Form 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
Commission file number 0 - 13442
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0786033
(State or other jurisdiction of (IRS Employer
ncorporation or organization) Identification No.)
8005 SW Boeckman Road 97070-7777
Wilsonville, Oregon (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (503) 685-7000
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(3) Exhibits
13. Portions of the 1993 Annual Report to Shareholders that
are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 30, 1994.
MENTOR GRAPHICS CORPORATION
By _________________________
Walden C. Rhines
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant on March 30, 1994 in the capacities
indicated.
Signature Title
(1) Principal Executive Officer:
____________________________ President, Chief Executive
Walden C. Rhines Officer and Director
(2) Principal Financial Officer:
____________________________ Senior Vice President and
R. Douglas Norby Chief Financial Officer
(3) Principal Accounting Officer:
_____________________________ Corporate Controller and
James J. Luttenbacher Chief Accounting Officer
(4) Directors:
_____________________________ Chairman of the Board and
Thomas H. Bruggere Director
_____________________________ Director
Marsha B. Congdon
_____________________________ Director
David R. Hathaway
_____________________________ Director
Fontaine K. Richardson
_____________________________ Director
Jon A. Shirley
_____________________________ Director
David N. Strohm
EXHIBIT 13
Selected Consolidated Financial Data
Year ended December31, 1993 1992 1991 1990 1989
In thousands, except per share data and percentages
Statement of Operations Data
Total revenues $339,775 $350,766 $400,127 $435,185 $426,359
Research and development
expense $ 77,598 $ 73,947 $ 79,539 $ 76,315 $ 70,891
Operating income
(loss) $(29,392)$(40,732) $(60,501) $ 20,715 $ 60,150
Net income
(loss) $(32,073)$(50,861) $(61,613) $ 23,625 $ 45,539
Gross margin percent 64.6% 56.4% 50.0% 58.3% 60.4%
Operating income(loss)
as a percent
of total revenues (8.7%) (11.6%) (15.1%) 4.8% 14.1%
Per Share Data
Net income (loss)
per common and
common equivalent
share $ (.69)$ (1.13) $ (1.43) $ .53 $ 1.06
Cash dividends
per common share
outstanding $ .18 $ .24 $ .24 $ .22 $ .15
Weighted average
number of common
and common
equivalent shares
outstanding 46,410 45,142 43,153 44,833 43,073
Balance Sheet Data
As of December 31, 1993 1992 1991 1990 1989
Cash and short-term
investments $109,568 $108,783 $144,022 $161,755 $160,343
Cash and investments,
long-term $ 30,000 $ 30,000 $ ^ $ ^ $ ^
Working capital $ 96,336 $108,892 $169,875 $208,223 $209,734
Property, plant and equipment,
net $104,912 $109,580 $114,213 $ 62,438 $ 51,563
Construction in
progress $ ^ $ ^ $ 1,156 $ 60,603 $ 15,959
Total assets $353,584 $ 378,565 $445,661 $504,287 $406,382
Short-term
borrowings $ 6,364 $ 5,548 $ 4,511 $ 11,953 $ 9,933
Long-term debt $ 54,321 $ 55,709 $ 50,554 $ 50,167 $ 7,729
Stockholders^
equity $195,711 $221,406 $267,667 $326,419 $297,850
MANAGEMENT^S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues and Gross Margins
1993 Change 1992 Change 1991
System and software
revenues $191,180 (10%) $ 212,397 (19%) $262,608
System and software
gross margins $138,879 7% $ 130,404 (10%) $145,694
Percentage of
revenues 72.6% 61.4% 55.5%
Service and support
revenues $148,595 7% $ 138,369 1% $137,519
Service and support
gross margins $ 80,704 20% $ 67,394 24% $ 54,387
Percentage of
revenues 54.3% 48.7% 39.5%
Total revenues $339,775 (3%) $350,766 (12%) $400,127
Total gross
margins $219,583 11% $197,798 (1%) $200,081
Percentage of
revenues 64.6% 56.4% 50.0%
System and Software
System and software revenues declined 10% from 1992 to 1993 and
19% from 1991 to 1992. The primary factors contributing to the
decline in system and software revenues include a significant
reduction in hardware revenues and a generally poor world-wide
economy, partially offset by the transition of customers to the
Company^s Version 8 software. During the last two years, the
Company has been executing a plan to exit from the hardware
business. This transition has been slow while the Company
attempted to meet the demands of some customers who prefer to
purchase their electronic design automation (EDA) solutions from
one vendor. The majority of the Company^s customers meet their
hardware needs by working directly with hardware vendors.
Hardware revenue is expected to become immaterial to the Company^s
financial statements in 1994.
The software component of system and software revenues
increased 14% from 1992. During the first quarter of 1993 the
Company shipped Version 8.2 of its software. This release
included enhanced performance and reliability and was a key factor
in the Company^s ability to increase the conversion of existing
customers. Customers who have transitioned or are in the process
of transitioning from Version 7 to Version 8 increased from 30% in
1992 to approximately 80% at the end of 1993. With a reliable
production quality release in place the Company will concentrate
more effort toward identifying and developing enhancement options
for the Version 8 software.
Revenues for the past three years continued to be negatively
impacted by a poor international economy. In 1993, the Company
experienced improved order activity in North America while
Japan and Europe results continued to reflect weakness. The
situation in Japan was particularly unfavorable as customers
remain extremely cautious in their capital spending. While
difficult to predict, the Company^s revenue will likely continue
to be negatively impacted by the economic recessions in Japan and
Europe.
System and software gross margin percentage improvements in
1993 and 1992 are a result of increased software versus hardware
sales each year. This mix shift is expected to continue to
favorably impact gross margin percentage at a much less
accelerated rate as hardware product revenues will likely become
immaterial in 1994. Gross margins were negatively impacted by
amortization of previously capitalized software development costs
to system and software cost of revenues totalling $7,449, $5,875,
and $3,961 for 1993, 1992, and 1991, respectively. The
increase is the result of higher levels of capitalization during
development of Version 8 software products. In 1994,
amortization is expected to decrease as some Version 8 software
products become fully amortized.
Service and Support
The increase in service and support revenue in 1993 and 1992 is
attributable to continued growth in professional services and
continued customer acceptance of the Company^s software support
programs. The Company has focused resources in the past two years
on development of a professional service business which provides
consulting and training to meet customer needs for
comprehensive EDA solutions. The response to these services has
been favorable as many customers seek external help to improve
their EDA processes. In 1993, the Company received
several large orders for combined software and services.
Increased professional service revenue is expected in 1994 based
on anticipated growth in customer demand.
The Company also recognized a one-time benefit from an
individual service contract in the third quarter of 1993
increasing service and support revenue by $2,100. These positive
factors were offset by reduced hardware service revenues as the
Company continued to deemphasize hardware-related activities.
