FORM 10-K/A
AMENDMENT NO. 1
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, 1994
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
incorporation 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes / X / No / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $716,668,378 on March 10, 1995, based upon
the last price of the Common Stock on the date reported on the NASDAQ
National Market System. On March 10, 1995, there were 51,651,775 shares of
the Registrant's Common Stock outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in
any amendment to this Form 10-K. / X /
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into
Document which incorporated
-------- ----------------------
Portions of 1994 Annual Report to Shareholders Parts I, II and IV
Portions of the 1995 Proxy Statement Part III
<PAGE>
MENTOR GRAPHICS CORPORATION
Index to Form 10-K/A
Amendment No. 1
PART II Page Number
- ------- -----------
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation............1
Item 8. Financial Statements and Supplementary Data............10
Signatures .......................................................29
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(All numerical references are in thousands, except for percentages)
RESULTS OF OPERATIONS
Revenue and Gross Margins
<TABLE>
<CAPTION>
1994 CHANGE 1993 CHANGE 1992
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
System and software revenue......................... $187,117 (2)% $191,180 (10)% $212,397
System and software gross margins................... $150,360 8% $138,879 7% $130,404
Percentage of revenue............................. 80.4% 72.6% 61.4%
Service and support revenue......................... $161,177 8% $148,595 7% $138,369
Service and support gross margins................... $91,114 13% $80,704 20% $67,394
Percentage of revenue............................. 56.5% 54.3% 48.7%
Total revenue....................................... $348,294 3% $339,775 (3)% $350,766
Total gross margins................................. $241,474 10% $219,583 11% $197,798
Percentage of revenue............................. 69.3% 64.6% 56.4%
</TABLE>
System and Software. System and software revenue is derived from
software products owned by Mentor Graphics, software products owned by
third parties for which royalties are paid by Mentor Graphics, and hardware
products. System and software revenue declined 2% from 1993 to 1994 and 10%
from 1992 to 1993. The primary factors contributing to the decline in
system and software revenue include a significant reduction in hardware
revenue and a generally poor world-wide economy in 1993. Offsetting these
reductions, the software components of 1993 and 1994 system and software
revenue increased due to improved product offerings, the completion of
Version 8 and additional point tool products.
The hardware component of system and software revenue declined to
8% in 1994 from 17% and 34% in 1993 and 1992, respectively. During the last
three years Mentor Graphics has been executing a plan to exit the hardware
business. While almost all of Mentor Graphics' customers now meet their
hardware needs by working directly with hardware vendors, Mentor Graphics
continues to meet the demands of some customers who prefer to purchase
complete systems from one vendor. Hardware revenue will continue to
decline, at a much slower rate, becoming an insignificant element of
revenue in the future.
Revenue for 1992, 1993, and to a much lesser extent 1994 were
negatively impacted by a poor world-wide economy. In 1994 Mentor Graphics
experienced improved activity in Europe while Japan continued to reflect
weakness. During 1994 the software component of system and software revenue
was up 24% for the European region compared to the same period last year
while North American and Japan experienced modest 4% and 7% improvement for
the same periods, respectively. From December 31, 1993 to December 31,
1994, the U.S. dollar weakened approximately 7% on a revenue-based weighted
average against the Japanese yen, resulting in higher U.S. dollar revenue
from Japanese yen based sales in 1994. Exclusive of currency exchange rate
changes, the software component of system and software revenue was flat
year to year in Japan. The North American sales force executed a
reorganization during the first quarter of 1994 which resulted in a
temporary reduction in productivity. The result of the reorganization was
to streamline operations by reducing two layers of management and better
aligning
1
<PAGE>
the sales team to meet customer demand. North America sales were also
impacted by the absence of large multi-year contracts which made a
significant contribution to revenue in 1993. 1994 systems and software
revenue was characterized by smaller sales contracts to a much broader
customer base.
The software component of system and software revenue increased 8%
from 1993 to 1994 and 14% from 1992 to 1993. The slower-than-anticipated
conversion of customers to Mentor Graphics' Version 8 software, which
previously had slowed sales of the new software tools, was substantially
completed by the end of 1993. During the first quarter of 1993 Mentor
Graphics shipped Version 8.2 of its software. This release included
enhanced performance and reliability of the Version 8 software and was a
key factor in Mentor Graphics' ability to increase the conversion of
existing customers. Customers who transitioned or were in the process of
transitioning from Version 7 to Version 8 increased from 30% in 1992 to
approximately 80% in 1993. Customer conversion to Version 8 was no longer
an issue in 1994.
In 1994, Mentor Graphics merged with Anacad Electrical Engineering
Software GmbH (Anacad) and Model Technology Incorporated (MTI). The Anacad
transaction was accounted for as a purchase and was completed on September
30, 1994, while the MTI transaction was accounted for as a pooling of
interests and was completed on November 30, 1994. The consolidated
financial results of Anacad were included in Mentor Graphics' consolidated
statements of operations for the fourth quarter of 1994 only. The financial
results of MTI were included in Mentor Graphics' consolidated statements of
operations for all of 1994, while Mentor Graphics' prior year financial
statements were not restated due to the relative immateriality of MTI's
separate financial statements for 1993 and 1992. The addition of Anacad and
MTI revenue increased the software component of system and software revenue
by approximately 3% in 1994.
Overall growth in the EDA industry has been slower over the last
several years. To achieve additional revenue growth, EDA vendors must
increase market share by either developing or acquiring new technologies
that provide additional competitive solutions. The mergers with Anacad and
MTI were a result of Mentor Graphics' strategy to evaluate make-or-buy
alternatives to achieve revenue growth. Anacad's mixed signal simulation
and optimization product offerings and MTI's VHDL simulation product
offerings are complementary to Mentor Graphics' current product lines and
will contribute to revenue growth in 1995. This growth may be offset as
some of Mentor Graphics' maturing products reach the late stages of their
product life cycles.
System and software gross margin improvement in 1994 and 1993 were
primarily a result of increased software versus hardware sales each year.
Software gross margins are much higher than hardware gross margins. The
impact of hardware-software mix-shift on gross margins will be less
significant in 1995 as hardware revenue will decline at a much slower rate.
Amortization of previously capitalized software development costs
to system and software cost of good sold was $6,220, $7,449, and $5,875 for
1994, 1993, and 1992, respectively.
Amortization of purchased technology increased in the fourth
quarter of 1994 due to the acquisition of Anacad and other technologies
during the third quarter of 1994. Quarterly purchased technology
amortization to system and software cost of revenues for the next three
years, exclusive of additional acquisitions, is expected to increase by
approximately $500. This increase will be partially offset by reduced
amortization of software development costs as several capitalized projects
became fully amortized in 1994. Technology acquisitions are expected to
continue in 1995 and may increase purchased technology and related
amortization, depending on the nature of the transaction.
2
<PAGE>
Services and Support. Service and support revenue consists of
software support, which consists primarily of revenue from annual
maintenance contracts, hardware support, and professional services, which
includes consulting services, customer training and custom design services.
Service and support revenue increased 8% from 1993 to 1994 and 7% from 1992
to 1993. Rapid growth in professional services combined with sustained
growth in software support yielded this result. These positive factors were
offset by a reduction in hardware support revenues as many customers
contracted directly with primary providers of hardware service. The
reduction in hardware support revenue reflects Mentor Graphics' planned
shift to a software-only business model. Mentor Graphics also recognized as
a one-time benefit from an individual service contract in the third quarter
of 1993 increasing service and support revenue by $2,100.
The software support component of service and support revenue
increased 12% from 1993 to 1994 and 12% from 1993 to 1992. Significant
Version 8 releases during 1993 and 1994 were the main factors contributing
to the success of Mentor Graphics' software support program. These releases
were a key to increasing both installed customer base and the percent of
established customers signing up for the software support program. Growth
in software support revenue is contingent on continued development and
acquisition of competitive software products. The mergers with Anacad and
MTI discussed above had minimal impact on 1994 service and support revenue.
Anacad and MTI are expected to contribute to software maintenance and
support revenue growth in 1995. This growth may be offset as some of Mentor
Graphics' current products reach the late stages of their product life
cycles.
Mentor Graphics has focused resources in the past three years
toward development of the professional service business to meet customer
needs for comprehensive EDA solutions. The response to this service has
been favorable since many customers want consulting and other services, in
addition to software products, to optimize their design processes.
Increased professional service revenue is expected in 1995 as Mentor
Graphics continues to respond to customer demand.
