(dollar figures are in millions) (dollar figures are in millions)
1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ----
$194 $191 $195 $145 $156 $189]
15
third party revenue content are difficult to predict since they are
dependent on such variables as new third party agreements, potential
acquisitions of third parties where existing agreements are in place, and
varying levels of customer demand for third party product offerings.
System and software gross margins improved in 1995 and 1994 compared
to 1993 primarily as a result of increased software product versus
workstation hardware sales each year. Software product gross margins are
much higher than workstation hardware gross margins. The effect is more
pronounced comparing 1993 to 1994 as workstation hardware revenue as a
percent of total system and software revenue decreased from approximately
17% to 8%, respectively. The impact of workstation hardware versus software
product mix-shift on gross margin results was less significant in 1995. The
impact of this mix-shift is expected to remain insignificant in 1996 and
beyond.
Amortization of previously capitalized software development costs to
system and software cost of revenue was $5,075, $6,220, and $7,449 for
1995, 1994, and 1993, respectively. The decline in amortization is
attributable to several capitalized projects becoming fully amortized over
the last two years. Amortization of such costs is expected to increase
slightly in 1996 as the Company's capitalization level has grown in 1995
and to a lesser extent in 1994 as more resources have been directed to the
development of new products and enhancement of existing products versus
fixing software defects and assisting customers in their transition to the
Company's Version 8 software. In addition, amortization of purchased
technology costs to system and software cost of revenue was $2,418, $760
and $565 for 1995, 1994 and 1993, respectively. The increase in 1995 is
primarily attributable to the purchase of Anacad in September 1994.
Capitalized software development costs and purchased technology costs are
amortized over a three year period to system and software cost of revenue.
Service and Support
Service and support revenue consists of revenue from annual software
support maintenance contracts, hardware support, and professional services,
which includes consulting services, training services, and custom design
services. Service and support revenue increased 22% from 1994 to 1995 and
increased 7% from 1993 to 1994. Factors contributing to the growth in 1994
and 1995 include higher software maintenance contract revenue, higher
professional service revenue and favorable effects of foreign currency
exchange rate fluctuations as discussed under geographic revenue
information, offset by the elimination of workstation hardware maintenance
contract revenue. Workstation hardware maintenance revenue totaled
approximately $500, $2,100 and $7,100 in 1995, 1994 and 1993, respectively.
This decline is a result of the Company's planned exit from the workstation
hardware business previously discussed.
Software maintenance revenue increased by 18% from 1994 to 1995 and
12% from 1993 to 1994. The increases are primarily a result of higher
installed customer base of the Company's products, favorable effects of
currency fluctuations discussed below and a continued effort to obtain
customer renewals of maintenance contracts. The Company is currently
studying the potential effects of unbundling maintenance services in
response to customer requests. This change, if made, will allow customers
to choose varying levels of phone support and software update support. This
change could result in lower revenue levels as some customers could choose
less than full support from available options. Since growth in software
support is dependent on continued success of the software product
offerings, increases in the Company's installed customer base, and the
impact of acquisitions, future software support revenue levels are
difficult to predict.
Professional service revenue totaled $51,000, $36,900 and $34,000 in
1995, 1994 and 1993, respectively, resulting in increases of 38% from 1994
to 1995 and 9% from 1993 to 1994. Overall, professional service revenue is
expected to continue to grow. In particular, integrated circuit technology
center (ICTC) custom design services are experiencing increased demand.
Over the past year, the Company has added resources to the ICTC business in
response to the increased demand resulting in higher revenue levels as more
design contracts are completed. In addition, the Company continues to
experience increased demand for consulting and training services.
Service and support gross margins improved in 1995 and 1994 as a
result of higher software mainte-
[Graphic chart:
Gross Margins
System & Software Service & Support
(Hardware Included) (Hardware Included)
1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ----
73.5% 82.3% 83.4% 55.2% 57.8% 58.6%]
16
nance revenue volume and were unfavorably impacted by professional service
volume. Consistent with EDA 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.
Professional service gross margins improved in 1995 but remain
substantially lower than software support. Future service and support gross
margins are expected to be lower as growth in the professional service
business is expected to be higher than growth in software support.
Geographic Revenue Information
Domestic revenues from unaffiliated customers including service and
support revenue increased by 7% from 1994 to 1995 and 3% from 1993 to 1994.
The North American sales force executed a reorganization in 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 align the sales team to meet customer
demand. The second half of 1994 and beyond were favorably impacted by these
changes as productivity in the region has improved.
International revenues from unaffiliated customers including service
and support revenue represented 48%, 46% and 47% of total revenues in 1995,
1994 and 1993, respectively. European revenues increased by 20% from 1994
to 1995 and decreased by 2% from 1993 to 1994. Japanese revenues increased
by 9% from 1994 to 1995 and 8% from 1993 to 1994. A weakened U.S. dollar in
1995 favorably impacted revenues by approximately 8% and 7% in Europe and
Japan, respectively. Exclusive of such currency trends, 1995 European
revenues were favorably impacted by improving economic conditions while
Japan's results continued to reflect economic weakness. In 1994, the U.S.
dollar weakened by approximately 2% and 7% in Europe and Japan,
respectively, which positively impacted year to year revenue trends.
Exclusive of such currency trends, 1994 international revenues were
approximately flat compared to prior year primarily due to weak economic
conditions. Since the Company generates approximately half of its revenues
outside of the United States and expects this to continue in the future,
revenue results should continue to be impacted by the effects of future
foreign currency fluctuations.
Operating Expenses
Year ended December 31, 1995 Change 1994 Change 1993
---------- ------ ----------- ------ -----------
Gross research and development $ 79,933 10% $ 72,948 (8)% $ 78,913
Percentage of total revenues 20.8% 21.1% 23.3%
Capitalized software development $ 7,241 40% $ 5,156 43% $ 3,609
Percentage of total revenues 1.9% 1.5% 1.1%
Net research and development $ 72,692 7% $ 67,792 (10)% $ 75,304
Percentage of total revenues 18.9% 19.6% 22.2%
Marketing, general, and administration $ 149,332 2% $ 146,767 (3)% $ 151,767
Percentage of total revenues 38.8% 42.4% 44.8%
Restructure costs $ (2,040) --- $ (6,045) --- $ 24,800
Percentage of total revenues (.5)% (1.8)% 7.3%
Research And Development
As a percent of revenue, gross R&D costs were 21%, 21% and 23% in
1995, 1994 and 1993, respectively. In 1995, gross R&D costs increased due
to the purchases of Anacad and Axiom which resulted in a year to year
increase of approximately $4,000. In addition, other acquisitions including
MTI, Exemplar and Precedence, which were reflected in 1995 and 1994
results, experienced higher R&D investment in 1995. In 1994, R&D
expenditures decreased due a lower head count 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.
During 1995 the Company capitalized software development costs of $7,241,
compared to $5,156 and $3,609 for 1994 and 1993, respectively.
Capitalization increased in 1995 as more resources were directed toward
development of new products and enhancement of existing products.
The Company will continue to evaluate make-or-buy alternatives in 1996
which should result in more acquisitions. Overall, management's goal is to
maintain the ratio of R&D expense as a percent of revenue consistent with
1995 levels.