Service and support gross margins have improved in 1993 and
1992 as a result of exiting the hardware service business and
focusing on higher margin software support. The Company also
experienced lower software update costs by implementing CD ROM
technology for paperless documentation, and reducing the number of
major update releases in the last two years.
Consistent with consulting and training business models, gross
margins generated by the Company^s professional services
activities have been, and are expected to continue to be, lower
than software support. Lower overall service and support gross
margins are anticipated as growth in the professional service
business is expected to be higher than growth in software support.
Operating Expense
1993 Change 1992 Change 1991
Research and
development $ 77,598 5% $ 73,947 (7%) $ 79,539
Percentage of total
revenues 22.8% 21.1% 19.9%
Marketing, general, and
administration $146,577 (3%) $151,683 (1%) $153,943
Percentage of total
revenues 43.1% 43.2% 38.5%
Restructure costs $ 24,800 92% $ 12,900 (52%) $ 27,100
Percentage of total
revenues 7.3% 3.7% 6.8%
Research and Development
Gross research and development (R&D) costs were $81,207 for
1993, a 1% increase from 1992 and a 9% reduction from 1991. R&D
expenditures were approximately flat in 1993 while the Company
focused on performance improvements of its Version 8 software
release. Offsetting these expenses was a reduction in headcount
for the year due to voluntary attrition.
1992 gross R&D costs were reduced from 1991 as a result of
lower headcount due to Company restructuring. In addition, 1991
R&D costs included a charge of $2,106 related to the write-off of
previously purchased technology.
During 1993, the Company capitalized R&D costs of $3,609,
compared to $6,120 and $9,917 for 1992 and 1991, respectively.
The decline in R&D capitalization during 1993 relates to
substantial completion of development activities associated with
Version 8, a focus on performance improvements, and an effort
toward transition of customers to the new software. Capitalization
is expected to increase in 1994 as more resources are directed
toward development of new products and enhancement of existing
products.
Gross R&D costs are expected to decline from 1993 levels due to
the Company restructuring plan approved in December 1993. See
Restructuring Costs discussion below. These cost savings are
expected to be realized in phases throughout 1994 as product group
management will execute separate plans to meet their 1994
financial goals. Also, improvement of product development
processes are expected to increase productivity in the coming
year. Negatively impacting R&D expenses will be the lifting of
the October 1992 Company-wide salary freeze, which occurred in the
third quarter of 1993. Maintaining a competitive salary structure
is a stated goal of management.
Marketing, General, and Administration
Marketing, general and administration (MG&A) expenses were
$146,577 for 1993, a 3% and 5% reduction from 1992 and 1991,
respectively. The decline in 1993 represents continued headcount
reductions due to voluntary attrition, partially offset by
increased recruiting costs associated with the successful hiring
of several key management positions.
In 1994, MG&A expenses are expected to decline as actions
associated with the December 1993 restructuring take place.
Negatively impacting MG&A expenses will be the lifting of the
October 1992 Company-wide salary freeze. Also, the Company will
experience additional costs for implementation of a new global
information system in the coming year. This system is expected to
significantly improve management^s ability to capture and analyze
financial and non-financial data.
Restructuring Costs
In December 1993, management of the Company approved a
restructuring plan aimed at reducing operating expenses by
streamlining and reorganizing Company operations. Restructure
costs of $24,800 to be incurred in executing this plan were
recognized in 1993. These costs consist primarily of costs
directly related to the severance and relocation of employees,
facilities closures, and write-offs of excess equipment and
intangible software technology assets related to discontinued
product development activities. The plan will be implemented in
phases throughout 1994. The plan will be carried out within
divisional and regional units based on their individual
business plans.
In 1994, implementation of the restructuring plan is expected
to reduce expenses by approximately $10,000 which may be partially
offset by increased expenditures in other areas. When all
elements of the restructuring plan have been fully implemented,
the Company expects future costs and expenses to be reduced even
further. Also, approximately $22,000 of the 1993 restructure
charge is expected to result in cash expenditures in 1994.
Spending associated with certain facilities closures may extend
beyond 1994.
In August 1992 and 1991, the Company executed
restructuring plans aimed at improving its focus on the core
businesses of integrated circuit design and electronic
systems design. Costs associated with the restructurings of
$12,900 and $27,100 were recognized in 1992 and 1991,
respectively. Restructuring costs included direct costs related
to the severance and relocation of employees, consolidation of
facilities, and write-offs of intangible software technology
assets related to discontinued product lines. The 1991 charge was
offset by a net gain on the sale of certain assets and the
subcontracting of the Company^s North America hardware service
business to Hewlett-Packard Company. See note 2 of Notes to
Consolidated Financial Statements.
Other Income (Expense)
1993 Change 1992 Change 1991
Interest income $ 4,338 (18%) $ 5,284 (46%) $ 9,800
Interest expense $ (4,404) (19%) $ (5,469) 1% $(5,428)
Contract settlement$ ^ ^ $ (6,150) ^ $ ^
Write-off of
non-operating
items $ ^ ^ $ (1,148) (85%) $(7,838)
Life insurance
proceeds $ ^ ^ $ ^ ^ $ 1,000
Other Income (Expense)
Interest income has declined significantly in the last three
years due to reduced average cash balances and much lower interest
rates on investments. Interest expense declined significantly in
1993 as a result of a reduction in the notional amount of the
Company^s interest rate swap agreement from $50,000 to $17,500,
and lower average debt outstanding through management of
the Company^s long-term committed revolving credit facility. The
reduction in notional amount results in subjecting $32,500 of
borrowings to more favorable floating rates. The interest rate
swap agreement converts floating rates on the remaining borrowings
of $17,500 to a fixed rate of 9.55%. 1992 interest expense was
relatively flat with 1991 levels, primarily a result of the
interest rate swap agreement which essentially fixed interest
rates on $50,000 of borrowings in each year.
Other expense for 1992 includes a charge of $6,150 related to
termination of a contractual relationship with a third-party
software supplier. The Company paid $4,250 in the fourth quarter
of 1992 and took a write-off of $1,900 in balance sheet amounts
related to the contract. In exchange, the supplier relinquished
all future claims against the Company, including cancellation of
the obligation to pay royalties on sales of certain products
through September 30, 1994. Other expense also includes write-
downs for certain non-operating assets to net realizable value,
totaling $1,148 and $7,838 for 1992 and 1991, respectively. In
addition, the Company recorded a one-time benefit of $1,000 in
other income related to the proceeds received from a key-man life
insurance policy during 1991. The Company is not the beneficiary
of any other life insurance policy on any employee.
Provision (Benefit) for Income Taxes
The provision for income taxes was $2,424 and $2,590 in 1993
and 1992, respectively. The Company recorded a benefit for income
taxes of $1,390 in 1991. The Company^s income tax position for
each year combines the effects of available tax benefits in
certain countries where the Company does business, benefits from
available net operating loss carrybacks, and tax expense for
subsidiaries with pre-tax income. As such, the Company^s income
tax position and resultant effective tax rate is uncertain in
1994.