The increase in service and support gross margins is primarily
attributable to the reduction of lower margin hardware support and higher
volume to absorb the fixed cost of overhead. In addition, 1993 gross
margins were favorably impacted by 100% margin associated with the
individual service contract discussed above. Consistent with consulting and
training business models, gross margins, generated by Mentor Graphics'
professional service activities have been, and are expected to continue to
be, lower than software support. Lower overall service and support gross
margins are anticipated as growth in the professional service business is
expected to be higher than growth in software maintenance and support.
Operating Expenses
<TABLE>
<CAPTION>
1994 CHANGE 1993 CHANGE 1992
------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Research and development........................... $72,484 (7)% $77,598 5% $73,947
Percentage of total revenues.................. 20.8% 22.8% 21.1%
Marketing, general, and administration............. $137,310 (6)% $146,577 (3)% $151,683
Percentage of total revenues.................. 39.4% 43.1% 43.2%
Restructure costs.................................. $(6,045) -- $24,800 92% $12,900
Percentage of total revenues.................. (1.7)% 7.3% 3.7%
</TABLE>
Research and Development. Gross research and development (R&D)
costs were $77,640, $81,207 and $80,067 for 1994, 1993 and 1992,
respectively, representing a 4% decrease from 1993 to 1994 and a 1%
increase from 1992 to 1993. In 1994, R&D expenditures decreased due to a
lower headcount plan that was achieved through attrition and layoffs.
Mentor Graphics closed an Integrated Circuit Division R&D site during the
first quarter of 1994, consolidating activities with other pre-existing
3
<PAGE>
locations. Additional cost saving actions were taken in other R&D divisions
of Mentor Graphics during the year.
Offsetting these cost savings were the acquisitions of Anacad and
MTI. Anacad and MTI increased R&D expense by approximately $1,100 each in
1994. In 1993, R&D expenditures remained flat while Mentor Graphics focused
on performance improvements of it's Version 8 software release. In the
fourth quarter of 1993, Mentor Graphics acquired CheckLogic Systems, Inc.
resulting in additional R&D expense of $630 for the year. Offsetting these
expenses was a reduction in headcount for the year due to attrition.
During 1994 Mentor Graphics capitalized software development costs
of $5,156, compared to $3,609 and $6,120 for 1993 and 1992, respectively.
Capitalization increased in 1994 as more resources were directed toward
development of new products and enhancement of existing products. The
decline in software development cost capitalization during 1993 relates to
substantial completion of development activities associated with Version 8,
focus on performance improvements and an effort toward transition of
customers to the new software.
Gross R&D costs are expected to increase from 1994 levels due to
acquisitions of Anacad and MTI, discussed above and additional research and
development investment in the coming year. In addition, Mentor Graphics
will continue to evaluate make-or-buy alternatives in 1995 which may result
in more acquisitions. Overall, the ratio of R&D expense as a percent of
revenue may increase in 1995 due to this additional investment activity.
Marketing, General, and Administration. Marketing, general and
administration (MG&A) expenses were $137,310, $146,577 and $151,683 for
1994, 1993 and 1992, respectively, representing a 6% decrease from 1993 to
1994 and a 3% decrease from 1992 to 1993. In 1994, MG&A expenses declined
as actions associated with the December 1993 restructuring were executed
during the year. The North American sales force executed a reorganization
during the first quarter of 1994 which resulted in lower headcount and
reduced layers of management to better align the sales teams with their
respective territories. In addition, actions were executed at several
international locations to streamline the organizations to improve the
ratio of selling and administrative expense compared to regional revenue
levels.
Offsetting these cost savings were the acquisitions of Anacad and
MTI, which increased MG&A expense by approximately $1,100 and $1,300,
respectively in 1994. The decline in 1993 represents headcount reductions
by selective replacement of voluntary attribution, partially offset by
increased recruiting costs associated with the successful hiring of several
key management positions.
In 1995 MG&A expenses are expected to increase from 1994 levels
due to acquisitions of Anacad and MTI, discussed above. In addition, Mentor
Graphics will experience increased costs associated with the implementation
of a new global information system in the coming year. The system is
expected to reduce the costs associated with capturing and analyzing
financial and non-financial data in 1996. Overall, the goal of management
is to improve the ratio of MG&A expense as a percent of revenue as compared
to 1994 levels. Achievement of this goal is not guaranteed due to the
uncertainty of revenues.
Restructuring Costs. During 1994, Mentor Graphics continued the
execution of the restructuring plan approved by its management in December
1993. This plan was aimed at reducing operating expenses by streamlining
and reorganizing certain of its operations. In 1994, implementation of the
restructuring plan reduced expenses by an estimated $10,000. When all
elements of the restructuring plan have been fully implemented, Mentor
Graphics expects future costs and expenses to be reduced even further.
4
<PAGE>
During 1994, Mentor Graphics 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 Mentor Graphics 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 Mentor Graphics'
Japanese subsidiary re-alignment. Estimated costs of executing the plan
were lowered by an additional $4,445 in the fourth quarter of 1994 due to
several changes in circumstances. In the third and fourth quarters of 1994,
Mentor Graphics exceeded its goal for reducing operating expenses,
exclusive of recent acquisitions. In addition, senior management changes
subsequent to the initial 1993 charge resulted in re-evaluating and
revising certain planned actions such as the relocation of European
headquarters and the out-sourcing of European order fulfillment. These
elements of the plan were revised because lower head count through
attrition and efficiencies through centralization made them financially
less attractive. In the fourth quarter of 1994, an additional restructure
accrual of $4,000 was established primarily to reduce a recently acquired
subsidiary's engineering staff and management team and to further
streamline Mentor Graphics' core product development activities, including
elimination of certain product offerings and reductions in engineering
staff.
In December 1993, Mentor Graphics 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 Mentor Graphics' 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.
In 1992, Mentor Graphics recorded a gross restructuring charge of
$14,500 offset by a credit of $1,600. The restructuring plan was aimed at
elimination of certain product development activities, discontinuance of
under-performing product lines, reduction of field sales organizations, and
reduction of administrative staff. Product eliminations resulted in costs
for ensuring customers reasonable transitions to similar third party
product offerings to replace Mentor Graphics' support of such products and
other foreseeable contract liabilities. In addition, capitalized software
development costs associated with these products were written down to net
realizable value. Field sales reductions included elimination of several
existing sales locations and down-sizing of other locations. The
restructure credit was associated with the 1991 charge and was the result
of lower than anticipated costs associated with employee severance.
Approximately $10,000 of the December 1993 restructuring accrual
resulted in cash expenditures in 1994. Approximately $10,000 of the
remaining restructure accrual of $11,897 should result in cash expenditures
in 1995. Spending associated with certain facilities closures should extend
beyond 1995.
Merger Related Charges. Merger related charges are the result of a
write-off of in-process R&D of $8,265 associated with the Anacad
transaction and consulting service costs of $1,000 associated with the MTI
transaction. On September 30, 1994, Mentor Graphics completed the
acquisition of Anacad. The acquisition was accounted for as a purchase. The
cost of the acquisition has been allocated on the basis of estimated fair
value of the assets and liabilities assumed. This allocation resulted in a
one-time charge
5
<PAGE>
for in-process R&D of $8,265, capitalization of goodwill of $2,897 and
capitalization of technology of $4,735. The charge for in-process R&D was a
result of allocating a portion of the acquisition costs to Anacad's
in-process product development that had not reached technological
feasibility. On December 1, 1994, Mentor Graphics completed the merger with
MTI. The transaction was accounted for as a pooling of interests. Mentor
Graphics' prior year financial statements were not restated due to relative
materiality of MTI's separate financial statements for 1993 and 1992. The
merger costs of $1,000 were paid by MTI for consulting services rendered to
facilitate negotiation of the various components of the merger agreement.
Other Income (Expense)
<TABLE>
<CAPTION>
1994 CHANGE 1993 CHANGE 1992
------ ------ ------ ------ --------
<S> <C> <C> <C> <C>
Other income (expense), net...................... $2,452 -- $(257) 97% $(7,539)
</TABLE>
Other income (expense) has increased significantly over the last
three years due to increased interest income in 1994, lower interest
expense in 1994 and 1993, and one-time charges of $7,298 in 1992. Interest
income was $4,953, $4,338 and $5,284 in 1994, 1993 and 1992, respectively.
The improvement in interest income is attributable to higher interest rates
and higher average cash balances due to earnings in 1994. In 1993, compared
to 1992, average interest rates on investments were much lower, while
average cash balances were flat, resulting in lower interest income.
