SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K/A AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JANUARY 31, 1996
------------------------------
MENTOR GRAPHICS CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
OREGON 0-13442 93-0786033
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
8005 S.W. BOECKMAN ROAD, WILSONVILLE, OR 97070-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 685-7000
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NO CHANGE
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
------------------------------------
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement")
by and among, Mentor Graphics Corporation, an Oregon corporation ("Mentor
Graphics"), M Acquisition Sub, Inc., a Delaware corporation and wholly
owned subsidiary of Mentor Graphics ("Merger Sub"), and Microtec Research,
Inc., a Delaware corporation ("Microtec"), dated as of October 9, 1995, as
amended on November 6, 1995, Merger Sub was merged with and into Microtec
(the "Merger"). As a result of the Merger, Microtec has become a wholly
owned subsidiary of Mentor Graphics.
At the time the Merger became effective on January 31, 1996 (the
"Effective Time"), each share of Common Stock of Microtec outstanding
immediately prior to the Effective Time was converted into and exchanged
for 0.6930693 shares of Common Stock of Mentor Graphics. The aggregate
number of shares of Common Stock of Mentor Graphics issued in accordance
with the terms of the Merger Agreement upon such conversion and exchange
was 6,223,340 shares. No fractional shares of Common Stock of Mentor
Graphics were issued in connection with such conversion and exchange. In
lieu thereof, Mentor Graphics will pay to the stockholders otherwise
entitled to a fraction of a share an amount in cash (rounded to nearest
whole cent) equal to such fractional share interest multiplied by $20.20.
In addition, pursuant to the Merger Agreement, Mentor Graphics has
reserved an aggregate of 687,925 shares of its Common Stock for issuance
upon exercise of previously outstanding options to purchase Microtec Common
Stock, which options vest and become exercisable in accordance with the
terms of the respective, original Microtec stock option agreements.
The amount of consideration paid in connection with the Merger was
determined in arms-length negotiations between officers of Mentor Graphics
and Microtec. The terms of the transaction were approved by the Boards of
Directors of Mentor Graphics, Merger Sub and Microtec and by the
stockholders of Merger Sub and Microtec.
In connection with the Merger, the former Chairman, Chief Executive
Officer and principal stockholder of Microtec, Jerry Kirk, entered into an
agreement with Mentor Graphics pursuant to which he will provide consulting
services to Mentor Graphics on a full time basis for a period of six months
after the Effective Time and on a part time basis for a period of eighteen
months thereafter. The agreement contains non-compete and a
non-solicitation provisions applicable for three years following the
Effective Time.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
-----------------------------------------
See "Financial Statements of Microtec Research, Inc." set forth on
pages F-29 through F-47 of Amendment No. 3 to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-63733) filed with the Securities and
Exchange Commission on January 10, 1996 and declared effective on January
10, 1996, which financial statements are hereby incorporated herein by
reference.
(b) Pro Forma Financial Information.
-------------------------------
See "Pro Forma Combined Condensed Financial Statements" set forth on
pages 36 through 39 of Amendment No. 3 to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-63733) filed with the Securities and
Exchange Commission on January 10, 1996 and declared effective on January
10, 1996, which financial statements are hereby incorporated herein by
reference.
2
<PAGE>
(c) Restated Financial Statements of the Registrant.
-----------------------------------------------
Pages 4 through 33 of this Form 8-K/A Amendment No. 1 contain
Supplemental Consolidated Financial Statements of the Registrant as of
December 31, 1995 and 1994 and for the three years ended December 31, 1995,
as restated to give retroactive effect to the Merger which has been
accounted for as a pooling of interests.
(d) Exhibits.
--------
2.1 Agreement and Plan of Merger dated October 9, 1995, as
amended November 6, 1995, among Registrant, M Acquisition
Sub, Inc. and Microtec Research, Inc.
2.2 Certificate of Merger of M Acquisition Sub, Inc. into
Microtec Research, Inc. as filed with the Delaware Secretary
of State on January 31, 1996.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Financial Data Schedule.