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 of
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.
Effects of Foreign Currency Fluctuations
The Company experienced net gains from foreign currency
transactions of $247, $297 and $827 in 1993, 1992 and 1991,
respectively. These amounts are 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 $7,539 at December 31, 1993, from $5,467 at
the end of 1992. This reflects the increase in the value of net
assets denominated in foreign currencies since year-end 1992, as a
result of a weaker U.S. dollar at the close of 1993.
During 1993 and 1992, the U.S. dollar was volatile against the
European currencies in which the Company does business, primarily
the Deutsche mark, British pound, and French franc. The U.S.
dollar strengthened relative to the European currencies during the
first three months and last six months of the year. The dollar
weakened when compared to the yen during the first nine months of
1993 and rebounded slightly in the fourth quarter. Foreign
currency fluctuations in Europe and Japan resulted in a slightly
weaker U.S. dollar overall during 1993. 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.
In 1994, the Company implemented a hedging strategy focused on
further reducing its exposure to foreign currency exchange rate
fluctuations. This strategy effectively hedges a percentage of
anticipated future foreign currency revenues against exchange rate
fluctuations. 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 will continue to be impacted by the effects of
future foreign currency fluctuations.
Liquidity and Capital Resources
Year Ended December 31, 1993 1992 1991
Cash and short-term investments $109,568 $108,783 $144,022
Cash and investments, long-term $ 30,000 $ 30,000 $ ^
Inventory $ 2,299 $ 9,683 $ 23,329
Other assets $ 20,584 $ 30,998 $ 35,885
Long-term debt $ 54,321 $ 55,709 $ 50,554
Cash provided by operating activities $ 25,289 $ 13,610 $ 30,790
Cash used for investing activities,
excluding short-term investments $(26,754) $(29,559)$(42,172)
Cash provided (used)
by financing activities $ 1,862 $(18,354)$ (6,429)
Cash and Investments
Total cash and investments remained relatively flat with an
increase of $785 during 1993. Cash provided by operating
activities was $25,289, an increase of $11,679 from 1992.
Negatively impacting cash provided by operating activities was the
net loss incurred for the year and reductions in accounts payable.
These uses of cash were offset by a reduction in trade accounts
receivable, continued transition out of the hardware business
resulting in lower inventory levels, and increased accrued
liabilities associated with the year-endrestructuring.
Cash and short-term investments were positively impacted by the
proceeds from issuance of common stock upon exercise of stock
options and employee stock plan purchases in the amount of
$10,672. This increase was offset by dividends paid to
stockholders during 1993 of $8,291. See Dividends discussion
below. In addition, the Company spent $22,790 for property, plant
and equipment which was primarily UNIX-based design environment
equipment. See Capital Resources discussion below.
Inventory
Inventory was down $7,384 from December 31, 1992 as a result of
the Company^s move away from selling hardware to emphasize
software sales. As this transition has been implemented, the
Company has instituted drop shipment programs to minimize the risk
of holding inventory for resale. Operating inventory levels are
near zero as the transition to a software-only business model is
in the final stages. Demonstration equipment included in
inventory amounted to $1,835 and $4,626 at December 31, 1993 and
1992, respectively.
Other Assets
Other assets were down $10,414 from December 31, 1992. Net
capitalized software development costs were lower by $4,364 as
amortization and restructuring-related write-offs exceeded
capitalization for the year. In September 1993, the Company
received a partial refund of a rent deposit totalling $4,800 as a
result of renegotiating a long-term office lease in Japan.
Capital Resources
Total capital expenditures decreased to $23,145 for 1993,
compared to $23,439 and $38,255 for 1992 and 1991, respectively.
Expenditures for property and equipment were $22,790 and $18,784
in 1993 and 1992, respectively. During 1992, the Company
continued its commitment to invest in a high quality software
development environment, purchasing the latest workstations for
engineers. In 1993, the Company made additional investments in
new computer equipment for development engineers as the Company^s
research and development efforts were fully transitioned to a
UNIX-based design environment. Future capital expenditure plans
include maintaining a state-of-the-art design environment for
research and development, maintaining updated sales demonstration
equipment, and implementing a new global information system.
Also, approximately $22,000 of the 1993 restructure charge of
$24,800 is expected to result in cash expenditures during 1994.
Spending associated with certain facilities closures may extend
beyond 1994.
Long-term Debt
Long-term debt decreased $1,388 from December 31, 1992. As of
December 31, 1993 the Company had no commercial paper outstanding
compared to borrowings of $3,096 as of December 31, 1992. The
Company does not anticipate issuing commercial paper in the
foreseeable future.
The Company had borrowings outstanding of $55,000 and $50,000
under its $55,000 committed revolving credit facility as of
December 31, 1993 and 1992 respectively. Due to required
commitment reductions of $840 annually beginning in July 1994, the
Company classified $840 of the credit facility borrowings as
current which are included in short-term borrowings on the
Consolidated Balance Sheet as of December 31, 1993.
During the third quarter of 1992, the Company^s Japanese
subsidiary entered into an agreement to borrow 300 million Yen
($2,681 and $2,405 at December 31, 1993 and 1992 exchange rates,
respectively). These borrowings mature on July 20, 1994 and have
a maximum interest rate of 5.95%. As such, the debt is classified
as current and is included in short-term borrowings on the
Consolidated Balance Sheet as of December 31, 1993.
Dividends
In October 1993, the Board of Directors voted to discontinue
paying a quarterly dividend to shareholders. The Company intends
to reinvest future earnings in opportunities for growth.
Dividends were paid during the first three quarters of 1993
totalling $8,291.