17
Achievement of this goal is not guaranteed due to the uncertainty of
revenue.
Marketing, General, and Administration
In 1995, the increase in marketing, general and administrative (MG&A)
expenses is principally attributable to merger and acquisition activity
discussed above, offset by lower base business head count. As a percent of
revenue, MG&A expenses were 39%, 42% and 45% in 1995, 1994 and 1993,
respectively. In 1995, MG&A expense increased due to the purchases of
Anacad and Axiom which resulted in a year to year increase of approximately
$3,700. This increase was partially offset by continued cost reduction
activity which focused on the administrative structure of the Company's
base business in 1995.
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 head count and reduced layers of management to
better align the sales team 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.
Overall, the goal of management is to maintain the ratio of MG&A
expense as a percent of revenue consistent with 1995 levels. Achievement of
this goal is not guaranteed due to the uncertainty of revenue.
Restructure Costs
Implementation of the Company's restructuring plan, which was approved
by management in December of 1993 and modified in 1994, continued during
1995. During the second quarter of 1995, the Company recorded a $2,040
restructure adjustment. The adjustment was primarily associated with the
1993 charge and was mainly the result of reduced estimates for severance
costs associated with replacement and globalization of the Company's
information systems. Information system implementation delays culminated
when a key project plan milestone was missed during the second quarter,
resulting in lower estimated costs for write-offs of old equipment due to
prolonged in-service periods. In addition, certain actions associated with
a product discontinuance plan were not taken when management determined
that the technology could be used by the Company's consulting organization
and sold as a custom integrated service rather than as a commercial design
tool.
During 1994, the Company recorded a gross restructuring credit of
$10,045 offset by an accrual of $4,000. The credit was primarily associated
with the 1993 and to a lesser extent the 1992 restructure charge and was
the result of reduced estimates for severance costs due to greater than
anticipated employee attrition among the product development and field
selling organizations and lower costs of executing the plan. In the third
quarter of 1994 the Company lowered its estimate of the cost of the 1993
plan by $5,600 mainly as a result of lower than anticipated costs
associated with completion of the first phase of the Company's Japanese
subsidiary re-alignment. Estimated costs of executing the plan were lowered
by an additional $4,445 in the fourth quarter of 1994 due to several
changes in circumstances. In the third and fourth quarters of 1994, the
Company exceeded its goal for reducing operating expenses, exclusive of
recent acquisitions. In addition, senior management changes subsequent to
the initial 1993 charge resulted in re-evaluating and revising certain
planned actions, such as the relocation of European headquarters and the
out-sourcing of European order fulfillment. These elements of the plan were
revised because lower head count through attrition and efficiencies through
centralization made them financially less attractive. In the fourth quarter
of 1994, an additional restructure accrual of $4,000 was established
primarily to reduce a recently acquired subsidiary's engineering staff and
management team and to further streamline the Company's core product
development activities, including elimination of certain product offerings
and reductions in engineering staff.
In December 1993, the Company recorded a gross restructuring charge of
$26,200 offset by a net credit adjustment of $1,400. The restructuring plan
was aimed at lowering operating expenses by reducing staffing levels in
product development and field sales organizations and streamlining business
support operations with a new organization structure. Planned product
development actions included down-sizing all divisions and closing two
satellite locations. Field sales organization actions included eliminating
several under performing locations, reducing management layers in all
regions and centralizing administrative activities. Organization
streamlining actions included globalizing the Company's information
systems, out-sourcing European order fulfillment activities, centralizing
European administrative activities and divisionalizing product development
activities. The net restructure credit was associated with the 1992 charge
and was the result of lower than estimated costs for settlements with
customers for product discontinuance and lower than estimated costs for
relocation of displaced employees offset by higher than expected severance
costs in Europe.
Costs remaining to be incurred in executing the restructuring plans
consist primarily of direct costs associated with severance of employees,
product discontinuance activities, and facility closure activities.
Remaining severance and relocation accruals are for continued changes in
18
product development and field sales organizations. Senior management
changes in both organizations were finalized in the second half of 1995
which should accelerate implementation of the final stages of the
restructuring plan. In addition, costs associated with globalization of the
Company's information systems remain accrued until the new system is
implemented in 1996.
Approximately $6,100 of the December 1994 restructuring accrual of
$11,897 resulted in cash outflows in 1995. The remaining accrual of
approximately $3,751 is expected to be disbursed in the first half of 1996.
Merger and Acquisition Related Charges
In 1995 the Company incurred merger related charges of $2,040. The
purchases of Axiom, 3Soft and Zeelan resulted in charges for in-process R&D
of $400, $850, and $180, respectively. These charges were a result of
allocating a portion of the acquisition costs to in-process product
development that had not reached technological feasibility. The
acquisitions of Precedence and Exemplar were accounted for as pooling of
interests which resulted in merger expenses of $400 and $210, respectively.
These costs were for services rendered to facilitate completion of the
merger agreements and severance costs to eliminate redundant management
positions.
In 1994 the Company incurred acquisition related charges of $9,265.
The purchase of Anacad resulted in a charge for in-process R&D of $8,265.
This charge was a result of allocating a portion of the acquisition cost to
in-process product development that had not reached technological
feasibility. In addition, merger expenses of $1,000 were paid by MTI for
consulting services rendered to facilitate negotiation of the various
components of the merger agreement.
As a result of the merger with Microtec, the Company expects to incur
a merger charge totaling between $3,000 and $4,000 in the first quarter of
1996. The costs associated with this charge are primarily related to
elimination of redundant management positions and facilities locations. The
expected cash outflow of this charge should occur primarily in 1996.
Other Income (Expense)
Year ended December 31, 1995 1994 1993
--------- --------- --------
Other income (expense), net $ 5,735 $ 2,428 $ (253)
Other income (expense) has improved significantly over the last three
years due to increased interest income and lower interest expense. Interest
income was $8,534, $4,956, and $4,342 in 1995, 1994 and 1993, respectively.
The improvement in interest income is attributable to higher average cash
balances due to earnings in 1995 and 1994. Interest expense was $2,444,
$2,730, and $4,404 in 1995, 1994 and 1993, respectively. In 1995 and 1994,
compared to 1993, average debt outstanding was lower due to improved cash
flow from operating activities and continued management of the Company's
long term committed revolving credit facility.
Provision For Income Taxes
The provision for income taxes was $7,468, $3,541 and $2,467 in 1995,
1994 and 1993, respectively. 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 was therefore not disclosed separately in the consolidated statement of
operations for the year ended December 31, 1993.
The Company has established a valuation allowance for certain current
deferred tax assets and net operating loss and tax credit carry forwards.
The valuation allowance as of December 31, 1994 was $46,213, of which
$1,974 was related to deferred tax assets of the Company's Japanese
subsidiary. The allowance was established when it was more likely than not
that some portion of the deferred tax asset would not be realized. Based on
operating income levels before tax for the Company's Japanese subsidiary,
it was determined that it was more likely than not that the Japanese
subsidiary's deferred tax assets would be realized. As such, the tax
provision for 1995 was adjusted for the reversal of the valuation allowance
for the Japanese deferred tax assets. This reversal resulted in a lower
effective tax rate for 1995. The Company's income tax position for each
year combines the effects of available tax benefits in certain countries
where the Company does business, benefits from available net operating loss
carrybacks, and tax expense for subsidiaries with pre-tax income.