3
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Mentor Graphics Corporation:
We have audited the accompanying supplemental consolidated balance sheets
of Mentor Graphics Corporation and subsidiaries as of December 31, 1995 and
1994, and the related supplemental consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These supplemental consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these supplemental
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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Mentor Graphics Corporation and Microtec Research, Inc. on
January 31, 1996, which has been accounted for as a pooling of interests as
described in note 3 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of
consummation. These financial statements do not extend through the date of
consummation. However, they will become the historical consolidated
financial statements of Mentor Graphics Corporation and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
4
<PAGE>
The Stockholders and Board of Directors
Mentor Graphics Corporation
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position
of Mentor Graphics Corporation and subsidiaries at 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 after financial statements
covering the date of consummation of the business combination are issued.
As discussed in note 1 to the supplemental 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
April 5, 1996
5
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Supplemental Consolidated Balance Sheets
December 31, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 185,825 $ 143,254
Short-term investments 24,504 7,180
Trade accounts receivable, net of allowance for
doubtful accounts of $3,291 in 1995 and $3,554
in 1994 95,946 91,484
Other receivables 3,421 4,853
Inventory 760 856
Prepaid expenses and other 14,395 12,027
---------- ----------
Total current assets 324,851 259,654
Property, plant and equipment, net (notes 5 and 8) 99,363 101,954
Cash and investments, long-term (note 8) 30,000 30,000
Other assets (note 6) 38,160 33,361
---------- ----------
Total assets $ 492,374 $ 424,969
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Short-term borrowings (notes 7 and 8) $ 9,108 $ 8,488
Accounts payable 9,484 13,872
Income taxes payable (note 4) 14,542 13,056
Accrued payroll and related liabilities 26,883 21,295
Accrued restructure costs (note 2) 3,751 11,897
Accrued and other liabilities 22,222 21,055
Deferred revenue 27,371 22,745
---------- ----------
Total current liabilities 113,361 112,408
Long-term debt (note 8) 52,700 53,675
Other long-term deferrals 2,102 4,272
---------- ----------
Total liabilities 168,163 170,355
---------- ----------
Stockholders' equity (notes 9 and 10):
Common stock, no par value, authorized 100,000
shares; 61,780 and 59,473 shares issued and
outstanding for 1995 and 1994, respectively 285,809 271,027
Incentive stock, no par value, authorized 1,200
shares; none issued - -
Retained earnings (accumulated deficit) 24,808 (29,126)
Foreign currency translation adjustment 13,594 12,713
---------- ----------
Total stockholders' equity 324,211 254,614
Commitments and contingencies (note 11)
---------- ----------
Total liabilities and stockholders' equity $ 492,374 $ 424,969
========== ==========
See accompanying notes to supplemental consolidated financial statements.
</TABLE>
6
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Supplemental Consolidated Statements of Operations
Years ended December 31, 1995 and 1994 and 1993
(In thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
System and software $ 230,676 $ 225,478 $ 216,323
Service and support 199,847 164,452 151,380
---------- ---------- ----------
Total revenues 430,523 389,930 367,703
---------- ---------- ----------
Cost of revenues:
System and software 36,241 37,664 54,546
Service and support 81,171 68,017 66,689
---------- ---------- ----------
Total cost of revenues 117,412 105,681 121,235
---------- ---------- ----------
Gross margin 313,111 284,249 246,468
---------- ---------- ----------
Operating expenses:
Research and development (note 6) 85,373 79,418 83,350
Marketing, general and administration 172,767 167,732 168,396
Restructure costs (note 2) (2,040) (6,045) 24,800
Merger and acquisition related charges (note 3) 2,040 9,265 14,403
---------- ---------- ----------
Total operating expenses 258,140 250,370 290,949
---------- ---------- ----------
Operating income (loss) 54,971 33,879 (44,481)
Other income (expense), net (note 12) 6,368 3,072 (274)
---------- ---------- ----------
Income (loss) before income taxes 61,339 36,951 (44,755)
Provision for income taxes (note 4) 8,542 3,765 1,818
---------- ---------- ----------
Net income (loss) $ 52,797 $ 33,186 $ (46,573)
========== ========== ==========
Net income (loss) per common and common
equivalents share$ .84 $ .55 $ (.87)
======= ====== =======
Weighted average number of common and
common equivalent shares outstanding 62,847 60,073 53,362
========== ========== ==========
See accompanying notes to supplemental consolidated financial statements.