Consolidated Statements of Operations
Year ended December 31, 1993 1992 1991
In thousands, except per share data
Revenues:
System and software $191,180 $212,397 $262,608
Service and support 148,595 138,369 137,519
Total revenues 339,775 350,766 400,127
Cost of revenues:
System and software 52,301 81,993 116,914
Service and support 67,891 70,975 83,132
Total cost of revenues 120,192 152,968 200,046
Gross margin 219,583 197,798 200,081
Operating expenses:
Research and development (note 6) 77,598 73,947 79,539
Marketing, general, and
administration 146,577 151,683 153,943
Restructure costs (note 2) 24,800 12,900 27,100
Total operating expenses 248,975 238,530 260,582
Operating loss (29,392) (40,732) (60,501)
Other expense, net (note 12) (257) (7,539) (2,502)
Loss before income taxes (29,649) (48,271) (63,003)
Provision (benefit) for
income taxes (note 4) 2,424 2,590 (1,390)
Net loss $ (32,073)$ (50,861)$ (61,613)
Net loss per common
and common
equivalent share $ (.69)$ (1.13)$ (1.43)
Weighted average number
of common and
common equivalent shares
outstanding 46,410 45,142 43,153
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
As of December 31, 1993 1992
In thousands
Assets
Current assets:
Cash and cash equivalents $ 95,958 $ 72,012
Short-term investments 13,610 36,771
Trade accounts receivable,
net of allowance for doubtful
accounts of $3,928 in 1993 and
$4,376 in 1992 72,655 75,604
Other receivables 4,167 4,678
Inventory 2,299 9,683
Prepaid expenses and other 9,399 9,239
Total current assets 198,088 207,987
Property, plant and equipment,
net (notes 5 and 8) 104,912 109,580
Cash and investments, long-term (note 8) 30,000 30,000
Other assets (note 6) 20,584 30,998
Total assets $353,584 $378,565
Liabilities and Stockholders^ Equity
Current liabilities:
Short-term borrowings
(notes 7 and 8) $ 6,364 $ 5,548
Accounts payable 10,637 17,185
Income taxes payable (note 4) 9,974 9,079
Accrued payroll and related
liabilities 14,162 12,043
Accrued restructure costs (note 2) 28,374 12,270
Accrued and other liabilities 14,603 17,122
Deferred revenue 17,638 25,848
Total current liabilities 101,752 99,095
Long-term debt (note 8) 54,321 55,709
Other long-term deferrals 1,800 2,355
Total liabilities 157,873 157,159
Stockholders^ equity: (notes 9 and 10)
Common stock, no par value, authorized
100,000 shares; 47,659 and 45,597
issued and outstanding
for 1993 and 1992,
respectively 243,951 231,354
Incentive stock, no par value,
authorized 1,200 shares;
none issued ^ ^
Accumulated deficit (55,779) (15,415)
Foreign currency translation
adjustment 7,539 5,467
Total stockholders^ equity 195,711 221,406
Commitments and contingencies (note 11)
Total liabilities and stockholders'
equity $ 353,584 $378,565
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Year ended December 31, 1993 1992 1991
In thousands
Operating Cash Flows:
Net loss $(32,073) $(50,861) $(61,613)
Adjustments to reconcile net
loss to net cash
provided by
operating activities:
Depreciation and
amortization of
property, plant
and equipment 27,600 25,750 29,701
Deferred taxes (259) 2,512 3,594
Amortization of other
assets 8,217 8,743 8,800
Amortization of nonqualified
stock options 1,418 237 676
Write-down of assets ^
restructure
(note 2) 524 935 7,895
Write-down of
assets ^ other 288 5,153 14,580
Changes in operating assets
and liabilities:
Trade accounts receivable 2,788 23,490 18,562
Inventory 7,771 13,934 593
Prepaid expenses
and other assets 6,623 9,409 (5,881)
Accounts payable (5,845) (9,383) 6,913
Accrued liabilities 16,634 (8,078) (606)
Other liabilities
and deferrals (8,397) (8,231) 7,576
Net cash provided by
operating activities 25,289 13,610 30,790
Investing Cash Flows:
Net maturities (purchases)
of short-term
investments 23,161 28,831 (4,888)
Purchases of property,
plant and equipment (22,790) (18,784) (31,235)
Capitalization of
software development
costs (3,609) (6,120) (9,917)
Development of corporate
facilities (355) (4,655) (7,020)
Proceeds from sale of
hardware service
business (note 2) ^ ^ 6,000
Net cash used by investing
activities (3,593) (728) (47,060)
Financing Cash Flows:
Proceeds from issuance
of common stock 11,179 16,074 10,864
Proceeds (repayment) of
short-term borrowings (89) 1,222 (6,836)
Proceeds (repayment) of
long-term debt (937) 5,176 (110)
Dividends paid to
stockholders (8,291) (10,826) (10,347)
Increase in cash and
investments, long-term ^ (30,000) ^
Net cash provided (used) by
financing activities 1,862 (18,354) (6,429)
Effect of exchange rate changes
on cash and cash
equivalents 388 (992) 181
Net change in cash and
cash equivalents 23,946 (6,464) (22,518)
Cash and cash equivalents at
beginning of period 72,012 78,476 100,994
Cash and cash equivalents
at end of period $ 95,958 $ 72,012 $78,476
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
Retained Foreign Total
Earnings, Currency Stock-
Common Stock (Accumulated Translation holders^
In thousands,
except per
share data Shares Amount Deficit) Adjustment Equity
Balance at
December 31,
1990 42,397 $203,417 $118,232 $ 4,770 $326,419
Stock issued
under stock
option and
stock
purchase
plans 1,198 10,950 ^ ^ 10,950
Compensation
related to
nonqualified
stock
options
granted
(note 10) ^ 676 ^ ^ 676
Foreign currency
translation
adjustment ^ ^ ^ 1,582 1,582
Net loss ^ ^ (61,613) ^ (61,613)
Cash dividends
($.24 per common
share
outstanding) ^ ^ (10,347) ^ (10,347)
Balance at
December 31,
1991 43,595 215,043 46,272 6,352 267,667
Stock issued
under stock
option and
stock
purchase
plans 2,002 16,074 ^ ^ 16,074
Compensation
related to
nonqualified
stock options
granted
(note 10) ^ 237 ^ ^ 237
Foreign currency
translation
adjustment ^ ^ ^ (885) (885)
Net loss ^ ^ (50,861) ^ (50,861)
Cash dividends
($.24 per
common
share
outstanding) ^ ^ (10,826) ^ (10,826)
Balance at
December 31,
1992 45,597 231,354 (15,415) 5,467 221,406
Stock issued
under stock
option and
stock
purchase
plans 1,641 10,672 ^ ^ 10,672
Stock issued
for acquisition
of business
(note 3) 421 507 ^ ^ 507
Compensation
related to
nonqualified
stock options
granted
(note 10) ^ 1,418 ^ ^ 1,418
Foreign currency
translation
adjustment ^ ^ ^ 2,072 2,072
Net loss ^ ^ (32,073) ^ (32,073)
Cash dividends
($.18 per
common
share
outstanding) ^ ^ (8,291) ^ (8,291)
Balance at
December 31,
1993 47,659 $243,951 $(55,779) $ 7,539 $195,711
See accompanying notes to consolidated financial statements.
All numerical references in thousands, except percentages and
per share data
1. Summary of Significant
Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial
statements of Mentor Graphics Corporation and its wholly owned and
majority-owned subsidiaries (the Company). All significant
intercompany accounts and transactions are eliminated in
consolidation.
Foreign Currency Translation
Local currencies are the functional currencies in 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. Remeasurement
gains and losses on these contracts are deferred and recognized
when the sales occur. 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 (note 14).
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 recognized over the life of
the agreement as an adjustment to interest expense (note 8).
The Company places its cash equivalents and short-term
investments with major banks and financial institutions. The
investment policy limits the Company^s creditexposure 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.