Effects of Foreign Currency Fluctuations
The Company experienced a net loss from foreign currency transactions
of $620 in 1995 and net gains of $177 and $247 in 1994 and 1993,
respectively. These amounts are
19
composed of realized gains and losses on cash transactions involving
various foreign currencies, and unrealized gains and losses related to
foreign currency receivables and payables resulting from exchange rate
fluctuations between the various currencies in which the Company operates.
Foreign currency gains and losses are included as a component of other
income and expense.
The "foreign currency translation adjustment," as reported in the
stockholders' equity section of the consolidated balance sheets, increased
to $13,597 at December 31, 1995, from $12,675 at the end of 1994. This
reflects the increase in the value of net assets denominated in foreign
currencies since year-end 1994 as a result of a weaker U.S. dollar at the
close of 1995.
During 1995, the Company entered into a three year forward contract to
stabilize the currency effects on a portion of the Company's net investment
in its Japanese subsidiary. The contract to sell Yen 2.2 billion will
guarantee the Company $25,400 at the contract's expiration. Any differences
between the contracted currency rate and the currency rate at each balance
sheet date will impact the foreign currency translation adjustment
component of the stockholders' equity section of the consolidated balance
sheet. The result is a partial offset of the effect of Japanese currency
changes on stockholders' equity during the contract term. This forward
contract should not impact current or future consolidated statements of
operations.
During 1995, the U.S. dollar weakened approximately 7% against the
Japanese yen and 8% against European currencies in which the Company does
business, primarily the Deutsche mark, British pound, and French franc.
Since the majority of the Company's revenues are booked in the last month
of each quarter a higher weight is given to the exchange rates of those
months when analyzing currency fluctuations for revenue comparison
purposes. 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 1994, the
U.S. dollar weakened approximately 7% and 2% against the Japanese yen and
European currencies, respectively.
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, 1995 1994
--------- -----------
Current Assets $ 303,343 $ 237,426
Cash and short term investments $ 201,004 $ 138,169
Cash and investments, long-term $ 30,000 $ 30,000
Cash provided by operations $ 83,187 $ 50,397
Cash used for investment activities,
excluding short-term investments $ (32,981) $ (31,233)
Cash provided by financing activities $ 13,617 $ 6,455
Cash and Investments
Total cash and investments increased $62,835 during 1995. Cash
provided by operations was $83,187, an increase of $32,790 from 1994.
Positively impacting cash provided by operations in 1995 was net income of
$49,859. This source of cash was offset by an increase in trade accounts
receivable and decreased accrued liabilities associated with the
restructuring accrual discussed previously. In 1994, cash was positively
impacted by the net profit earned of $27,767 for the year. This source of
cash was offset by an increase in trade accounts receivables and a decrease
in accrued liabilities associated with the 1993 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 $16,223 and $10,205 in 1995
and 1994, respectively. This increase was offset by investment in property,
plant and equipment of $19,843 in 1995 and $14,327 in 1994. The purchase of
Anacad late in 1994 resulted in cash payments totaling $10,050 in 1994 and
$1,950 in 1995. Also, cash distributions of $2,346 were paid in 1994 by MTI
to its shareholders in the normal course of S-Corporation business prior to
the date of acquisition.
Trade Accounts Receivable
The trade accounts receivable balance increased $2,887 from December 31,
1994. The increase is primarily attributable to a growth in revenues offset
by more evenly distributed shipments in 1995. The Company was able to
20
improve cash collections and reduce days sales outstanding in 1995 as a
result of a more evenly distributed shipment pattern versus late quarter
shipments. The Company continues to realize a majority of revenues in the
last month of each quarter due to the timing of orders but has noted
improvement in 1995. Future trade receivable trends are difficult to
predict due to this relationship.
Other Assets
Other assets increased to $33,723 at December 31, 1995 from $29,912 at
December 31, 1994. Net capitalized software development costs increased by
$2,166 as capitalization and amortization were $7,241 and $5,075,
respectively, in 1995. Also, capitalized purchased technology decreased by
$440 in 1995 due to amortization which was partially offset by
acquisitions. The purchase of Axiom, 3Soft and Zeelan in 1995 resulted in
goodwill capitalization of $528 and technology capitalization of $892. The
Company owns common stock and common stock warrants of two independent
public companies with an original carrying cost of $1,200 and $0, and a
market value of $4,150 and $1,812, as of December 31, 1995 and 1994,
respectively. The securities have been classified as available for sale,
which requires the difference between original carrying cost and market
value to be recognized. In 1994, capitalization and amortization of
software development costs were $5,156 and $6,220, respectively. The 1994
acquisition of Anacad resulted in goodwill capitalization of $2,897 and
technology capitalization of $4,735. Goodwill costs are being amortized
over a three year period to R&D expense and technology costs are being
amortized over a three year period to system and software cost of revenue.
Long-Term Debt
Long-term debt decreased $975 from December 31, 1994. The Company had
borrowings outstanding of $53,320 and $54,160 under its $55,000 committed
revolving credit facility as of December 31, 1995 and 1994, respectively.
Due to required annual commitment reductions, the Company reduced credit
facility borrowings by $840 in July 1995. 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, 1995 and
1994.
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 not paid during 1995
or 1994.
Capital Resources
Total capital expenditures increased to $25,740 for 1995, compared to
$26,077 and $23,145 for 1994 and 1993, respectively. The purchases of
Axiom, 3Soft and Zeelan in 1995 resulted in cash payments of $1,707. The
Company also acquired a number of technologies, primarily software source
code totaling $1,040 in 1995. The purchase of Anacad late in 1994 resulted
in cash payments totaling $10,050 in 1994 and $1,950 in 1995. In addition,
the Company purchased technologies totaling $1,700 during 1994. The Company
will continue to evaluate make-or-buy alternatives which should result in
additional capital expenditures in 1996.
Expenditures for property and equipment were $19,843 and $14,327 in
1995 and 1994, respectively. In 1995, investment in the Company's new
global information system resulted in expenditures of approximately $4,800
compared to approximately $2,500 in 1994. Future capital expenditure plans
include maintaining a state of the art environment for research and
development and sales demonstration equipment and implementing the new
global information system.
As a result of the merger with Microtec, the Company expects to incur
a merger charge totaling between $3,000 and $4,000 in the first quarter of
1996. The costs associated with this charge are primarily related to
elimination of redundant management positions and facilities locations. The
expected cash outflow of this charge should primarily occur in 1996. The
Company anticipates that current cash balances, anticipated cash flows from
operating activities, and existing credit facilities will be sufficient to
meet its working capital needs for at least the next twelve months.