Interest expense was $2,703, $4,404 and $5,469 in 1994, 1993 and 1992,
respectively. In 1994, average debt outstanding was lower due to improved
cashflow from operating activities and continued management of Mentor
Graphics' long term committed revolving credit facility. Interest expense
declined significantly in 1993 as a result of a reduction in the notional
amount of its interest rate swap agreement from $50,000 to $17,500 and
lower average debt outstanding through management of Mentor Graphics' long
term committed revolving credit facility. The interest rate swap agreement
converts floating rates on $17,500 of borrowings to a fixed rate of 9.55%.
The reduction in notional amount resulted in moving $32,500 of borrowings
to more favorable floating rates.
Other expense for 1992 includes a charge of $6,150 related to
termination of a contractual relationship with a third-party software
supplier. Mentor Graphics 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
Mentor Graphics, including cancellation of the obligation to pay royalties
on sales of certain products through September 30, 1994. Other expense in
1992 also includes write-downs for certain non-operating assets to net
realizable value, totaling $1,148.
Provision for Income Taxes
The provision for income taxes was $3,375, $2,424 and $2,590 in
1994, 1993 and 1992, respectively. Mentor Graphics' income tax position for
each year combines the effects of available tax benefits in certain
countries where Mentor Graphics does business, benefits from available net
operating loss carrybacks, and tax expense for subsidiaries with pre-tax
income. As such Mentor Graphics' income tax position and resultant
effective tax rate is uncertain in 1995.
Effective January 1, 1993, Mentor Graphics adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
cumulative effect of the change in the method for accounting for income
taxes was not material to Mentor Graphics' financial statements, and is
therefore not disclosed separately in the Consolidated Statement of
Operations for the year ending December 31, 1993.
6
<PAGE>
Effects of Foreign Currency Fluctuations
Mentor Graphics experienced net gains from foreign currency
transactions of $177, $247 and $297 in 1994, and 1993 and 1992,
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 payable
resulting from exchange rate fluctuations between the various currencies in
which Mentor Graphics 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 sheet, increased
to $12,674 at December 31, 1994, from $7,539 at the end of 1993. This
reflects the increase in the value of net assets denominated in foreign
currencies since year-end 1993 as a result of a weaker U.S. dollar at the
close of 1994.
During 1994, the U.S. dollar weakened approximately 8% against the
Japanese yen and 2% against European currencies in which Mentor Graphics
does business, primarily the Deutsche mark, British pound, and French
franc. The Japanese yen strengthened steadily over 1994, while European
currencies fluctuated minimally during the same period. A weaker U.S.
dollar results in Mentor Graphics' products being more affordable in
foreign markets, which generally results in favorable economics for Mentor
Graphics. 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. dollars terms.
During 1993, the U.S. dollar was volatile against the European
currencies, strengthening during the first three months and last six months
of the year. The dollars 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. dollars overall during 1993.
Mentor Graphics generates approximately half of its revenues
outside of the United States and expects this to continue in the future. As
such, Mentor Graphics' business and operating results can be impacted by
the effects of future foreign currency fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1993 1992
--------------- -------------- --------------
<S> <C> <C> <C>
Current Assets.................................................... $238,006 $198,088 $207,987
Cash and short-term investments................................... $137,856 $109,568 $108,783
Cash and investments, long-term................................... $30,000 $30,000 $30,000
Cash provided by operations....................................... $50,397 $25,289 $13,610
Cash used for investment activities, excluding short-term
investments..................................................... $(31,233) $(26,754) $(29,559)
Cash provided (used) by financing activities...................... $6,455 $1,862 $(18,354)
</TABLE>
Cash and Investments. Total cash and investments increased $28,288
during 1994. Cash provided by operations was $50,397, an increase of
$25,108 from 1993. Positively impacting cash provided by operations in 1994
was net income of $27,537 coupled with the impact of the adjustment for
in-process R&D associated with the Anacad acquisition of $8,265. These
sources of cash were offset by an increase in trade accounts receivable and
decreased accrued liabilities associated with the restructuring accrual
changes discussed previously. In 1993, cash was negatively impacted by the
net loss incurred of $32,073
7
<PAGE>
for the year and reductions in accounts payable. These uses of cash were
offset by a reduction in trade accounts receivable, continued transition
out of the hardware business resulting in lower inventory levels and
increased accrued liabilities associated with the year-end restructuring.
Cash and short-term investments were positively impacted by the
proceeds from issuance of common stock upon exercise of stock options and
employee stock plan purchases in the amount of $10,205 and $11,179 in 1994
and 1993, respectively. This increase was offset by investment in property,
plant and equipment of $14,327 in 1994 and $22,790 in 1993. In addition,
the purchase of Anacad late in 1994 resulted in cash payments totaling
$10,050. In 1993, dividends paid to stockholders totaled $8,291. See
dividends discussion below. Also, cash distributions of $2,346 were paid in
1994 by MTI to its shareholders in the normal course of S-Corporation
business prior to Mentor Graphics' November 30, 1994 acquisition.
Trade Accounts Receivable. The trade accounts receivable balance
increased $9,630 from the December 31, 1993 balance. The increase is
primarily attributable to a large customer contract receivable due in 1995
totaling $8,000. In addition, Anacad and MTI acquisitions increased the
trade receivable balance by $2,531 year to year. Excluding the large
customer contract and the impact of acquisitions on trade receivables,
Mentor Graphics was able to improve cash collections and reduce days sales
outstanding in 1994.
Inventory. Inventory levels at December 31, 1994 totaled $856,
down $1,443 since December 31, 1993. The reduction in inventory reflects
Mentor Graphics' shift to a software-only business model resulting in the
reclassification of demonstration equipment to property, plant and
equipment in 1994. In 1994, demonstration equipment was not promoted for
sale as it was in prior years. Demonstration equipment included in
inventory amounted to $1,835 at December 31, 1993. The remaining balance in
inventory primarily consists of documentation and CD ROM media for software
updates. Inventory is expected to be at approximately current levels in
1995. For any remaining hardware requests from customers, Mentor Graphics
will use a drop ship approach, shipping directly from the hardware vendor
to the customer.
Other Assets. Other assets increased to $28,090 at December 31,
1994 from $20,584 at year-end 1993. The 1994 acquisition of Anacad resulted
in goodwill capitalization of $2,897 and technology capitalization of
$4,735. The goodwill costs will be amortized over a three-year period to
R&D expense. The technology costs will be amortized over a three-year
period to system and software cost of revenues. Net capitalized software
development costs decreased by $1,064 as capitalization and amortization
were $5,156 and $6,220, respectively, in 1994. Also, capitalized purchased
technology increased by $1,700 in 1994. In 1993, capitalization and
amortization of software development costs were $3,609 and $7,449,
respectively.
Long-term Debt. Long-term debt decreased $696 from December 31,
1993. Mentor Graphics had borrowings outstanding of $54,160 and $55,000
under its $55,000 committed revolving credit facility as of December 31,
1994 and 1993, respectively. Due to required annual commitment reductions,
Mentor Graphics reduced credit facility borrowings by $840 in July 1994. In
addition, $840 of the credit facility borrowings are classified as current
and included in short-term borrowings on the consolidated balance sheets as
of December 31, 1994 and 1993.
Dividends. In October 1993, the Board of Directors voted to
discontinue paying a quarterly dividend to Stockholders. Mentor Graphics
intends to reinvest future earnings in opportunities for growth. Dividends
were paid during the first three quarters of 1993 totaling $8,291.
8
<PAGE>
Capital Resources. Total capital expenditures increased to $26,077
for 1994, compared to $23,145 and $23,439 for 1993 and 1992, respectively.
The purchase of Anacad late in 1994 resulted in cash payments totaling
$10,050 during the year. In addition, Mentor Graphics purchased
technologies totaling $1,700 during 1994. Mentor Graphics will continue to
evaluate make-or-buy alternatives which should result in additional capital
expenditures in 1995.
Expenditures for property and equipment were $14,327 and $22,790
in 1994 and 1993, respectively. In 1994 investment in computer equipment
for development engineers declined as significant investment in 1993 and
1992 completed Mentor Graphics' transition to a UNIX-based operating system
environment. Future capital expenditure plans include maintaining a state
of the art design environment for research and development and sales
demonstration equipment and implementing a new global information system.
Mentor Graphics anticipates that current cash balances,
anticipated cashflows from operating activities, and existing credit
facilities will be sufficient to meet its working capital needs for at
least the next twelve months.
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Mentor Graphics Corporation:
We have audited the accompanying consolidated balance sheets of
Mentor Graphics Corporation and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Mentor Graphics Corporation and subsidiaries as of December 31, 1994, and
1993, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 4, to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities" in
1994 and SFAS No. 109, "Accounting for Income Taxes" in 1993.