</TABLE>
7
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Supplemental Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995 and 1994 and 1993
(In thousands, except per share data)
<TABLE>
<CAPTION>
Foreign Total
Retained currency stock
Preferred stock Common stock earnings translation -holder's
Shares Amount Shares Amount (deficit) adjustment equity
------ ------ ------ ------ --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 - $ - 51,085 $ 232,307 $ (7,392) $ 5,570 $ 230,485
Stock issued under stock option
and stock purchase plans - - 1,803 10,934 - - 10,934
Stock issued for acquisition of
businesses (note 3) 2,084 7,018 493 686 - - 7,704
Compensation related to nonqualified
stock options granted (note 10) - - - 1,418 - - 1,418
Accretion of redeemable preferred
stock - - - - (261) - (261)
Foreign currency translation
adjustment - - - - - 2,100 2,100
Net loss - - - - (46,573) - (46,573)
Cash dividends ($.18 per common
share outstanding) - - - - (8,291) - (8,291)
-------- ------- --------- ---------- --------- --------- ----------
Balance at December 31, 1993 2,084 7,018 53,381 245,345 (62,517) 7,670 197,516
Stock issued under stock option
and stock purchase plans 114 368 1,387 10,544 - - 10,912
Stock issued for acquisition of
businesses (note 3) - - 2,443 1 899 - 900
Stock issued, net of issuance costs
of $1,485 - - 693 6,515 - - 6,515
Accretion of redeemable preferred
stock - - - - (160) - (160)
Conversion of redeemable
convertible preferred stock - - 554 1,122 - - 1,122
Conversion of preferred stock (2,198) (7,386) 1,015 7,386 - - -
Compensation related to nonqualified
stock options granted (note 10) - - - 114 - - 114
Foreign currency translation adjustment - - - - - 5,043 5,043
Change in value of investments
available for sale - - - - 1,812 - 1,812
Net income - - - - 33,186 - 33,186
Cash distribution - - - - (2,346) - (2,346)
-------- ------- --------- ---------- --------- --------- ----------
Balance at December 31, 1994 - - 59,473 271,027 (29,126) 12,713 254,614
Stock issued under stock option
and stock purchase plans - - 2,417 16,929 - - 16,929
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 - - - - - 881 881
Change in value of investments
available for sale - - - - 1,137 - 1,137
Net income - - - - 52,797 - 52,797
-------- ------- --------- ---------- --------- --------- ---------
Balance at December 31, 1995 - $ - 61,780 $ 285,809 $ 24,808 $ 13,594 $ 324,211
======== ======= ========= ========== ========= ========= =========
See accompanying notes to supplemental consolidated financial statements.
</TABLE>
8
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Supplemental Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Operating cash flows:
<S> <C> <C> <C>
Net income (loss) $ 52,797 $ 33,186 $(46,573)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property,
plant and equipment 25,764 25,792 28,633
Deferred taxes (1,338) (290) (259)
Amortization of other assets 9,999 7,993 8,538
Amortization of nonqualified stock options 103 114 1,418
Write-down of assets in process - research
and development 1,430 8,265 14,403
Write-down of assets - other - - 812
Changes in operating assets and liabilities:
Trade accounts receivable (3,238) (4,055) (513)
Inventory 107 46 7,771
Prepaid expenses and other assets 350 (2,237) 6,206
Accounts payable (4,598) (1,581) (5,516)
Accrued liabilities 1,266 (11,974) 17,283
Other liabilities and deferrals 2,392 600 (7,478)
---------- ---------- ----------
Net cash provided by operating activities 85,034 55,859 24,725
---------- ---------- ----------
Investing cash flows:
Net maturities (purchases) of short-term investments (17,092) 6,430 23,161
Purchases of property, plant and equipment (22,644) (16,204) (24,087)
Capitalization of software development costs (8,129) (5,718) (3,976)
Purchase of businesses (6,216) (10,050) (768)
Purchase of technologies (1,444) (1,700) -
---------- ---------- ----------
Net cash used by investing activities (55,525) (27,242) (5,670)
---------- ---------- ----------
Financing cash flows:
Proceeds from issuance of common stock 16,929 17,513 11,281
Proceeds (repayment) of short-term borrowings 619 (367) (509)
Repayment of long-term debt (975) (3,866) (941)
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 14,323 11,833 1,540
---------- ---------- ----------
Effect of exchange rate changes on cash and
cash equivalents (1,261) 2,383 325
---------- ---------- ----------
Net change in cash and cash equivalents 42,571 42,833 20,920
Cash and cash equivalents at beginning of year 143,254 100,421 79,501
---------- ---------- ----------
Cash and cash equivalents at end of year $ 185,825 $ 143,254 $ 100,421
========== ========== ==========
See accompanying notes to supplemental consolidated financial statements.