The Company has evaluated Statement of Financial Accounting
Standards No. 115, ^Accounting for Certain Investments in Debt and
Equity Securities,^ issued in May 1993. As required, the Company
will adopt Statement No. 115 effective January 1, 1994,
prospectively. The Statement requires reporting of investments as
either held to maturity, trading or available for sale. The
Company owns common stock and common stock warrants of an
independent public company with a carrying cost of $0 and a market
value of $1,375 as of December 31, 1993. Pursuant to rule 144
under the Securities Act of 1933 the Company must follow a
restricted schedule for selling these equity securities. It is
anticipated that the shares will be sold when restriction
milestones have been met. Accordingly, under Statement No. 115,
the securities will be classified as held for sale which, upon
adoption in the first quarter of 1994, will require the difference
between carrying cost and market value to be recognized and
included as a separate component of stockholders^ equity. No
other investments owned by the Company are expected to be
materially impacted by the 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.
Short-term investments consist of certificates of deposit,
commercial paper and other highly liquid investments with original
maturities in excess of three months. It is the Company^s intent
to hold these investments for less than one year.
Inventory
Inventory, consisting principally of computer hardware and
demonstration equipment, is stated at the lower of average cost or
market. Demonstration equipment comprised $1,835 and $4,626 of
the total inventory balance at December 31, 1993 and 1992,
respectively.
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.
Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
^Accounting for Income Taxes^. Statement No. 109 requires a
change from the deferred method under APB Opinion 11 to the asset
and liability method of accounting for income taxes. Under the
asset and liability method, deferred income taxes are
recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts and tax balances of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. Under Statement 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.
Effective January 1, 1993, the Company adopted Statement No.
109. The cumulative effect of that change in the method of
accounting for income taxes was not material to the Company^s
financial statements, and is therefore not disclosed separately in
the Consolidated Statement of Operations for the year ending
December 31, 1993.
Pursuant to the deferred method under APB Opinion 11, which was
applied in 1992 and prior years, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the year of
calculation. Under the deferred method, deferred taxes are not
adjusted for subsequent changes in tax rates.
Revenue Recognition
Revenues from system sales and software licenses are recognized
at the time of shipment. Contract service revenues are billed in
advance and recorded as deferred revenue. Service
revenues are then recognized ratably over the contractual period
as the services are performed. Training and consulting revenues
are recognized as the related services are performed. Custom
design and software porting revenues are recognized using the
percentage of completion method or as contract milestones are
achieved.
Software Development Costs
The Company capitalizes certain software development costs
incurred. These capitalized costs are amortized over the
estimated economic life of the software, not exceeding three
years, computed principally on a straight-line basis.
Amortization is included in system and software cost of
revenues in the Consolidated Statements of Operations. All other
research and development costs are expensed as incurred.
Net Loss Per Common and Common Equivalent Share
For 1993, 1992 and 1991, the weighted average number of common
and common equivalent shares outstanding was calculated using only
common shares outstanding. Common stock equivalents, related to
stock options outstanding, are anti dilutive as the Company is in
a loss situation and, therefore, are not included.
Reclassifications
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1991 and 1992 to conform
with the 1993 presentation.
2. Restructuring
In December 1993, the Company recorded a charge of $24,800
associated with a restructuring plan aimed at reducing operating
expenses by streamlining and reorganizing company operations.
These costs consist primarily of direct costs related to the
severance and relocation of employees, facilities closures, and
write-offs of excess equipment and intangible software technology
assets related to discontinued product development. The plan will
be implemented in phases during 1994.
In August 1992 and 1991, the Company executed restructuring
plans aimed at improving its focus on the core businesses of
integrated circuit design and electronic systems design.
Restructure costs of $12,900 and $27,100 were recognized in 1992
and 1991, respectively. These restructuring costs included direct
costs related to the severance and relocation of employees,
consolidation of facilities, and write-offs of intangible software
technology assets related to discontinued product
lines. The 1991 restructure costs were offset by a net gain on
the sale of certain assets and the subcontracting of the Company^s
North American hardware service business to Hewlett-Packard
Company.
Following is a summary of the major elements of the
restructure charges:
Year ended December 31, 1993 1992 1991
Employee severance
and relocation $ 19,400 $ 5,700 $ 9,700
Asset write-offs
and product
discontinuance costs 2,300 6,435 16,300
Facilities closures and
consolidation 4,300 1,800 2,600
Sale of hardware
service business ^ ^ (2,400)
Reversal of accrued
restructure costs due to
change in estimates (1,400) (1,600) ^
Other 200 565 900
Total $ 24,800 $ 12,900 $ 27,100
3. Business Acquisition
On December 1, 1993, the Company issued approximately 421
shares of its common stock for all the outstanding common and
preferred stock of CheckLogic Systems, Inc. (CheckLogic). In
addition, up to 35 common shares were reserved for issuance with
respect to CheckLogic employee stock options outstanding.
CheckLogic is a developer of automatic test pattern generation
point tools used to test designs of application specific
integerated circuits. The Company has accounted for this
transaction as a pooling of interests, and the financial results
for the year ended December 31, 1993 include the accounts of
CheckLogic. The separate financial results of CheckLogic prior to
the acquisition are not material, and accordingly the consolidated
financial statements for 1992 and 1991 have not been restated.
4. Income Taxes
As discussed in Note 1, the Company adopted Statement No. 109
as of January 1, 1993. The cumulative effect of this change in
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. Prior years^ financial statements have not
been restated to apply the provisions of Statement No. 109.