KPMG Peat Marwick LLP
Portland, Oregon
January 31, 1995
10
<PAGE>
MENTOR GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1993 1992
------------- -------------- ---------------
REVENUES:
<S> <C> <C> <C>
System and software........................................... $187,117 $191,180 $212,397
Service and support........................................... 161,177 148,595 138,369
------------- -------------- ---------------
Total revenues........................................ 348,294 339,775 350,766
------------- -------------- ---------------
COST OF REVENUES:
System and software........................................... 36,757 52,301 81,993
Service and support........................................... 70,063 67,891 70,975
------------- -------------- ---------------
Total cost of revenues................................ 106,820 120,192 152,968
------------- -------------- ---------------
Gross margin.......................................... 241,474 219,583 197,798
------------- -------------- ---------------
OPERATING EXPENSES:
Research and development (note 6)............................. 72,484 77,598 73,947
Marketing, general, and administration........................ 137,310 146,577 151,683
Restructure costs (note 2).................................... (6,045) 24,800 12,900
Merger related charges (note 3)............................... 9,265 -- --
------------- -------------- ---------------
Total operating expenses.............................. 213,014 248,975 238,530
------------- -------------- ---------------
OPERATING INCOME (LOSS)......................................... 28,460 (29,392) (40,732)
Other income (expense), net (note 12)......................... 2,452 (257) (7,539)
------------- -------------- ---------------
Income (loss) before income taxes.......................... 30,912 (29,649) (48,271)
------------- -------------- ---------------
Provision for income taxes (note 4)........................... 3,375 2,424 2,590
------------- -------------- ---------------
Net Income (loss).......................................... $27,537 $(32,073) $(50,861)
============= ============== ===============
Net Income (loss) per common and
common equivalent share.................................. $.53 $(.69) $(1.13)
============= ============== ===============
Weighted average number of common and common
equivalent shares outstanding.............................. 52,120 46,410 45,142
============= ============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
11
<PAGE>
MENTOR GRAPHICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------
1994 1993
------------- --------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents....................................................... $130,676 $95,958
Short-term investments.......................................................... 7,180 13,610
Trade accounts receivable, net of allowance for doubtful accounts of
$2,847 in 1994 and $3,928 in 1993............................................ 82,285 72,655
Other receivables............................................................... 4,853 4,167
Inventory....................................................................... 856 2,299
Prepaid expenses and other...................................................... 12,156 9,399
------------- --------------
Total current assets.................................................... 238,006 198,088
PROPERTY, PLANT AND EQUIPMENT, Net (notes 5 and 8)................................ 97,701 104,912
CASH AND INVESTMENTS, LONG-TERM (notes 8)......................................... 30,000 30,000
OTHER ASSETS (note 6)............................................................. 28,090 20,584
------------- --------------
Total assets............................................................ $393,797 $353,584
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (notes 7 and 8)........................................... $ 8,450 $ 6,364
Accounts payable................................................................ 11,570 10,637
Income taxes payable (note 4)................................................... 12,793 9,974
Accrued payroll and related liabilities......................................... 19,469 14,162
Accrued restructure costs....................................................... 11,897 28,374
Accrued and other liabilities................................................... 17,399 14,603
Deferred revenue................................................................ 17,649 17,638
------------- --------------
Total current liabilities............................................... 99,227 101,752
LONG-TERM DEBT (note 8)........................................................... 53,625 54,321
OTHER LONG-TERM DEFERRALS......................................................... 1,877 1,800
------------- --------------
Total liabilities....................................................... 154,729 157,873
STOCKHOLDERS' EQUITY: (notes 9 and 10)
Common stock, no par value, authorized 100,000 shares; 51,350 and
47,659 issued and outstanding for 1994 and 1993, respectively 254,271 243,951
Incentive stock, no par value, authorized 1,200 shares; none
issued....................................................................... -- --
Accumulated deficit............................................................. (27,877) (55,779)
Foreign currency translation adjustment......................................... 12,674 7,539
------------- --------------
Total stockholders' equity.............................................. 239,068 195,711
------------- --------------
COMMITMENTS AND CONTINGENCIES (note 11)
Total liabilities and stockholders' equity.............................. $393,797 $353,584
============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
12
<PAGE>
MENTOR GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Foreign
Common Stock Retained Currency Total
---------------------------- Earnings Translation Stockholder's
Shares Amount (Deficit) Adjustment Equity
------------ ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
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
Stock issued under stock option and
stock purchase plans.................. 1,248 10,205 -- -- 10,205
Stock issued for acquisition of business
(note 3).............................. 2,443 1 899 -- 900
Compensation related to nonqualified
stock options granted (note 10)....... -- 114 -- -- 114
Foreign currency translation adjustment. -- -- -- 5,135 5,135
Change in value of trading securities... -- -- 1,812 -- 1,812
Net Income.............................. -- -- 27,537 -- 27,537
Cash distribution....................... -- -- (2,346) -- (2,346)
------------ ----------- ------------ ------------- ---------------
Balance at December 31, 1994............ 51,350 $254,271 $(27,877) $12,674 $239,068
============ =========== ============ ============= ===============
See accompanying notes to consolidated financial statements.
</TABLE>
13
<PAGE>
MENTOR GRAPHICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1993 1992
------------- ------------ ------------
OPERATING CASH FLOWS:
<S> <C> <C> <C>
Net Income (loss)...................................................... $27,537 $(32,073) $(50,861)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property, plant and
equipment......................................................... 24,687 27,600 25,750
Deferred taxes...................................................... (290) (259) 2,512
Amortization of other assets........................................ 7,428 8,217 8,743
Amortization of nonqualified stock options.......................... 114 1,418 237
Write-down of assets -- in-process R&D.............................. 8,265 -- --
Write-down of assets -- other....................................... -- 812 6,088
Changes in operating assets and liabilities:
Trade accounts receivable........................................... (4,921) 2,788 23,490
Inventory........................................................... 46 7,771 13,934
Prepaid expenses and other assets................................... (1,782) 6,623 9,409
Accounts payable.................................................... (1,596) (5,845) (9,383)
Accrued liabilities................................................. (11,345) 16,634 (8,078)
Other liabilities and deferrals..................................... 2,254 (8,397) (8,231)
------------- ------------ ------------
Net cash provided by operating activities...................... 50,397 25,289 13,610
INVESTING CASH FLOWS:
Net maturities of short-term investments............................ 6,430 23,161 28,831
Purchases of property, plant and equipment.......................... (14,327) (22,790) (18,784)
Capitalization of software development costs........................ (5,156) (3,609) (6,120)
Development of corporate facilities................................. -- (355) (4,655)
Purchase of business................................................ (10,050) -- --
Purchases of technology............................................. (1,700) -- --
------------- ------------ ------------
Net cash used by investing activities.......................... (24,803) (3,593) (728)
FINANCING CASH FLOWS:
Proceeds from issuance of common stock.............................. 10,205 11,179 16,074
Proceeds (repayment) of short-term borrowings....................... (367) (89) 1,222
Proceeds (repayment) of long-term debt.............................. (1,936) (937) 5,176
Cash distribution................................................... (2,346) -- --
Adjustment for pooling of interests................................. 899 -- --
Dividends paid to stockholders...................................... -- (8,291) (10,826)
Increase in cash and investments, long-term......................... -- -- (30,000)
------------- ------------ ------------
Net cash provided (used) by financing activities............... 6,455 1,862 (18,354)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS....................................................... 2,669 388 (992)
------------- ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................. 34,718 23,946 (6,464)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 95,958 72,012 78,476
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $130,676 $95,958 $72,012
============= ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
14
<PAGE>
MENTOR GRAPHICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All numerical references in thousands, except percentages and per share data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial
statements of Mentor Graphics Corporation and its wholly owned and
majority-owned subsidiaries (the Company). All significant intercompany
accounts and transactions are eliminated in consolidation.
Foreign Currency Translation
Local currencies are the functional currencies for the Company's
foreign subsidiaries except for the Netherlands and Singapore where the
U.S. dollar is used as the functional currency. Assets and liabilities of
foreign operations are translated to U.S. dollars at current rates of
exchange, and revenues and expenses are translated using weighted average
rates. Gains and losses from foreign currency translation are included as a
separate component of stockholders' equity. Foreign currency transaction
gains and losses are included as a component of other income and expense
(note 12).