[Graphic chart:
Cash & Investments Combined Short & Long-Term Debt
(dollar figures are in millions) (dollar figures are in millions)
1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ----
$140 $168 $231 $ 61 $ 62 $ 62]
21
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1995 1994 1993
In thousands, except per share data ----------- ----------- -----------
Revenues:
System and software $ 195,231 $ 190,530 $ 193,707
Service and support 189,230 155,674 145,276
Total revenues 384,461 346,204 338,983
Cost of revenues:
System and software 32,505 33,772 51,355
Service and support 78,340 65,773 65,097
Total cost of revenues 110,845 99,545 116,452
Gross margin 273,616 246,659 222,531
Operating expenses:
Research and development (note 6) 72,692 67,792 75,304
Marketing, general, and administration 149,332 146,767 151,767
Restructure costs (note 2) (2,040) (6,045) 24,800
Merger and acquisition related charges (note 3) 2,040 9,265 ---
Total operating expenses 222,024 217,779 251,871
Operating income (loss) 51,592 28,880 (29,340)
Other income (expense), net (note 12) 5,735 2,428 (253)
Income (loss) before income taxes 57,327 31,308 (29,593)
Provision for income taxes (note 4) 7,468 3,541 2,467
Net income (loss) $ 49,859 $ 27,767 $ (32,060)
Net income (loss) per common and
common equivalent share $ .88 $ .51 $ (.66)
Weighted average number of common and
common equivalent shares outstanding 56,381 54,367 48,657
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 1994
In thousands ----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 176,500 $ 130,989
Short-term investments 24,504 7,180
Trade accounts receivable, net of allowance for doubtful
accounts of $2,771 in 1995 and $2,998 in 1994 85,994 83,107
Other receivables 3,421 4,853
Inventory 660 856
Prepaid expenses and other 12,264 10,441
Total current assets 303,343 237,426
Property, plant and equipment, net (notes 5 and 8) 94,556 98,020
Cash and investments, long-term (note 8) 30,000 30,000
Other assets (note 6) 33,723 29,912
Total assets $ 461,622 $ 395,358
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings (notes 7 and 8) $ 9,108 $ 8,488
Accounts payable 7,347 11,747
Income taxes payable (note 4) 14,439 12,793
Accrued payroll and related liabilities 25,286 19,765
Accrued restructure costs (note 2) 3,751 11,897
Accrued and other liabilities 19,802 17,399
Deferred revenue 22,896 18,092
Total current liabilities 102,629 100,181
Long-term debt (note 8) 52,700 53,675
Other long-term deferrals 772 1,975
Total liabilities 156,101 155,831
Stockholders' equity: (notes 9 and 10)
Common stock, no par value, authorized 100,000 shares; 55,557 and
53,597 issued and outstanding for 1995 and 1994, respectively 268,807 254,731
Incentive stock, no par value, authorized 1,200 shares; none issued -- --
Retained earnings (accumulated deficit) 23,117 (27,879)
Foreign currency translation adjustment 13,597 12,675
Total stockholders' equity 305,521 239,527
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $ 461,622 $ 395,358
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1995 1994 1993
In thousands ----------- ----------- -----------
Operating Cash Flows:
Net income (loss) $ 49,859 $ 27,767 $ (32,060)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization of
property, plant and equipment 23,836 24,687 27,600
Deferred taxes (1,338) (290) (259)
Amortization of other assets 9,061 7,428 8,217
Amortization of nonqualified stock options 103 114 1,418
Write-down of assets - in-process R&D 1,430 8,265 --
Write-down of assets - other -- -- 812
Changes in operating assets and liabilities:
Trade accounts receivable (1,663) (4,921) 2,788
Inventory 207 46 7,771
Prepaid expenses and other assets 170 (1,782) 6,623
Accounts payable (4,610) (1,596) (5,845)
Accrued liabilities 2,435 (11,345) 16,634
Other liabilities and deferrals 3,697 2,024 (8,410)
Net cash provided by operating activities 83,187 50,397 25,289
Investing Cash Flows:
Net maturities (purchases) of short-term investments (17,092) 6,430 23,161
Purchases of property, plant and equipment (19,843) (14,327) (23,145)
Capitalization of software development costs (7,241) (5,156) (3,609)
Purchase of businesses (4,857) (10,050) --
Purchase of technologies (1,040) (1,700) --
Net cash used by investing activities (50,073) (24,803) (3,593)
Financing Cash Flows:
Proceeds from issuance of common stock 16,223 10,205 11,179
Proceeds (repayment) of short-term borrowings 619 (367) (89)
Repayment of long-term debt (975) (1,936) (937)
Cash distribution (note 3) -- (2,346) --
Adjustment for pooling of interests (note 3) -- 899 --
Dividends paid to stockholders -- -- (8,291)
Repurchase of common stock (2,250) -- --
Net cash provided by financing activities 13,617 6,455 1,862
Effect of exchange rate changes on
cash and cash equivalents (1,220) 2,669 388
Net change in cash and cash equivalents 45,511 34,718 23,946
Cash and cash equivalents at beginning of period 130,989 96,271 72,325
Cash and cash equivalents at end of period $ 176,500 $ 130,989 $ 96,271
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign Total
Retained Currency Stock-
Common Stock Earnings Translation holders'
In thousands, except per share data Shares Amount (Deficit) Adjustment Equity
------ ----------- ----------- ----------- -----------
Balance at December 31, 1992,
as previously reported 45,597 $ 231,354 $ (15,415) $ 5,467 $ 221,406
Adjustment for acquisition of
businesses (note 3) 2,247 460 (245) -- 215
Balance at December 31, 1992,
as restated 47,844 231,814 (15,660) 5,467 221,621
Stock issued under stock option and
stock purchase plans 1,641 10,672 -- -- 10,672
Stock issued for acquisition of
business (note 3) 421 507 -- -- 507
Compensation related to nonqualified
stock options granted (note 10) -- 1,418 -- -- 1,418
Foreign currency translation adjustment -- -- -- 2,072 2,072
Net loss -- -- (32,060) -- (32,060)
Cash dividends ($.18 per common
share outstanding) -- -- (8,291) -- (8,291)
Balance at December 31, 1993 49,906 244,411 (56,011) 7,539 195,939
Stock issued under stock option and
stock purchase plans 1,248 10,205 -- -- 10,205
Stock issued for acquisition of
business (note 3) 2,443 1 899 -- 900
Compensation related to nonqualified
stock options granted (note 10) -- 114 -- -- 114
Foreign currency translation adjustment -- -- -- 5,136 5,136
Change in value of investments
available for sale -- -- 1,812 -- 1,812
Net income -- -- 27,767 -- 27,767
Cash distribution -- -- (2,346) -- (2,346)
Balance at December 31, 1994 53,597 254,731 (27,879) 12,675 239,527
Stock issued under stock option and
stock purchase plans 2,070 16,223 -- -- 16,223
Compensation related to nonqualified
stock options granted (note 10) -- 103 -- -- 103
Repurchase of common stock (note 1) (110) (2,250) -- (2,250)
Foreign currency translation adjustment -- -- -- 922 922
Change in value of investments
available for sale -- -- 1,137 -- 1,137
Net income -- -- 49,859 -- 49,859
Balance at December 31, 1995 55,557 $ 268,807 $ 23,117 $ 13,597 $ 305,521
See accompanying notes to consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All numerical references in thousands, except percentages and per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Mentor Graphics Corporation (the Company) is a supplier of electronic
design automation (EDA) systems - advanced computer software used to
automate the design, analysis and testing of electronic systems and
components. System and software revenues comprise more than half of the
Company's revenues and are derived primarily from software products owned
by the Company and by third parties for which royalties are paid by the
Company. Service and support revenues consist of revenue from annual
software support maintenance contracts, hardware support, and professional
services, which includes consulting services, training services, and custom
design services. Established in 1981, the Company is a leader in worldwide
EDA sales and markets its products primarily to customers in the aerospace,
computer, consumer electronics, semiconductor, automotive and
telecommunications industries. The Company sells and licenses its products
primarily through its direct sales force in North America, Europe and Asia,
and through distributors in territories where the volume of business does
not warrant a direct sales presence. In addition to its corporate offices
in Wilsonville, Oregon, the Company has sales, support, software
development and professional services offices worldwide.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its wholly owned and majority-owned subsidiaries. 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, 1995 and 1994 the Company had forward contracts
and options outstanding of $38,069 and $25,825, respectively, to primarily
sell various foreign currencies. These contracts generally have maturities
which do not exceed twelve months. At December 31, 1995 and 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.