Domestic and foreign pre-tax income (loss) is as follows:
Year ended December 31, 1993 1992 1991
Domestic $(23,682) $(41,322) $(72,570)
Foreign (5,967) (6,949) 9,567
Total $(29,649) $(48,271) $(63,003)
The provision (benefit) for income taxes
is as follows:
Year ended December 31, 1993 1992 1991
Current:
Federal $ ^ $ (1,141) $(13,292)
State (162) 138 (311)
Foreign 2,041 1,081 8,619
1,879 78 (4,984)
Deferred:
Federal 655 102 5,515
Foreign (110) 2,410 (1,921)
545 2,512 3,594
Total $ 2,424 $ 2,590 $ (1,390)
The effective tax (benefit) rate differs from the Federal
statutory rates as follows:
Year ended December 31, 1993 1992 1991
Federal statutory tax
(benefit) rate (35.0%) (34.0%) (34.0%)
State taxes, net of Federal
tax benefits (2.3) 0.3 (0.5)
Differences in foreign
tax rates 8.0 0.3 2.9
Losses from foreign
subsidiaries 0.6 7.7 2.6
Unrealized benefit of net
operating loss carryforwards ^ 26.9 8.2
Unrealized benefit of tax
credit carryforwards ^ ^ 16.6
Alternative minimum tax ^ ^ 2.0
Adjustment of deferred
tax assets due to net
operating loss ^ 4.2 21.4
Reduction of income tax
liability due to net
operating loss ^ ^ (21.4)
Adjustment of beginning of
year balance of deferred tax
assets and liabilities for
settlement of Federal income
tax obligations 2.5 ^ ^
Change in valuation
allowance for deferred
tax assets 29.5 ^ ^
Other, net 4.9 ^ ^
Effective tax (benefit) rate 8.2% 5.4% (2.2%)
The significant components of deferred income tax expense for the
year ended December 31, 1993 are as follows:
Net changes in deferred tax
assets and liabilities $ (8,205)
Increase in beginning-of-year
balance of the
valuation allowance
for deferred tax assets 8,750
Total $ 545
For the years ended December 31, 1992 and 1991, deferred income
tax expense of $2,512 and $3,594, respectively, results from
timing differences in the recognition of income and expense for
income tax and financial reporting purposes. The sources and tax
effects of those timing differences are presented below:
As of December 31, 1992 1991
Depreciation $ 1,198 $ (5,267)
Inventory valuation
adjustments 556 (1,155)
Accrued vacation and other
compensation 822 1,562
Other asset valuation
adjustments 413 (1,040)
Capitalization of software
development costs (152) 138
Customer service accruals 901 (419)
Accrued restructure costs (292) (3,512)
Adjustment of deferred tax assets
due to net operating loss (1,296) 13,485
Other, net 362 (198)
Total $ 2,512 $ 3,594
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, 1993
Deferred tax assets:
Property and equipment, principally
due to differences in depreciation
and capitalized interest $ 810
Inventories, principally due to adjustments
to lower of cost or market 3,358
Accounts receivable, principally due
to allowance for doubtful accounts 1,241
Compensated absences and other
compensation, principally due to accrual
for financial reporting purposes 3,105
Restructure costs, principally due to accrual
for financial reporting purposes 9,642
Net operating loss carryforwards 29,576
Tax credit carryforwards 11,523
Other, net 1,663
Total gross deferred tax assets 60,918
Less valuation allowance (58,495)
Net deferred tax assets 2,423
Deferred tax liabilities:
Capitalization of software development
costs for financial reporting purposes (3,634)
Net deferred tax liabilities $ (1,211)
The Company has established a valuation allowance for certain
current deferred tax assets, and 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
valuation allowance as of January 1, 1993 was $49,745.
The effect of Statement No. 109 on the consolidated effective
tax rate for 1993 and future years, compared to those rates which
would have applied under APB Opinion 11, is not expected to be
material to the Company^s financial statements.
As of December 31, 1993, the Company has net operating loss
carryforwards for income tax purposes of approximately $74,100.
Such carryforwards will expire from 1996 to 2008 if not
used by the Company to reduce income taxes payable in future
periods.
As of December 31, 1993 the Company has foreign tax credits and
research and experimentation tax credits totaling approximately
$11,500. These tax credits can be applied against Federal tax
liabilities from 1994 through 2008 subject to various limitations
under current tax law.
The Company has not provided for Federal income taxes on
approximately $64,600 of undistributed earnings of foreign
subsidiaries at December 31, 1993, 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, 1993 1992
Computer equipment
and furniture $121,975 $118,528
Buildings and building
equipment 53,326 53,129
Land and improvements 14,641 14,567
Leasehold improvements 9,613 10,057
Service spare parts 3,857 2,998
203,412 199,279
Less accumulated depreciation
and amortization (98,500) (89,699)
Property, plant and
equipment, net $104,912 $109,580
In January, 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 will be made available to a third party on a firm
take-down schedule. The agreement results in rental payments of
$3,985 over the remaining term of the lease.
6. Other Assets
A summary of other assets follows:
As of December 31, 1993 1992
Software development
costs, net $ 9,085 $ 13,449
Long-term deposits 5,613 10,119
Investment in real estate 2,935 2,935
Long-term receivables 2,453 2,693
Purchased technology, net 106 744
Long-term prepaid royalties
and licenses 63 794
Other 329 264
Total $ 20,584 $ 30,998
The Company capitalized software development costs of $3,609,
$6,120, and $9,917 in 1993, 1992, and 1991, respectively. Related
amortization expense of $7,449, $5,875, and $3,961 was
recorded for the years ended December 31, 1993, 1992, and 1991,
respectively.
Purchased technology is carried at cost and is
amortized over the estimated economic life of the technology,
generally three years. Related amortization expense of $565,
$636, and $3,183 was recorded for the years ended December 31,
1993, 1992, and 1991, respectively.
During 1993, 1992 and 1991, certain purchased technology and
software development costs were written off due to product
discontinuances resulting from the December 1993, August 1992 and
August 1991 restructurings. These write-offs, combined with
write-downs of certain other software development, prepaid
royalties, and purchased technology to net realizable value,
totaled $812, $1,005 and $11,774 in 1993, 1992 and 1991,
respectively.
7. Short-Term Borrowings
Short-term borrowings represent drawings by subsidiaries under
multi-currency unsecured credit agreements and the current portion
of long-term debt. Interest rates are generally based on the
applicable country^s prime lending rate depending on the currency
borrowed. The Company has available lines of credit of
approximately $25,255 as of December 31, 1993. 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, 1993 1992
Revolving term credit facility $ 55,000 $ 50,000
Bank note 2,681 2,405
Commercial paper ^ 3,096
Other 161 299
57,842 55,800
Less current portion (3,521) (91)
Total $ 54,321 $ 55,709
Effective December 31, 1992, the Company amended its committed
credit facility with First Interstate Bank of Oregon, N.A. Under
terms of the amendment, the revolving credit facility
remains in effect until July 2000 and the commitment level was
established at $55,000. Interest on borrowings under the credit
facility remain floating-rate based. Borrowings are
collateralized by cash and investments of $30,000 and a trust deed
on the Company^s headquarters site in Wilsonville, Oregon of
$25,000. The amendment requires commitment reductions of $840
annually beginning in July 1994, therefore $840 is classified as
current and included in short-term borrowings on the Consolidated
Balance Sheet as of December 31, 1993.
In conjunction with the loan amendment, the Company also
modified its interest rate swap agreement with First Interstate
Bank of Oregon, N.A., reducing the notional amount from $50,000
to $17,500 without any negative financial impact. The interest
rate swap agreement effectively converts floating rates on $17,500
of borrowings to a fixed rate of 9.55% until expiration of the
agreement in January 2000. The amendment allowed the Company to
subject $32,500 of 9.55% fixed rate borrowings to more favorable
floating rates. The average floating interest rate as of
December 31, 1993 was approximately 5%. While the Company may be
exposed to credit risk in the event of nonperformance by the
counterparty to the interest rate swap agreement, the risk of
incurring losses due to nonperformance by the counterparty is
considered remote
During 1992, the Company^s Japanese subsidiary borrowed 300
million Yen ($2,681 and $2,405 at December 31, 1993 and 1992
exchange rates, respectively) from a local bank to finance its
local operations. The interest rate on these borrowings is
floating-rate based with a cap of 5.95%. The effective rate on
these borrowings during 1993 was approximately 4%. The entire
bank note matures on July 20, 1994 and is classified as current
and included in short-term borrowings on the Consolidated Balance
Sheet as of December 31, 1993.