Financial Instruments
The Company enters into forward foreign exchange contracts as a
hedge against foreign currency sales commitments. To hedge its foreign
currency against highly anticipated sales transactions, the Company also
purchases foreign exchange options which permit but do not require foreign
currency exchanges at a future date with another party at a contracted
exchange price. Remeasurement gains and losses on forward and option
contracts are deferred and recognized when the sale occurs. All subsequent
remeasurement gains and losses are recognized as they occur to offset
remeasurement gains and losses recognized on the related foreign currency
accounts receivable balances. At December 31, 1994 and 1993 the Company had
forward contracts and options outstanding of $25,825 and $13,847,
respectively, to primarily sell various foreign currencies. These contracts
generally have maturities which do not exceed twelve months. At December
31, 1994, the recorded value and the fair value of the Company's foreign
exchange position related to these contracts was approximately zero. The
fair value of these contracts was calculated based on dealer quotes. The
Company does not anticipate non-performance by the counterparties to these
contracts.
The fair market value of the Company's long-term debt approximates its
carrying value as the interest rates on borrowings are floating rate based.
The Company has entered into an interest rate swap agreement to manage
exposure to interest rate fluctuations. The differential to be paid or
received is accrued and is recognized over the life of the agreement as an
adjustment to interest expense. The Company would incur a cost of
approximately $994 to terminate its interest rate swap agreement as of
December 31, 1994. This cost is based on dealer quotes taking into
consideration current interest rates and the current creditworthiness of
the counterparties (note 8).
The Company places its cash equivalents and short-term investments
with major banks and financial institutions. The investment policy limits
the Company's credit exposure to any one financial institution.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of
15
<PAGE>
customers comprising the Company's customer base, and their dispersion
across different businesses and geographic areas. The carrying amounts of
cash equivalents, short-term investments, trade receivables, accounts
payable, and short term borrowings approximate fair value because of the
short-term nature of these instruments.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Statement No. 115
requires reporting of investments as either held to maturity, available for
sale or trading. The Company owns common stock and common stock warrants of
an independent public company with an original carrying cost of $0 and a
market value of $1,812 as of December 31, 1994. Under Statement No. 115,
the securities have been classified as available for sale, which requires
the difference between original carrying cost and market value to be
recognized. This difference is included on the consolidated balance sheet
in prepaid and other assets and as a reduction of the same amount in
accumulated deficit. No other investments owned by the Company are
materially impacted by provisions of this Statement as the underlying
carrying values approximate market.
Cash, Cash Equivalents, and Short-Term Investments
The Company classifies highly liquid investments purchased with an
original maturity of three months or less as cash equivalents. As of
December 31, 1994 and 1993, the Company held $50,990 and $35,614,
respectively of short term securities under agreements to resell on January
1, 1994 and 1995, respectively. Due to the short-term nature of these
investments, the Company did not take possession of the securities which
were instead held in the Company's account at Smith Barney Inc. The Company
does not believe it is exposed to any significant credit or market risk on
cash and cash equivalent balances.
Short-term investments consist of certificates of deposit,
commercial paper and other highly liquid investments with original
maturities in excess of three months. These investments mature primarily in
less than one year.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and consists of
land and improvements, buildings and building equipment, computer equipment
and furniture, leasehold improvements, and service spare parts (note 5).
Expenditures for additions to property, plant and equipment are
capitalized. The cost of repairs and maintenance is expensed as incurred.
Depreciation of buildings and building equipment, and land improvements, is
computed on a straight-line basis over lives of forty and twenty years,
respectively. Depreciation of computer equipment and furniture is computed
principally on a straight-line basis over the estimated useful lives of the
assets, generally three to five years. Leasehold improvements are amortized
on a straight-line basis over the lesser of the term of the lease or
estimated useful lives of the improvements. Service spare parts are
amortized on a straight-line basis over their estimated useful lives,
generally four years.
Income Taxes
Effective January 1, 1993, the Company adopted Statement No. 109,
"Accounting for Income Taxes." Statement No. 109 requires a change from the
deferred method under APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts and
tax balances of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years
16
<PAGE>
in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. The cumulative effect of that change in the method for accounting for
income taxes was not material to the Company's financial statements, and is
therefore not disclosed separately in the Consolidated Statement of
Operations for the year ending December 31, 1993.
Pursuant to the deferred method under APB Opinion 11, which was
applied in 1992 and prior years, deferred income taxes are recognized for
income and expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable
for the year of calculation. Under the deferred method, deferred taxes are
not adjusted for subsequent changes in tax rates.
Revenue Recognition
Revenues from system sales and software licenses are recognized at
the time of shipment. Contract service revenues are billed in advance and
recorded as deferred revenue. Service revenues are then recognized ratably
over the contractual period as the services are performed. Training and
consulting revenues are recognized as the related services are performed.
Custom design and software porting revenues are recognized using the
percentage of completion method or as contract milestones are achieved.
Software Development Costs
The Company 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 research and development costs.
Amortization of capitalized software development costs is
calculated as the greater of the ratio that the current product revenues
bear to estimated future revenues or the straight-line method over the
expected product life cycle of approximately three years. Amortization is
included in system and software cost of revenues in the Consolidated
Statements of Operations.
Net Income (Loss) per Common and Common Equivalent Share
For 1994, net income per common and common equivalent share was
calculated on the basis of the weighted average number of common shares
outstanding plus dilutive common stock equivalents related to stock options
outstanding. For 1993 and 1992, net loss per common and common equivalent
share was calculated using only the weighted average of common shares
outstanding. Common stock equivalents related to stock options are
anti-dilutive in a net loss situation and, therefore, were not included in
1993 and 1992.
Reclassifications
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1992 and 1993 to conform with the
1994 presentation.
17
<PAGE>
2. RESTRUCTURING
Following is a summary of the major elements of the restructure
charges:
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993 1992
- ----------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Additions to restructure charges:
Employee severance.................................................. $2,430 $15,850 $4,800
Employee relocation................................................. -- 3,550 900
Asset write-offs and product discontinuance costs................... 1,570 2,300 6,435
Facilities closure and consolidation................................ -- 4,300 1,800
Other............................................................... -- 200 565
------------- --------------- ---------------
Total additions................................................ 4,000 26,200 14,500
Adjustment of restructure charges:
Employee severance.................................................. (3,324) 1,280 (1,600)
Employee relocation................................................. (2,600) (450) --
Asset write-offs and product discontinuance costs................... (2,060) (1,935) --
Facilities closure and consolidation................................ (2,061) (295) --
------------- --------------- ---------------
Net adjustments................................................ (10,045) (1,400) (1,600)
------------- --------------- ---------------
Net restructure charges........................................ $(6,045) $24,800 $12,900
============= =============== ===============
</TABLE>
During 1994, the Company recorded a gross restructuring credit of
$10,045 offset by an accrual of $4,000. The credit was primarily associated
with the 1993 and to a lesser extent the 1992 restructure charges and was
the result of reduced estimates for severance costs due to greater than
anticipated employee attrition among the product development and field
selling organizations and lower costs of executing the plan. In the third
quarter of 1994 the Company lowered its estimate of the cost of the 1993
plan by $5,600 mainly as a result of lower than anticipated costs
associated with completion of the first phase of the Company's Japanese
subsidiary re-alignment. Estimated costs of executing the plan were lowered
by an additional $4,445 in the fourth quarter of 1994 due to several
changes in circumstances. In the third and fourth quarters of 1994, the
Company exceeded its goal for reducing operating expenses, exclusive of
recent acquisitions. In addition, senior management changes subsequent to
the initial 1993 charge resulted in re-evaluating and revising certain
planned actions, such as the relocation of European headquarters and the
out-sourcing of European order fulfillment. These elements of the plan were
revised because lower head count through attrition and efficiencies through
centralization made them financially less attractive. In the fourth quarter
of 1994, an additional restructure accrual of $4,000 was established
primarily to reduce a recently acquired subsidiary's engineering staff and
management team and to further streamline the Company's core product
development activities, including elimination of certain product offerings
and reductions in engineering staff.
In December 1993, the Company recorded a gross restructuring
charge of $26,200 offset by a net credit adjustment of $1,400. The
restructuring plan was aimed at lowering operating expenses by reducing
staffing levels in product development and field sales organizations and
streamlining business support operations with a new organization structure.