</TABLE>
9
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
December 31, 1995 and 1994
(All numerical references in thousands, except
percentages and per share data)
(1) Summary of Significant Accounting Policies
(a) 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.
(b) Principles of Consolidation
The supplemental consolidated financial statements include the
supplemental financial statements of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
(c) 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).
(Continued)
10
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(d) 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 nonperformance 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 supplemental 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 supplemental 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 nonperformance by the counterparty to this
contract.
The fair market value of the Company's long-term debt approximates its
carrying value as the interest rates on borrowings are floating rate
based. The Company has entered into an interest rate swap agreement to
manage exposure to interest rate fluctuations. The differential to be
paid or received is accrued and is recognized over the life of the
agreement as an adjustment to interest expense. The Company would
incur a cost of approximately $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 (see note 8).
(Continued)
11
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 supplemental
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.
(e) 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.
(Continued)
12
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(f) 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 (see 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.
(g) Income Taxes
Effective January 1, 1993, the Company adopted Statement No. 109,
"Accounting for Income Taxes". Statement No. 109 requires a change
from the deferred method under APB Opinion 11 to the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts and tax balances of existing
assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 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 supplemental financial statements and is therefore not
disclosed separately in the supplemental consolidated statement of
operations for the year ended December 31, 1993.
(Continued)
13
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(h) 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.
Custom design and software porting revenues are recognized using the
percentage of completion method or as contract milestones are
achieved.
(i) 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
supplemental consolidated statements of operations.
(j) 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.
(Continued)
14
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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.
(k) 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.
(l) 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.
(m) Reclassifications
Certain reclassifications have been made in the accompanying
supplemental consolidated financial statements for 1993 and 1994 to
conform with the 1995 presentation.
(Continued)
15
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(2) Restructuring
Following is a summary of the major elements of the restructure
charges:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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
======= ======== =========
</TABLE>
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.
(Continued)
16
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 realignment.
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 reevaluating 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.
(Continued)
17
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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
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.
(3) Business Acquisitions
On January 31, 1996, the Company issued 6,223 shares of its common
stock for all outstanding common stock of Microtec Research Inc.
(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 Company accounted for this transaction as a pooling of interests
and accordingly, the results of Microtec are included in the Company's
supplemental consolidated financial statements for all periods
presented. 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.
(Continued)
18
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 research
and development 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
supplemental 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 supplemental
consolidated financial statements for all periods presented. Merger
expenses of $210 were for services rendered to facilitate completion
of the merger agreement.
(Continued)
19
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 supplemental 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 stockholders 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 preferred 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 supplemental consolidated financial
statements for all periods presented.
In December 1993, Microtec completed a merger with Ready Systems
Corporation (Ready). Under the terms of the agreement Microtec issued
2,084 shares of convertible preferred stock valued at $7,018 and $377
in cash for all of the outstanding common stock of Ready. The
transaction was accounted for as a purchase and the operations of
Ready have been included in the results of Microtec since December
1993. In addition 114 shares of convertible preferred stock were sold
in June of 1994 under the Ready Purchase Agreement. Ready is a
developer of real-time operating systems and software connectivity
products.
(Continued)
20
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 to in-process research and development of
$14,403, technology capitalization of $1,570 and goodwill
capitalization of $300.