The fair market value of the Company^s long-term debt
approximates its carrying value as the interest rates on
borrowings are floating-rate based. The Company would incur a
cost of approximately $3,660 to terminate its interest rate swap
agreement as of December 31, 1993. This cost is based on dealer
quotes taking into consideration current interest rates and the
current creditworthiness of the counterparties.
9. Incentive Stock Plan
The Board of Directors has the authority to issue incentive
stock in one or more series and to determine the relative rights
and preferences of the incentive stock (note 10). The incentive
stock is convertible into common stock upon attainment of
specified objectives or upon the occurrence of
certain events to be determined by the Board of Directors.
10. Employee Stock and Savings Plans
The Company has five stock option plans. The three common
stock option plans provide for the granting of incentive and
nonqualified stock options to key employees, officers, and non-
employee directors of the Company and its subsidiaries.
The three stock option plans are administered by the
Compensation Committee of the Board of Directors, and permit
accelerated vesting of outstanding options upon the occurrence of
certain changes in the control of the Company.
The Company also has a stock plan which provides for the sale
of common stock to key employees of the Company and its
subsidiaries. Shares can be awarded under the plan at no purchase
price as a stock bonus, and the stock plan also provides for the
granting of nonqualified stock options.
In addition, the Company has an incentive stock option plan and
has reserved 600 shares of incentive stock for issuance. No
options have been granted under this plan.
Options under all five plans generally become exercisable over
a 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, if any, of the fair
market value of the shares at the measurement date over the option
price is charged to operations ratably over the vesting period.
At December 31, 1993, options for 2,451 shares were exercisable,
19,810 shares were reserved for issuance, and 1,674 shares were
available for future grant. Stock options outstanding and
transactions involving the stock option plans are summarized as
follows:
Price per
Shares Share
Balance at December 31, 1991 7,886 $ .12 ^ 19.76
Granted 4,637 6.00 ^ 20.25
Exercised (1,433) .12 ^ 18.13
Canceled (4,514) 2.08 ^ 20.25
Balance at December 31, 1992 6,576 .21 ^ 19.76
Granted 1,180 .07 ^ 12.63
Exercised (1,021) .21 ^ 13.00
Canceled (834) 4.95 ^ 18.13
Balance at December 31, 1993 5,901 $ .07 ^ 19.76
In October 1992, the Board of Directors adopted a resolution to
offer employees holding incentive and nonqualified stock options
for 5,840 shares the opportunity to exchange their existing
options for nonqualified stock options. The exchange allowed
employees to receive options for the same number of shares at
$6.00 per share, the then current market price. The new options
vest ratably over between two to five years, depending on the
vesting status of exchanged options as of January 2, 1993. The
offer was made because the Board of Directors believes lower-
priced options provide a greater incentive to key employees and
officers. Options holders elected to exchange options covering
3,808 shares.
In May 1989, the shareholders adopted the 1989 Employee Stock
Purchase Plan and reserved 1,400 shares for issuance. In April
1992, the shareholders amended the plan to reserve an
additional 2,000 shares for issuance. Under the plan, each
eligible employee may purchase up to six hundred shares of stock
per quarter at prices no less than 85% of its fair market value
determined at certain specified dates. Employees purchased 605
and 569 shares under the plan in 1993 and 1992, respectively. At
December 31, 1993, 1,324 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 matchingcontributions to
the Savings Plan were $1,896, $1,989, and $2,140 in 1993, 1992,
and 1991, 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 is $6,444, of which
the first six month^s payments in 1994 of $1,878 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
1994 $ 10,054
1995 6,704
1996 5,298
1997 4,258
1998 3,928
Later years 14,348
Total $ 44,590
Rent expense under operating leases was approximately $16,776,
$16,156, and $16,709 for the years ending December 31, 1993, 1992,
and 1991, respectively.
12. Other Expense
Other expense is comprised of the following:
Year ended December 31, 1993 1992 1991
Interest income $ 4,338 $ 5,284 $ 9,800
Interest expense (4,404) (5,469) (5,428)
Foreign exchange gain 247 297 827
Contract settlement ^ (6,150) ^
Write-off of non-
operating items ^ (1,148) (7,838)
Life insurance proceeds ^ ^ 1,000
Other, net (438) (353) (863)
Total $ (257) $ (7,539) $ (2,502)
13. Supplemental Cash Flow Information
The following provides additional information concerning
supplemental disclosures of cash flow activities:
Year ended December 31, 1993 1992 1991
Cash paid (received) for:
Interest expense, net of
capitalized interest $ 4,042 $ 5,030 $ 4,969
Income taxes $ 2,403 $ (2,662) $ 5,936
14. Forward Foreign Exchange Contracts
At December 31, 1993 and 1992, the Company had forward
contracts outstanding of $13,847 and $18,899, respectively, to buy
and sell various foreign currencies. These contracts generally
have maturities which do not exceed six months. At December 31,
1993, the estimated fair value of these contracts was $13,797
based on dealer quotes. The Company does not anticipate non-
performance by the counterparties to these contracts.
15. Industry and Geographic Information
The Company designs, manufactures, markets and provides related
service for electronic design automation software for the
integrated circuit (IC) and systems design markets. The Company^s
software products enable engineers and designers to design,
analyze, place, route, layout and test custom ICs, application
specific ICs (ASIC), printed circuit boards, multichip modules and
other electronic systems and subsystems
Foreign operations consist of offices whose principal
activities are the sale, distribution, and service of the
Company^s products. Foreign offices purchase the computer
workstations on which the Company^s software operates principally
from suppliers located in each respective geographic area.
Software reproduction facilities operate in both Europe and
Asia-Pacific to supply the Company^s software directly to these
market areas.
Intercompany transfers are accounted for at amounts generally
above cost. Corporate expenses are general expenses which are not
allocated to the operations of each geographic area. For the
purposes of determining operating income, research and development
and certain marketing expenses are allocated based on each
region^s percentage of total revenue contribution. Corporate
assets are comprised of capital assets used in research and
development activities, short-term investments, and cash and
investments classified as long-term in the consolidated balance
sheets. Geographic information for 1993, 1992 and 1991 is set
forth in the table below.