During 1995, the Company entered into a three year forward contract to
stabilize the currency effects on a portion of the Company's net investment
in its Japanese subsidiary. The contract to sell Yen 2.2 billion will
guarantee the Company $25,400 at the contract's expiration. Any differences
between the contracted currency rate and the currency rate at each balance
sheet date will impact the foreign currency translation adjustment
component of the stockholders' equity section of the consolidated balance
sheets. The result is a partial offset of the effect of Japanese currency
changes on stockholders' equity during the contract term. This forward
contract should not impact current or future consolidated statements of
operations. At December 31, 1995 the difference between the recorded value
and the fair value of the Company's foreign exchange position related to
this contract was approximately zero. The fair value of this contract was
calculated based on dealer quotes. The Company does not anticipate
non-performance by the counterparty to this contract.
The fair market value of the Company's long-term debt
26
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 $2,689 to terminate its interest rate
swap agreement as of December 31, 1995. 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 Company's investment
policy limits its 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 two
independent public companies with an original carrying cost of $1,200 and
$0, and a market value of $4,150 and $1,812, as of December 31, 1995 and
1994, respectively. 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 sheets in other assets (see note 6)
and as an increase(reduction) of the same amount in retained earnings
(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, 1995 and 1994, the Company held $41,716 and $50,990,
respectively of short term securities under agreements to resell on January 1,
1996 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 risk 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 land 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.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Statement No. 121 provides specific guidance regarding when impairment
of Long-Lived assets such as plant, equipment and certain intangibles
including goodwill and capitalized technology should be recognized and how
impairment losses of such assets should be measured. Statement No. 121 is
effective for fiscal years beginning after December 15, 1995. The Company
is preparing to adopt Statement No. 121 in 1996 and expects the impact on
its consolidated statements of operations will not be material.
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.
27
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 No.
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 ended December 31, 1993.
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 accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The
Company capitalizes certain costs incurred in the production of computer
software once technological feasibility of the product to be marketed has
been established. Capitalization of these costs ceases when the product is
considered available for general release to customers. Costs incurred prior
to technological feasibility, including amounts attributable to in-process
research and development in business acquisitions, are expensed as
incurred.
Amortization of capitalized software development costs is calculated
as the greater of the ratio that the current product revenues bear to
estimated future revenues or the straight-line method over the expected
product life cycle of approximately three years. Amortization is included
in system and software cost of revenues in the consolidated statements of
operations.
STOCKHOLDERS' EQUITY
In August 1995, the Company's Board of Directors approved a plan to
repurchase, from time to time over the next eighteen months on the open
market, up to $50,000 in market value of the Company's common shares.
During the third quarter of 1995, the Company repurchased 110 shares on the
open market with a market value of $2,250. All 110 shares repurchased
during the third quarter of 1995 were subsequently reissued through the
Company's stock option plan exercises prior to consummation of the October,
1995 acquisition of Precedence Incorporated (Precedence) described in
Note 3.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." Statement No.
123 permits a company to choose either a new fair value based method of
accounting for its stock-based compensation arrangements or to comply with
the current APB Opinion 25 intrinsic value based method adding pro forma
disclosures of net income and earnings per share computed as if the fair
value based method had been applied in the financial statements. Statement
No. 123 is effective for fiscal years beginning after December 15, 1995.
The Company will adopt Statement No. 123 in 1996 using pro forma
disclosures of net income and earnings per share. The impact of stock
options on the Company's pro forma disclosures of net income and earnings
per share calculation is not known as the Company has not yet implemented
the provisions of this Statement.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
For 1995 and 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, 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.
USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1993 and 1994 to conform with the
1995 presentation.
28
2. RESTRUCTURING
Following is a summary of the major elements of the restructure charges:
Year ended December 31, 1995 1994 1993
Additions to restructure charges: ----------- -------- --------
Employee severance $ -- $ 2,430 $ 15,850
Employee relocation -- -- 3,550
Asset write-offs and product
discontinuance costs -- 1,570 2,300
Facilities closure and consolidation -- -- 4,300
Other -- -- 200
Total additions -- 4,000 26,200
Adjustment of restructure charges:
Employee severance (1,540) (3,324) 1,280
Employee relocation -- (2,600) (450)
Asset write-offs and product
discontinuance costs (500) (2,060) (1,935)
Facilities closure and consolidation -- (2,061) (295)
Net adjustments (2,040) (10,045) (1,400)
Net restructure charges $ (2,040) $ (6,045) $ 24,800
Implementation of the Company's restructuring plan, which was approved
by management in December of 1993 and modified in 1994, continued during
1995. During the second quarter of 1995, the Company recorded a $2,040
restructure adjustment. The adjustment was primarily associated with the
1993 charge and was mainly the result of reduced estimates for severance
costs associated with replacement and globalization of the Company's
information systems. Information system implementation delays culminated
when a key project plan milestone was missed during the second quarter,
resulting in lower estimated costs for write-offs of old equipment due to
prolonged in-service periods. In addition, certain actions associated with
a product discontinuance plan were not taken when management determined
that the technology could be used by the Company's consulting organization
and sold as a custom integrated service rather than as a commercial design
tool.
During 1994, the Company recorded a gross restructuring credit of
$10,045 offset by an accrual of $4,000. The credit was primarily associated
with the 1993 and to a lesser extent the 1992 restructure charges and was
the result of reduced estimates for severance costs due to greater than
anticipated employee attrition among the product development and field
selling organizations and lower costs of executing the plan. In the third
quarter of 1994 the Company lowered its estimate of the cost of the 1993
plan by $5,600 mainly as a result of lower than anticipated costs
associated with completion of the first phase of the Company's Japanese
subsidiary re-alignment. Estimated costs of executing the plan were lowered
by an additional $4,445 in the fourth quarter of 1994 due to several
changes in circumstances. In the third and fourth quarters of 1994, the
Company exceeded its goal for reducing operating expenses, exclusive of
recent acquisitions. In addition, senior management changes subsequent to
the initial 1993 charge resulted in re-evaluating and revising certain
planned actions, such as the relocation of European headquarters and the
out-sourcing of European order fulfillment. These elements of the plan were
revised because lower head count through attrition and efficiencies through
centralization made them financially less attractive. In the fourth quarter
of 1994, an additional restructure accrual of $4,000 was established
primarily to reduce a recently acquired subsidiary's engineering staff and
management team and to further streamline the Company's core product
development activities, including elimination of certain product offerings
and reductions in engineering staff.