(4) Income Taxes
Domestic and foreign pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Domestic $ 28,117 $ 11,302 $ (40,456)
Foreign 33,222 25,649 (4,299)
--------- --------- ---------
Total $ 61,339 $ 36,951 $ (44,755)
========= ========= =========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,511 $ (269) $ (856)
State 413 63 (162)
Foreign 7,956 4,261 2,291
--------- --------- ----------
9,880 4,055 1,273
--------- --------- ----------
Deferred:
Federal 251 (347) 655
Foreign (1,589) 57 (110)
--------- --------- ----------
(1,338) (290) 545
--------- --------- ----------
Total $ 8,542 $ 3,765 $ 1,818
========= ========= ==========
</TABLE>
(Continued)
21
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
The effective tax rate differs from the federal tax rate as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
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 .6
Foreign tax credits (7.6) - -
Non-taxable income of acquired corporations .4 (2.9) -
Change in valuation allowance (10.2) (39.2) 29.6
Adjustment to beginning valuation allowance (12.6) - 2.5
Other, net 1.5 (1.8) .7
------ ------ -----
Effective tax rate 13.9% 10.2% 4.1%
====== ====== =====
</TABLE>
The significant components of deferred income tax expense are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net changes in deferred tax assets and
liabilities $ 547 $ 13,982 $ (13,604)
Increase (decrease) in beginning of year
balance of the valuation allowance
for deferred tax assets (1,885) (14,272) 14,149
-------- -------- ---------
Total $ (1,338) $ (290) $ 545
======== ======== =========
</TABLE>
(Continued)
22
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
The tax effects of temporary differences and carryforwards which gave
rise to significant portions of deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
As of
December 31
---------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to
differences in depreciation and capitalized
interest $ 1,788 $ 1,863
Inventories, principally due to adjustments
to lower of cost or market 207 494
Accounts receivable, principally due to
allowance for doubtful accounts 467 982
Compensated absences and other
compensation, principally due to
accrual for financial reporting purposes 5,021 4,089
Restructure costs, principally due to accrual
for financial reporting purposes 878 4,480
Net operating loss carryforwards 24,279 27,730
Tax credit carryforwards 17,513 11,284
Purchased technology 848 85
Other, net 2,590 2,262
--------- ---------
Total gross deferred tax assets 53,591 53,269
Less valuation allowance (48,358) (50,243)
--------- ---------
Net deferred tax assets 5,233 3,026
Deferred tax liabilities:
Capitalization of software development
costs for financial reporting purposes (4,816) (3,947)
--------- ---------
Net deferred tax asset (liability) $ 417 $ (921)
========= =========
</TABLE>
(Continued)
23
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 $16,229 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 $60,059, research and
experimentation credits carryforwards of $12,790 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.
(Continued)
24
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(5) Property, Plant and Equipment
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
As of
December 31
--------------------
1995 1994
---- ----
<S> <C> <C>
Computer equipment and furniture $ 152,032 $ 149,338
Buildings and building equipment 53,638 53,573
Land and improvements 14,641 14,641
Leasehold improvements 10,723 9,744
Service spare parts 207 188
--------- ---------
231,241 227,484
Less accumulated depreciation and
amortization (131,878) (125,530)
--------- ---------
Property, plant and equipment, net $ 99,363 $ 101,954
========= =========
</TABLE>
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.
(Continued)
25
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(6) Other Assets
A summary of other assets follows:
<TABLE>
<CAPTION>
As of
December 31
--------------------
1995 1994
---- ----
<S> <C> <C>
Software development costs, net $ 11,330 $ 8,712
Long-term deposits 6,673 7,618
Purchased technology, net 5,841 6,369
Goodwill 3,864 2,655
Investment in real estate 2,935 2,935
Investments available for sale 4,150 1,812
Long-term receivables 2,106 2,442
Other 1,261 818
--------- ---------
Total $ 38,160 $ 33,361
========= =========
</TABLE>
The Company capitalized software development costs amounting to
$8,129, $5,718 and $3,976 in 1995, 1994 and 1993, respectively.
Related amortization expense of $5,511, $6,785 and $7,770 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 research and development expense and technology costs are
being amortized over a three year period to system and software cost
of revenues.
In June 1995, the Company purchased a 20% equity interest in a
privately held software company for $1.4 million. The investment is
carried at cost and future results of the Company will reflect the
effect of using the equity method of accounting for this investment.
The excess of the purchase price over the proportionate recorded net
book value of the Company will be amortized over five years.
(Continued)
26
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(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 $33,191 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:
<TABLE>
<CAPTION>
As of
December 31
--------------------
1995 1994
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
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.