Geographic Information N. America Europe Asia-Pacific
1993
Revenues from unaffiliated
customers $184,303 $ 87,178 $68,294
Intercompany transfers 1,282 5,016 20,948
Total revenues $185,585 $ 92,194 $89,242
Operating income (loss) $ (195) $(14,564) $ 1,678
Identifiable assets $152,514 $124,956 $64,271
1992
Revenues from unaffiliated
customers $180,716 $ 99,481 $ 70,569
Intercompany transfers 1,611 11,849 15,187
Total revenues $182,327 $111,330 $ 85,756
Operating income (loss) $(21,151) $ (7,267) $ 735
Identifiable assets $164,614 $116,174 $ 53,518
1991
Revenues from unaffiliated
customers $195,796 $110,203 $ 94,128
Intercompany transfers 6,254 9,700 20,087
Total revenues $202,050 $119,903 $114,215
Operating income (loss) $(51,876) $ (5,082) $ 7,454
Identifiable assets $193,001 $117,597 $ 77,692
Geographic Information Eliminations Corporate Consolidated
1993
Revenues from unaffiliated
customers $ ^ $ ^ $339,775
Intercompany transfers (27,246) ^ ^
Total revenues $(27,246) $ ^ $339,775
Operating income (loss) $ (2,939) $(13,372) $(29,392)
Identifiable assets $(92,258) $104,101 $353,584
1992
Revenues from unaffiliated
customers $ ^ $ ^ $350,766
Intercompany transfers (28,647) ^ ^
Total revenues $(28,647) $ ^ $350,766
Operating income (loss $(1,538) $(11,511) $(40,732)
Indentifiable assets $(60,471) $104,730 $378,565
1991
Revenues from unaffiliated
customers $ ^ $ ^ $400,127
Intercompany transfers (36,041) ^ ^
Total revenues $(36,041) $ ^ 400,127
Operating income (loss) $ 985 $(11,982) $(60,501)
Identifiable assets $(54,147) $111,518 $445,661
Quarterly Financial Information (Unaudited)
Quarter ended March 31 June 30 September 30 December 31
In thousands, except per share and shareholders of record data
1993
Total revenues $ 82,639 $ 88,416 $ 84,950 $ 83,770
Gross margin $ 52,371 $ 56,214 $ 56,378 $ 54,620
Operating income
(loss) $ (3,317) $ 633 $ 1,888 $(28,596)
Net income
(loss) $ (4,298) $ 290 $ 1,490 $(29,555)
Net income (loss)
per common
and common
equivalent
share $ (.09) $ .01 $ .03 $ (.63)
1992
Total revenues $ 100,115 $ 89,085 $ 77,540 $ 84,026
Gross margin $ 55,660 $ 50,690 $ 39,385 $ 52,063
Operating income
(loss) $ 491 $ (6,819) $(35,720) $ 1,316
Net income (loss) $ 1,227 $ (6,885) $(45,550) $ 347
Net income (loss)
per common and
common
equivalent share$ .03 $ (.15) $ (1.01) $ .01
Common stock market price:
Quarter ended March 31 June 30 September 30 December 31
1993
High $ 11 $ 12 $ 11 1/2 $ 15 1/2
Low $ 7 7/8 $ 7 7/8 $ 8 3/8 $ 10
1992
High $ 22 1/4 $ 16 1/2 $ 10 1/4 $ 9 1/2
Low $ 14 1/4 $ 9 1/2 $ 6 1/2 $ 5 1/4
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, 1993, the Company had
1,843 shareholders of record.
Report of Management
Management of Mentor Graphics Corporation is responsible for
the preparation of the accompanying consolidated financial
statements. The consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and necessarily
include some amounts which represent the best estimates and
judgments of management. The consolidated financial statements
have been audited by KPMG Peat Marwick, independent auditors,
whose report is included on this page.
The Audit Committee of the Board of Directors is comprised of
two directors who are not officers or employees of Mentor Graphics
Corporation or its subsidiaries. These directors meet with
management and the independent auditors in connection with their
review of matters relating to the Company^s annual financial
statements, the Company^s system of internal accounting controls,
and the services of the independent auditors. The Committee meets
with the independent auditors, without management present, to
discuss appropriate matters. The Committee reports its findings
to the Board of Directors and also recommends the selection and
engagement of independent auditors.
R. Douglas Norby
Senior Vice President
and Chief Financial Officer
Walden C. Rhines
President and Chief Executive Officer
Independent Auditors^ Report
To the Stockholders and Board of Directors of Mentor Graphics
Corporation:
We have audited the accompanying consolidated balance sheets of
Mentor Graphics Corporation and subsidiaries as of December 31,
1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 4 to the consolidated financial
statements, the Company adopted the provisions of the Financial
Accounting Standards Board^s Statement of Financial Accounting
Standards No. 109, ^Accounting for Income Taxes^ in 1993.
Portland, Oregon
February 1, 1994
Shareholders' Information
Directors
Thomas H. Bruggere
Chairman of the Board of Directors Mentor Graphics Corporation
Walden C. Rhines
President and Chief Executive Officer
Mentor Graphics Corporation
Marsha B. Congdon
Vice President, Policy and Strategy US West Communications
David R. Hathaway
General Partner
Venrock Associates
Fontaine K. Richardson
General Partner
Eastech Management Company, Inc.
Jon A. Shirley
Private Investor
David N. Strohm
General Partner
Greylock Management Corporation
Corporate Office
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
(503) 685-7000
Executive Officers
Walden C. Rhines
President and Chief Executive Officer Mentor Graphics Corporation
Waldo J Richards
Senior Vice President
Product Operations
R. Douglas Norby
Senior Vice President and
Chief Financial Officer
Frank S. Delia
Vice President
Chief Administrative Officer
General Counsel and Secretary
Patricia J. O^Connor
Vice President
Human Resources
James J. Luttenbacher
Corporate Controller and
Chief Accounting Officer
Counsel
Stoel Rives Boley Jones & Grey
Attorneys-at-Law
900 S.W. Fifth Avenue, Suite 2300
Portland, Oregon 97204
Independent Certified Public Accountants
KPMG Peat Marwick
1211 S.W. Fifth Avenue
Suite 2000
Portland, Oregon 97204
Transfer Agent and Registrar
First Interstate Bank
Security Holder Relations Division
26610 West Agoura Road
Calabasas, CA 91302
1-800-522-6645
Annual Meeting
The Annual Meeting of shareholders will be held at 5:00 p.m.,
Pacific Time, on April 26, 1994 at:
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
Investor Relations
For additional information on the Company, or to obtain a copy of
Mentor Graphics^ Annual
Report on Form 10-K filed with the Securities and Exchange
Commission, contact:
Investor Relations Manager
Mentor Graphics Corporation
8005 S.W. Boeckman Road
Wilsonville, Oregon 97070-7777
For financial and company information, call 1-800-546-4628.
Stock Trading
Mentor Graphics Corporation^s common stock traded publicly in the
NASDAQ National Market
System under the symbol MENT.
All references to market share in this report are based upon
Dataquest preliminary 1993 EDA market share and growth estimates.