Planned product development actions included down-sizing all divisions and
closing two satellite locations. Field sales organization actions included
eliminating several under performing locations, reducing management layers
in all regions and centralizing administrative activities. Organization
streamlining actions included globalizing the Company's information
systems, out-sourcing European order fulfillment activities, centralizing
European administrative activities and divisionalizing product development
activities. The net restructure credit was associated with the 1992 charge
and was the result of lower than estimated costs for settlements with
18
<PAGE>
customers for product discontinuance and lower than estimated costs for
relocation of displaced employees offset by higher than expected severance
costs in Europe.
In 1992, the Company recorded a gross restructuring charge of
$14,500 offset by a credit of $1,600. The restructuring plan was aimed at
elimination of certain product development activities, discontinuance of
under-performing product lines, reduction of field sales organizations, and
reduction of administrative staff. Product eliminations resulted in costs
for ensuring customers reasonable transitions to similar third party
product offerings to replace the Company's support of such products and
other foreseeable contract liabilities. In addition, capitalized software
development costs associated with these products were written down to net
realizable value. Field sales reductions included elimination of several
existing sales locations and down-sizing of other locations. The
restructure credit was associated with the 1991 charge and was the result
of lower than anticipated costs associated with employee severance.
3. BUSINESS AQUISITIONS
On September 30, 1994, the Company completed the acquisition of
Anacad Electrical Engineering Software GmbH (Anacad). Anacad is primarily
engaged in developing, marketing and supporting analog and mixed signal
simulation and optimization software for the integrated circuit and printed
circuit board markets of the electronic design automation (EDA) industry.
Anacad's product offerings are complementary to the Company's current broad
line of EDA tools and systems. The total purchase price of $12,000 was
financed with cash of $10,050 and the issuance of a short-term obligation
classified under accrued liabilities totalling $1,950.
The acquisition was accounted for as a purchase, and therefore,
the consolidated balance sheet of Anacad has been included in the
accompanying Consolidated Balance sheets as of December 31, 1994. The cost
of the acquisition was allocated on the basis of estimated fair value of
the assets and liabilities assumed. This allocation resulted in a charge
for in-process R&D of $8,265, goodwill capitalization of $2,897 and
technology capitalization of $4,735. The charge for in-process R&D was a
result of allocating a portion of the acquisition cost to Anacad's
in-process product development that had not reached technological
feasibility. The goodwill costs will be amortized over a three year period
to R&D expense primarily to recognize the value of the development
work-force acquired. The technology costs will be amortized over a three
year period to system and software cost of revenues. Financial results
subsequent to the acquisition date have been included in the Consolidated
Statements of Operations and Cash Flows. The separate operational results
of Anacad were not material compared to the Company's overall results of
operations, and accordingly pro-forma financial statements of the combined
entities have been omitted.
On November 30, 1994, the Company issued 2,443 shares of its
common stock for all outstanding common stock of Model Technology
Incorporated (MTI). MTI is a developer of VHDL simulation point tools using
direct compile technology to design and test application specific
integrated circuits. The Company accounted for this transaction as a
pooling of interests. The balance sheet of MTI is included in the
accompanying Consolidated Balance Sheets as of December 31, 1994 and MTI's
results of operations are included in the accompanying Consolidated
Statement of Operations for all of 1994. The Company's prior year financial
statements were not restated due to the relative materiality of MTI's
separate financial statements for 1993 and 1992. Merger costs of $1,000
were paid by MTI for consulting services rendered to facilitate negotiation
of the various components of the merger agreement. Also, cash distributions
of $2,346 were paid in 1994 by MTI to its shareholders in the normal course
of S- Corporation business prior to the Company's November 30, 1994
acquisition.
On December 1, 1993, the Company issued 421 shares of its common
stock for all outstanding common and preferred stock of CheckLogic Systems,
Inc. (CheckLogic). In addition, up to 35 common
19
<PAGE>
shares were reserved for issuance with respect to CheckLogic employee stock
options outstanding. CheckLogic is a developer of automatic test pattern
generation point tools used to test designs of application specific
integrated circuits. The Company accounted for this transaction as a
pooling of interests, and the financial results for the year ended December
31, 1993 include the accounts of CheckLogic. The separate financial results
of CheckLogic prior to the acquisition were not material, and accordingly
the consolidated financial statements for 1992 were not restated.
4. INCOME TAXES
Domestic and foreign pre-tax income (loss) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1994 1993 1992
--------------- ---------------- ---------------
<S> <C> <C> <C>
Domestic............................... $6,279 $(23,682) $(41,322)
Foreign................................ 24,633 (5,967) (6,949)
--------------- ---------------- ---------------
Total........................ $30,912 $(29,649) $(48,271)
=============== ================ ===============
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ---------
Current:
<S> <C> <C> <C>
Federal.............................. $(435) $-- $(1,141)
State................................ 63 (162) 138
Foreign.............................. 4,033 2,041 1,081
--------- ---------- ---------
3,661 1,879 78
Deferred:
Federal.............................. (347) 655 102
Foreign.............................. 57 (110) 2,410
--------- ---------- ---------
(290) 545 2,512
--------- ---------- ---------
Total........................ $3,375 $2,424 $2,590
========= ========== =========
</TABLE>
The effective tax (benefit) rate differs from the Federal
statutory rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1993 1992
------------ ------------- ------------
<S> <C> <C> <C>
Federal statutory tax (benefit) rate................... 35% (35.0)% (34.0)%
State taxes, net of Federal tax benefits............... 3.5 (2.3) 0.3
Foreign tax rate differential.......................... 9.2 8.0 0.3
Losses from foreign subsidiaries....................... 6.4 0.6 7.7
Unrealized benefit of net operating loss
carryforwards.......................................... -- -- 26.9
Adjustment of deferred tax assets due to net
operating loss...................................... -- -- 4.2
Adjustment of beginning of year balance
of deferred tax assets and liabilities for
settlement of Federal income tax obligations........ -- 2.5 --
Income of acquired S corporation not subject to
income tax.......................................... (2.9) -- 0
Change in valuation allowance for deferred tax
assets................................................. (39.7) 29.5 0
Other, net............................................. (0.6) 4.9 0
------------ ------------- ------------
Effective tax rate..................................... 10.9% 8.2% 5.4%
============ ============= ============
</TABLE>
20
<PAGE>
The significant components of deferred income tax expense are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993
--------------- -------------
<S> <C> <C>
Net changes in deferred tax assets and liabilities......................... $11,992 $(8,205)
Increase(decrease) in beginning-of-year balance of the valuation
allowance for deferred tax assets....................................... (12,282) 8,750
--------------- -------------
Total............................................................ $(290) $545
=============== =============
</TABLE>
For the year ended December 31, 1992, deferred income tax expense
was $2,512, resulting from timing differences in the recognition of income
and expense for income tax and financial reporting purposes.
The sources and tax effects of those timing differences are
presented below:
<TABLE>
<CAPTION>
As of
December 31,
1992
------------
<S> <C>
Depreciation.................................................................... $1,198
Inventory valuation adjustments................................................. 556
Accrued vacation and other compensation......................................... 822
Other asset valuation adjustments............................................... 413
Capitalization of software development costs.................................... (152)
Customer service accruals....................................................... 901
Accrued restructure costs....................................................... (292)
Adjustment of deferred tax assets due to net operating loss..................... (1,296)
Other, net...................................................................... 362
----------
Total................................................................. $2,512
==========
</TABLE>
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,
--------------------------------------
1994 1993
--------------- -----------------
<S> <C> <C>
Deferred tax assets:
Property and equipment, principally due to differences in depreciation
and capitalized interest.................................................. $2,032 $810
Inventories, principally due to adjustments to lower of cost or market........ 494 3,358
Accounts receivable, principally due to allowance for doubtful accounts........ 836 1,241
Compensated absences and other compensation, principally due to
accrual for financial reporting purposes..................................... 3,730 3,105
Restructure costs, principally due to accrual for financial
reporting purposes.......................................................... 4,480 9,642
Net operating loss carryforwards............................................... 23,567 29,576
Tax credit carryforwards....................................................... 11,153 11,523
Other, net..................................................................... 2,208 1,663
--------------- -----------------
Total gross deferred tax assets.............................................. 48,500 60,918
--------------- -----------------
Less valuation allowance..................................................... (46,213) (58,495)
--------------- -----------------
Net deferred tax assets...................................................... 2,287 2,423
Deferred tax liabilities:
Capitalization of software development costs for financial
reporting purposes........................................................ (3,208) (3,634)
--------------- -----------------
Net deferred tax liability..................................................... $(921) $(1,211)
=============== =================
</TABLE>
21
<PAGE>
The Company has established a valuation allowance for certain
current deferred tax assets, and net operating loss and tax credit
carryforwards. Statement 109 requires that such a valuation allowance be
recorded when it is more likely than not that some portion of the deferred
tax assets will not be realized. The portion of the valuation allowance for
deferred tax assets for which subsequently recognized tax benefits will be
applied directly to contributed capital is $10,650 as of December 31, 1994.