In December 1993, the Company recorded a gross restructuring charge of
$26,200 offset by a net credit adjustment of $1,400. The restructuring plan
was aimed at lowering operating expenses by reducing staffing levels in
product development and field sales organizations and streamlining business
support operations with a new organization structure. Planned product
development actions included down-sizing all divisions and closing two
satellite locations. Field sales organization actions included eliminating
several under performing locations, reducing management layers in all
regions and centralizing administrative activities. Organization
streamlining actions included globalizing the Company's information
systems, out-sourcing European order fulfillment activities, centralizing
European administrative activities and divisionalizing product development
activities. The net restructure credit was associated with the 1992 charge
and was the result of lower than estimated costs for settlements with
customers for product discontinuance and lower than estimated costs for
relocation of displaced employees offset by higher than expected severance
costs in Europe.
Costs remaining to be incurred in executing the restructuring plan
consist primarily of direct costs associated with severance of employees,
product discontinuance activities, and facility closure activities.
Remaining severance and relocation accruals are for continued changes in
product development and field sales organizations. Senior management
changes in both organizations were finalized in the second half of 1995
which should accelerate imple-
29
mentation of the final stages of the restructuring plan. In addition, costs
associated with globalization of the Company's information systems remain
accrued until the new system is implemented in 1996.
Approximately $6,100 of the December 1994 restructuring accrual of
$11,897 resulted in cash outflows in 1995. The remaining accrual of
approximately $3,751 is expected to be disbursed in the first half of 1996.
3. BUSINESS ACQUISITIONS
The Company acquired Axiom Datorer Scandinavian AB (Axiom), 3Soft
Corporation (3Soft), and Zeelan Technology, Inc. (Zeelan) in May 1995,
December 1995, and December 1995, respectively. These acquisitions were
accounted for as purchases and accordingly, their results of operations are
included in the Company's results of operations from the date of
acquisition. Axiom and Zeelan are primarily engaged in developing,
marketing and supporting software library tools used to model electronic
components for the printed circuit board and the application specific
integrated circuit markets of the EDA industry. 3Soft is primarily engaged
in developing, marketing and supporting a library of pre-designed and
tested standard logic functions or blocks which are process technology
independent, and available at the Register Transfer Level for both VHDL and
Verilog HDL markets of the EDA industry. In connection with these
acquisitions, the Company recorded one-time charges to operations for the
write-off of each enterprises' in-process product development that had not
reached technological feasibility. The cost of each acquisition was
allocated on the basis of estimated fair value of the assets and
liabilities assumed. These allocations resulted in charges for in-process
R&D of $1,430, goodwill capitalization of $528 and technology
capitalization of $892. The separate operational results of these
acquisitions 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.
In May 1995, the Company issued 1,512 shares of its common stock for
all outstanding common stock of Exemplar Logic, Inc. (Exemplar). Exemplar
develops, markets and supports a family of software tools for
high level design automation for the application specific integrated
circuit and field programmable gate array markets. The Company accounted
for this transaction as a pooling of interests and accordingly, the results
of Exemplar are included in the Company's consolidated financial statements
for all periods presented. Merger expenses of $400 were for services
rendered to facilitate completion of the merger agreement and severance
costs.
In October 1995, the Company issued 735 shares of its common stock for
all outstanding common stock of Precedence Incorporated (Precedence).
Precedence is primarily engaged in developing, marketing and supporting
simulation backplane technology and co-simulation solutions for the
electronic design automation industry. The Company accounted for this
transaction as a pooling of interests and accordingly, the results of
Precedence are included in the Company's consolidated financial statements
for all periods presented. Merger expenses of $210 were for services
rendered to facilitate completion of the merger agreement.
In September 1994, the Company completed the acquisition of Anacad
Electrical Engineering Software GmbH (Anacad). The acquisition was
accounted for as a purchase and accordingly, the results of operations are
included in the Company's results of operations from the date of
acquisition. 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 EDA
industry. 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 totaling $1,950, which was fully paid by December 31,
1995. In connection with this acquisition, the Company recorded a one-time
charge to operations for the write-off Anacad's in-process product
development that had not reached technological feasibility. 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 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.
In December 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 and Verilog simulation point tools using direct
compile technology to design and test components and boards. The Company
accounted for this transaction as a pooling of interests and accordingly,
the results of MTI are included in the Company's consolidated financial
statements for 1994 and 1995. The Company's 1993 financial statements were
not restated due to the relative materiality of MTI's separate financial
statements. Merger costs of $1,000 were paid by MTI for consulting services
rendered to facilitate negotiation of the various components of the merger
agreement. Also, cash distributions of $2,346 were paid in 1994 by MTI to
its shareholders in the normal course of S-Corporation business prior to
the date of acquisition.
In December 1993, the Company issued 421 shares of its common stock
for all outstanding common and pre-
30
ferred stock of CheckLogic Systems, Inc. (CheckLogic). 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 accordingly, the results
of CheckLogic are included in the Company's consolidated financial
statements for all periods presented.
4. INCOME TAXES
Domestic and foreign pre-tax income (loss) is as follows:
Year ended December 31, 1995 1994 1993
----------- ------------- -------------
Domestic $ 24,827 $ 6,675 $ (23,626)
Foreign 32,500 24,633 (5,967)
Total $ 57,327 $ 31,308 $ (29,593)
The provision for income taxes is as follows:
Year ended December 31, 1995 1994 1993
Current: ----------- ------------- ------------
Federal $ 1,024 $ (269) $ 43
State 206 63 (162)
Foreign 7,576 4,037 2,041
8,806 3,831 1,922
Deferred:
Federal 251 (347) 655
Foreign (1,589) 57 (110)
(1,338) (290) 545
Total $ 7,468 $ 3,541 $ 2,467
The effective tax rate differs from the
federal tax rate as follows:
Year ended December 31, 1995 1994 1993
------ ----- -----
Federal tax rate 35.0% 35.0% (35.0)%
State taxes, net 5.0 3.5 (2.3)
Foreign tax rate differential (4.8) 9.2 8.0
Income and losses of
foreign subsidiaries 7.2 6.4 0.6
Foreign tax credits (7.6) -- --
Non-taxable income of
acquired corporations 0.4 (2.9) --
Change in valuation allowance (10.2) (39.2) 29.6
Adjustment to beginning
valuation allowance (12.6) -- 2.5
Other, net 0.6 (0.7) 4.9
Effective tax rate 13.0% 11.3% 8.3%
The significant components of deferred income
tax expense are as follows:
Year ended December 31, 1995 1994 1993
------ ----- -----
Net changes in deferred tax
assets and liabilities $ 588 $ 11,992 $ (8,205)
Increase(decrease) in
beginning-of-year balance
of the valuation allowance
for deferred tax assets $ (1,926) $ (12,282) $ 8,750
Total $ (1,338) $ (290) $ 545
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, 1995 1994
------------- ------------
Deferred tax assets:
Property and equipment,
principally due to differences in
depreciation and capitalized
interest $ 1,957 $ 2,032
Inventories, principally due to
adjustments to lower
of cost or market 207 494
Accounts receivable, principally due
to allowance for doubtful accounts 343 836
Compensated absences and other
compensation, principally due to
accrual for financial
reporting purposes 4,624 3,730
Restructure costs, principally due to
accrual for financial reporting
purposes 878 4,480
Net operating loss carryforwards 20,833 23,567
Tax credit carryforwards 16,445 11,153
Purchased technology 848 85
Other, net 2,644 2,123
Total gross deferred tax assets 48,779 48,500
Less valuation allowance (44,287) (46,213)
Net deferred tax assets 4,492 2,287
Deferred tax liabilities:
Capitalization of software
development costs for
financial reporting purposes (4,075) (3,208)
Net deferred tax asset (liability) $ 417 $ (921)
31
The Company has established a valuation allowance for certain deferred
tax assets, including those for net operating loss and tax credit
carryforwards. Statement No. 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 $15,582 as of
December 31, 1995. This amount was primarily attributable to differences
between financial and tax reporting of employee stock option transactions.