(Continued)
27
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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 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.
(Continued)
28
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
Options under all 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 2,730 shares were exercisable, 22,310 shares were reserved
for issuance and 2,226 shares were available for future grant. Stock
options outstanding and transactions involving the stock option plans
are summarized as follows:
<TABLE>
<CAPTION>
Price per
Shares share
------ -------------
<S> <C> <C>
Balance at December 31, 1993 6,459 $ .07 - 19.76
Granted 1,356 2.93 - 14.31
Exercised (919) .07 - 13.00
Canceled (373) 1.29 - 14.63
------- -------------
Balance at December 31, 1994 6,523 .07 - 19.76
Granted 1,534 .71 - 21.13
Exercised (1,870) .07 - 15.41
Canceled (421) .07 - 19.76
------- -------------
Balance at December 31, 1995 5,766 $ .07 - 21.13
======= =============
</TABLE>
In May 1989, the stockholders adopted the 1989 Employee Stock Purchase
Plan and reserved 1,400 shares for issuance. The stockholders 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.
(Continued)
29
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
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
noncancelable 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 cancelable
lease with a six-month notice of cancellation. The total commitment
under this cancelable 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
noncancelable operating leases are approximately as follows:
Operating
lease
payments
--------
Years ending December 31:
1996 $ 11,495
1997 8,530
1998 7,813
1999 5,734
2000 4,310
Later years 11,557
---------
Total $ 49,439
=========
Rent expense under operating leases was approximately $16,070, $15,746
and $18,274 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(Continued)
30
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(12) Other Income (Expense)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income $ 9,194 $ 5,247 $ 4,458
Interest expense (2,585) (2,826) (4,460)
Foreign exchange gain (loss) (506) 626 166
Other, net 265 25 (438)
-------- -------- --------
Total $ 6,368 $ 3,072 $ (274)
======== ======== ========
</TABLE>
(13) Supplemental Cash Flow Information
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Interest expense $ 2,294 $ 2,349 $ 4,046
Income taxes 7,611 3,364 2,730
</TABLE>
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.
(Continued)
31
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
(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:
(Continued)
32
<PAGE>
MENTOR GRAPHICS CORPORATION
AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
(All numerical references in thousands, except
percentages and per share data)
<TABLE>
<CAPTION>
United Other
States Europe Japan International Eliminations Consolidated
------ ------ ----- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1995:
Revenues from unaffiliated
customers $221,968 $117,159 $ 68,650 $ 22,746 $ - $ 430,523
Intercompany transfers - - - 18,524 (18,524) -
-------- -------- -------- -------- -------- ---------
Total revenues $221,968 $117,159 $ 68,650 $ 41,270 $(18,524) $ 430,523
======== ======== ======== ======== ======== =========
Operating income (loss) $ (6,907) $ 27,206 $ 26,363 $ 8,309 $ - $ 54,971
======== ======== ======== ======== ======== =========
Identifiable assets $300,727 $110,834 $ 52,047 $ 28,766 $ - $ 492,374
======== ======== ======== ======== ======== =========
1994:
Revenues from unaffiliated
customers $208,925 $ 99,906 $ 61,762 $ 19,337 $ - $ 389,930
Intercompany transfers - - - 13,618 (13,618) -
-------- -------- -------- -------- -------- ---------
Total revenues $208,925 $ 99,906 $ 61,762 $ 32,955 $(13,618) $ 389,930
======== ======== ======== ======== ======== =========
Operating income (loss) $(27,385) $ 30,975 $ 23,193 $ 7,096 $ - $ 33,879
======== ======== ======== ======== ======== =========
Identifiable assets $264,382 $ 94,325 $ 46,606 $ 19,656 $ - $ 424,969
======== ======== ======== ======== ======== =========
1993:
Revenues from unaffiliated
customers $194,675 $ 95,831 $ 56,597 $ 20,600 $ - $ 367,703
Intercompany transfers - - - 16,110 (16,110) -
-------- -------- -------- -------- -------- ---------
Total revenues $194,675 $ 95,831 $ 56,597 $ 36,710 $(16,110) $ 367,703
======== ======== ======== ======== ======== =========
Operating income (loss) $(86,499) $ 20,880 $ 16,202 $ 4,936 $ - $ (44,481)
======== ======== ======== ======== ======== =========
Identifiable assets $225,018 $ 95,177 $ 38,927 $ 17,161 $ - $ 376,283
======== ======== ======== ======== ======== =========
</TABLE>
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
MENTOR GRAPHICS CORPORATION
(Registrant)
Date: April 24, 1996 By: R. DOUGLAS NORBY
-------------------------------------
R. Douglas Norby
Senior Vice President and Chief
Financial Officer
34
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
2.1 Agreement and Plan of Merger dated October 9, 1995,
as amended November 6, 1995, among Registrant,
M Acquisition Sub, Inc. and Microtec Research, Inc.(1)
2.2 Certificate of Merger of M Acquisition Sub, Inc. into
Microtec Research, Inc., as filed with the Delaware
Secretary of State on January 31, 1996.(2)
23.1 Consent of Deloitte & Touche LLP, independent
auditors.(2)
23.2 Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 Financial Data Schedule.