This amount was primarily attributable to differences between financial and
tax reporting of employee stock option transactions. During 1994, the
valuation allowance decreased by $12,282, of which $6,404 related to the
realization of net operating loss carry forwards. The valuation allowance
as of January 1, 1993 was $49,745. The net increase in the valuation
allowance for the year ended December 31, 1993 was $8,750.
As of December 31, 1994, the Company has net operating loss
carryforwards for income tax purposes of approximately $53,726. Such
carryforwards will expire from 1998 to 2009 if not used by the Company to
reduce income taxes payable in future periods.
As of December 31, 1994 the Company has research and
experimentation tax credits available totaling approximately $11,153. These
tax credits are applicable against Federal tax liabilities from 1994
through 2008 subject to various limitations under current tax law.
The Company has not provided for Federal income taxes on
approximately $85,291 of undistributed earnings of foreign subsidiaries at
December 31, 1994, since these earnings have been invested indefinitely in
subsidiary operations. Upon repatriation, some of these earnings would
generate foreign tax credits which will reduce the Federal tax liability
associated with any future foreign dividend.
The Company has settled its Federal income tax obligations through
1991. The Company believes the provisions for income taxes for years since
1991 are adequate.
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
Computer equipment and furniture........................... $135,723 $121,975
Buildings and building equipment........................... 53,365 53,326
Land and improvements...................................... 14,641 14,641
Leasehold improvements..................................... 9,577 9,613
Service spare parts........................................ 4,953 3,857
---------------- ----------------
218,259 203,412
Less accumulated depreciation and amortization............. (120,558) (98,500)
---------------- ----------------
Property, plant and equipment, net......................... $97,701 $104,912
================ ================
</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 $3,252 over the remaining term of
the lease.
22
<PAGE>
6. OTHER ASSETS
A summary of other assets follows:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C>
Software development costs, net.................. $8,021 $9,085
Long-term deposits............................... 6,220 5,613
Purchased technology, net........................ 5,781 106
Goodwill......................................... 2,655 --
Investment in real estate........................ 2,935 2,935
Long-term receivables............................ 2,316 2,453
Other............................................ 162 392
---------------- ----------------
Total.................................. $28,090 $20,584
================ ================
</TABLE>
The Company capitalized software development costs amounting to
$5,156, $3,609, and $6,120 in 1994, 1993, and 1992, respectively. Related
amortization expense of $6,220, $7,449, and $5,875 was recorded for the
years ended December 31, 1994, 1993, and 1992, respectively.
Purchased technology is carried at cost and is amortized over the
estimated economic life of the technology, generally three years. Related
amortization expense of $760, $565, and $636 was recorded for the years
ended December 31, 1994, 1993, and 1992, respectively. The 1994 Anacad
acquisition resulted in goodwill capitalization of $2,897 and technology
capitalization of $4,735. In addition, other purchased technology totalling
$1,700 was acquired in 1994.
During 1993 and 1992, certain purchased technology and software
development costs were written off due to product discontinuance resulting
from the December 1993 and August 1992 restructurings. These write-offs,
combined with write-downs of certain other software development, prepaid
royalty, and purchased technology costs to net realizable value, totaled
$812 and $1,005 in 1993 and 1992, respectively.
7. SHORT-TERM BORROWINGS
Short-term borrowings represent drawings by subsidiaries under
multi-currency unsecured credit agreements and the current portion of
long-term debt. Interest rates are generally based on the applicable
country's prime lending rate depending on the currency borrowed. The
Company has available lines of credit of approximately $23,574 as of
December 31, 1994. Certain agreements require compensatory balances which
the Company has met.
8. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
1994 1993
------------- ----------------
<S> <C> <C>
Revolving term credit facility................... $54,160 $55,000
Bank note........................................ -- 2,681
Other............................................ 305 161
------------- ----------------
54,465 57,842
Less current portion............................. (840) (3,521)
------------- ----------------
Total.................................. $53,625 $54,321
============= ================
</TABLE>
23
<PAGE>
Effective December 31, 1992, the Company amended its committed
credit facility with First Interstate Bank of Oregon, N.A. Under terms of
the amendment, the revolving credit facility remains in effect until July
2000 and the commitment level was established at $55,000. Interest on
borrowings under the credit facility remain floating rate based. Borrowings
are collateralized by cash and investments of $30,000 and a trust deed on
the Company's headquarters site in Wilsonville, Oregon of $25,000. The
amendment requires commitment reductions of $840 annually which began in
July 1994, therefore the debt was reduced by $840 in 1994. Also, $840 of
the debt is classified as current in short-term borrowings on the
Consolidated Balance Sheets as of December 31, 1994 and 1993.
In conjunction with the loan amendment, the Company also modified
its interest rate swap agreement with First Interstate Bank of Oregon,
N.A., reducing the notional amount from $50,000 to $17,500 without any
negative financial impact. The interest rate swap agreement effectively
converts floating rates on $17,500 of borrowings to a fixed rate of 9.55%
until expiration of the agreement in January 2000. The amendment allowed
the Company to move $32,500 of 9.55% fixed rate borrowings to more
favorable floating rates. The average floating interest rate as of December
31, 1994 was approximately 5%. While the Company may be exposed to credit
risk in the event of nonperformance by the counterparty to the interest
rate swap agreement, the risk of incurring losses due to nonperformance by
the counterparty is considered remote.
During 1992, the Company's Japanese subsidiary borrowed 300
million Yen ($2,681 at December 31, 1993 exchange rates) from a local bank
to finance its local operations. The interest rate on these borrowings was
floating rate based with a cap of 5.95%. The effective rate on these
borrowings during 1994 was approximately 2%. The entire bank note was paid
off on July 20, 1994.
9. INCENTIVE STOCK PLAN
The Board of Directors has the authority to issue incentive stock
in one or more series and to determine the relative rights and preferences
of the incentive stock (note 10). The incentive stock is convertible into
common stock upon attainment of specified objectives or upon the occurrence
of certain events to be determined by the Board of Directors.
10. EMPLOYEE STOCK AND SAVINGS PLAN
The Company has five stock option plans. The three common stock
option plans provide for the granting of incentive and nonqualified stock
options to key employees, officers, and non-employee directors of the
Company and its subsidiaries.
The three stock option plans are administered by the Compensation
Committee of the Board of Directors, and permit accelerated vesting of
outstanding options upon the occurrence of certain changes in control of
the Company.
The Company also has a stock plan which provides for the sale of
common stock to key employees of the Company and its subsidiaries. Shares
can be awarded under the plan at no purchase price as a stock bonus and the
stock plan also provides for the granting of nonqualified stock options.
In addition, the Company has an incentive stock option plan and
has reserved 600 shares of incentive stock for issuance. No options have
been granted under this plan.
Options under all five plans generally become exercisable over a
four to five-year period from the date of grant or from the commencement of
employment at prices generally not less than the fair
24
<PAGE>
market value at the date of grant. The excess of the fair market value of
the shares at the date of grant over the option price, if any, is charged
to operations ratably over the vesting period. At December 31, 1994,
options for 2,949 shares were exercisable, 19,810 shares were reserved for
issuance and 3,549 shares were available for future grant. Stock options
outstanding and transactions involving the stock option plans are
summarized as follows:
<TABLE>
<CAPTION>
Shares Price Per Share
---------------- --------------------
<S> <C> <C>
Balance at December 31, 1992..................... 6,576 $.21 - $19.76
Granted.......................................... 1,180 .07 - 12.63
Exercised........................................ (1,021) .21 - 13.00
Canceled......................................... (848) 4.95 - 18.13
---------------- --------------------
Balance at December 31, 1993..................... 5,887 .07 - 19.76
Granted.......................................... 983 9.63 - 14.31
Exercised........................................ (780) .07 - 13.00
Canceled......................................... (343) 6.00 - 14.63
---------------- --------------------
Balance at December 31, 1994..................... 5,747 $.07 - 19.76
================ ====================
</TABLE>
In October 1992, the Board of Directors adopted a resolution to
offer employees holding incentive and nonqualified stock options for 5,840
shares the opportunity to exchange their existing options for nonqualified
stock options. The exchange allowed employees to receive the same number of
shares at $6.00 per share, the then current market price. The new options
vest ratably over between two to five years, depending on the vesting
status of exchanged options as of January 2, 1993. The offer was made
because the Board of Directors believes lower-priced options provide a
greater incentive to key employees and officers. Option holders elected to
exchange options covering 3,808 shares.