During 1995, the valuation allowance decrease included a benefit from net
operating loss carryforwards of $2,885.
As of December 31, 1995, the Company, for income tax purposes, has net
operating loss carryforwards of approximately $49,834, research and
experimentation credits carryforwards of $11,722 and a foreign tax credit
carryforward of $4,723. If not used by the Company to reduce income taxes
payable in future periods, net operating loss carryforwards will expire
between 1997 through 2009, research and experimentation credit
carryforwards between 1998 through 2010 and the foreign tax credit
carryforward in the year 2000.
The Company has not provided for Federal income taxes on approximately
$96,727 of undistributed earnings of foreign subsidiaries at December 31,
1995, 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, 1995 1994
----------- -----------
Computer equipment and furniture $ 141,140 $ 140,807
Buildings and building equipment 53,420 53,365
Land and improvements 14,641 14,641
Leasehold improvements 10,556 9,577
Service spare parts 207 188
219,964 218,578
Less accumulated depreciation
and amortization (125,408) (120,558)
Property, plant and equipment, net $ 94,556 $ 98,020
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 $2,168 over the remaining term of the lease.
6. OTHER ASSETS
A summary of other assets follows:
As of December 31, 1995 1994
----------- ------------
Software development costs, net $ 10,187 $ 8,021
Long-term deposits 5,987 6,220
Purchased technology, net 4,695 5,135
Goodwill 2,566 2,655
Investment in real estate 2,935 2,935
Investments available for sale 4,150 1,812
Long-term receivables 2,003 2,316
Other 1,200 818
Total $ 33,723 $ 29,912
The company capitalized software development costs amounting to
$7,241, $5,156, and $3,609 in 1995, 1994, and 1993, respectively. Related
amortization expense of $5,075, $6,220, and $7,449 was recorded for the
years ended December 31, 1995, 1994, and 1993, respectively.
The purchase of Axiom, 3Soft and Zeelan in 1995 resulted in goodwill
capitalization of $528 and technology capitalization of $892. The 1994
Anacad acquisition resulted in goodwill capitalization of $2,897 and
technology capitalization of $4,735. Other purchased technology of $1,040
and $1,700 was acquired in 1995 and 1994, respectively. Total purchased
technology amortization expense of $2,418, $760, and $565 was recorded for
the years ended December 31, 1995, 1994, and 1993, respectively. Goodwill
costs are being amortized over a three year period to R&D expense and
technology costs are being amortized over a three year period to system and
software cost of revenues.
32
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
weighted average interest rate on short term borrowings during 1995 and
1994 was approximately 6%. The Company has available lines of credit of
approximately $30,191 as of December 31, 1995. 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, 1995 1994
----------- -----------
Revolving term credit facility $ 53,320 $ 54,160
Other 220 355
53,540 54,515
Less current portion (840) (840)
Total $ 52,700 $ 53,675
At December 31, 1995 and 1994, the Company had a committed credit
facility with First Interstate Bank of Oregon, N.A. which remains in effect
until July 2000 at a commitment level of $55,000. The agreement requires
commitment reductions of $840 annually which began in July 1994, therefore
the debt was reduced by $840 in 1995 and 1994. Also, $840 of the debt is
classified as current in short-term borrowings on the consolidated balance
sheets as of December 31, 1995 and 1994. Interest on borrowings under the
credit facility are 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.
At December 31, 1995 and 1994, the Company had an interest rate swap
agreement with First Interstate Bank of Oregon, N.A. which 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 average floating
interest rate as of December 31, 1995 was approximately 6%. 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.
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. 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 PLANS
The Company has three common stock option plans which 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.
Options under all four 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, 1995, options for 2,409
shares were exercisable, 22,310 shares were reserved for issuance and 2,914
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, 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
Granted 1,265 .71 - 21.13
Exercised (1,523) .07 - 15.41
Canceled (411) .07 - 19.76
Balance at December 31, 1995 5,078 $ .07 - 21.13
33
In May 1989, the shareholders adopted the 1989 Employee Stock Purchase
Plan and reserved 1,400 shares for issuance. The shareholders have
subsequently amended the plan to reserve an additional 4,000 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 382
and 527 shares under the plans in 1995 and 1994, respectively. At December
31, 1995, 2,415 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 $2,220, $1,997, and $1,896 in 1995, 1994, and 1993,
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 $3,022, of which
the first six months payments of $1,511 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
------------
1996 $ 9,448
1997 6,581
1998 6,105
1999 4,523
2000 3,459
Later years 9,715
Total $ 39,831
Rent expense under operating leases was approximately $14,006,
$14,025, and $17,063 for the years ended December 31, 1995, 1994, and
1993, respectively.
12. OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
Year ended December 31, 1995 1994 1993
-------- --------- --------
Interest income $ 8,534 $ 4,956 $ 4,342
Interest expense (2,444) (2,730) (4,404)
Foreign exchange gain (loss) (620) 177 247
Other, net 265 25 (438)
Total $ 5,735 $ 2,428 $ (253)
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning supplemental
disclosures of cash flow activities:
Year ended December 31, 1995 1994 1993
Cash paid for: ----------- ----------- -------
Interest expense $ 2,221 $ 2,201 $ 4,042
Income taxes $ 6,868 $ 2,840 $ 2,403
The Company owns common stock and common stock warrants of two
independent public companies with an original carrying cost of $1,200 and
$0 and a market value of $4,150 and $1,812 as of December 31, 1995 and
1994, respectively. This difference resulted in a non-cash increase on the
consolidated balance sheets in other assets and as a increase(reduction) of
the same amount in retained earnings(accumulated deficit) as of December 31,
1995 and 1994.