- -------------------
(1) Incorporated by reference to Annex A of Amendment No. 3 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-63733) filed on
January 10, 1996.
(2) Included as an exhibit to the original Current Report on Form 8-K
dated January 31, 1996, as filed on February 15, 1996.
35
EXHIBIT 23.2
CONSENT OF ACCOUNTANTS
The Board of Directors and Shareholders
Mentor Graphics Corporation:
We consent to incorporation by reference in the registration statements on
Form S-8 (Nos. 33-11291, 33-18259, 2-90577, 33-30036, 2-99251, 33-30774,
33-57147, 33-57149, 33-57151 and 33-64717) and on Form S-3 (Nos. 33-52419,
33-56759, 33-60129 and 333-277) of Mentor Graphics Corporation and
subsidiaries of our report dated April 5, 1996, relating to the
supplemental consolidated balance sheets of Mentor Graphics Corporation and
subsidiaries as of December 31, 1995 and 1994 and the related supplemental
consolidated statements of operations, cash flows and stockholders' equity
for each of the years in the three-year period ended December 31, 1995,
which report appears in the current report on Form 8-K/A Amendment No. 1 of
Mentor Graphics Corporation and subsidiaries dated April 24, 1996. Our
report refers to a change in the method of accounting for certain
investments in debt and equity securities and income taxes.
KPMG PEAT MARWICK LLP
Portland, Oregon
April 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<PERIOD-END> DEC-31-1995 DEC-31-1994 DEC-31-1993
<CASH> 185,825 143,254 0<F1>
<SECURITIES> 24,504 7,180 0<F1>
<RECEIVABLES> 95,946 91,484 0<F1>
<ALLOWANCES> 3,291 3,554 0<F1>
<INVENTORY> 760 856 0<F1>
<CURRENT-ASSETS> 324,851 259,654 0<F1>
<PP&E> 99,363 101,954 0<F1>
<DEPRECIATION> 25,764 25,792 28,633
<TOTAL-ASSETS> 492,374 424,969 0<F1>
<CURRENT-LIABILITIES> 113,361 112,408 0<F1>
<BONDS> 0 0 0<F1>
0 0 0<F1>
0 0 0<F1>
<COMMON> 285,809 271,027 0<F1>
<OTHER-SE> 38,402 (16,413) 0<F1>
<TOTAL-LIABILITY-AND-EQUITY> 492,374 424,969 0<F1>
<SALES> 430,523 389,930 367,703
<TOTAL-REVENUES> 430,523 389,930 367,703
<CGS> 117,412 105,681 121,235
<TOTAL-COSTS> 117,412 105,681 121,235
<OTHER-EXPENSES> 258,140 250,370 290,949
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,585 2,826 4,460
<INCOME-PRETAX> 61,339 36,951 (44,755)
<INCOME-TAX> 8,542 3,765 1,818
<INCOME-CONTINUING> 52,797 33,186 (46,573)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 52,797 33,186 (46,573)
<EPS-PRIMARY> .84 .55 (.87)
<EPS-DILUTED> .84 .55 (.87)
<FN>
<F1> The restated balance sheet as of December 31, 1993 is not included in this report.
</FN>
</TABLE>