In May 1989, the shareholders adopted the 1989 Employee Stock
Purchase Plan and reserved 1,400 shares for issuance. In April 1992, the
shareholders amended the plan to reserve an additional 2,000 shares for
issuance. Under the plan, each eligible employee may purchase up to six
hundred shares of stock per quarter at prices no less than 85% of its fair
market value determined at certain specified dates. Employees purchased 527
and 605 shares under the plans in 1994 and 1993, respectively. At December
31, 1994, 797 shares remain available for future purchase under the plan.
The plan will expire upon either issuance of all shares reserved for
issuance or at the discretion of the Board of Directors.
There are no plans to terminate the plan at this time.
The Company has an employee savings plan (the Savings Plan) that
qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Under the Savings Plan, participating U.S. employees
may defer a portion of their pretax earnings, up to the Internal Revenue
Service annual contribution limit. The Company currently matches 50% of
eligible employee's contributions, up to a maximum of 6% of the employee's
earnings. Employer matching contributions vest over 5 years, 20% for each
year of service completed. The Company's matching contributions to the
Savings Plan were $1,997, $1,896, and $1,989 in 1994, 1993, and 1992,
respectively.
11. COMMITMENTS
The Company leases a majority of its field office facilities under
noncancellable operating leases. In addition, the Company leases certain
equipment used in its research and development activities. This equipment
is generally leased on a month-to-month basis after meeting a six-month
lease minimum.
The Company rents its Japanese facilities under a two year
cancellable lease with a six month notice of cancellation. The total
commitment under this cancellable lease, which expires in December 1996, is
$6,256, of which the first six month's payments in 1995 of $1,564 are
included in the schedule
25
<PAGE>
below. Future minimum lease payments under noncancellable operating leases
are approximately as follows:
<TABLE>
<CAPTION>
Annual Periods Operating
Ending Lease
December 31, Payments
- ------------------ --------------
<S> <C>
1995..................................................... $9,270
1996..................................................... 6,325
1997..................................................... 5,198
1998..................................................... 4,838
1999..................................................... 4,624
Later years.................................................. 15,698
--------------
Total................................................ $45,953
==============
</TABLE>
Rent expense under operating leases was approximately $13,722,
$16,776, and $16,156 for the years ending December 31, 1994, 1993, and
1992, respectively.
12. OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1994 1993 1992
-------------- --------------- ----------------
<S> <C> <C> <C>
Interest income.................................. $4,953 $4,338 $5,284
Interest expense................................. (2,703) (4,404) (5,469)
Foreign exchange gain............................ 177 247 297
Contract settlement.............................. -- -- (6,150)
Write-off of non-operating items................. -- -- (1,148)
Other, net....................................... 25 (438) (353)
-------------- --------------- ----------------
Total.................................. $2,452 $(257) $(7,539)
============== =============== ================
</TABLE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning
supplemental disclosures of cash flow activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1993 1992
--------- --------- ----------
<S> <C> <C> <C>
Cash paid (received) for:
Interest expense, net of capitalized interest.............. $2,201 $4,042 $5,030
Income taxes................................................. $2,840 $2,403 $(2,662)
</TABLE>
The Company owns common stock and common stock warrants of an
independent public company with an original carrying cost of $0 and a
market value of $1,812 as of December 31, 1994. This difference resulted in
a non-cash increase on the consolidated balance sheet in prepaid and other
assets and as a reduction of the same amount in accumulated deficit as of
December 31, 1994.
14. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company designs, manufactures, markets and supports electronic
design automation (EDA) software for the integrated circuit (IC) and
systems design markets. The Company provides a broad range of EDA tools
developed either by the Company or together with third parties to support
the entire electronic design process. The Company's software products
enable engineers and designers to design,
26
<PAGE>
analyze, place and route, and test custom ICs, application specific ICs
(ASICs), printed circuit boards, multichip modules and other electronic
systems and subsystems. The Company's Falcon Framework software provides a
common foundation for the Company's EDA software products. Falcon Framework
software also allows for the integration of third party software tools
developed by other commercial EDA vendors and by customers for their own
internal use. The Company's products help customers reduce development time
while producing innovative hardware products of high quality. In addition
to software products, the Company's Professional Services Division offers
consulting, support and training services to enhance customers' success in
the design and manufacture of hardware products.
Foreign operations consist of offices whose principal activities
are the sale, distribution, service, and research and development of the
Company's products. Foreign offices purchase the computer workstations on
which the Company's software operates principally from suppliers located in
each respective geographic area.
Intercompany transfers are accounted for at amounts generally
above cost. Corporate expenses are general expenses which are not allocated
to the operations of each geographic area. For the purposes of determining
operating income, research and development and certain marketing expenses
are allocated based on each region's percentage of total revenue
contribution. Corporate assets are comprised of capital assets used in
research and development activities, short-term investments, and cash and
investments classified as long- term in the consolidated balance sheets.
Geographic information for 1994, 1993 and 1992 is set forth in the table
below.
<TABLE>
<CAPTION>
Geographic Information USA Europe Japan Other Intl Eliminations Corporate Consolidated
- ------------------------ ----------- ---------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
Revenues from
unaffiliated customers $189,495 $88,593 $53,059 $17,818 $(671) $-- $348,294
Intercompany
transfers............. 2,103 1,728 -- 14,609 (18,440) -- --
----------- ---------- ----------- ------------ -------------- ----------- --------------
Total revenues.......... $191,598 $90,321 $53,059 $32,427 $(19,111) $-- $348,294
Operating income
(loss)................ $23,195 $6,885 $3,948 $5,102 $1,979 $(12,649) $28,460
----------- ---------- ----------- ------------ -------------- ----------- --------------
Identifiable assets..... $197,124 $150,508 $44,900 $24,169 $(112,701) $89,797 $393,797
=========== ========== =========== ============ ============== =========== ==============
1993
Revenues from
unaffiliated
customers............. $181,371 $87,178 $50,667 $20,559 $-- $-- $339,775
Intercompany
transfers............. 1,282 5,016 -- 20,948 (27,246) -- --
----------- ---------- ----------- ------------ -------------- ----------- --------------
Total revenues.......... $182,653 $92,194 $50,667 $41,507 $(27,246) $-- $339,775
Operating income
(loss)................ $1,354 $(14,564) $(2,402) $2,531 $(2,939) $(13,372) $(29,392)
----------- ---------- ----------- ------------ -------------- ----------- --------------
Identifiable assets..... $150,915 $124,956 $39,548 $26,322 $(92,258) $104,101 $353,584
=========== ========== =========== ============ ============== =========== ==============
1992
Revenues from
unaffiliated
customers............. $178,732 $99,481 $53,626 $18,927 $-- $-- $350,766
Intercompany
transfers............. 1,611 11,849 -- 15,187 (28,647) -- --
----------- ---------- ----------- ------------ -------------- ----------- --------------
Total revenues.......... $180,343 $111,330 $53,626 $34,114 $(28,647) $-- $350,766
Operating income
(loss)................ $(19,035) $(7,267) $(1,205) $(176) $(1,538) $(11,511) $(40,732)
----------- ---------- ----------- ------------ -------------- ----------- --------------
Identifiable assets..... $162,654 $116,174 $33,522 $21,956 $(60,471) $104,730 $378,565
=========== ========== =========== ============ ============== =========== ==============
</TABLE>
27
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1994
Total revenues............................... $85,299 $82,668 $83,543 $96,784
Gross margin................................. $59,234 $57,333 $57,526 $67,381
Operating income............................. $4,989 $5,466 $4,753 $13,252
Net income................................... $4,612 $4,851 $5,067 $13,007
Net income per common and common $.09 $.09 $.10 $.25
equivalent share...........................
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 $(.09) $.01 $.03 $(.63)
common equivalent share....................
</TABLE>
28
<PAGE>
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 13, 1996.
MENTOR GRAPHICS CORPORATION
By RICHARD TREBING
-------------------------------------------
Richard Trebing
Corporate Controller and
Chief Accounting Officer
29
EXHIBIT 23
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 January 31, 1995, relating to the
consolidated balance sheets of Mentor Graphics Corporation and subsidiaries
as of December 31, 1994 and 1993 and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in
the three-year period ended December 31, 1994, which report appears in the
December 31, 1994 annual report on Form 10-K/A Amendment No. 1 of Mentor
Graphics Corporation and subsidiaries. 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
March 13, 1996