34
14. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company is a supplier of EDA systems - advanced computer software
used to automate the design, analysis and testing of electronic systems and
components. System and software revenues comprise more than half of the
Company's revenues and are derived primarily from software products owned
by the Company and by third parties for which royalties are paid by the
Company. Service and support revenues consist of revenue from annual
software support maintenance contracts, hardware support, and professional
services, which includes consulting services, training services, and custom
design services. Established in 1981, the Company is a leader in worldwide
EDA sales and markets its products primarily to customers in the aerospace,
computer, consumer electronics, semiconductor, automotive and
telecommunications industries. The Company sells and licenses its products
primarily through its direct sales force in North America, Europe and Asia,
and through distributors in territories where the volume of business does
not warrant a direct sales presence. In addition to its corporate offices
in Wilsonville, Oregon, the Company has sales, support, software
development and professional services offices worldwide.
Intercompany transfers are accounted for at amounts generally above
cost. Corporate expenses are general expenses included in the United States
and are not allocated to the operations of each geographic area. For the
purposes of determining operating income, corporate administration
expenses, corporate marketing expenses and research and development costs
are included in the region where the expenses were actually incurred,
resulting in such expenses being allocated primarily to the United States.
Corporate assets of cash and investments and the Company's headquarter
facilities in Wilsonville, Oregon are included in the United States.
Geographic information for 1995, 1994 and 1993 is set forth in the table
below.
Geographic Information U.S. Europe Japan Other Int'l Eliminations Consolidated
----------- ----------- ---------- ----------- ------------ ------------
1995
Revenues from unaffiliated customers $ 198,346 $ 103,749 $ 59,620 $ 22,746 $ -- $ 384,461
Intercompany transfers -- -- -- 18,524 (18,524) --
Total revenues $ 198,346 $ 103,749 $ 59,620 $ 41,270 $ (18,524) $ 384,461
Operating income (loss) $ (9,543) $ 26,496 $ 26,330 $ 8,309 $ -- $ 51,592
Identifiable assets $ 280,738 $ 103,761 $ 48,357 $ 28,766 $ -- $ 461,622
1994
Revenues from unaffiliated customers $ 185,448 $ 86,532 $ 54,887 $ 19,337 $ -- $ 346,204
Intercompany transfers -- -- -- 13,618 (13,618) --
Total revenues $ 185,448 $ 86,532 $ 54,887 $ 32,955 $ (13,618) $ 346,204
Operating income (loss) $ (31,284) $ 29,925 $ 23,143 $ 7,096 $ -- $ 28,880
Identifiable assets $ 245,135 $ 87,514 $ 43,053 $ 19,656 $ -- $ 395,358
1993
Revenues from unaffiliated customers $ 179,393 $ 88,323 $ 50,667 $ 20,600 $ -- $ 338,983
Intercompany transfers -- -- -- 16,110 (16,110) --
Total revenues $ 179,393 $ 88,323 $ 50,667 $ 36,710 $ (16,110) $ 338,983
Operating income (loss) $ (68,784) $ 19,669 $ 14,839 $ 4,936 $ -- $ (29,340)
Identifiable assets $ 212,547 $ 89,892 $ 35,545 $ 17,161 $ -- $ 355,145
35
15. SUBSEQUENT EVENT
On January 31, 1996 the Company completed a merger agreement with
Microtec Research, Inc. (Microtec). Under terms of the Agreement the
Company issued 6,223 shares of its common stock for all outstanding common
stock of Microtec. In addition, the Company has reserved 688 shares of its
common stock for previously outstanding options to purchase Microtec common
stock. These options vest and become exercisable under the terms of the
respective, original Microtec stock option agreements. The transaction was
accounted for as a pooling of interests. Microtec is primarily engaged in
developing and marketing embedded operating systems and products to
optimize the development and operation of embedded systems across
hardware/software boundaries. Microtec's integrated software product
solutions enable embedded systems developers to increase productivity,
thereby decreasing costs of product development and reducing time-to-market
for new products. Microtec's product offerings are complementary to the
Company's current broad line of EDA tools and systems. Since the
acquisition was not consummated as of December 31, 1995, the results of
Microtec are not included in the Company's Consolidated Financial
Statements.
The following is a summary of certain information concerning unaudited
pro forma consolidated financial information for the Company and Microtec
for the years ended December 31,
1995 1994
---------- ---------
Total revenues $ 430,523 $ 389,930
Operating income $ 54,737 $ 34,114
Net income $ 52,562 $ 33,421
Net income per share $ 0.84 $ 0.56
Shares used in per share calculations 62,847 60,073
The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the merger had been
consummated at the beginning of the periods presented, nor is it
necessarily indicative of future operating results or financial position.
36
QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Quarter ended March 31 June 30 September 30 December 31
in thousands, except per share data ---------- ----------- ------------ -----------
1995
Total revenues $ 86,346 $ 94,453 $ 95,880 $ 107,782
Gross margin $ 59,606 $ 66,016 $ 68,091 $ 79,903
Operating income $ 7,015 $ 11,462 $ 13,789 $ 19,326
Net income $ 6,476 $ 11,957 $ 12,792 $ 18,634
Net income per common and common
equivalent share $ .12 $ .21 $ .23 $ .33
1994
Total revenues $ 84,883 $ 82,423 $ 82,485 $ 96,413
Gross margin $ 60,643 $ 59,183 $ 58,034 $ 68,799
Operating income $ 5,094 $ 5,571 $ 4,858 $ 13,357
Net income $ 4,669 $ 4,908 $ 5,125 $ 13,065
Net income per common and common
equivalent share $ .09 $ .09 $ .09 $ .24
Common stock market price:
Quarter ended March 31 June 30 September 30 December 31
1995 ---------- --------- ------------ -----------
High $ 16 3/8 $ 18 1/2 $ 21 3/8 $ 22 7/8
Low $ 12 3/8 $ 14 7/8 $ 16 1/8 $ 16 1/8
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
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, 1995, the Company had 1,308 stockholders of record.
37
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS
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 LLP, 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
R. Douglas Norby
Senior Vice President
and Chief Financial Officer
WALDEN RHINES
Walden 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, 1995 and 1994, 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, 1995. 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, 1995, and
1994, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 1 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.
KPMG PEAT MARWICK LLP
Portland, Oregon
January 29, 1996
38
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 A. Hodges
Dean of College of Engineering
The University of California at Berkeley
Fontaine K. Richardson
General Partner
Eastech Management Company, Inc.
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
James W. Martin
Executive Vice President
R. Douglas Norby
Senior Vice President and Chief Financial Officer
Frank S. Delia
Vice President
Human Resources
Dean Freed
Vice President
General Counsel and Secretary
Richard Trebing
Corporate Controller and Chief Accounting Officer
Dennis Weldon
Treasurer
COUNSEL
Stoel Rives LLP
Attorneys-at-Law
900 SW Fifth Avenue, Suite 2300
Portland, Oregon 97204
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP
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 2, 1996 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 or, visit Mentor
Graphics on the World Wide Web: http://www.mentorg.com.
STOCK TRADING
Mentor Graphics Corporation's common stock is traded publicly in the NASDAQ
National Market System under the symbol MENT.
Windows 95 and Windows NT are registered trademarks of Microsoft Corporation.
Design and text by Karakas, VanSickle, Ouellette Advertising and Public
Relations.
Photography by Damian Conrad Photography. Printed by Graphic Arts Center.
39